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Legitimacy and multi-level institutional environments: implications for foreign subsidiary ownership structure

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  • Christine M Chan

    (School of Business, University of Hong Kong, Pokfulam, Hong Kong)

  • Shige Makino

    (Department of Management, Chinese University of Hong Kong, Shatin, Hong Kong)

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    Abstract

    In this study, we examine from an institutional perspective the legitimacy rationale behind the choice of subsidiary ownership structure among multinational corporations (MNCs). We suggest that, when under a strong pressure to conform at the host country and local industry levels of their institutional environment, MNCs are likely to take a lower ownership stake in exchange for external legitimacy in the host country or local industry that their foreign subsidiaries are entering. We also suggest that MNCs are likely to take a higher ownership stake in response to strong internal pressure to sustain their internal legitimacy at the corporate level of their institutional environment. We also propose that MNCs are more likely to exchange ownership for legitimacy in local industries than in host countries, and in local markets with a high level of political instability than in those with a low level of political instability. These propositions are generally supported by our analysis of 4451 subsidiaries established by 898 Japanese MNCs that operated in 39 countries across 52 industries (two-digit SIC) between 1988 and 1999. Journal of International Business Studies (2007) 38, 621–638. doi:10.1057/palgrave.jibs.8400283

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Journal of International Business Studies.

    Volume (Year): 38 (2007)
    Issue (Month): 4 (July)
    Pages: 621-638

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    Handle: RePEc:pal:jintbs:v:38:y:2007:i:4:p:621-638

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    Cited by:
    1. Tseng, Chiung-Hui & Lee, Ruby P., 2010. "Host environmental uncertainty and equity-based entry mode dilemma: The role of market linking capability," International Business Review, Elsevier, Elsevier, vol. 19(4), pages 407-418, August.
    2. Li, Peng-Yu & Meyer, Klaus E., 2009. "Contextualizing experience effects in international business: A study of ownership strategies," Journal of World Business, Elsevier, Elsevier, vol. 44(4), pages 370-382, October.
    3. Qunyong Xie, 2013. "RETRACTED ARTICLE: State ownership, firm size, and Chinese firms’ entry mode choices," Asia Pacific Journal of Management, Springer, Springer, vol. 30(1), pages 319-319, March.
    4. Lin Cui & Fuming Jiang, 2010. "Behind ownership decision of Chinese outward FDI: Resources and institutions," Asia Pacific Journal of Management, Springer, Springer, vol. 27(4), pages 751-774, December.
    5. Klaus Meyer & Ornjira Thaijongrak, 2013. "The dynamics of emerging economy MNEs: How the internationalization process model can guide future research," Asia Pacific Journal of Management, Springer, Springer, vol. 30(4), pages 1125-1153, December.
    6. Hou, Wanrong & Li, Sali & Priem, Richard L., 2013. "How do CEOs matter? The moderating effects of CEO compensation and tenure on equity ownership in international joint ventures," Journal of International Management, Elsevier, Elsevier, vol. 19(2), pages 138-151.
    7. Andrei Panibratov & Alexander Abramkov, 2012. "Joint Venture Strategy For Emerging Economy: Evidence From Russian Energy Sector," Organizations and Markets in Emerging Economies, Faculty of Economics, Vilnius University, vol. 3(2).
    8. Forstenlechner, Ingo & Mellahi, Kamel, 2011. "Gaining legitimacy through hiring local workforce at a premium: The case of MNEs in the United Arab Emirates," Journal of World Business, Elsevier, Elsevier, vol. 46(4), pages 455-461, October.
    9. Tsai-Ju Liao & Chwo-Ming Yu, 2013. "The impact of local linkages, international linkages, and absorptive capacity on innovation for foreign firms operating in an emerging economy," The Journal of Technology Transfer, Springer, Springer, vol. 38(6), pages 809-827, December.
    10. George Peng & Paul Beamish, 2014. "The effect of host country long term orientation on subsidiary ownership and survival," Asia Pacific Journal of Management, Springer, Springer, vol. 31(2), pages 423-453, June.
    11. Cui, Lin & Li, Yi & Li, Zijie, 2013. "Experiential drivers of foreign direct investment by late-comer Asian firms: The Chinese evidence," Journal of Business Research, Elsevier, Elsevier, vol. 66(12), pages 2451-2459.
    12. Cui, Lin & Jiang, Fuming, 2009. "FDI entry mode choice of Chinese firms: A strategic behavior perspective," Journal of World Business, Elsevier, Elsevier, vol. 44(4), pages 434-444, October.
    13. Peng, George Z., 2012. "FDI legitimacy and MNC subsidiary control: From legitimation to competition," Journal of International Management, Elsevier, Elsevier, vol. 18(2), pages 115-131.

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