Contextualising foreign subsidiary governance of EMNEs: antecedents and consequences

Abstract

The institutional environments for international business have become increasingly complex and uncertain, which presents disproportionate challenges to emerging market multinational enterprises (EMNEs). Foreign subsidiaries of EMNEs are expected to establish well-functioning governance structures and play crucial roles in managing the global strategy journey of parent companies. However, the literature reveals a gap in systematic research on foreign subsidiary governance. To address the research gap, I develop a comprehensive framework to explore (1) the understudied internal drivers of foreign subsidiary governance structure such as the FDI motives, business relatedness, and the parent firm’s ownership; (2) the lack of understanding of the impact of foreign subsidiary governance structure on local legitimacy of EMNEs. To empirically test the hypotheses, I utilise data from 116 listed foreign subsidiaries of Chinese MNEs, collected from CSMAR, ORBIS, BoardEx, and ProQuest, spanning from 2005 to 2021.
Subsidiary governance mainly serves an internal role in managing relationships with headquarters and an external role in managing relationships with host countries. Conflicts may arise due to this dual role, leading to a trade-off or varying emphasis between headquarters control/standardisation and subsidiary autonomy/adaptation (Kostova & Roth, 2002).
The first empirical study examines the impact of antecedents. The findings indicate that the strategic asset-seeking motive positively influences the external role of the subsidiary board while negatively affecting its internal role. This impact is demonstrated by a greater emphasis on engaging with the host country environment, evidenced by a higher proportion of independent directors and a preference for non-expatriate CEOs. Conversely, the internal role receives less emphasis, as reflected in a lower ratio of expatriate directors. In comparison, institutional escape, business relatedness, and headquarters ownership of subsidiaries correlate more strongly with the subsidiary board’s internal role and less with its external role. The hypotheses regarding institutional escape—that it correlates with a higher expatriate director ratio, lower independent director ratio, and a higher likelihood of hiring a non-expatriate CEO—are supported. However, hypotheses concerning business relatedness and headquarters ownership receive only partial support.
The second empirical study investigates the influence of subsidiary governance on legitimacy. Utilising sentiment analysis of news titles and two-stage least squares regressions (2SLS), the study reveals that a greater external role and lesser internal role positively correlate with subsidiary legitimacy. Specifically, a higher ratio of independent directors, the appointment of non-expatriate CEOs, and a lower ratio of expatriate directors facilitate legitimacy attainment.
Additionally, the moderating effect of cultural distance is discussed across both empirical studies. Generally, increasing cultural distance strengthens the internal role while weakening the external role. Both empirical chapters employ regression analyses, followed by a series of robustness tests, which generally confirm the robustness of the results.
I contribute significantly to international corporate governance and the study of EMNEs. It addresses gaps highlighted by Puck & Filatotchev (2020) by integrating multi-disciplinary approaches in corporate governance and strategic management in the process of firm internationalisation. Moreover, I integrates and extends management theories within the context of foreign subsidiaries, which are essential elements of MNEs navigating dual pressures from both home and host environments. Moreover, it shifts the focus from previous research on DMNEs to include EMNEs, which uniquely impact subsidiary board composition and CEO recruitment and are supplementary to existing literature. Additionally, I empirically examine the impact of board composition on legitimacy, a novel contribution not previously directly tested in the literature. Finally, it provides implications for both practitioners and researchers, highlighting the importance of strategically selecting board members and CEOs for subsidiaries to align their expertise and strategic vision with local contextual dynamics and subsidiary-specific objectives.

Date of Award	Nov 2024
Original language	English
Awarding Institution	University of Nottingham
Supervisor	Lei Li (Supervisor) & Young Un Kim (Supervisor)