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The Determinants of Foreign Multinational Enterprise Firms' Board Governance in Cari
ean Offshore Island Economies
Journal of International Management XXXXXXXXXX
Available online 2 March 2022
XXXXXXXXXX/© 2022 The Author. Published by Elsevier Inc. This is an open access article under the CC BY license
(http:
creativecommons.org/licenses
y/4.0/).
The Determinants of Foreign Multinational Enterprise Firms’
Board Governance in Cari
ean Offshore Island Economies
Bruce Hearn *
Department of Accounting, Centre for Research in Accounting, Accountability and Governance (CRAAG), Southampton Business School, University
of Southampton, Building 2, University Road, Highfield Campus, Highfield, Southampton SO17 1BJ, UK
A R T I C L E I N F O
Keywords:
Foreign MNE networks
Subsidiary governance
Tax havens
Institutions
Cari
ean
A B S T R A C T
Using a unique sample of 171 listed firms in the Cari
ean region, this paper explores the in-
fluence of post-entry ownership of foreign MNEs on the board composition of subsidiaries. Our
findings reveal higher ownership is a means of enhancing the security of property rights while
simultaneously creating a liability of foreignness. This causes subsidiaries to externally contract
for resources, leading to the hiring of more lawyers and fewer accountants. The opposite is true
for progressively lower levels of foreign MNE ownership. Firms’ adoption of shareholder rights
governance amplifies these findings, while state formal institutional quality reverses them.
“The Devon [England] town of Ilfracombe, with its 11,000 inhabitants, has two lawyers’ offices, an insurance company and two sets of
accountants, as well as a
anch of Lloyds and a Nationwide. The 11,000 Nevisians [St Kitts & Nevis offshore centre], by contrast, host
six domestic banks, one international bank, 18 insurance managers, seven international insurance entities, four money service businesses
and 58 registered agents, many of them law firms. Nevis may be the most over-lawyered place on earth.” (The Guardian, 2018)
1. Introduction
The Cari
ean region has largely been overlooked in the international business (IB) literature, despite its immediate proximity to
some of the largest economies worldwide in North and Latin America, the exception being a study by Woodward and Rolfe (1993).
However, during the last thirty years since that study, the region has rapidly evolved to account for the largest concentration of
offshore tax centres worldwide, the latter acting as conduits for approximately 40% of all foreign direct investment (FDI) flows
worldwide (Damgaard et al., XXXXXXXXXXWhile this burgeoning offshore industry has precipitated rapid development of some of the re-
gion’s distinctive island economies, it has been accompanied by profound heterogeneity in the institutional frameworks. This has
motivated foreign multinational enterprises (MNEs) to increasingly invest into the island economies themselves, rather than merely
using them as tax-efficient investment conduits, with internationally renowned financial services
ands, such as Royal Bank of Canada
and Scotiabank, as well as leisure industry icons such as Four Seasons and Ma
iott, proliferating their regional investments. Our study
focusses on the complementary roles played by foreign MNEs’ increasing direct ownership in their subsidiaries, and the proportions of
commercial lawyers and professional chartered accountants serving on their boards of directors as a means of protecting against
infringements of their property rights.
Our theoretical approach contrasts the property rights perspective advanced by Driffield et al XXXXXXXXXXwith institutional theory’s
* School of Management, University of Bradford, Bradford, West Yorkshire BD7 1DP, UK.
E-mail address: b.hearn@
adford.ac.uk.
Contents lists available at ScienceDirect
Journal of International Management
journal homepage: www.elsevier.com/locate/intman
https:
doi.org/10.1016/j.intman XXXXXXXXXX
Received 11 August 2020; Received in revised form 14 Fe
uary 2022; Accepted 17 Fe
uary 2022
mailto:b.hearn@
adford.ac.uk
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doi.org/10.1016/j.intman XXXXXXXXXX
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Journal of International Management XXXXXXXXXX
2
legitimacy-based view (Scott, 1995), which we apply to rationalise Sewak and Sharma’s XXXXXXXXXXnovel market-entry strategy based on
federations or clusters of subsidiaries. These regional conglomerates of subsidiaries afford economies of scale in coordination costs and
economies of scope through the power of the foreign MNE parent’s
and image (Sewak and Sharma, XXXXXXXXXXThis “liability of
foreignness” differentiates the subsidiary’s products and services at a local level, as exemplified by financial services, and at an in-
ternational level, as with the leisure industry, which leads to competitive monopoly rents (Zaheer, 2005).
While the foreign MNE’s
and is central to value creation (Zaheer, 2005), this might also be expected to lead to an elevated
protection of property rights based on higher ownership and related control (Driffield et al., XXXXXXXXXXHowever, the autonomy of island
political economies, alongside their considerable heterogeneity, leads to elevated risks of expropriation at a local island level. These
isks can be countered by subsidiaries hiring more lawyers onto their boards of directors, whose intimate local knowledge mitigates the
more dynamic vulnerabilities to local actors adept in the idiosyncrasies of the indigenous institutional framework (Pham, 2020; Liu
and Sun, XXXXXXXXXXThe above quote from The Guardian underscores the importance of lawyers within offshore jurisdictions, highlighting
their proliferation in these locations. Conversely, the same risks increase the reliance on the foreign MNE’s elevated ownership and
accompanying
and and reputation to reinforce its property rights and deter expropriation. This leads to a reduction in stakeholders’,
other than the foreign MNE’s, participation in the control of the subsidiary, leading to less likelihood of conflict between economic
actors and hence less necessity for hiring onto the board of directors accountancy experts whose attestation skills would be essential for
esolving and mitigating such conflict.
We explore the institutional contingencies of our main theorised association with a combination of, first, firm governance level and,
then, national formal institutional quality. We argue that these institutional contingencies mi
or the motivations behind the role of the
subsidiary within the wider networks of foreign MNEs. The first, being the degree of adoption of shareholder rights governance, is
associated with international investment norms emphasising the appropriateness of minority investor property rights and welfare
protections (Bell et al., XXXXXXXXXXWe argue that a subsidiary’s adoption of such governance reflects the foreign MNE’s motivations for
increased engagement with external constituencies (Aguilera et al., 2008), both local and international. However, such increased
engagement is also associated with increased tunnelling risks, as well as complexity in contracting, leading to an increased need for the
subsidiary to hire lawyer-directors in order to co-opt these contingencies (Mescher, XXXXXXXXXXEqually, the risk from increasing
engagement leads foreign MNEs to increase their ownership within the subsidiary in order to better assert their property rights, leaving
even less room for local stakeholders to participate (Driffield et al., XXXXXXXXXXIncreased dominance by the foreign MNE parent,
accompanied by its leverage of an international
and and reputation, leads to a reduction in potential conflict with minority
stakeholders, who lack substantive control, and therefore a reduced need for specialist accounting skills on the board (Engel, 2005;
Maury, XXXXXXXXXXThis implies a lower need for professional chartered accountants to be hired onto boards of directors.
The second institutional contingency is formal institutional quality, which we use in conjunction with our singular focus on the
Cari
ean region, where te
itories are uniquely divided between high-quality offshore jurisdictions and their low-quality developing-
country counterparts (Hines, 2010; Allred et al., XXXXXXXXXXOffshore jurisdictions are complex in being bifurcated between some of the
highest-quality protections afforded for minority investor property rights in the world and, paradoxically, some of their biggest in-
fringements through formally mandated opacity and enhancements of insider welfare vis-à-vis that of minorities (Hines, 2010; Allred
et al., XXXXXXXXXXThis distinction masks the presence of overwhelmingly powerful family institutions underlying the formal institutional
architecture that is reflective of the islands’ colonial heritage (Fichtner, XXXXXXXXXXIt also underscores the considerable complexity in the
egulatory environment for subsidiaries, including powerful indigenisation policies designed to protect the hegemonic control of the
handfuls of extended families that are dominant in offshore island economies. The former necessitates increased need for legal skills to
e hired onto boards of directors to co-opt the contingencies associated with complex offshore regulation. The latter necessitates higher
accounting skills, due to increased risks of conflict arising from the control of cash flows and assets, due to the powerful presence of
indigenous stakeholders, who are empowered by indigenisation policies, and who participate in the subsidiaries.
Finally, we make a number of methodological contributions that will assist in the future study of offshore jurisdictions. The first is
in the unique, if laborious, hand collection of our dataset that is based on the collection and compilation of individual firm annual
eports for a comprehensive sample of all 171 listed firms, from 2000 to 2017, across the Cari
ean region. All of these firms are
indigenised as primary listings and so embedded within the indigenous socio-cultural fa
ic. Secondly, we introduce a new firm-level
shareholder rights governance adoption index, based on 31 hand-collected governance elements drawn from annual reports, based on
the OECD’s XXXXXXXXXXPrinciples of Good Governance. This is tractable, replicable and appropriate for the severe data limitations prevalent
in emerging economies, while we find it equally appropriate for application to a severely understudied region characterised by the
world’s highest proportion of offshore centres and tax havens.
Our study proceeds in the next section with an outline of the theory and related hypotheses. The section thereafter details data
collection and sample construction before the following section outlines our model and defines the independent and control variables
used. Thereafter follows a section in which the empirical results are discussed. The final section contains conclusions and policy
ecommendations.
2. Theory and hypotheses
Our starting point is to draw on the model of subsidiary federations as a distinct entry-mode strategy, as cited by Sewak and Sharma
(2020), which supersedes the traditional “hub and spokes” model of subsidiary networks envisaged in IB literature such as Ghoshal and
Bartlett XXXXXXXXXXThese subsidiary federations are argued to lead to competitive advantages derived from their conglomerate organ-
isational form, in which a number of subsidiaries are subordinated