The Impact Of Institutional Distance On The Ownership Structure Of The Foreign Subsidiaries Of Chinese MNCs

During the internationalization process of multinational corporations(MNCs), the first choose they should make is the pattern they will take to enter the host country, as well as the the proportion of ownership they should occupy in the overseas subsidiaries, i.e., to determine the ownership structure of the overseas subsidiaries. The decision of ownership structure reflects the control of the multinational company over a subsidiary, which may have significant impact on the operation of such subsidiary. In fact, the ownership decision of multinational companies is subject to various factors, such as the company’s internationalization strategy, the laws and restrictions of the host country, etc. Among the various factors, the institutional differences between home and host country is of significant importance, which are attracting the attention from more and more scholars.The effect of institutional distance between mother and host countries on the ownership decision of multinational companies has been discussed by former scholars, who use western multinational companies as samples. Chinese multinational corporations in China, however, grew in a very different environment with Western multinationals, thus even into the same host, they may also have different decision-making behaviors compared with western MNCs. Therefore, the conclusions of the study on the basis of western multinationals are not fully applicable to the Chinese multinational companies.This paper analyzes the applicability of the former theories on Chinese multinationals, and then raises several assumptions for Chinese MNCs according to the conclusions of the relative study in the past. In the next section, the empirical test on the sample of1200overseas subsidiaries of Chinese MNCs is conducted to study the effect of institutional distance on the ownership structure of Chinese MNCs. The empirical results show that the effect of institutional distance on Chinese MNCs is significantly different from that on Western MNCs. In addition to the absolute institutional distance, the relative difference of mother and host countries’ institutional quality also has a significant impact on the ownership structure of Chinese MNCs. At the same time, different types of institutions such as political, market, economic institutions will produce different effects.Finally, a number of recommendations are proposed for Chinese MNCs on the basis of the empirical results. Management of Chinese MNCs should consider the impact of institutional distance on the operation of overseas subsidiaries either the company is entering into institutional developed countries or undeveloped countries. It’s necessary for them to make proper ownership decisions which are consistent with the institutional distance.