05 Oct 2011  Working Papers

Doing What the Parents Want? The Effect of the Local Information Environment on the Investment Decisions of Multinational Corporations

Executive Summary — As firms increase the scale of their global operations, monitoring operations across borders becomes increasingly challenging. Transparency in the external information environment can help multinational corporations monitor foreign subsidiaries and resolve internal agency problems. In this paper, researchers Nemit O. Shroff, Rodrigo S. Verdi, and Gwen Yu find that foreign subsidiaries located in country-industries with more transparent information environments are better able to translate local growth opportunities into investments. Key concepts include:

  • The external information environment can help MNCs better translate growth opportunities into growth by mitigating information frictions within the firm.
  • The role of the information environment on the sensitivity of investment to growth opportunity is greater when parents and subsidiaries are (1) located in countries that speak different languages, (2) geographically more distant, and (3) located in different countries.

 

Author Abstract

This paper examines how the external information environment in which foreign subsidiaries operate affects investment decisions in multinational corporations. We hypothesize and find that foreign subsidiaries in country-industries with more transparent information environments better translate the local growth opportunities into investments. This result is consistent with the information environment helping MNCs monitor the subsidiary's investment decision. Cross-sectional tests show that the effect is larger when there is greater "distance" between the parent and the subsidiary. Our results suggest that the external information environment helps mitigate agency problems that arise when firms expand their operations across borders. This paper contributes to the literature by showing that the external information environment helps MNCs mitigate information frictions within the firm.

Paper Information