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The role of agency costs in explaining the superior performance of foreign MNE subsidiaries

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  • Boardman, Anthony E.
  • Shapiro, Daniel M.
  • Vining, Aidan R.

Abstract

Many studies find that foreign subsidiaries of multi-national enterprises are more profitable or more productive than firms that operate exclusively in a single domestic market or that produce in and export from a single domestic market. These differences are usually attributed to firm-specific assets. This article explores an additional explanation for the observed profitability differences: agency costs. Specifically, we suggest that MNE subsidiaries perform better than domestic corporations in part because of lower agency costs due to more concentrated ownership. We find support for this hypothesis using data on Canadian companies for the years 1986 and 1991. Key results: The performance advantage of foreign subsidiaries attributable to firm-specific advantages is reduced when one controls for differences in agency costs due to ownership concentration differences between these subsidiaries and domestic firms.

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  • Boardman, Anthony E. & Shapiro, Daniel M. & Vining, Aidan R., 1997. "The role of agency costs in explaining the superior performance of foreign MNE subsidiaries," International Business Review, Elsevier, vol. 6(3), pages 295-317, June.
  • Handle: RePEc:eee:iburev:v:6:y:1997:i:3:p:295-317
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    2. Zhang, Feng & Jiang, Guohua & Cantwell, John A., 2015. "Subsidiary exploration and the innovative performance of large multinational corporations," International Business Review, Elsevier, vol. 24(2), pages 224-234.
    3. Carney, Michael & Shapiro, Daniel & Estrin, Saul & Liang, Zhixiang, 2018. "National institutional systems, foreign ownership and firm performance: the case of understudied countries," LSE Research Online Documents on Economics 87042, London School of Economics and Political Science, LSE Library.
    4. Halkos, George Emmanuel & Tzeremes, Nickolaos G., 2007. "Productivity efficiency and firm size: An empirical analysis of foreign owned companies," International Business Review, Elsevier, vol. 16(6), pages 713-731, December.
    5. George Halkos & Nickolaos Tzeremes, 2010. "The effect of foreign ownership on SMEs performance: An efficiency analysis perspective," Journal of Productivity Analysis, Springer, vol. 34(2), pages 167-180, October.
    6. Polsiri, Piruna & Jiraporn, Pornsit, 2012. "Political connections, ownership structure, and financial institution failure," Journal of Multinational Financial Management, Elsevier, vol. 22(1), pages 39-53.
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    8. Ephraim W. Chirwa, 2004. "Industry and firm effects of privatization in Malawian oligopolistic manufacturing," Journal of Industrial Economics, Wiley Blackwell, vol. 52(2), pages 277-289, June.
    9. Bamiatzi, Vassiliki & Efthyvoulou, Georgios & Jabbour, Liza, 2017. "Foreign vs domestic ownership on debt reduction: An investigation of acquisition targets in Italy and Spain," International Business Review, Elsevier, vol. 26(5), pages 801-815.
    10. Sangcheol Song, 2017. "Ownership Increase in International Joint Ventures: The Within- and Across-Country Flexibility Perspective," Management International Review, Springer, vol. 57(1), pages 93-120, February.
    11. Calabrese, Giuseppe Giulio & Manello, Alessandro, 2018. "Firm internationalization and performance: Evidence for designing policies," Journal of Policy Modeling, Elsevier, vol. 40(6), pages 1221-1242.
    12. Svilena Mihaylova, 2023. "Foreign Affiliates versus Domestic Firms in the Information and Communication Services Sector in Central and Eastern Europe," Bulgarian Economic Papers bep-2023-04, Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria // Center for Economic Theories and Policies at Sofia University St Kliment Ohridski, revised Mar 2023.
    13. Wiwattanakantang, Yupana, 2001. "Controlling shareholders and corporate value: Evidence from Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 9(4), pages 323-362, August.
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