Foreign subsidiary performance: social trust–entry fit
Abstract
Purpose
This paper aims to study whether the adoption of an entry mode that fits the social trust level contributes to the improvement of foreign subsidiary performance.
Design/methodology/approach
The authors used the Probit model, linear regression, strategic fit approach and instrumental variable regression. The sample was made up of 11,095 observations of Chinese multinational enterprises' foreign subsidiaries in 54 countries from 2005 to 2020.
Findings
The results suggest that a host country with a high level of social trust results in fewer difficulties for enterprises in gaining legitimacy, thus foreign subsidiaries are more likely to select the wholly owned entry mode. The results also show that the effect is contingent on the formal institutions of host countries. The results of the mechanism test suggest that social trust influences subsidiaries' entry mode choice by reducing information asymmetry, costs and uncertainty risks. This study further finds that selecting a fit entry mode based on social trust level substantially increases foreign subsidiary performance and this effect is more significant when multinational enterprises (MNEs) are state-owned enterprises (SOEs).
Research limitations/implications
The main limitation of this paper is its only focus on foreign subsidiaries of Chinese MNEs, which may limit the generalizability of research findings.
Originality/value
This paper responds to the call for conducting more research on informal institutions. Findings highlight the critical role of informal institutions in helping foreign subsidiaries in gaining legitimacy in host countries and the essentialness of selecting a fit entry mode based on the informal institutions of host countries for the development of foreign subsidiaries.
Keywords
Acknowledgements
The authors thank the editors and anonymous reviewer for their valuable comments and constructive suggestions, and the authors acknowledge the funding support by Philosophy and Social Science Foundation of China [Grant number, 22AGL004].
Since acceptance of this article, the following author(s) have updated their affiliation(s): Huiyun Shen is at the College of Economic and Management, Zhejiang Normal University, Jinhua, China.
Citation
Yu, J., Yi, C. and Shen, H. (2023), "Foreign subsidiary performance: social trust–entry fit", Management Decision, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MD-03-2023-0317
Publisher
:Emerald Publishing Limited
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