Host country household spending and foreign subsidiary performance: The role of local knowledge, entry mode strategies, and the digital economy

Abstract

Given the recent concerns about de-globalization following the pandemic, this study explores the extent to which the performance of multinational firms (specifically their foreign subsidiaries) is influenced by country-specific, sectoral, and firm-level factors, drawing on a firm-level panel of more than 130 thousand foreign subsidiaries in 99 countries. We find evidence that a rise in host country household spending (per capita) improves the financial performance of foreign subsidiaries. This suggests that host countries with growing household spending show greater market potential, enabling foreign companies to generate higher returns. In addition, this positive return is contingent on the subsidiary's local knowledge and entry mode strategies, and the positive effect is more prominent during times of uncertainties like the recent global pandemic. Furthermore, we find that this positive effect of greater household spending is conditional on the sectoral affiliation of firms, namely, digital versus non-digital sectors. As foreign companies in the digital sector are typically characterized by advanced sophisticated technologies and know-how, they tend to benefit more in countries where per capita household spending is greater. Our results support the rationale for globalization in the digitalized world.