General manager staffing and performance in transitional economy subsidiaries

Drawing from institutional theory, we address the issues that headquarters of multinational corporations (MNCs) face when selecting local versus expatriate subsidiary general managers (GMs). Our analysis of 2,315 MNC subsidiaries in China shows that foreign direct investment (FDI) legitimacy is a reliable measure of institutional environment differences at the subnational level and that the commonly used country-level measures, including institutional distance and cultural distance, mask pertinent withincountry differences. MNCs that invest in Chinese provinces with lower FDI legitimacy use more local nationals as subsidiary GMs, compared to MNCs that invest in provinces with higher FDI legitimacy. In provinces with low FDI legitimacy, subsidiaries with local GMs perform relatively better than subsidiaries with expatriate GMs. This effect is particularly strong for wholly owned subsidiaries, as compared with joint ventures, and applies to all provinces except the most developed coastal regions. In provinces with higher levels of FDI legitimacy, these effects are reversed.