The ownership structure of foreign subsidiaries and the effect of institutional distance: a case study of Japanese firms

Abstract

This study investigates how institutional distance between a home country and a host country affects the ownership structure of foreign subsidiaries. Using a sample consisting of foreign subsidiaries of Japanese firms, the effect of institutional distance on the ownership structure of foreign subsidiaries is tested. The results indicate that Japanese firms reduce equity shares in foreign subsidiaries as institutional distance increases. The study also finds that internationally experienced Japanese firms tend to have large equity ownership in institutionally distant countries. In addition, this study shows that complementing host country experience with international experience further mitigates uncertainty arising from institutional distance.

Keywords:

• foreign subsidiary
• host country experience
• institutional distance
• international experience
• ownership strategy