Ownership mode, cultural distance, and the extent of parent firms’ strategic control over subsidiaries in the PRC

Abstract

Previous studies often associated a specific type of ownership mode with the extent of control a parent firm may have over (strategic) decision-making in a foreign subsidiary, suggesting that parent firms should have higher control over wholly-owned subsidiaries (WoS) than international joint ventures (IJVs). Building on principal agent theory, we argue that in the Chinese context higher ownership levels do not necessarily have a positive effect on the extent of control over the foreign subsidiary. We further argue that cultural distance between the parent firm and the subsidiary moderates this relationship. We test our hypotheses using data from a sample of 156 foreign subsidiaries in the People's Republic of China (PRC) and find strong support for our arguments. Our findings show that in WoS parent firms reduce their extent of control, while in IJVs parent firms increase their extent of control. Moreover, we find that extent of control over WoS (IJVs) declines (increases) when cultural distance increases. Our results have significant theoretical implications for international business (IB) research as they challenge existing views with regard to the relationship between ownership mode and control as well as the moderating effect of cultural distance.

Control, innovation and international joint venture performance: The moderating role of internal and external environments

“…Aiming to contribute to control literature in the specific context of IJVs, our study continues the research stream of e.g. Geringer and Hebert (1989), Nguyen et al (2016a), and Puck et al (2016) who have raised the important role of parent control on IJV operations. Our study investigates the role of control strategies including mechanisms, focus, and extent on IJV innovation activity such as incremental innovation and radical innovation.…”

“…Control extent refers to the degree to which a parent exercises control over an IJV (Geringer & Hebert, 1989). In other words, control extent is related to how much control power the parent firm has used to align its IJV (Puck et al, 2016). Partners can choose to have a broad control focus so that they can exercise control over the entire range of the IJV's activities.…”

“…Previous studies (e.g. Das & Teng, 2001;Lu & Hebert, 2005;Xu & Lu, 2007;Tiwana, 2008;Lawson et al, 2009;Larimo & Nguyen, 2015;Mantecon et al, 2016;Nguyen et al, 2016b;Puck et al, 2016;Trąpczyński & Gorynia, 2017) in particular have investigated the relationship between parent control and performance of IJVs. This study extends previous studies by adding the analysis of the relationship between control strategies and performance of IJVs through the role of innovation.…”

The Paths of Internationalization of Chinese Innovative Firms

“…Based on existing studies, the international entry mode choice in the Chinese context mainly included: (1) entry through joint ventures or through wholly-owned subsidiaries [10,62,63], and (2) entry through greenfield investment or international acquisition [13,[64][65][66]. Cui and Jiang [10] found that when seeking assets to be the main purpose in OFDI, Chinese companies are more inclined to establish the wholly-owned subsidiary instead of the joint venture, but a joint venture is preferred when the firm is investing in a high growth host market.…”

Why We Should Stop Using the Kogut and Singh Index

“…Such a moderating effect can take a linear or a non-linear form but the most common approach is to propose a linear moderating effect of cultural distance. For example, prior research has tested the moderating effect of cultural distance on the relationship between foreign ownership and the extent of control (Puck et al 2016) or between the use of expatriates and the performance of overseas subsidiaries (Colakoglu and Caligiuri 2008). Because of the use of a quadratic function of distance in the KSI, these studies are in fact testing the moderating effect of squared cultural distance rather than the moderating effect of cultural distance.…”