Trojan Horses or Local Allies: Local Board Members in Emerging Market Subsidiaries

We investigate an MNC’s decision to appoint host-country national (HCN) managers to foreign subsidiaries based on the institutional context of and familiarity with the host country. HCN managers are commonly associated with specialized knowledge, superior responsiveness, and higher legitimacy. On the negative side, we argue that these characteristics of HCNs can potentially be used to the harm of a foreign MNC. We analyze how formal and informal institutions affect the trade-off between positive effects and the potential costs associated with HCN managers (“Local allies” vs. “Trojan horses”). We find that legal institutions protect foreign MNCs from potential costs, encourage the use of HCNs and reinforce their benefits. Corruption and corruption distance, however, increase perceived costs associated with HCN managers up to a point, at which they outweigh their benefits. Our results suggest that subsidiary staffing decisions are not only influenced by the benefits of HCNs. Potential costs of HCNs that manifest if appropriate institutions do not sufficiently protect foreign MNCs matter to an equal extent.