Foreign subsidiary CSR as a buffer against parent firm reputation risk
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Foreign subsidiary CSR as a buffer against parent firm reputation risk Nan Zhou1
and Heli Wang2
1
Nankai University Business School, Nankai University, Tianjin 300071, China; 2 Lee Kong Chian School of Business, Singapore Management University, Singapore, Singapore Correspondence: N Zhou, Nankai University Business School, Nankai University, Tianjin 300071, China e-mail: [email protected]
Abstract This study examines the influence of parent firm reputation risk on the level of corporate social responsibility activities of foreign subsidiaries. We first argue that a strong reputation risk spillover occurs from parent firms to their foreign subsidiaries due to the high visibility of multinationals, the control of parent firms over their subsidiaries, and the liability of foreignness associated with foreign firms in host countries. Then, we argue that subsidiaries may resort to CSR in their host country to reduce the spillover effect. Thus, we hypothesize a positive relationship between parent firm reputation risk and foreign subsidiary CSR activities. Moreover, we explore several contingency factors at both the parent firm and subsidiary levels that affect the extent of spillover and the need for subsidiaries to use CSR as a buffer against parent firm reputation risk. We find that the positive relationship between parent firm reputation risk and foreign subsidiary CSR activities is weaker for foreign subsidiaries that directly report to the parent firm, with longer operations in the host country and larger institutional distance between host and home countries. Using a unique sample of subsidiaries of large multinationals in China from 2009 to 2016, we find general support for our arguments. Journal of International Business Studies (2020). https://doi.org/10.1057/s41267-020-00345-7 Keywords: reputation risk spillover; corporate social responsibility; foreign subsidiary; headquarters–subsidiary relationship
Received: 6 June 2018 Revised: 3 May 2020 Accepted: 24 May 2020
INTRODUCTION On July 14, 2017, Nick, a teenage worker at McDonalds’ Louisiana store, posted ‘disgusting’ photos of the interior of an ice cream machine on Twitter: a thick layer of moldy cream festering in the McDonalds machine. By July 26, Nick’s Tweet had been shared more than 13,000 times and was featured on Twitter’s headline. That same day, a Chinese social media outlet picked up the story and the post quickly attracted public attention in China. McDonalds China ultimately faced public critique over the crisis, which occurred at its parent firm. With the deepening globalization and development of information technology, it is common that crises in one country quickly spread to another. However, the mainstream literature on headquarters–subsidiary relationships in multinational enterprises (MNEs) mainly focuses on how foreign subsidiaries benefit from
Foreign subsidiary CSR and parent firm reputation risk
firm-specific advantages of parent firms, such as the leverage of brand and technology (Buckley & Casson, 1976; Dunning, 1993; Nell
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