Foreign subsidiaries' status: Distinctive determinants and implications for subsidiary performance

• Author: Anran Li
• Published date: 01 July 2018
• Date: 01 July 2018
• DOI: http://doi.org/10.1002/tie.21956

DIMENSIONS OF INTERNATIONAL BUSINESS

Foreign subsidiaries' status: Distinctive determinants

and implications for subsidiary performance

Anran Li

PhD Candidate, Hong Kong University of

Science and Technology

Correspondence

Anran Li, Room 5017-5018, Lee Shau Kee

Business Building, The Hong Kong University

of Science and Technology, Clear Water Bay,

Kowloon, Hong Kong SAR

Email: aliai@connect.ust.hk

The purpose of this article is to develop a theoretical framework for understanding what deter-

mines foreign subsidiaries' status, and how status affects their performance. The basic argu-

ment is that foreign subsidiaries have several unique characteristics that distinguish them from

local firms in terms of the factors determining organizational status and the implications status

has for subsidiaries' performance. This conceptual article first reviews the three existing deter-

minants of organizational status as theorized by existing status research and makes the case

for an extension of the three determinants to account for the special situation of foreign sub-

sidiaries. Having examined the determinants of subsidiary status, this study explores the effect

of organizational status on firm performance, and finds that it reduces the liability of foreign-

ness (LoF) that foreign subsidiaries encounter. The study contributes to multiple research

streams, including organizational status, LoF, country of origin (CoO), and the international

business literature in general. Practically, this study highlights the importance of obtaining high

organizational status and provides valuable suggestions for multinational managers in general

and subsidiary managers in particular.

KEYWORDS

country of origin, foreign subsidiaries, liability of foreignness, organizational identity,

organizational status determinants, subsidiary performance

1|INTRODUCTION

The purpose of this article is to explore how multinational subsidiaries

gain organizational status in a host country and how their status

affects performance. Status is defined as “socially constructed, inter-

subjectively agreed-on and accepted ordering or ranking of individuals,

groups, organizations, or activities in a social system”(Washington &

Zajac, 2005; p.284). Since multinational subsidiaries are a significant

source of economic growth for a host country and create value for the

parent company (Rugman & Verbeke, 2001), a body of literature has

been amassed on multinational subsidiaries' cross-border operations

from multiple perspectives (see Paterson & Brock, 2002, for reviews).

One perspective concerns the institutional and sociological attributes

of foreign subsidiaries, with a focus on gaining local legitimacy in host

countries (Cui, Jiang, & Stening, 2011; Li, Yang, & Yue, 2007).

However, this stream of literature has largely neglected two key

issues: (1) From where do foreign subsidiaries derive their

organizational status in a host country; and (2) how does status affect

a subsidiary's performance in the host country? These questions can-

not be left unanswered because a large body of literature on strategy

and organizational theory has found that status has a profound effect

on a firm's ability to generate sales and profits (e.g., Piazza & Castel-

lucci, 2014; Rhee & Haunschild, 2006). This prevents us from under-

standing an important means by which subsidiaries can facilitate their

local operations and maximize their performance in a host country.

Organizational status matters to foreign subsidiaries in a host

country. To facilitate their subsequent actions and, in turn, achieve

ideal firm outcomes (Podolny, 1993; Stuart, Hoang, & Hybels, 1999),

foreign subsidiariesmust acquire organizational status (Sauder, Lynn,&

Podolny, 2012; Yu & Sharma, 2016). High-status firms can achieve

greater sales growth (Benjamin & Podolny, 1999; Roberts & Reagans,

2011), incur lower costs (Podolny, 1993), and have higher survival

rates (Baum & Oliver, 1992). Given the importance of organizational

status, researchers have developed two insights that are relevant to

DOI: 10.1002/tie.21956

Thunderbird Int. Bus. Rev. 2018;60:699–708. wileyonlinelibrary.com/journal/tie © 2017 Wiley Periodicals, Inc. 699