Overseas compliance risk prevention for multinational corporations in a law and economics perspective: empirical evidence from Chinese MNCs

Purpose This paper aims to investigate whether executive compensation and internal control can prevent overseas compliance risks through the mediating influence of multinational corporation (MNC) legitimacy and the moderating role of institutional distance. Design/methodology/approach Based on a law and economics perspective and the “bad apple,” the “red barrel” and the “bad cellar” theory of business misconduct, this paper constructs a systematic framework of “compliance motivation MNC legitimacy overseas compliance risk prevention” from the individual, organizational and systematic levels and uses data of Chinese MNCs for empirical analysis. Findings Empirical data from Chinese MNCs show that overseas compliance risks are comprehensively affected by the factors of the individual, organizational and systematic levels. Higher executive compensation and internal control will reduce MNCs’ overseas compliance risks through MNC legitimacy acquisition; institutional distance hinders the positive effect of internal control on MNC legitimacy and therefore aggravates overseas compliance risks. Practical implications This paper contributes to the understanding of the overseas law-abiding and offence behavior of MNCs from a law and economics perspective and offers valuable insights on how to prevent the ever-increasing overseas compliance risks. Originality/value Although the literature has analyzed the factors of compliance behavior, they are not interrelated, let alone integrated in a systematic risk prevention framework. This paper applies a law and economic analysis framework to the study of the overseas compliance risks for the first time.