Phasing the operation mode of foreign subsidiaries: Reaping the benefits of multinationality through internal capital markets

The lifetime of foreign equity partnerships is often limited. Research suggests that MNCs abandon their local partners when the need for sharing ownership in foreign subsidiaries has diminished. This study shows that MNCs may abandon their local equity partners to reap the benefits of multinationality: as MNCs gain a competitive advantage from leveraging resources across borders, they will initially benefit from sharing ownership with a local firm, to embed their foreign subsidiaries in the local environment and access local resources more effectively. Later, they will benefit from taking over the local partner’s equity share, to better embed their subsidiaries in the parent organization and transfer locally accessed resources to the MNC’s other locations. Moderated-mediation regressions provide evidence of such practice in the context of cross-border transfers of capital resources. This strategy seems to work: as a corollary of our model, panel regressions suggest that sharing ownership with local firms in a host country with a capital resource advantage is associated with appropriating more capital resources from the local debt market, while abandoning these partner firms later is associated with transferring more capital resources from this host country, via internal capital markets, to other parts of the MNC.