Governance costs in foreign direct investments: a MNC headquarters challenge

Abstract

According to transaction cost and internalization theories of multinational enterprises, companies make foreign direct investments (FDI) when the combined costs of operations and governance are lower for FDI than for market or contract based options, such as exports and licensing. Yet, ex post governance costs remain a conjectural construct, which has evaded empirical scrutiny, and the lack of focus on the implications of these costs constitutes a challenge for management in multinational companies (MNCs). What effects does the ensuing establishment of subsidiaries abroad have in terms of governance costs? What factors drive these costs? We hypothesize that such costs are driven by external contingencies as well as factors that characterize a particular company headquarters-subsidiary relationship. Using survey data from Norwegian MNCs, this study investigates 159 MNC-subsidiary relationships. Overall, our framework is corroborated by the data.