Institutional and Resource‐based Explanations for Subsidiary Performance

AuthorMathew Hughes,Taman H. Powell,Leanne Chung,Kamel Mellahi
Published date01 July 2017
Date01 July 2017
DOIhttp://doi.org/10.1111/1467-8551.12169
British Journal of Management, Vol. 28, 407–424 (2017)
DOI: 10.1111/1467-8551.12169
Institutional and Resource-based
Explanations for Subsidiary Performance
Mathew Hughes, Taman H. Powell,1Leanne Chung1and Kamel Mellahi2
Durham University Business School, Durham University, Mill Hill Lane, Durham DH1 3LB, UK, 1Cardi
Business School, Cardi University, Aberconway Building, CardiCF10 3EU, UK, and 2Warwick Business
School, University of Warwick, Coventry CV4 7AL, UK
Corresponding author email: mat.hughes@durham.ac.uk
Addressing calls to integrate insights from institutional theory and the resource-based
view, we bring together dual theoretical explanations from institutional theory and the
resource-based viewto examine the eectiveness of transfer of practice and human capital
development as tworoutes to subsidiary performance. Our study of Hong Kong firms with
subsidiaries in Mainland China shows that both routes positivelyaect subsidiary perfor-
mance. However,our data show that our sampled firms struggled to successfully transfer
practices from their parents. Weattribute an explanation for this to the characteristics of
practices as organizational capabilities in which transfer is made harder by the diculty
in replicating such capabilities. Consequently, developing subsidiary human capital is an
important ally to practice transfer as a means to achievesuperior subsidiary performance.
Our results raise interestingquestions about practice transfer and the resource-based view
relevant to future scholarly research.
Introduction
Studies tend towards competing accounts of sub-
sidiary performance, typically grounded in insti-
tutional explanations of the successful transfer of
parent practices for internal legitimacy (Chan and
Makino, 2007; Kostova and Roth, 2002) or other-
wise the development of new or alternative prac-
tices for external legitimacy (Lu and Xu, 2006).1
But from a resource-based view (RBV), parent
1Studies typically focus on ‘foreign’ subsidiaries but the
challenge they face is rooted in institutional variation,
and such institutional variations can perpetuate among
regions as well as within and across boundaries. For ex-
ample, ‘Certainly . . . there are substantial dierences in
corporate and managerial behaviour between Mainland
China and [Hong Kong].... As “same culture, dierent
system” examples like Mainland China and Hong Kong
illustrate, the impact of institutional dierences is su-
cient forHong Kong managers to regard managing opera-
tions in the Mainland as problematic’(Child and Warner,
2003, pp. 2425). Child and Warner (2003) cite many
others who share their conclusion that regional dier-
ences are greatbetween Hong Kong and Mainland China.
firms may persist with the transfer of established
organizationalpractices to draw on resource-based
advantages to generate more defendable returns
to their subsidiary (Mellahi et al., 2013). The
transfer of practice may then indicate that par-
ents seek to capitalize on their reservoir of rare,
valuable and dicult-to-imitate advantages to in-
crease subsidiary performance (Dunning, 1988;
He, Brouthers and Filatotchev, 2013; Peng, 2001),
which points to a resource-based explanation for
what otherwise appears to be internal legitimation
behaviour (Mellahi et al., 2013).
Alternatively, the subsidiary may develop novel
practices towards the same end and for external
legitimation. For a subsidiary to create new prac-
tices, it must invest in its human capital resources
Indeed, these remain challenging (Li, Karande and Zhou,
2009; McKirdy,2014). Thus, the reader may wish to think
of the subsidiaries in our study as being distant or regional
in that respect, in whichthe object of interest is the institu-
tional variation they face not too dissimilar to the idea
of a foreign subsidiary.
© 2016 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
408 M. Hughes et al.
(Bj¨
orkman and Budhwar, 2007; Peng, 2001) as hu-
man capital functions as (micro)foundations for
new routines and capabilities (Felin et al., 2012).
While this is rooted in the RBV and the human
capital literature (Co and Kryscynski, 2011), it
has connections to institutional theory. Develop-
ing human capital strength can counter against the
tendency for institutionalized practices to crowd
out the search for new alternatives (Yang and
Konrad, 2011), which can weaken subsidiary per-
formance (Rugman and Verbeke, 2001). Given
these dierences, to what extent do transfer
of practices and development of human capital
strength explain subsidiary performance?
Focusing on this key question, we argue that
both institutional theory and the RBV providethe-
oretical explanations for both the transfer of prac-
tices and the development of human capital as
routes to subsidiary performance. We advocate an
integrative perspective because the pressure of in-
stitutional duality (Kostova and Roth, 2002) re-
duces organizational activity to a response-driven
problem, downplaying the value creation aspect
of transfer of practice versus human capital de-
velopment activity. The RBV instead posits that
multinational corporations(MNCs) and their sub-
sidiaries can create value by leveraging existing
resources or developing new ones to generate
resource-based advantages (Brouthers, Brouthers
and Werner, 2008).
The literature integrating insights from insti-
tutional and RBV perspectives is thin despite
repeated calls from international business and
strategy scholars (He, Brouthers and Filatotchev,
2013; Meyer et al., 2009; Oliver, 1997; Peng, 2001,
2003; Wright et al., 2005). Addressingthis problem
is valuable because integrating insights from both
perspectives can yield new insights neither alone
could oer. For example, transferring practices
for internal legitimacy sacrifices novelty on the
assumption that practices transfer in complete
ways that replicate the original resource. Transfer
success is then fundamental if value is to follow.
But developing subsidiary-level human capital
oers opportunities to shape new practices best
suited to the context of the subsidiary, such that
its strength may also yield important returns to
performance. We do not purport to integrate both
institutional theory and the RBV perspectives
into one position or theory. Rather, we believe
that drawing explanations from both theories for
an integration of insights oers a better way to
understand the phenomena of interest.
This study contributes to the important body
of research that seeks to untangle predictions of
resource-based and institutional perspectives on
subsidiary performance. We make two important
contributions. First, theorizing an integration of
insights from institutional and resource-based
explanations leads us to suspect a competition
in how corporations approach subsidiary perfor-
mance. For example, while a successful transfer
of practice might increase internal legitimacy and
leverage what the MNC parent sees as ‘core’ prac-
tices, novel advantages are more likely to emerge
from human capital investments (Andersson,
Bj¨
orkman and Forsgren, 2005). We oer a model
to address this concern by demonstrating dual in-
stitutional and resource-based reasons for practice
transfer and human capital routes to subsidiary
performance. Bringing together legitimacy-
seeking and advantage-seeking behaviour in
this manner oers an alternative to traditional
conceptualizations of the phenomena under
investigation. Second, we oer an empirical model
that unpacks the contribution of human capital
to subsidiary performance. The human capital of
the subsidiary is important for establishing and
enacting new practices in pursuit of subsidiary
performance, but also oers a direct basis for
subsidiary performance by serving as critical re-
sources capable of generating rare advantages and
dicult-to-imitate rents (Co, 1997). This adds
new knowledge to how beneficial resource-based
advantages may come about within subsidiaries
(Brouthers, Brouthers and Werner, 2008).
We now move to establish the theoretical back-
ground for the work.
Theoretical background and hypotheses
Institutional theory, the resource-based view and
subsidiary performance
Institutional theory places emphasis on the nor-
mative contexts within which subsidiaries exist
(Bj¨
orkman, Fey and Park, 2007). An understand-
ing of the subsidiary’s internal and external con-
texts is needed to appreciate what actions it ‘must’
take to enable subsidiary performance. The source
of greatest institutional pressure (Kostova and
Roth, 2002) then creates coercive and mimetic
pressures (DiMaggio and Powell, 1983) to adopt
practices deemed legitimate by the source of that
pressure. A subsidiary’s actions are a response to
institutional pressure.
© 2016 British Academy of Management.

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