Is the relationship between institutional distance and subsidiary performance moderated by top management team? Evidence from Chinese multinational enterprises

The study investigates how top management team (TMT) characteristics moderate the effect of institutional distance—differences in regulatory, normative, and cognitive institutions between home and host countries—on multinational enterprise (MNE) subsidiary performance. While prior work largely shows institutional distance reduces performance due to liability of foreignness, less is known about micro-level managerial factors. Drawing on upper echelons theory and institutional perspectives, the research asks: how do TMT members’ work experiences (home, host, and international) shape the institutional distance–performance relationship? The paper posits that managers’ prior experiences influence their cognitive bases and values, thereby affecting how they build legitimacy and transfer strategic organizational practices across borders, which are key mechanisms through which institutional distance operates. The study proposes and tests hypotheses that: institutional distance negatively impacts subsidiary performance (H1); more expatriates (home-country experience) in TMT strengthen the negative effect (H2); more TMT host-country work experience weakens it (H3); and greater diversity of TMT international experience weakens it, especially experience gained in weak-institution markets (H4a, H4b).

The literature recognizes multiple drivers of subsidiary performance, including intangible assets, financing, entry mode, diversification, learning, entrepreneurship, and host-country conditions. Institutional distance has strong explanatory power in international business: greater distance increases liability of foreignness via unfamiliarity, relational, and discriminatory hazards, raising coordination and transfer costs and undermining legitimacy and practice transfer. MNEs can pursue local isomorphism and/or negotiate with legitimating actors to build legitimacy, but greater distance amplifies tensions between local responsiveness and global integration. Transfer of strategic practices is impeded when home-grown practices misfit host institutions or when local employees resist implementation. Building on upper echelons theory, the paper argues that TMT members’ backgrounds shape their interpretations and responses to institutional distance via legitimacy building and strategic practice transfer. The study formulates: H1, institutional distance negatively relates to subsidiary performance; H2, more expatriates in TMT (home-country experience) strengthen the negative effect; H3, more TMT host-country experience weakens it; H4a, greater diversity of TMT international experience weakens it; H4b, the mitigating effect is stronger when TMT international experience is from weak-institution markets compared to strong-institution markets.

Data and sample: The study uses Orbis data on Chinese MNE foreign subsidiaries, identifying subsidiaries outside mainland China in 58 economies with >50% ownership by a Chinese ultimate owner and complete data on ROA, TMT backgrounds, incorporation date, and assets. Offshore territories lacking governance indicators (e.g., Bermuda, Cayman Islands) were excluded. The final dataset comprises 6,119 subsidiaries and 34,870 TMT manager observations after outlier removal via Cook’s distance. Orbis firm-level data were merged with World Governance Indicators (WGI) for institutions, World Development Indicators for GDP per capita and GDP growth, and the Index of Economic Freedom (IEF) for robustness checks. Analyses were conducted in Stata 17. Measures: Dependent variable is ROA (net income/total assets). Independent variable is institutional distance, primarily computed using WGI following Kogut–Singh/Euclidean approaches: Euclidean distance between home (China) and host across six WGI dimensions; as a robustness check, distance was also computed using all 12 IEF dimensions. Moderators capture TMT characteristics: number of expatriates (Chinese nationals residing in host country; home-country experience proxy), number of TMT managers with host-country work experience, and diversity of TMT international work experience (count of distinct non-China countries where TMT members have worked). International experience was further categorized into experience in strong- vs weak-institution markets using UN developed/developing classifications. Controls include firm age, firm size (log assets), state ownership (SOE), capital, current ratio, intangible assets, host GDP per capita (log), and GDP growth. Models and estimation: Moderation was tested via OLS with robust standard errors on cross-sectional data, including mean-centered predictors and interaction terms for institutional distance with each TMT characteristic. The primary specification used WGI-based distance; robustness used IEF-based distance. To address non-normality and enhance inference, bias-corrected and accelerated (BCa) bootstrap confidence intervals with 5,000 resamples were also estimated for all models (M0–M4). Multicollinearity was low (Spearman correlations mostly <0.3 among predictors; VIF 1.02–4.83). Descriptive statistics indicated ROA mean −0.296 with high variance and non-normality; Spearman correlation analysis was employed given distributional properties. Regression specifications: Baseline model (M0) includes institutional distance and controls. M1 adds the expatriate interaction; M2 adds the host-country experience interaction; M3 adds the international experience diversity interaction; M4 includes all interactions jointly. Additional analyses split international experience into strong- vs weak-institution market experience. Robustness checks replicate moderation analyses using IEF-based distance.

- Institutional distance has a significant negative effect on Chinese MNE subsidiary performance (ROA), supporting H1. OLS coefficients across models: −2.420 to −2.376 (p < 0.01); BCa 95% CIs exclude zero (e.g., M0: −3.356 to −1.563). - Expatriates in TMT strengthen the negative institutional distance–performance relationship (H2 supported in main models): Interaction INDIS-WGI × TMT Expatriates negative and significant (M1 β = −0.346, p < 0.05; M4 β = −0.386, p < 0.01; BCa 95% CIs e.g., M1 [−0.637, −0.056]). Robustness with IEF yielded marginal significance in OLS (β ≈ −0.021, p < 0.1) and was not significant with BCa, indicating weaker robustness of H2. - TMT host-country work experience mitigates the negative effect (H3 supported): INDIS-WGI × TMT Host Exp positive and significant (M2 β = 0.129, p < 0.01; M4 β = 0.110, p < 0.01; BCa 95% CIs e.g., M2 [0.072, 0.193]). Robust to IEF distance (β ≈ 0.008, p < 0.05; BCa 95% CI [0.001, 0.016]). - Greater diversity of TMT international experience mitigates the negative effect (H4a supported): INDIS-WGI × TMT International Experience Diversity positive and significant (M3 β = 0.555, p < 0.01; M4 β = 0.382, p < 0.05; BCa 95% CIs e.g., M3 [0.217, 0.886]). Robust to IEF (β ≈ 0.064, p < 0.01; BCa 95% CI [0.030, 0.097]). - Experience context matters (H4b supported): The mitigating effect is driven by TMT international experience in weak-institution markets, not strong-institution markets. INDIS-WGI × TMT Int Exp Weak: β = 0.640, p < 0.01 (BCa 95% CI [0.213, 1.067]); INDIS-WGI × TMT Int Exp Strong: not significant. - Control variables: Firm age and size positively relate to ROA; current ratio positive; some negative associations for capital and intangible assets in certain models. R-squared values are modest (≈0.026–0.033), consistent with cross-sectional performance models. - Visualizations (marginal effects plots) corroborate that higher expatriate intensity steepens the negative slope of institutional distance on performance, while greater host-country experience and international experience diversity flatten it. - Sample and scope: 6,119 subsidiaries in 58 countries; 34,870 TMT managers; results consistent across OLS and BCa, with robustness checks using alternative institutional distance (IEF) largely confirming H1, H3, and H4a, while H2 is weaker under robustness.

Findings confirm that institutional distance imposes liability of foreignness that depresses subsidiary performance, but the extent of this penalty depends on TMT human capital and experience portfolios. At the micro level, TMT members shape how subsidiaries build legitimacy and transfer strategic practices across institutional environments. More expatriates (home-country oriented) tend to prioritize parent integration and familiar mental models, which can impede local responsiveness and complicate negotiations with host-country actors, amplifying the negative performance impact of distance. Conversely, TMT host-country work experience equips managers with local knowledge, networks, and political negotiation skills, facilitating legitimacy acquisition and smoother transfer/adaptation of practices, thereby weakening the negative effect. Diverse international experience broadens cognitive frames, reduces perceived uncertainty, and enhances capability to navigate diverse institutional logics; importantly, experience in weak-institution environments appears especially valuable, signaling institutional entrepreneurial abilities to manage uncertainty, negotiate with stakeholders, and adapt business models. These insights add a TMT lens to institutional management, suggesting that micro-level managerial experiences can buffer or exacerbate macro-level institutional frictions and informing staffing strategies for MNE subsidiaries.

The study demonstrates that TMT experience profiles significantly condition the institutional distance–performance relationship for Chinese MNE subsidiaries. Institutional distance reduces ROA, and this negative effect is aggravated by higher shares of expatriates in the TMT, but mitigated by greater TMT host-country experience and by more diverse international experience—particularly when gained in weak-institution markets. Integrating upper echelons and institutional perspectives, the research highlights the micro-foundations of managing institutional distance. Practically, MNEs should prioritize hiring or developing managers with host-country experience and diverse international backgrounds, especially those seasoned in weak-institution environments, when staffing foreign subsidiaries facing distant institutions.

The study treats institutional distance as an aggregate construct, which may obscure dimensionality and directionality. Future research should unpack different institutional dimensions (regulatory, normative, cognitive), explore the direction (asymmetric distance), and adopt comparative capitalism frameworks to contextualize institutional configurations. Longitudinal designs could capture temporal changes in distance and evolving TMT capabilities. Qualitative methods (case studies, qualitative comparative analysis) could provide richer insights into how specific TMT characteristics interact with context-specific institutional conditions to overcome distance.