What Makes MNCs Succeed in Developing countries? An Empirical Analysis of Subsidiary Performance

MNCs are increasingly investing in developing countries to be part of rapid market growth, to enhance the efficiency of their value chains, and to access abundant resources and talent. The potential gains are high, however so are the risks. Some developing country subsidiaries become top performers in terms of growth and revenue and assume key roles in the MNCs’ global value chains, but other subsidiaries fail to meet expectations, struggling to produce positive returns and frequently experiencing stop of operations. While the issue of subsidiary performance should be at the heart of any International Business (IB) enquiry into MNC activity in developing countries, surprisingly little research has examined this issue. Based on a unique data base of approx. 800 MNC subsidiaries established between 1969 and 2008, this paper examines the evolution in subsidiary performance and the factors influencing this performance. The analysis reveals that MNC subsidiaries in developing countries have improved enormously on their performance since the early investments in the 1960s and 70s, but also that the risks of failure remain high. The paper moves on to analyze factors shaping subsidiary performance. Inspired by received IB theory, it is hypothesized that subsidiary performance is essentially shaped by five dimensions: location, industry, MNC capabilities, subsidiary role, and entry mode. A variance component analysis is employed to identify the sources of subsidiary performance. Especially MNC capabilities and subsidiary role appear to explain variance in performance, while location and industry factors appear to have less explanatory power. This suggests that while locational and industry factors affect subsidiary performance, strong MNC capabilities and appropriate strategy can make MNCs succeed regardless of location and industry. The findings of the study have important implications for the IB literature, for managers and for policy aimed at promoting FDI in developing countries.