Entrepreneurial leadership and MNE subsidiary performance: The moderating role of subsidiary context

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Entrepreneurial leadership and MNE subsidiary performance: The moderating role of subsidiary context Almasa Sarabia, Fabian J. Froeseb,*, Daniel H.M. Chngc, Klaus E. Meyerd a

University of Erlangen-Nuremberg, Nuremberg, Germany University of Goettingen, Goettingen, Germany c China Europe International Business School, Shanghai, China d Ivey Business School, Western University, London, Canada b

A R T I C LE I N FO

A B S T R A C T

Keywords: Entrepreneurial leadership Subsidiary performance Managerial discretion Organizational inertia Decision autonomy Task complexity

Managers of international subsidiaries, especially subsidiary CEOs, operate at critical interfaces within multinational enterprises (MNEs) and hold strategic responsibility for the operations in their country. Yet, their impact on subsidiary performance has received scant research attention. Building on the subsidiary entrepreneurship and strategic leadership literatures, we develop a model of how subsidiary CEOs’ entrepreneurial leadership affects subsidiary performance, and how this relationship is moderated by the subsidiary context that determines managerial discretion. We combine survey data of 291 international subsidiaries in South Korea with archival data to test our hypotheses. Our results show that subsidiary CEOs’ entrepreneurial leadership enhances subsidiary performance and that this relationship is strengthened by managerial discretion. Our study highlights the pivotal role of subsidiary CEOs within MNEs and contributes to a microfoundational understanding of international subsidiary management.

1. Introduction The management and performance of international subsidiaries is central to the competitive advantage of multinational enterprises (MNEs) (e.g., Birkinshaw, Hood, & Young, 2005; Boojihawon, Dimitratos, & Young, 2007; Yamin & Andersson, 2011). International subsidiaries, as semi-autonomous entities, operate in distinct local contexts with their own resources and capabilities. While they develop and implement strategies within parameters set by MNEs’ corporate strategy (Rugman & Verbeke, 2001), research on subsidiary entrepreneurship suggests that international subsidiaries can and do take strategic initiatives through the mobilization and deployment of resources within their local context to benefit both the subsidiary and the MNE (e.g., Ambos, Andersson, & Birkinshaw, 2010; Birkinshaw, 1997; Birkinshaw, Hood, & Jonsson, 1998, 2005; Verbeke & Yuan, 2013). However, while this literature recognizes that subsidiary entrepreneurship is grounded in the “entrepreneurial efforts of subsidiary managers” (Birkinshaw et al., 2005: 228), most studies are situated at the organizational level, exploring how characteristics of the subsidiary drive entrepreneurial initiatives to affect subsidiary performance (O’Brien, Sharkey Scott, Andersson, Ambos, & Fu, 2019; Strutzenberger & Ambos, 2014). The influence of subsidiary managers, specifically

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subsidiary chief executive officers (CEOs), has largely been overlooked (Dörrenbächer & Geppert, 2009; Schmid, Dzedek, & Lehrer, 2014; Strutzenberger & Ambos, 2014). As a consequence, relatively little is known about the roles subsidiary CEOs play in shaping subsidiary strategies and performance (Bouquet, Birkinshaw, & Barsoux, 2016; Contractor, Foss, Kundu, & Lahiri, 2019). This presents a conundrum for international business research since “macro concepts and macro outcomes, such as firm-level capabilities, performance, and strategies, need to be understood in terms of the underlying actions, interactions and characteristics of micro-level entities, such as individual actors and managers” (Contractor et al., 2019: 3). As subsidiary CEOs of international subsidiaries operate at critical interfaces within MNEs and hold strategic responsibility for the operations in their country, explanations how subsidiary initiatives are enacted and affect performance require a microfoundational examination of their roles (O’Brien et al., 2019; Schmid et al., 2014; Strutzenberger & Ambos, 2014). In this study, we aim to explain subsidiary performance by connecting the characteristics of individual subsidiary CEOs with subsidiary outcomes. Recent studies highlight that subsidiary performance is simultaneously influenced by factors at multiple levels, including the parent organization, the local context, and the subsidiary itself (e.g.,

Corresponding author. E-mail addresses: [email protected] (A. Sarabi), ff[email protected] (F.J. Froese), [email protected] (D.H.M. Chng), [email protected] (K.E. Meyer).

https://doi.org/10.1016/j.ibusrev.2020.101672 Received 2 October 2018; Received in revised form 18 November 2019; Accepted 17 January 2020 0969-5931/ © 2020 Elsevier Ltd. All rights reserved.

Please cite this article as: Almasa Sarabi, et al., International Business Review, https://doi.org/10.1016/j.ibusrev.2020.101672

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(Birkinshaw, 1997). Research also suggests that subsidiary entrepreneurship can enhance the performance of both the subsidiary and the MNE (Birkinshaw et al., 2005; Verbeke & Yuan, 2013). Subsidiary entrepreneurship in its turn involves taking strategic initiatives, such as autonomous actions, proactive risk-taking, activation of resources beyond the subsidiary’s control, and the acquisition of power to shape subsidiary activities (Birkinshaw, 1997, 1999). Such initiatives not only foster operational efficiency but also enhance innovation and increase market penetration (e.g., Ambos et al., 2010; Birkinshaw et al., 1998; Scott, Gibbons, & Coughlan, 2010; Verbeke & Yuan, 2013). For example, Birkinshaw et al. (2005) observe a positive relationship between the competitive arena of a subsidiary, its degree of entrepreneurship, and performance. They proxy subsidiary entrepreneurship by measuring subsidiary autonomy, its value-added scope, and subsidiary upgrading. Thus, previous studies suggest that entrepreneurial initiatives at the subsidiary-level can boost subsidiary performance. Given that initiatives in subsidiaries start with the “entrepreneurial efforts of subsidiary managers” (Birkinshaw et al., 2005: 228), it becomes important to examine the latter’s individual-level impact. However, microfoundational research on subsidiary management is relatively under-developed, and we know very little about whether or how individual subsidiary CEOs matter (Contractor et al., 2019; Foss & Pedersen, 2019). This stands in contrast to the general literature on leadership in organizations (Bass & Bass, 2008; Yukl, 2013), and more focused literature on strategic leadership in strategic management (Finkelstein et al., 2008). Both of these literatures acknowledge the influence of organizational leaders on organizational actions and firm performance (e.g., Hambrick & Mason, 1984; Rauch, Wiklund, Lumpkin, & Frese, 2009; Waldman, Ramirez, House, & Puranam, 2001). Accordingly, organizational leaders act to create a collective vision and purpose that binds and motivates members, infuse the organization with values, and enable actions that help members and their organizations attain their goals (Bass & Bass, 2008; Yukl, 2013). The effects of effective leadership are thus felt throughout an organization and can substantially impact its performance (Waldman et al., 2001). Similarly, strategic leadership research draws attention to how top executives’ personal and leadership characteristics can impact firm performance (Finkelstein et al., 2008). International business research has begun to embrace the microfoundational perspective by connecting the characteristics of individual managers (and even founders) with organizational-level activities and outcomes (e.g., Becker-Ritterspach & Dörrenbächer, 2011; Chittoor, Aulakh, & Ray, 2019; Contractor et al., 2019; O’Brien et al., 2019). In a recent study that explores the role of subsidiary CEOs on strategic initiatives, O’Brien et al. (2019), for example, find that subsidiary CEOs' actions mediate the positive relationship between a subsidiary’s entrepreneurial orientation and the realization of strategic initiatives. Subsidiary CEOs who facilitate adaptability within their subsidiaries and build connections to external stakeholders are better able to enact strategic initiatives. However, in their study, the authors do not explain the underlying sources of subsidiary CEOs’ actions or their impact on subsidiary performance. Building on this emerging research, we aim to contribute to the understanding of subsidiary CEOs’ roles in the management and performance of their subsidiaries. To do so, we incorporate micro-level concepts from the general literature on leadership and more specific concepts from strategic leadership (Finkelstein et al., 2008) with macrolevel concepts and outcomes in subsidiary entrepreneurship. Specifically, we draw on the concept of entrepreneurial leadership (Gupta et al., 2004), which integrates concepts of leadership and entrepreneurship and underlines a strategic approach to entrepreneurship centered on entrepreneurial initiatives, to understand how subsidiary CEOs’ leadership can affect subsidiary performance.

Kafouros & Aliyev, 2016; Tian & Slocum, 2014). Yet, little evidence exists regarding the contribution of individual subsidiary CEOs. Drawing on the micro-level literature in strategic leadership (Finkelstein, Hambrick, & Cannella, 2008), we examine how subsidiary CEOs’ entrepreneurial leadership, “leadership that creates visionary scenarios that are used to assemble and mobilize a ‘supporting cast’ of participants who become committed by the vision to the discovery and exploitation of strategic value creation” (Gupta, MacMillan, & Surie, 2004: 242), can affect subsidiary performance. The effectiveness of individual managers is further conditioned by the context in which they operate (Crossland & Hambrick, 2007; Ling, Simsek, Lubatkin, & Veiga, 2008). We posit that subsidiary context, that is, a subsidiary’s organizational-level characteristics, affects subsidiary CEOs’ managerial discretion (Hambrick & Finkelstein, 1987; Li & Tang, 2010; Wangrow, Schepker, & Barker, 2015), and thereby influences the extent to which subsidiary CEOs' entrepreneurial leadership affects subsidiary performance. Specifically, we argue that three key factors affecting managerial discretion, namely the subsidiary’s organizational inertia, decision autonomy, and task complexity (Hambrick & Finkelstein, 1987), moderate the effect of subsidiary CEOs’ entrepreneurial leadership on subsidiary performance. We test our model by combining survey and archival data of 291 international subsidiaries of MNEs operating in South Korea. Our study provides two contributions to international business research. First, we contribute to the mircofoundational perspective in international business (e.g. Contractor et al., 2019) by developing a better understanding of the pivotal role of subsidiary CEOs within MNEs. Our study is one of the few to explain how subsidiary CEOs’ individual characteristics affect subsidiary performance. Addressing this question is critical because it is subsidiary CEOs, rather than leaders at MNE headquarters (HQ), who have their hands on the “pulse of the operations” (Kanter, 2004: 111). Subsidiary CEOs are the primary implementers of MNE strategy and have the means to direct HQ’s attention towards important strategic issues (e.g., Bouquet & Birkinshaw, 2008). Our study thus provides a better understanding of leadership in these semi-autonomous business units. Second, we contribute to a deeper understanding of cross-level explanatory mechanisms of MNEs’ subsidiary performance (e.g., Johnston & Menguc, 2007; Tian & Slocum, 2014) by offering a contingency perspective that integrates the micro-level characteristics of individual managers with the macro-level characteristics of the subsidiary. In doing so, we contribute to research that focuses on person-in-situation analyses (e.g., Hirst, Van Knippenberg, & Zhou, 2009; Taggar, 2002) and help inform ongoing person-situation debates (Sørensen, 2007). In summary, our theory and findings provide critical insights into subsidiary management and performance and offer important managerial implications on how MNEs can enhance the performance of international subsidiaries by recruiting, developing, and empowering subsidiary CEOs with strong entrepreneurial leadership. 2. Subsidiary entrepreneurship and entrepreneurial leadership Research on subsidiary entrepreneurship, conducted mostly at the organizational level (O’Brien et al., 2019; Strutzenberger & Ambos, 2014), draws attention to a subsidiary’s potential to develop entrepreneurial capabilities and enact strategic initiatives. Similar to entrepreneurial ventures, international subsidiaries can identify and exploit opportunities in local markets (Birkinshaw, 1997; Boojihawon et al., 2007). Birkinshaw (1997:207) argues that subsidiaries explore such opportunities by taking strategic initiatives, which begin “with the identification of an opportunity and culminating in the commitment of resources to that opportunity.” Subsidiary entrepreneurship thus incorporates a proactive process involving the identification of opportunities in local (i.e., host country), global, or even internal (i.e., MNE) markets and the creation of facilitating conditions, including the mobilization of local resources and intra-subsidiary communication 2

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Finkelstein et al., 2008; Yukl, 2013). Specifically, research in strategic leadership argues that top executives affect their organizations to the extent of their managerial discretion (Crossland & Hambrick, 2007; Ling et al., 2008). Managerial discretion, defined as the latitude of action that is available to leaders (Hambrick & Finkelstein, 1987; Li & Tang, 2010; Wangrow et al., 2015), enables leaders to broaden the scope of their actions and significantly influences organizational actions and outcomes (Crossland & Hambrick, 2011; Finkelstein & Boyd, 1998; Finkelstein & Hambrick, 1990). Finkelstein and Boyd (1998), for example, observe that managerial discretion is an important determinant of CEO compensation and that firm performance is higher when discretion and compensation are aligned. Research on subsidiaries has captured these ideas primarily with reference to subsidiary autonomy, which plays a critical role for subsidiary initiatives and performance (Gammelgaard, McDonald, Stephan, Tüselmann, & Dörrenbächer, 2012; Lazarova, Peretz, & Fried, 2017; Paterson & Brock, 2002). Thus, managerial discretion is an essential concept in strategic leadership that helps to understand the relationship between micro-level influences of top managers and macro-level organizational outcomes. Drawing on these insights, we propose that the impact of subsidiary CEOs’ entrepreneurial leadership depends on the discretion that CEOs have in their specific subsidiary context. Specifically, discretion affects the potential for subsidiary CEOs to enhance subsidiary performance through their entrepreneurial leadership. Managerial discretion emanates from the degree to which an organization is amenable to an array of possible actions and empowers leaders to formulate and execute those actions (Hambrick & Finkelstein, 1987). Hambrick and Finkelstein (1987) argue that discretion emanates from three sets of forces: the degree to which the environment allows variety and change, the degree to which the organization is amenable to an array of possible actions and empowers the executive to formulate and execute those actions, and the degree to which the executive personally is able to envision or create multiple courses of action. Following prior research at the organizational-level (Finkelstein & Hambrick, 1990; Haleblian & Finkelstein, 1993; Li & Tang, 2010) and given our attention on MNEs’ international subsidiaries, we limit our focus to the three primary organizational sources of managerial discretion. These include (a) organizational inertia arising from firm characteristics such as age and size, (b) internal structures that determine the relative power and decision autonomy within the organization, and (c) the complexity of the organization’s task environment (Hambrick & Finkelstein, 1987). Next, we explore the moderating influence of these three key aspects of subsidiary context.

2.1. Subsidiary CEOs’ entrepreneurial leadership and subsidiary performance The role of the subsidiary CEO provides ample scope for entrepreneurial leadership, especially for CEOs with strong negotiation and cross-cultural management skills (Bird & Mendenhall, 2016; Birkinshaw, 1997). Specifically, subsidiary CEOs’ daily work includes extensive boundary spanning between the subsidiary and other local stakeholders, the MNE's HQ, or other subsidiary units (Meyer, Mudambi, & Narula, 2011; Reiche, Bird, Mendenhall, & Osland, 2017). Subsidiary CEOs design and implement strategies within the parameters set by MNE HQ while managing HQ expectations, motivating their local teams, and engaging with external partners in the local market. A key antecedent to subsidiary entrepreneurship is the development of an entrepreneurial culture in which the subsidiary CEO instills a sense of action and commitment among local employees (Birkinshaw, 1997). Managers with the ability to build commitment “use their teambuilding skills to inspire and mold a team that is highly committed to extending extraordinary energy and effort” (Gupta et al., 2004: 248) to accomplish set goals. Entrepreneurial leadership enables subsidiary CEOs to inspire and mold local employees, and thus mobilize a ‘supporting cast’ that is committed to the subsidiary’s objectives (Gupta et al., 2004). In line with this, research on employee commitment establishes a positive relationship between commitment and both individual as well as organizational performance (e.g., Cheng, Jiang, & Riley, 2003; Siders, George, & Dharwadkar, 2001). The commitment of employees to their supervisor, especially their propensity to internalize the values of the latter, is also associated with positive work outcomes (Becker, Billings, Eveleth, & Gilbert, 1996). In international subsidiaries, and although MNE HQ may provide the guiding value system, it is up to the subsidiary CEO to transform this system into immediate cues that generate the desired behaviors among subsidiary employees. Through regular interactions with subsidiary employees, especially by rewarding behaviors that are consistent with their own values and goals, subsidiary CEOs have a stronger influence on employee behaviors than any other party involved (Cheng et al., 2003). Subsidiary employees who trust and feel motivated by their subsidiary CEOs are more likely to go beyond contractual obligations and put in extra efforts to achieve set goals compared to subsidiary employees who feel a lower level of attachment (Becker et al., 1996). This suggests that entrepreneurial leadership helps subsidiary CEOs to gain the confidence of local employees motivating them toward subsidiary goals. Overall, subsidiary CEOs act at many critical interfaces both within and outside the MNE. In fact, boundary spanning in multiple directions has been recognized as a major aspect of subsidiary management, more so than in leadership roles in purely domestic operations (Schotter, Mudambi, Doz, & Gaur, 2017; Tippmann, Scott, & Parker, 2017). Entrepreneurial leadership helps to manage these boundary spanning activities for the benefit of the subsidiary by enhancing trust and cohesiveness while at the same time facilitating interpersonal relationships across organizations and hierarchies (Williams, 2002). Subsidiary CEOs with stronger entrepreneurial leadership are better able to mobilize internal and external resources and to win support from key domestic and international stakeholders, and thus enable better subsidiary performance. Hence, we predict:

2.2.1. Subsidiary organizational inertia As Hannan and Freeman (1977) point out, organizational inertia set "limitations on the ability of organizations to adapt" and make "organizations respond relatively slowly to the occurrence of threats and opportunities in their environments" (Hannan & Freeman, 1984: 151). Hambrick and Finkelstein (1987) propose that organizational inertia arising from firm characteristics such as age and size constrain managerial discretion. Extending this argument, we propose that organizational inertia in the subsidiary moderate the positive effect of subsidiary CEOs’ entrepreneurial leadership on subsidiary performance. Specifically, we contend that subsidiary CEOs’ entrepreneurial leadership has a greater impact on performance in younger organizations that are not yet infused with established routines and other inertial forces. While younger subsidiaries may suffer from both the liability of newness (Stinchcombe, 1965) and the liability of foreignness (Zaheer, 1995) as they start operating in a relatively unfamiliar context which necessitates high rates of learning (Wilkinson, Peng, Brouthers, & Beamish, 2008), these initial conditions also create opportunities for subsidiary CEOs to exercise their entrepreneurial leadership. Subsidiary CEOs in younger subsidiaries facing fewer inertial forces and with greater managerial discretion will be able to recruit and mold a new team of local employees, inspire and socialize them to the vision of

Hypothesis 1. Subsidiary CEOs’ entrepreneurial leadership is positively related to subsidiary performance. 2.2. Moderating role of subsidiary context While subsidiary CEOs’ entrepreneurial leadership is important to subsidiary management and performance, leadership research suggests that the extent to which leaders can affect behaviors and performance often depends on the context (Clark, Murphy, & Singer, 2014; 3

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performance. Thus, we predict:

subsidiary and MNE, and establish external relationships with local stakeholders (Gupta et al., 2004). The latitude for managerial action in younger subsidiaries allows subsidiary CEOs to fully exert their entrepreneurial leadership, developing opportunities in local markets and convincing employees and key stakeholders to pursue subsidiary goals. However, international subsidiaries, like most organizations, will develop stable routines that limit managerial discretion over time and restrict their ability to exert their entrepreneurial leadership to affect subsidiary operations. As a subsidiary grows older, operating procedures become more formalized and organizational cultures more entrenched (Freeman, Carroll, & Hannan, 1983; Stinchcombe, 1965). Older subsidiaries necessarily include more administrative functions and routines with more formalized roles and responsibilities (DiMaggio & Powell, 1983; Hannan & Freeman, 1977). This runs counter to the dynamics needed for subsidiary CEOs to express their entrepreneurial leadership to affect subsidiary performance. In summary, older subsidiaries with stronger organizational inertia offer subsidiary CEOs less scope to exercise their entrepreneurial leadership, while younger subsidiaries present CEOs with greater managerial discretion that allows them to act more entrepreneurially, and consequently have a stronger impact on subsidiary performance. Thus, we predict:

Hypothesis 3. Subsidiary decision autonomy strengthens the positive relationship between subsidiaryCEOs’ entrepreneurial leadership and subsidiary performance. 2.2.3. Subsidiary task complexity Managerial discretion also varies with the complexity of the organization’s task environment (Hambrick & Finkelstein, 1987). As Hambrick and Finkelstein (1987) note, when organizational task environments are more complex (e.g., differentiated products and services selling in multiple markets), top executives tend to have much more discretion over their strategic actions. This is because, in complex environments, means-ends linkages are more ambiguous, which requires greater variation in strategic options and ultimately offers top executives greater discretion over their actions. In the MNE context, the task complexity that subsidiary CEOs face varies with the different types of activities and markets the subsidiary serves (Reiche et al., 2017). International subsidiaries may serve only the local market of the host country, provide specialized inputs within a global supply chain, export their output, or engage in combinations of these activities. In many cases, international subsidiaries serve both local and export markets (Estrin, Meyer, Wright, & Foliano, 2008). Subsidiaries that do so have a more complex task environment than those that address only one type of market opportunity (Chung, Lee, Beamish, & Isobe, 2010). This is because the joint pursuit of local and overseas markets exposes subsidiaries to multiple cross-cultural interfaces and the volatility of various markets while simultaneously opening opportunities for the recombination of resources and knowledge across locations (Meyer et al., 2011). While subsidiaries can and do learn and adapt to the local markets of their host countries, overseas export markets are comparatively more volatile with more competitors to which subsidiaries need to respond (Luo, 2007). Facing more complex and unpredictable task environments, CEOs of export-oriented subsidiaries must explore greater variations in their strategic options. As such, we expect greater task complexity of international subsidiaries to increase the managerial discretion of subsidiary CEOs. Increased task complexity increases the potential for entrepreneurial subsidiary CEOs to pursue subsidiary initiatives in both the host country and abroad. Indeed, previous studies observe that entrepreneurial characteristics of top executives are positively associated with both export orientation and performance (Filatotchev, Liu, Buck, & Wright, 2009). With greater managerial discretion, CEOs of export-orientated subsidiaries can exercise their entrepreneurial leadership to pursue export markets and make strategic adaptions. Subsidiary CEOs with more entrepreneurial leadership will be able to ensure that their local employees understand the complexities associated with an export orientation and commit them to export performance in addition to their domestic sales performance. Thus, export activities confer greater managerial discretion to subsidiary CEOs and thereby provide them with more scope to contribute to subsidiary performance. Thus, we predict:

Hypothesis 2. Subsidiary organizational inertia weakens the positive relationship between subsidiaryCEOs’ entrepreneurial leadership and subsidiary performance. 2.2.2. Subsidiary decision autonomy Managerial discretion also varies with the internal structures that determine the relative power in an organization. Managerial discretion is high when internal political configuration grants top executives control and decision autonomy over a broad set of actions (Hambrick & Finkelstein, 1987). In an MNE, international subsidiaries are semi-autonomous entities within a larger organization that spans many countries. The extent of coordination within MNEs varies considerably and with it the relationship between MNE HQ and its subsidiaries abroad (Ambos, Asakawa, & Ambos, 2011; Ciabuschi, Forsgren, & Martín, 2011). In some MNEs, important strategic decisions, such as major investment projects or foreign market expansions, need to be approved at higher levels in the MNE, such as the regional or global HQ. MNE leaders may also limit international subsidiaries’ decision autonomy and closely monitor foreign operations when concerned with subsidiary CEOs acting as ‘autonomous barons’ (Taggart, 1997) engaging in behaviors that may harm the MNE (Ambos & Birkinshaw, 2010; Andersson, Forsgren, & Holm, 2007). From the subsidiary's perspective, however, this can be an arduous and time-consuming process that substantially inhibits its ability to react timely and effectively to local market needs or trends (Bouquet et al., 2016). Hence, when decision autonomy is low, decisions are explicitly controlled by MNE HQ (Birkinshaw, 1999; Birkinshaw et al., 2005) as MNEs aim to align subsidiaries with their overall corporate strategy. Under such circumstances, subsidiary CEOs have little latitude to exercise entrepreneurial leadership. In contrast, some MNEs grant their subsidiaries greater decision autonomy, allowing subsidiary CEOs to take strategic decisions for the subsidiary independently or using simplified approval processes (Lazarova et al., 2017; Strutzenberger & Ambos, 2014; Young & Tavares, 2004). Empowering subsidiary CEOs with greater decision autonomy provides them with greater control over their subsidiary’s resources, enhances their bargaining power vis-à-vis MNE HQ (Ambos et al., 2011), and ultimately offers them greater latitude to exercise their entrepreneurial leadership. Entrepreneurial subsidiary CEOs empowered with greater discretion can design and select strategic initiatives, establish relationships with important suppliers or customers, and build commitment among their employees. Hence, greater decision autonomy increases subsidiary CEOs’ managerial discretion and strengthens the impact of their entrepreneurial leadership on subsidiary

Hypothesis 4. Subsidiary task complexity strengthens the positive relationship between subsidiaryCEOs’ entrepreneurial leadership and subsidiary performance. We summarize our model in Fig. 1. 3. Methods 3.1. Sample To test our hypotheses, we combined survey and archival data on MNEs’ international subsidiaries operating in South Korea. South Korea is a relevant research setting that has featured prominently in international business research (e.g., Froese, Pak, & Chong, 2008; Hemmert 4

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Fig. 1. Conceptual model.

able to measure important micro-level constructs, which allow us to conduct cross-level analyses that connect to macro-level outcomes. This approach gives us a deeper understanding of the cross-level explanatory mechanisms of subsidiary performance.

et al., 2019; Park & Ghauri, 2011; Shin, Seidle, & Okhmatovskiy, 2016; Zeng, Shenkar, Lee, & Song, 2013). As the fourth largest Asian economy with a per capita GDP of around USD$40,000, it represents a strategically important market for many MNEs (Froese, 2019). The country hosts many international subsidiaries and is highly integrated into international trade, playing a focal role in many Asia-wide supply chains. Although the country is an attractive and important market, it is also highly competitive and can be difficult to navigate for MNEs. This stresses the role of subsidiary CEOs, who become important players within a culture that exhibits a high degree of power distance and collectivism (Froese et al., 2008). South Korea presents an interesting and relevant context in which market and socio-cultural environments place unique challenges on the effective management of international subsidiaries. We used the KIS Value database published annually by the South Korea Trade-Investment Promotion Agency, the official trade agency of South Korea. It covers all registered MNEs’ international subsidiaries in the country. We started with all 2533 international subsidiaries listed in 2008. Of these, 967 subsidiaries with identifiable financial data served as the sample frame for our survey. We collected information for each subsidiary, including the year it was established, its number of employees, and revenue, as well as the name of the subsidiary CEO. We then sent the survey questionnaires to the subsidiary CEOs listed in the database in 2008. Given that subsidiary CEOs in South Korea usually speak Korean, English, and/or Japanese, we prepared our questionnaire in these three languages. The questionnaire was initially developed in English and then translated into Korean and Japanese by bilingual research assistants using forward and backward translation to ensure equivalence of meaning. We conducted pilot tests of the different versions of the questionnaire with several top executives of international subsidiaries to determine if any of the items were ambiguous or difficult to understand. Ambiguities were corrected in all versions of the questionnaire based on the feedback received. The survey package contained a personalized cover letter explaining the purpose of the study and guaranteeing the confidentiality of responses. A total of 320 usable questionnaires were returned within four weeks. After discarding questionnaires with incomplete data, our final sample comprises 291 subsidiaries, representing an effective response rate of approximately 30 percent. This response rate compares favorably with a typical range of 10–12 percent for surveys targeting senior executives in the US (e.g., Hambrick, Geletkanycz, & Fredrickson, 1993). Our research approach of combining primary (survey) data with secondary (archival) data offers several advantages. First, by drawing on different data sources, we avoid common method bias that can lead to less reliable results. Second, by surveying subsidiary CEOs we were

3.2. Measures 3.2.1. Dependent variable Following previous studies (Gaur, Delios, & Singh, 2007; Gong, 2003), we assessed subsidiary performance using labor productivity, which is measured as total sales (in billion Korean Won) divided by the number of subsidiary employees using data from the KIS Value database. We averaged the variable over the three-year period from 2009 to 2011 to minimize the influence of short-term performance variations (Lee & MacMillan, 2008) and adjusted it for inflation. A sales-based measure better reflects performance than profit-based performance measures for subsidiaries that operate within the global MNE context (Chan, Isobe, & Makino, 2008; Christmann, Day, & Yip, 1999). Profitbased performance measures are difficult to interpret in a subsidiary context because international accounting and transfer pricing practices often dilute them. Accordingly, MNEs may distort the reported profitability of their international subsidiaries through cross-subsidization (Hamel & Prahalad, 1985) or manipulating transfer prices, and corporate charges to benefit from differential tax rates (Yunker, 1983). 3.2.2. Independent variable We used four items from Gupta et al. (2004) to measure subsidiary CEOs’ entrepreneurial leadership. This variable, which is measured on a Likert scale ranging from 1 to 7 (1 = strongly disagree and 7 = strongly agree), comprises the following items: “I am skilled at interpersonal relations and tactful,” “I give courage, confidence, and hope to others by reassuring and advising them,” “I can integrate people into a cohesive working unit,” and “I can inspire the emotions, beliefs, values, and behaviors of others.” The Cronbach’s alpha for this measure is 0.91. 3.2.3. Moderating variables We examined the moderating influence of three aspects of the subsidiary context that determine managerial discretion on the relationship between subsidiary CEOs’ entrepreneurial leadership and subsidiary performance. First, we assessed subsidiary organizational inertia using subsidiary age as a proxy, measured as the logged number of years of operation since the subsidiary was established (Young & Tavares, 2004). Second, we evaluated subsidiary decision autonomy, measured as the extent to which the subsidiary has decision autonomy relative to the MNE HQ on three key decision areas. Following previous 5

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research (e.g., Hedlund, 1981; Johnston & Menguc, 2007), we assessed decision autonomy in (a) products and services offering, (b) advertising and promotion, and (c) target markets selection using the following four-point scale: (1) solely decided by the foreign investor, (2) mainly decided by the foreign investor after consulting the local company in South Korea, (3) mainly decided by the local company in South Korea after consulting the foreign investor, and (4) solely decided by the local company in South Korea. We summed the ratings for the three decision areas to create an aggregate measure of subsidiary decision autonomy. The Cronbach’s alpha for this measure is 0.81. Third, following previous research (Ganotakis & Love, 2012; Gao, Murray, Kotabe, & Lu, 2010), we proxied subsidiary task complexity using export orientation by a binary variable equal to 1 for a subsidiary with export sales, and 0 otherwise. In supplementary analyses, we also use the percentage of exports to total sales.

Table 1 Country of origin of MNEs. Country

Number of MNEs

Europe Austria 3 Belgium 4 Denmark 3 Finland 1 France 11 Germany 24 Ireland 4 Luxembourg 2 Netherlands 26 Norway 2 Portugal 1 Spain 2 Sweden 3 Switzerland 4 UK 4 Total Europe 94 North America Canada 2 USA 42 Total North America 44 Asia China 5 Hongkong 4 Japan 107 Malaysia 7 Singapore 12 Taiwan 3 Total Asia 138 Rest (Caribbean Islands, Bahamas, etc.) Total rest 15 Total 291

3.2.4. Control variables To rule out alternative explanations based on previous research on subsidiary performance (Fang, Wade, Delios, & Beamish, 2007; Gaur et al., 2007; Gong, 2003; Tallman & Li, 1996), we controlled for factors at three levels: the individual subsidiary CEO, the subsidiary, and the MNE HQ. Research has shown that managers’ demographic characteristics can influence a firm’s organizational outcomes (Gammelgaard et al., 2012; Li & Tang, 2010). Accordingly, we included a subsidiary CEO’s age (measured in years), Korean nationality (dummy where 1=Korean; 0=Non-Korean), and education (dummy where 1=graduate degree or higher; 0=otherwise). Similarly, we controlled for a subsidiary CEO’s tenure at the subsidiary (measured in months), and previous work experience (number of previous firms worked at). We did not include gender because only five of the sampled subsidiary CEOs were female, which would have rendered this statistically meaningless. At the subsidiary level, we controlled for industry effects using the industry classification of the KIS Value database. We accounted for the two biggest industries in our sample by creating a manufacturing and a wholesale and retail trade dummy. We also included subsidiary size, measured as the logged number of employees working in the subsidiary. At the MNE HQ level, we controlled for the MNE country of origin (Table 1). About 32 percent of the MNEs were of a European origin, 15 percent of a North American, 47 percent of an Asian, and 5 percent of other origins. Accordingly, we created four dummies: Europe, North America, Asia, and Rest (excluded dummy). In addition to this detailed analysis of host countries, we also included a variable which served as a proxy for the overall MNE’s global strategy adapted from Taggart (1998). We assessed MNE global strategy by assessing the extent to which a subsidiary’s operations were localized or globally standardized in the following functions: (1) services or products range offered, (2) advertising and promotion, and (3) target markets of services or products. The items were rated on a 7-point Likert-scale ranging from 1=completely localized to 7=completely standardized. The Cronbach’s alpha for this measure is 0.61. We also controlled for the percentage of foreign ownership (logged) and the original mode of establishment with a dummy variable taking the value of 1 for acquisition entry. These measures are necessary to control for major contextual factors that might influence the MNE-subsidiary relationship (Fang et al., 2007).

% of overall sample

32.30 %

15.12 %

47.42 % 5.15 % 100%

subsidiaries. Our dependent variable is a dummy variable indicating whether the subsidiary is part of the final sample or not. We then chose public-listed as our exclusion restriction variable, a dummy variable which equals 1 if listed and 0 otherwise, as listed companies may have been more likely to reply to our survey by having, for example, an investor relations department our survey could be directed to. At the same time, public-listing is not necessarily associated with our independent variable, labor productivity, after controlling for size. Accordingly, we regressed our dependent variable on the exclusion restriction variable (i.e., public-listed), subsidiary age, size, and industry (dummy for the manufacturing and the wholesale and retail trade industry). The results are presented in Table 2. In the second stage, we controlled for selection by including the inverse Mills ratio (Lambda) in our regression models. In line with Aiken and West (1991), we meancentered our variables before generating interaction terms. 4. Results Table 3 presents the descriptive statistics and correlations for all variables. The 291 subsidiaries in our sample had on average been Table 2 Probit results (Stage one Heckman) (N = 967).

3.2.5. Analysis We conducted standard statistical tests comparing respondents versus non-respondents along several key variables using t-tests, including subsidiary size, subsidiary age, and labor productivity. We found that respondents versus non-respondents differed significantly along some variables. Therefore, we employed a two-stage Heckman (1979) procedure to ensure that our results were not biased because of the exclusion of MNE subsidiaries that did not respond to the survey (i.e., non-response bias). In the first stage, we modeled the selection process using a Probit regression based on all 967 international

Variables

Model 1

Constant Public-listed Subsidiary sizea Subsidiary agea Industry (manufacturing) Industry (wholesale and retail trade)

ß −1.176*** 0.149 0.012 0.117† 0.396*** 0.111

Significance levels: †p < 0.10, *p < 0.05, **p < 0.01, *** p < 0.001. a logarithm. 6

SE 0.207 0.119 0.033 0.067 0.112 0.135

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Table 3 Descriptive Statistics and Correlation Coefficients (N = 291 subsidiary CEOs). Variables

Mean

S.D.

1

2

3

4

5

6

7

8

1. Subsidiary CEO age 2. Subsidiary CEO nationality 3. Subsidiary CEO education 4. Subsidiary CEO tenure 5. Subsidiary CEO work experience 6. European foreign owner 7. North American foreign owner 8. Asian foreign owner 9. MNE global strategy 10. Percentage of foreign ownership 11. Acquisition entry 12. Manufacturing 13. Wholesale and trade 14. Subsidiary organizational inertia (age) 15. Subsidiary size 16. Subsidiary decision autonomy 17. Task complecity (export orientation) 18. Entrepreneurial leadership 19. Subsidiary performance Variables 9. MNE global strategy 10. Percentage of foreign ownership 11. Acquisition entry 12. Manufacturing 13. Wholesale and trade 14. Subsidiary organizational inertia (age) 15. Subsidiary size 16. Subsidiary decision autonomy 17. Task complecity (export orientation) 18. Entrepreneurial leadership 19. Subsidiary performance

54.73 0.80 0.28 86.92 2.24 0.32 0.15 0.47 4.25 62.46 0.21 0.65 0.18 19.97 234.94 3.14 0.70 4.66 1.64 9 1.00 −0.05 −0.01 −0.08 0.00 0.06 0.03 −0.19*** 0.27*** 0.22*** 0.02

8.03 0.40 0.45 81.31 1.26 0.47 0.36 0.50 1.05 35.40 0.41 0.48 0.38 11.96 345.91 0.62 0.46 1.04 9.52 10

1.00 0.33*** −0.01 0.01 −0.01 −0.08 −0.11 0.14* 0.04 −0.19** 0.00 0.20*** −0.11 0.29*** 0.21*** 0.04 0.11 −0.10 −0.04 11

1.00 0.09 −0.12* 0.04 −0.13* −0.00 0.07 −0.05 −0.33*** 0.03 0.08 −0.15* 0.21*** 0.19*** 0.02 0.14* −0.17** −0.07 12

1 1.00 0.02 −0.00 0.01 0.03 −0.03 0.04 −0.14* −0.04 −0.04 −0.01 0.11 0.19** −0.03 −0.04 −0.04 0.03 13

1.00 −0.03 0.00 0.03 −0.01 0.12* 0.04 0.08 −0.02 0.15* 0.02 −0.04 −0.15** 0.10 0.08 −0.05 14

1.00 0.12* −0.06 −0.12* −0.04 0.05 −0.10 −0.05 0.06 0.03 −0.00 0.05 −0.10 0.02 −0.06 15

1.00 −0.29*** −0.66*** 0.03 0.30*** −0.07 −0.04 0.09 −0.04 0.05 −0.04 0.05 −0.04 −0.06 16

1.00 −0.40*** 0.00 0.01 −0.03 −0.03 0.06 0.04 0.03 −0.12* −0.06 0.03 −0.05 17

1.00 −0.03 −0.15** 0.10 0.10 −0.13* −0.00 −0.08 0.11 0.02 0.04 0.10 18

19

1.00 0.00 −0.11 0.26*** −0.10 −0.13* −0.07 −0.11 −0.07 0.04

1.00 0.09 −0.04 0.04 0.06 −0.18** 0.10 −0.06 −0.05

1.00 −0.63*** 0.15** 0.32*** 0.06 0.15** −0.13* 0.04

1.00 −0.07 −0.23*** −0.08 −0.13* 0.09 −0.01

1.00 0.42*** 0.04 0.11 −0.07 −0.18**

1.00 0.03 0.19*** −0.01 −0.24***

1.00 −0.17** −0.10 0.11

1.00 0.02 −0.05

1.00 0.10

1.00

Nonparametric Spearman correlation coefficients are reported. Significance levels: * p < 0.05, ** p < 0.01, *** p < 0.001.

Table 4 presents our results. In Model 1, we regressed subsidiary performance (i.e., labor productivity) on our control variables as well as on the three moderating variables subsidiary organizational inertia, decision autonomy, and task complexity. As expected, subsidiary size (ß

operating for 20 years with 70 percent exporting to other countries. Subsidiary CEOs were on average 55 years old, and 80 percent were Koreans. Average labor productivity amounted to 1.64 billion Korean Won (about 1.5 million US$).

Table 4 Regression results of subsidiary CEOs’ entrepreneurial leadership on subsidiary performance (N = 291 subsidiary CEOs). Model 1

Lambda Subsidiary CEO age Subsidiary CEO nationality Subsidiary CEO education Subsidiary CEO tenure Subsidiary CEO work experience European foreign owner North American foreign owner Asian foreign owner MNE global strategy Percentage of foreign ownershipa Acquisition entry Manufacturing Wholesale and trade Subsidiary organizational inertia (age)a Subsidiary sizea Subsidiary decision autonomy Subsidiary task complexity (export orientation) Entrepreneurial leadership (EL) EL x Subsidiary organizational inertia (age) EL x Subsidiary decision autonomy EL x Subsidiary task complexity R² Adj. R² F F change

ß −8.435 0.020 −0.172 2.195† −0.006 −0.393 −1.980 −1.570 −0.502 0.663 0.996 −0.431 0.946 0.503 −2.565 −2.147*** 1.806† 0.033

Model 2 SE (15.969) (0.076) (1.543) (1.258) (0.007) (0.443) (2.819) (2.922) (2.677) (0.554) (0.905) (1.386) (5.005) (2.416) (1.783) (0.608) (0.936) (1.317)

0.121 0.063 2.079

b −8.934 0.031 0.364 2.409† −0.007 −0.448 −2.530 −2.228 −1.241 0.436 1.290 −0.223 1.103 0.321 −2.523 −2.269*** 1.964* 0.086 1.201*

0.136 0.075 2.242 4.66*

Significance levels: †p < 0.10, *p < 0.05, **p < 0.01, *** p < 0.001. a logarithm. 7

Model 3 SE (15.864) (0.076) (1.553) (1.253) (0.007) (0.441) (2.812) (2.919) (2.681) (0.560) (0.909) (1.380) (4.972) (2.401) (1.771) (0.606) (0.933) (1.309) (0.556)

b −10.949 0.031 0.361 2.335† −0.005 −0.417 −1.904 −2.223 −1.611 0.578 1.249 −0.526 0.465 0.138 −2.543 −2.199*** 1.878* −0.355 −0.860 −1.765*** 1.414* 2.106† 0.189 0.122 2.835 5.83***

SE (15.490) (0.074) (1.520) (1.229) (0.007) (0.429) (2.760) (2.850) (2.623) (0.549) (0.886) (1.350) (4.852) (2.342) (1.726) (0.598) (0.911) (1.282) (0.966) (0.471) (0.631) (1.151)

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= −2.147, p < 0.000) is negative and highly significantly related to subsidiary performance. Moreover, decision autonomy (ß = 1.806, p = 0.055) and CEO’s education (ß = 2.195, p = 0.082) have positive effects on subsidiary performance. In Model 2, we added our independent variable, entrepreneurial leadership. The effect of subsidiary CEOs’ entrepreneurial leadership on subsidiary performance is positive and significant (ß = 1.201, p = 0.032). In line with Hypothesis 1, subsidiary CEOs’ entrepreneurial leadership is positively associated with subsidiary performance. In Model 3, we included the interaction terms for entrepreneurial leadership with subsidiary organizational inertia, decision autonomy, and task complexity. Consistent with Hypothesis 2, subsidiary organizational inertia (ß = − 1.765, p < 0.000) weakens the positive relationship between subsidiary CEOs’ entrepreneurial leadership and subsidiary performance. Moreover, in line with Hypothesis 3 and Hypothesis 4, subsidiary decision autonomy (ß = 1.414, p = 0.026) and task complexity (ß = 2.106, p = 0.068) strengthen the positive relationship between subsidiary CEOs’ entrepreneurial leadership and subsidiary performance, respectively. Our results suggest that organizational inertia tends to constrain subsidiary CEOs’ expression of entrepreneurial leadership while decision autonomy and task complexity seem to have the opposite effect. We also note that the model statistics are significantly improved after adding the moderating effects; the adjusted R² increases from 6.3%–12.2% while the F-statistic of change is highly significant (F=5.83; p = 0.0007). To facilitate the interpretation of the interaction effects, we have plotted their relationships in Figs. 2–4 using high and low levels as defined by the mean ± 1 SD for each moderating variable. Stronger entrepreneurial leadership is beneficial in less inert subsidiaries, with higher degrees of decision autonomy, and operating in more complex task environments.

tighter coordination with HQ regarding their contribution to the global value chain. Hence, the relationship may be non-linear. Thus we entered the percentage of exports as well as its squared term in the regression. We found the linear term to have a significantly positive moderating effect (ß = 0.147, p = 0.032) and the quadratic term a significantly negative moderating effect (ß = −0.002, p = 0.057). This result is consistent with our argument that exporting increases task complexity, and hence managerial discretion, but it does not monotonically increase with increasing shares of exports. Third, we created a cultural distance variable following the cultural distance index created by Kogut and Singh (1988), which calculates the average of the differences in Hofstede (1980) country scores, adjusted by the variance of the corresponding dimensions. Since fifteen subsidiaries in our sample involve MNEs from countries in which Hofstede scores are not available, we removed them from the sample, resulting in 276 subsidiaries. In regression analysis available from the authors upon request, the focal effects remained as in our primary analysis. 5. Discussion Drawing on the premise that subsidiary CEOs play a critical role in the management of MNEs (Bird & Mendenhall, 2016; Schotter et al., 2017), we develop and test a model of how subsidiary CEOs’ entrepreneurial leadership (Gupta et al., 2004) contributes to subsidiary performance and how organizational factors affecting managerial discretion, including subsidiary’s organizational inertia, decision autonomy, and task complexity, moderate this relationship. In doing so, our study offers several important implications for theory and practice. 5.1. Theoretical insights and future research To international business research, we, first, contribute a better understanding of the pivotal role of subsidiary CEOs within MNEs. International business scholarship in general (Contractor et al., 2019), and subsidiary entrepreneurship research in particular (Ambos et al., 2010; Birkinshaw, 1997; Birkinshaw et al., 1998, 2005) focuses on the aggregate organizational level (O’Brien et al., 2019; Strutzenberger & Ambos, 2014). While we know which subsidiary characteristics contribute toward strategic initiatives that benefit subsidiary performance, we know little about the individual managers that play a critical role in these activities. By elaborating on how subsidiary CEOs’ entrepreneurial leadership drives subsidiary performance, we bring direct attention to the central role of subsidiary CEOs. Conceptually, this cross-level approach integrates the literatures on

4.1. Supplementary analyses First, as performance impact may be quicker than our three-year average captures, we corroborated our results by assessing subsidiary performance using labor productivity for a two-year period instead of a three-year period: 2009 ̶2010, and 2010 2 ̶ 011. The results for both of these alternative measures of subsidiary performance were consistent with those reported here. Second, the impact of task complexity may depend not only on the incidence of exporting but the degree of export orientation (e.g., Estrin et al., 2008). However, the theoretical relationship is not clear; particular subsidiaries with very high degrees of export orientation may face

Fig. 2. Interaction between subsidiary CEOs’ entrepreneurial leadership and subsidiary organizational inertia (age). 8

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Fig. 3. Interaction between subsidiary CEOs’ entrepreneurial leadership and subsidiary decision autonomy.

spanners – ought to be considered in future studies of MNE subsidiaries. Second, we contribute to a deeper understanding of the cross-level explanatory mechanisms of business unit performance (e.g., Johnston & Menguc, 2007; Tian & Slocum, 2014) by offering a contingency perspective that integrates micro-level characteristics of individual subsidiary CEOs with macro-level characteristics of subsidiaries. This contributes to research that focuses on person-in-situation analyses (e.g., Hirst et al., 2009; Taggar, 2002) and helps inform ongoing personsituation debates, such as whether contextual factors explain entrepreneurial activities and performance more than dispositional factors (Sørensen, 2007). Prior research has identified subsidiary management as a multi-level phenomenon (e.g., Strutzenberger & Ambos, 2014) and highlighted the importance of contextual influences (e.g., Kafouros & Aliyev, 2016; Meyer & Su, 2015), but again paid scant attention to the role and characteristics of individual managers (O’Brien et al., 2019; Schotter et al., 2017). Our study suggests that both contextual and individual factors are important to subsidiary performance. Subsidiary contexts can either enable or restrict subsidiary CEOs’ ability to exercise their

leadership (Finkelstein et al., 2008; Gupta et al., 2004; Yukl, 2013) and subsidiary entrepreneurship (Ambos et al., 2010; Birkinshaw, 1997; Birkinshaw et al., 1998, 2005). Specifically, we bring personal characteristics of key individuals into subsidiary performance research. Literature on subsidiary entrepreneurship has hinted at the fact that strategic entrepreneurial initiatives require subsidiary managers to take action (Birkinshaw et al., 2005), yet few studies have investigated subsidiary managers’ specific micro-activities (Tippmann, Scott, & Mangematin, 2012, 2017). Our study extends literature on subsidiary entrepreneurship by doing exactly that: Our findings show that variance in individual subsidiary CEOs’ leadership abilities matters for subsidiary performance above and beyond those that are explained by organizational characteristics. In other words, subsidiary CEOs can ‘make a difference’ through entrepreneurial leadership. Future research thus ought to pay more attention to subsidiary managers to develop our understanding of subsidiary management and subsidiary outcomes (Contractor et al., 2019; Felin & Foss, 2005). For example, other aspects of leadership style as well as demographic and experiential characteristics of key individuals – not only CEOs but also other boundary-

Fig. 4. Interaction between subsidiary CEOs’ entrepreneurial leadership and subsidiary task complexity (export orientation). 9

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our study. The concept of managerial discretion also raises numerous questions for future research. Given the importance of managerial discretion for subsidiary outcomes, MNEs must consider how to provide subsidiary CEOs with managerial discretion without undermining the coherence of the MNE’s overall corporate strategy. Within the context of international subsidiary management, MNEs need to find ways to provide subsidiary CEOs with the right amounts of managerial discretion. Fourth, a key methodological limitation is that we cannot fend off potential endogeneity concerns stemming from the endogenous nature of our main interest variable (subsidiary CEOs’ entrepreneurial leadership). In line with most empirical setups, we are not able to resolve this potential problem methodologically, that is, with a meaningful instrumental variable (Antonakis, Bendahan, Jacquart, & Lalive, 2010; Cameron & Trivedi, 2005), as we are not able to make a conclusive case based on economic or conceptual reasoning for such an instrument in our setting. Specifically, two potential problems might arise affecting the interpretation of our interaction terms. First, there might be a potential reverse causality between our moderator variable, subsidiary autonomy, and our dependent variable, labor productivity. Conceptually, we do not believe that a reverse causal relationship would necessarily hamper our predicted moderating effect. We predict that subsidiaries with high degrees of autonomy will have higher performance in light of subsidiary CEOs’ high entrepreneurial leadership. Our prediction would still hold if we changed the causal chain arguing that subsidiaries with high performance are more likely to have higher degrees of autonomy in light of high entrepreneurial leadership of their subsidiary CEO. Second, studies have argued that managers develop their leadership orientations in interaction with the business environments they are situated in (Nadkarni & Barr, 2008; Nadkarni, Herrmann, & Perez, 2011). Thus, the subsidiary’s context – as captured by our three moderator variables – might shape both subsidiary managers’ entrepreneurial leadership and subsidiary performance. This in turn could lead to biased estimates of our interaction effects through the potential confounding role of our three moderators. To mitigate these concerns, we provide two sets of tests. First, the correlations between our variables do not suggest that our moderators are significantly associated with either subsidiary performance or subsidiary CEO’s entrepreneurial leadership, except for one correlation (Table 3). Second, we examine whether the coefficient estimate of subsidiary CEO’s entrepreneurial leadership changes when including or excluding the moderating variables (without interactions) in our model. If the three moderating variables constituted confounding variables in our regressions, the inclusion or exclusion of these variables should affect the economic as well as statistical significance level of our main interest variable (e.g., Atanasov & Black, 2016). In untabulated results, we do not see any changes.1 Collectively, we thus do not find empirical evidence to substantiate the concern that our interaction effects might be biased by a potential confounding effect of our moderating variables. However, future studies may collect datasets that allow more systematic methodologies to control for possible endogeneity in this type of study.

entrepreneurial leadership by shaping managerial discretion (Hambrick & Finkelstein, 1987). Specifically, our study illustrates how aspects of organizational context that shape managerial discretion influence the extent to which subsidiary CEOs’ entrepreneurial leadership affects subsidiary performance. Empirically, this insight emerges from the moderating effects of subsidiary organizational inertia, decision autonomy, and task complexity. As such, our results contribute to the growing literature that shows that the effectiveness of leaders depends on the relevance of the particular context they work in (Crossland & Hambrick, 2007). Future research may further explore the interplay between (organizational) context and levels of discretion awarded to individuals. A subsidiary context that provides room for managerial discretion gives subsidiary CEOs the opportunity to develop, for example, their entrepreneurial leadership for the MNE’s overall benefit. If, in contrast, managerial discretion for subsidiary CEOs is highly constrained, for example, because the subsidiary serves a specific specialized role within a global value chain, the potential of unfolding individual-level characteristics may be much more limited. 5.2. Empirical limitations and future research Our study benefits from a dataset that provides unique data on subsidiary CEOs and the subsidiaries they lead. However, the dataset also has a number of limitations that prevent us from conducting all the robustness checks that ideally one would have wished to conduct. These limitations of our empirical study may inspire future research. First, we only examined MNE subsidiaries in a single host country, South Korea. Thus, the generalizability of our findings may be questionable. Although prior research has found differences in leadership styles across countries (e.g. Cho, Shin, Billing, & Bhagat, 2019), entrepreneurial leadership and attributes of successful entrepreneurs are common across cultures (Gupta et al., 2004), suggesting that our theoretical arguments should be generalizable, though the magnitude of effects might vary. For instance, it is plausible to expect that the effects of leadership are stronger in high power distance countries, such as South Korea, Mexico, or Saudi Arabia. Thus, we encourage future research to replicate and extend our model in different host-country contexts, ideally in a multi-level study design to discern the (moderating) effects of various host-country contexts (e.g., legal, economic, and cultural characteristics). Second, subsidiary CEOs evaluated their own entrepreneurial leadership in our survey. This approach benefits from direct measurement but has the potential drawback of social desirability bias. Although our data and results indicate sufficient variance in subsidiary CEOs’ entrepreneurial leadership, future research should consider surveying subordinates to rate the leadership style of their superiors. Future studies could also consider how other subsidiary CEO characteristics (e.g., personality traits or career experience) influence their leadership style, and thereby directly or indirectly affect the performance of MNE subsidiaries. Likewise, future research may also explore the influence of subsidiary CEOs on other important subsidiary-level outcomes, such as sales growth or innovation. These intermediate outcomes are likely to be more closely related to specific aspects of leadership at the subsidiary level. Third, a central insight of our study concerns the importance of managerial discretion in studying subsidiary leadership. However, in line with prior research (Finkelstein & Hambrick, 1990; Haleblian & Finkelstein, 1993; Li & Tang, 2010), we only focused on one set of forces, namely the organizational ones. Hambrick and Finkelstein (1987) suggest that discretion can emanate from two other sets of forces, the degree to which the environment allows variety and change and the degree to which the executive personally can envision or create multiple courses of action. Thus, future studies could observe how environmental- and individual-level forces affect the relationship between individual-level leadership and subsidiary performance we observe in

5.3. Managerial implications and conclusion MNE HQ are often ambivalent toward subsidiary initiatives as they seek to establish their control over the activities of subsidiary CEOs (e.g., Birkinshaw, 1997). However, a “headquarters knows best” mindset (Bouquet et al., 2016) often prevents MNEs from being truly responsive to local needs in distant markets. Subsidiary CEOs often perceive the HQ as presenting “unrealistic demands […], misguided advice or directives, micromanagement, and a lack of receptiveness to subsidiary contributions and ideas” (Bouquet et al., 2016:60). This can 1

10

Results available from the first author upon request.

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potentially undermine the MNE’s ability to understand, learn from, and adapt to distant locations. Successful subsidiary managers thus spend considerable time and resources in managing HQ expectations (Bouquet & Birkinshaw, 2008). Our study provides critical evidence regarding the important role of subsidiary CEOs for subsidiary management and performance. First, we observe that subsidiary CEOs with stronger entrepreneurial leadership can benefit subsidiary performance, and by implication, the performance of the MNE as a whole. This suggests that MNEs should aim to select subsidiary CEOs with a strong entrepreneurial leadership style and provide them with the necessary managerial discretion to apply it. Moreover, MNE HQ should develop systems to foster subsidiary CEOs' entrepreneurial leadership behaviors (Haynes, Campbell, & Hitt, 2014). For example, leading initiatives in distant markets requires self-motivation and confidence on the part of subsidiary CEOs. Subsidiary CEOs are likely to expose higher levels of these qualities if they feel that they are heard at MNE HQ, that their ideas are followed up on, and that they feel trusted. Second, MNE HQ need to empower subsidiary CEOs if they expect them to act entrepreneurially. Entrepreneurial leadership needs room to manifest itself. MNEs need to establish a subsidiary context that provides opportunities for subsidiary CEOs to develop their entrepreneurial leadership. A subsidiary context that provides room for managerial discretion (e.g., young subsidiaries with higher autonomy, and export orientation) gives subsidiary CEOs the opportunity to develop their entrepreneurial leadership for the MNE’s overall benefit. If, in contrast, managerial discretion for subsidiary CEOs is highly constrained, for example, because the subsidiary serves a specific specialized role within a global value chain, then the potential for entrepreneurial leadership to make a difference to the organization is more limited. Overall, our study enriches our microfoundational understanding of subsidiary performance by highlighting the role of the individual subsidiary CEO. Building on the concept of entrepreneurial leadership (Gupta et al., 2004), we argue and show empirically that a subsidiary CEO’s leadership plays a pivotal role in affecting subsidiary performance; yet, this role is conditioned by the subsidiary context. Our theory and findings provide critical insights into subsidiary management and performance and offer important managerial implications on how MNEs can enhance the performance of international subsidiaries by recruiting, developing, and empowering subsidiary CEOs with strong entrepreneurial leadership. We encourage other scholars to follow our lead to study MNE subsidiaries and subsidiary CEOs, and specifically the latter’s role in designing and implementing subsidiary strategies.

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