FDI Motive and Business Relatedness as Drivers Affecting Foreign Subsidiary Governance

The institutional environments for international business have become increasingly more complex and uncertain, which engenders disproportionately more challenges to emerging market multinational enterprises (EMNEs). Foreign subsidiaries of EMNEs may consequently be expected to establish well-functioning governance structure and play crucial roles in managing the global strategy journey of the parent companies. Extant literature indicates a lack of research on what affect foreign subsidiary governance. This study examines foreign subsidiaries of EMNEs and investigates how the unique foreign direct investment motives and business relatedness influence the subsidiary board composition and CEO appointment: two essential attributes of subsidiary-level governance. We find that strategic-assets seeking motive is positively associated with the subsidiary board’s external role gearing toward the host country environment and the tendency to appoint non-expatriate CEOs. In contrast, escape investment is positively associated with the subsidiary board’s internal role well aligned with the parent company’s strategy intent and implementation. In addition, for foreign subsidiaries focusing on the business closely related to that of the parent company, the board’s internal role is more important than the external role and the CEO is more likely to be an expatriate. The current study contributes to the international corporate governance research by systhesizing the mainstream corporate governance theories with the geographic relational perspective.