Why do Firms Divest a Foreign Subsidiary and Not Divest it? A Social Network Theory Perspective

Prior literature examines the characteristics of subsidiaries, parent firms, and countries to explain why multinational corporations (MNCs) divest foreign subsidiaries. This study, however, applies the concepts of dependency and non-redundancy from social network theory to propose that MNCs are less likely to divest a subsidiary if the subsidiary has high degrees of hub and authority functions in the subsidiary networks. Moreover, this study discusses the logic of non-redundancy and economies of density in subsidiary networks. This study predicts that MNCs likely divest a focal subsidiary if regional redundancy in subsidiary functions is higher to make the subsidiary networks more efficient. This study also hypothesizes that MNCs are less likely to divest if regional redundancy in subsidiary functions is higher to enjoy economies of density. Using data from Japanese foreign affiliates, including transaction information among subsidiaries, we find a significant effect on the predictions.