FDI Legitimacy and MNC Subsidiary Control: From Legitimation to Competition

Abstract

This study contributes to the subsidiary control literature by empirically demonstrating the importance of FDI legitimacy in determining subsidiary ownership and expatriate staffing levels. Based on organizational ecology theory (OET), our study considers the tension between legitimation and competition pressures. This is a significant step beyond institutional theory, which only accounts for the former pressure. Based on a sample of Japanese MNCs, we find that there is an interaction effect between subsidiary size and FDI legitimacy on both subsidiary ownership and expatriate staffing levels. With increasing FDI legitimacy, smaller subsidiaries tend to increase their ownership and expatriate staffing levels, whereas larger subsidiaries tend to reduce their ownership and expatriate staffing levels. The results hold both across host countries and over time. Our findings have significant theoretical and practical implications. MNCs are advised to give full attention to the dual pressure of legitimation and competition when determining subsidiary control strategies. Caution is advised when applying the institutional theory based prescription that MNCs should assume higher ownership and expatriate staffing levels in their subsidiaries with increasing FDI legitimacy.