Subsidiary staffing strategy and innovation performance in Chinese multinational enterprises: the moderating effect of institutional distance

Abstract

This article examines the impact of the staffing of foreign subsidiaries of multinational enterprises (MNEs) on the innovation performance of the parent company and the moderating effect of the institutional distance between the host country and the home country. This paper conducts an empirical analysis on the data of 59 mature Chinese MNEs and their 872 overseas subsidiaries over the past 11 years and obtains some interesting results. The results show that the proportion of host country nationals (HCNs) in overseas subsidiaries has a significant positive impact on the innovation performance of the parent company and that it is not a simple linear relationship but rather an inverted U‐shaped relationship. As HCNs increase, the ability to acquire knowledge is increasing, while the ability to integrate knowledge is decreasing. Thus, multiplicative combinations of latent mechanisms result in an inverted U‐shaped relationship. However, the institutional distance between countries negatively moderates the effect of subsidiary HCN proportions on parent company innovation performance. The findings have important practical implications for the multinational innovation strategies of Chinese MNEs and governments.