Institutional determinants of domestic and foreign subsidiaries’ performance

This article investigates the determinants of subsidiaries’ profitability using a unique dataset of more than 23,000 listed and unlisted subsidiaries worldwide over the period 1994–2005. We find that profitable parent companies are able to transfer some of the intangible assets that make them profitable to their subsidiaries. Our results indicate that good institutions (measured by the Worldwide Governance Indicators) are associated with better performance for companies’ subsidiaries. When we categorize countries in terms of the origins of their legal systems, we also find that this dimension of institutional quality is generally associated with better performance. Controlling for both legal origins and country governance institutions, we find that both sets of institutions are significantly related to subsidiaries’ performance, and that there is an overlap in their explanatory power.