Decision-Making Power in Foreign Subsidiaries and its Effect on Financial Constraints: An Analysis for Selected European Transition Economies on the Basis of the IWH FDI Micro Database 2013

Abstract

This article analyzes whether the distribution of decision-making power between the headquarters and foreign subsidiaries of multinational enterprises (MNEs) affects the foreign affiliates’ financial constraints. The findings show that not much decision-making power has as yet been moved from headquarters to foreign subsidiaries in European post-transition economies. The high concentration of decision-making power within the MNE’s subsidiary points toward higher financial constraints. However, a nonlinear effect is found, which suggests that financial constraints within the subsidiary only increase with more decision-making power when the power granted to the subsidiary is at a low level. For subsidiaries that already have autonomy in decision-making, granting more power in this regard has no effect on financial constraints.

Keywords:

• decision-making power
• Eastern Europe
• financial constraints
• multinational enterprises

JEL Classification:

• O1
• O12
• F23
• M14

ACKNOWLEDGMENT

We thank Josef Brada and two anonymous referees for valuable feedback and suggestions.

FUNDING

The research leading to these results received funding from the European Union’s Seventh Framework Programme (FP7/2007-2013) under grant agreement no. 290657 in the project “Growth-Innovation-Competitiveness: Fostering Cohesion in Central and Eastern Europe” (GRINCOH).

Notes

^1. For further information, please see http://www.iwh-halle.de/projects/2010/fdi/e/DatenundMethoden.asp?lang=e

^2. In unreported results, we show that using Eastern German firms leaves us with only insignificant marginal effects.

^3. The new variable has a value of 1 if “Power division” is below 2; 2 if “Power division” is between 2 and 5; 3 if “Power division” is above 5.

Additional information

Funding

The research leading to these results received funding from the European Union’s Seventh Framework Programme (FP7/2007-2013) under grant agreement no. 290657 in the project “Growth-Innovation-Competitiveness: Fostering Cohesion in Central and Eastern Europe” (GRINCOH).

Notes on contributors

Felix Noth

Felix Noth is at the Financial Markets Department, Halle Institute for Economic Research (IWH), Halle (Saale); an Assistant Professor at the Faculty of Economics and Management, Otto-von-Guericke University, Magdeburg.

Andrea Gauselmann

Andrea Gauselmann is an instructor at the Faculty of Business Administration, Hochschule für Technik, Wirtschaft und Kultur Leipzig, University of Applied Sciences, Leipzig, Germany.