Institutional development and subsidiary performance

Abstract

This paper investigates the impacts of the level of institutional development of host countries on the performance of foreign affiliates of multinational corporations. Institutional development is defined in terms of the extent to which economic, political, and social institutions in host countries are favorable to foreign affiliates. A longitudinal analysis of over 17,000 foreign affiliate-year cases, including 7,172 foreign affiliates operating in 38 host countries over the period 1996-2001, shows that foreign affiliate performance noticeably varies across countries. The results suggest that the performance of foreign affiliates varies strongly in countries where the level of institutional development is low, and that the effect of economic institutions on the variation in foreign affiliate performance is stronger than those of political and social institutions. (For more information, contact Shige Makino, Chinese University of Hong Kong, Hong Kong, makino@baf.msmail.cuhk.edu.hk)