Familiarity Does Not Breed Contempt: Curbing Subsidiary Corruption Through a Legitimacy-Enhanced Ownership Structure

Abstract

We analyze how the choice of firm ownership structure mitigates the effect of high dependence on a corrupt host government when investing abroad. We draw on a unique dataset of subsidiary-level engagement in corruption of 175 foreign subsidiaries entering three Central American countries. We found that there are two mechanisms to mitigate corrupt behavior when a subsidiary is dependent on a corrupt host government: internal legitimacy that accrues to wholly-owned subsidiaries, and external legitimacy built through a strong regional presence.The effect of dependency on a corrupt host government can be mitigated by enacting internal and external legitimacies.