Equity Structure of MNE Affiliates and Scope of Their Activities: Distinguishing the Incentive and Control Effects of Ownership

Abstract

This study examines the effects of an MNE 's equity ownership on the scope of its affiliate's activities. We focus on architectural design and engineering ( ADE ) activities and distinguish them from other activities because ADE capabilities are often core to the MNE 's competitiveness. Our empirical analysis, set in the C hinese automobile industry, reveals that the MNE 's equity ownership tends to narrow the scope of an affiliate's ADE activities while widening the scope of other knowledge‐intensive activities the two parties undertake jointly. The results suggest that equity ownership enables an MNE to control more effectively the scope of its affiliate's ADE activities for better protection against leakage and, at the same time, motivates the MNE to perform a broader spectrum of other knowledge‐intensive activities at the affiliate.