What is the principle advantage of national responsiveness?

Theoretical background

Local responsiveness strategy for foreign subsidiaries of Chinese MNEs

The liabilities of origin fundamentally stem from home country institutional voids. The institutional deficiencies include weak regulatory infrastructure, rule of law and contract enforcing mechanisms, and political hazards, for example, the lack of voice and accountability, government interference and corruption [Cuervo-Cazurra & Genc, 2008; Khanna & Palepu, 2010]. These institutional voids constrain Chinese parent firms to develop NLB FSAs in proprietary technology, brand name and management capabilities in the home country, eroding their competitiveness. In addition, the liabilities of origin create post-entry disadvantages for foreign subsidiaries of Chinese MNEs due to the negative institutional heritage and the undesirable image as perceived by various host country stakeholders [Luo & Tung, 2007; Meyer, Ding, Li, & Zhang, 2014; Wang, Luo, Lu, Sun, & Maksimov, 2014]. In this study, we argue that local responsiveness strategy is particularly important for foreign subsidiaries of Chinese MNEs, assisting them in overcoming the liabilities of origin in global competition [Rugman et al., 2016; Wei & Nguyen, 2017].

First, foreign subsidiaries develop local responsiveness strategy to address the complexity and dynamism of host country conditions and business requirements associated with local customer needs, sales and distribution channels, market structures, and legal regulations [Bartlett & Ghosbal, 1989; Prahalad & Doz, 1987]. Local responsiveness represents the ‘bottom-up’ knowledge because subsidiaries create new knowledge and develop innovative and learning capabilities in host countries by interacting with indigenous stakeholders. The rest of MNEs can draw upon this stock of knowledge [Brock & Birkinshaw, 2004; Nguyen & Rugman, 2015a]. The generation of new FSAs and resources compensates for the lack of NLB FSAs of Chinese parent firms so that foreign subsidiaries can compete effectively in international markets.

Second, local responsiveness strategy requires subsidiaries to maximize delegated autonomy so that they can tap into local resources and assist them in adapting products and services to satisfy local markets and regulatory requirements [Birkinshaw, 2000; Rugman & Verbeke, 2003]. Accordingly, foreign subsidiaries undertake initiatives to build strong corporate governance and their own reputation and legitimacy in local operations [Birkinshaw, 2014; Rugman et al., 2016]. Such a local embeddedness enables foreign subsidiaries of Chinese MNEs to disassociate themselves from their parent firms’ negative institutional heritage [deriving from the home country of origin] so that they become more locally accepted [Wang et al., 2014; Wei & Nguyen, 2017].

FSAs, CSAs and foreign subsidiaries of Chinese MNEs

We draw upon the insights of Rugman’s [1981] FSAs/CSAs theoretical framework which is built upon internalization theory. The FSAs-CSAs concepts are entirely consistent with Dunning’s ownership-location-internalization [OLI] paradigm, in which the CSAs can be replaced by the location advantages and the internalization [advantage] of ownership advantages is an integrated feature of FSA in practice [Eden & Dai, 2010; Rugman, 2010; Rugman & Verbeke, 2008].

The FSAs can be both asset-based and transaction-based [Rugman & Verbeke, 2008]. The former refers to MNEs’ product or process-related proprietary assets, typically technological, manufacturing and marketing know-how. The latter refers to an organizational capability to efficiently internalise and organise assets, coordinate separate value-added activities across national boundaries, and reduce environmental and foreign risks. As such, FSAs cover a very broad set of unique firm resources and capabilities which are compatible with the resource-based view [Rugman, 2010; Rugman & Verbeke, 2008; Rugman & Li, 2007]. The two types of FSAs are corresponding to Dunning’s [1988] classification of the ownership advantages – the exclusive possession and use of certain valuable assets [Oa: asset-based ownership advantages] and the coordinating mechanism [Ot: transaction-based ownership advantages].

The CSAs or locational advantages refer to strengths and benefits specific to a country that can result from its competitive environment, labour force, geographic location, institutions, government policies, industrial clusters, and cultural factors, etc. Rugman’s FSAs/CSAs analysis of firm competitiveness is for firm level strategy covering the activities of the MNE and its foreign subsidiaries in both home and host countries [Rugman, 1981, 2010; Rugman & Verbeke, 2001, 2008].

Relational-assets [R-assets] as a type of location bound [LB] FSA of Chinese MNEs

R-assets are defined as ‘the stock of a firm’s willingness and capability to access, create, to shape economically, and to coordinate the resources and capabilities necessary to beneficial relationships, and to sustain and upgrade the quality of these relationships’ [Dunning, 2004: 205]. We define local R-assets at the firm level, because connections between individuals are often dedicated to and applied by the organization in its business operations [Luo, Shenkar, & Nyaw, 2002; Luo, Huang, & Wang, 2012]. Dunning [2003, 2004] argue that R-assets constitute one type of the transaction-based FSAs as they refer to an MNE’s capability of leveraging cross-border network resources and benefiting from the cumulative experience of past relationships. Indeed, the R-assets, like the transaction-based FSAs are derived from the multinationality of previous international experience [Eden & Dai, 2010; Rugman, 2010].

Moreover, R-assets tend to be strongly contextual and they reflect cultures, ideologies and economic systems of one particular location [Dunning, 2003, 2004]. R-assets of the established network of privileged access to suppliers, buyers, distributors, and government authorities is specific to one location and they are either home or host country-bound [Luo, 2001; Verbeke, 2013]. As such, we consider R-assets as one important LB FSAs [transaction-based] and the critical determinant of local responsiveness strategy of foreign subsidiaries of Chinese MNEs.

It is well-documented in the literature that when Chinese MNEs do business in their home countries they build and exploit network relationships which help nurture cultural adaptation, mitigate institutional uncertainty and enhance strategic flexibility [Li & Zhang, 2007; Luo et al., 2002]. Accordingly, they follow business practices developed in the home country and explore international markets by building network relationships [Kotabe, Jiang, & Murray, 2011; Wei, 2010]. The importance of R-assets is particularly evident in Chinese MNEs’ outward FDI because they tend to internationalize into host countries endowed with existing networks [Buckley et al., 2007; Yiu, Lau, & Bruton, 2007]. Arguably, when Chinese MNEs expand internationally, local R-assets of linkages with external parties facilitate market entry and subsequent development by accessing resources and leveraging opportunities of the business networks [Erdener & Shapiro, 2005; Kotabe et al., 2011].

Host country CSAs – Market seeking FDI

Dunning [1988, 1998] identifies key location advantages of four types of international production: market seeking, efficiency seeking, natural resource seeking, and strategic asset seeking. Market seeking FDI can be explained by strong host CSAs, referring to market size and the prospects for market growth, proximity to regional markets, such as NAFTA [now known as the USMCA Agreement] and the EU, low cost of production, quality of host country infrastructure, supplier networks, customers, and government policies, etc. [Dunning & Lundan, 2008; Rugman, 2010]. This study considers marketing seeking FDI only as one CSA determinant for subsidiaries’ local responsiveness strategy for three reasons.

First, unlike other FDI motives, market-seeking subsidiaries are often viewed as self-contained production units rather than as a part of an integrated network of cross-border activities. They tend to be localized in response to customer needs, cultural diversity and government regulations [Dunning & Lundan, 2008; Rugman, Verbeke, & Yuan, 2011b]. In order to achieve local responsiveness, subsidiary managers are often granted with autonomy in making strategic decisions for the future development of subsidiaries [Birkinshaw, 1997, 2014].

Second, Chinese MNEs’ internationalization is largely motivated by market-seeking and asset-seeking FDI motives, especially in the manufacturing and service sectors [Buckley et al., 2007; Lu, Liu, & Wang, 2011; Wang & Shao, 2016; Wei, 2010]. Chinese MNEs establishing foreign subsidiaries tend to pursue market-seeking strategies in response to intensified competition in the home country market due to trade liberalization leading to increased imports as well as increased inward FDI. Furthermore, the problems of domestic manufacturing overcapacity result in falling prices and thus force Chinese MNEs to seek new international markets to sell their products and services in response to their diminishing profits at home [Deng, 2009; Kang & Jiang, 2012].

Third, Chinese MNEs tend to invest in host countries with large markets and growing demand to exploit economies of scale and scope [Buckley et al., 2007; Deng, 2009; Rugman et al., 2016]. Chinese MNEs are able to develop ‘good enough products’ suited to emerging market conditions, which are either cheaper and more affordable, or rugged and easy for maintenance [Bhaumik & Driffield, 2011; Ramamurti, 2009]. Furthermore, Chinese MNEs have engaged aggressively in acquisitions of existing local firms in advanced economies which provide them with immediate access to local distribution channels, suppliers, customers and sales volumes [Deng, 2009; Luo & Tung, 2007]. These strategic decisions help their subsidiaries improve foreign market shares.

Host country CSAs – Institutional development

The second CSA variable examined in our study is the quality of host country institutional environment. Institutions are broadly defined as formal rules [such as political and judicial rules and laws, legal regulations and law enforcement] and informal constraints [such as cultures, norms and values] [North, 1990; Scott, 1995]. Institutional advancement contributes to one important dimension of CSAs due to “rules of the game” in either home or host countries [Dunning & Lundan, 2008; Meyer & Nguyen, 2005; Meyer, Mudambi, & Narula, 2011; Narula & Santangelo, 2012; Rugman, 2010; Sun, Peng, Ren, & Yan, 2012].

In this study, we focus on the formal institutional aspects of host CSAs only because such regulative forces have a more direct impact on market functions [Dikova & Witteloostuijn, 2007; Lin, Peng, Yang, & Sun, 2009]. Formal institutions are found to influence the parent-level decision making, such as location of FDI and entry mode choices [Dikova & Witteloostuijn, 2007; Kang & Jiang, 2012; Lin et al., 2009], as well as the subsidiary-level strategies and performance [He, Zhang, & Wang, 2015; Liu, Gao, Lu, & Lioliou, 2016a]. Foreign subsidiaries must adapt their strategy and organizational structure to respond to different institutional pressures and regulatory requirements which minimize uncertainties and transaction costs [Meyer et al., 2011; Xu & Shenkar, 2002].

While the institution literature has extensively investigated the strategic choices and the performance of foreign subsidiaries of Western MNEs operating in China [He et al., 2015; Meyer, 2001; Sheng, Zhou, & Li, 2011], little attention has been paid to how foreign subsidiaries of Chinese MNEs align their strategies in response to host country institutional variations when they expand internationally. Thus, in this study, we examine the relationship between host country institutional development and local responsiveness strategy of foreign subsidiaries of Chinese MNEs.

Figure 1 depicts the impact of R-assets as the NLB FSAs and host CSAs of market seeking FDI and institutional development on the local responsiveness strategy of Chinese multinational subsidiaries.

Fig. 1

Conceptual model

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Hypotheses development

Relational assets [R-assets] and local responsiveness strategy

Local R-assets and business networks refer to local business and political ties which can be leveraged to gain competitive advantages and achieve success in local markets [Luo, 2003; Park & Luo, 2001]. As R-assets are particularly important for domestic firms and foreign investors to induce business cooperation and maintain government relationships in emerging markets, Chinese MNEs tend to explore local network relationships in their internationalization activities [Buckley et al., 2007; Kotabe et al., 2011].

In this study, we argue that R-assets facilitate foreign subsidiaries of Chinese MNEs to achieve local responsiveness strategy for three specific reasons. First, foreign subsidiaries need to develop new assets and capabilities by gaining access to complementary resources from local actors so that they can realize local responsiveness and adaptation requirements [Nguyen & Rugman, 2015a, b; Wei & Nguyen, 2017]. However, such a combination with host CSAs is difficult since host country resources are often controlled by local firms and local governments and they are not freely accessible [Hennart, 2009, 2012; Rugman et al., 2014]. It is even more challenging for foreign subsidiaries of Chinese MNEs to access local resources due to their limited international experience and local market knowledge if, as they often are, latecomers in their internationalization [Hoskisson, Wright, Filatotchev, & Peng, 2013; Lu, Liu, Wright, & Filatotchev, 2014; Luo & Tung, 2007].

Local R-assets enable subsidiaries to tap into local resources in host countries through information exchange and knowledge transfer with their network partners [Park & Luo, 2001; Zhou, Poppo, & Yang, 2008]. Business ties provide them with knowledge on products, markets, and business opportunities. Government ties grant them with access to financial resources, industrial policies, and state-owned assets [Jiang, Wang, & Jiang, 2018; Luo, 2001, 2003; Sheng et al., 2011]. As such, local R-assets heighten adaptation and localization, and improve flexibility of subsidiaries in response to changing external business environments [Luo et al., 2002; Luo, Griffith, Liu, & Shi, 2004; Sheng et al., 2011].

Second, foreign subsidiaries of Chinese MNEs also suffer from the liabilities of origin [Ramachandran & Pant, 2010; Wei & Nguyen, 2017]. Accordingly, their subsidiaries face greater obstacles in achieving local responsiveness strategy and acceptance compared with foreign subsidiaries of MNEs from advanced economies. Arguably, local R-assets can enhance trust since past behaviours are observable and indicative of the firm’s reputation [Luo et al., 2012; Sheng et al., 2011]. Local R-assets can help foreign subsidiaries of Chinese MNEs to mitigate negative image by virtue of being a part of a local network, which provides access to partners’ resources and reputation in the market [Kwon, 2010]. Specifically, local business ties help them to develop and introduce good quality products and services to markets, as well as induce customer satisfaction and loyalty [Luo et al., 2012; Peng & Luo, 2000]. Meanwhile, political ties improve political legitimacy [Rao, Chandy, & Prabhu, 2008; Sheng et al., 2011]. Therefore, local acceptance and legitimacy are important strategic resources which enable foreign subsidiaries to overcome the liabilities of origin and enhance local responsiveness strategy. Based on the above discussions, we propose that:

Hypothesis 1:

Local R-assets are positively related to a local responsiveness strategy of foreign subsidiaries of Chinese MNEs.

Market-seeking FDI and local responsiveness strategy

Dunning and Lundan [2008] argue that market-seeking subsidiaries tend to be the most responsive to local needs and cultural sensitivities. In the related manner, we propose a positive relationship between market-seeking FDI and local responsiveness strategy of foreign subsidiaries of Chinese MNEs. First, market-seeking subsidiaries depend not only on the factor endowment CSAs of low cost production and innovation capacity for local manufacturing but also on marketing and information resources for local market expansion and growth [Luo, 2003; Park & Luo, 2001; Wang, Hong, Kafouros, & Wright, 2012]. They often focus on accessing host CSAs of the output market side in terms of high demand for end products and local market knowledge, thereby fostering sales [Rugman et al., 2011a]. As such, compared with other FDI motives, such as strategic asset-seeking, market-seeking subsidiaries must have an in-depth understanding of local customer needs, the degree of competition intensity, marketing and communications, sales and distribution channels [He et al., 2015].

Accordingly, market-seeking subsidiaries usually need substantial time to accumulate a well-established set of resources to develop new products or services for local customers, respond effectively to local market conditions, and develop new business opportunities [Birkinshaw, 1997; Birkinshaw et al., 2005; Birkinshaw, 2014; Rugman et al., 2014]. Moreover, these downstream competences in product sales, services, and market knowledge associated with host CSAs tend to be LB FSAs which are instrumental for a local responsiveness strategy [Bouquet & Birkinshaw, 2008; Rugman et al., 2011a].

Second, market-seeking subsidiaries are often perceived as self-contained units and they are delegated with autonomy from the HQs which enable them to develop resources to respond to local business opportunities [Birkinshaw, 1997, 2014; Dunning & Lundan, 2008]. Accordingly, the subsidiary management team is encouraged to engage in R&D activities, product development, local employment, and operational flexibilities in order to enhance local adaptation, and increase legitimacy in the eyes of local governments and stakeholders [He et al., 2015; Luo, 2003; Tseng & Chang, 2005].

Third, in many countries, host governments encourage export-oriented FDI by offering import tariff and value-added tax exemptions for imported raw materials and parts used in the export processing [Engman, Onodera, & Pinali, 2007]. In contrast, market-seeking subsidiaries inevitably face a greater level of pressure from host governments and local business communities because their products are manufactured and sold locally, intensifying host market competition [Luo, 2001, 2003]. Therefore, subsidiaries need to employ strategic tactics geared towards unique parameters of local business norms and regulatory systems, and exert influence on institutional frameworks which constrain how foreign investors engage in local competition [He et al., 2015]. Putting the above discussions and arguments altogether, we predict that:

Hypothesis 2:

Market-seeking FDI by foreign subsidiaries of Chinese MNEs is positively related to a local responsiveness strategy.

Host country institutional development and local responsiveness strategy

In this study, we argue that local responsiveness strategy is of more importance for foreign subsidiaries of Chinese MNEs when they enter countries with advanced institutional development. There are two underlying reasons. First, the larger the institutional distance between home and host countries, the greater the pressure on subsidiaries for local responsiveness. Host country formal institutions create pressure for local isomorphism which subsidiaries must conform to adopt social and regulatory patterns and to achieve local legitimacy [Eden & Miller, 2004; Prahalad & Doz, 1987]. Therefore, the pressure for local responsiveness is particularly pronounced in host countries with advanced institutional infrastructures, in which foreign subsidiaries of Chinese MNEs inevitably face greater liabilities of origin and discrimination by local governments, customers and business communities [Khanna & Palepu, 2010; Madhok & Keyhani, 2012; Ramachandran & Pant, 2010]. Accordingly, foreign subsidiaries of Chinese MNEs are prompted to disassociate themselves from the negative image of their home country. Thus, local responsiveness strategy will help them to establish a positive local reputation and legitimacy [Wei & Nguyen, 2017]. Specifically, they need to interact intensively with host-country stakeholders and take into consideration the interests of local communities in their decisions, and more importantly develop new products and services through local adaption to gain acceptance in advanced institutions [Madhok & Keyhani, 2012; Wei & Nguyen, 2017].

Second, well-developed institutions not only attract investment, but also enable foreign investors gain sufficient knowledge about customers, suppliers and business communities, etc. [Lu et al., 2014; Meyer, 2001; Meyer, Estrin, Bhaumik, & Peng, 2009]. Moreover, strong institutions make it less likely that local resources [such as business networks, distribution channels and labour markets, etc.] are controlled by domestic players, local state-owned enterprises [SOEs] and governments [Meyer & Nguyen, 2005]. Such supporting mechanisms for local operations not only reduce information asymmetries, but also encourage subsidiaries to adopt a local responsiveness strategy. Combining our theoretical arguments from previous studies, we predict:

Hypothesis 3:

The level of host country institutional development is positively related to a local responsiveness strategy of foreign subsidiaries of Chinese MNEs.

Moderating effect of host country institutional development on the relationship between R-assets and local responsiveness strategy

In this study, we also examine the quality of host country formal institutions as a moderator influencing the relationships between local R-assets and local responsiveness strategy of foreign subsidiaries of Chinese MNEs. First, the utilization of R-assets is a key characteristic of doing business in many emerging economies, such as China, Russia and India, where the formal institutional framework is relatively undeveloped in terms of legal protection, market monitoring mechanisms and economic control of fragmented bureaucracy [Lin et al., 2009; Zhou et al., 2008]. In such settings, firms tend to rely excessively on informal cultural-cognitive institutions of social capital to negotiate contracts and conduct business [Peng, 2003; Puffer & McCarthy, 2011]. In other words, local R-assets become more critical FSAs when dealing with business in weak institutional contexts due to a lack of formal institutional infrastructures [Xin & Pearce, 1996; Zhang & Keh, 2010].

Second, local R-assets facilitate subsidiaries to overcome uncertainties of pursuing a local responsiveness strategy in weak institutional environments. Local responsiveness requires the development of new knowledge or the generation of FSAs at the subsidiary level [Meyer et al., 2011; Rugman et al., 2016]. However, the creation and transfer of knowledge are of particular concern in under-developed institutions because weak judicial systems and law enforcements may fail to protect intellectual property rights and innovation outputs [Dikova & Witteloostuijn, 2007]. Host country institutional voids generate hazards of expropriation and transaction uncertainties due to opaque legal systems and the weak rule of law [Buckley et al., 2007; Lu et al., 2014]. Accordingly, opportunistic and unlawful behaviours [e.g., misleading advertising, piracy, contract violations and counterfeiting] become more likely [Park & Luo, 2001]. Unless there are external safeguarding mechanisms in place to impose effective supervision and punishment, local R-assets become more reliable tools to identify trustworthy partners, protect knowledge assets, and lower risks of opportunism [Kotabe et al., 2011; McMillan & Woodruff, 1999; Xin & Pearce, 1996].

Third, uncertainties also arise from unpredictable policy changes, corruption and bureaucratic practices in dealing with local governments in weak institutions [Ahlstrom & Bruton, 2006; Luo et al., 2002]. However, local responsiveness strategy implies that subsidiaries need to tailor business activities, products and services to local demands and government regulations [Luo, 2001; Rugman & Verbeke, 1992, 2003]. Political ties with government officials can be used not only to enforce business contracts and prevent unlawful competition, but also to obtain exclusive information about policy changes and scarce resources controlled by the government [Luo et al., 2002, 2012]. Conversely, improved regulatory framework reduces the need to rely on local R-assets to mitigate business and institutional uncertainties associated with the local responsiveness strategy. Thus we propose that:

Hypothesis 4:

The level of host country institutional development negatively moderates the relationship between R-assets and the local responsiveness strategy of foreign subsidiaries of Chinese MNEs.

Moderating effect of host country institutional development on the relationship between market-seeking FDI and local responsiveness strategy

When it comes to market-seeking FDI, we argue that foreign subsidiaries of Chinese MNEs are more motivated to pursue local responsiveness strategy in institutionally advanced countries where they face higher liabilities of origin [as discussed previously]. First, negative perceptions of the home country of origin and associated products [e.g. cheap and low quality products made in China] add extra obstacles for foreign subsidiaries of Chinese MNEs intending to increase market share in countries with advanced institutions. Customers in these countries often prefer products and services from local companies and advanced economy MNEs, which are perceived as having higher quality and safety standards [Held & Berg, 2014; Roll, 2014]. Therefore, market-seeking subsidiaries are under greater pressure to establish a positive local reputation and legitimacy through local responsiveness strategy [Wei & Nguyen, 2017]. Specifically, they need to interact intensively with host-country stakeholders and incorporate their interests through local adaptation, and develop new products and services locally to gain acceptance and increase market share in advanced institutions [Madhok & Keyhani, 2012; Wei & Nguyen, 2017].

Second, the liabilities of origin also reside in resource deficiencies in technology, brand and managerial capabilities at the parent level [Ramachandran & Pant, 2010; Witt & Lewin, 2007]. As Chinese MNEs are not competitive in institutionally advanced economies, market-seeking FDI is more likely pursued in conjunction with strategic asset-seeking, in which their subsidiaries need to find ways to augment existing asset portfolios which can add value to their products and services [Dunning & Lundan, 2008; Wang et al., 2014]. Accordingly, subsidiaries need to develop new FSAs and enhance their competitiveness by taking advantage of well-established institutional endowments, learning and cooperating closely with local suppliers, customers and competitors, and educational and research institutes [Li et al., 2012; Wei & Nguyen, 2017].

In contrast, FSAs developed by the Chinese parent firms in the home country are more relevant to host countries with under-developed formal institutional environments. In this instance, subsidiaries can achieve market-seeking and rent-generating opportunities more easily by exploiting parent-level FSAs in host countries with similar weak institutional conditions [Cuervo-Cazurra & Genc, 2008; Cross et al., 2007; Cui & Jiang, 2009]. When foreign subsidiaries of Chinese MNEs face fewer liabilities of origin and customer demands are usually less sophisticated, local responsiveness strategy and the generation of new FSAs become less necessary for subsidiaries with market-seeking FDI in weak institutional countries [Bhaumik & Driffield, 2011; Held & Berg, 2014]. Accordingly, we hypothesize:

Hypothesis 5:

The level of host country institutional development positively moderates the relationship between market-seeking FDI and the local responsiveness of foreign subsidiaries of Chinese MNEs.

Methodology

Sample and data collection by survey

To collect our data by survey, we manually compiled a dataset of foreign subsidiaries of the top 500 Chinese manufacturing firms from information published by the China Enterprise Confederation and China Enterprise Directors Association in the year 2010. The headquarters of the manufacturing parent firms are located in different provinces and cities across China. The parent firms are listed on the Stock Exchanges of Shanghai, Shenzhen, Hong Kong or New York. They are required to publish company annual reports which disclose information on foreign subsidiaries [e.g., subsidiary name, parental ownership, business operations, registered assets and address]. We focus on subsidiaries engaging in economic and value-adding business activities [e.g. R&D, manufacturing, marketing, sales, distribution, etc.]. The total population of our dataset includes 633 foreign subsidiaries from 144 Chinese manufacturing firms.

We used survey data for five variables in this study [see variable measurements for the detailed description]. Our survey was developed and documented in English language [it will be made available upon request]. To ensure the content and validity of our measurements, the questionnaire was reviewed by several senior scholars in the field of MNE subsidiary strategy and management. For pilot test purposes, we conducted eight in-depth telephone interviews with executives of the parent firms located in Zhejiang province. Based on their responses and feedback on the relevance of measurements, the design and the wording of the questions, we revised and finalised the questionnaire accordingly. The specific questions used in this study are presented in Table 1 with a detailed assessment of construct reliability and validity.

Table 1 Construct measurements and tests of scale reliabilities

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We collected data by contacting all 633 subsidiaries which are located in different countries around the world over a period of seven months between September 2011 and March 2012. We sent our questionnaire via personalised emails to either the managing director or the general manager of the target subsidiaries. We also sent our questionnaire to the ‘managing director’ of subsidiaries by post when we could not find information on the management team of these subsidiaries. It is well-documented in previous studies that data collection by survey is a time-consuming process and fraught with difficulties [Nguyen & Almodóvar, 2018; Nguyen & Rugman, 2015a, b]. A total of 124 returned questionnaires were received from the foreign subsidiaries of Chinese firms. We discarded seven returned questionnaires which included incomplete information. Therefore, the final sample included 117 verified questionnaires, representing a response rate of 18.48%, which is consistent with previous studies using survey data [Liu et al., 2016a; Liu, Gao, Lu, & Lioliou, 2016b; Nguyen & Rugman, 2015a, b] The geographical location and industrial sectors of these subsidiaries are presented in Fig. 2 and Table 2 respectively.

Fig. 2

Geographical distribution of the sample by percentage [N = 117]

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Table 2 Industrial sectors of the sample [N = 117]

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A two-tailed t-test comparison of location [developing versus developed host economies] and subsidiary size [registered assets] between the responding and non-responding subsidiaries shows that the two groups have similar distribution patterns in location and size. Because we sent two rounds of invitations and five rounds reminders to obtain an adequate sample size, we also compared the above characteristics between early respondents [replies after the first two rounds of invitations] and late respondents [replies after the last two rounds of reminders]. There are no significant differences between these two groups, demonstrating that there is no non-response bias in the final sample.

Variable measurements

The dependent variable at the heart of our hypotheses is local responsiveness strategy, which is operationalized by a four-item scale asking subsidiary managers’ perceptions of subsidiary responses to local customer needs, government policies, market conditions, and rivalries. This construct has been developed and used in previous studies [Luo, 2001; Meyer & Estrin, 2014]. We used a seven-point Likert scale, ranging from 1 = not at all to 7 = very much.

As for the independent variables, the local R-assets were built upon the construct which was developed and tested in several papers such as Jiang et al. [2018], Li, Zhou, & Shao, [2009], Luo [2001] and Peng and Luo [2000]. Specifically, subsidiary managers were asked to rate their parent firms’ existing managerial or personal connections with five local stakeholders at the time of entry, including buyers, suppliers, distributors, competitors, and officials in governments and other institutions on a seven-point Likert scale, ranging from 1 = not at all to 7 = very much.

We developed the market-seeking FDI measurement based on the extant literature on Chinese outward FDI [Buckley et al., 2007; Buckley, Cross, Tan, Liu, & Voss, 2008; Cross et al., 2007]. The construct was captured by four items which consist of both the defensive and offensive market-seeking FDI. Specifically, subsidiary managers were asked to rate the extent to which the subsidiary was established to: 1] seek new markets in the host country; 2] facilitate export to the host country [e.g., collect local information, and respond to customer demands and government requirements etc.]; 3] overcome trade barriers; and 4] provide after-sale service. We used a five-point Likert scale, ranging from 1 = not at all to 5 = very much.

To capture the moderating variable of the level of host country institutional development, we followed previous studies [Dikova & Witteloostuijn, 2007; Liu et al., 2016a] to use an objective measurement from the public data source of the World Bank’s Governance Indicators [WGI] in the year 2010. WGI reports governance indicators for 215 economies worldwide. The six dimensions of governance are voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and corruption control. The composite measure ranges from −2.5 to 2.5, with higher scores corresponding to higher institutional advancement.

In this study, we included a range of control variables. The ownership of the subsidiary is captured with a dummy variable with wholly-owned subsidiaries [share ≥95%] coded as “1” and joint ventures as “0”. Subsidiary size is measured by the logarithm of subsidiary assets in U.S. dollars. In order to address heterogeneity of Chinese parent firms [Meyer & Estrin, 2014], we control for the marketing resources of parent firms as measured by the ratio of advertising, promotions, and marketing expenses to total sales, as well as the parent size operationalised as the logarithm of parent’s total global assets in U.S. dollars. Meanwhile, we control for industry-specific effects by including nine industry dummies. The data for these control variables were sourced from Chinese parent firms’ annual reports.

While we focus on market-seeking FDI, we also control for strategic asset-seeking FDI by asking subsidiary managers’ perceptions to rate the extent to which the subsidiary was established to: 1] seek advanced technology; 2] obtain a well-known brand; and 3] gain management know-how. We asked subsidiary managers’ perceptions of natural resource-seeking FDI and low-cost labour-seeking FDI by asking them to rate the extent to which the subsidiary was established to access to natural resources and low-cost labour respectively [1 = not at all to 5 = very much].

Results and findings

Common method variance

We follow the recommendations by Chang, Witteloostuijn, and Eden [2010] to address the concern of potential risks of common method variance as the dependent and independent variables were generated through a questionnaire survey. First, in our empirical analysis, the level of host country institutional development as the focal explanatory variable is taken from the archival source [public data source], thus reducing the likelihood of having the common method variance. Second, testing the moderating effect or the complex relationships between the dependent and independent variables are not part of the respondents’ theory-in-use [Chang et al., 2010]. Third, we used different scale types, including 1-to-7 Likert scale and 1-to-5 Likert scale in the questionnaire which reduce the likelihood of common method variance. Fourth, we conduct a Harman’s single-factor test and find that the single factor model demonstrated a poor fit of the data with the largest factor explaining only 24.358% of the total variance in the analysis. Thus, common method bias is not a major threat to the subsequent hypotheses testing.

Construct reliability and validity testing

We evaluate the construct composite [CR] reliability, convergent and discriminant validity. Table 1 presents the five-factor confirmatory analysis [CFA] results, providing a good overall fit of the data with all indicators meeting the respective criteria: X2[199] =211.325; RMSEA = .023; CFI = .993; [N]NFI/TLI = .992; SRMR = .054. More specifically, all measures show a CR value in excess of the recommended threshold value of .70 [Hair, Black, Babin, & Anderson, 2010]. Meanwhile, all individual items load strongly, which are higher than the recommended value of .5 and they are statistically significant [Fornell & Larcker, 1981; Hair et al., 2010]. Hence, the results show good convergent validity of construct indicators. The average variance extracted [AVE] and the square of the correlation among pairs of constructs are presented in Table 3. The AVE value for each construct is higher than .50, and is larger than the squared correlation coefficients between constructs. Therefore, the measurement scales used in this study are reliable and valid [Fornell & Larcker, 1981; Hair et al., 2010].

Table 3 Convergent and discriminant validity assessment

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Hypotheses testing

Table 4 shows the descriptive statistics, correlations and variance inflation factors [VIF]. All correlations are fairly low, except for the correlation between low-cost labour-seeking FDI and host country institutional development [−.625]. However, the VIF of all variables are well below 10, the acceptable cut-off point [Hair et al., 2010], and the mean VIF is only 1.56. Thus, multicollinearity is not a concern.

Table 4 Descriptive statistics and correlation [N = 117]

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We test our hypotheses using ordinary least square [OLS] estimates. We first test all control variables in Model 1 before including independent variables – local R-assets, market-seeking FDI, and host country institutional development in Model 2. We then add the moderating effects in Model 3. As shown in Model 1 in Table 5, two of the control variables are statistically significant. Specifically, the wholly owned subsidiary is negatively related to the local responsiveness strategy of foreign subsidiaries of Chinese MNEs, while the size of the subsidiary is positively related to the local responsiveness strategy.

Table 5 OLS regression results [N = 117]

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We also find that there is no significant relationship between strategic asset-seeking FDI and local responsiveness strategy. It may be explained by the fact that Chinese MNEs go abroad with objectives to acquire strategic assets which can be brought back to China for exploitation as a response to increasing domestic competition [Cui, Meyer, & Hu, 2014; Meyer, 2015; Ramamurti, 2012]. Cui et al., [2014] argue that achieving local responsiveness occurs only in market-seeking FDI of Chinese MNEs, while strategic asset-seeking FDI focuses on identifying, acquiring and reverse-transferring intangible resources back to home country. For example, Geely’s acquisition of Volvo and British Manganese Bronze is used to strengthen its position in China [Meyer, 2015]. As such, it is less important for strategic asset-seeking subsidiaries of Chinese MNEs to develop host market based capabilities and response actively to customer demands in order to explore and maintain local market share.

In model 2, the results [p