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Offshoring innovation to emerging markets: Organizational control and informal institutional distance

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Abstract

The literature on innovation offshoring has focused on the dichotomous choice between two distinct investment strategies – captive offshoring and outsourced offshoring. We use the concept of organizational control to investigate how differences in the informal institutions that prevail in the home and host countries influence multinational enterprise (MNE) strategy (or, the organizational control decision) with respect to subsidiaries established to offshore innovation. While the relationship between formal institutions and MNE strategy has been the subject of considerable academic scrutiny, less is known about the role of informal institutions. We propose that the type of uncertainty precipitated by informal institutions is critical to understanding the strategic behavior of foreign-investing MNEs. We hypothesize that an MNE’s organizational control over a subsidiary will be contingent upon the type of informal institutional uncertainty encountered by the subsidiary. More specifically, we disaggregate the informal institutions construct and develop three new, more explicit, latent constructs – behaviorally-oriented informal institutions (BOII), technology-oriented informal institutions (TOII) and demand-oriented informal institutions (DOII). Our theory posits that while an increase in BOII distance will precipitate a preference for greater organizational control, heightened TOII and DOII distances will induce the opposite outcome – a preference for lower levels of organizational control.

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Notes

  1. The number of subsidiary investments in each host country is indicated in brackets: Brazil (2), Chile (1), China (86), Czech Republic (2), Hong Kong (10), Hungary (1), India (4), Indonesia (4), South Korea (21), Malaysia (2), Philippines (1), Poland (1), Singapore (9), South Africa (1) and Thailand (12). Host countries were identified as “emerging markets” based upon The Economist’s designation. Their definition has been used by Michigan State University’s Center for International Business Education and Research (CIBER) which has published an annual Market Potential Index for Emerging Markets since 1996.

  2. Given that expatriate deployment (often operationalized using the subsidiary’s expatriate intensity or, the ratio of expatriate employees to total subsidiary employees) has also been recognized in the literature as a strategy employed by MNEs to exercise control over subsidiary investments (Caligiuri & Stroh, 1995; Shay & Baack, 2004), we executed additional regression models as robustness tests in which the organizational control dependent variable was constituted by three indicators – the focal MNE’s proportionate share of total equity in the subsidiary investment, the proportionate share of total equity in the subsidiary investment that was held by all home-country (Japanese) partners and the subsidiary’s expatriate intensity (log). The results of these robustness analyses are reported in the Results section.

  3. We thank an anonymous Reviewer for bringing this dynamic and control variable to our attention.

  4. We thank an anonymous Reviewer for suggesting this control variable.

  5. We also executed regression models as robustness tests in which the organizational control dependent variable was constituted by three indicators – the focal MNE’s proportionate share of total equity in the subsidiary investment, the proportionate share of total equity in the subsidiary investment that was held by all home-country (Japanese) partners and the subsidiary’s expatriate intensity (log). While the signs of the coefficients in these models were generally consistent with our theory, the results generated by these models were not as strong as the results presented in Table 4.

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Acknowledgements

Our sincere thanks to Area Editor Paula Caligiuri and two anonymous JIBS reviewers for providing constructive and valuable input during the review process. We also acknowledge the insightful comments and feedback of Andreas Schotter, Shige Makino and Norihiko Takeuchi.

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  1. Ivey Business School, Western University, London, Canada

    Michael A Sartor & Paul W Beamish

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  1. Michael A Sartor
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Accepted by Paula Caligiuri, Area Editor, 28 May 2014. This article has been with the authors for two revisions.

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Sartor, M., Beamish, P. Offshoring innovation to emerging markets: Organizational control and informal institutional distance. J Int Bus Stud 45, 1072–1095 (2014). https://doi.org/10.1057/jibs.2014.36

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