Internalization advantage and subsidiary performance: The ...

Internalization advantage and subsidiary

performance: The role of business group

affiliation and host country characteristics

Ajai S Gaur1,Chinmay Pattnaik2,Deeksha Singh3 andJeoung Yul Lee4,5

1Department of Management and Global

Business, Rutgers Business School - Newark andNew Brunswick, 1 Washington Park, Newark,

NJ 07102, USA; 2Discipline of International

Business, University of Sydney Business School,

Sydney, Australia; 3School of Business, RutgersUniversity, 227 Penn Street, Camden,

NJ 08102-1656, USA; 4National Research Base of

Intelligent Manufacturing Service, Chongqing

Technology and Business University,Chongqing 400067, China; 5School of Business

Management, Hongik University, Sejong 30016,

South Korea

Correspondence:JY Lee, School of Business Management,Hongik University, Sejong 30016, SouthKorea.Tel: +82-44-860-2496;Fax: +82-44-862-3760;e-mail: [email protected]

AbstractWe extend internalization theory by examining the contingencies associated

with market internalization and its impact on foreign subsidiary survival. Based

on a sample of 6170 subsidiary–year observations in 63 countries belonging to292 MNCs from Korea during 1995–2013, we find that greater product and

labor market internalization have weaker impacts on the survival of subsidiaries

operating in countries with more developed institutional environments butstronger for subsidiaries of MNCs affiliated with business groups. The impact of

business group affiliation is further dependent on host country institutional

development, and the diversification and size of the business group.

Journal of International Business Studies (2019) 50, 1253–1282.https://doi.org/10.1057/s41267-019-00236-6

Keywords: internalization advantages; MNCs; business groups; subsidiary survival; Korea

INTRODUCTIONInternalization theory has been the dominant theoretical frame-work to explain the emergence and rise of Multinational Corpo-rations (MNCs). It posits that MNCs overcome cross-nationalmarket imperfections and minimize the associated transactioncosts through the internalization of transactions within theorganization (Buckley & Casson, 1976, 2009). If the benefits ofinternalization of transactions within the MNC exceed the cost ofutilizing external market transactions, it is efficient for MNCs toconduct transactions within the MNCs (Buckley & Casson, 1976;Hennart, 1982; Rugman, 1981). By internalizing transactions,MNCs create ‘‘internal markets’’ for the intermediate products,knowledge, financial and human capital (Hennart, 2009). Thecompetitive advantage of MNCs is thus derived through the‘‘ability of the management to organize an internal market’’(Buckley & Casson, 1976: 34) which confers internalization benefitson their foreign subsidiaries (Birkinshaw, 2000; Narula, 2014;Nguyen & Rugman, 2015; Rugman & Verbeke, 2001).

While it has become a received wisdom that MNCs possessinternalization advantages, we have limited understanding of howMNCs utilize these advantages in their foreign subsidiaries.

Received: 1 June 2017Revised: 16 February 2019Accepted: 2 April 2019Online publication date: 14 May 2019

Journal of International Business Studies (2019) 50, 1253–1282ª 2019 Academy of International Business All rights reserved 0047-2506/19

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Although there are several benefits of internaliza-tion, internal markets within MNCs are also proneto failure due to the associated governance andcoordination costs (Hennart, 2009; Buckley &Strange, 2011). The significant transformation inthe governance structure and management ofMNCs over the years (Rugman & Verbeke,2001, 2003), through geographically dispersedvalue-added activities (Asmussen, 2009; Kedia &Mukherjee, 2009; Strange & Humphrey, 2018) andspecialized scope of subsidiaries (Cantwell &Mudambi, 2005; Mudambi, 2011; Narula, 2014),has further augmented the governance and coordi-nation costs. Therefore, internalization advantagesto ‘‘capture the transactional benefits (or lessentransaction costs) arising from the common gover-nance of MNC assets located in different countries’’(Dunning, 1988: 2) need to be analyzed to under-stand the benefits and costs of using internalmarkets within the MNCs in comparison to exter-nal markets. The relative costs and benefits oftransacting through the internal markets clearlyhave implications for foreign subsidiary behaviorand performance (Asmussen, Foss, & Pedersen,2011; Birkinshaw, 2000; Nguyen & Rugman, 2015;Rugman & Verbeke, 2001).

We can develop a more nuanced understandingof internalization advantages by shifting the focusfrom the MNC to its foreign subsidiaries, whichoccupy a dominant role in the modern MNC(Narula, 2014; Narula & Verbeke, 2015; Rugman,Verbeke, & Yuan, 2011; Cantwell & Mudambi,2005). While prior studies have pursued this line ofinquiry by integrating internalization theory withthe resource-based view to argue that firm-specificadvantages (FSAs) in conjunction with host coun-try-specific advantages (CSAs) improve competitiveadvantages of the subsidiaries (Chi, 2015; Rugman& Verbeke, 1992, 2001, 2003), there is an implicitassumption of efficient internal markets, especiallyfor the exchange of knowledge, products, andtalent within the MNCs (Hennart, 2009; Mudambi,2011; Narula, 2014; Asmussen et al., 2011). How-ever, the efficiency of the internal market isimpeded by governance- and subsidiary-relatedfactors (Buckley & Strange, 2011; Hennart, 2009;Mudambi & Navarra, 2004; Andersson, Forsgren, &Holm, 2007).

Therefore, considering the benefits and costsassociated with internalization, it is important toexamine the boundary conditions to ‘‘establish astructure which can discriminate between situa-tions where direct foreign investment is more

efficient than alternative organizational modes’’(Teece, 1985; 236). We advance internalizationtheory by focusing on the organizational andenvironmental contingencies that condition theeffect of product and labor market internalizationon subsidiary performance. Specifically, we focuson product market internalization through inter-subsidiary trade (Buckley & Casson, 1976;Ramondo, Rappoport, & Ruhl, 2016) and labormarket internalization (Hennart, 2009) through thedeployment of parent country nationals (PCNs) insubsidiaries (Gaur, Delios, & Singh, 2007). Usinginternalization theory, we argue that the relativecosts and benefits from internalization of productand labor markets will be contingent on the hostcountry characteristics (Benito, Grogaard, & Nar-ula, 2003; Dunning & Lundan, 2008; Meyer,Mudambi, & Narula, 2011) of the subsidiary andthe organizational characteristics of the MNC par-ent firm (Kostova, Marano, & Tallman, 2016).Internalization theory predicts that market inter-

nalization benefits available to subsidiaries arecontingent on the level of host country marketimperfection where the internalization advantagesare exploited (Dunning & Lundan, 2008). Theinternalization benefits are likely to be stronger incountries with underdeveloped institutions, or‘institutional voids’, which restrict the efficiencyof the external markets (Khanna & Palepu, 2000).The ability to exploit internalization advantages arealso likely to vary for different MNCs depending onthe organizational characteristics of the parentfirm. We focus on a specific type of organizationalform, the business group, which are prevalent inmany developed and emerging market economiesaround the world (Khanna & Yafeh, 2007). WhileMNCs emerge to overcome natural market imper-fections, through economizing on transaction costsin cross-border market imperfections across geo-graphic markets (Buckley & Casson, 1976, 2009;Caves, 1982), business groups evolve to overcomethe market imperfections or institutional voidsacross product, labor and capital markets in theirdomestic market (Leff, 1978; Khanna & Palepu,2000). The ability of business groups to effectivelymanage internal markets through internalizingtransactions creates opportunities for MNC parentsaffiliated with business groups to derive strengthfrom their domestic internalization capabilities(Lee & Gaur, 2013), and to augment the multina-tional internalization (MNC) advantage. Therefore,MNC parents affiliated with a business group arelikely to be in a better position to derive

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internalization advantages than those unaffiliatedwith a business group. At the same time, theadvantages of business groups are context-depen-dent, such that these advantages are likely to bemuch smaller for MNCs affiliated with businessgroups in host countries containing well-developedinstitutions due to the limitation of internalizationbenefits in these countries.

Our study makes important contributions to theadvancement of internalization theory and theinternational business literature. First, we extendinternalization theory by examining the mecha-nism through which MNCs internalize transactions(Narula, 2014). In his exposition of FSAs, Narula(2014) argued that MNCs have FSAs that go beyondthe two classic categories of asset-type and transac-tion-type FSAs. While asset-type FSAs emphasizethe role of personnel, technology, and knowledgeand transaction-type FSAs include organizing intra-firm activities and knowledge flows, Narula (2014)argued that MNEs have other FSAs such as recom-binant capabilities, superior knowledge of externalmarkets and institutions and superior relationalcapabilities that give them competitive advantagesover other firms. Our examination of ability tointernalize product and labor markets within MNCsand their subsequent performance implications forthe subsidiaries contributes to one of the under-studied aspect of FSAs in internalization theory.Second, we integrate the transaction-type FSAs withthe CSAs by examining the varying levels ofinstitutional developments in host markets, whilethe MNCs come from the same home market. Thishelps us examine how the variations in CSAs interms of the level of market imperfections mayaffect the ability to exploit the internalizationadvantage.

Third, we extend internalization theory bydemonstrating the complementarity betweentransaction cost theory (Coase, 1937; Williamson,1985) and internalization theory (Buckley & Cas-son, 1976). We assess the transferability of thetransaction-type FSAs beyond national bordersthrough an organizational form (i.e. businessgroup) which is similar to the MNC. Analysis ofthese two organizational forms simultaneously andin contexts with varying level of institutions helpsdetermine whether the internalization advantagesof business groups transform to MNC advantages.Finally, we integrate internalization theory withthe subsidiary performance literature. Internaliza-tion theory and MNC subsidiary literature havedeveloped somewhat independently, with some

attempts to integrate these two (Narula, 2014;Rugman & Verbeke, 2003). By identifying theconditions under which subsidiaries can benefitfrom the internalization advantages, we demon-strate the applicability of internalization theory atthe subsidiary level.

THEORY AND HYPOTHESES

Benefits and Costs of InternalizationInternalization theory has its origins in transactioncost economics (TCE). The TCE explains the exis-tence of the firm as a governance mechanism thatinternalizes transactions within the firm boundaryand thereby minimizes costs associated with exter-nal market imperfections (Coase, 1937; Wil-liamson, 1985). Building on the TCE,internalization theory posits that MNCs arise dueto internalization of economic activities acrossborders to overcome the imperfection in thecross-border transactions, which are subject tomarket failure (Buckley & Casson, 1976; Rugman,1981; Hennart, 1982). Inefficiencies in the externalmarket arise due to several factors, such as theinformation asymmetries between buyers and sell-ers, uncertainty in the futures market, impractica-bility of discriminatory pricing to exploit marketpower, indeterminate bargaining situations result-ing from bilateral concentrations of market, andgovernment intervention in the form of tradebarriers or the ineffective application of nationalpatent systems (Buckley & Casson, 1976: 37–8). Theinformation asymmetry between the buyer andseller, in particular, leads to moral hazard andadverse selection problems (Akerlof, 1970).While internalization has several benefits, there

are also costs associated with the governance andorganization of activities within the MNC. Buckleyand Strange (2011) identify three major costsassociated with internalization—information costs,coordination costs and motivation costs. The infor-mation costs are the costs of acquisition andtransmission of information between employeesin different sub-units, the coordination costs referto the difficulties in communication about com-plementary actions and tasks, and the motivationcosts are the costs of incentivizing members of thefirm to align their interests with the objective of thefirm (Ambos, Kunisch, Leicht-Deobald, & Stein-berg, 2019). These costs are particularly pro-nounced in MNCs due to the cross-nationaldifference in language, culture, and attitudes. Thus,


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the choice between conducting transactions withinthe MNC or through external market depends onthe relative costs and benefits of internalization.Grogaard, Rygh, and Benito (2019) further arguethat the costs and benefits of internalization alsodepend on the nature of the firm as well as thegovernance quality of the home country. Theyfound that certain firms, such as state-ownedenterprises from countries with weaker governanceenvironments, may not be able to realize theinternalization benefits and so opt for lower equityposition in their foreign expansion.

Buckley and Casson (1976) conceptualized inter-nalization advantages as the ability of a firm tointernalize the knowledge-intensive intermediateproduct markets such as technology, productionknow-how, and brand. Rugman (1981) on the otherhand, proposed that MNCs possess an idiosyncraticset of FSAs which can be exploited in an efficientway within the MNC by utilizing the CSAs (Rug-man et al., 2011). Hennart (1982) argued thatMNCs emerge due to their ability to organize inter-dependencies between economic actors across dif-ferent countries more efficiently than markets.Thus, internalization advantages, along with theownership and location advantages, are at the coreof explaining the existence of MNCs (Dunning,1988).

Based on this original conceptualization, recentresearch has extended internalization theory byshifting the analytical focus from the parent firm tothe subsidiaries (Rugman & Verbeke, 2001, 2003;Rugman et al., 2011). The original conceptualiza-tion in internalization theory was to propose therole of internalization as a governance mechanismby considering the MNC as a centralized hierarchy.Recent work considers MNCs ‘‘as an inter-organi-zational grouping rather than as a unitary organi-zation’’ (Ghoshal & Bartlett, 1990: 604), whichoperate by undertaking ‘‘capital, product, andknowledge transactions among units located indifferent countries’’ (Gupta & Govindarajan, 1991:770). In this conceptualization, the primary focushas shifted from why MNCs exist to how themodern MNCs function through the organizationand coordination of activities within the MNCs(Birkinshaw, 2000). In modern MNCs, subsidiariesdevelop FSAs, which can be exploited throughmarket internalization within the focal subsidiaryas well as in other subsidiaries of the MNC (Rugman& Verbeke, 1992, 2009). Clearly, the role of sub-sidiaries becomes important as the efficiency oftransactions within the MNC depends on how

subsidiaries engage with the host market as well aswith the rest of the MNC.Rugman and Verbeke (1992, 2009) argued that

FSAs are developed in a subsidiary as compared tothe headquarters. In this conceptualization, thescope of FSAs is expanded to include the internal-ization advantages, that is ‘‘the capability todevelop optimal internal coordination and controlmechanisms’’ (Rugman & Verbeke, 2003: 127),which is akin to the firm-specific capability con-ceptualized by Buckley and Casson (1976: 34) as the‘‘ability of the management to organize an internalmarket’’. Similarly, Narula (2014) argued that FSAsare of two types—asset-type and transaction-type.The asset-type FSAs refer to knowledge embeddedin product or services. The transaction-type FSAsrefer to the ‘‘capabilities for the creation andcoordination of efficient internal hierarchies andmarkets within MNEs that span a complex diversityof locations’’ (Narula, 2014: 6).Despite many advantages of internalization,

scholars have argued that internalization of eco-nomic transactions within the MNCs does notalleviate the coordination and governance prob-lem, as there are costs of internalization (Buckley &Strange, 2011; Hennart, 2009; Strange & Hum-phrey, 2018). MNCs seldom use a price (externalmarket) versus hierarchy (internalization) model inorganizing economic activities. Rather, the coordi-nation of activities within MNCs is through acombination of managerial controls and some levelof price mechanism (Hennart, 1991, 1993), imply-ing the existence of internal market within MNCs.Therefore, the effectiveness of internalizationwithin the MNC depends on how efficiently theparent and subsidiaries coordinate activities toovercome the deficiencies of the external market(Nguyen & Rugman, 2015). While the parent firmsmay be the driving force behind internalization,the benefits that accrue from the effective func-tioning of an internal market are likely to beexperienced at the subsidiary level. Accordingly,in this paper, we shift the focus from the MNC toforeign subsidiaries.While there has been some emphasis on the

internal market of MNCs in recent years (Birkin-shaw, 2000), this aspect has not been fully devel-oped to understand the conditions under whichinternalization of the market within the MNCtranslates into superior performance at the sub-sidiary level. We focus on two key mechanismsthrough which MNCs exploit their internalizationadvantages, which in turn affect the performance


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of their foreign subsidiaries. These include greaterinterdependence between different subsidiaries asreflected in a higher level of inter-subsidiary salesand greater deployment of PCNs in subsidiaries forefficient transfer of organizational routines, knowl-edge and other FSAs from the parent firm to thesubsidiary.

Product market internalizationThe internal product market is a key feature ofMNCs through which intermediate products aretraded among subsidiaries. Such inter-subsidiarytrade offers internalization advantage by avoidingexternal market failure and leveraging the low-costlocation advantages (Feinberg & Keane, 2006;Buckley & Casson, 1976). MNCs exploit theseadvantages by disintegrating their value-creatingactivities to derive benefits from globally scatteredfactors of production and markets (Asmussen,Pedersen, & Dhanaraj, 2009; Meyer et al., 2011).Disintegration offers the advantages of specializa-tion, depending on the FSAs of the parent firm andthe CSAs of the host country (Mukherjee, Lahiri,Ash, & Gaur, 2018a; Rugman et al., 2011), togetherwith the arbitrage opportunities resulting fromfactor cost differentials (Rugman & Verbeke,2001). Moreover, organizing the value-added activ-ities within the MNC may allow subsidiaries tobenefit from several internalization advantagesincluding coordination of multistage productionprocess, avoiding bilateral concentration of marketpower and overcoming knowledge asymmetriesbetween buyers and sellers (Foss & Pedersen, 2004).

However, internalizing the product market trans-actions within the MNCs also has certain costs. Forexample, independent suppliers may have advan-tages of scale and specialization that are difficult torecreate within the MNE (Riordan & Williamson,1985). There are also heightened communicationcosts due to cross-national distances and coordina-tion difficulties (Asmussen, Larsen, & Pedersen,2016; Malhotra & Gaur, 2014). Greater specializa-tion within MNE subsidiaries leads to higher levelof interdependence between subsidiaries, making itdifficult to design products and share all the neededinformation for their efficient use in differentsubsidiaries (Andersson et al., 2007). While theflow of products in the form of intra-MNC tradegives subsidiaries an edge over local firms, the costsof such activities set a limit on the growth of MNCs.

Labor market internalizationIn addition to product market internalization,MNCs also rely on labor market internalization byfilling key subsidiary roles using parent countrynationals (PCNs). In making the staffing decisions,MNCs have the choice to deploy PCNs or hostcountry nationals (HCNs). This choice has impor-tant implications for exerting control over sub-sidiaries, transferring knowledge, strategicorganizational practices, and learning from thehost countries (Gaur et al., 2007; Singh, Pattnaik,Lee, & Gaur, 2019).From an internalization theory perspective, expa-

triate PCNs have superior knowledge and under-standing of the internal functioning of the MNC ascompared to HCNs and therefore serve as a superiorconduit for knowledge transfer (Kawai & Chung,2019; Singh et al., 2019). The FSAs of MNCs arederived from superior knowledge and technology,as well as routines, strategic organizational prac-tices, and an understanding of the complex intra-organizational relationships (Contractor, Yang, &Gaur, 2016; Narula & Zanfei, 2005). MNCs utilizethese FSAs by transferring them to host markets.However, MNCs cannot rely on HCNs for thetransfer of FSAs. HCNs are less reliable than PCNsas they may not be culturally and psychologicallyconnected to the MNC (Singh et al., 2019). HCNshave a steep learning curve before they can under-stand the complexities of the MNC operations(Gaur et al., 2007). This may require transferringHCNs to the headquarters and extensive accultur-ation and training. From the market failure per-spective, MNCs may need to rely on the internaltransfer of PCNs as there may not be enoughqualified HCNs who can assume important leader-ship positions in the foreign subsidiaries (Masters &Miles, 2002).Despite these advantages, the reliance on PCNs

also has some significant costs due to their inade-quate understanding of the host market contextand loss of legitimacy for the subsidiary. HCNs withtheir superior knowledge of the local context andrelationships with different local stakeholders helpin bringing the much-needed legitimacy to theforeign subsidiaries (Gaur et al., 2007; Singh et al.,2019).

Examining the Contingencies of MNCInternalizationWe argue that the net effect of the costs andbenefits of product and labor market internaliza-tion for subsidiary survival is dependent on the


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host market institutions and the organizationalcharacteristics of the parent firm. As describedabove, prior research has established that prevailinginstitutional environment determines the transac-tion cost of relying on external market and benefitsof internalization of the transaction within the firm(North, 1990). However, internalization of transac-tions is associated with certain costs, which under-mine the efficiency of the internal market.Therefore, it is the ‘‘capabilities for the creationand coordination of efficient internal hierarchiesand markets within MNEs’’ (Narula, 2014: 6) that isneeded for successful internalization. Accordingly,we focus on the affiliation of the parent firm to abusiness group as another contingency. We elabo-rate on these in the following sections.

MNC internalization and the contingent value of hostmarket institutionsThe internalization advantages, which are relatedto the transaction cost of operating in the externalmarkets are determined by the prevailing institu-tions (North, 1990). Institutions are ‘humanelydevised constraints’ which establish ‘rules of thegame’ for individuals and organizations to devisetheir actions and strategy (North, 1990). A coun-try’s institutional environment consists of formalinstitutions such as rules, regulations, judiciary,constitution and informal institutions of norms,customs, and beliefs (Bhaumik, Driffield, Gaur,Mickiewicz, & Vaaler, 2019; Gaur & Lu, 2007).These institutions set up the context for theefficient functioning of markets, which facilitatesthe transactions between parties.

Lack of such formal and informal institutionalmechanisms gives rise to opportunism and uncer-tainty in the transactional environment, discour-aging transacting parties to enter into contractualrelationships. In such circumstances, it is efficientfor firms to internalize a transaction as compared toentering into a contractual relationship with anexternal partner (North, 1990; Williamson, 1985).Such weak institutions expose the subsidiaries ofMNCs to contractual hazards, especially for theintermediate products. Subsidiaries overcome themby internalizing transactions within the MNC bytrading with other sister subsidiaries. Subsidiariesface similar difficulties in the labor market in theabsence of an efficient labor market in host coun-tries due to a paucity of potential human resources,a mechanism to ensure their credibility and regu-latory restrictions in hiring policies. There may be

significant benefits of internalizing the labor mar-ket and relying on expatriate PCNs rather thanHCNs.MNCs can mitigate the transaction costs arising

out of institutional weaknesses by either avoiding aparticular host country or devising entry modes tominimize their equity exposure in high-risk coun-tries (Delios & Henisz, 2000). However, ex antedesigning of entry mode may not alleviate thecontractual hazards which may require alternativeforms of control along dimensions other thanownership. Prior studies find a positive associationbetween country risk and operational integration,which results in a greater level of subsidiary outputtraded within the MNC network (Feinberg &Gupta, 2009). Likewise, MNCs can exert a greaterlevel of informal control over subsidiaries by labormarket internalization via a greater reliance onPCNs in host countries with weak institutions(Gaur et al., 2007). Therefore, the institutionalenvironment of the host country is important forthe product market and labor market internaliza-tion decisions of MNCs (Dunning & Lundan, 2008).In summary, the internalization advantages

derived from inter-affiliate sales should be moreprominent in economies where the level of insti-tutional development is weak, and the relativeadvantages of expatriate deployment in compar-ison to HCNs are stronger if the host country lacksefficient external labor market. However, if theexternal markets are well developed, there arelimits to internalization benefits. Thus, as theinter-subsidiary sales and the deployment of expa-triates increase, subsidiaries located in countrieswith weaker institutional environments havehigher survival rate (lower exit rate) than sub-sidiaries located in countries with stronger institu-tional environments. In other words, there is agreater potential for exploiting internalizationadvantages if there is a risk of market failure dueto less advanced institutional environments in hostcountries.

Hypothesis 1a: The host country institutionalenvironment negatively moderates the relation-ship between inter-subsidiary sales and subsidiarysurvival.

Hypothesis 1b: The host country institutionalenvironment negatively moderates the relation-ship between PCN staffing and subsidiarysurvival.


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MNC internalization and the contingent valueof business group affiliationMNCs also derive certain advantages based on theorganizational form that they have in their homecountries. In many economies, firms are part ofdiversified organizations such as business groups,which is essentially a set of legally independentfirms connected through a myriad of formal andinformal ties (Khanna & Yafeh, 2007; Granovetter,1994; Leff, 1978). The formal ties include financialrelationships based on equity ties through cross- orcircular shareholdings between firms affiliated withthe same business group (Khanna & Yafeh, 2007),product trade among the affiliated firms (Leff, 1978;Chang & Hong, 2000) and deployment of managersfrom one affiliate to the other (Khanna & Yafeh,2007). The informal ties are based on family, caste,religion, language, ethnicity, and region-basedsimilarities (Granovetter, 1994). Such ties reinforcefinancial and organizational linkages between affil-iated firms and help them take coordinated actions(Khanna & Rivkin, 2001; Khanna & Yafeh, 2007).

Business groups share many similarities withMNCs, even though the structure, characteristics,and intensity of the ties vary greatly across MNCs(Birkinshaw, 2000; Ghoshal & Bartlett, 1990). Thesimilarity of formal control over sister firms inMNCs and business groups is evident in ownershipstructures, with a pyramidal ownership structureused by the controlling families of the businessgroups (Almeida & Wolfenzon, 2006) and owner-ship over a portfolio of firms adopted by the MNCs(Nohria & Ghoshal, 1994). The informal controlacross business group affiliated firms is throughfamily, ethnic, and other social ties between man-agers of the affiliated firms (Granovetter, 1994) andPCN deployment, acculturation, and socializationof senior subsidiary managers in MNCs (Doz &Prahalad, 1984; Nohria & Ghoshal, 1994). Bothbusiness groups and MNCs have a vibrant internalmarket for product, capital, and labor.

Despite these similarities, there are some impor-tant differences. For example, although there isoften a strong undercurrent of family relationshipsin business groups, such linkages are absent inMNCs. While business groups operate in a diverseset of industries through corporate diversification,MNCs tend to focus on a narrower set of industries.The internal transactions within MNCs focus moreon market-based considerations to leverage factorcost differentials whereas the internal transactionswithin business groups could be to cross-subsidizeaffiliated firms. Business groups that focus primarily

on domestic markets may be able to thrive withoutproprietary knowledge and technologies (Pattnaik,Lu, & Gaur, 2018). They often possess institutionaladvantages in home markets based on their con-nections with the government and embeddednessin the local environment. MNCs, however, oftenneed some unique technological and/or marketingresources to succeed in international markets.Considering the similarities and differences

between MNCs and business groups, it is plausiblethat business group-affiliated firms operating ininternational markets may derive certain benefitsby translating their ability to internalize transac-tions or the transaction-type FSA in the domesticmarket to their global operation. Business groupsemerge as a ‘mechanism for dealing with deficien-cies in the markets for primary factors, risk, andintermediate products in the developing countries’Leff (1978: 667). They substitute the externalmarket failure by internalizing product, capitaland managerial labor markets (Khanna & Palepu,2000). Therefore, market internalization is one ofthe core capabilities of business groups (Khanna &Rivkin, 2001). Given the importance of internal-ization for MNCs, it is likely that business group-affiliated firms with their prior experience in mar-ket internalization in domestic markets have asuperior ability to manage their internal market asthey expand internationally (Lee & Gaur, 2013).Specifically, when it comes to product market

internalization, both business groups and MNCsrely on sister firms, often purchasing and sellingintermediate products (Gedajlovic & Shapiro,2002). When business group-affiliated MNCsexpand to foreign markets, they may be moreadept at creating similar structures by mandatingcertain subsidiaries to produce intermediate prod-ucts, coordinating the flow of such products andmanaging the multistage production process. Dueto such advantages, business groups such asJapanese keiretsu facilitate the internationalizationof firms from the same network in a particular hostcountry and replicate the internal exchange ofproduct and resources with other firms of the samekeiretsu in foreign markets (Chang, 1995; Gaur &Lu, 2007).Similarly, business groups are known to rely on

internal training and deployment of key employeesacross affiliated firms to help them take coordi-nated actions in different product and geographicmarkets (Khanna & Palepu, 2000; Khanna & Yafeh,2007). MNCs too rely on expatriate deploymentand internal transfers from headquarters to


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subsidiaries and between subsidiaries, often toexercise informal control and develop a uniformorganizational culture (Gaur et al., 2007). If anMNC is also part of a business group, there is aculture of relying on internal employees for infor-mal control, which makes it more effective todeploy expatriate PCNs in foreign subsidiaries.

Business group-affiliated MNCs also receive sev-eral other benefits from other group affiliates in theinternational market. For example, group-affiliatedfirms leverage the international experience andknowledge of the other affiliates to reduce the costof foreign expansion (Elango & Pattnaik, 2007;Gaur, Kumar, & Singh, 2014), establish operationsin countries in which other affiliates have alreadyestablished their operations (Guillen, 2002), use thesame entry modes (Guillen, 2003) and experienceless political hazard (Delios & Henisz, 2000). More-over, business groups’ affiliates can use otheraffiliates’ resources to internationalize (Elango &Pattnaik, 2011; Guillen, 2002, 2003) and combineresources that are shared internally with resourcesthat are accessed from external entities (Gaur et al.,2014).

However, business groups are embedded in thelocal institutional environment, and some of theirinternalization advantages may be context-specific.For example, some of the non-market advantagesresulting from superior institutional connections,such as with bureaucrats, regulators, and govern-ment in home markets (Cuervo-Cazurra, Luo,Ramamurti, & Ang, 2018; Gaur, Ma, & Ding,2018), may be difficult to transfer to their overseasoperations. Despite the non-transferability of cer-tain advantages, we expect that subsidiaries belong-ing to business groups, through their orchestrationof internal capital, labor, and product markets,have an advantage over subsidiaries that are notaffiliated to business groups. As a result, we expectthat the internalization advantages of MNCs areaugmented when combined with advantages ofbusiness groups such that, as the inter-subsidiarysales and deployment of expatriates increase, sub-sidiaries affiliated to business groups have a highersurvival rate (lower exit rate) than unaffiliatedsubsidiaries.

Hypothesis 2a: Business group affiliation pos-itively moderates the relationship between inter-subsidiary sales and subsidiary survival.

Hypothesis 2b: Business group affiliation pos-itively moderates the relationship between PCNstaffing and subsidiary survival.

Business Group Affiliation and Contingent Valueof Host Market InstitutionsAs argued in the previous sections, some of theadvantages of business groups are context-specific.The institutional voids argument suggests that theorganizational form of business groups helps inovercoming the inefficiencies of the external cap-ital, labor and product markets by internalizingthese transactions within the group (Khanna &Palepu, 2000; Leff, 1978). While the institutionalvoids argument is proposed in relation to the homecountry institutional context of business groups,we argue that the host market institutional envi-ronment also affects the benefits that the sub-sidiaries of MNCs affiliated to business groupsderive in a host market.A key characteristic of business groups is that the

affiliated firms take coordinated actions in differentproduct and geographic markets, and rely on bothmarket-based internalization advantages as well asnon-market advantages (Antras, Desai, & Foley,2009; Khanna & Palepu, 2000; Khanna & Yafeh,2007; Mukherjee, Makarius, & Stevens, 2018b). Thetransferability and utilization of these advantagesin a host market depends on the quality of hostmarket institutions (Buckley, 1990; Erramilli, Agar-wal, & Kim, 1997). While prior studies in interna-tional business have argued that host countryfactors can strengthen the FSA or render themredundant (Dunning, 1995; Erramilli et al., 1997),we extend this line of reasoning to internalization-based FSAs with reference to host country institu-tions (Dunning & Lundan, 2008). For example, themarket-based advantages from the internalizationof capital, labor and product markets may not be aneffective mode to transact when the external mar-ket provides these with greater efficiency. In fact,continued reliance on internal markets may bedetrimental to firm performance if competitors canhave superior access to resources from the externalmarkets. Likewise, the non-market-based advan-tages may not be valuable in host countries withwell-developed institutions. For example, whilebusiness groups overcome institutional voidsthrough reputational advantage in their homecountries, group-affiliated firms may need to over-come the reputational disadvantages when expand-ing abroad, as both foreign investors and customers


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may view them with suspicion due to the connec-tions with home governments and dominant fam-ilies (Mukherjee et al., 2018a, b). Thus, even thoughthe subsidiaries belonging to business groups are inan advantageous position due to their orchestra-tion of internal capital, labor and product marketsand the non-market-based advantages, the value ofthese advantages is contingent on the host institu-tions. In host countries with superior institutions,foreign subsidiaries of business group-affiliatedMNCs are likely to have lower survival rate thanthose belonging to non–business group MNCs.

Hypothesis 3: The quality of host marketinstitutions negatively moderates the relation-ship between business group affiliation and sub-sidiary survival.

Contingent Value of Inter-Business GroupVariationsBusiness groups vary on several dimensions, whichinfluence how they augment their internalizationadvantages. To examine these variations acrossdifferent business groups, we focus on two impor-tant characteristics of business groups—scope andsize. The size and scope dimensions are related tothe economies of scale and scope, which areimportant from the perspective of how MNCsderive internalization advantages in internationalmarkets.

Business group scope (unrelated diversification)An important distinguishing feature of businessgroups is their diversification into unrelated indus-tries to increase their scope of operations (Khanna& Palepu, 2000; Khanna & Rivkin, 2001; Leff,1978). Unrelated diversification through affiliatedfirms is the mechanism through which businessgroups internalize transactions when the externalmarkets are inefficient or underdeveloped. Basedon this rationalization, empirical studies find apositive relationship between business group diver-sification and performance, particularly for groupsthat are highly diversified (Khanna & Palepu,2000).

In the context of internationalization activities ofdiversified business groups, the theoretical predic-tions and empirical results about the relationshipbetween product and geographic diversification areinconsistent. Some scholars argue that the marketinternalization advantages of business groups arelocation-specific which may not translate to similaradvantages when group-affiliated MNCs operate in

foreign countries (Gaur & Kumar, 2009; Kumar,Gaur, & Pattnaik, 2012). For such firms, productdiversification may constrain the internationalactivities due to high internal governance costs,overstretching of managerial resources andincreased complexity in running a firm that isdiversified on both product and geographic dimen-sions (Kumar et al., 2012). However, other studieshave challenged this static perspective on thelocation specificity of the business group advan-tages which argues that ‘‘as market supporting-institutions evolve and imperfections decline, the[internal market] advantages of business groupsmay dissipate’’ (Kim, Kim, & Hoskisson, 2010:1156). In reality, many business groups have per-sisted and thrived even when the institutionalvoids dissipated (Lee & Gaur, 2013; Manikandan& Ramachandran, 2015). Moreover, businessgroups have become more diversified as their homemarkets became more advanced in terms of market-supporting institutions (Siegel & Choudhury,2012). These studies suggest that diversificationand internalization advantages are not tied toinstitutional voids and can be transferred to over-seas operations.With respect to the scope advantages of unre-

lated diversification, Khanna and Palepu (2000)find that the performance of business group affil-iates ‘‘initially decline with group diversificationand subsequently increase once group diversifica-tion exceeds a certain level (in India)’’ and the ‘‘netbenefits of unrelated diversification were positive ifgroup diversification exceeded a threshold level’’(in Chile). These findings suggest that internaliza-tion advantages accrue to the business groups aftera certain level of diversification. Moreover, highlydiversified business groups can allocate and lever-age the fixed costs of building and operatinginternal markets across larger potential revenuebases and more product markets (Khanna & Palepu,2000).Therefore, business groups with higher levels of

unrelated diversification are likely to develop com-petencies for exploiting internalization advantages,which may be applied within as well as beyond thehome countries. Prior studies have found thathigher unrelated diversification of business groupsis related to growth opportunities for affiliatedfirms (Manikandan & Ramachandran, 2015), andthat highly diversified groups act as a conduit ofinformation by identifying potential exchangepartners and enabling transactions with externalclients in domestic and foreign markets. As a result,


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the affiliates of diversified business groups expandto more industries and international markets.Accordingly, we expect that business groups withhigher levels of unrelated diversification will aug-ment the product and labor market internalizationadvantages of MNCs. As the inter-subsidiary salesand deployment of expatriates increase, sub-sidiaries affiliated to more diversified businessgroups have a higher survival rate (lower exit rate)than those affiliated to less diversified businessgroups.

Hypothesis 4a: Business group diversificationpositively moderates the relationship betweeninter-subsidiary sales and subsidiary survival.

Hypothesis 4b: Business group diversificationpositively moderates the relationship betweenPCN staffing and subsidiary survival.

Business group sizeSimilar to the scope dimension, size also providesseveral benefits to business group-affiliated firms.Firms affiliated to large business groups have accessto a large pool of tradeable and non-tradeableresources (Guillen, 2000), reputation (Mukherjeeet al., 2018a, b) and superior ability of marketintermediation (Khanna & Yafeh, 2007). Largerbusiness groups tend to have larger and richerresource endowments, such as access to finance,technology, labor and non-tradeable resources,such as reputation and political power.

Similarly, large groups tend to attract highlytalented employees to the group affiliates. In thecase of Korea, large chaebols like Samsung, LG, andHyundai are known for mass recruitment drives(known as Gongchae) for college graduates, whoview these chaebols as preferred employers (Chang,2012). Large groups have superior technology poolsdue to their investment in R&D. MNCs prefer toform joint ventures or license their technology tolarge business groups due to their reputation for fairdealing with business partners (Lu & Ma, 2008).Size also confers business groups with substantialpolitical power (Dieleman & Sachs, 2008). Accord-ing to Encarnation (1989), large Indian businessgroups run embassies in the Indian capital, NewDelhi, to lobby the government. Finally, largegroups can benefit from economies of scale incarrying out their intermediating functions in acost-effective manner (Khanna & Palepu, 2000).

The above advantages of size help group-affili-ated firms in carrying out market intermediationwhen group-affiliated MNCs operate in foreignmarkets. For example, the superior work force thatlarger groups acquire in domestic markets helpsthem in their staffing needs in foreign markets.Likewise, access to different tradeable and non-tradeable resources in the network of affiliatedfirms in domestic markets translates to similarbenefits for subsidiaries in foreign markets. There-fore, we argue that internalization advantages aremore likely to accrue to the MNCs affiliated withlarger business groups as compared to smallerbusiness groups. As the inter-subsidiary sales anddeployment of expatriates increase, subsidiariesaffiliated to larger business groups have a highersurvival rate (lower exit rate) than those affiliated tosmaller business groups.

Hypothesis 5a: Business group size positivelymoderates the relationship between inter-sub-sidiary sales and subsidiary survival.

Hypothesis 5b: Business group diversificationpositively moderates the relationship betweenPCN staffing and subsidiary survival.

METHODS

SampleWe examined the above hypotheses using longitu-dinal panel data on foreign direct investments(FDIs) by South Korean (Korean hereafter) manu-facturing firms listed on the Korea Stock Exchangeover a 19-year period (1995–2013). A sample ofKorean MNCs provides an ideal context for exam-ining our theoretical framework for the followingreasons. First, Korean MNCs have expanded abroadin the last three decades to both developing anddeveloped countries, giving a good variance on thehost country institutional development. Many ofthese MNCs are affiliated with business groupsknown as chaebols (Chang & Hong, 2000). Second,firms affiliated with chaebols actively use internalcapital, labor, and product markets through inter-affiliate trade in the domestic market (Chang &Hong, 2000; Khanna & Yafeh, 2007). Such experi-ence provides advantages to extend the marketinternalization experience acquired in domesticmarkets to international markets through tradeamong foreign subsidiaries. Third, a study ofKorean MNCs complements prior studies on the


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survival of foreign subsidiaries, which have beenconducted on the U.S., European, and JapaneseMNCs (Delios & Beamish, 2001).

To construct our panel, we collected data frommultiple sources, including financial and account-ing information about publicly traded KoreanMNCs from KISLINE and KISVALUE, Korean FDIinformation from the Korean Ministry of Financeand Economy (KMFE) and the Korean Ministry ofStrategy and Finance (KMSF) databases, the KoreaListed Companies Association (KLCA), and theKorea Information Service aligning with each firm’sannual reports. Although we gathered data from1995, a small portion (around 15%) of these foreignsubsidiaries were established before 1995, makingtheir past histories left-censored. To address thisissue, we excluded FDIs initiated before 1990. Toavoid biases potentially caused by FDIs still underimplementation, we included only subsidiaries thatwere at least a year old by the end of our studyperiod. After these screenings, we obtained 6170subsidiary–year observations of 4478 manufactur-ing subsidiaries owned by 292 MNCs in 63 coun-tries (see Tables 1, 2 and 3 for detailed sampledescription). Among these 4478 manufacturingsubsidiaries, 767 were terminated by the end-dateof our study period which is 2013 (see Table 4 fordetails on subsidiary exits by year).

Variables

Dependent variableWe considered subsidiary survival as a dependentvariable. Subsidiary survival is an appropriate mea-sure of subsidiary performance as not all sub-sidiaries may pursue profit maximization in hostcountries. Previous studies have found subsidiarysurvival to correlate highly with the managerialperception of subsidiary performance (Delios &Beamish, 2001). To test the robustness of ourfindings, we also utilized return on assets (ROA) atthe subsidiary level and found qualitatively similarresults.

To estimate the hazard rate of the subsidiary, westructured the data in a panel in which eachsubsidiary had one observation in each year it wasin operation. The observations on a given sub-sidiary stop in the data set in the year in which itceases to have operations (exits the market). Ineach year, the survival status of a subsidiary isindicated using a dummy variable that equals 1 ifa subsidiary exited and 0 otherwise. For example, asubsidiary that is founded in year 2000 and exitsthe market in year 2005 will have six years of datasuch that a 0 will appear for years 2000–2004showing survival, and a 1 will appear in year 2005showing the exit. Consistent with previous litera-ture (Delios & Beamish, 2001), our definition ofsubsidiary exit refers to subsidiary failure, whichinvolves subsidiary exits by divestiture and disso-lution. Korean MNCs report their subsidiary failuresthrough failure-based closedowns, sell-offs, anddissolution to KMFE or KMSF. Such reportingexcludes success-based sell-offs, spin-offs, orcarves-out from the subsidiary exits.

Explanatory variablesThe key explanatory variables include internaliza-tion of product market (i.e., inter-affiliate sales),and labor market (i.e., deployment of expatriates inthe subsidiary) within the MNCs, the host marketinstitutional environment, and business groupaffiliation of MNCs. First, for product marketinternalization, we operationalized the inter-affiliatesales of a MNC as the ratio of a specific subsidiary’ssales to the rest of the MNC in a particular year tothe total subsidiary sales in that year (Feinberg &Gupta, 2009). It should be noted that subsidiarysales comprise (1) sales to other subsidiaries in thehost market, (2) sales other subsidiaries all over theworld, (3) sales to other firms/customers in the hostmarket, and (4) sales to other firms/customers allover the world. In most cases, the first three (1, 2and 3) constitute the majority of subsidiary sales.Our measure of inter-affiliate sales is addition ofsales to other subsidiaries in the host market as wellas in the rest of the world.Second, for labor market internalization, we

measure the ratio of the number of parent countryexpatriates to the total number of employees in thesubsidiary (Gaur, Delios, & Singh, 2007).Third, we measured the host country institutional

environment using the Heritage Economic FreedomIndex of a host country. The Index of EconomicFreedom, an annual guide published by the Her-itage Foundation for over 20 years, comprises 10

Table 1 Sample description by chaebols versus non-chaebols

Organizational

type

Number of MNCs

(%)

Number of subsidiaries

(%)

Chaebols 131 (44.9%) 2125 (47.5%)

Non-chaebols 161 (55.1%) 2353 (52.5%)

Total 292 (100%) 4478 (100%)


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quantitative and qualitative factors, categorizedinto four pillars of economic freedom: rule of law(property rights, freedom from corruption), limitedgovernment (fiscal freedom, government spend-ing), regulatory efficiency (business, labor, andmonetary freedom), and open markets (trade,investment, and financial freedom), each gradedon a scale of 0–100. A host country’s overalleconomic freedom score is derived by averagingthese economic freedom grades, with equal weightgiven to each item (Heritage Foundation, 2015).We used overall scores of economic freedom,which fits with our objective to examine theimpact of the host country institutional environ-ment. Previous studies have similarly used thismeasure to assess the impact of the institutionalcontext of a country on firm-level strategies(Meyer & Sinani, 2009).

Fourth, in line with previous studies (Chang &Hong, 2000; Guillen, 2000), we coded an MNC’sbusiness group affiliation as 1 if the MNC wasaffiliated with one of the 30 largest Korean chae-bols listed in the Korea Fair Trade Commission’slist of the largest Korean business groups. Follow-ing Chang and Hong (2000), we operationalizedbusiness group unrelated diversification by theentropy measure at the business group level basedon two-digit Korean Standard Industry Classifica-tion, and business group size by the log of thetotal assets.

Control variablesWe included an extensive set of control variables,which have been identified in the extant literatureas determinants of subsidiary survival (Nielsen &Raswant, 2018). These control variables includesubsidiary-, (host) country-, parent firm-, and busi-ness group-level factors.First, subsidiary-level control variables include

each subsidiary’s size and age, human capitalintensity, advertising intensity, entry modedummy, and global industry dummy. Subsidiarysize may affect subsidiary survival because largersubsidiaries have additional organizational slackthat enables them to deal with financial turbulence(Reuer & Leiblein, 2000). We operationalized sub-sidiary size as the log of total assets for eachsubsidiary. The older subsidiary can accumulateexperiences from its operation in each host coun-try, and hence this may affect subsidiary survivalpositively. We operationalized subsidiary age as thelog of years since its establishment in a particularhost country.If subsidiaries have more learning capacity, such

that they can absorb external and internal knowl-edge sources available across their MNC network,they may experience a higher survival rate. Theabsorptive capacity of an organization can beoperationalized as the ratio of R&D sales to totalsales (Cohen & Levinthal, 1990). However, in thecase of foreign subsidiaries of emerging marketMNCs, the ratio of skilled personnel to total

Table 2 Description of sample subsidiaries by industry

Industry Number of sample subsidiaries Percentage (%)

1. Food and beverage 91 2.0

2. Apparel and leather 78 1.7

3. Pulp and paper 47 1.0

4. Petroleum and coal products 95 2.1

5. Chemical 979 21.9

6. Plastics and rubber 142 3.2

7. Non-metallic mineral products 226 5.1

8. Primary metal 357 8.0

9. Fabricated metal products 60 1.4

10. Machinery and equipment 195 4.4

11. Computer and office supplies 56 1.3

12. Electrical equipment, appliance, and components 142 3.2

13. Electronic products and communications equipment 963 21.5

14. Medical/optical instruments and precision machinery 139 3.1

15. Automobiles and trailers 667 14.9

16. Other transportation equipment 110 2.5

17. Others 131 2.9

Total 4478 100


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employees may be a more appropriate variable tomeasure absorptive capacity, because subsidiaryskilled personnel have a very important role asconduits of knowledge transfer between the parentand the subsidiary (Nuruzzaman, Gaur, & Samb-harya, 2018). Therefore, we use the latter measure-ment for subsidiary human capital intensity. Inaddition, if foreign subsidiaries have more market-ing capabilities, they can survive longer (Delios &Beamish, 2001). We operationalize subsidiary adver-tising intensity as advertising expenses divided bytotal sales of the subsidiary.

We also controlled the entry mode of eachsubsidiary. Ownership mode variables take a valueof 1 for wholly-owned subsidiaries (WOS) if itsparent has 95% or more equity in a subsidiary, and0 otherwise (Gaur & Lu, 2007). Because MNC

parents have more involvement and resource allo-cation in WOS than in joint ventures (JVs), WOStend to have lower exit rates than JVs (Gaur & Lu,2007). We included a global industry dummy torepresent whether an industry is included in thequadrant signaling a high level of internationaltrade (0.5–1.0) or a low intra-industry trade (0–0.5)(Makhija, Kim, & Williamson, 1997). Because tan-gible flows (exports and imports flows) commonlyinclude intangible asset flows (Foss & Pedersen,2004), a high level of international trade suggeststhat international linkages, in the form of exportsand imports, are integral to the industry (Makhijaet al., 1997).Second, we controlled for host country effects

(Mingo, Junkunc, & Morales, 2018) by includingthe cultural distance between Korea and each host

Table 3 Description of sample subsidiaries by country

Country name Number of sample

subsidiaries

Percentage

(%)

Country name Number of sample

subsidiaries

Percentage

(%)

China 1526 34.1 Myanmar 22 0.5

United States 635 14.2 United Arab Emirates 22 0.5

Vietnam 259 5.8 Chile 22 0.5

Indonesia 166 3.7 South Africa 22 0.5

Hong Kong 161 3.6 Honduras 22 0.5

Japan 148 3.3 Mongolia 21 0.5

Germany 89 2.0 New Zealand 21 0.5

Thailand 76 1.7 Guatemala 21 0.5

Singapore 63 1.4 Belgium 21 0.5

United Kingdom 58 1.3 Portugal 21 0.5

Malaysia 54 1.2 Switzerland 21 0.5

Australia 54 1.2 Argentina 21 0.5

Philippines 54 1.2 Czech 21 0.5

Canada 45 1.0 Pakistan 21 0.5

India 40 0.9 Sri Lanka 21 0.5

Bangladesh 31 0.7 Peru 21 0.5

Mexico 31 0.7 Rumania 20 0.4

Taiwan 31 0.7 Solomon Islands 20 0.4

Poland 30 0.7 Israel 20 0.4

Hungary 30 0.7 Sudan 19 0.4

Netherlands 25 0.6 Austria 19 0.4

Slovakia 25 0.6 Ireland 19 0.4

Cambodia 25 0.6 Luxembourg 19 0.4

Russia 25 0.6 Sweden 19 0.4

France 25 0.6 Cyprus 19 0.4

Brazil 24 0.5 Nicaragua 19 0.4

Uzbekistan 24 0.5 El Salvador 19 0.4

Italy 24 0.5 Nigeria 18 0.4

Panama 24 0.5 Saudi Arabia 18 0.4

Turkey 23 0.5 Bolivia 18 0.4

Kazakhstan 23 0.5

Spain 23 0.5 Total 4478 100


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country, and each host country’s gross domesticproduct (GDP) in the empirical models. In line withprevious literature, we operationalized cultural dis-tance using the Euclidean distance formula, whichovercomes some of the limitations of the Kogut andSingh’s (1988) index. When the cultural distance isgreater, the liability of foreignness is likely toincrease, and negatively affect subsidiary survival.We controlled for host country’s GDP because alarger market size is likely to enhance subsidiarysurvival and host countries with low GDP mayprovide cost advantages to subsidiaries due to lowerlabor cost, which has a positive impact on sub-sidiary survival.

In addition, to control for the host countryexperience of the MNC parent, we used the logarithmof each parent firm’s prior experience in a hostcountry in months at the end of each year. If anMNC has a longer host country experience, it hasthe time to adapt to the local institutional envi-ronment and overcome the liability of foreignnessin a host country which leads to enhanced sub-sidiary survival rate. Chang (1995) shows thatMNCs can benefit from the previous existence ofan investment by the same MNC in a specific hostcountry. This means that the benefits of being partof a business group transcend the home countryboundary. The existence of previous investments inthe same host country can decrease the initial costof investment, which can make the entry decisioneasier to make. Hence, in this vein, we included two

control variables: (1) the number of previous invest-ment by the same MNC in a particular host country and(2) the number of previous investment by the MNCsfrom the same business groups in a particular hostcountry. Lastly, when looking into Chaebol firms,there is potential that there will be sub-additivityfor a subsidiary that is co-located with othersubsidiaries from the same firm in the same hostcountry. Therefore, we controlled for a dummyvariable assigning ‘1’ if a Chaebol firm has a morethan one subsidiary in the same host country, and ‘0’otherwise.Third, parent firm-level variables also affect the

survival of subsidiaries since foreign subsidiaries areembedded within the MNC. A parent firm withlarger resources and capabilities has supplementaryorganizational slack to confront financial difficul-ties (Fuad & Gaur, 2019). We measured parent firmsize as the logarithm of total assets for eachsubsidiary’s parent firm. An older parent firm hasmore experience to solve a variety of MNC-spannedissues caused by internal problems or externalvolatilities (Gaur & Lu, 2007). Hence, we controlledfor a parent firm’s age by using the logarithm ofyears since the establishment of a parent firm, andfor a parent’s R&D intensity by the R&D expendi-tures as a percentage of total sales. We alsocontrolled for parent firm profitability as measuredby a parent firm’s ROA, since profitable parent firmscan support their subsidiaries to survive.Fourth, we controlled for the time period effects

for the Asian financial crisis and global financialcrisis since these periods may induce some system-atic effects on subsidiary survival. For the Asianfinancial crisis, we assigned a dummy for the periodfrom 1998 to 2001, and for the global financial crisis,we assigned a dummy for the period from 2008 to2011.Finally, we also included industry dummies using

the two-digit Korea standard industry code in orderto take into account the potential impact ofunobserved differences in capital intensity or com-petition associated with different industrial charac-teristics on subsidiary survival. In addition, weincluded year dummies to control the potentialimpact of time effects on subsidiary survival.We present data sources of all variables in

Table 5.

Statistical ApproachWe conducted the analysis using a multi-levellogistic regression approach, given that ourexplanatory variables operate at different levels.

Table 4 Description of subsidiary exits by year

Year Number of subsidiary exits Percentage (%)

1996 34 4.4

1997 36 4.7

1998 42 5.5

1999 48 6.3

2000 47 6.1

2001 52 6.8

2002 38 5.0

2003 42 5.5

2004 40 5.2

2005 41 5.3

2006 37 4.8

2007 41 5.3

2008 44 5.8

2009 45 5.9

2010 50 6.5

2011 47 6.1

2012 42 5.5

2013 41 5.3

Total 767 100


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Further, there could be concerns about potentialendogeneity, as the motives of investments differdepending on the choice of host country. In orderto address the endogeneity problem arising due topotential selection bias, we utilized the two-stageHeckman selection models (Heckman, 1979).Because our analysis was based on longitudinalpanel data, we utilized a panel data extension ofthis procedure (Wooldridge, 1995). In the first-stageselection model, we ran a probit model andobtained the inverse Mills ratio values. The predic-tor in the probit model was host country factors aswell as other explanatory variables (except for

subsidiary-level variables) similar to those used inthe second-stage model, but with a different num-ber of variables to minimize the identificationproblem (Sartori, 2003). The dependent variablefor this probit model was the likelihood of entryinto a market. This inverse Mills ratio was then putin the second-stage model (i.e., multi-level logisticmodel).Some data structures such as ours do not have a

complete hierarchical structure, making it neces-sary to utilize special specifications, such as cross-classified multilevel analysis (Hillman & Wan,2005). A foreign subsidiary’s survival ratio may be

Table 5 Variables and data sources

Variables Data sources

Subsidiary level

Subsidiary exit KMFE and KMSF databases

Subsidiary size = log (subsidiary assets) KMFE and KMSF databases; each firm’s annual reports

Subsidiary age = log (years since establishment) KMFE and KMSF databases; each firm’s annual reports

Subsidiary human capital intensity KMFE and KMSF databases; each firm’s annual reports

Subsidiary advertising intensity KMFE and KMSF databases; each firm’s annual reports

Ownership mode dummy (WOS = 1 vs. JV = 0) KMFE and KMSF databases; each firm’s annual reports

Global industry dummy KMFE and KMSF databases; each firm’s annual reports; OECD database;

UNCTAD database

Inter-affiliate sales ratio KMFE and KMSF databases; each firm’s annual reports

Korean expatriates in the subsidiary KMFE and KMSF databases

(Host) country level

Cultural Euclidean distance KMFE and KMSF databases; each firm’s annual reports; Hofstede index

Host country experience = log (number of months) KMFE and KMSF databases; each firm’s annual reports

Previous investment by the same MNC in host country KMFE and KMSF databases; each firm’s annual reports

Previous investment by MNCs from the same group in

host country

KMFE and KMSF databases; each firm’s annual reports

More than one subsidiary by a chaebol firm in the

same host country

KMFE and KMSF databases; each firm’s annual reports; Korea Fair Trade

Commission

Host country GDP = log (host country GDP) World Bank database/World Development Indicators

Host country GDP per capita = log (host country GDP

per capita)

World Bank database/World Development Indicators

Host country institutions Heritage Economic Freedom Index

Parent firm level

Parent firm size = log (firm assets) Korea Information Service/KISLINE and KISVALUE; KLCA

Parent firm age = log (years since establishment) Korea Information Service/KISLINE and KISVALUE; KLCA

Parent firm R&D intensity Korea Information Service/KISLINE and KISVALUE; KLCA

Parent ROA Korea Information Service/KISLINE and KISVALUE; KLCA

Business group level

Business group affiliation dummy Korea Fair Trade Commission; KLCA

Business group unrelated diversification Korea Fair Trade Commission; Korea Information Service/KISLINE and

KISVALUE; KLCA

Business group size = log (business group assets) Korea Fair Trade Commission; Korea Information Service/KISLINE and

KISVALUE; KLCA

Asian financial crisis dummy (1998–2001 = 1 or 0

otherwise)

LexisNexis database; KMFE and KMSF databases; each firm’s annual

reports

Global financial crisis dummy (2008–2011 = 1 or 0

otherwise)

LexisNexis database; KMFE and KMSF databases; each firm’s annual

reports

KMFE Korean Ministry of Finance and Economy, KMSF Korean Ministry of Strategy and Finance, KLCA Korea Listed Companies Association.


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affected by both the parent firm to which thatsubsidiary is affiliated and the host country whereits parent firm enters. A single parent firm is likelyto have subsidiaries from more than one hostcountry. In this regard, parent firm is not nestedwithin the host country, and host country is notnested within parent firm. Moreover, in this study,not all subsidiaries are part of the parent firmsaffiliated with business groups. Accordingly, thisstudy’s data structure follows a cross-classifiedmultilevel data structure. Although our data havea multilevel structure at four levels (level 4: busi-ness group-, level 3: parent firm-, level 2: hostcountry-, and level 1: subsidiary-level), it is not acomplete-four-level hierarchical structure. Respec-tive lower-level unit (level 1) in our sample is cross-classified by other higher-level units. In otherwords, subsidiaries are cross-classified by the parentfirm in which they are affiliated to and by the hostcountry in which they operate; additionally, not allsubsidiaries are part of the parent firms affiliated tobusiness groups. Furthermore, because the depen-dent variable is a dummy variable (i.e., subsidiaryexit), we utilize the Glimmix function in SAS toassess the cross-classified multilevel logistic regres-sion in the present study (Hox, 2010). We alsoconducted robustness tests using Cox regressionand found consistent results.

RESULTS

Descriptive Statistics and CorrelationsTable 6 presents the descriptive statistics and thecorrelation matrix. To diagnose any potentialproblem of multicollinearity, we checked the vari-ance inflation factor (VIF) for each variable; a VIF inexcess of 10 is indicative of a multicollinearityproblem (Menard, 1995). Our results revealed thatthe VIFs associated with our independent variablesdid not exceed 1.86, suggesting that multicollinear-ity is not a concern for our models. We alsoconducted analysis by removing variables withhigh correlations (Kalnins, 2018) and found resultsto be qualitatively similar.

Subsidiary SurvivalTable 7 presents the estimation results for cross-classified multilevel logit model on the factorsaffecting the subsidiary exit likelihood. The resultsof the unconditional models are reported as Model1 in Table 7. We also tested three different uncon-ditional models (not presented in the paper) to

assess variance components for cross-classifiedmultilevel logit models. We first treated only onelevel (i.e., country-level) random effect in the firstunconditional model, and then added the parentfirm level random effect, and the business grouplevel random effect. We adopted this analyticaltechnique by following the previous literature(Goldstein, 1994).Since the dependent variable is a subsidiary exit,

a positive coefficient indicates that the covariateincreases the likelihood of exit (reduces the survivalrate), while a negative coefficient indicates that thecovariate reduces the likelihood of exit (increasesthe survival rate).We built in fixed control effects in Model 2.

Among subsidiary-level factors, subsidiary size andadvertising intensity have a significant negativeeffect on subsidiary exit likelihood in all models;subsidiary age, human capital intensity and globalindustry dummy also have a negative and signifi-cant effect, but only in Model 2. Among hostcountry-level factors, host country experience isnegatively and significantly associated with sub-sidiary exit likelihood; while cultural distance andhost country GDP per capita are positively andsignificantly associated with subsidiary exit likeli-hood in all models. Among parent firm-levelfactors, parent firm size, age, and profitability arenegatively and significantly associated with sub-sidiary exit likelihood in all models.Model 3 includes the main explanatory variables.

Model 4 incorporates country-subsidiary levelinteraction terms (1) between inter-affiliate salesof an MNC and host market institutional environ-ment and (2) between Korean expatriates in thesubsidiary and host market institutional environ-ment. Model 5 incorporates business group-sub-sidiary level interaction terms (1) between inter-affiliate sales of an MNC and business groupaffiliation and (2) between Korean expatriates inthe subsidiary and business group affiliation. Model6 includes the interaction of business group andcountry level institutions, and Model 7 includes allvariables and cross-level interaction terms.Model 3 revealsthat inter-affiliate sales is nega-

tively and significantly associated with the sub-sidiary hazard rate (b = - 0.311, p = 0.006); thisresult is consistent in different models, indicatingthat subsidiaries with higher levels of inter-affiliatesales are likely to have a higher likelihood ofsurvival. Also, the deployment of Korean expatri-ates in the subsidiary is negatively and significantlyassociated with the subsidiary hazard rate


1268


Table

6Means,

standard

deviations,

andco

rrelations

Mean

SD

Min

Max

12

34

56

78

910

11

1.

Subsidiary

exit

0.12

0.33

0.00

1.00

2.

Subsidiary

size

(log)

16.25

1.69

7.61

22.79

-0.30

3.

Subsidiary

age(log)

2.07

1.95

0.00

4.17

-0.07

0.32

4.

Subsidiary

humancapitalintensity

0.47

0.41

0.00

1.00

-0.12

0.03

-0.01

5.

Subsidiary

advertisingintensity

0.03

0.05

0.00

0.99

-0.40

0.27

-0.02

0.12

6.

Ownership

modedummy

0.79

0.41

0.00

1.00

-0.01

-0.04

-0.02

0.02

-0.04

7.

Globalindustry

dummy

0.16

0.36

0.00

1.00

-0.01

0.07

0.06

0.10

0.04

0.07

8.

CulturalEuclideandistance

62.13

20.33

2.09

96.38

0.05

-0.02

-0.01

0.00

0.08

0.03

-0.01

9.

Host

countryexperience

(log)

4.77

3.40

2.48

6.12

-0.14

0.05

0.15

0.35

0.13

0.07

0.04

-0.28

10.

Invest

bysameMNC

inhosta

3.58

0.86

0.00

8.00

-0.02

-0.02

0.01

0.07

-0.02

0.02

0.00

-0.13

0.10

11.

Invest

bysameMNCsfrom

groupc

4.71

1.54

0.00

10.00

-0.02

-0.02

-0.02

0.09

-0.00

0.02

-0.01

-0.17

0.12

0.46

12.

More

thanonech

aebolsubsidiary

c0.44

0.50

0.00

1.00

-0.02

0.19

0.12

0.05

-0.03

-0.14

-0.00

0.01

0.02

-0.02

-0.02

13.

Host

countryGDP(log)

6.99

1.78

-1.47

9.49

-0.07

0.06

0.01

0.09

0.12

0.06

0.04

-0.04

0.20

0.45

0.48

14.

Host

countryGDPpercapita(log)

8.35

1.53

4.61

11.41

0.11

0.03

0.02

-0.16

0.04

0.03

-0.06

0.21

-0.18

-0.19

-0.17

15.

Inter-affiliate

salesratio

0.34

0.43

0.00

1.00

-0.07

0.03

-0.03

0.26

-0.01

0.07

0.21

-0.02

0.17

0.09

0.10

16.

Koreanexpatriatesin

thesubsidiary

0.14

0.26

0.00

1.00

-0.09

-0.03

0.00

-0.01

0.06

0.10

-0.01

0.11

0.22

-0.02

-0.02

17.

Host

countryinstitutions

61.79

12.56

33.20

90.00

0.14

-0.09

-0.06

-0.46

0.11

0.06

-0.06

0.36

-0.03

-0.10

-0.16

18.

Parentfirm

size

(log)

22.69

0.74

14.80

28.78

-0.02

0.02

-0.02

0.04

0.03

0.06

0.03

-0.04

0.13

0.15

0.14

19.

Parentfirm

age(log)

3.28

2.01

0.69

4.59

-0.07

0.24

0.11

-0.02

-0.02

-0.02

0.06

-0.02

0.15

0.02

-0.03

20.

Parentfirm

R&D

intensity

0.02

0.05

0.00

0.11

-0.01

0.00

0.00

0.03

0.02

0.00

0.02

0.02

0.02

0.03

0.03

21.

ParentROA

0.06

0.48

-3.10

2.02

-0.38

0.18

0.10

0.09

0.03

0.02

-0.00

-0.02

0.01

0.01

0.02

22.

Business

groupaffiliationdummy

0.46

0.50

0.00

1.00

-0.06

0.48

0.05

0.21

-0.10

-0.15

0.00

0.00

0.05

-0.02

-0.03

23.

Asianfinancialcrisisdummy

0.20

0.40

0.00

1.00

0.08

0.13

0.14

-0.04

-0.04

-0.05

0.00

0.02

-0.09

-0.02

-0.03

24.

Globalfinancialcrisisdummy

0.25

0.43

0.00

1.00

0.07

-0.11

-0.12

0.01

0.11

0.04

0.02

-0.02

0.15

-0.03

-0.01

Mean

SD

Min

Max

12

13

14

15

16

17

18

19

20

21

22

23

1.

Subsidiary

exit

0.12

0.33

0.00

1.00

2.

Subsidiary

size

(log)

16.25

1.69

7.61

22.79

3.

Subsidiary

age(log)

2.07

1.95

0.00

4.17

4.

Subsidiary


0.47

0.41

0.00

1.00

5.

Subsidiary


0.03

0.05

0.00

0.99

6.

Ownership

modedummy

0.79

0.41

0.00

1.00

7.

Globalindustry

dummy

0.16

0.36

0.00

1.00

8.


62.13

20.33

2.09

96.38

9.

Host

countryexperience

(log)

4.77

3.40

2.48

6.12

10.

Invest

bysameMNC

inhosta

3.58

0.86

0.00

8.00

11.

Invest

bysameMNCsfrom

groupc

4.71

1.54

0.00

10.00

12.

More

thanonech

aebolsubsidiary

c0.44

0.50

0.00

1.00

13.

Host

countryGDP(log)

6.99

1.78

-1.47

9.49

0.05

14.

Host


8.35

1.53

4.61

11.41

-0.15

0.28

15.

Inter-affiliate

salesratio

0.34

0.43

0.00

1.00

-0.01

-0.02

-0.20

16.

Koreanexpatriatesin

thesubsidiary

0.14

0.26

0.00

1.00

0.03

0.08

0.09

-0.01

17.

Host

countryinstitutions

61.79

12.56

33.20

90.00

-0.04

-0.04

0.52

-0.21

-0.05

18.

Parentfirm

size

(log)

22.69

0.74

14.80

28.78

-0.01

0.16

0.04

0.01

0.00

0.01

19.

Parentfirm

age(log)

3.28

2.01

0.69

4.59

0.03

0.01

0.04

0.03

-0.01

0.02

-0.02

20.

Parentfirm

R&D

intensity

0.02

0.05

0.00

0.11

-0.02

0.03

0.03

0.02

-0.02

0.02

0.13

0.03

21.

ParentROA

0.06

0.48

-3.10

2.02

0.03

-0.04

-0.12

0.05

0.01

-0.03

0.01

0.02

0.01

22.

Business


0.46

0.50

0.00

1.00

0.50

0.07

0.07

0.06

0.07

-0.02

0.00

0.26

0.02

0.03

23.


0.20

0.40

0.00

1.00

0.29

-0.08

0.08

-0.03

0.04

0.04

-0.21

0.14

0.02

0.00

0.16


1269


(b = - 0.372, p = 0.028), and is consistent in othermodels, indicating that the internal transfer ofemployees through the deployment of expatriatesfrom the headquarters to the foreign subsidiaryleads to higher likelihood of subsidiary survival.Hypothesis 1(a) predicted a negative moderating

effect of host market institutional environment onthe relationship between inter-affiliate sales of anMNC and subsidiary survival. Model 4 presents thatthe interaction coefficient for Hypothesis 1(a) ispositive and significant (b = 0.018, p = 0.051), sup-porting Hypotheses 1(a). Hypothesis 1(b) predicts anegative moderating effect of host market institu-tional environment on the relationship betweenthe Korean employee transfer from the headquar-ters to the subsidiary and subsidiary survival. Model4 also shows that the coefficient of the interactionterm for Hypothesis 1(b) is positive and significant(b = 0.026, p = 0.028). Hypotheses 1(b) issupported.Hypothesis 2(a) posits that business group affil-

iation of the MNC parent positively moderates therelationship between inter-affiliate sales of an MNCand the survival of the foreign subsidiary; whileHypothesis 2(b) posits that business group affilia-tion positively moderates the relationship betweenthe Korean employee transfer from the headquar-ters to the subsidiary and the survival ratio of thesubsidiary. As can be seen in Model 5, the coeffi-cient of the interaction between inter-affiliate salesand business group affiliation is negative andsignificant (b = - 0.682, p = 0.003), supportingHypothesis 2(a). Next, Model 5 also demonstratesthat the coefficient of interaction between expatri-ate PCNs and business group affiliation is negativeand significant (b = - 0.707, p = 0.027). Thus,Hypotheses 2(b) is also supported.Hypothesis 3 predicts a negative interaction

between business group affiliation and host marketinstitutions in affecting subsidiary survival. InModel 6, we included the business group-countrylevel interaction term (business group affiliation xhost country institutions). Model 6 demonstratesthat the coefficient of interaction between businessgroup affiliation and host country institutions ispositive and significant (b = 0.018, p = 0.014), sup-porting Hypothesis 3.

Inter-Business Group VariationsWe conducted additional analyses to examine theeffect of inter-group variations. We conductedthese analyses on a sub-sample of only those MNCsthat are affiliated with business groups in Korea.T

able

6(Continued

)

Mean

SD

Min

Max

12

13

14

15

16

17

18

19

20

21

22

23

24.


0.25

0.43

0.00

1.00

-0.28

0.04

-0.00

0.02

0.03

-0.02

0.04

-0.05

0.02

-0.05

-0.10

-0.08

Coefficients

above

0.026andbelow

-0.026are

significantatp\

0.05,andthose

above

0.034andbelow

-0.034are

significantatp\

0.01(two-tailedsignificance

levels).

aPreviousinvestmentbythesameMNC

inhost

country.

bPreviousinvestmentbyMNCsfrom

thesamegroupin

host

country.

cMore

thanonesubsidiary

byach

aebolfirm

inthesamehost

country.


1270


Table

7Resultsofcross-classifiedmultilevellogitmodelforfullsample

DV:subsidiary

exit

Model1

Model2

Model3

Model4

Variables

Coef.

SE

Sig.

Coef.

SE

Sig.

Coef.

SE

Sig.

Coef.

SE

Sig.

Random

effects

(Host)co

untrylevel

0.35

0.09

0.00

0.33

0.09

0.00

0.31

0.09

0.00

0.30

0.09

0.00

Parentfirm

level

0.31

0.06

0.00

0.29

0.07

0.00

0.28

0.07

0.00

0.28

0.07

0.00

Business

grouplevel

0.34

0.10

0.00

0.34

0.10

0.00

0.32

0.10

0.00

0.30

0.10

0.00

Fixedeffects

Subsidiary

level

Subsidiary

size

=log(subsidiary

assets)

-0.66

0.04

0.00

-0.67

0.04

0.00

-0.67

0.04

0.00

Subsidiary

age=log(YEARSsince

establishment)

-0.09

0.05

0.07

-0.08

0.05

0.11

-0.08

0.05

0.10

Subsidiary


-0.30

0.13

0.02

-0.05

0.14

0.71

-0.03

0.14

0.81

Subsidiary


-1.18

0.06

0.00

-1.19

0.07

0.00

-1.19

0.07

0.00

Ownership

modedummy(W

OS=1vs.JV

=0)

-0.01

0.12

0.91

-0.03

0.12

0.81

-0.03

0.12

0.82

Globalindustry

dummy

-0.27

0.13

0.04

-0.19

0.13

0.13

-0.20

0.13

0.12

Inter-affiliate

salesratio

-0.31

0.11

0.01

-0.37

0.15

0.01

Koreanexpatriatesin

thesubsidiary

-0.37

0.17

0.03

-0.63

0.25

0.01

(Host)co

untrylevel


0.01

0.00

0.02

0.01

0.00

0.04

0.01

0.00

0.04

Host

countryexpereince

=log(numberofmonths)

-0.62

0.19

0.00

-0.55

0.19

0.00

-0.55

0.19

0.01

PreviousinvestmentbythesameMNC

-0.07

0.12

0.60

-0.01

0.13

0.94

-0.01

0.13

0.97

PreviousinvestmentbyMNCsfrom

thesamegroup

-0.12

0.07

0.10

-0.07

0.08

0.37

-0.07

0.08

0.35

More

thanonesubsidiary

byach

aebolfirm

-0.17

0.11

0.11

-0.18

0.28

0.53

-0.18

0.28

0.52

Host

countryGDP(log)

-0.02

0.05

0.74

-0.03

0.05

0.56

-0.03

0.05

0.59

Host


0.18

0.07

0.01

0.35

0.12

0.00

0.34

0.12

0.00

Host

countryinstitutions

0.03

0.01

0.01

0.03

0.01

0.03

Parentfirm

level

Parentfirm

size

=log(firm

assets)

-0.14

0.07

0.05

-0.17

0.07

0.02

-0.17

0.07

0.02

Parentfirm

age=log(years

since

establishment)

-0.17

0.08

0.03

-0.17

0.08

0.04

-0.16

0.08

0.04

Parentfirm

R&D

intensity

-0.01

0.01

0.62

-0.01

0.01

0.61

-0.01

0.01

0.59

ParentROA

-0.25

0.10

0.01

-0.24

0.10

0.02

-0.23

0.10

0.02

Business

grouplevel

Business


-0.54

0.26

0.04

-0.54

0.26

0.04

Asianfinancialcrisisdummy(1998–2001=1or0otherw

ise)

0.35

0.13

0.01

0.35

0.14

0.01

0.35

0.14

0.01

Globalfinancialcrisisdummy(2008–2011=1or0otherw

ise)

0.04

0.11

0.69

0.07

0.11

0.53

0.07

0.11

0.54

Country-subsidiary

levelinteractions

Inter-affiliate

salesratio9

host

countryinstitutions(H

1a)

0.02

0.01

0.05

Koreanexpatriates9

host


1b)

0.03

0.01

0.03

Business

group–subsidiary

levelinteractions

Inter-affiliate

salesratio9

business

groupaffiliation(H

2a)

Koreanexpatriates9

business

groupaffiliation(H

2b)

Business

groupaffiliationxhost


3)

Inversemillsratio

0.31

0.10

0.00

0.29

0.10

0.01

0.29

0.12

0.01

No.ofobservations

6170

6170

6170

6170

No.offailu

res

767

767

767

767

-2logpseudo-likelih

ood

3618.18

3567.19

3515.95

3473.66

DV:subsidiary

exit

Model4

Model5

Model6

Model7

Variables

Coef.

SE

Sig.

Coef.

SE

Sig.

Coef.

SE

Sig.

Coef.

SE

Sig.

Random

effects

(Host)co

untrylevel

0.30

0.09

0.00

0.29

0.09

0.00

0.29

0.10

0.00

0.28

0.10

0.01


1271


Table

7(Continued

)

DV:subsidiary

exit

Model4

Model5

Model6

Model7

Variables

Coef.

SE

Sig.

Coef.

SE

Sig.

Coef.

SE

Sig.

Coef.

SE

Sig.

Parentfirm

level

0.28

0.07

0.00

0.23

0.07

0.00

0.23

0.07

0.00

0.22

0.07

0.00

Business

grouplevel

0.30

0.10

0.00

0.30

0.10

0.00

0.30

0.10

0.00

0.28

0.11

0.01

Fixedeffects

Subsidiary

level

Subsidiary

size

=log(subsidiary

assets)

-0.67

0.04

0.00

-0.68

0.04

0.00

-0.67

0.04

0.00

-0.68

0.04

0.00

Subsidiary

age=log(YEARSsince

establishment)

-0.08

0.05

0.10

-0.06

0.05

0.19

-0.06

0.05

0.17

-0.07

0.05

0.15

Subsidiary


-0.03

0.14

0.81

-0.07

0.14

0.61

-0.08

0.14

0.57

-0.04

0.14

0.75

Subsidiary


-1.19

0.07

0.00

-1.19

0.07

0.00

-1.19

0.07

0.00

-1.19

0.07

0.00

Ownership

modedummy(W

OS=1vs.JV

=0)

-0.03

0.12

0.82

-0.01

0.12

0.96

-0.01

0.12

0.96

-0.01

0.12

0.97

Globalindustry

dummy

-0.20

0.13

0.12

-0.18

0.13

0.16

-0.20

0.13

0.13

-0.18

0.13

0.15

Inter-affiliate

salesratio

-0.37

0.15

0.01

-0.28

0.14

0.04

-0.32

0.11

0.00

-0.30

0.15

0.04

Koreanexpatriatesin

thesubsidiary

-0.63

0.25

0.01

-0.59

0.24

0.02

-0.35

0.17

0.04

-0.60

0.27

0.02

(Host)co

untrylevel


0.01

0.00

0.04

0.01

0.00

0.04

0.01

0.00

0.04

0.01

0.00

0.04

Host

countryexpereince


-0.55

0.19

0.01

-0.57

0.20

0.00

-0.55

0.20

0.01

-0.57

0.20

0.00


-0.01

0.13

0.97

-0.02

0.13

0.89

-0.01

0.13

0.95

-0.01

0.13

0.92


thesamegroup

-0.07

0.08

0.35

-0.08

0.08

0.31

-0.08

0.08

0.33

-0.08

0.08

0.29

More

thanonesubsidiary

byach

aebolfirm

-0.18

0.28

0.52

-0.38

0.28

0.19

-0.24

0.28

0.40

-0.37

0.28

0.19

Host

countryGDP(log)

-0.03

0.05

0.59

-0.02

0.05

0.68

-0.02

0.05

0.67

-0.02

0.05

0.72

Host


0.34

0.12

0.00

0.34

0.12

0.00

0.35

0.12

0.00

0.34

0.12

0.00

Host

countryinstitutions

0.03

0.01

0.03

0.03

0.01

0.01

0.03

0.01

0.02

0.02

0.01

0.05

Parentfirm

level

Parentfirm

size

=log(firm

assets)

-0.17

0.07

0.02

-0.18

0.07

0.02

-0.18

0.07

0.02

-0.18

0.07

0.02

Parentfirm

age=log(years

since

establishment)

-0.16

0.08

0.04

-0.17

0.08

0.04

-0.17

0.08

0.04

-0.16

0.08

0.05

Parentfirm

R&D

intensity

-0.01

0.01

0.59

-0.01

0.02

0.59

-0.01

0.02

0.61

-0.01

0.02

0.58

ParentROA

-0.23

0.10

0.02

-0.23

0.10

0.03

-0.23

0.10

0.02

-0.22

0.11

0.04

Business

grouplevel

Business


-0.54

0.26

0.04

-0.53

0.27

0.05

-0.57

0.26

0.03

-0.52

0.27

0.05


ise)

0.35

0.14

0.01

0.35

0.14

0.01

0.35

0.14

0.01

0.34

0.14

0.01


ise)

0.07

0.11

0.54

0.06

0.11

0.60

0.08

0.11

0.49

0.05

0.11

0.62

Country-subsidiary

levelinteractions

Inter-affiliate

salesratio9

host


1a)

0.02

0.01

0.05

0.02

0.01

0.08

Koreanexpatriates9

host


1b)

0.03

0.01

0.03

0.02

0.01

0.06

Business

group–subsidiary

levelinteractions

Inter-affiliate

salesratio9

business

groupaffiliation(H

2a)

-0.68

0.23

0.00

-0.67

0.23

0.00

Koreanexpatriates9

business

groupaffiliation(H

2b)

-0.71

0.32

0.03

-0.76

0.32

0.02

Business

groupaffiliationxhost


3)

0.02

0.01

0.01

0.02

0.01

0.03

Inversemillsratio

0.29

0.12

0.01

0.27

0.12

0.02

0.28

0.11

0.01

0.30

0.12

0.01

No.ofobservations

6170

6170

6170

6170

No.offailu

res

767

767

767

767

-2logpseudo-likelih

ood

3473.66

3400.95

3409.75

3289.52

Thepvaluesare

basedontw

o-tailedtests.

Industry-andyear-fixedeffectsare

estim

atedbutnotreportedhere.


1272


Table 8 reports the descriptive statistics for thisreduced sample, and Table 9 presents the results ofcross-classified multilevel logit model on the factorsinfluencing the subsidiary hazard rate. Like ourprevious multilevel logit model analysis, we built infixed control effects in Model 2 and included maineffects in Model 3. In Table 9, Model 4 incorporatesbusiness group-subsidiary level interaction terms(1) between inter-affiliate sales of an MNC and thelevel of business group unrelated diversificationand (2) between the Korean expatriate ratio in thesubsidiary and the level of business group unrelateddiversification. Model 5 also incorporates businessgroup-subsidiary level interaction terms (1)between inter-affiliate sales of an MNC and busi-ness group size and (2) between Korean expatriatesin the subsidiary and business group size. Model 6includes all variables and cross-level interactionterms.

Model 4 shows that the coefficient of the inter-action term for Hypothesis 4(a) is negative andsignificant (b = - 0.916, p = 0.042), supportingHypotheses 4(a). Model 4 also demonstrates thatthe coefficient of the interaction term for Hypoth-esis 4(b) is negative and significant (b = - 0.787,p = 0.075) supporting Hypothesis 4b. Further, aspresented in Model 5, the coefficient of the inter-action between inter-affiliate sales and businessgroup size is negative and significant (b = - 1.103,p = 0.014), supporting Hypothesis 5(a). Likewise,Model 5 also exhibits that the coefficient of theinteraction between the ratio of expatriates andbusiness group size is negative and significant(b = - 1.157, p = 0.035), supporting Hypothesis5(b).

Robustness TestsWe conducted two robustness checks. First, as arobustness check for multilevel logit model, weconducted the Cox frailty survival model with log-normal frailty distribution analysis (Duchateau &Janssen, 2008; Hougaard, 2000; Rabe-Hesketh &Skrondal, 2012; Rondeau, Mazroui, & Gonzalez,2012) for both the full sample (all firms) and a splitsample for only business group-affiliated firms.Second, a measure of institutional distance from ahome country (Korea) to host countries wouldmake sense in terms of the transferability of thehome country-based advantages that might accrueas a result of business group affiliation. Hence, weconducted a robustness check with the institu-tional distance between Korea and host countries inempirical models. The results in both these tests

were qualitatively similar, and are available fromthe authors.

DISCUSSION AND CONCLUSIONDrawing from the literature on internalizationtheory, we identify two boundary conditions thataffect the relationship between product and labormarket internalization and subsidiary performance:institutional development of the host country, andaffiliation of the MNC parent with a businessgroup. The empirical analyses based on a sampleof Korean MNCs provide robust support to ourtheoretical predictions.Our findings have important implications for

market internalization within MNCs and the per-formance implications for foreign subsidiaries.When MNCs maintain interdependent relation-ships with sister subsidiaries (through inter-affiliateproduct trade) and with their parent firms, theydemonstrate higher survival rates. The strength ofties through product trade thus provides substan-tial advantages to subsidiaries of MNCs. To remaincompetitive, MNCs leverage location economies bydispersing their value chains in host countries,thereby providing opportunities for cost reductionand value enhancement. Although such dispersionof activities poses several challenges to MNCs,exposing them to host country institutionalidiosyncrasies such as socio-political and culturalrisks and macroeconomic conditions, MNCs arestill able to leverage their strength through intra-subsidiary product trade.Similarly, the positive impact of the deployment

of expatriates to foreign subsidiaries demonstratesthe benefits of the internal labor market onsubsidiary survival. While prior research hasdemonstrated the role of expatriates on the sub-sidiary performance (Gaur et al., 2007; Singh et al.,2019), this study delineates clear boundaries byexamining the host country institutional develop-ment and affiliation of the parent to the businessgroup as important contingencies. Despite manybenefits, labor market internalization also has itscosts. For example, greater reliance on expatriatesmay result in a lack of legitimacy in the hostmarkets, increasing the liability of foreignness forthe subsidiary (Gaur et al., 2007). Additionally,greater reliance on expatriates in locations wherequalified local employees may be available showsthe ethnocentric mindset of the top managementof the MNC, which may affect the morale of localemployees. The host market- and business group-


1273


Table

8Means,

standard

deviations,

andco

rrelationsforonly

chaebols

Mean

SD

Min

Max

12

34

56

78

910

11

1.

Subsidiary

exit

0.11

0.31

0.00

1.00

2.

Subsidiary

size

(log)

19.10

1.74

9.55

22.79

-0.33

3.

Subsidiary

age(log)

2.09

1.85

0.00

4.17

-0.08

0.29

4.

Subsidiary


0.38

0.40

0.00

1.00

-0.12

0.08

-0.02

5.

Subsidiary


0.03

0.05

0.00

0.99

-0.40

0.25

-0.03

0.09

6.

Ownership

modedummy

0.73

0.45

0.00

1.00

-0.01

-0.05

0.01

0.02

-0.04

7.

Globalindustry

dummy

0.15

0.35

0.00

1.00

-0.01

0.06

0.05

0.04

0.06

0.06

8.

culturaleuclideandistance

62.06

22.05

2.09

96.38

0.05

-0.02

0.03

0.00

0.06

0.03

0.00

9.

Host

countryexperience

(log)

5.79

3.41

2.48

6.12

-0.13

0.04

0.23

0.25

0.06

0.12

0.01

-0.21

10.

Invest

bysameMNC

inhosta

3.51

0.88

0.00

8.00

-0.03

0.03

-0.03

0.08

0.01

0.03

-0.01

-0.14

0.10

11.

Invest

bysameMNCsfrom

groupb

4.50

1.53

0.00

10.00

-0.03

0.01

-0.04

0.08

0.03

0.04

-0.03

-0.18

0.14

0.48

12.

More

thanonesubsidiary

bych

aebolc

0.93

0.25

0.00

1.00

-0.01

0.17

0.20

0.09

0.14

-0.04

0.10

0.04

0.09

0.11

0.11

13.

Host

countryGDP(log)

6.86

1.79

-1.47

9.49

-0.08

0.05

-0.01

0.07

0.11

0.08

0.02

-0.04

0.21

0.39

0.47

14.

Host


8.63

1.57

5.28

11.41

0.15

0.03

0.04

-0.15

0.09

0.04

0.01

0.20

-0.17

-0.20

-0.18

15.

Inter-affiliate

salesratio

0.31

0.41

0.00

1.00

-0.09

0.01

0.03

0.25

-0.00

0.02

0.19

-0.01

0.10

0.06

0.06

16.

Koreanexpatriatesin

thesubsidiary

0.16

0.27

0.00

1.00

-0.08

-0.03

-0.03

-0.01

0.02

0.13

-0.01

0.14

0.23

-0.04

0.04

17.

Parentfirm

size

24.70

0.67

17.93

28.78

-0.02

0.01

-0.02

0.03

0.02

0.07

0.01

-0.03

0.11

0.04

0.13

18.

Parentfirm

age(log)

3.97

1.02

0.75

4.59

-0.08

0.26

0.13

-0.02

-0.02

-0.01

0.05

-0.02

0.19

-0.02

-0.04

19.

Parentfirm

R&D

intensity

0.02

0.04

0.00

0.11

-0.02

0.00

0.03

0.00

0.02

0.02

0.01

0.03

0.02

0.01

0.04

20.

ParentROA

0.07

0.44

-3.10

2.02

-0.43

0.20

0.06

0.07

0.03

0.02

-0.02

-0.03

-0.01

-0.03

-0.01

21.

BG

unrelateddiversification

1.22

0.17

0.43

2.09

-0.05

0.06

0.16

0.07

-0.02

-0.02

0.00

0.00

0.16

0.05

0.06

22.

Business

groupsize

30.40

0.69

16.40

36.77

-0.03

0.05

0.05

0.08

-0.01

0.00

0.01

-0.01

0.08

0.10

0.09

23.


0.21

0.46

0.00

1.00

0.05

0.15

0.16

-0.03

-0.01

-0.06

0.01

0.03

-0.10

0.01

-0.05

24.


0.14

0.34

0.00

1.00

0.10

-0.13

-0.11

-0.04

0.11

0.03

0.03

-0.00

0.17

-0.05

-0.05

Mean

SD

Min

Max

12

13

14

15

16

17

18

19

20

21

22

23

1.

Subsidiary

exit

0.11

0.31

0.00

1.00

2.

Subsidiary

size

(log)

19.10

1.74

9.55

22.79

3.

Subsidiary

age(log)

2.09

1.85

0.00

4.17

4.

Subsidiary


0.38

0.40

0.00

1.00

5.

Subsidiary


0.03

0.05

0.00

0.99

6.

Ownership

modedummy

0.73

0.45

0.00

1.00

7.

Globalindustry

dummy

0.15

0.35

0.00

1.00

8.

culturaleuclideandistance

62.06

22.05

2.09

96.38

9.

Host

countryexperience

(log)

5.79

3.41

2.48

6.12

10.

Invest

bysameMNC

inhosta

3.51

0.88

0.00

8.00

11.

Invest

bysameMNCsfrom

groupb

4.50

1.53

0.00

10.00

12.

More

thanonesubsidiary

bych

aebolc

0.93

0.25

0.00

1.00

13.

Host

countryGDP(log)

6.86

1.79

-1.47

9.49

0.06

14.

Host


8.63

1.57

5.28

11.41

-0.04

0.26

15.

Inter-affiliate

salesratio

0.31

0.41

0.00

1.00

0.20

-0.01

-0.15

16.

Koreanexpatriatesin

thesubsidiary

0.16

0.27

0.00

1.00

0.05

0.10

0.10

-0.02

17.

Parentfirm

size

24.70

0.67

17.93

28.78

-0.03

0.07

0.04

0.00

0.05

18.

Parentfirm

age(log)

3.97

1.02

0.75

4.59

0.04

-0.01

0.05

0.03

-0.02

-0.03

19.

Parentfirm

R&D

intensity

0.02

0.04

0.00

0.11

0.04

0.01

0.04

-0.00

0.00

0.16

0.03

20.

ParentROA

0.07

0.44

-3.10

2.02

0.03

-0.05

-0.07

0.07

0.01

0.03

0.06

0.01

21.

BG

unrelateddiversification

1.22

0.17

0.43

2.09

0.07

0.04

0.06

0.04

0.10

0.05

0.16

0.02

0.01

22.

Business

groupsize

30.40

0.69

16.40

36.77

0.09

0.04

0.04

0.02

0.02

0.20

0.05

0.04

0.01

0.38

23.


0.21

0.46

0.00

1.00

0.18

-0.07

0.04

-0.03

0.03

-0.22

0.16

0.02

-0.00

0.12

-0.09


1274


related contingencies that we identify help delin-eate the conditions under which subsidiaries derivegreater benefits from labor market internalization.The contingency effects that we identify offer

important insights on how to augment benefitsrelated to product and labor market internalizationfor subsidiary survival. Specifically, we find thatsubsidiaries of MNCs that are affiliated to businessgroups have higher survival rates in countries withweaker institutions than in countries with strongerinstitutions. This finding provides a strong supportfor the institutional voids hypothesis, which hasbeen proposed and tested only in home marketcontexts (Khanna & Palepu, 2000). As we demon-strate, the benefits of business group affiliation dotransfer to foreign locations (Gaur & Kumar, 2009),and their relative value is dependent on the hostmarket institutional development.We also find that the strength of host country

institutions negatively moderates the relationshipbetween inter-affiliate sales and subsidiary survival.This finding demonstrates that MNCs are particu-larly able to leverage their internalization advan-tages in countries characterized by weakerinstitutions. In such countries, external marketsare characterized by institutional voids, with apaucity of specialized intermediaries to connectbuyers and sellers, misguided regulations, and alack of contract enforcement mechanisms (Khanna& Palepu, 2000). In such circumstances, internalmarkets of MNCs play an important role in over-coming the deficiencies of external markets. Incontrast to prior studies that examine the institu-tional context in a single country setting, weempirically demonstrate their applicability in alarge number of host countries.Our findings have important implications for

internalization theory, which suggests that FSAs areexploited in conjunction with the CSAs throughmarket internalization. We show that FSAs could bebetter exploited within the internal markets in hostcountries with weak institutional development.Further, given the growing emphasis on the roleof institutions in the international business, thisstudy shows how MNCs can overcome the institu-tional deficiencies in host countries by internaliz-ing the transaction within the MNC network. Itmay be beneficial for MNCs to engage in internaltransactions with subsidiaries located in the hostcountries with the weak institutional environmentby giving them the mandate to make intermediategoods and services, which could be used in othersubsidiaries.T

able

8(Continued

)

Mean

SD

Min

Max

12

13

14

15

16

17

18

19

20

21

22

23

24.


0.14

0.34

0.00

1.00

-0.20

0.01

0.02

0.03

0.05

0.04

-0.05

0.02

-0.04

-0.08

-0.09

-0.06

Coefficients

above

0.026andbelow

-0.026are

significantatp\

0.05,andthose

above

0.034andbelow

-0.034are

significantatp\

0.01(two-tailedsignificance

levels).

aPreviousinvestmentbythesameMNC

inhost

country.

bPreviousinvestmentbyMNCsfrom

thesamegroupin

host

country.

cMore

thanonesubsidiary

byach

aebolfirm

inthesamehost

country.


1275


Table

9Resultsofcross-classifiedmultilevellogitmodelforonly

business

group-affiliatedMNCs

DV:Subsidiary

Exit

Model1

Model2

Model3

Variables

Coef.

SE

Sig.

Coef.

SE

Sig.

Coef.

SE

Sig.

Random

effects

(Host)co

untrylevel

0.22

0.05

0.00

0.19

0.05

0.00

0.16

0.05

0.00

Parentfirm

level

0.26

0.08

0.00

0.24

0.08

0.00

0.23

0.08

0.01

Business

grouplevel

0.35

0.11

0.00

0.33

0.12

0.00

0.35

0.12

0.00

Fixedeffects

Subsidiary

level

Subsidiary

size

=log(subsidiary

assets)

-0.60

0.05

0.00

-0.60

0.05

0.00

Subsidiary

age=log(years

since

establishment)

-0.02

0.07

0.76

-0.02

0.08

0.79

Subsidiary


-0.38

0.21

0.07

-0.10

0.22

0.64

Subsidiary


-1.20

0.11

0.00

-1.20

0.11

0.00

Ownership

modedummy(W

OS=1vs

JV=0)

-0.13

0.17

0.44

-0.14

0.17

0.42

Globalindustry

dummy

-0.57

0.21

0.01

-0.38

0.22

0.08

Inter-affiliate

salesratio

-0.70

0.20

0.00

Koreanexpatriatesin

thesubsidiary

-0.59

0.23

0.01

(Host)co

untrylevel


0.00

0.00

0.26

0.00

0.00

0.28

Host

countryexperience


-0.82

0.30

0.01

-0.64

0.29

0.03


-0.08

0.17

0.63

-0.16

0.17

0.36


thesamegroup

-0.05

0.11

0.65

-0.11

0.11

0.29

More

thanonesubsidiary

byach

aebolfirm

-0.25

0.30

0.40

-0.43

0.30

0.16

Host

countryGDP=log(host

countryGDP)

0.00

0.06

0.95

-0.01

0.06

0.82

Host

countryGDPpercapita(Log)

0.31

0.10

0.00

0.28

0.10

0.00

Parentfirm

level

Parentfirm

size

=log(firm

assets)

-0.24

0.11

0.03

-0.23

0.12

0.05

Parentfirm

age=log(years

since

establishment)

-0.23

0.12

0.05

-0.23

0.12

0.06

Parentfirm

R&D

intensity

-0.03

0.04

0.43

-0.03

0.04

0.35

ParentROA

-0.38

0.15

0.01

-0.38

0.15

0.01

Business

grouplevel

Business

groupunrelateddiversification

-1.20

0.64

0.06

Business

groupsize

=log(business

groupassets)

-0.06

0.14

0.67


ise)

0.41

0.18

0.02

0.33

0.19

0.07


ise)

0.02

0.19

0.93

0.06

0.20

0.78

Level4–1interactions

Inter-affiliate

sales9

BG

unrelateddiversification( H

4a)

Koreanexpatriates9

BG

unrelateddiversification(H

4b)

Inter-affiliate

salesratio9

business

groupsize

(H5a)

Koreanexpatriates9

business

groupSize(H

5b)

Inversemillsratio

0.26

0.09

0.00

0.22

0.09

0.02

No.ofobservations

2937

2937

2937

No.offailu

res

313

313

313

-2Lo

gpseudo-likelih

ood

1587.91

1540.03

1460.13

DV:Subsidiary

Exit

Model4

Model5

Model6

Variables

Coef.

SE

Sig.

Coef.

SE

Sig.

Coef.

SE

Sig.

Random

effects

(Host)co

untrylevel

0.19

0.06

0.00

0.18

0.06

0.00

0.16

0.06

0.01

Parentfirm

level

0.23

0.09

0.01

0.23

0.09

0.01

0.22

0.09

0.02


1276


Table

9(Continued

)

DV:Subsidiary

Exit

Model4

Model5

Model6

Variables

Coef.

SE

Sig.

Coef.

SE

Sig.

Coef.

SE

Sig.

Business

grouplevel

0.33

0.12

0.01

0.31

0.12

0.01

0.32

0.13

0.01

Fixedeffects

Subsidiary

level

Subsidiary

size

=log(subsidiary

assets)

-0.60

0.05

0.00

-0.60

0.05

0.00

-0.60

0.05

0.00

Subsidiary

age=log(years

since

establishment)

-0.02

0.08

0.78

-0.02

0.08

0.78

-0.03

0.08

0.73

Subsidiary


-0.10

0.22

0.64

-0.10

0.22

0.64

-0.11

0.22

0.64

Subsidiary


-1.20

0.11

0.00

-1.20

0.11

0.00

-1.20

0.11

0.00

Ownership

modedummy(W

OS=1vs.JV

=0)

-0.14

0.17

0.42

-0.14

0.17

0.42

-0.14

0.17

0.42

Globalindustry

dummy

-0.38

0.22

0.08

-0.38

0.22

0.08

-0.38

0.22

0.08

Inter-affiliate

salesratio

-0.64

0.23

0.01

-1.42

0.46

0.00

-1.47

0.47

0.00

Koreanexpatriatesin

thesubsidiary

-0.57

0.24

0.02

-1.06

0.46

0.02

-1.01

0.47

0.03

(Host)co

untrylevel


0.01

0.00

0.27

0.00

0.00

0.30

0.00

0.00

0.32

Host

countryexperience


-0.64

0.28

0.02

-0.65

0.29

0.03

-0.66

0.29

0.02


-0.16

0.17

0.36

-0.16

0.17

0.36

-0.15

0.17

0.37


thesamegroup

-0.12

0.11

0.27

-0.11

0.11

0.30

-0.12

0.11

0.26

More

thanonesubsidiary

byach

aebolfirm

-0.43

0.30

0.16

-0.43

0.30

0.16

-0.43

0.30

0.15

Host

countryGDP=log(host

countryGDP)

-0.02

0.06

0.77

-0.01

0.06

0.83

-0.02

0.06

0.79

Host

countryGDPpercapita(Log)

0.28

0.10

0.00

0.29

0.10

0.00

0.29

0.10

0.00

Parentfirm

level

Parentfirm

size

=log(firm

assets)

-0.22

0.12

0.06

-0.23

0.12

0.05

-0.24

0.12

0.05

Parentfirm

age=log(years

since

establishment)

-0.22

0.12

0.06

-0.21

0.12

0.07

-0.21

0.12

0.08

Parentfirm

R&D

intensity

-0.04

0.04

0.35

-0.03

0.04

0.35

-0.04

0.04

0.34

ParentROA

-0.37

0.15

0.01

-0.38

0.15

0.01

-0.37

0.15

0.02

Business

grouplevel

Business

groupunrelateddiversification

-1.06

0.82

0.20

-1.17

0.67

0.08

-1.09

0.81

0.18

Business

groupsize

=log(business

groupassets)

-0.06

0.15

0.68

-0.05

0.13

0.70

-0.04

0.13

0.78


ise)

0.35

0.19

0.06

0.34

0.19

0.07

0.34

0.19

0.07


ise)

0.06

0.20

0.78

0.06

0.20

0.75

0.08

0.20

0.68

Level4–1interactions

Inter-affiliate

sales9

BG


4a)

-0.92

0.45

0.04

-0.89

0.46

0.05

Koreanexpatriates9

BG


4b)

-0.79

0.44

0.08

-0.75

0.45

0.09

Inter-affiliate

salesratio9

business

groupsize

(H5a)

-1.10

0.45

0.01

-1.27

0.60

0.04

Koreanexpatriates9

business

groupSize(H

5b)

-1.16

0.55

0.04

-1.30

0.66

0.05

Inversemillsratio

0.21

0.10

0.03

0.22

0.10

0.03

0.24

0.10

0.02

No.ofobservations

2937

2937

2937

No.offailu

res

313

313

313

-2Lo

gpseudo-likelih

ood

1429.61

1390.00

1328.55

Thepvaluesare

basedontw

o-tailedtests.

Industry-andyear-fixedeffectsare

estim

atedbutnotreportedhere.


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Our study also reveals that the affiliation of theparent firm of an MNC with a business grouppositively moderates the relationship betweeninter-affiliate sales and internal transfer of employ-ees, and the survival of foreign subsidiaries. Busi-ness group-affiliated firms are experienced inconducting inter-affiliate trade in product, laborand capital markets (Holmes, Hoskisson, Kim, Wan,& Holcomb, 2018; Gaur & Delios, 2015). Two viewshave emerged on the role of market internalizationwithin the business group network. One viewsuggests that business groups overcome the ineffi-ciencies in external markets through market inter-nalization, which leads to superior performance ofaffiliates of business groups as compared to stand-alone firms (Khanna & Rivkin, 2001; Chang &Hong, 2000). Proponents of the opposing viewargue that internal markets used to cross-subsidizeaffiliates, deter entry by competitors, set predatorypricing, or support poorly performing affiliates(Pattnaik et al., 2018). Our finding largely supportsthe former view and suggests that superior ability tointernalize markets by business group affiliates canbe transferred to other geographical markets.

Considering that prior research on businessgroups and MNCs has developed independently,there is clear scope for scholars in the two streamsto learn from each other. Our study demonstratesthat the experience and ability of market internal-ization is one of the mechanisms through whichbusiness groups can exploit their domestic advan-tage in international markets. Moreover, we alsodemonstrate that large and diversified businessgroups can derive more benefits from marketinternalization than small and focused businessgroups. Some prior research has examined this issueand found a positive association between interna-tionalization and performance among the businessgroup-affiliated firms that are parent firms of MNCs(Kim et al., 2010); our study complements these byexamining subsidiary-level performance.

Our research has some limitations, which openup several avenues for further investigations. First,although we focused on the inter-affiliate sales andinternal transfer of employees on foreign subsidiarysurvival, future studies could focus on inter-affili-ates’ financial transactions through internal capitalmarkets (Nguyen & Rugman, 2015) and knowledgetransfer through the internal market to get a robustunderstanding of the role of market internalizationon subsidiary performance. Second, existing studieson business groups provide several explanations forthe competitiveness of business groups in domestic

markets beyond the role of internal markets, suchas networking capabilities with external actors suchas governments and local elites (Granovetter, 1994;Gaur et al., 2018). It would be worth examiningwhether such bases of competitiveness can beleveraged in international markets by businessgroup-affiliated MNCs.Third, as discussed in our theoretical review and

hypotheses, business group affiliates are connectedbased on family, kinship, or ethnic ties, but MNCsubsidiaries rely on market-based transactions. Aninteresting avenue for research could be to examinehow non-market-based networks, such as businessgroups, transform into market-based networks suchas MNCs. These market- and non-market-basedadvantages of business groups vary depending onthe home markets of the business groups. It wouldbe interesting to compare with other Asian andEuropean business groups and examine their inter-nalization trajectories. Fourth, while we do nothypothesize the direct effect of business groupaffiliation on subsidiary performance, it is plausiblethat group affiliation affects inter-subsidiary trade,raising endogeneity concerns. This is a commonproblem with much of the research on the effect ofgroup affiliation on firm-level outcomes and needsto be addressed in a theoretical manner, using in-depth qualitative research designs. Finally, we donot have information about the motives of foreigninvestment, which is likely to affect the choice ofmarkets and the extent of intra-subsidiary trade.While we use the two-step Heckman models, futurestudies can provide a more nuanced understandingof the costs and benefits of internalization byincorporating the motives of foreign market entryinto the theoretical and empirical modeling.In conclusion, we believe that examining the

internal functions of MNC networks providesimportant insights for advancing internalizationtheory through cross-fertilization of conceptsdeveloped and examined independently for differ-ent types of network-based organizational forms.We hope that this research will encourage scholarsto pursue such endeavors and enrich the overallunderstanding of MNCs and other network formsof organizations.

ACKNOWLEDGEMENTSA previous version of this manuscript was presented atthe AOM 2016 conference in Anaheim. It was alsonominated for IM Division GWU-CIBER Best Paper on


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Emerging Markets award. We are grateful for theinvaluable comments received from Christian Asmus-sen, Peter Buckley, Mark Casson, Tailan Chi, Farok

Contractor, Vikas Kumar, Sumit Kundu, RamMudambi, Rajneesh Narula and Jane Lu on earlierversions of this paper.

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ABOUT THE AUTHORSAjai S Gaur is an Associate Professor at RutgersBusiness School. He has a PhD from the NationalUniversity of Singapore. Ajai studies the distinctinstitutional influences on firms’ internationalexpansion strategies in different institutional con-texts. A related focus of his research is to studyinstitutional influences on various firm-level gov-ernance mechanisms and their strategic and per-formance consequences. He is serving as the


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http://dx.doi.org/10.1002/gsj.1202

http://dx.doi.org/10.1002/gsj.1202

http://dx.doi.org/10.1007/s10551-018-3914-2

http://dx.doi.org/10.1007/s10551-018-3914-2

http://dx.doi.org/10.1002/hrm.21947

http://dx.doi.org/10.1057/s41267-018-0186-0

President of the Asia Academy of Management andthe Editor-in-Chief of the Journal of World Business.

Chinmay Pattnaik is a Senior Lecturer at the Dis-cipline of International Business, The University ofSydney Business School. He serves as the reviewingeditor at the Asia Pacific Journal of Management. Hisresearch focuses on the corporate and globalstrategies of firms from emerging economies. Hisresearch has appeared in journals including Journalof International Business Studies, Journal of BusinessEthics, Human Resource Management, ManagementInternational Review, and Journal of Business Research.His coedited book Emerging Market Firms in GlobalEconomy is published by Emerald Publishing UK.

Deeksha Singh is an Assistant professor at theSchool of Business, Rutgers University - Camden.She has a PhD from National University of Singa-pore. Her research interests lie at the intersection ofinternational management and strategy. The theo-retical focus of her research is on the strategy–en-vironment fit, within an institutional theoretical

framework. Using institutional theory as the maintheoretical lens, she has examined issues in thebroad domains of corporate governance, firms’growth strategies, and foreign subsidiary manage-ment issues.

Jeoung Yul Lee is an Associate Professor at HongikUniversity School of Business Management (Sejong,South Korea). He serves on the Editorial Boards ofthe Management International Review, InternationalBusiness Review, Management and OrganizationReview, and Asia Pacific Journal of Management. He isthe Guest Editor of a Special Issue on Success- vs.Failure-Based Learning of SMEs at the ManagementInternational Review. He was a postdoctoral fellow atthe Wharton School, and has published papers inleading journals such as the Journal of InternationalBusiness Studies, Human Resource Management, LongRange Planning, Management International Review,Journal of International Management, InternationalBusiness Review, Journal of Business Research, andInternational Journal of Human Resource Management.

Publisher’s Note Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutionalaffiliations.

Accepted by Christian Geisler Asmussen, Tailan Chi, and Rajneesh Narula, Special Issue Guest Editors, 2 April 2019. This article has been withthe authors for four revisions.


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