The Exit Decision of Chinese Foreign Subsidiaries: Is It Institutional Distance or Institutional Profile That Matters?

The Exit Decision of Chinese Foreign Subsidiaries: Is It Institutional Distance or Institutional Profile That Matters?

Purpose - The effect of institutional distance and institutional profile has been well documented. However, the effects of these two are sometimes indistinguishable and highly correlated, and few studies have analyzed empirically which one really matters. This study focuses on the exit of foreign subsidiaries from the host country to determine whether institutional distance or institutional profile affects the exit of foreign subsidiaries. Design/Methodology/Approach - The sample includes 7,098 foreign subsidiaries established by 2,401 Chinese listed manufacturing firms in 121 countries during the period of 2007 to 2017. Using China as a benchmark, we divided the host countries into those with institutions better than China and those with institutions worse than China, and analyzed the effects of institutional profile and institutional distance separately. Findings - The logit regression results showed that in countries with better institutions than China, institutional profile has a negative impact on the exit of foreign subsidiaries, while in countries with worse institutions than China, institutional profile has a positive impact on the exit of foreign subsidiaries. However, institutional distance has a negative impact on the exit of foreign subsidiaries, and this impact is not affected by the institutional level of the host countries. Therefore, we conclude that it is institutional distance, rather than institutional profile, that affects the exit of Chinese foreign subsidiaries. Research Implications - This study empirically determined which factor affects the exit of foreign subsidiaries after entering foreign markets, and provides a clearer guide for the development of internationalization strategies.