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Interfirm trust and subsidiary performance of emerging market multinational enterprises: an examination of contingent factors

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Abstract

Although emerging market multinational enterprises (EMNEs) face substantial liabilities of origin (LoO) that hinder their global expansion, under-researched is whether trust-building with foreign partners in host markets can help them reduce these liabilities and enhance their subsidiary performance. Drawing on the relational exchange view and institutional theory, our study examines how interfirm trust affects EMNEs’ subsidiary performance in host countries, and how this effect is moderated by factors reflecting the regulative, normative, and cognitive institutional pressures that confront EMNEs in host countries. The results from a survey of 146 senior managers of overseas subsidiaries of Chinese multinational enterprises show that interfirm trust is positively related to subsidiary performance, and this positive effect is stronger when host countries’ legal systems are deficient but financial markets are munificent, and when EMNEs partner with state-owned foreign firms or possess rich international experience.

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Notes

  1. The correlations between the variables pertaining to the host country institution were typically high, e.g., the correlation coefficient between legal efficiency and financial munificence is 0.47 and the correlation coefficient between protecting minority investors and credit system is 0.49. To mitigate concerns of multicollinearity, we orthogonalized these variables following Jensen and Wang (2018) and Hiatt et al. (2009). Thus, in Table 4, the corresponding correlation coefficients are 0.

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Authors and Affiliations

  1. Department of Marketing, Dongbei University of Finance and Economic Dalian, Liaoning, Dongbei, China

    Mandi E & Chuang Zhang

  2. School of Business Administration, South China University of Technology, Guangdong, Guangzhou, China

    Qiyuan Zhang

  3. School of Business, University of Hong Kong, Hong Kong, Pokfulam, China

    Kevin Zheng Zhou

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This study was supported by China National Natural Science Foundation (project no. 71,772,031 and 71,602,173).

Appendix A

Appendix A

Main Variables

Items

Factors

Subsidiary performance

α = 0.83

CR = 0.85

AVE = 0.65

Compared with local competitors, how does your firm perform in the following terms (1 = much worse, 7 = much better)

 

1. Profit level

.88

2. Return on investment

.86

3. Market share.

.66

Interfirm trust

α = 0.95

CR = 0.95

AVE = 0.83

1. Our firm is trusted by the partner firm at all times.

2. Our firm is counted on by the partner firm to do what is right.

3. Our firm has been assessed by the partner firm as of high integrity.

4. The partner firm is satisfied with our firm.

.90

.90

.93

.91

Legal efficiency

A subdimension of the political risk rating from the International Country Risk Guide (ICRG). Evaluating the impartiality of the legal system and the strength of popular observance of the law in a country.

Financial munificence

A subdimension of the financial risk rating from the International Country Risk Guide (ICRG), which measures a country’s ability to finance its official, commercial, and trade debt obligations. It provides a comparative liquidity risk ratio that indicates how many months of imports can be financed with reserves. The higher the score, the better the financial environment in host countries.

Foreign partners’ state ownership

Whether your target foreign partner is state-owned? It was assigned a value of 1 if the answer is yes; otherwise, it was 0.

EMNEs’ international experience

How many years has your company operated in multinational markets?

Control Variables

Items

Factors

Social ties with local Chinese institutes

α = 0.94

CR = 0.93

AVE = 0.75

1. Our firm has close links with other local Chinese-funded institutions (including enterprises and government departments).

.82

2. We often visit each other with other local Chinese-funded institutions (including enterprises and government departments).

.94

3. Our leaders often communicate with the leaders of other local Chinese-funded institutions (including enterprises and government departments).

.93

4. We have good relations with other local Chinese-funded institutions (including enterprises and government departments).

.84

5. We often hold friendship activities with other local Chinese-funded institutions (including enterprises and government departments).

.79

EMNE dependence

α = 0.79

CR = 0.79

AVE = 0.66

1. It would be difficult to find another local firm that could provide us with comparable profitability.

.85

2. Our total costs of switching to another foreign partner firm would be prohibitive.

.78

Foreign partner dependence

α = 0.72

CR = 0.74

AVE = 0.60

1. The partner firm’s total costs of switching to another firm would be prohibitive.

.88

2. It would be difficult for the partner firm to find another partner that could provide it with comparable profitability.

.64

Interest-based dispute resolution

α = 0.90

CR = 0.91

AVE = 0.62

In dealing with arising problems, to what degree does your partner firm rely on the following factors to handle the dispute (1 = very low, 7 = very high)

1. Consensus.

2. Problem-solving.

3. Common interests.

4. Mutual benefits.

5. The reaching of an agreement.

6. A “win-win” or other mutually beneficial solution.

.72

.73

.78

.84

.78

.85

EMNE size

What is the number of overall employees in your company?

International diversity

How many countries has your company entered?

Number of partners

How many partners has your firm cooperated with in the host country?

Manufacturing industry

What is the industry of your firm? It was assigned a value of 1 if the answer is manufacturing; otherwise, it was 0.

Management localization

What percentage of your subsidiary’s middle management team in the host country is local?

Private relationships with local firms

In local operations, our senior managers actively use private relationships with managers of local firms.

Foreign partner size

What is the number of employees in your partner firm?

Strategic alliance

What is the type of relationship between your firm and the partner? It was assigned a value of 1 if the answer is strategic alliance; otherwise, it was 0.

Protecting minority investors

A subdimension of the EODB index. Evaluating minority shareholders’ rights in related-party transactions and in corporate governance of a country by following two indexes, the extent of conflict of interest regulation index and the extent of shareholder governance index.

Credit system

A subdimension of the Ease of Doing Business (EODB) index. Evaluating the movable collateral laws and credit information system of a country by following two indexes, Strength of legal rights index and Depth of credit information index.

  1. Note: All items except as indicated in the table using a Likert scale (1 = strongly disagree, and 7 = strongly agree).

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E, M., Zhang, Q., Zhou, K.Z. et al. Interfirm trust and subsidiary performance of emerging market multinational enterprises: an examination of contingent factors. Asia Pac J Manag (2022). https://doi.org/10.1007/s10490-022-09851-8

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