FDI motives of emerging market multinationals and foreign subsidiary governance

Purpose: This study aims to examine how the parent firm’s foreign direct investment (FDI) motive influences the roles of corporate boards and CEO appointment of foreign subsidiaries in the context of emerging market multinational enterprises (EMNEs). Based on the agency and resource dependence theories, foreign subsidiary boards mainly serve two governance roles: an internal role focusing on monitoring subsidiary operations and resource flows with parent firms and an external role aimed at securing local operational effectiveness. This paper specifically examines the composition of foreign subsidiary boards in terms of board independence and expatriate director ratio, and whether the CEO is an expatriate, which reflects the emphasized role. Design/methodology/approach: This paper collects data on listed foreign subsidiaries of Chinese MNEs between 2005 and 2021. The final sample includes 754 subsidiary-year observations across 20 host economies. The analysis is conducted using Hausman–Taylor estimation. Findings: This paper finds that strategic asset-seeking FDI motive is associated with a lower expatriate director ratio, a higher independent director ratio and a higher likelihood of hiring nonexpatriate CEOs. In contrast, foreign subsidiaries established with the motive of institutional escape to tax havens result in a higher expatriate director ratio, lower independent director ratio and lower likelihood of hiring nonexpatriate CEOs. Originality/value: To the best of the authors’ knowledge, this study is the first to explore how FDI motives influence board composition of foreign subsidiaries and appointment of subsidiary CEOs. Theoretically, this paper draws upon agency theory and resource dependence theory to extend their application to foreign subsidiaries of EMNEs. The findings enhance the understanding of international corporate governance.