Linking formal institutional distance, subsidiary autonomy for innovation and subsidiary global (value-added) mandates

Abstract

Purpose

This study examines the effects of formal institutional distance (ID) on the foreign subsidiary global mandates (i.e. the subsidiary value-added role in terms of research and development (R&D), product management and supplying of inputs to the multinational enterprise (MNE) globally). Furthermore, it examines the mediating role of subsidiary autonomy for innovation in the relationship between formal ID and subsidiary global mandates.

Design/methodology/approach

Survey evidence from foreign subsidiaries in a remote developed economy, i.e. New Zealand, is obtained. Formal distance is measured based on the worldwide governance indicators (WGI), and the hypotheses are tested using structural equation modeling.

Findings

Results show that the direct link between formal ID and subsidiary global mandates is negative. However, autonomy for innovation as a mediator offsets this negative relationship, showing a positive mediating effect between formal ID and subsidiary global mandates.

Originality/value

This study extends research on foreign subsidiaries and their value-added roles in the MNE. We show the differentiated role of formal ID and indicate a contingency showing how the negative influence of formal ID on subsidiary global mandates can be offset. The inconsistent mediation of autonomy for innovation suggests that the concept of ID is multifaceted and complex, in contrast to the popular view that ID has only negative implications. Drawing upon evidence from a remote, developed economy and secondary data sources, we suggest how MNEs may positively use their formal ID with their subsidiaries.