1. ¹School of Business, University of Hong Kong, Pokfulam, Hong Kong
2. ²Department of Management, Chinese University of Hong Kong, Shatin, Hong Kong

Correspondence: CM Chan, School of Business, The University of Hong Kong, Room 729H, Meng Wah Complex, Pokfulam, Hong Kong. Tel: +852 2241 5226; Fax: +852 2858 5614; E-mail: mkchan@business.hku.hk

Received 5 May 2004; Revised 28 October 2005; Re-revised 20 June 2006; Accepted 19 September 2006; Published online 17 May 2007.

Abstract

In this study, we examine from an institutional perspective the legitimacy rationale behind the choice of subsidiary ownership structure among multinational corporations (MNCs). We suggest that, when under a strong pressure to conform at the host country and local industry levels of their institutional environment, MNCs are likely to take a lower ownership stake in exchange for external legitimacy in the host country or local industry that their foreign subsidiaries are entering. We also suggest that MNCs are likely to take a higher ownership stake in response to strong internal pressure to sustain their internal legitimacy at the corporate level of their institutional environment. We also propose that MNCs are more likely to exchange ownership for legitimacy in local industries than in host countries, and in local markets with a high level of political instability than in those with a low level of political instability. These propositions are generally supported by our analysis of 4451 subsidiaries established by 898 Japanese MNCs that operated in 39 countries across 52 industries (two-digit SIC) between 1988 and 1999.