Dual-Dimensional Digital Transformation Systematically Reshapes the U-Curve of Knowledge and Political Distance on Subsidiary Exit

Abstract

In the era of digital business model innovation, multinational corporations face a dual challenge: leveraging digital technologies to overcome institutional barriers while reconfiguring value creation in cross-border operations. Grounded in institutional theory and the digital transformation literature, this study investigates how knowledge distance and political distance shape subsidiary exits through a U-shaped relationship, and how digital transformation breadth and depth differentially reconfigure these effects. We conduct empirical research on 1203 Chinese multinational enterprises from 2015 to 2019. The results indicate that both knowledge distance and political distance exhibit a U-shaped relationship with the subsidiary exit. The breadth of digital transformation strengthens the U-shaped relationship between knowledge distance and subsidiary exit but weakens the relationship between political distance and subsidiary exit. The depth of digital transformation mitigates the effects of both knowledge distance and political distance on subsidiary exit. These findings provide a novel explanatory perspective on the ‘Distance Paradox’ in internationalization theory, address a critical gap in the multinational enterprise (MNE) exit literature, and propose a modular governance blueprint for MNEs.