Subsidiary relative performance and risk-taking behavior: the role of host country culture

Abstract

Purpose Research on MNE subsidiaries has recently started to examine the risk-taking behavior at the subsidiary level, leveraging insights from the Behavioral Theory of the Firm (BTOF). While prior studies have demonstrated that as performance falls below the aspiration, subsidiaries will take more risks, this study focuses on when subsidiary performance surpasses the aspiration by unveiling the mechanisms guiding subsidiaries' risk-taking behavior. In doing so, it proposes that subsidiaries' decision-making autonomy and self-assurance are contingent on contextual factors such as the headquarter influence and the cultural conditions of the host country. Design/methodology/approach This study draws on panel data from foreign subsidiaries operating in five European countries (the UK, Germany, France, Italy, and Spain) between 2013 and 2022, sourced from the Orbis database. Fixed effects regression models were used to test the hypotheses. Findings Findings suggest that as performance exceeds the aspiration level, decision-makers within subsidiaries become inclined to take more risks. Moreover, our study reveals that the increase in risk-taking is not uniform across all subsidiaries. In particular, those situated in countries characterized by high power distance and uncertainty avoidance exhibit a weaker inclination towards risk-taking in response to performance exceeding aspirations. Conversely, subsidiaries in individualistic countries demonstrate a stronger propensity for risk-taking under similar circumstances. Originality/value This is an original study contributing to the literature on subsidiary risk behavior and the BTOF by elucidating the underlying conditions shaping such behavior.