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Journal of International Business Studies

, Volume 38, Issue 4, pp 621–638 | Cite as

Legitimacy and multi-level institutional environments: implications for foreign subsidiary ownership structure

  • Christine M ChanEmail author
  • Shige Makino
Article

Abstract

In this study, we examine from an institutional perspective the legitimacy rationale behind the choice of subsidiary ownership structure among multinational corporations (MNCs). We suggest that, when under a strong pressure to conform at the host country and local industry levels of their institutional environment, MNCs are likely to take a lower ownership stake in exchange for external legitimacy in the host country or local industry that their foreign subsidiaries are entering. We also suggest that MNCs are likely to take a higher ownership stake in response to strong internal pressure to sustain their internal legitimacy at the corporate level of their institutional environment. We also propose that MNCs are more likely to exchange ownership for legitimacy in local industries than in host countries, and in local markets with a high level of political instability than in those with a low level of political instability. These propositions are generally supported by our analysis of 4451 subsidiaries established by 898 Japanese MNCs that operated in 39 countries across 52 industries (two-digit SIC) between 1988 and 1999.

Keywords

legitimacy foreign subsidiary ownership structure multinational corporations 

Notes

Acknowledgements

This paper is based on a chapter of the first author's dissertation, which was awarded the Barry M. Richman Best Dissertation Award and the Best Paper Award at the Academy of Management conference in 2003. The authors would like to thank Professor Anand Swaminathan and three anonymous reviewers for their constructive comments. We also thank the participants of the Academy of Management meeting for their valuable feedback on our study. A special thank goes to Professor W. Richard Scott for his continuous support and encouragement. This paper was supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region (Project No. HKU 7468/06H).

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© Academy of International Business 2007

Authors and Affiliations

  1. 1.School of Business, University of Hong KongPokfulamHong Kong
  2. 2.Department of ManagementChinese University of Hong KongShatinHong Kong

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