Subsidiary-level performance comparisons with external versus internal peers and subsidiary termination decisions: The role of host country experience

Abstract

Research Summary: We examine how a subsidiary's host country experience affects the way in which multinational corporations' (MNCs) subsidiary termination decisions are geared toward subsidiary-level social performance comparisons. For a subsidiary, social comparisons can be made against external peer subsidiaries (in the same industry and country but under different parents) and internal peer subsidiaries (in the same industry, country, and parent) whose performance levels constitute external social aspirations (ESA) and internal social aspirations (ISA), respectively. Using unpublished survey data on Japanese MNCs that offer subsidiary-level performance data, we found that a subsidiary's below-ESA performance is a stronger predictor of subsidiary termination than below-ISA performance. However, as a subsidiary's host country experience increases, the effect of below-ISA performance is amplified and even surpasses the effect of below-ESA performance. Managerial Summary: A subsidiary's performance relative to comparable peers serves as a critical criterion for MNC managers when evaluating the subsidiary's efficacy. However, little is known about how MNC managers' subsidiary termination decisions are geared toward subsidiary-level performance comparisons against different reference groups and under what conditions these decisions vary. Using data on Japanese MNCs, we found that a subsidiary is at greater risk of termination when it underperforms relative to external peer subsidiaries (in the same industry and country but under different parents) than to internal peers (in the same industry, country, and parent). However, a subsidiary's host country experience amplifies MNC managers' sensitivity to underperformance relative to internal peers, while having less effect on their sensitivity to underperformance relative to external peers.