Analysing Corporate Political Activity in MNC Subsidiaries Through the T Integration-Responsiveness Framework ⁎ Shantanu Banerjee , Sunil Venaik, Paul Brewer

International Business Review 28 (2019) 101498

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International Business Review

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Analysing corporate political activity in MNC subsidiaries through the T integration-responsiveness framework ⁎ Shantanu Banerjee , Sunil Venaik, Paul Brewer

University of Queensland Business School, Brisbane, QLD, 4072, Australia

ARTICLE INFO ABSTRACT

Keywords: Our study applies the well-known, market-strategy focussed integration-responsiveness (IR) framework and ex- MNC subsidiary tends it to incorporate the non-market corporate political strategies of MNC subsidiaries. We find government Corporate political activity regulation and the market strategies of integration and innovation have positive relationships with MNC subsidiary Integration-responsiveness political activities. Interestingly, whereas the market strategy of innovation has a positive effect on subsidiary Performance performance (but not on legitimacy), the non-market corporate political activities undertaken by MNC subsidiaries Legitimacy enhance subsidiary legitimacy (but not subsidiary performance). In addition, both market innovation and non- market subsidiary political activities are useful tools to gain favourable government decisions. Overall, our study incorporates both market and non-market strategies within a single overarching IR framework, and highlights their complementary role in achieving the twin goals of performance and legitimacy respectively.

1. Introduction Moodley, 2015). These advances represent a welcome rebalancing of the market/non-market strategy divide in IB research towards the Multinational corporations (MNCs) are central to international latter, which has historically received less attention than the work done business (IB) and globalisation (Dunning, 1993) and hence a key area of to assess market behaviour (Baron, 1995a). IB research. In the development of MNC theory, much progress has been Of course the MNC-political interaction covers a wide range of made in understanding the MNC’s motivation (e.g. Dunning, 1988), its theories, concepts and relationships, including government conditions decision making process (e.g. Johanson & Wiedersheim-Paul, 1975), placed on MNC operations (Doz & Prahalad, 1980; Hadjikhani, Lee, & the role of firm specific advantages (e.g. Hymer, 1976) and foreign Ghauri, 2008; Holtbrügge, Berg, & Puck, 2007), competition between direct investment (FDI) outcomes in both firm and national terms (e.g. MNCs and government (Luo, 2004), and disinvestment challenges Buckley & Casson, 1976). But in recent decades there have been calls (Sachdev, 1976). But linking these disparate issues, and concomitant for in-depth comprehension of the role of politics in MNC behaviour. relationships between governments and MNCs, is their sensitivity to Kobrin (1979, p. 69), for example, asserts at a general level, that initiatives by the MNC to affect policy outcomes. Such efforts byfirms “politics largely determines the framework of economic activity”. to shape public policy in their favour are known as corporate political Boddewyn (1988), more specifically to IB, argues for inclusion ofpo- activity (CPA) (Hillman & Wan, 2005) and in this respect CPA can be litical policy and associated activity in the development of MNC theory. seen as an overarching phenomenon in MNC-politics theorising. In In a similar vein, Baron (1995a) and Zhao, Fisher, Lounsbury, and practice, CPA is not only widespread but also quite contentious Miller (2017) call for a holistic understanding of firm strategy in- (Lawton, McGuire, & Rajwani, 2013) and there are understandable tegrating both the market and non-market domains. All these per- concerns on the part of some regarding these activities. Others argue spectives are particularly relevant in the modern era of globalisation that business plays an important role in working with government to where corporate and political interests are intertwined (Hansen & generate positive outcomes for society as a whole (Dahan, Hadani, & Mitchell, 2000) and where governments control the rules of FDI and Schuler, 2013). These debates on CPA, together with its growing fre- determine the level and type of political risks in their jurisdictions. In quency and the increasingly vital function of the private sector in the response to these calls, there is now a recognition in the literature of the global economy, have driven considerable research interest in the CPA important role of national politics in MNC behaviour and vice versa phenomenon over recent decades (Okhmatovskiy, 2010). (Boddewyn & Brewer, 1994; Shirodkar & Mohr, 2015a; Wöcke & The growing role and significance of CPA is widely accepted inthe

⁎ Corresponding author. E-mail addresses: [email protected] (S. Banerjee), [email protected] (S. Venaik), [email protected] (P. Brewer). https://doi.org/10.1016/j.ibusrev.2018.04.001 Received 9 August 2017; Received in revised form 3 April 2018; Accepted 6 April 2018 Available online 30 April 2018 0969-5931/ Crown Copyright © 2018 Published by Elsevier Ltd. All rights reserved. S. Banerjee, et al. International Business Review 28 (2019) 101498 developed economies, e.g., USA and EU, in the real world of practice, subsidiary market strategy and non-market CPA strategy. Also, whilst across a range of industries. In Australia too, media reports “mining CPA generally is assumed to be aimed at improved performance of the magnates … enjoyed favourable government concessions; CEOs of su- firm, results of empirical studies in this respect are mixed(Hadani & perannuation funds … benefitted from government guarantees …; Schuler, 2013; Rajwani & Liedong, 2015) and await empirical closure banking and finance CEOs … received government guarantees andfa- (Hadani, Bonardi, & Dahan, 2017). This ambiguity, together with the vourable legislation; and – the largest group of all – property developers key role of government in national economic activity, means it is en- … rely on rezoning and other favourable political decisions.” tirely plausible that there are multiple outcomes sought and resulting (ABCNews, 2015). from subsidiary CPA, including, for example, legitimacy and favourable Although, as we have noted, the political aspects of MNCs and CPA government decisions (Baysinger, 1984). These unresolved issues lead in general management have both separately attracted strong recent us to examine the following research questions: (1) how do the sub- research interest, the intersection of MNC subsidiaries and CPA is re- sidiary environment and subsidiary market strategies affect subsidiary latively recent and rare (Hillman & Wan, 2005), especially outside the CPA; and (2) what are the subsidiary level outcomes resulting from North American and European contexts (Rajwani & Liedong, 2015). CPA. By answering these questions we extend the market strategy-based Evidently, researchers “are less inclined to develop theoretical tools for IR theory to include the non-market CPA phenomenon, and address further understanding of the MNCs’ socio-political behaviour” (Hadji- Baron’s (1995a) call to integrate market and non-market strategies khani et al., 2008, p. 912), leading to calls for more research into how within a single framework. firms develop and exploit political resources in international environ- The rest of the paper is organized as follows. The next section pre- ments (De Villa, Rajwani, & Lawton, 2015; Mantere, Pajunen, & sents a brief review of the CPA literature and identifies the gaps that we Lamberg, 2009). This is notable, because MNC market strategy research address in our study. We next discuss the well-known market-strategy has broadened in its analysis over recent decades, from nations to the based integration-responsiveness framework, and adapt and extend it to MNC and ultimately to the individual subsidiaries of MNCs incorporate non-market subsidiary CPA strategy that is the focus of our (Birkinshaw, Hood, & Jonsson, 1998). However, non-market strategy study. We draw on the literature to develop our theoretical model and (CPA) research in IB remains primarily directed at the corporate level hypotheses linking subsidiary CPA with its antecedents and outcomes. (Lawton, McGuire et al., 2013) and subsidiary level CPA has only re- In the subsequent section, we discuss our research method, including cently been the subject of some emerging theoretical and empirical the sample from a mail survey of MNC subsidiaries in Australia, the study (Banerjee & Venaik, 2017; Hillman & Wan, 2005; Shirodkar & operational measures, and our analysis using the partial least squares Mohr, 2015a). This is puzzling as MNC subsidiaries operate in varied approach. Finally, we present our empirical results and discuss its im- conditions and are exposed to large variations in their business en- plications in the context of extant IB and CPA theory and suggest out- vironment that might conceivably affect both their market and non- standing issues that are worthy of further investigation. market activities (Zaheer, 1995). In such complex settings subsidiaries may engage in non-market strategies such as CPA to seek important 2. A review of literature on CPA in IB objectives such as legitimacy and favourable government decisions that cannot be obtained through market activities alone (Wöcke & Moodley, Earlier research into CPA has understandably focused on domestic 2015). We conclude that, in the face of a continuing strong research firms and their interactions with local governments in home markets. attention on the market strategies of MNCs and their subsidiaries, an The extant literature on CPA activities in foreign markets, notably by important challenge is to better understand subsidiaries’ non-market MNCs rather than exporters, has emerged only relatively recently political activities, and the degree to which the two are related (Lawton, (Hillman & Wan, 2005) and still reveals important gaps in our under- McGuire et al., 2013). standing of how firms conduct CPA in an overseas context (Lawton, To advance on this front we build on the classic industry-based in- McGuire et al., 2013). Table 1 summarises our review of the important tegration-responsiveness (IR) framework of Prahalad and Doz (1987), literature relating to CPA in an international business context and by including CPA. The IR framework – adapted from Lawrence and points to where our article seeks to fill a lacuna in MNC CPA theory. Lorsch’s (1967) integration-differentiation dimensions to the specific The review was undertaken in a systematic fashion along the lines re- context of MNCs – emphasises the importance of the business en- commended by Gaur and Kumar (2018). We searched abstracts and vironment on MNC market strategies and its impact on firm perfor- keywords for “corporate political activity” within the six major inter- mance (e.g. Devinney, Midgley, & Venaik, 2000), Although the merits national business journals over the last 27 years (i.e. since 1990). The of the IR framework are generally recognised (e.g. Johnson, 1995; Roth journals are: Journal of International Business Studies (JIBS); Management & Morrison, 1990), its proposed refinement and extension are rare. For International Review (MIR); International Business Review (IBR); Interna- example, whereas the earlier IB literature focussed on the headquarters tional Marketing Review (IMR); Journal of International Marketing (JIM) as the source of innovation that is transferred around the globe and Journal of World Business (JWB). Where other journal articles came (Vernon, 1966), the later literature acknowledges the importance of to our attention; for example; as a result of citations; these are also subsidiary innovation, which both Bartlett and Ghoshal (1990, p. 216) included from Academy of Management Perspectives (AMP); International and Nobel and Birkinshaw (1998,p. 479) describe as the “raison d’etre” Journal of Management Reviews (IJMR); Journal of Business Research of multinationals in determining performance. Similarly, Devinney (JBR); Journal of Business Economics (JBE); and Business and Society (B& et al. (2000) reformulate the IR framework to be more in accordance S). with modern economic models of the firm, and Meyer and Estrin (2014) We found 24 articles that focus on or include CPA in an interna- extend the IR framework from the headquarters to the subsidiary level. tional business context. Twelve are quantitative empirical studies, five Although these extensions are valuable, they continue to focus on the are qualitative case studies, four are literature reviews and three are market activities of MNC subsidiaries, and effectively ignore two key theoretical papers. The majority of the studies are quantitative, con- areas of significant MNC involvement – the non-market strategy ofCPA, stituting half of the total. Over 70% of the studies were published in the and its impact on non-market outcomes such as subsidiary legitimacy four main IB journals, namely, IBR, JIBS, JWB (four papers each) and and favourable government decisions. MIR (five papers). The most interesting aspect is the recency ofthe Our study aims to incorporate subsidiary CPA within the broader IR interest on the topic of CPA in IB. Our search found no articles speci- framework, and draw upon the underlying logic of the IR framework to fically on CPA in the key IB journals from 1990 to 1999. Further, only explain the antecedents and outcomes of subsidiary CPA. It would be 11 articles were published during the 15-year period from 2000 to valuable to understand the environmental antecedents of subsidiary 2014, whereas twelve articles have been published in the last 3 years CPA, in particular, whether the same variables are relevant for both alone from 2015 to 2017. And one article has been published in the first

2 S. Banerjee, et al. International Business Review 28 (2019) 101498

Table 1 Selected literature on CPA in IB.

Author(s) Journal Method Key Results

Doh, Lawton, and Rajwani AMP Literature review. The article finds that institutional factors have a significant relevance (2012) to MNE nonmarket activities, especially in the context of IB in emerging economies. As firms devote more resources to nonmarket activities, and adapt their activities to specific national country contexts, future research will need to take into account multiple theories and perspectives. Windsor (2007) B&S Theoretical. The article examines the complexity involved in corporate resource allocation towards integrating MNEs’ multilevel international political strategies. The author examines “horizontal” and “vertical” division of MNEs’ scarce corporate resources to political activities across different countries. The paper acknowledges that ineach country and at various levels, different institutional conditions and demands shape business-relevant political strategies. Holtbrügge et al. (2007) IBR Interview 84 subsidiaries/HQ of 19 German MNEs in China, Regression analysis shows the effect of political stakeholders France, India, Germany, USA. increases with MNC size. The significance of political stakeholders and the strength of political activities is contingent on country- and firm-specific factors, such as GDP per capita and firmsize. Shirodkar and Mohr (2015a) IBR Survey 105 foreign subsidiaries from 9 counties operating in Results show MNE unrelated diversification and close integration of India. subsidiaries result in a transactional approach to CPA. On the other hand, importance of local resources and relationships with local firms results in a less transactional approach to CPA. Wöcke and Moodley (2015) IBR Survey 103 local and foreign subsidiary firms supplying The article found high level of commonality in the way local and products to the South African health care sector. MNE firms perceive uncertainty in South Africa. MNEs pursued adaptation and avoidance CPA strategies. Antecedents such as turnover, subsidiary age and industry are more significant than liability of foreignness in the selection of CPA strategies. Gao, Yang, Huang, Gao, and IBR Survey 303 Chinese firms across 23 provinces. Results of this article show that firms’ formal and informal Yang (2018) institutional capital partially or fully mediates the relationship between CPA and its competencies. Lawton, McGuire et al. (2013) IJMR Literature review. The paper shows the continuing globalisation of business, especially given the increased role of developing country economies and their firms, and challenges our understanding of CPA theory and practice in different institutional environments. CPA continues to grow and businesses globalize, and encompass a much broader range of players and national institutions. Welch and Wilkinson (2004) IMR Case study of Australian sugar exporter and associate The article finds that an interaction of marketing and non-market organisations in its key networks. strategies is a feature of networks with strong political relationships in certain industries. Political influence in business networks isan important consideration in our understanding of them. Wrona and Sinzig (2017) JBE Literature review. This review of nonmarket strategy literature builds on the extant literature in this field by including firm and environmental antecedents that affect the conduct of nonmarket strategies. It explores the effect of nonmarket activities on firm performance, as well as the level of integration nationally and globally. Hadjikhani et al. (2008) JBR Theoretical. This paper theorises on how MNCs develop connections with socio- political organizations. The paper develops a theoretical perspective using business networks and incorporates the ideas of legitimacy, commitment and trust. Based on two case studies, it proposes that firms act proactively towards public actors concerning totheir business objectives. The study provides a better understanding of how firms develop their socio-political relationships. Blumentritt and Nigh (2002) JIBS Survey 91 subsidiaries of 22 US MNEs in 37 countries; This article studies factors that influence the extent to which secondary macro statistics. subsidiary CPA is aligned with associated business units. It finds that subsidiary integration together with the “business integration of the host country” with other countries influence the coordination of subsidiaries' CPA. Hillman and Wan (2005) JIBS Survey 178 subsidiaries of US based MNEs operating in This study examines external legitimacy forces on the CPA strategy of Europe. subsidiaries, including subsidiary tenure, size, degree of host country liberalism and parent diversification. Internal legitimacy pressures on subsidiary CPA include choice of CPA type and degree of MNE integration. Sun, Mellahi, and Thun (2010) JIBS Three longitudinal case studies of MNE auto JV in China. The paper discusses the factors that result in the diminishing, and at times negative, value of excessive political activity by MNEs in a politically stable emerging economy. Darendeli and Hill (2016) JIBS Case studies of 8 Turkish construction MNEs in Libya. The article concludes there is a social route to gain MNE legitimacy in host countries that supplements and may even replace the government-focussed path to gain legitimacy. Czinkota (2000) JIM Theoretical. This article discusses the vital role of government policy in determining the nature of national markets. It recommends, amongst other things, more interaction by marketing experts and firm managers with government decision makers in foreign country markets. (continued on next page)

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Table 1 (continued)

Author(s) Journal Method Key Results

Rajwani and Liedong (2015) JWB Literature review. The article reviews prior research on the effectiveness of CPA on firm value. It concludes that CPA is more likely to be beneficial in emerging economies. Further, relational CPA is more common in developing (versus developed) nations, since political and economic exchange is underpinned by social capita. Zhang, Zhao, and Ge (2016) JWB Survey 398 MNEs in China from a range of home nations and This analysis suggests the importance of institutional pressure from industries. both home and host countries in influencing MNE strategic decisions. Country-, region-, and firm-levels institutional facts affect the choice of different strategic tactics and activities. Involvement in local and foreign business groups (e.g., associations) increases firm political activities, albeit the effect of engaging with local business associations is stronger., augments the firms’ espousal of political devices, but joining in domestic business associations has a greater impact. Barron, Pereda, and Stacey JWB Comparative case studies/interviews in the government The study shows that subsidiary managers with decentralised and (2017) affairs units of Toyota and Hyundai in Brussels coordinated government affairs gain more internal and external social capital, and have more influence in comparison with subsidiary managers with relatively centralised and loosely coordinated government affairs. Mbalyohere, Lawton, JWB Interview based case studies of 5 MNEs in Uganda’s This article explores the CPA strategy of developed and developing Boojihawon, and Viney hydropower generation. country MNEs in the electricity industry in Uganda. It finds effective (2017) MNE political strategies in newly emerging countries with immature institutions, such as Uganda, include community embeddedness, political stakeholder engagement, regional understanding, and responsiveness to the institutional environment. Wan and Hillman (2006) MIR Survey 178 subsidiaries operating in Western Europe, owned The article finds that differences in MNE subsidiary political by 52 US MNEs. strategies are due to a range of corporate, subsidiary, and host country factors, including size, experience, strategic responsiveness, diversification, decentralisation, host country competition laws and host country openness including cultural openness. Jiménez, Benito-Osorio, and MIR Secondary data for 119 Spanish MNEs on product diversity, Analysing data from Spanish MNEs, the study shows that higher level Palmero-Cámara (2015) a secondary index for political risk & corruption. of experience, and relationships and negotiation with government and related agencies in host countries facilitates firm entry into markets especially where the degree of political risk is intolerable for competitors. Shirodkar and Mohr (2015b) MIR Survey 105 Indian subsidiaries of foreign MNEs from 9 In India, information based CPA strategy is more likely to be used by advanced economies. foreign MNEs relying on local intangible resources and less likely to be used by foreign MNEs relying on local tangible resources. Constituency-building CPA strategy is more likely to be used by firms that rely on both tangible and intangible resources. Finally, financial incentive strategy is less likely to be used by firms relying on local intangible resources. Yasuda and Mitsuhashi (2017) MIR Data from a database including 1013 mine owning firms and The study analyses data from the global mining industry and links it 938 mines annually from 1997 to 2007; matched to known with political developments in host countries. The paper finds that political changes. Average 398 MNEs p.a. MNCs enter politically risky countries when then can partially divest their assets following political change but do not enter these countries when they have to exit the country. Banerjee and Venaik (2017) MIR Survey 214 subsidiaries of MNCs from 29 countries Using data drawn from Australian subsidiaries, the study empirically operating in Australia. assesses the effectiveness of various CPA strategies on subsidiary legitimacy from an institutional perspective. The study finds that mimetic isomorphism is most effective and information strategy is least effective in gaining legitimacy. The other non-market strategies, namely, financial, constituency-building and relational, provide strong to moderate help in gaining legitimacy. In addition, multiple CPA strategies when employed together can increase overall effectiveness to achieve legitimacy.

The 24 studies are listed by journal, then by year and finally by author. AMP-Academy of Management Perspectives; B&S-Business and Society; IBR-International Business Review; IJRM- International Journal of Management Reviews; IMR-International Marketing Review; JBE- Journal of Business Economics; JBR- Journal of Business Research; JIBS- Journal of International Business Studies; JIM- Journal of International Marketing; JWB-Journal of World Business; MIR-Management International Review. two months of 2018. This suggests that interest in CPA is growing 3. Integration-responsiveness framework, research model and significantly among IB scholars, and our paper will be a useful addition hypotheses to this literature. In particular, none of the articles examines empirically the joint effects of both market and non-market strategies on multiple 3.1. Integration-responsiveness framework desirable outcomes, as our paper does. Further, as we discuss next, we analyse these strategies through the lens of the integration-respon- The IR framework has a long tradition in IB and has “a standing siveness framework, which is the cornerstone of MNC theory. among scholars as a ‘kind of theory’” (Haugland, 2010). It is a proven paradigm, empirically validated, that provides a robust theoretical framework for modelling international strategies both at the corporate and subsidiary levels (Haugland, 2010; Jarillo & Martinez, 1990; Lin & Hsieh, 2010; Luo, 2001b; Taggart, 1997, 1998; Venaik, Midgley, & Devinney,

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Fig. 1. Extended IR framework. (The unshaded boxes and linking arrows in the upper half of the figure represent the traditional market strategy focussed IR framework. The shaded arrows and boxes in the lower section of the figure represent our extension of the IR framework with non-market CPA strategy and related outcomes.)

2004). The framework recognises the pressures of cross-border integra- operate in varied local conditions (Luo, 2001a). Consequently, there is a tion and local responsiveness and proposes international market strategies need for cross-border integration and coordination among the dispersed that are consistent with these pressures (Bartlett, 1986; Bartlett & foreign operations of MNC subsidiaries to exploit comparative ad- Ghoshal, 1998; Prahalad & Doz, 1987). However, besides the market vantages across nations, as well as for local responsiveness to adapt to factors that impact MNC subsidiary strategy (Doz, Bartlett, & Prahalad, host country pressures (Doz et al., 1981). Thus, local responsiveness 1981; Gupta & Govindarajan, 1991; Yip, 1995), institutional theory re- relates to conditions in which benefits through integration are either cognizes the importance of non-market CPA by MNC subsidiaries in re- absent or inadequate. In such circumstances, strategy making is dele- sponse to host country pressures (Banerjee & Venaik, 2017; Hillman & gated to subsidiaries, at least in certain specialised areas of activities, Wan, 2005). Thus, for effective subsidiary operations, it is imperative to although the MNC headquarters might still have interest or keep watch focus not just on designing appropriate market strategies, but to also on such activities. Accordingly, a locally responsiveness strategy of concentrate on creating suitable non-market CPA – an aspect that is ne- adaptation is typically required by subsidiaries when institutional en- glected in the extant IR framework. For example, as noted in our in- vironments are local specific, albeit the need for local adaptation might troduction, firms in the banking and finance, mining, superannuation vary depending on host country environments (Bartlett & Ghoshal, sectors in Australia protect their interests through favourable government 1989; Prahalad & Doz, 1987). guarantees, concessions and regulations besides pursuing market strate- Host country environmental pressures can emanate from complex gies (such as product innovation). and/or vibrant market conditions as well as from the specific non- Fig. 1 summarises the key facets of the extant market-strategy fo- market context of the local environment (Luo, 2001a; Morrison & Roth, cused IR framework and our proposed extension. As shown in the 1992; Okhmatovskiy, 2010). As the host country business environment figure, the three unshaded boxes and linking arrows in the upper halfof is shaped by the process of public policy formulation and government the figure capture the current IR framework, namely, the influence of regulation, establishing relationships with governmental authorities, the business environment on MNC market strategy, and the perfor- public policy decision makers, and key local stakeholders at the sub- mance outcome of pursuing the chosen market strategy. As noted sidiary level through CPA will either lessen or weaken host country above, following the call to holistically examine both market and non- disadvantages and uncertainties and/or create more competitive op- market MNC subsidiary strategies, we extend the IR framework by portunities (Ghoshal & Nohra, 1989; Meyer & Su, 2015). Our study is adding the non-market responsiveness strategy of CPA, and two addi- based on the premise that for an MNC, responsiveness to foreign busi- tional outcomes, namely, favorable government decisions and legiti- ness environments is often more difficult than to its domestic en- macy (the three shaded boxes and associated arrows in the lower half of vironment. This is primarily because the operational environments of Fig. 1). Given the increasing importance of CPA for MNCs, we believe foreign countries can be highly uncertain. While there may be an un- there is a need to extend the IR framework by formally including CPA derlying presumption that substantial information about market con- alongside market activities as part of the overall strategy of MNC sub- ditions and socio-political circumstances in different countries are sidiaries in host countries. Our extension is also in line with Doz and known, MNCs face information disadvantages when compared to do- Prahalad’s (1991) call for a new paradigm for integration-responsive- mestic firms (Gaur, Sarathy, & Kumar, 2011; Hymer, 1976), and ness that balances economic and environmental adaptation. In doing so, therefore can falter in predicting changes in those conditions. In par- we also attempt to bring to life Baron’s (1995a) concept of integrated ticular, environmental uncertainty arising from both host government strategy comprising market and non-market components. Since the and competitor decisions may result in elevated risk (Miller, 1993). market-strategy related aspects of the IR framework have been dis- Likewise, MNCs encounter regulation of their economic activity cussed widely in the literature over the last three decades, and given the from host governments (Gaur et al., 2011; Lux, Crook, & Woehr, 2011). focus of our study is on extending the IR framework by incorporating However, government regulation can be a source of both risks and the non-market responsiveness strategy of CPA, we concentrate on the benefits to MNCs in many ways. Regulation can be a constraint on latter aspect in our research model and hypotheses, as discussed next. subsidiary operations and profitability or it may offer opportunities for subsidiaries through regulatory advantages and consequent rents, both presenting incentives for CPA (Boddewyn & Brewer, 1994). Also the 3.2. Research model type and degree of government regulation applying in a foreign environment can be important for a subsidiary (Luo, 2004) particularly in MNCs, viewed as collective entities of subsidiary organisations,

5 S. Banerjee, et al. International Business Review 28 (2019) 101498 policy-sensitive and regulation-intensive sectors. In such circumstances, or services in the industry depending on managerial perception of the if an MNC seeks to preserve its strong presence in a host country while trajectory of these changes in future (Anderson & Tushman, 1990). protecting or enhancing its competitive position, it becomes necessary Additionally, policy uncertainty in a host nation can be detrimental to to increase non-market local responsiveness efforts (Ghoshal & Nohra, the smooth operation of an MNC. Thus, an MNC operating in an IB 1989; Luo, 2001a). This may therefore encourage a subsidiary to un- context may confront a variety of uncertain environmental factors that dertake CPA to seek business stability or opportunity and/or protection can arise from a mix of both industry- and country-specific effects through government support. Extending these ideas, we propose that (Miller, 1993), wherein the economic and socio-political elements are subsidiary environmental factors (uncertainty and regulation) may be so intertwined that they are hard to distinguish (Boddewyn, 1988). important in deciding the non-market strategies of MNC subsidiaries, To minimise uncertainty and make informed decisions for realising including whether and to what degree the subsidiary engages in CPA. business potential within the host environment, MNC subsidiaries need We also expect MNCs to maintain a strategic balance between local to incorporate local responsiveness strategies for which subsidiaries responsiveness and integration activities (though this balance is MNC- may find it difficult to depend solely on market strategies togain specific). Both integration and innovation have long been regarded as competitive advantage (Hada, Grewal, & Chandrashekaran, 2013; Ozer, key reasons for MNCs’ existence and critical to success (Lee, 2010). 2010). While we contend that MNC subsidiaries’ responsiveness stra- Accordingly, to augment our theoretical analysis and offer practical tegies will depend on the degree of environmental uncertainty in the implications for MNCs operating in a foreign country market, we argue host nation, we argue that CPA is one strategic tool that facilitates that subsidiary market strategies of integration and innovation will subsidiaries to interact with and influence the local environment. CPA encourage CPA (Hillman, Keim, & Schuler, 2004; Shaffer, 1995). In can provide opportunities for subsidiaries to develop relational ties particular, a more integrated subsidiary is likely to proactively engage with important host country non-market actors, namely government in CPA to better position itself as a contributor to global operations and officials and policy makers as well as with community members(Baron, to counter the effects of the liability of foreignness (Zaheer, 1995). Neale, & Rao, 2016; Dorobantu, Kaul, & Zelner, 2017). Since informa- Innovation, a key aspect of an MNC’s global market strategy, is also tion is the antidote to uncertainty, firms seek to increase the amount important in deciding whether and to what degree the subsidiary en- and accuracy of information to minimise uncertainty and make in- gages in non-market CPA (Hillman et al., 2004; Shaffer, 1995). Sub- formed decisions (Boyce & Ville, 2002). For example, MNC subsidiaries sidiaries for which innovation is integral to their competitiveness, may can develop long-term relationships with policy makers and officials seek government protection for their innovation (Birkinshaw et al., (Puck, Rogers, & Mohr, 2013), which will help them to assess and mi- 1998) and are more likely to conduct CPA to curb knowledge leakage tigate uncertainty in a wide range of areas. This relationships-based and protect their proprietary advantage. strategy gives subsidiaries the opportunity to exchange information Turning to CPA outcomes, whereas the classic IR framework fo- with government at regular intervals and to participate in the creation cusses on performance as the objective of MNC subsidiary market of public policy. Such information-based exchanges can reduce en- strategy (Mauria & Sambharya, 2001), we believe that given the com- vironmental uncertainty as subsidiaries can monitor and even drive plexity and diversity of international markets, MNC subsidiaries are changes in public policy to either gain advantage or mitigate dis- likely to aim at a wider range of objectives. Whilst it is presumed CPA is advantage arising from the business environment. As host country en- intended to directly improve firm performance (Hillman et al., 2004; vironmental uncertainty also stems from social influences, by under- Rodriguez, Siegel, Hillman, & Eden, 2006), there may also be an in- taking CPA, subsidiaries can engage with the wider community on tention to gain what we term favourable government decisions that emerging and realised issues to minimise uncertainty. Thus, environ- provide benefits or long-term advantage to the firm, for example, fa- mental uncertainty increases the likelihood of MNC subsidiaries in- vourable technical standards, foreign trade mission participation, trade vesting proactively in CPA to influence political and public opinion petitions success, etc. (e.g. Schuler, Schnietz, & Baggett, 2002). Another (Hillman & Wan, 2005). Based on this discussion, we hypothesise that: objective of CPA would be to enhance legitimacy in the eyes of external H1a. More environmental uncertainty leads to more subsidiary CPA. stakeholders (Shaffer, 1995), potentially a very valuable outcome in a foreign environment. Thus, in the IB context, CPA may be a tool to improve subsidiary performance, obtain favourable government deci- 3.3.1.2. Government regulation. Prahalad and Doz (1987) identify sions, and/or enhance subsidiary legitimacy in the eyes of host gov- government regulations as one of the key pressures for local ernments and customers (Chan & Makino, 2007; Shaffer, 1995). responsiveness. As local responsiveness refers to the adaptation of In sum, we build on the classic market-strategy focussed IR frame- MNC operation to local business conditions, it is primarily driven by the work by adding the increasingly important non-market responsiveness contextual settings at the subsidiary level. With MNC subsidiaries strategy of CPA to develop our holistic model of MNC subsidiary operating in diverse business environments characterised by different strategy (see Fig. 2). As shown in the figure, the subsidiary pressures of constraints and regulations (Hadani & Schuler, 2013), the regulatory environmental uncertainty and government regulation influence sub- environment affects many aspects of their business, which canbea sidiary CPA. In addition, subsidiary CPA is influenced by the two sub- powerful motivation to engage in non-market local responsiveness CPA sidiary market strategies of integration and innovation. Finally, CPA strategy for regulatory advantage (Keillor & Hult, 2004). Consequently, impacts on the three subsidiary outcomes of performance, legitimacy in industries where the business environment is more regulated, and favourable government decisions. We next present our hypotheses government players who institute, alter and administer rules and laws relating the antecedents and outcomes of subsidiary CPA. tend to have greater control over commercial opportunities (Baron, 1995a, 1995b; Young & Makhija, 2014). MNC subsidiaries under 3.3. Hypotheses heavier government regulation might choose to engage in CPA to not only access government controlled opportunities but also because their 3.3.1. Subsidiary environment and CPA dependency on public policies is high (Baron, 1995b). MNC subsidiaries 3.3.1.1. Environmental uncertainty. Environmental uncertainty refers to may seek, either directly or through public opinion, adjustments in host a lack of information on economic and commercial conditions, country regulations especially when MNCs are unable to pursue their including the unpredictable nature of these conditions, that can preferred strategic option or outcomes due to changes in regulations critically affect managerial decisions (Daft, 2004; Luo & Zhao, 2013). and policies. Additionally, considering the advantages to economic Uncertainty also arises from a lack of clarity of existing information that activities obtained with government support (Gaur, Ma, & Ding, 2018), “may have several interpretations” (Daft & Lengel, 1986). For example, MNC subsidiaries may employ CPA strategies to make friends even in technological uncertainty can bring about changes in the products and/ hostile regulated environments (Holburn & Vanden Bergh, 2008).

6 S. Banerjee, et al. International Business Review 28 (2019) 101498

Fig. 2. Research model and hypotheses for MNC subsidiary CPA.

Hence, we hypothesise that: Ghoshal, 1989; Zaheer & Bell, 2005). Thus, MNC subsidiaries play a decisive role in the globalization of innovation, as they facilitate host H1b. More government regulation leads to more subsidiary CPA. country resources to become a part of MNCs’ global resource network (Dörrenbächer & Gammelgaard, 2016; Phene & Almeida, 2008). 3.3.2. Subsidiary market strategy and CPA Subsidiaries are in a better position to contribute successfully to 3.3.2.1. Integration. IB research shows how MNC strategy and structure MNC’s worldwide operations when local knowledge and strategies are evolve in response to the firm’s business environment (Bartlett & pursued to gain and exploit opportunities globally. The most potent Ghoshal, 2000; Prahalad & Doz, 1987). Whereas the earlier IR innovation actions are also those in which the subsidiary is able to take framework considered integration and responsiveness as alternative charge before others do in altering the rules of competition in its strategies (Prahalad & Doz, 1987), Bartlett and Ghoshal’s (1989) industry (Bouquet & Birkinshaw, 2008; Dörrenbächer & Gammelgaard, transnational strategy requires a high level of both integration and 2016). Therefore, while subsidiary innovation may include adaptation responsiveness for superior organizational performance. It is now to the market, product development, adoption of new technologies, recognized that effective enactment of integration strategy entering new markets, or the enlargement of its product portfolio, it complemented with subsidiary responsiveness can supercharge MNC also includes subsidiary efforts to identify opportunities in the host performance in local and global markets (Meyer & Estrin, 2014). country. Typically, MNCs exploit comparative advantages of different nations, Furthermore, host governments across the world are keen on pur- which are used for building competitive advantages for greater returns suing the innovation agenda to generate new opportunities for eco- on a worldwide basis (Asmussen, Pedersen, & Dhanaraj, 2009). nomic growth and development in the country and create high quality Whereas market strategy related responsiveness to, for example, local jobs for citizens. Given the harmony between MNC subsidiaries and customer needs is captured in the traditional IR framework, there is national governments in pursuing innovation, it is reasonable to expect limited recognition of the non-market strategy related responsiveness innovative subsidiaries to engage in CPA, gathering resources, in- through CPA by MNC subsidiaries. For MNCs to succeed, a subsidiary cluding information, from the government’s innovation agenda. can strengthen the overall effort of parent MNC integration by Innovative subsidiaries may also engage in CPA to influence the di- exploiting local conditions through subsidiary CP Hillman and Wan rection of government innovation plans, and to access funds allocated (2005) argue that integrated MNC subsidiaries are under pressure to by governments for specific innovation programs. Moreover, innovative formulate responsive local political strategies that support their role subsidiaries operating in environments where information asymmetries within the MNC. Since the political environment is nation specific, exist, and information gathering is difficult, may engage in CPA toac- subsidiaries’ CPA will inevitably be tailored to local issues, institutions cess information and knowledge about future innovation policy direc- and interests, and failure could potentially result in damage to tions. Subsidiaries leaning towards innovation could, as part of CPA, performance across the MNC network. This is especially the case with also seek opportunities to cooperate with government agencies in the MNCs today that operate increasingly in a transnational environment design of research and development policies and in developing in- with high pressures for both responsiveness and integration. This leads novative capabilities within the host country. Through this process, the us to our hypothesis: subsidiaries achieve better relationships with key policy makers of the host country, and, for example, be in a better position to lobby gov- H2a. A more integrated subsidiary will engage in more CPA. ernments for stronger intellectual property protection laws and regulations (Boddewyn, 2016) for greater security of their knowledge- 3.3.2.2. Innovation. Within the globally distributed MNC innovation based assets such as patents, trademarks, and trade secrets (Gaur et al., network, competitive success depends on the ability to leverage the 2011). From the above discussion, we hypothesise that: uneven distribution of subsidiary resources and capabilities (Bartlett &

7 S. Banerjee, et al. International Business Review 28 (2019) 101498

H2b. A more innovative subsidiary will engage in more CPA. wage laws and subsidies (direct and indirect) (Gale & Buchholz, 1987) and CPA has at times led to lower taxation, favourable terms of lending, awards of government contracts, reduced regulatory requirements, and 3.3.3. Subsidiary CPA and outcomes bailout assistance. (e.g. Faccio, 2006). Firms engaging in CPA can also 3.3.3.1. Subsidiary performance. It is often assumed that firms conduct act as consultants to government and influence government decision CPA to gain competitive advantage and improve economic performance making (Yongqiang & Zhilong, 2006) including, for example, their own as CPA provides “a means of competing not permitted by the pure interests in the reports sent to government. In sum, given the market pursuit of objectives” (Gale & Buchholz, 1987, p. 39).There are importance of government in the economy, there is a wide range of many ways in which this might be achieved. For example, as a member potentially beneficial outcomes in policy terms from CPA. Thus, we of influential advisory bodies, firms can acquire a variety of benefitsby hypothesise that: way of advance information that might defend or improve their relative competitive position, and positively affect firm performance (Hillman, H3c. Subsidiary CPA leads to more favourable government decisions. Zardkoohi, & Bierman, 1999). Pertinent early information can be instrumental in shaping the competitive environment in favour of the 4. Method firm’s overall market position (Schuler, Rehbein, & Cramer, 2002). Prior studies have also shown that firms engage in CPA to impede 4.1. Sample and data collection industry rivals and erode competitors’ advantages (Gale & Buchholz, 1987), thereby maintaining or strengthening their own competitive Our sample of subsidiary firms is selected from one host country, position. Consequently, we hypothesise that: Australia; while the parent headquarters are situated in 28 different H3a. Subsidiary CPA leads to better subsidiary performance. home nations (see Table A1 in Appendix A). Our sample therefore offers a new view on CPA, as most research examines US-origin MNCs. Ad- ditionally, conducting the study within a single host country provides a 3.3.3.2. Subsidiary legitimacy. The creation and maintenance of focus on subsidiaries’ business environment, strategy and outcome after legitimacy defined as “…acceptance by the specific host country controlling for factors that may influence subsidiary activities ina institutional environment.” (Kostova & Zaheer, 1999, p. 65) is one of multi-country study (Amine & Cavusgil, 1986). the most critical concerns for MNCs (Kostova & Roth, 2002). Several We collected the data with a self-administered questionnaire during researchers have argued that firm-level CPA activity is driven at least in the period 2008/2009. The responses were measured primarily on five part by a quest for social legitimacy and the need to balance legitimacy point Likert scales with the survey items obtained from relevant lit- with market efficiency (Marcus, Kaufman, & Beam, 1987). Since firms’ erature (see Table B1 in Appendix B). We mailed the questionnaires to behaviour needs to conform to rules and expectations for social the CEOs of 2776 MNC subsidiaries based in Australia, with an ex- acceptance or fitness (Oliver, 1991), CPA can be an effective non- planatory cover letter. Dun and Bradstreet database was the source for market instrument to achieve legitimacy. In interacting with the list of MNC subsidiaries, which includes all MNC subsidiaries in government under an environment of incomplete or inaccurate Australia, thus reducing any potential bias. We received 217 subsidiary information, subsidiaries can endeavour to provide policy makers responses. Excluding the three with missing data, the usable sample is with valuable information (Schuler, Rehbein et al., 2002). It can be 214, reflecting a net 7.7% response rate. While our overall response rate expected that such interactions between subsidiaries and policy makers seems low, it accords with the expected response rate of 5–10% in large not only deepen cooperation and relationships, they also confer mail surveys (Alreck & Settle, 1995; Stock, Greis, & Kasarda, 2000) and legitimacy on the subsidiary. To further their legitimacy, subsidiaries is similar to other published large mail survey studies (e.g. Dawson & can also respond politically to the social needs of the host nation such as Dickinson, 1988; Dikova, 2009). A recent CPA study by Shirodkar and education of local nationals, financial support for local infrastructure, Mohr (2015b) has a similar response rate to ours. Our study has no schools, research, sports, and other public goods (Luo, 2001b). This industry association endorsement vis-à-vis the Hillman and Wan (2005) raises the subsidiaries’ social responsibility profile and connects them study which had a response rate of 22.5% owing to the survey en- with societal norms and values of the host nation. As Sethi (1982) dorsement by the American Chamber of Commerce in Brussels. We points out, public acceptance of corporations depends upon their presume the low response rate in our large-scale mail survey was also in positive influence for social good. Boddewyn and Brewer (1994) and part due to the complex nature of the survey topic and questions. In Hillman et al. (1999) also argue in favour of CPA as a means to create addition, the questionnaire was lengthy as multiple items were used to legitimacy. It is therefore hypothesised that: operationalize each construct. H3b. Subsidiary CPA leads to higher subsidiary legitimacy. Notwithstanding these explanations, we tested our sample to verify whether it represented the MNC subsidiary population in Australia. Following Dikova (2009), we conducted t-tests to compare the age, 3.3.3.3. Favourable government decisions. The effectiveness of CPA can sales and size of our responding subsidiaries with random samples of be viewed in terms of favourable government decisions that confer subsidiaries in our survey population. We found no statistically sig- advantages to firms by tailoring public policies and regulations intheir nificant difference between the two groups. Our sample includes adi- interests (Hillman & Hitt, 1999). These can create opportunities, reduce verse range of subsidiaries operating in eight broad industry sectors: (a) regulatory intrusion, and/or eliminate threats from rival firms, for mining, manufacturing and construction, (b) wholesale and retail trade, example, in the form of exclusive government contracts or monopoly (c) professional, scientific, training, administration and support ser- rights (Lord, 2000; McWilliams, Van Fleet, & Cory, 2002). Other vices, (d) financial and insurance service, (e) transport, postal and examples of favourable government decisions that firms can gain by warehouse, (f) information, media and telecom, (g) agriculture, forestry engaging in CPA include the adoption of the firm’s technology as the and fishing, and (h) rental and real estate services. The average period public standard, and/or winning subsidies, both of which can lead to of operation in Australia of our sample MNC subsidiaries is 22.3 years. competitive advantage (Dean & Brown, 1995). CPA has also been Our survey respondents are senior managers of the subsidiaries and shown to sometimes (i) alter the content of legislative provisions (Lord, therefore familiar with their organization’s overall environment, 2000), (ii) increase the likelihood of participation in foreign trade strategy, structure and performance (Kumar, Stern, & Anderson, 1993; missions (Schuler, Schnietz et al., 2002), and (iii) affect firms’ success Mitchell, 1994). Our approach of using single key informants is in ac- with trade petitions (Rehbein & Lenway, 1994). Firms might also seek cordance with prior research (Wan & Hillman, 2006). All informants to alter their cost structure through favourable policies on minimum hold important decision-making positions reflecting a high level of

8 S. Banerjee, et al. International Business Review 28 (2019) 101498 engagement with the survey, and thus supporting the quality of our production and marketing, each measured with multiple items. Finally, data. On average, our respondents are 48 years in age and have nine innovation refers to subsidiaries’ pursuit of product and market in- years’ experience in the subsidiary, and therefore are expected to have a novation and the propensity to invest in research and development. good knowledge and understanding of the CPA behaviour of their This too is operationalised with two components, new products and subsidiaries. 208 (97%) of our 214 usable cases are MNC subsidiaries markets, and research and development, each measured with multiple that are wholly-owned, with ownership data missing in six cases. Thus, items (See Table B1 in Appendix B). there is practically no difference in ownership characteristics in our sample. Finally, and most importantly, our sample size is adequate for 4.4. Controls the partial least squares (PLS) technique that we use for our data analysis (Tabachnick & Fidell, 2007). We include several controls while testing our hypothesised relationships between subsidiary CPA and its antecedents and outcomes. 4.2. Dependent variables The first set of controls includes the paths in the traditional IR framework that link subsidiary environment to subsidiary market strategy, We have two levels of dependent variables. At the first level of and then to subsidiary outcome. The second set of controls are those subsidiary strategy, the core dependent construct that we theorize is that are commonly used in the literature, namely, related diversifica- subsidiary CPA. At the second level of subsidiary outcome, the three tion, industry concentration, subsidiary size, and subsidiary age (see ultimate dependent variables that we theorize are subsidiary perfor- Table B1 in Appendix B). Finally, we control for parent-subsidiary mance, subsidiary legitimacy, and favourable government decisions. country distance while testing the effect of subsidiary environment and We operationalize subsidiary CPA with the measures developed by market activity on subsidiary CPA. With studies (e.g. Geppert, Williams, Hillman and Wan (2005) based on Hillman and Hitt’s (1999) three & Matten, 2003) showing home country economic, political and in- generic CPA strategies: constituency building, financial incentive, and stitutional environment affecting MNCs’ international strategies, we use information strategy. In addition, we include two other CPA strategies the World Bank Governance Indicators (Kaufmann, Kraay, & Mastruzzi, that are considered important in the literature, namely, legislative co- 2003). First, we calculate the overall average governance score for the operation and relational (Keillor & Hult, 2004; Lawton, Rajwani, & subsidiary country (Australia) and the 28 parent countries, across the Doh, 2013; Luo, 2001b). Thus, our focal construct of subsidiary CPA is six governance dimensions. Next, we compute the parent-subsidiary operationalized with five components, each measured with multiple country distance as the difference (in absolute terms) between Australia items. and each of the 28 parent countries in their respective overall average For subsidiary performance, IB literature suggests that MNC execu- governance score. tives are hesitant to provide objective financial performance information (e.g. Roth, Schweiger, & Morrison, 1991). Consequently, MNC 4.5. Potential biases subsidiary performance is often measured using a subjective self-report instrument (Conant, Mokwa, & Varadarajan, 1990). Previous research Common method bias (CMB) may be a concern when self-report shows strong associations between subjective and objective measures questionnaires collect data from the same respondents for both the (Dawes, 1999; Venkatraman & Ramanujam, 1986). Hence, following dependent and independent variables (Podsakoff & Organ, 1986). To earlier studies, we measure subsidiary performance with self-reports by address this concern, we examine our data following Chang, respondents on four items encompassing both financial performance Witteloostuijn, and Eden (2010). In keeping with prior research using a (profitability and profit growth) and operational performance (market uniform Likert scale across measures, we dealt with potential CMB at share and sales growth) (Venkatraman & Ramanujam, 1986). For fa- both the instrument design and data collection stages by ensuring that vourable government decisions, we capture subsidiary success in shaping “ambiguous, vague and unfamiliar terms are not included” and assuring government decisions that are advantageous to it. We selected five anonymity and confidentiality to the respondents (Chang et al., 2010; areas of potential influence from the CPA literature, namely, trade Podsakoff, MacKenzie, Lee, & Podsakoff, 2003). Additionally, we promotion participation, influence over trade issues, influence over “manipulated the order of questionnaire items” across dependent, in- wage laws, influence on competition, and the subsidiary position as dependent, and control variables (Chang et al., 2010, p. 180). Further, economic advisor to the government. Finally, subsidiary legitimacy re- following Chang et al. (2010), we measure subsidiary-parent country flects the degree to which subsidiary business behaviour and outcome distance with secondary data. After following all necessary procedural accord with society’s expectations (Johnson, Dowd, & Ridgeway, 2006; remedies pertaining to questionnaire design, we did ex post statistical Wood, 1991). Following the literature (e.g. Dowling & Pfeffer, 1975; analysis to test for CMB. Using Podsakoff et al.’s (2003) single-common- Ryan, Swanson, & Buchholz, 1987; Singh, Tucker, & House, 1986; method-factor approach, our exploratory factor analysis (EFA) of the Zimmerman & Zeitz, 2002), subsidiary legitimacy is measured with two variables extracted 16 factors, accounting for 72.8% of the variance. components, namely (i) behaviour validation, and (ii) endorsement The first factor extracted 17.6% of the variance. As per the guideline from government and industry, each measured with multiple items (See proposed by Fuller, Simmering, Atinc, Atinc, and Babin (2016), one- Table B1 in Appendix B). factor test indicates CMB when more than 50% variance is extracted in the first factor or when only one factor emerges. As there is nosingle 4.3. Independent variables large common factor underlying all of our measures and no general factor extracted more than 50% variance, CMB is unlikely in these data. Our research model of MNC subsidiary CPA has four independent In addition, research suggests that complicated models, such as ours, variables: the two subsidiary environment variables of environmental reduce the likelihood of CMB, because in complex models, the re- uncertainty and government regulation, and the two subsidiary market lationships among the independent and dependent variables are not strategy variables of integration and innovation. Environmental un- simple and unlikely to be part of the respondents’ cognitive map (Chang certainty is operationalised with two components, namely, degree of et al., 2010; Podsakoff et al., 2003). predictability of industry competition and of government policies, each We also examined our data for non-response bias. Following measured with multiple items. Government regulation, which reflects the Armstrong and Overton (1977) and Lambert and Harrington (1990), we extent of perceived government involvement in subsidiary activities or compared the characteristics of respondent subsidiaries from earlier its industry through regulation, is measured with two items. Integration waves (n = 141) of returned surveys to those received later (n = 73). reflects the degree of subsidiary integration with the MNC global net- The early wave comprises subsidiaries that mailed back completely work and is operationalised with three components: administration, filled questionnaires following the initial survey and two written follow

9 S. Banerjee, et al. International Business Review 28 (2019) 101498 up reminders. To enhance the response rate, we did a second run of our 5. Results original survey after five months. The later wave of completed surveys is regarded as representative of the non-respondents (Armstrong & Table 2 provides the correlations, means and standard deviations for Overton, 1977; Lambert & Harrington, 1990). Similar to our efforts in our model constructs. As shown in the table, all our constructs have the first phase of survey, we could elicit 73 responses only aftertwo sufficient discriminant validity (i.e., the square root of average variance written reminders and verbal follow-ups. The t-tests between the two extracted (AVE) for each construct (Table 1, diagonal entries) is greater groups of respondents yielded no significant differences on subsidiary than its correlation with all other constructs in the model (Table 1, off- age (t = −1.08), size (t = −0.91), assets (t = −0.45), and sales diagonal elements in respective rows and columns) (Venaik et al., (t = −1.35), suggesting no concern for non-response bias in our study. 2005). The results of our measurement model analysis, including additional reliability statistics for the model constructs and components are shown 4.6. Analysis technique in Table 3. As indicated in the table, the composite reliability for our eight constructs and 14 components is at or above the threshold level of Our multilevel theoretical model of subsidiary CPA examines the 0.7. Similarly, 17 of the 22 constructs plus components have a Cron- antecedents and outcomes of non-market CPA alongside market bach alpha (α) above the minimum cut-off level of 0.7, the exceptions strategy within a single integrated framework. An integrated multilevel being the five components with α ranging from 0.40 to 0.66. Finally, model with multiple independent variables, dependent variables and except environmental uncertainty, the AVE is close to 50% or more for controls is best estimated using the structural equation modelling (SEM) all constructs and components. Overall, given that we measure some of based PLS method. A key advantage of SEM is that it allows us to si- the components and constructs for the first time (for example, sub- multaneously estimate both the structural model relationships among sidiary legitimacy), and the measures could be improved in future, the multiple independent and dependent variables, and the measurement measurement model seems adequate for our study. model relationships between latent, unobserved variables and multiple Table 4 exhibits the results of our structural model analysis using observed indicators (Tabachnick & Fidell, 2007; Venaik, Midgley, & the partial least squares approach. For the first set of hypotheses re- Devinney, 2005). lating subsidiary environment with subsidiary CPA, we find strong We also chose the PLS approach to SEM because models of CPA are support for H1b (more government regulation leads to more subsidiary at an early stage of theoretical development, and the regression-based CPA, β = 0.37, p < 0.001), but not for H1a (that is, environmental approach underlying PLS is regarded as more appropriate than the uncertainty does not have a significant relationship with subsidiary covariance based approach such as AMOS or LISREL in such situations. CPA). Next, for the hypotheses regarding the effect of subsidiary market Second, a critical assumption in LISREL and AMOS is that the data have strategy on subsidiary CPA, we find support for H2a (a more integrated a multivariate normal distribution, which may not be so with our data. subsidiary engages in more subsidiary CPA, β = 0.12, p < 0.10), and Third, PLS deals with skewness of manifest variables, multicollinearity, strong support for H2b (a more innovative subsidiary engages in more and misspecification of structural models in a robust way(Cassel, subsidiary CPA, β = 0.24, p < 0.001). Finally, looking at the sub- Hackl, & Westlund, 1999) and can handle a range of variables – con- sidiary CPA outcomes, although we find no support for H3a (that is, tinuous, ordinal and nominal. It also allows the use of both reflective subsidiary CPA does not lead to better subsidiary performance), we find (effect) and formative (cause) indicators (Chin, Peterson, & Brown, strong support for both H3b (subsidiary CPA leads to higher subsidiary 2008). Finally, our theoretical model involves eight constructs that are legitimacy, β = 0.31, p < 0.001) and H3c (subsidiary CPA leads to measured with multiple components and/or items. Five of the eight more favourable government decisions, β = 0.42, p < 0.001). Overall, constructs – environmental uncertainty, integration, innovation, sub- we find empirical support for five of our seven hypotheses.2 TheR sidiary CPA, and subsidiary legitimacy – are second-order factors values for the four key dependant constructs are 23.6% for subsidiary measured reflectively with 14 first-order components, and which in CPA, 29.3% for favourable government decisions, 11% for subsidiary turn are measured with 52 questionnaire items. PLS technique easily legitimacy and 6.3% for subsidiary performance. incorporates multiple, multilevel constructs and is appropriate for es- We also found a number of significant controls. Among the first set timating these types of complex relationships (Barclay, Higgins, & of controls linking subsidiary environment to subsidiary market Thompson, 1995; Fornell, Lorange, & Roos, 1990). strategy and outcomes, we find three significant relationships: innovation has significant positive effects on subsidiary performance and favourable government decisions (β = 0.11 and β = 0.13 respectively,

Table 2 Correlations, means, standard deviations, and square root of AVE in the diagonal.

Constructs Mean SD 1 2 3 4 5 6 7 8 9 10 11 12 13

1. Environmental Uncertainty 3.17 0.47 0.67 2. Government Regulation 2.57 0.80 0.01 0.90 3. Integration 2.47 0.98 −0.14* 0.03 0.70 4. Innovation 2.60 1.04 0.04 −0.01 −0.33*** 0.71 5. Subsidiary CPA 1.63 0.64 −0.01 0.37** 0.02 0.23*** 0.71 6. Subsidiary Performance 2.60 1.06 0.01 0.09 0.01 0.11* 0.09 0.76 7. Subsidiary Legitimacy 1.69 0.58 0.05 0.19** −0.01 0.17** 0.45*** 0.04 0.73 8. Favourable Govt. Decisions 1.30 0.49 −0.10 0.18** −0.00 0.19** 0.52** 0.09 0.39*** 0.75 9. Related Diversification a 2.63 1.29 0.03 −0.02 0.14* 0.00 0.05 0.19** 0.04 0.08 0.88 10. Industry Concentration a 3.74 3.23 0.04 0.00 0.14* 0.05 −0.02 0.00 0.04 −0.02 0.13* 1 11. Subsidiary Size a 238.13 651.81 0.04 0.14* −0.21*** 0.15* 0.19** 0.14† 0.02 0.01 −0.05 −0.02 1 12. Subsidiary Age a 22.27 19.27 0.07 0.07 −0.12* 0.03 0.01 −0.08 −0.09 0.04 0.08 0.03 0.32*** 1 13. Subsidiary-Parent Country Distance a 0.42 0.41 −0.09 0.12* −0.05 0.03 0.07 0.03 0.12* 0.09 0.03 0.05 −0.04 −0.08 1

*** p < 0.001, ** p < 0.01, * p < 0.05, † p < 0.10. All tests are two-tailed. SD – standard deviation. AVE – average variance extracted. CPA – corporate political activity. a Control variables.

10 S. Banerjee, et al. International Business Review 28 (2019) 101498

Table 3 Measurement model results for constructs and components.

Constructs/Components Number of components/items Composite Reliability Cronbach Alpha (α) Average Variance Extracted

1. Environmental Uncertainty 2 0.81 0.73 0.45 - Industry Competition 3 0.82 0.66 0.61 - Government Policies 4 0.91 0.86 0.72

2. Government Regulation 2 0.90 0.78 0.82

3. Integration 3 0.86 0.83 0.49 - Administration 4 0.89 0.84 0.70 - Production 3 0.89 0.82 0.76 - Marketing 3 0.81 0.65 0.63

4. Innovation 2 0.89 0.83 0.51 - New Products & Markets 6 0.92 0.90 0.68 - Research & Development 2 0.84 0.63 0.74

5. Subsidiary CPA Strategy 5 0.95 0.92 0.51 - Constituency Building 4 0.89 0.83 0.67 - Financial Incentive 3 0.73 0.51 0.50 - Information 7 0.93 0.92 0.70 - Legislative Cooperation 4 0.95 0.93 0.85 - Relational 4 0.92 0.89 0.75

6. Subsidiary Performance 4 0.81 0.75 0.57

7. Subsidiary Legitimacy 2 0.82 0.72 0.53 - Behaviour validation 3 0.92 0.88 0.82 - Endorsement 2 0.77 0.40 0.62

8. Favourable Government Decisions 5 0.87 0.82 0.57

9. Related Diversification a 2 0.88 0.74 0.78

10. Industry Concentration a 1 1 1 na

11. Subsidiary Size a 1 1 1 na

12. Subsidiary Age a 1 1 1 na

13. Subsidiary-Parent Country Distance a 1 1 1 na

Theoretical model constructs highlighted in bold. na – not applicable, as the control variables are measured with single items/index. a Control variables. both p < 0.10) and environmental uncertainty has significant negative outcomes, and therefore may be less keen on using CPA than may be relationship with integration (β = −0.14, p < 0.05). For the second optimal for subsidiary advantage. set of controls, we find two significant relationships that are consistent The second local responsiveness pressure of government regulation with prior research: subsidiary size has a significant positive relation- from the host country environment has a significant positive relationship with CPA (β = 0.15, p < 0.10), and related diversification has a ship with subsidiary CPA but has no relationship with subsidiary significant positive relationship with subsidiary performance (β =0.18, market strategy. This suggests that in a highly regulated environment, p < 0.01). subsidiaries have a stronger incentive to cultivate host governments and the local community through CPA. By conducting CPA, MNC subsidiaries keep key stakeholders, namely the host governments and the 6. Discussion society, informed of the efficient manner in which they have adapted to local government regulations or changes in existing regulations. This 6.1. Effect of subsidiary environment on subsidiary strategy will help subsidiaries to not only understand the host government demands, but also foster stronger relations with host governments to We examine two subsidiary business environment pressures, shape favourable policies, gain favourable interpretation of existing namely, environmental uncertainty and government regulation, and rules/regulations, and create liberal trading regulations for cross-border test their effects on subsidiary non-market strategy of CPA (as well ason trade advantageous to the firm. Taken together, our results show how subsidiary market strategies of integration and innovation as controls). the two local responsive pressures in the subsidiary business environ- Whereas environmental uncertainty has a significant negative re- ment jointly but differentially explain the two aspects of subsidiary lationship with integration, it does not have any effect on subsidiary strategy, namely, market integration and non-market responsiveness CPA. Lower market strategy integration in an environment char- through CPA. Our study demonstrates the importance of examining acterised by high environmental uncertainty is consistent with IR market as well as non-market strategies of MNCs within the IR frame- theory, since the local subsidiary rather than the corporate head- work to get a holistic understanding of the effects of different en- quarters is in the best position to respond to these uncertainties quickly vironmental factors on diverse market and non-market activities. and effectively. On the other hand, we speculate that the non-significant effect of environmental uncertainty on subsidiary CPA couldbe due to managers in general, through their MBA and other formal edu- 6.2. Effect of subsidiary market strategy on non-market CPA cation, being trained more in evaluating and implementing market rather than non-market strategy related options to respond to en- Our results show that the choice of an integrated market strategy vironmental uncertainty. Due to their bounded rationality (Simon, has a positive relationship with subsidiary non-market CPA strategy. In 1963), subsidiary managers may not fully realize the strategic potential an integrated MNC, the firm’s diverse business units and functions are of non-market responsiveness strategy of CPA to achieve desired located around the world and depend on each other for the success of

11 S. Banerjee, et al. International Business Review 28 (2019) 101498

Table 4 Structural model results.

Estimated Relationships Path Coefficient (β) Observed t-values Sig. level a Hypothesis Supported

HYPOTHESISED Subsidiary Environment → Subsidiary CPA H1a: Environmental Uncertainty → CPA 0.03 0.32 ns No H1b: Government Regulation → CPA 0.37 5.99 *** Yes Subsidiary Market Activity → Subsidiary CPA H2a: Integration → CPA 0.12 1.75 † Yes H2b: Innovation → CPA 0.24 3.58 *** Yes Subsidiary CPA → Subsidiary Outcomes H3a: CPA → Subsidiary Performance 0.05 0.75 ns No H3b: CPA → Subsidiary Legitimacy 0.31 4.30 *** Yes H3c: CPA → Favourable Government Decisions 0.42 5.11 *** Yes CONTROLS Environmental Uncertainty → Integration −0.14 1.98 * Environmental Uncertainty → Innovation 0.06 0.83 Government Regulation → Integration 0.04 0.46 Government Regulation → Innovation −0.01 0.18 Integration → Subsidiary Performance 0.03 0.23 Integration → Subsidiary Legitimacy 0.04 0.05 Integration → Favourable Government Decisions 0.04 0.62 Innovation → Subsidiary Performance 0.11 1.70 † Innovation → Subsidiary Legitimacy 0.09 1.02 Innovation → Favourable Government Decisions 0.13 1.88 † Related Diversification → CPA 0.07 0.85 Industry Concentration → CPA −0.06 1.00 Subsidiary Size → CPA 0.15 1.82 † Subsidiary Age → CPA −0.04 0.67 Subsidiary-Parent Country Distance → CPA 0.07 1.02 Related Diversification → Subsidiary Performance 0.18 2.71 ** Industry Concentration → Subsidiary Performance 0.04 0.46 Subsidiary Size → Subsidiary Performance −0.03 0.40 Subsidiary Age → Subsidiary Performance −0.11 1.22

a Significance levels: *** p < 0.001, ** p < 0.01, * p < 0.05, † p < 0.10. ns – not significant. the corporation. MNC subsidiaries therefore conduct CPA within the other words “thinking outside the box”, relative to firms low on in- political/national environment in which the subsidiary is located, and novation, hence the leveraging of government through CPA. We also leverage local resources, including government relationships, to con- suggest that as it is a high priority for some governments to encourage tribute to the performance of the MNC, as suggested by Hillman and innovation (Australian Department of Industry, Innovation, & Science, Wan (2005). While the IB literature acknowledges the importance of 2016); innovative subsidiaries are more likely to respond to this by MNCs’ global integration strategy, it is not necessarily about promoting developing closer relationships with the innovation authorities, homogeneity, but “managing differences” (Ghemawat, 2007) across whereas non-innovative firms may consider government relationships nations, cultures and people as subsidiaries are embedded in multiple as irrelevant or costly. heterogeneous contexts (Meyer, Mudambi, & Narula, 2011). This raises an important challenge for MNC subsidiaries as they battle the dual pressures of integration and local responsiveness. 6.3. CPA outcomes Against this background, our study provides empirical support to Meyer et al.’s (2011) conceptual assertion that MNC subsidiaries bal- The IR framework in its current form and the IB literature more ance the pressures of local responsiveness and integration within the broadly mainly focus on performance as the ultimate outcome of the MNC’s overall structure. Our results show that MNC subsidiaries in- market strategy of MNC subsidiaries. However, MNC subsidiaries might creasingly pursue a transnational strategy, wherein an integrated engage in non-market CPA strategy to achieve other important out- market strategy and a responsive non-market CPA strategy complement comes including subsidiary legitimacy and favourable government de- and reinforce each other to achieve the desired outcomes. In doing so, cisions. Our theoretical model of subsidiary CPA therefore examines the our result also supports Baron’s (1995a) advice to combine market and effect of subsidiary CPA (with market strategy as control), onthree non-market strategy. By carrying out their roles and responsibilities in subsidiary outcomes: subsidiary performance, subsidiary legitimacy, maintaining good relations with host governments and societal stake- and favourable government decisions. Whereas subsidiary CPA has a holders via CPA, subsidiaries help in creating and sustaining the MNC’s strong positive relationship with subsidiary legitimacy but does not firm specific advantages. affect performance, innovation has a positive relationship with per- We also find that subsidiary innovation is a key determinant ofits formance but does not affect subsidiary legitimacy. This suggests that political involvement. Subsidiaries with innovative behaviours use CPA market and non-market strategies play complementary roles in achieving to seek favourable government policy decisions from host governments the twin outcomes of subsidiary performance and legitimacy respec- to enhance their own research and development activities and for better tively. intellectual property protection (Keim & Baysinger, 1988). Such gov- Since legitimacy management depends on communication between ernment protection can potentially provide innovative subsidiaries with firms and legitimating actors (Suchman, 1995), the host country gov- advantage over their relatively less-innovative industry rivals (Keim & ernment being one of the most important of these (Chan & Makino, Baysinger, 1988), for example, by extending the legal life of patents and 2007), CPA is a potent tool that can be used effectively by MNC sub- copyrights and extracting super-normal profits. It is also probable that sidiaries to achieve legitimacy in the host nations. In the IB literature, innovative firms are more likely to search for non-market advantage, in environment-driven liability of foreignness has its roots in the host country environment (Gaur et al., 2011). It is acknowledged that any

12 S. Banerjee, et al. International Business Review 28 (2019) 101498 adverse local perception of an MNC operation in a host country not only performance, it may be useful for future research to carefully reassess increases the costs of doing business but also can trigger opposition to the relationships with longitudinal data to more effectively capture the its activities (Zaheer, 1995; Zaheer & Mosakowski, 1997). Thus MNC temporal delay between CPA strategies and their impact on perfor- subsidiaries often encounter legitimacy problems that might be over- mance, and controlling for other longitudinal factors such as exchange come through CPA (Kostova & Zaheer, 1999; Suchman, 1995). Until rate changes. Also, in future studies, researchers could include parent recently, recognition of CPA as a strategic source of subsidiary legiti- company related controls such as parent company size, age, and geo- macy was based primarily on theoretical logic, and mostly implied ra- graphic diversity, and whether the subsidiary manager is local or expat, ther than tested empirically, a notable exception being a recent study to complement our subsidiary specific controls, such as subsidiary size, by Banerjee and Venaik (2017). In our current paper, we extend that age and subsidiary-parent country distance. work by examining both market and non-market strategies and their Finally, to the best of our knowledge, our study is the first to em- antecedents and outcomes within an extended IR framework. Our pirically test an integrated IR framework encompassing market as well findings confirm that subsidiaries use non-market CPA strategies togain as non-market CPA strategies of MNC subsidiaries. To keep our model reputation and goodwill, thereby offsetting their initial disadvantages manageable and parsimonious, we examined a limited set of variables and protecting their social license to operate. within each of the domains of the business environment, subsidiary A plausible explanation for no relationship between CPA and sub- strategy and subsidiary outcome. In future research, our extended IR sidiary performance is that CPA may affect performance in a complex framework could be enriched and extended to include a broader range manner and over a much longer time frame vis-à-vis market strategies; of environmental, organizational and outcome variables of interest to effects that are difficult to capture in a cross-sectional study(Hadani & researchers. Schuler, 2013). Prior CPA research also acknowledges that political advantages gained from CPA do not necessarily translate into economic 8. Conclusion performance (Hadani & Schuler, 2013; Hillman et al., 2004). Our study adds support to this counter-intuitive idea. For example, favourable Our study makes several important theoretical, methodological and legislation or securing monopoly rights or an exclusive government managerial contributions to the IB literature. Specifically, our paper contract may help a subsidiary to continue its operations, but may not makes three key theoretical contributions. One, our paper extends the result in improved market share or profitability per se. CPA can po- market-strategy focussed IR framework by incorporating the key as- tentially assist MNC subsidiaries to gain legitimacy to overcome the pects of non-market CPA strategy as part of the overall strategy of the social and cultural disadvantage of operating in a different institutional MNC subsidiary. We thus expand the scope of the industry-based IR environment, but not gain enough advantage to improve financial framework by including the non-market local responsiveness strategy of performance. CPA that has mainly been studied from the perspective of institutional Finally, both subsidiary innovation and CPA have significant posi- theory. Two, our study expands the subsidiary outcome construct to tive effects on favourable government decisions. Innovation has botha include both the traditional market based outcome of performance, and direct effect on favourable government decision (β = 0.13) as well institutional theory inspired non-market outcomes of subsidiary legiti- an indirect effect via subsidiary CPA (β = 0.26 × 0.42 = 0.11) re- macy and favourable government decisions. Three, we develop (and sulting in a total effect size of 0.24. In contrast, CPA has a direct effect test) an integrated, multilevel model of subsidiary strategy encom- on favourable government decisions (β = 0.42) which is nearly twice passing a range of environmental antecedents and multiple desirable the effect of innovation. This shows that the primary driver of favour- outcomes within a single, theoretical model. Overall, our expanded able government decisions is the non-market strategy of CPA, albeit strategy lens enables us to explain a broader range of outcomes such as bolstered with the market strategy of innovation. subsidiary legitimacy and favourable government decisions, in addition to the traditional outcome of firm performance within a single holistic 7. Limitations and directions for future research theoretical model. Our model therefore encompasses a more compre- hensive range of activities of MNC subsidiaries in foreign markets than We suggest a few directions for future researchers, to both overcome the existing IR models that focus solely on the market activities of MNC our study’s limitations and to extend it in new directions. One, our subsidiaries, and addresses the call in the literature to encompass both study examines the strategy of MNC subsidiaries from multiple home market and non-market strategies within a single integrated framework countries but in one host country, Australia. In contrast, most of the (Baron, 1995a; Zhao et al., 2017). existing studies examine subsidiary CPA strategy of MNCs from one Methodologically, we extend the study of CPA from primarily do- home country and their subsidiaries located in multiple countries (see mestic markets to international markets and from the MNC head- Wan & Hillman, 2006). Future research could extend these studies by quarters to MNC subsidiaries in one country, Australia, a setting that is examining subsidiaries from both multiple home countries and located new in the IB/CPA literature (Rajwani & Liedong, 2015). Using the PLS- in multiple host countries. In addition, the integrated IR framework SEM approach, our empirical test of the extended IR framework pro- could be tested and compared across MNCs and subsidiaries in and from vides a more robust understanding of the relationships between MNC advanced and emerging economies. Two, we explore CPA strategy of subsidiary environment and market and non-market strategies, and in MNC subsidiaries operating in eight different industry sectors. It is particular the differential outcomes for the firm arising from these dual plausible that the CPA imperatives vary by industry, for example, in sets of strategies. In doing so, our study supports Doz and Prahalad’s mining versus services. However, we could not test industry specific (1991) appeal for integration-responsiveness balance, and reinforces models due to our industry sample sizes ranging from four for services Meyer et al.’s (2011) work by empirically showing that MNC sub- to 79 for mining. Larger samples focussing on a few industries and sidiaries’ strategic options of market-oriented global integration and collected with the help of industry partners and associations would help non-market local responsiveness of CPA co-exist in a way that is aligned address the important question of how the empirical model of CPA with MNC’s strategic goals and outcomes. varies by industry. The key finding of our study – that the dual paths of marketand Three, our study is a cross-sectional snapshot of MNC subsidiary non-market strategies complement each other to achieve the twin CPA antecedents and outcomes, and does not capture the strategies of outcomes of performance and legitimacy respectively – has important non-surviving subsidiaries. A longitudinal study design would help us managerial implications for MNC subsidiaries. MNC subsidiary man- examine the linkages between subsidiary CPA and their survival in host agement need to deploy their resources judiciously, and design and countries, using a binomial logit model. Further, given the weight of implement strategies that are consistent with the outcomes they aim to theoretical support for positive effects of subsidiary CPA on achieve at a given point in time. If the subsidiary is falling behind in

13 S. Banerjee, et al. International Business Review 28 (2019) 101498 market performance, the firm needs to focus more on market strategy, leverage in their dealings with MNCs (Cohn, 2000). Overall, the find- such as innovation. On the other hand, if the market performance is ings of this study will provide better understanding to governments as satisfactory, but the subsidiary is losing legitimacy in society, managers to how MNCs use political strategies in their jurisdictions, and how need to deploy additional resources directly towards non-market stra- these might affect the interests of other MNCs and domestic firmsthat tegies, namely CPA. Recognising these dual paths to diverse outcomes is do not conduct CPA. essential for MNC subsidiary managers to achieve positive outcomes in both performance and legitimacy in the marketplace. Our study also has important public policy implications. Host Acknowledgments country policies towards MNCs vary widely, ranging from welcoming FDI to imposing a range of restrictive controls (Cohn, 2000). Although We are grateful to the editor Ajai Gaur and the two anonymous FDI can be important for a host country economy by bringing capital, reviewers for their helpful comments and suggestions. We would also skills, technology and employment (Xu, 2000), the role of MNCs in a like to acknowledge the participants at various seminars and con- country’s development has also been controversial at times. An appre- ferences including ANZIBA, AIB and EIBA for their positive inputs and ciation of the political behaviour of MNC subsidiaries becomes im- advice. All authors contributed equally in preparing the manuscript. portant in this context as host countries in general have sources of The authors are responsible for all errors and omissions.

Appendix A

Table A1 Home nations of our sample MNC subsidiaries in Australia.

Home Nation Number of Home Nation Number of subsidiaries subsidiaries

Austria 2 Japan 23 Bahrain 1 Kuwait 2 Belgium 2 Liechtenstein 1 Bermuda 1 Luxembourg 2 Brazil 1 Malaysia 2 Canada 3 Netherlands 10 Cayman Islands 1 New Zealand 9 China 1 Singapore 9 Denmark 2 South Africa 2 France 12 Spain 1 Germany 15 Sweden 5 Hong Kong 4 Switzerland 15 India 2 UK 36 Italy 2 USA 48

Note – this country data set was also used in Banerjee and Venaik (2017).

Appendix B

Table B1 Constructs, Components and Item Measures with Loadings and Sources.

Constructs Components Item Measures Sources

1. Environmental Uncertainty Industry Competition The degree to which, in the last 5 years: Miller (1993) - Changes in competitors’ strategies were predictable (0.78) - Changes in the line of products/services of competitors were predictable (0.77) - Competition from domestic firms was predictable (0.79) Government Policies The degree to which, in the last 5 years: - Tax policies were predictable (0.86) - Monetary policies were predictable (0.84) - Import-export policies were predictable (0.85) - Changes in tariff structures were predictable (0.85) 2.Government Regulation - Indicate the extent to which the industry faces regulation (0.91) Blumentritt (1999) - Indicate the number of regulatory agencies that subsidiary deals with (0.89) 3. Integration Administration The degree to which decisions are made by the subsidiary without interference from Roth et al. (1991) HQs with respect to: - Career development plans for department managers (0.84) - Restructuring of the subsidiary organisation (0.82) - Settling internal labour disputes (0.84) - Recruitment of managers (0.84) Production The degree to which decisions are made by the subsidiary without interference from Roth et al. (1991) HQs with respect to: - Modification of an existing product (0.88) - Modification of a production process (0.89) - Machinery or equipment selection (0.84) (continued on next page)

14 S. Banerjee, et al. International Business Review 28 (2019) 101498

Table B1 (continued)

Constructs Components Item Measures Sources

Marketing The extent to which: Harzing (2000), Roth et al. (1991), Leong and Tan (1993) - Subsidiaries are focused on building a strong local presence (0.68) -% of subsidiary products (a) Created or substantially modified for Australia (0.84) (b) Marketed by consciously adapting to local circumstances (0.84) 4. Innovation New Products & Markets The degree to which subsidiary: Manu and Sriram (1996) - Emphasised new product development through allocation of substantial financial resources (0.83) - Developed a large variety of new products (0.89) - Made dramatic changes in existing products (0.82) - Increased the rate of new product introduction to the market (0.87) - Increased its overall commitment to develop & market new products (0.86) - Benefited from patents, trademarks, copyrights, etc. (0.63) Research & Development Specify the subsidiary’s: - Percentage of R&D expenditures to total sales (0.86) - Percentage of locally performed R&D in subsidiary products (0.86) 5. Subsidiary Corporate Political Constituency Building The degree to which the subsidiary engages in: Hillman and Wan Activity (CPA) Strategy (2005) - Media advertising for public relations (0.73) - Public policy issues through press conferences (0.80) - Political programs at grassroots level (0.84) - Advertising to advocate particular issues (0.88) Financial Incentive The degree to which the subsidiary: Strategy - Employs executives who worked in a political position (0.73) - Hires people who have professional and/or political experience (0.73) - Provides financial contributions to political parties and/or candidates (0.66) Information Strategy The degree to which the subsidiary: - Informs government officials about their research findings (0.76) - Establishes contacts, initiates discussions, offers information to public officials (0.85) - Advocates company programs for government support (0.86) - Incorporates firm’s perspectives in reports/analyses for government (0.81) - Engages in discussion with national level government (0.89) - Cultivates contacts with state government (0.78) - Engages with local government (0.96) Legislative Cooperation The degree to which the subsidiary: Blumentritt (1999) Strategy - Works with government to develop mutually beneficial industry regulation (0.94) - Helps the government to write new industry regulations (0.89) - Attempts to influence legislative proposals that may impact business (0.94) − Engages in discussions about upcoming legislative decisions with government officials(0.92) Relational Strategy The degree to which the subsidiary agrees with the following: Blumentritt (1999), Hillman and Hitt (1999) - Shows interest in a range of public policy issues enabling growing political participation in Australia (0.84) - Regards political strategies to interact with government as a good investment of time and money (0.89) - Creates relationships over a period of time so that the connections are established to address issues as and when they arise (0.82) - Considers engagement in government activities to be critical for subsidiary’s competitive success (0.91) 6. Subsidiary Performance The degree to which the subsidiary has achieved: Roth et al. (1991) - Annual percentage increase in total sales (0.85) - Annual increase in net profit as% of total sales (0.80) - Satisfaction with performance with regard to profitability (0.71) - Satisfaction with performance with regard to market share (0.65) 7. Subsidiary Legitimacy Behaviour validation The degree to which subsidiary conduct leads to: Ryan et al. (1987), Dowling and Pfeffer (1975), Zimmerman and Zeitz (2002), Luo (2001b) - Greater conformity with societal expectations (0.89) - Greater legitimacy in Australia (0.91) - Justification of strategic choices (0.92) Endorsement - The degree to which the subsidiary experiences reciprocal support from industry members (0.81) - The extent to which the subsidiary’s involvement in economic/political education programs have resulted in more acceptances of your projects (0.77) (continued on next page)

15 S. Banerjee, et al. International Business Review 28 (2019) 101498

Table B1 (continued)

Constructs Components Item Measures Sources

8. Favourable Government The extent to which subsidiary’s government relation activities has led to: Hillman et al. Decisions (2004), Lord (2000), Schuler, Schnietz, et al. (2002), Dean, Vryza, and Fryxell (1998) - Successful foreign trade mission participation (0.74) - Success with trade petitions (0.85) - Success with altering wage laws (0.65) - Success in restricting competition within its industry (0.74) - Appointment as economic consultants to government (0.77) 9. Related Diversification a In a given year, indicate the share of the subsidiary’s Rumelt (1982) - Sales (total) by its largest single business (0.93) - Sales (total) by its largest group of related business (0.85) 10. Industry Concentration a Top four firms’ market share in the industry Schuler, Rehbein et al. (2002) 11. Subsidiary Size a Total employees in the local subsidiary Wan and Hillman (2006) 12. Subsidiary Age a Numbers of years of subsidiary operations in Australia Wan and Hillman (2006) 13. Subsidiary-Parent Country Difference in absolute value between WGI (average) score for home country andWGI Kaufmann et al. Distance a (average) score for Australia based on the six dimensions of governance. (2003)

a Control variables.

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