Why is MNC Subsidiary Performance Better in Developing Countries than in Developed Countries?

This paper examines a puzzle related to performance of MNC subsidiaries, namely that return on foreign direct investment (FDI) in subsidiaries is consistently and systematically higher in developing countries than in developed countries. The relatively high performance of developing country subsidiaries is puzzling for two reasons: The first reason is that it seems counterintuitive that the locations with the presumably most challenging business environments yield the highest returns. The second reason is that it seems surprising that MNCs, over time, fail to even out returns on FDI between developed and developing countries. The paper straddles International Business and International Finance theory in search of explanations for this puzzle and develops a number of propositions that may provide the basis for future empirical research on subsidiary performance in developing countries. Overall, the paper demonstrates the merits of combining the IB literature’s focus on strategies and capabilities of MNCs with the International Finance literature’s focus on FDI as a capital flow