FDI motives, market governance, and ownership choice of MNEs: A study of Malaysia and Thailand from an incomplete contracting perspective

Authors: Yu, J., Lee, S.-H., Han, K.

Publication: Asia Pacific Journal of Management

Abstract

The ownership choice between full and shared ownership in MNEs’ foreign affiliates is complex, especially when they confront various institutional conditions. Drawing on the theory of incomplete contracts, we hypothesize and empirically show that the influence of host country institutions on ownership choice arises differentially between market-seeking and resource-seeking affiliates. In particular, we use the relative importance of an MNE’s versus a local partner’s non-contractible investments derived from the theory of incomplete contracts as a primary ownership determinant in explaining these differential effects. Using data from 547 MNE affiliates in Malaysia and Thailand, we demonstrate that MNEs are more likely to choose shared ownership, as compared to full ownership, in both market-seeking and resource-seeking affiliates due to the amplified impact of local idiosyncrasies across all value chain activities. However, we find that in a relatively more institutionally developed environment (i.e., with stronger market governance), this tendency for an MNE to choose shared ownership is reduced in resource-seeking affiliates, whereas the tendency is further strengthened in market-seeking affiliates, consistent with our hypotheses based on the focal theory.

Read full article: Springer Link, March 27, 2015