How Subnational Institutions Shape Foreign Ownership Structure in China?

Abstract

This study, drawing on the institution-based view, investigates the influences of subnational economic, political, and social institutions on the ownership choice of foreign affiliates of multinational corporations (MNCs). We extend foreign market entry literature by emphasizing the interactive effects of different institutional constituents and within-country institutional heterogeneity. A longitudinal analysis of 9,648 foreign affiliates established in 28 subnational regions in China between 1999 and 2007 shows that MNCs tend to lower ownership level in foreign affiliates when economic and political institutions are deficient in a subnational region. Our findings further reveal that subnational social institutions serve as significant substitutes for deficient economic institutions in shaping ownership choice, and the effects of subnational political (social) institutions are stronger for large (export market-focused) foreign affiliates. Theoretical implications for foreign market entry research and practical implications for managers of MNCs are discussed.