Does politician turnover affect foreign

subsidiary performance? Evidence in China

Weiguo Zhong1, Ya Lin2,Danxue Gao3 andHaibin Yang4

1Guanghua School of Management, Peking

University, 5 Yiheyuan Road, Haidian, Beijing,

China; 2Department of Management, Hong KongBaptist University, Kowloon, Hong Kong;3Department of Strategic Management, Business

School, Central University of Finance and

Economics, 39 Xueyuan Road, Haidian, Beijing,China; 4College of Business, City University of

Hong Kong, 83 Tat Chee Avenue, Kowloon, Hong

Kong

Correspondence:H Yang, College of Business, City Universityof Hong Kong, 83 Tat Chee Avenue,Kowloon, Hong Konge-mail: haibin@cityu.edu.hk

AbstractWhile research has acknowledged the importance of political risks in affecting

multinational companies’ behavior and performance outcomes, the roles ofpolitical agents in this process have largely been ignored. This study explores

one important dimension of political risks caused by politician turnover at the

sub-national level and examines its influence on the performance of foreignsubsidiaries. We contend that policy uncertainty arising from politician turnover

adversely affects the performance of foreign subsidiaries. We further develop a

multi-level framework identifying contingent factors at event (i.e., internalpromotion), firm (i.e., international joint venture), and environment (i.e.,

market intermediary development) levels that moderate the relationship

between politician turnover and MNC performance. Analyses of foreign

subsidiaries located in 310 Chinese cities from 1998 to 2007 largely supportour thesis that politician turnover dampens the performance of foreign

subsidiaries. This negative performance impact is then alleviated for internal

promotions, international joint ventures, and firms located in regions with ahigh degree of market intermediary development. Our study opens a new

avenue for examining the role of host-country political agents in affecting MNC

performance.

Journal of International Business Studies (2019).https://doi.org/10.1057/s41267-019-00229-5

Keywords: politician turnover; regional political uncertainty; multinational corporations;sub-national environment

INTRODUCTIONAs one of the most important dimensions in institutional environ-ment political risk has received burgeoning attention from bothresearchers (Boddewyn, 2005; Brewer, 1983; Henisz & Zelner,2004, 2005) and practitioners (Bremmer & Zakaria, 2006).Researchers find that political risk in the form of governmentintervention affects country investment (Henisz, 2002), govern-ment expenditures and revenues (Henisz, 2004), inward andoutward foreign direct investments (Bekaert, Harvey, Lundblad, &Siegel, 2014; Globerman & Shapiro, 2003; Li & Vashchilko, 2010),and eventually economic growth at the national level (Henisz,2000a). At the firm level, political risk has significant impacts onfirm strategies such as divestments (Minor, 1994), foreign directinvestment (FDI) location decisions (Garcia-Canal & Guillen, 2008;

Received: 1 May 2017Revised: 15 January 2019Accepted: 13 February 2019

Journal of International Business Studies (2019)ª 2019 Academy of International Business All rights reserved 0047-2506/19

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Henisz & Delios, 2001; Holburn & Zelner, 2010;Vaaler, 2008), FDI entry mode choices (Chan &Makino, 2007; Delios & Henisz, 2000, 2003a), andrisk-taking (Boubakri, Mansi, & Saffar, 2013; Vaaler,Schrage, & Block, 2005). Political risk consequen-tially affects multinational corporation (MNC) per-formance via its impacts on operationdiscontinuity (Fitzpatrick, 1983; Stevens, Xie, &Peng, 2016) and stock market returns (Beaulieu,Cosset, & Essaddam, 2005; Cosset & Suret, 1995).

However, the research on political risk has so farpaid less attention to the roles of agents (i.e.,politicians) in influencing MNCs and thus has notresolved ‘‘how’’ institutions mattered (Aguilera &Grøgaard, 2019; Eden, 2010). Prior literature pre-dominantly uses the specific attributes of a coun-try’s institutions as a clue for inferring political risksincluding political constraints such as checks andbalances (Delios & Henisz, 2003b; Henisz,2000a, b), shifts in government regimes (Siegel,2007; Vaaler et al., 2005), and political or militarycrises (Beaulieu et al., 2005; Li & Vashchilko, 2010).For example, empirical studies on corruption as aspecific form of political risk primarily focus ongovernment officials’ exercises of public power forprivate gains at the aggregated country level (Ro-driguez, Siegel, Hillman, & Eden, 2006; Spencer &Gomez, 2011). This stream of research thereforelargely emphasizes the overall institutional effectwhile assuming homogeneous interests and prefer-ences for the political agents engaged in theseprocesses (DiMaggio, 1988; Jackson, 2010). Politi-cians embedded within different institutional con-texts may in fact have varying interests and policypreferences at different stages (Bonardi, Hillman, &Keim, 2005; Wang & Luo, 2018).

We introduce a specific source of political risk:politician turnover. Specifically, we contend thatpolicy uncertainty arising from politician turnoverincreases the information asymmetry betweenMNCs and the host-country’s institutional envi-ronment at the time of politician turnover. Foreignsubsidiaries operating within a new politician’sjurisdiction may face a significant amount ofinformation asymmetry regarding the politician’sinterests and policy preferences. These uncertain-ties may negatively affect subsidiary performancedue to policy inconsistency and officer arbitrariness(Child, Chung, & Davies, 2003; Inkpen & Pien,2006). In order to identify the policy uncertaintymechanism, we develop a multi-level framework,

examining contingent factors at the event (i.e.,internal promotion), firm (i.e., international jointventure), and environment (i.e., market develop-ment) levels. We argue that these contingenciesalleviate the level of information asymmetry at thetime of turnover, weakening the performanceeffects of politician turnover on foreignsubsidiaries.We examine our theory using a large sample of

foreign-invested subsidiaries operating at themunicipal level in China during the period from1998 to 2007. This research context is appropriatefor several reasons. First, the interplay betweenfirms and government is a particularly prominentissue in the Chinese context characterized by theincomplete institutionalization of formal legal rules(Child & Mollering, 2003). Second, politician turn-over in China is beyond the influence of anyindividual firms via either lobbying or donation(Liu, Luo, & Rao, 2015) compared with politicianturnovers realized through elections (Vaaler, 2008;Vaaler et al., 2005). Politician turnover may there-fore serve as an unexpected exogenous shock forfirms, mitigating endogeneity concerns. Third,China is also a country with large regional devel-opment variances. Local governments possess highautonomy in policy making, creating significantvariations in regional institutional environments.This makes China an ideal setting for subnationalresearch (Chan, Makino, & Isobe, 2010; Ma, Tong,& Fitza, 2013; Meyer & Peng, 2016).We seek to make two major contributions. First,

we extend prior research on the relationshipbetween political risk and MNC performance bydelving into the role of political agents. In partic-ular, we provide a fresh perspective to investigatewhether or not policy uncertainties arising frompolitician turnover may adversely affect MNC per-formance. Our study speaks to the importance ofexamining politician turnover as a critical source ofpolitical risk. Second, we delineate the boundariesof our theory by developing a multi-level frame-work to identify this underlying mechanism atdifferent levels. Our multi-level framework exem-plifies how policy uncertainty is manifested andalleviated at the event, firm, and environmentlevels. In doing so, our study also echoes the call forresearch on the sub-national institutional environ-ment, which is important yet remains underdevel-oped (Lu, Song, & Shan, 2018; Ma et al., 2013;Meyer & Nguyen, 2005).

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THEORY AND HYPOTHESES

Politician Turnover and Information AsymmetryResearchers have long acknowledged the institu-tional environment’s effect on MNC investmentstrategies and survival likelihoods (Rosenzweig &Singh, 1991; Westney, 1993). Prior research exam-ines the effects of institutional voids (Khanna &Palepu, 1997; Miller, Lee, Chang, & Breton-Miller,2009), marketization level (Park, Li, & Tse, 2006),social norms (Yiu & Makino, 2002), and variouslaws (Brouthers, 2002; Hagedoorn, Cloodt, & vanKranenburg, 2005; Meyer, Ding, Li, & Zhang, 2014)on MNC foreign subsidiaries’ survival. We focus ona specific form of political risk, political uncer-tainty, which is defined as the difficulty of infor-mation collection and interpretation arising frominstability within the political environment (Childet al., 2003). The extant literature examines variouspolitical uncertainty sources such as the bargainingpower imbalance between MNCs and the govern-ment (Grosse, 2005; Kobrin, 1987), lack of institu-tional constraints on the government’s capabilityto alter existing policies (Henisz, 2000a; Henisz &Zelner, 2001), and policy changes due to partycompetition (Vaaler, 2008; Vaaler et al., 2005), aswell as political and military crises (Beaulieu et al.,2005; Li & Vashchilko, 2010).

We highlight the role of politicians in generat-ing political uncertainty rather than focusing oninstitutional attributes. Politician turnover causesinformation asymmetry for foreign subsidiariesbecause even in democratic countries, individualpoliticians have large variations in their interpre-tations and implementations of rules or laws(Bonardi et al., 2005). Even when a politician’sgeneral interests and policy preferences maintainsome degree of consistency, his or her segment-specific preferences (e.g., FDI-related interests andpolicy preferences) are difficult to interpretbecause regional conditions vary significantlywhen attracting and developing FDI (Agosin &Machado, 2005; Wagner & Timmins, 2009). It islikely that political successors may not honor thecommitments made by predecessors in terms ofpreferential policies toward foreign subsidiariessuch as tax reduction rates and institutionalresource support. Foreign subsidiaries accordinglyface substantial political uncertainties due to a lackof adequate and relevant information on newpoliticians, aggravating the information asymme-try between MNCs and the host-country’s institu-tional environment at the time of politician

turnover. Indeed, Li, Ng, Tsang, & Urcan (2019)found that the precision of management earningsforecasts is significantly affected by government-related governance indicators such as politicalstability. Li, Li, & Wang (2019) also documentedthat state-owned enterprises are more opaque thanother types of firms due to their semipoliticalnature, providing indirect evidence to the infor-mation disadvantages of MNCs.The Chinese context of politician turnover makes

this information asymmetry more salient. Whilethe National People’s Congress oversees the collec-tive administration for national affairs, substantivenational power is controlled by the CommunistParty – the only party in power within the Chinesepolitical system. The Communist Party uses a cadrepersonnel management system in order to deter-mine politician turnover. At least three points onthe system are noteworthy. First, politicians’ pri-mary private interests center on winning rank-order tournaments in order to remain in power(Bonardi et al., 2005; Lazear & Rosen, 1981). Thehuge personal benefits of remaining in powergreatly reinforce the incentives for Chinese officialsto control critical activities within theirjurisdictions.Second, the system requires government officials

to rotate their positions across different depart-ments and geographic locations every 5 years. Theearlier officials are promoted, the more likely theypotentially reach a higher position before they arerequired to retire at the age of 65 (Li & Walder,2001). However, in reality, the promotion pace ismuch faster; more than half of all politicianscannot complete a full term (Liu et al., 2015).Between 1998 and 2007 (the period of our study),the average tenure for municipal politicians isapproximately 3 years. An extreme case is the cityof Handan, which experienced six turnovers of theparty secretary and seven turnovers of the citymayor within 10 years. These frequent rotationscreate significant disruptions and uncertainties forthe local economy – such as taking 15 years tocomplete construction of the city airport.Third, while the system is hierarchical in nature

in that officials located at a higher echelon have thepower to appoint and promote subordinate officials(Du, Lu, & Tao, 2008), lower-level officials are givena high degree of discretion in deciding localpolicies. Upper-level politicians are specificallyconcerned with the increase of overall gross domes-tic product (GDP) within a region. However, lower-level politicians have a high degree of discretion in

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deciding the pathways to achieve top-level objec-tives. The transition from a planned to a marketeconomy in China is a large-scale social andeconomic experiment in that many of the policychanges are initiated and pilot-tested in local areas,and are then widely adopted across a larger region ifthe policy changes prove successful. Local officialsare therefore encouraged to be open-minded intheir market economy experiments. Moreover, inorder to win the rank-order tournaments, govern-ment officials must show either competitive advan-tages or uniqueness over their competitors. Chen,Li, & Zhou (2005) empirically demonstrate that theChinese central government significantly weighsthe provincial benchmark set by the contestedposition’s immediate predecessor versus politicalperformance from neighboring provinces in evalu-ating turnover decisions. If newly appointed politi-cians only follow the blueprint set by theirpredecessors, then the credit may go to theirpredecessors rather than themselves. New appoin-tees accordingly have a strong motivation to actdifferently from their predecessors.

Changes within China’s FDI environment alsoaggravate information asymmetry for foreign sub-sidiaries. Attracting FDI was previously one of themost important political tasks for governmentofficials. Governments at all levels commonlyregard FDI as an important engine of economicgrowth, job creation, and technological upgrades;China therefore bids fiercely for FDI. The centralgovernment pushes local governments to attractFDI by directly linking the evaluation of localperformance with the amount of FDI attracted.Government officials therefore have private inter-ests and incentives for attracting FDI. Both centraland local government officials are also increasinglyaware of FDI’s potentially negative influences asconstraining rather than promoting technologicalupgrades (Bishop & Wiseman, 1999; Huang, 2003),crowding out domestic investments (Agosin &Machado, 2005), as well as damaging localresources and the natural environment (Wagner &Timmins, 2009). Few governments will judge theinfluence of FDI purely on economic criteria (Wells,1998). The Chinese central government hasrecently become more cautious regarding FDI,subsequently attaching greater importance to socialinterests in the promotion system. Politicians havecome to develop divergent views on the roles of FDIand MNCs (Guillen, 2000; Skippari & Pajunen,2010), leading to greater difficulties in foreign

subsidiaries understanding the interests and policypreferences of newly appointed politicians.We focus on politician turnover at the municipal

level for the following two major reasons. First, it iscritical to examine the influence of subnationalinstitutions on the performance of foreign sub-sidiaries (Chan et al., 2010; Meyer & Peng, 2016).Prior research has often treated regional effect as awhole, and has not explicitly examined institu-tional factors at the subnational level (Lu et al.,2018). Our study speaks importance to the role oflocal politician turnover in affecting foreign sub-sidiary performance, an approach that has not beenexamined before. Second, decentralization withinChina shifts greater resources and regulatory powerto the local level (provincial and municipal levels)so that the Chinese economy is characterized by aweak central government and strong local govern-ment agencies (Nee, 1992; Qian & Weingast, 1997).Municipal-level governments have a high degree ofpolicy discretion (Child & Tse, 2001) so that thedecentralization of FDI is more extensive. Forexample, since April 2010, the central governmentincreased the approval authority of local govern-ments from US $100 million to US $300 million forFDI projects, giving local officials additional auton-omy in their interactions with MNCs. According tothe 2012 China Statistical Yearbook, more than 80%of FDI now enters China as wholly foreign-ownedenterprises so that MNCs must interact directlywith municipal government officials.

Politician Turnover and MNC PerformancePolitician turnover generates political uncertaintiesor unpredictability regarding a newly appointedpolitician’s interests and policy preferences, partic-ularly those concerning FDI and MNCs. Thisuncertainty resonates with the electoral uncer-tainty examined by studies adopting a partisanpolitical business cycle model in that they bothfocus on the potential policy discontinuities cre-ated by politician turnover. However, the politicalbusiness cycle model attributes politicians’ policypreferences to the ideologies of their affiliatedparties (Vaaler, 2008; Vaaler et al., 2005) by assum-ing that politicians belonging to the same partyhold homogeneous policy orientations. Policy dis-continuities are then only likely to occur acrosssuccessive politicians from different parties. Ourstudy departs from this assumption by focusing onthe political uncertainty caused by individualpoliticians regardless of party affiliation.

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Chinese municipal politicians enjoy a largedegree of autonomy in customizing policies suchas FDI attraction and local business governanceaccording to idiosyncratic regional conditions. Thenon-existence of a distinct partisan ideologicallabel (such as left- vs. right-wing groups) makespredicting a politician’s preferences an even morechallenging task. Politicians vary in their incen-tives, talent, knowledge, and personal predilections(Boisot & Child, 1999). Policy making is to a largeextent subject to the influence of a given politi-cian’s personal preferences when there is either ahigh level of institutional void (Khanna & Palepu,1997), or when the system provides few checks andbalances from veto players (Henisz, 2000a).Researchers find that regional government officialsare arbitrary and inconsistent in their decisionswithin the FDI context (Child et al., 2003; Inkpen& Pien, 2006).

Autonomy in local policy making creates signif-icant policy uncertainties. In a transition economysuch as China, local governments are motivated toimplement innovative policies within their ownterritories (Luo, 2006), often as a process of exper-iments in economic reform. Some of these policyinnovations are made and implemented withoutpassing through the formal legislation process.Formal legislation only follows when the newpolicy is proven effective and can be transferredto other regions. There is therefore little legislativefoundation constraining policy changes when apolitician holding different opinions is appointed.These turnover events could also be announced inan unexpected manner that creates substantialdifficulties in collecting information regarding thesuccessor. This information asymmetry imposessignificant threats for foreign subsidiaries’ perfor-mance (Holburn & Zelner, 2010).

For example, newly appointed politicians usuallyrenegotiate and breach their predecessor’s contractsor promises in order to protect either their own orconnected local firms’ interests (Bremmer &Zakaria, 2006). Politicians can also circumventlegally enforced contracts in order to restrict MNCs’transfers or conversions of profits away fromregional control. They may additionally accuseMNCs of unfair labor practices or unsafe environ-mental conditions in order to seek rents. Heniszand Zelner (2010) point out that an opaque policy-making environment is equivalent to at least a 33%increase in taxation. Politician turnover imposeshigher information asymmetry onto MNCs thatincreases their likelihood of performance failure.

The policy uncertainty, arising from politicianturnover, is likely to dampen foreign firms’ perfor-mance in general. The literature on institutionalvoids suggests that uncertainty in institutionalenvironment increases the cost of knowledgesearching, contracting, and monitoring (Khanna& Palepu, 1997; Xie & Li, 2018), increasing theliabilities of foreignness faced by foreign firms inChina. When faced with policy uncertainty, for-eign firms often experience an obsolescing bargain-ing scenario in which their prior terms ofinvestment may be altered by incoming politicians(Delios & Henisz, 2003b). The unpredictability ofthe institutional environment heightens the infor-mation asymmetry dilemma for foreign firms andincreases their costs and risks of doing business inChina. Policy uncertainty will lead to reducedinvestment and employment for foreign firms(Baker, Bloom, & Davis, 2016; Julio & Yook, 2012;Nguyen, Kim, & Papanastassiou, 2018). Giambonaand his colleagues (2017) found that about 50% offirms in their study avoid foreign direct investmentdue to political risks. Brogaard and Detzel (2015)even found that firms with the greatest exposure toeconomic policy uncertainty underperforms otherfirms with the lowest exposure to economic policyuncertainty by 5.53% per annum after controllingfor realized volatility. Their study testifies to theoverall negative impact of policy uncertainty onfirms. Therefore, we propose that:

Hypothesis 1: A politician turnover eventoccurring in a municipal city is negatively asso-ciated with the performance of foreign sub-sidiaries operating within that city.

Multi-Level Contingency EffectsThe policy uncertainty caused by politician turn-over is contingent on the degree of informationasymmetry between foreign subsidiaries and thenewly appointed politician. Factors that help for-eign subsidiaries overcome such asymmetry canaccordingly alter the effects of politician turnoveron foreign subsidiary performance. We propose amulti-level contingency framework, contendingthat the information asymmetry between foreignsubsidiaries and host institutional environments atthe time of politician turnover will be alleviated viafactors at event, firm, and environment levels.Specifically, we focus on three critical contingen-cies that help reduce information asymmetry,namely internal promotion mode at the eventlevel, international joint venture governance at

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the firm level, and market intermediary develop-ment at the environmental level.

Internal promotionTurnover mode in terms of internal versus externalpromotion will significantly affect the degree ofinformation asymmetry during succession. Politi-cians who are promoted from within a jurisdictioncause a lower level of information asymmetryversus those rotated in from other regions (i.e.,external promotion, Li & Zhou, 2005).

Within the cadre personnel management system,the party secretary is generally considered the toppolitical figure for regional governments. The citymayor usually serves as the deputy party secretaryand is therefore the second most important polit-ical figure; a position change from city mayor tocity party secretary is considered a significantpromotion. The origins of new political leaderssuch as municipal party secretaries are typicallydivided into two categories: (1) an internally pro-moted municipal party secretary promoted withinthe jurisdiction in which city mayors are importantcandidates, and (2) an externally promoted munic-ipal party secretary from outside the jurisdictionwhose candidates typically include party secretariesand mayors from other cities as well as officers froma variety of administrative entities.

In an internal promotion, foreign subsidiarieshave greater opportunities to accurately updatetheir information regarding a specific politician’sinterests and policy preferences over time. Forexample, mayors or other internal candidates usu-ally follow the municipal party secretary’s orderswhen implementing FDI-related policies (Li &Zhou, 2005). MNCs may accordingly have exten-sive direct interactions with candidates before theirpromotions. Although internally promoted politi-cians may still behave differently from their prede-cessors, foreign subsidiaries have accumulatedinstitutional knowledge concerning this specificdomestic environment and can therefore anticipateroutines to a large extent (Eriksson, Johanson,Majkgard, & Sharma, 1997). We accordingly expectthat internal promotion weakens the negativeeffect between politician turnover and foreignsubsidiary performance. In contrast, an externalpromotion is characterized by a higher level ofinformation asymmetry between foreign sub-sidiaries and the new politician (Zhang, 2008).The uncertainty caused by politician turnover

therefore increases, leading to an aggravated neg-ative effect on foreign subsidiary performance. Weposit:

Hypothesis 2: Internal promotion weakens thenegative relationship between politician turnoverand the performance of foreign subsidiaries.

International joint ventureWhile foreign subsidiaries have difficulties in com-prehending and predicting the possible policychanges generated by politician turnover, we con-tend that this information asymmetry can bealleviated via collaboration with local firms asinternational joint ventures. Prior research suggeststhat local firms tend to have rich institutionalknowledge because they are embedded within thehost-country’s economic and political environ-ment (Lu & Beamish, 2006; Makino & Delios,1996). Local partners accordingly have a betterunderstanding of local customers and competitors;they may even develop personal connections withgovernment officials through various guanxi andkinship relationships. Local partners are further-more likely to receive early wind of possible policychanges from government officials at differentadministrative bureaus. They are also in a betterposition to interpret and understand the implicitmessages conveyed in the administrative notes andpolicies.Local partners in international joint ventures

allow foreign subsidiaries to either increase theirabsorption of both explicit and tacit knowledgeregarding the local institutional environment(Dhanaraj, Lyles, Steensma, & Tihanyi, 2004), ordelegate their local partners to interact directlywith local institutions in order to reduce theinformation asymmetry on policy uncertainty.Local partners provide MNCs with immediate alle-viation of the latter’s local knowledge deficiencies(Lu & Beamish, 2006). Delios and Henisz (2003b)analyzed a sample of 665 Japanese manufacturingfirms operating within 49 countries, and found thatinternational joint venture significantly reducesthe level of policy uncertainty exposed to foreignsubsidiaries in host countries. Foreign subsidiariesthat do not directly interact with local govern-ments may still improve their understanding ofinstitutional changes by observing the behaviorand results of local partners’ dealings (Makhija &Ganesh, 1997; Sartor & Beamish, 2018).

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Conversely, foreign subsidiaries operating alonemay encounter serious difficulties in accessing tacitknowledge regarding institutional knowledge. Theymay also have no one to rely on in their interac-tions with local governments, aggravating theinformation asymmetry on policy uncertaintiesfrom politician turnover. Therefore:

Hypothesis 3: International joint venturesweaken the negative relationship betweenpolitician turnover and the performance of for-eign subsidiaries.

Market intermediary developmentThe information asymmetry between foreign sub-sidiaries and policy uncertainty during politicianturnover is likely to be strengthened when themarket lacks sufficient intermediaries who can facil-itate information flow and act as brokers. A lack ofeither reliable and transparent market informationor predictable government actions creates institu-tional voids that increase the cost of knowledgesearching, contracting, and monitoring (Khanna &Palepu, 1997; Xie & Li, 2018). A lack of specializedmarket intermediaries such as qualified legal andaccounting services, industry associations, and lawfirmsmakes it difficult or even impossible for foreignsubsidiaries to access and understand complicatedinstitutional environments. This is particularly truefor the unpredictable policy changes experiencedduring politician turnover. This situation is severe inemergingmarket countries where the government isless transparent to either business or its citizens(Arregle, Miller, Hitt, & Beamish, 2013; Xie & Li,2018).

Conversely, in regions with well-functioningmarket intermediaries, any institutional knowledgeregarding the market and government can bereadily analyzed and digested by professional mar-ket intermediaries first and then relayed to foreignsubsidiaries, reducing the information asymmetry.Third-party analysts can employ localized man-power to collect information, help facilitate inter-actions, and reduce uncertainties regarding policychanges and market functioning (Khanna &Palepu, 2000; Kingsley & Graham, 2017). There isa large variation of market intermediary develop-ment in China where coastal areas such as Shang-hai and Guangzhou are well equipped with adiversity of market intermediaries. However, inlandareas significantly lack intermediaries who canprovide professional services to foreign subsidiaries,

leaving them without a public and independentsource of analysis regarding policy uncertainties inpolitician turnovers. Therefore:

Hypothesis 4: Market intermediary develop-ment weakens the negative relationship betweenpolitician turnover and the performance of for-eign subsidiaries.

METHODS

Data and SampleWe examined our hypotheses using the AnnualCensus on Industrial Enterprises (ACIE) Databasecollected by China’s National Bureau of Statistics(NBS). Firms registered within mainland China arerequired by The Statistics Law of the People’s Republicof China to collaborate with the NBS and reportaccurate information annually, making this data-base by far the most comprehensive informationsource for firms operating within China. Thisdatabase covers key ownership and financial infor-mation for all domestic and foreign-invested firmswith annual sales larger than 5 million RMB(approximately US $680,000 according to the2007 exchange rate) from 1998 to 2007. Thisdatabase has also been widely used in prior researchstudying firms with various ownership characteris-tics within the Chinese context, ensuring its highvalidity and reliability (Chang, Chung, & Moon,2013; Chang & Wu, 2014; Xu, Lu, & Gu, 2014;Zhang, Li, Li, & Zhou, 2010).We constructed a panel data set by matching the

yearly ACIE data over time using firms’ uniquenumerical IDs. In cases where firms received a newID due to a merger and acquisition or other majorreconfiguration, we relied on information such asfirm name, address, post-code, industry code, legalrepresentative, phone number, founding year, etc.,in order to conduct supplemental matches. Wefound that only 3.23% of all year-to-year matcheswere completed using information other thannumerical IDs; 12.9% firms experienced at leastone ID change. This procedure significantlyenhanced the consistency of both firm historytracking and the accuracy of firm failure identifica-tion by avoiding contaminating concerns causedby ID changes. We also handled the NBS’s industryclassification changes in 2002 by following Brandt,Van Biesebroeck, and Zhang’s (2012) method forconcording inconsistent industry codes. Weextracted all foreign invested enterprises from the

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matched database using information regardingcapital investment from foreign shareholders.

In estimating the failure hazards of foreignsubsidiaries, we focused on firms that first appearedin the databases as foreign-invested firms, exclud-ing those that received foreign capital investmentshalfway through the study period. We also fol-lowed Xu et al. (2014) by excluding firms estab-lished before 1998 in order to eliminate any left-truncation bias (Allison, 1984; Guo, 1993). Re-estimation using the full sample shows that theseresults are robust to the alternative samples. Weused the full sample of foreign subsidiaries in orderto estimate firm productivities. We also used a1-year lag for all time-variant independent variablesand control variables in order to control for reversecausality. We then estimated the failure hazardmodel using a final sample comprising of 32,665firms with 88,249 firm-year observations; the pro-ductivity model is a sample of 78,537 firms with272,824 observations. These firms were locatedwithin 30 provinces and 310 municipal cities (thefailure sample contained 299 cities) spanning 39two-digit industries as defined by the adaptedcodes.

We captured the local political environment’sfeatures by manually collecting personal and back-ground information for local political leaders at themunicipal level (a total number of 333 regions,including municipality-equivalent regions such asautonomous prefectures), as well as four province-equivalent cities including Beijing, Tianjin, Shang-hai, and Chongqing. We focused on the turnover ofparty secretaries since they are the top politicalfigure in municipal cities. In the Chinese context,mayors usually occupy a lower political positionthan the party secretary within the CPC ranks andmay simultaneously serve as the city’s deputy partysecretary. Our data sources included Xinhua Net(www.xinhuanet.com) and Renminwang (www.people.com.cn) as the official news media of theChinese government and Communist Partyrespectively, as well as news releases and publicannouncements made by local governments. Eco-nomic data for cities were obtained from theregional economic data module of the CSMARdatabase and the China Statistical Yearbook forRegional Economy published annually by the NBS.

Figure 1 captures the distribution of 1029 citysecretaries’ tenures in our sample between 1998and 2007. For example, 200 city secretaries have atenure of 2 years for one city and then may move toother cities, be promoted to higher positions, or

simply disappear from our observation window dueto death or other reasons. As shown in Figure 1, wefound that 71.3% of city secretaries could not finisha 5-year full term. The frequency of tenure peaks at3 years and rapidly declines thereafter. Figure 2provides a map of the average turnover eventsdistributed across 31 provinces between 1998 and2007. According to Figure 2, the number of partysecretary turnover events is on average higher inthe northern part of China as well as in coastalregions.

Variables and Measures

Dependent variableWe employed two indicators measuring the perfor-mance of foreign subsidiaries: failure likelihood andproductivity.1 Following previous literature (Chang& Wu, 2014; Delios & Beamish, 2001; Xu et al.,2014), we identified failure events at time t if: (1)the focal firm no longer exists in the database att + 1, or (2) foreign capital decreases to zero at t + 1,i.e., the firm underwent foreign divestment. In thefirst case, a firm disappears from the database due tobankruptcy, liquidation, or achieving annual salesof less than 5 million RMB for 2 years in a row. TheNBS maintained firms undergoing occasional1-year sales falls lower than 5 million RMBs in thedatabase for continuity reasons (Xu et al., 2014).Disappearance from the database therefore repre-sents either significant performance downfalls,actual organizational demise, or significant salesdownfalls; these are consistent with our theoreticalargument. In the second case, divestment alsoserves as an appropriate indicator of operationdifficulties. For firms that experienced more thanone foreign divestment, we included only the first-time divestment in our analysis.

Figure 1 Distribution of city secretary tenure 1998–2007.

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We also measured the total factor productivity(TFP) of foreign firms. Extant studies estimated TFPusing several alternative approaches. In a detailedreview, Van Biesebroeck (2007) used Monte Carlosimulations to evaluate the sensitivity of five widelyused productivity estimators to various complica-tions.2 The results show that the semi-parametricmethod developed by Olley and Pakes (1996)exhibits remarkable robustness over varied formsof measurement and specification errors. Levin-sohn and Petrin (2003) further modified Olley andPakes’ (1996) method by using intermediate inputsrather than investment as a proxy for unobservedproductivity effects. Their method therefore notonly controls for simultaneity bias and selectionbias but also retains most observations in estima-tion (Liu, Wang, & Wei, 2009). We accordinglyfollowed the procedure proposed by Levinsohn andPetrin (2003), using the STATA ‘‘levpet’’ commanddeveloped by Petrin, Poi and Levinsohn (2004) inorder to estimate a firm’s TFP. We followed priorliterature and took the natural log of estimated TFPas our dependent variable (Liu et al., 2009).

Independent variables and moderatorsOur independent variable is party secretary turnover,which was coded as a dummy variable taking thevalue of 1 if a new politician took the partysecretary position at year t, and 0 otherwise. We

collected the exact dates that each party secretarytook his (her) office. Turnover was coded as occur-ring during the focal year if the party secretary tookhis (her) office earlier than July 1; otherwise thenext year was coded as the turnover year. Ourtheoretical framework also proposed three moder-ating effects. First, internal promotion was a dummyvariable coded as 1 if the party secretary waspromoted from a prior job located within the samecity, and 0 otherwise. Second, we defined a foreignfirm as an international joint venture when theforeign equity shares fall in the range of 5 to 95%,since firms with equity shares outside this range aretypically treated as wholly owned subsidiaries.Third, we measured market intermediary developmentusing an index obtained from the National Eco-nomic Research Institute (NERI) database publishedby Fan, Wang, & Zhu (2006).3 As a dimensionalindex for the marketization index which has beenwidely used in measuring overall regional institu-tional development in past studies (Chang & Wu,2014; Zhang, Marquis, & Qiao, 2016) we find thatmarket intermediary development captures: (1) theavailability of qualified legal and accounting ser-vices, (2) the development and helpfulness ofindustry associations, (3) the degree of protectionfor manufacturers’ legal rights, and (4) the degree ofprotection for intellectual property within the

Figure 2 Average number of turnover events across provinces 1998–2007.

Foreign subsidiary performance Weiguo Zhong et al

Journal of International Business Studies

province. We took the mean-centered value of thiscontinuous variable in our interaction analyses inorder to avoid multicollinearity issues.

Control variablesWe include the following firm-, industry-, and city-level variables that may affect either the survivallikelihood or productivity of foreign firms. At thefirm level, we first controlled for firm age measuredas the number of years since its establishment; firmage is positively associated with local knowledgeand network ties accumulated by foreign firms thataffects performance (Luo & Peng, 1999). Second, wecontrolled for firm size by taking the natural log oftotal assets because firm size is significantly associ-ated with both productivity and failure likelihood(Chang & Wu, 2014). Third, we controlled for priorproductivity in models estimating failure likelihoodbecause firms with higher productivity are morelikely to survive market competition (Chang & Wu,2014). Prior productivity was measured using the1-year lagged value of the log-transformed Levin-sohn-Petrin TFP estimator. This variable was notincluded in models estimating productivity since itmay introduce bias caused by autocorrelation. Weinstead employed a fixed-effect model in produc-tivity models to control for unobserved firmheterogeneity that is stable over time such asmanagement quality and organizational efficiency.Fourth, we controlled for firm liability (in millionRMB) since it affects the level of financial resources,and accordingly, firm performance (Xu et al.,2014). Fifth, we controlled for export sales ratiogiven that exporting activities have been found toaffect foreign firms’ embeddedness within the hosteconomy, and thus exposure to political dynamicsoccurring within China (Zhang, Hitt, & Cui, 2007).Finally, we controlled for country origins of foreignownership using a dummy variable identifyingfirms with parents originating from Hong Kong,Macao, or Taiwan (HMT). HMT parent is coded as 1when investors from HMT regions hold greaterownership shares than other foreign investors, and0 otherwise. This is controlled because ethnicChinese investors may have advantages in adaptingto the local market over non-ethnic Chineseinvestors, affecting foreign firm performance(Chang et al., 2013).

We controlled for two industry variables. IndustryROA and industry sales growth are both controlledbecause they reflect the overall industrial environ-mental munificence, which is closely related to

firms’ survival likelihood and productivity (Xuet al., 2014). Industry ROA is measured as theaverage value of net income over total assets withina three-digit industry. Industry sales growth wasmeasured using the following equation:

Industry Sales Growthit ¼Industry Salesit � Industry Salesit�1

� �=

Industry Salesit�1:

Finally, we controlled for the following variablesat the city level. First, we controlled for mayorturnover, which is a potential alternative source ofpolitical uncertainty that may affect firm perfor-mance. Second, we controlled for specific turnoverevent scenarios using a variable identifying prede-cessor promotion. This was coded as 1 if the prede-cessor (i.e., the departing official) was promoted tohigher-level positions, and 0 otherwise. This wascontrolled since the incoming politician may havehigher pressure to perform better than the prede-cessor, which may increase policy uncertainty.Third, we controlled for three variables capturingthe regional economic environment that may becorrelated with turnover events and firm perfor-mance. GDP growth rate is controlled since it is avital indicator of local economic development thatimpacts the firm operations as well as the promo-tion likelihood of local political leaders (Li & Zhou,2005). The foreign subsidiary entry rate in each city iscontrolled because politician turnover may intro-duce new foreign firms and crowd-out old ones.The variable is measured as the ratio of new foreignentrants to the total number of foreign firms withinthe same city.4 Fourth, we controlled for theincoming political leader’s characteristics since thismay influence policy orientations and further affectfirm performance. Such characteristics include: (1)leader gender, which is coded to 1 if the focalpolitician is a male, and 0 for a female; (2) leadereducation, which is coded as 5 for a Doctorate, 4 fora Master’s degree, 3 for a Bachelor degree, 2 for highschool, and 1 for less than a high school education;and (3) leader experience measured as the totalnumber of years the politician served as the topleader of either the Communist Party or govern-ment at any authority level. Education and expe-rience serve as a measure for the focal politician’scapability in leading the government, which maybe correlated with policy changes and firmperformance.

Foreign subsidiary performance Weiguo Zhong et al

Journal of International Business Studies

We also included city, industry, and year dum-mies in order to control for time-invariant influ-ences that cannot be explicitly measured. Wewinsorized industry sales growth and GDP growthrate at 1% in order to avoid biases caused by outlierissues.

Estimation StrategyWe modeled the hazard rate of failure for foreignfirms by employing the discrete-time logit model ofevent history analyses (Allison, 1984). This modelwas chosen over other continuous-time survivalmodels since we employed a wide yearly panel datawith thousands of firms failing within the sameyear creating a serious estimation bias of tied failure(Allison, 1984; Arora & Nandkumar, 2012). Thetime-discrete model uses the logit specification andtreats each yearly panel data set as a separateobservation. In our sample, a firm received ‘‘treat-ment’’ and entered the risk set of potential failuresince its first appearance in the ACIE database, i.e.,its first time reaching an annual sale of 5 millionRMB. Before this time, it was counted as a firm withsmall scale, and accordingly no significant compet-itive power. We followed Allison (1984) and tookthe number of years since firm entrance as oursurvival analysis time. This entrance time may notcoincide with a firm’s founding year since youngfirms may not be able to generate considerable andstable sales revenue during their first several yearsof establishment. The analysis time also differsfrom historical time since firms in our sampleentered the risk set during varied historical years.Year dummies of analysis time were included ascontrol as a standard specification for the time-discrete model (Allison, 1984). We also controlledfor the age effect by adding firm age as controlvariable, and for the historical time effect by addingthe dummy variable POST-WTO as a control(Cleves, Gould, Gutierrez, & Marchenko, 2010).

Another estimation concern is the left-censoringproblem introduced by including objects that enterthe risk set for an unknown length of time. Thiscreates an over-representative sample for firms thatexhibit a higher likelihood of survival (Guo, 1993).In our data firms established before 1998 are objectswith an unknown time for entering the risk setsince we could not identify when they first reachedthe census scope. We accordingly removed all firmsestablished before 1998 as described in the sam-pling section. Our empirical model can be summa-rized as follows:

logPitþ1

1�Pitþ1¼ a0þa1Turnoverit þa2Turnoverit

� Internal Promotionit

þ a3Turnoverit � IJVit þa4Turnoverit

�Market Intermediary Developmentitþ a5Moderators and Controlsit þ eit :

We employed fixed-effect regressions to estimatethe productivity of foreign firms. We followedWooldridge (2002) and used the following proce-dures to determine the use of a fixed-effect model.We first performed Breusch–Pagan Lagrange multi-plier test to check the existence of unobservedindividual effects within our panel data. Rejectionfor the null hypotheses of this test suggested thatunobserved individual effects indeed exist in ourdata. Therefore, panel data models were chosenover pooled ordinary least-square models. Second,we conducted Hausman test to examine whetherthe unobserved individual effects are correlatedwith observable variables in the model, determin-ing our use of either fixed- or random-effectsmodels. Results from the test revealed that thereexists a significant correlation between unobservedindividual effects and observable variables; a fixed-effect model is therefore more appropriate for ourdata. We estimated the model using the followingequation:

ln TFPð Þitþ1 ¼ b0 þ b1Turnoverit þ b2Turnoverit

� Internal Promotionit þ b3Turnoverit

� IJVit þ b4Turnoverit

�Market Intermediary Developmentit

þ b5Moderators and Controlsit þ eit :

RESULTSTables 1 and 2 show the descriptive statistics andcorrelation matrix. We calculated variance inflationfactors (VIFs) for all estimated models that rangedfrom 4.78 to 6.89, well below the acceptable level of10 (Neter, Wasserman, & Kutner, 1985). Table 3reports results of the discrete-time logit analysis.Model 1 in Table 3 is a baseline model with onlycontrol variables. In Model 2, we added partysecretary turnover in order to test Hypothesis 1. Theresults show that party secretary turnover has apositive and significant (b = 0.259, p = 0.000) effecton failure probabilities of foreign firms, lendingstrong support for H1. The coefficient of 0.259 in

Foreign subsidiary performance Weiguo Zhong et al

Journal of International Business Studies

Table

1D

esc

rip

tive

stati

stic

san

dco

rrela

tion

s–

failu

rem

od

el

Vari

ab

les

Mean

SD

Min

Max

12

34

56

78

9

1Fa

ilure

(t)

0.0

63

0.2

43

01

2Part

yse

creta

rytu

rnove

r(t

-1)

0.2

10

0.4

07

01

0.0

17

3In

tern

alp

rom

oti

on

(t-

1)

0.2

38

0.4

26

01

0.0

29

-0.0

72

4Jo

int

ven

ture

(t-

1)

0.5

84

0.4

93

01

0.0

07

0.0

18

-0.0

46

5M

ark

et

inte

rmed

iary

deve

lop

men

t(t

-1)

0.3

13

0.4

64

01

-0.0

79

-0.0

94

0.1

35

-0.1

16

6Fi

rmag

e(t

-1)

4.1

74

1.9

11

19

-0.0

42

-0.0

29

0.0

13

-0.0

12

0.2

32

7Fi

rmsi

ze(t

-1)

10.1

54

1.3

80

4.1

43

17.4

25

-0.0

65

-0.0

13

0.0

16

0.0

02

0.0

46

0.1

49

8Pri

or

pro

duct

ivit

y(t

-1)

6.1

52

1.1

46

-4.0

27

14.1

57

-0.1

04

0.0

07

0.0

03

-0.0

06

0.0

78

0.1

08

0.5

14

9Fi

rmlia

bili

ty(t

-1)

0.0

06

0.0

34

02.7

11

0.0

18

0.0

35

-0.0

17

-0.0

59

0.0

51

-0.0

02

-0.0

69

-0.0

54

10

Exp

ort

rati

o(t

-1)

0.4

52

0.4

43

01

-0.0

21

0.0

04

0.0

03

0.0

01

0.0

24

0.0

25

0.2

50

0.3

75

-0.0

36

11

HM

Tp

are

nt

(t-

1)

0.4

58

0.4

98

01

-0.0

18

-0.0

02

-0.0

14

-0.1

00

0.0

63

0.0

54

-0.0

31

-0.1

17

-0.0

26

12

Ind

ust

ryRO

A(t

-1)

0.0

68

0.0

52

-0.0

03

0.4

46

-0.0

19

0.0

18

-0.0

26

-0.0

16

0.0

62

0.0

69

0.0

17

-0.0

08

-0.0

15

13

Ind

ust

rysa

les

gro

wth

(t-

1)

0.2

78

0.1

53

-0.0

62

0.8

14

-0.0

18

-0.0

38

-0.0

38

-0.0

28

0.0

36

0.0

26

0.0

15

0.0

36

-0.0

28

14

Mayor

turn

ove

r(t

-1)

8.0

86

2.7

76

1.1

50

13.8

70

0.0

07

-0.1

04

0.1

12

-0.0

89

0.1

57

0.0

74

0.0

21

0.0

42

0.0

18

15

Pre

dece

ssor

pro

moti

on

(t-

1)

0.3

81

0.4

86

01

0.0

29

-0.0

94

-0.1

01

0.0

02

-0.2

33

-0.1

72

-0.1

00

-0.0

76

0.0

02

16

Cit

yG

DP

gro

wth

(t-

1)

0.1

80

0.1

10

-0.1

70

0.8

88

0.0

03

0.3

68

0.0

43

0.0

22

-0.1

22

-0.0

53

-0.0

21

-0.0

22

0.0

26

17

Fore

ign

sub

sid

iary

en

try

rate

(t-

1)

0.1

75

0.1

26

01

-0.0

11

-0.0

48

-0.0

09

-0.0

36

0.2

49

0.0

34

-0.0

04

-0.0

56

0.0

21

18

Lead

er

gen

der

(t-

1)

0.9

73

0.1

62

01

-0.0

20

0.0

61

0.1

83

0.0

06

0.0

65

0.0

07

0.0

10

0.0

14

0.0

08

19

Lead

er

ed

uca

tion

(t-

1)

3.5

24

0.9

84

15

-0.0

19

0.1

45

-0.3

37

0.0

50

-0.2

28

0.0

13

0.0

34

0.0

30

-0.0

14

20

Lead

er

exp

eri

en

ce(t

-1)

14.0

01

7.9

92

035

0.0

11

-0.0

26

0.3

29

-0.0

76

-0.0

09

0.0

23

0.0

03

-0.0

70

-0.0

26

Vari

ab

les

10

11

12

13

14

15

16

17

18

19

11

HM

Tp

are

nt

(t-

1)

-0.0

07

12

Ind

ust

ryRO

A(t

-1)

-0.0

03

0.0

07

13

Ind

ust

rysa

les

gro

wth

(t-

1)

0.0

13

-0.0

26

0.0

15

14

Mayor

turn

ove

r(t

-1)

0.0

15

0.0

82

0.0

29

0.0

98

15

Pre

dece

ssor

pro

moti

on

(t-

1)

-0.0

24

0.0

70

-0.1

43

0.3

20

0.0

92

16

Cit

yG

DP

gro

wth

(t-

1)

-0.0

07

0.0

15

0.0

09

-0.0

21

-0.0

55

-0.0

06

17

Fore

ign

sub

sid

iary

en

try

rate

(t-

1)

-0.0

11

0.0

07

0.0

13

0.0

55

-0.1

62

0.0

25

-0.0

13

18

Lead

er

ed

uca

tion

(t-

1)

-0.0

05

-0.0

64

0.0

22

-0.0

56

0.0

07

-0.1

88

0.0

16

-0.0

37

19

Lead

er

gen

der

(t-

1)

0.0

02

-0.0

24

0.0

27

0.0

67

-0.0

49

0.1

03

0.0

78

-0.1

14

0.0

08

20

Lead

er

exp

eri

en

ce(t

-1)

-0.0

16

0.0

47

0.0

16

-0.0

42

0.0

50

-0.0

66

0.0

85

0.0

61

0.1

57

-0.2

14

Sam

ple

size

=88,2

49,

ab

solu

teva

lue

of

corr

ela

tion

sla

rger

than

0.0

7are

sig

nifi

can

tat

0.0

5le

vel(t

wo-t

aile

dte

st).

Foreign subsidiary performance Weiguo Zhong et al

Journal of International Business Studies

Table

2D

esc

rip

tive

stati

stic

san

dco

rrela

tion

s–

pro

duct

ivit

ym

od

el

Vari

ab

les

Mean

SD

Min

Max

12

34

56

78

9

1ln

TFP

(t)

6.2

12

1.1

89

-4.0

27

14.1

57

2Part

yse

creta

rytu

rnove

r(t

-1)

0.2

45

0.4

30

01

-0.0

19

3In

tern

alp

rom

oti

on

(t-

1)

0.6

29

0.4

83

01

0.0

02

-0.0

43

4Jo

int

ven

ture

(t-

1)

0.3

78

0.4

85

01

-0.0

10

-0.0

11

-0.0

04

5M

ark

et

inte

rmed

iary

deve

lop

men

t

(t-

1)

7.0

48

2.9

56

1.1

50

13.8

70

0.0

80

-0.0

53

0.1

09

-0.1

32

6Fi

rmag

e(t

-1)

8.0

72

5.9

15

176

0.0

60

0.0

17

0.0

03

0.0

35

-0.0

08

7Fi

rmsi

ze(t

-1)

10.3

66

1.4

22

4.1

43

18.1

69

0.5

52

0.0

02

0.0

17

0.0

26

0.0

27

0.1

81

8Fi

rmlia

bili

ty(t

-1)

0.0

07

0.0

43

-0.0

21

5.2

42

0.2

68

-0.0

01

0.0

05

0.0

15

-0.0

04

0.0

87

0.3

90

9Exp

ort

rati

o(t

-1)

0.4

43

0.4

40

01

-0.0

58

0.0

21

-0.0

11

-0.1

35

0.0

90

-0.0

09

-0.1

49

-0.0

50

10

HM

Tp

are

nt

(t-

1)

0.4

71

0.4

99

01

-0.1

00

0.0

33

0.0

04

-0.0

05

0.0

46

0.0

34

-0.0

75

-0.0

36

0.0

38

11

Ind

ust

ryRO

A(t

-1)

0.0

61

0.0

52

-0.0

03

0.4

46

0.0

26

0.0

17

-0.0

44

-0.0

37

0.1

48

-0.0

13

-0.0

34

-0.0

05

0.0

32

12

Ind

ust

rysa

les

gro

wth

(t-

1)

0.2

40

0.1

54

-0.0

62

0.8

14

0.0

72

-0.0

22

-0.0

51

-0.0

52

0.2

23

-0.0

45

0.0

28

0.0

11

-0.0

17

13

Mayor

turn

ove

r(t

-1)

0.1

54

0.0

75

-0.1

70

0.8

88

-0.0

19

0.3

60

0.0

40

-0.0

05

-0.0

38

0.0

18

-0.0

13

-0.0

08

0.0

31

14

Pre

dece

ssor

pro

moti

on

(t-

1)

0.1

65

0.1

13

01

0.0

34

-0.0

20

-0.0

16

-0.0

58

0.3

07

-0.0

15

-0.0

30

-0.0

09

0.0

32

15

Cit

yG

DP

gro

wth

(t-

1)

0.2

72

0.4

45

01

0.0

88

-0.0

61

0.0

42

-0.0

85

0.3

29

-0.0

11

0.0

46

0.0

16

0.0

47

16

Fore

ign

sub

sid

iary

en

try

rate

(t-

1)

0.3

19

0.4

66

01

-0.0

49

-0.1

00

-0.0

67

-0.0

18

-0.1

08

-0.0

79

-0.0

58

-0.0

17

0.0

68

17

Lead

er

gen

der

(t-

1)

0.9

68

0.1

76

01

0.0

00

0.0

15

0.2

25

0.0

29

0.0

06

-0.0

25

-0.0

11

-0.0

05

-0.0

78

18

Lead

er

ed

uca

tion

(t-

1)

3.3

75

0.9

71

15

0.0

44

0.1

78

-0.2

77

-0.0

01

-0.0

64

-0.0

32

0.0

03

0.0

08

-0.0

04

19

Lead

er

exp

eri

en

ce(t

-1)

13.6

42

7.4

25

035

0.0

09

-0.0

09

0.3

32

-0.0

56

0.0

92

-0.0

20

-0.0

30

-0.0

15

0.0

43

Vari

ab

les

10

11

12

13

14

15

16

17

18

11

Ind

ust

ryRO

A(t

-1)

-0.0

16

12

Ind

ust

rysa

les

gro

wth

(t-

1)

-0.0

37

0.0

95

13

Mayor

turn

ove

r(t

-1)

0.0

20

0.0

25

-0.0

09

14

Pre

dece

ssor

pro

moti

on

(t-

1)

0.0

28

0.0

56

0.1

18

0.0

18

15

Cit

yG

DP

gro

wth

(t-

1)

-0.0

12

0.1

02

0.2

68

-0.0

03

-0.0

05

16

Fore

ign

sub

sid

iary

en

try

rate

(t-

1)

0.0

09

-0.0

93

0.2

67

-0.0

32

0.0

66

0.1

60

17

Lead

er

gen

der

(t-

1)

-0.0

12

0.0

06

-0.0

64

-0.0

13

-0.1

06

-0.0

55

-0.1

95

18

Lead

er

ed

uca

tion

(t-

1)

0.0

11

0.0

59

0.1

01

0.0

93

0.0

03

0.0

64

0.0

78

-0.0

01

19

Lead

er

exp

eri

en

ce(t

-1)

0.0

04

0.0

10

-0.0

14

0.0

53

0.1

04

0.1

13

-0.0

40

0.1

76

-0.1

75

Sam

ple

size

=272,8

24,

ab

solu

teva

lue

of

corr

ela

tion

sla

rger

than

0.0

3are

sig

nifi

can

tat

0.0

5le

vel(t

wo-t

aile

dte

st).

Foreign subsidiary performance Weiguo Zhong et al

Journal of International Business Studies

our model represents the log odds ratio for politi-cian turnover. By converting this number into theprobability of firm failure likelihood (Ellis, 2010;Williams, 2012), we find that foreign firms locatedwithin a city undergoing politician turnover are

1.28 times more likely to fail than firms located incities without a turnover event.Models 3–5 report results of moderating effects.

In Model 3, we tested the moderating effect ofinternal promotion by adding the interaction termof party secretary turnover 9 internal promotion, yield-ing a negative and significant coefficient(b = -0.158, p = 0.035). This result provides sup-port for H2. Model 4 tests the moderating effect ofinternational joint ventures. The coefficient was neg-ative but fails to be significant, providing nosupport for H3. Model 5 tests the moderating effectof market intermediary development, where we founda negative and marginally significant coefficient forthe interaction term (b = -0.025, p = 0.073). Thisresult shows that regions with higher marketintermediary development attenuate the effect ofpolitical turnover on failure hazards of foreignfirms, thus providing support for H4. Model 6reports estimates of the full model. The resultsremain consistent, and the moderating effect ofinternational joint venture becomes marginally sig-nificant (p = 0.072) in the full model.Since the logit model is non-linear, the marginal

effect of each individual coefficient depends on thevalue of other covariates and the interpretation ofinteraction terms requires special attention (Ai &Norton, 2003; Hoetker, 2007). We used STATA’sinteff command to plot the true interaction effectsand examine the z-statistics. The interaction termsare all in the negative area, and the z-statistics arealso distributed in the negative area, confirmingour analyses. We also used STATA’s margins andmarginsplot commands to plot the estimates ofthese moderating relationships in Figure 3. Thesecommand estimates predicted failure likelihood ateach interacted variable value while holding allother variables at the mean value. Moreover, theinterpretation of interaction effects between cate-gorical variables (e.g., turnover and internal pro-motion) needs further elaborations (Jaccard, 2001).As shown in Figure 3a, the difference in the prob-ability of failure between turnover and non-turn-over becomes much larger when the politician isexternally promoted than that of internal promo-tion, indicating that internal promotion mitigatesthe effects of turnover on the probability of firmfailure. H2 is further supported. Similarly, accord-ing to Figure 3b, for wholly owned subsidiaries thedifference in the probability of failure betweenturnover and non-turnover is positive and slightlylarger than that of international joint ventures.Finally, Figure 3c shows that development of

Figure 3 Interaction plots of firm failure hazard.

Foreign subsidiary performance Weiguo Zhong et al

Journal of International Business Studies

Table

3Est

imati

on

of

fore

ign

-firm

failu

relik

elih

ood

Vari

ab

les

Mod

el1

Mod

el2

Mod

el3

Mod

el4

Mod

el5

Mod

el6

Part

yse

creta

rytu

rnove

r0.2

59**

*0.3

45**

*0.2

94**

*0.2

32**

*0.3

59**

*

(0.0

40)

(0.0

57)

(0.0

46)

(0.0

42)

(0.0

62)

Part

yse

creta

rytu

rnove

r9

inte

rnalp

rom

oti

on

-0.1

58*

-0.1

59*

(0.0

75)

(0.0

75)

Part

yse

creta

rytu

rnove

r9

join

tve

ntu

re-

0.1

06

-0.1

27

+

(0.0

74)

(0.0

75)

Part

yse

creta

rytu

rnove

r9

mark

et

inte

rmed

iary

deve

lop

men

t-

0.0

25

+-

0.0

27

+

(0.0

14)

(0.0

15)

Inte

rnalp

rom

oti

on

0.0

61

0.0

85

0.1

43

+0.0

86

0.0

76

0.1

35

+

(0.0

76)

(0.0

74)

(0.0

80)

(0.0

74)

(0.0

75)

(0.0

80)

Join

tve

ntu

re0.0

26

0.0

24

0.0

24

0.0

50

0.0

25

0.0

56

(0.0

35)

(0.0

35)

(0.0

35)

(0.0

39)

(0.0

35)

(0.0

39)

Mark

et

inte

rmed

iary

deve

lop

men

t-

0.3

23**

*-

0.3

21**

*-

0.3

19**

*-

0.3

21**

*-

0.3

17**

*-

0.3

14**

*

(0.0

13)

(0.0

13)

(0.0

13)

(0.0

13)

(0.0

13)

(0.0

13)

Firm

ag

e0.0

10

0.0

10

0.0

10

0.0

10

0.0

10

0.0

10

(0.0

11)

(0.0

11)

(0.0

11)

(0.0

11)

(0.0

11)

(0.0

11)

Pri

or

pro

duct

ivit

y-

0.0

64**

*-

0.0

63**

*-

0.0

63**

*-

0.0

63**

*-

0.0

63**

*-

0.0

63**

*

(0.0

16)

(0.0

16)

(0.0

16)

(0.0

16)

(0.0

16)

(0.0

16)

Firm

size

-0.3

51**

*-

0.3

52**

*-

0.3

52**

*-

0.3

52**

*-

0.3

51**

*-

0.3

52**

*

(0.0

15)

(0.0

15)

(0.0

15)

(0.0

15)

(0.0

15)

(0.0

15)

HM

Tp

are

nt

0.0

52

0.0

51

0.0

51

0.0

50

0.0

51

0.0

51

(0.0

32)

(0.0

32)

(0.0

32)

(0.0

32)

(0.0

32)

(0.0

32)

Liab

ility

1.6

77**

*1.6

82**

*1.6

78**

*1.6

80**

*1.6

80**

*1.6

74**

*

(0.3

21)

(0.3

28)

(0.3

28)

(0.3

29)

(0.3

26)

(0.3

27)

Exp

ort

rati

o-

0.3

13**

*-

0.3

12**

*-

0.3

12**

*-

0.3

12**

*-

0.3

12**

*-

0.3

11**

*

(0.0

37)

(0.0

37)

(0.0

37)

(0.0

37)

(0.0

37)

(0.0

37)

Ind

ust

ryRO

A-

0.6

80*

-0.6

98*

-0.6

87*

-0.6

99*

-0.6

84*

-0.6

73*

(0.3

34)

(0.3

31)

(0.3

31)

(0.3

31)

(0.3

32)

(0.3

32)

Ind

ust

rysa

les

gro

wth

-0.3

28**

-0.3

29**

-0.3

31**

-0.3

29**

-0.3

21**

-0.3

21**

(0.1

13)

(0.1

13)

(0.1

13)

(0.1

13)

(0.1

13)

(0.1

13)

Cit

yG

DP

gro

wth

1.1

22**

*1.2

08**

*1.2

40**

*1.2

18**

*1.2

36**

*1.2

84**

*

(0.2

02)

(0.2

04)

(0.2

05)

(0.2

04)

(0.2

05)

(0.2

07)

Fore

ign

sub

sid

iary

en

try

rate

-0.4

58**

-0.3

62*

-0.3

44*

-0.3

53*

-0.3

54*

-0.3

23*

(0.1

62)

(0.1

62)

(0.1

63)

(0.1

63)

(0.1

63)

(0.1

64)

Mayor

turn

ove

r-

0.0

92*

-0.1

73**

*-

0.1

59**

*-

0.1

73**

*-

0.1

62**

*-

0.1

46**

*

(0.0

37)

(0.0

40)

(0.0

41)

(0.0

40)

(0.0

40)

(0.0

41)

Pre

dece

ssor

pro

moti

on

0.3

01**

*0.3

01**

*0.2

95**

*0.3

03**

*0.3

01**

*0.2

98**

*

(0.0

51)

(0.0

51)

(0.0

51)

(0.0

51)

(0.0

51)

(0.0

51)

Lead

er

gen

der

-0.7

98**

*-

0.9

22**

*-

0.9

51**

*-

0.9

26**

*-

0.8

90**

*-

0.9

23**

*

(0.1

43)

(0.1

43)

(0.1

44)

(0.1

43)

(0.1

41)

(0.1

43)

Lead

er

ed

uca

tion

0.0

41

0.0

21

0.0

20

0.0

21

0.0

22

0.0

21

(0.0

26)

(0.0

26)

(0.0

26)

(0.0

26)

(0.0

26)

(0.0

26)

Foreign subsidiary performance Weiguo Zhong et al

Journal of International Business Studies

market intermediaries significantly alleviates thepositive relationship between political turnoverand failure likelihood of foreign firms.Table 4 reports the productivity results. Model 1

contains only control variables, and Model 2introduces the party secretary turnover to test forH1. The negative and significant coefficient(b = - 0.019, p = 0.000) suggests that political turn-overs exert negative influences on foreign firmproductivity, providing strong support for H1. Thecoefficient indicates that the total factor produc-tivities of foreign firms located within a cityundergoing politician turnover are 0.98 times lessthan that of foreign firms located in cities without aturnover event. Model 3 tests the moderatingeffects of internal promotion. The coefficient isnegative and not significant, rejecting H2. In Model4, the interactions of international joint venture withparty secretary turnover is positive and significant(b = 0.016, p = 0.017). As shown in Figure 4, forwholly owned subsidiaries, the difference in theprobability of failure between turnover and non-turnover is negative and larger than that of inter-national joint ventures, providing support for H3.Finally, Model 5 tests for the moderating effect of

market intermediary development on the relation-ship between politician turnover and foreign firmproductivity.5 The estimate for the interaction termis positive and not significant, rejecting H4. Model6 presents the full model, and the results remainconsistent.

Supplementary Analyses

Test for mechanism of policy uncertaintyOur theory predicts that the turnover of localpolitical leader increases policy uncertainty, whichfurther exerts negative effects on the performanceof foreign firms operating within the region. Weverify this proposed mechanism by using textmining techniques in order to measure annualpolicy uncertainty for each municipal city. Specif-ically, we adopted a measure of policy uncertaintyfollowing Baker, Bloom, & Davis (2016), whomeasure policy uncertainty by content analysis ofnewspapers. In our context, we used governmentannual reports in order to measure our key mech-anisms. Like annual reports issued by public com-panies, the governments’ annual report is regardedas the most important document capturing the keypolicy dimensions within a certain year for acertain municipal city. These documents are typi-cally issued in January of each year: theyT

able

3(Continued

)

Vari

ab

les

Mod

el1

Mod

el2

Mod

el3

Mod

el4

Mod

el5

Mod

el6

Lead

er

exp

eri

en

ce0.0

15**

*0.0

13**

*0.0

13**

*0.0

13**

*0.0

13**

*0.0

13**

*

(0.0

04)

(0.0

04)

(0.0

04)

(0.0

04)

(0.0

04)

(0.0

04)

Post

-WTO

0.7

58**

*0.7

50**

*0.7

46**

*0.7

49**

*0.7

53**

*0.7

47**

*

(0.0

74)

(0.0

73)

(0.0

74)

(0.0

73)

(0.0

73)

(0.0

73)

Year

dum

mie

sYes

Yes

Yes

Yes

Yes

Yes

Ind

ust

ryd

um

mie

sYes

Yes

Yes

Yes

Yes

Yes

Cit

yd

um

mie

sYes

Yes

Yes

Yes

Yes

Yes

Con

stan

t5.2

86**

*5.3

88**

*5.3

29**

*5.3

84**

*2.7

27**

*2.6

74**

*

(0.6

52)

(0.6

46)

(0.6

47)

(0.6

47)

(0.6

45)

(0.6

46)

Ob

serv

ati

on

s88,2

49

88,2

49

88,2

49

88,2

49

88,2

49

88,2

49

Num

ber

of

firm

s32,6

65

32,6

65

32,6

65

32,6

65

32,6

65

32,6

65

Log

pse

ud

o-lik

elih

ood

-18,8

46.0

67

-18,8

25.2

44

-18,8

23.0

17

-18,8

24.2

11

-18,8

23.8

94

-18,8

20.3

07

Rob

ust

stan

dard

err

ors

inp

are

nth

ese

s.+

Sig

nifi

can

tat

10%

;*s

ign

ifica

nt

at

5%

;**

sig

nifi

can

tat

1%

,**

*sig

nifi

can

tat

0.1

%.

Foreign subsidiary performance Weiguo Zhong et al

Journal of International Business Studies

summarize development and achievements for thelast year as well as laying out focus, direction, andstrategy for the next year’s policy making.

Specifically, we took four steps in order to deriveour variable of interest, policy uncertainty. First, weuse the paper by Baker et al. (2016) to develop adictionary of keywords capturing the degree ofpolicy uncertainty reflected in the annual report.We used change-related keywords as a proxy forpolicy uncertainty since we found that uncertainty-related keywords are rarely used in governmentdocuments. We followed a three-step procedure indeveloping this dictionary of keywords. First, weconducted text segmentation using the jiebaRpackage operating in R software. The package wasdesigned for Chinese text segmentation and is ableto extract all valid words used in the naturallanguage of the annual report. Second, we exam-ined all extracted words and kept those that bearthe meaning of ‘‘change’’ in Chinese such asreform, adjust, reorganize, reconstruct, and modify.Third, since we found that these words can captureboth changes in the external environment andpolicy making, we used two raters to independentlyselect those words that were mostly related tochanges in government policy making. They agreedon 71% of the cases, and reached consensusthrough discussion for the remaining words. Thefinal dictionary of keywords contained 20 keywordscapturing changes, trials, or reforms in local policymaking.6 Finally, we used R software to count thetotal frequency of these keywords occurring in theannual government report as a measure of policyuncertainty.

We estimated a mediation model using policyuncertainty as the mediator. We still took 1-yearlagged value for all independent variables, and tookvalues of the policy uncertainty within the sameyear along with our dependent variables. We werethen able to establish a lag of time from dependentvariables, mediators to independent variables toensure causal links. This is because political turn-over was only coded if it occurred earlier than July;policy uncertainty is measured in January of eachyear, and financial information used in calculatingfirm performance is updated at the end of eachyear. Tables 5 and 6 report the results of ourmediation analysis. Missing values of policy uncer-tainty caused a slightly reduced sample size com-pared with the main analysis. In the first step, were-estimated the effect of political turnover on firmperformance, and the results remain consistentdespite change of samples. In the second step, we

performed city-level analysis in order to examinethe effect of political turnover on policy uncer-tainty. We used a city-level fixed-effect model. Asshown in the tables, party secretary turnover exerts asignificantly positive effect on policy uncertainty. Wefurther found that effect of party secretary turnoveron firm performance (both failure hazards andproductivity) shrinks after adding policy uncer-tainty into the model. A Sobel test for the media-tion effects also yielded marginally significantresults (p value ranges from 0.042 to 0.068). Theseresults confirm that policy uncertainty exists as animportant mechanism linking political turnoverand foreign-firm performance.

Alternative identification strategy: unexpectedturnoversThe success of our empirical analysis also largelydepends on the extent to which political turnoversare indeed exogenous. It may be reasonable tospeculate that politician turnover and subsidiaryperformance downfalls are simultaneously causedby the same factor such as an unfavorable macro-economic environment. To further address thisissue, following Chen, Crossland, & Huang (2016),we conducted a difference-in-differences (DiD)analysis (Donald & Lang, 2007) on a sub-sampleof firms, using unexpected turnover cases caused bysudden death or sudden removals from officecaused by corruption investigations. We identified21 cases during our research window and employedthese cities as treatment cases. For each treatmentcity, we find a matching city with a similar GDPgrowth rate, FDI inflow, and located in a provincewith similar institutional development (measuredin marketization index) in the year before unex-pected turnovers. We conducted one-to-one match-ing using the STATA’s cem command and analyze asubsample based on matched pair of cities. Wefocus on the period of observations between t - 1to t + 1 (t is the event year), and conduct adifference-in-difference analysis using this sample.Specifically, we coded two dummy variables: Shock,equals 1 for cities experiencing unexpected turn-over, and 0 otherwise; After, equals 1 for year t andt + 1, and 0 for year t - 1. We then re-estimated themodels for both firm failure and productivity usingthese two variables and their interaction terms.Since we required the variation in the turnoverevents at the city level in order to identify the DiDeffect, we can no longer include city dummies; wecontrolled for province dummies instead. Based onthe same logic, we estimated an OLS model with a

Foreign subsidiary performance Weiguo Zhong et al

Journal of International Business Studies

Table 4 Estimation of foreign-firm productivity

Fixed-effect model Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Party secretary turnover - 0.019*** - 0.016** - 0.025*** - 0.019*** - 0.022***

(0.004) (0.005) (0.004) (0.004) (0.006)

Party secretary turnover 9 internal promotion - 0.006 - 0.006

(0.007) (0.007)

Party secretary turnover 9 joint venture 0.016* 0.017*

(0.007) (0.007)

Party secretary turnover 9 market intermediary

development

0.001 0.001

(0.001) (0.001)

Internal promotion 0.017* 0.016* 0.018* 0.016* 0.016* 0.019*

(0.007) (0.007) (0.008) (0.007) (0.007) (0.008)

Joint venture - 0.021** - 0.021*** - 0.021*** - 0.025*** - 0.021*** - 0.025***

(0.006) (0.006) (0.006) (0.007) (0.006) (0.007)

Market intermediary development - 0.014*** - 0.013*** - 0.013*** - 0.013*** - 0.014*** - 0.013***

(0.003) (0.003) (0.003) (0.003) (0.003) (0.003)

Firm age - 0.001+ - 0.001+ - 0.001+ - 0.001+ - 0.001+ - 0.001+

(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)

Firm size 0.227*** 0.226*** 0.226*** 0.226*** 0.226*** 0.226***

(0.005) (0.005) (0.005) (0.005) (0.005) (0.005)

HMT parent - 0.014* - 0.014* - 0.014* - 0.014* - 0.014* - 0.014*

(0.006) (0.006) (0.006) (0.006) (0.006) (0.006)

Liability 0.411*** 0.411*** 0.411*** 0.411*** 0.411*** 0.411***

(0.099) (0.099) (0.099) (0.099) (0.099) (0.099)

Export ratio 0.006 0.006 0.006 0.006 0.006 0.006

(0.008) (0.008) (0.008) (0.008) (0.008) (0.008)

Industry ROA 0.021 0.020 0.020 0.020 0.020 0.020

(0.030) (0.030) (0.030) (0.030) (0.030) (0.030)

Industry sales growth 0.060*** 0.060*** 0.060*** 0.060*** 0.060*** 0.060***

(0.013) (0.013) (0.013) (0.013) (0.013) (0.013)

City GDP growth 0.220*** 0.208*** 0.210*** 0.208*** 0.207*** 0.207***

(0.025) (0.025) (0.025) (0.025) (0.025) (0.025)

Foreign subsidiary entry rate - 0.103*** - 0.108*** - 0.107*** - 0.110*** - 0.108*** - 0.108***

(0.022) (0.022) (0.022) (0.022) (0.022) (0.022)

Mayor turnover 0.012*** 0.017*** 0.018*** 0.017*** 0.017*** 0.017***

(0.003) (0.003) (0.003) (0.003) (0.003) (0.003)

Predecessor promotion 0.053*** 0.053*** 0.053*** 0.053*** 0.053*** 0.052***

(0.006) (0.006) (0.006) (0.006) (0.006) (0.006)

Leader gender 0.030+ 0.034* 0.033* 0.033* 0.034* 0.032*

(0.015) (0.015) (0.015) (0.015) (0.015) (0.015)

Leader education 0.008** 0.010*** 0.010*** 0.010*** 0.010*** 0.010***

(0.003) (0.003) (0.003) (0.003) (0.003) (0.003)

Leader experience 0.000 0.000 0.000 0.000 0.000 0.000

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Year dummies Yes Yes Yes Yes Yes Yes

Industry dummies Yes Yes Yes Yes Yes Yes

City dummies Yes Yes Yes Yes Yes Yes

Constant - 4.575*** - 4.575*** - 4.477*** - 4.479*** - 4.191*** 1.538***

(0.266) (0.263) (0.264) (0.266) (0.263) (0.106)

Observations 272,824 272,824 272,824 272,824 272,824 272,824

Number of firms 78,537 78,537 78,537 78,537 78,537 78,537

R-Square 0.073 0.074 0.074 0.074 0.074 0.074

Robust standard errors in parentheses.+ Significant at 10%; *significant at 5%; **significant at 1%, ***significant at 0.1%.

Foreign subsidiary performance Weiguo Zhong et al

Journal of International Business Studies

robust standard error clustered at firm in modelingfirm productivities, rather than using a fixed-effectmodel that models only within-firm variations. Westill employed an estimated discrete time logitmodel for failure likelihood; Tables 7 and 8 reportthe results. As shown in the tables, we find thatunexpected turnovers exert a positive effect onforeign firms’ failure likelihoods, and negativeeffects on the productivity of foreign firms. Theseresults further confirm our theoretical arguments.

Other robustness checksFinally, we tested the sensitivity of our results byconducting several robustness checks. First, ourestimation results may be contaminated by endo-geneity issues caused by omitted variables (Se-madeni, Withers, & Trevis, 2014). To address thisissue, we followed prior studies (e.g., Chin &Semadeni, 2017) to conduct Durbin–Wu–Hausmantest to evaluate the existence of endogeneity.Durbin–Wu–Hausman test applies a two-stagemodel. In the first-stage model, we regressedpolitician turnover on the instrument variable ofprovince corruption level and all other control vari-ables. Province corruption level is measured as thetotal number of arrested corrupt officials divided bytotal number of government employees. First-stageresults report a significant coefficient for provincecorruption level and a significant F-statistics(F = 318.27, p = 0.000), suggesting the validity ofour instrument. In the second-stage model, weperformed an augmented regression by adding the

residual of politician turnover predicted from thefirst-stage regression along with the original model,including the original value of politician turnover.Durbin–Wu–Hausman test shows that the coeffi-cient of politician turnover residual is not signifi-cantly different from zero, suggesting no evidenceof endogeneity in all our models. We also triedanother instrument: turnover of province secretary,which was coded to 1 if a new politician took theprovince party secretary position at year t, and 0otherwise. The test results remain robust.Second, we constricted our sample to firms that

remain foreign throughout the study period, anduse disappearance from the database only as per-formance failure coding. Third, we examinedwhether domestic firms are affected by politicianturnover. Our findings show that the performanceof domestic firms is also negatively affected bypolitician turnover, but to a much lesser extentcompared to that of foreign firms. Fourth, we testedthe sensitivity of our results to different samplingschemes. We specifically estimated models using allforeign firms drawn from the ACIE database. Fifth,we performed additional analyses in order todetermine whether or not our results are robust tothe choice of estimation methods. Specifically, wererun all the models using the piece-wise exponen-tial model and Cox model, respectively. Our resultsremain consistent with those reported in the mainanalysis. These results are not presented due tospace considerations, but are available on request.

DISCUSSIONIn this study, we examined one particular form ofpolitical risk (i.e., politician turnover), and itsimpact on the performance of foreign subsidiaries.We found that the exogenous turnovers of Chinesemunicipal political leaders do pose a significantinstitutional uncertainty for foreign-invested firmsoperating within their jurisdictions and adverselyaffects their performance. We also found thatcontingencies at the event (i.e., internal promo-tion), firm (international joint venture), and envi-ronment (i.e., market intermediary development)levels all help foreign subsidiaries alleviate theinformation asymmetry between the firms andthe institutional environment on possible policychanges in politician turnover, boosting theirperformance.

Figure 4 Interaction plot of firm productivity.

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Table 5 Estimation of firm failure likelihood: mediation effect of policy uncertainty

Model 1 Model 2 Model 3

X ? Y X ? M X, M ? Y

Exit Uncertainty Exit

Policy uncertainty 0.003***

(0.001)

Party secretary turnover 0.223*** 3.124* 0.211***

(0.041) (1.553) (0.041)

Internal promotion 0.153* 2.631 0.108

(0.076) (2.052) (0.077)

Intermediary market development - 0.326*** 0.331 - 0.321***

(0.013) (0.942) (0.013)

Mayor turnover 1.264*** - 1.615 1.280***

(0.206) (1.487) (0.208)

City GDP growth - 0.338* - 12.086 - 0.306+

(0.165) (10.192) (0.165)

Foreign subsidiary entry rate - 0.206*** - 3.339 - 0.203***

(0.041) (7.131) (0.041)

Turnover type 0.290*** 0.879 0.278***

(0.054) (2.261) (0.054)

Leader gender - 0.955*** - 6.301 - 0.937***

(0.146) (6.144) (0.147)

Leader education 0.030 - 2.246* 0.036

(0.026) (1.051) (0.027)

Leader experience 0.014*** - 0.012 0.014***

(0.004) (0.121) (0.004)

Joint venture 0.026 0.026

(0.036) (0.036)

Firm age 0.014 0.015

(0.011) (0.011)

Prior productivity - 0.366*** - 0.366***

(0.015) (0.015)

Firm size - 0.064*** - 0.063***

(0.016) (0.016)

HMT parent 0.045 0.045

(0.033) (0.033)

Liability 1.733*** 1.730***

(0.338) (0.340)

Export ratio - 0.316*** - 0.316***

(0.038) (0.038)

Industry ROA - 0.810* - 0.797*

(0.346) (0.345)

Industry sales growth - 0.340** - 0.324**

(0.116) (0.116)

Post-WTO 0.727*** 0.727***

(0.080) (0.079)

Year dummies Yes Yes Yes

Industry dummies Yes No Yes

City dummies Yes No Yes

Constant 5.168*** 93.884*** 4.843***

(0.756) (8.000) (0.762)

Observations 86,022 1326 86,022

Number of groups 33,067 270 33,067

Log Pseudo-likelihood (R2) - 18,117.576 (0.178) - 18,111.218

Sobel mediation test (p value) 1.823 (0.068)

Robust standard errors in parentheses.+ Significant at 10%; *significant at 5%; **significant at 1%, ***significant at 0.1%.

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Table 6 Estimation of firm productivity: mediation effect of policy uncertainty

Model 1 Model 2 Model 3

X ? Y X ? M X, M ? Y

Productivity Uncertainty Productivity

Policy uncertainty - 0.000***

(0.000)

Party secretary turnover - 0.022*** 3.134* - 0.021***

(0.004) (1.444) (0.004)

Internal promotion 0.014* - 1.304 0.019**

(0.007) (1.874) (0.007)

Intermediary market development - 0.013*** - 0.006 - 0.011***

(0.002) (0.878) (0.002)

Mayor turnover 0.019*** - 2.016 0.019***

(0.004) (1.394) (0.004)

City GDP growth 0.169*** - 14.123 0.160***

(0.027) (9.857) (0.027)

City population - 0.188*** 39.140+ - 0.181***

(0.024) (23.764) (0.024)

Foreign subsidiary entry rate 0.063*** - 2.395 0.063***

(0.005) (6.667) (0.005)

Turnover type 0.052*** 0.008 0.049***

(0.014) (2.007) (0.014)

Leader age 0.016*** 0.020 0.015***

(0.003) (0.227) (0.003)

Leader sex 0.000 - 7.942 0.000

(0.000) (5.784) (0.000)

Leader experience - 0.024*** 0.030 - 0.024***

(0.006) (0.114) (0.006)

Joint venture - 0.001+ - 0.001+

(0.001) (0.001)

Firm age 0.228*** 0.228***

(0.004) (0.004)

Firm size - 0.022*** - 0.000***

(0.004) (0.000)

HMT parent - 0.013* - 0.014*

(0.006) (0.006)

Liability 0.427*** 0.429***

(0.081) (0.081)

Export ratio 0.009 0.009

(0.008) (0.008)

Industry ROA - 0.002 - 0.002

(0.031) (0.031)

Industry sales growth 0.057*** 0.057***

(0.013) (0.013)

Year dummies Yes Yes Yes

Industry dummies Yes No Yes

City dummies Yes No Yes

Constant 3.700*** 93.884*** 3.730***

(0.411) (8.000) (0.411)

Observations 246,410 1326 246,410

Number of groups 75,196 270 75,196

R-square 0.071 (0.178) 0.071

Sobel mediation test 2.029(0.042)

Robust standard errors in parentheses.+ Significant at 10%; *significant at 5%; **significant at 1%, ***significant at 0.1%.

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Table 7 Unexpected turnovers and FDI subsidiary failure likelihood

Discrete logit model Model 1 Model 2

Shock 2.602* 1.563

(1.054) (1.030)

After 1.116*** 0.111

(0.249) (0.496)

Shock 9 after 1.167*

(0.487)

Internal promotion 0.804 0.834

(0.968) (0.950)

Joint venture 0.270*** 0.271***

(0.080) (0.080)

Market intermediary development - 1.346*** - 1.446***

(0.157) (0.159)

Firm age 0.028** 0.028**

(0.009) (0.009)

Firm size - 0.088* - 0.089*

(0.039) (0.039)

Prior productivity - 0.371*** - 0.372***

(0.038) (0.038)

HMT parent 0.111 0.108

(0.077) (0.078)

Liability 2.526*** 2.532***

(0.721) (0.723)

Export ratio - 0.224* - 0.224*

(0.091) (0.091)

Industry ROA - 0.846 - 0.938

(1.031) (1.030)

Industry sales growth - 0.020 - 0.027

(0.304) (0.304)

City GDP growth - 3.687 - 4.150+

(2.253) (2.325)

Foreign subsidiary entry rate - 7.403*** - 7.420***

(1.188) (1.192)

Mayor turnover - 0.283 - 0.426

(0.303) (0.314)

Predecessor promotion 1.248* 1.381**

(0.530) (0.521)

Leader gender 0.000 0.184

(1.520) (1.485)

Leader education 0.668*** 0.615***

(0.151) (0.152)

Leader experience 0.010 0.024

(0.037) (0.034)

POST-WTO 0.542 0.939*

(0.439) (0.450)

Year dummies Yes Yes

Province dummies Yes Yes

Industry dummies Yes Yes

Constant 3.047 3.876+

(2.076) (2.047)

Observations 17,848 17,848

Number of groups 8205 8205

Log pseudo-likelihood (R-square) - 3227.5898 - 3224.979

Robust standard errors in parentheses.+ Significant at 10%; *significant at 5%; **significant at 1%, ***significant at 0.1%.

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This study makes three major contributions tothe extant literature. First, our study offers adifferent perspective to deal with political risks in

emerging market. Previous literature often suggeststhat institutional strategies such as political net-working are effective ways of dealing with political

Table 8 Unexpected turnovers and FDI subsidiary productivity

OLS model Model 1 Model 2

Shock - 0.528* - 0.326

(0.218) (0.223)

After - 0.061 0.134

(0.050) (0.088)

Shock 9 after - 0.251*

(0.110)

Mayor turnover 0.358+ 0.365*

(0.184) (0.184)

Internal promotion 0.014 0.014

(0.019) (0.019)

Joint venture - 0.080 - 0.045

(0.052) (0.055)

Market intermediary development - 0.013*** - 0.013***

(0.002) (0.002)

Firm age 0.472*** 0.472***

(0.007) (0.007)

Firm size - 0.528* - 0.326

(0.218) (0.223)

HMT parent - 0.104*** - 0.104***

(0.019) (0.019)

Liability 1.163*** 1.162***

(0.176) (0.176)

Export ratio - 0.064** - 0.065**

(0.021) (0.021)

Industry ROA - 0.245 - 0.234

(0.203) (0.203)

Industry sales growth 0.111* 0.113*

(0.046) (0.046)

City GDP growth - 1.526*** - 1.423**

(0.446) (0.446)

Foreign subsidiary entry rate 0.464 0.691

(0.457) (0.462)

Predecessor promotion 0.056 0.082

(0.074) (0.074)

Leader gender - 0.085 - 0.130

(0.109) (0.116)

Leader education - 0.993*** - 1.078***

(0.287) (0.292)

Leader experience - 0.103* - 0.097+

(0.050) (0.050)

Year dummies Yes Yes

Province dummies Yes Yes

Industry dummies Yes Yes

Constant 3.355*** 3.243***

(0.471) (0.467)

Observations 20,879 20,879

Number of groups 8881 8881

R-square (R2) 0.372 0.373

Robust standard errors in parentheses.+ Significant at 10%; *significant at 5%; **significant at 1%, ***significant at 0.1%.

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risks (Marquis & Raynard, 2015). However, Siegel(2007) shows that political connections are them-selves sources of political risk during regimechanges. Different from Siegel’s (2007) research,which focused on the firms connected with gov-ernment officials as victims during a regimechange, we highlight the imperfect informationproblems of politician turnover causes for foreignsubsidiaries in general. We find new approachesthat may help foreign subsidiaries mitigate politicaluncertainty during politician turnover via contin-gent factors at multiple levels. Rather than relyingon potentially costly and risky political connec-tions (Marquis & Raynard, 2015), MNCs could bebetter off by assessing, comprehending, and inter-nalizing tacit knowledge regarding politician turn-over via international joint ventures and marketintermediaries.

Second, our study contributes to the broaderliterature on institutional theory with a rich yetdiverse view on the relationship between agentsand institutions (DiMaggio, 1988; Kostova, Roth, &Dacin, 2008). For example, the neoinstitutionalperspective sees institutions as the ‘‘rules of thegame’’ and emphasizes the constraining role ofinstitutions in setting agents choice boundaries(Ingram & Clary, 2000). From this perspective,agents are merely ‘‘rule takers.’’ In contrast, the‘‘old’’ institutionalism is a more subjective andagent-dominated view describing institutions as anendogenous outcome of the social interactionsamong agents that treats agents as ‘‘rule makers’’(Hirsch & Lounsbury, 1997; Kostova et al., 2008).Our study complements the previous literature byfinding that agents such as politicians matter. Aspolitician turnover occurs, these new politicalleaders can change the local rules and regulations,law enforcement practices, and firm resources flowsbecause they have considerable discretionary poweravailable within their jurisdictions (Bo, 2013).

Meanwhile, our finding that the positive effect ofpolitician turnover on foreign subsidiaries’ perfor-mance failure is weaker in regions with a highdegree of market intermediary development con-firms the interactive relationship between institu-tions and agents. Market intermediaries influencethe functioning of institutional fields as well asaffect the interaction of every institutional partic-ipant. Politicians, firms, and markets are thereforepart of both internal and external institutionalprocesses that jointly co-evolve (Kostova et al.,2008). The empirical evidence we find supportspromising new directions for developing an overall

coherent institutional theory within the MNCcontext.Third, we also contribute to research on the sub-

national institutional environment, which isimportant and yet under-developed (Ma et al.,2013; Meyer & Nguyen, 2005). Previous literaturefocuses on political risk at the country level andexamines how cross-country differences matter(Beaulieu et al., 2005; Henisz, 2000a). Yet we knowlittle regarding how regional institutional factorssuch as politician turnover within a city or marketintermediary development affect MNCs operatingwithin the sub-national environment of a hostcountry. Sub-national regions matter not onlybecause regions are different in their geographicalconcentrations of industrial activities (Porter, 1998)and factor endowments (Venables, 2005), but alsobecause regions vary in the political risks thatinfluence embedded foreign subsidiaries (Chanet al., 2010; Meyer & Nguyen, 2005). By enrichingour understanding of these sub-national effects onforeign subsidiaries, we empirically show that notonly sub-national effects matter but also that localpoliticians matter. We thereby contribute by iden-tifying politician turnovers as critical events inshaping local institutional environments, as well ashighlighting the important roles of politicians as asource of political risk. This points to a fruitfulavenue for future research.Our research also provides important insights for

MNC executives. Based on our results, MNC man-agers may gain a clearer and more integratedunderstanding of political risk development andits effects on foreign subsidiary performance. Theyshould accordingly take politician turnover-relatedfactors into account during their operations withindeveloping markets such as China. While the largevariations in institutional and economic conditionsacross sub-national regions of China are wellknown to managers, they may have given greaterattention toward the favorable policies offered bylocal governments as an important factor in deter-mining investment locations. Our study offers acaveat to such reasoning in that politician turnovermay change the institutional environment inunexpected ways. A newly appointed politicalleader may show little commitment to the policypromises made by his or her predecessor. MNCsmay strategically employ certain tactics such ascollaboration with local partners in internationaljoint ventures or relocation to a region with ahigher degree of market intermediaries so as to

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reduce the political uncertainty caused by politi-cian turnover.

Limitations and Directions for Future ResearchOur research has several limitations, which in turnserve as promising directions for future research.First, the concept of political risk in our study isconfined to the uncertainties caused by politicianturnover. This assumption is reasonable becausepoliticians operating at the municipal level inChina have considerable discretionary power overresource allocation as well as policy interpretationand implementation within their jurisdictions (Bo,2013). However, politician turnover may exertother political risks such as corruption (Rodriguezet al., 2006), retaliation (Siegel, 2007), or evenupside political risks such as improved businessenvironments (Holburn & Zelner, 2010). Thesepossible outcomes may not fundamentally changeour information asymmetry logic between foreignsubsidiaries and newly appointed politicians, butare worth examining in the future.

Second, our study emphasized the unidirectionalinfluence of politician turnover on foreign sub-sidiaries’ performance. Although we controlled forseveral important firm attributes, we did not con-ceptualize foreign subsidiaries as social agents thatmay proactively either interpret or participate inthe institutional process of politician turnover.While MNCs cannot affect the appointment ofpoliticians ex ante, they may ex post influence thepreferences or interests of newly appointed politi-cians via socialization processes (Kostova et al.,2008). How MNCs and their foreign subsidiariesrespond to such external shocks as politician turn-over is an unexplored yet important question.Future research may explore mechanisms such asnon-market strategies (Bonardi et al., 2005) thathelp MNCs manage political risk.

Third, there may be a potential sample bias in ourstudy because the sampling criteria used by the NBSmeans that our sample focuses on large firms.Although our robustness check analyses suggestthat our sample choice did not bias our hypothesistesting, caution should be taken in generalizingand interpreting our results.

Finally, our study focuses on the role of the partysecretary at the municipal level as the most signif-icant local political leader. However, the directorsof the municipal People’s Congress and mayors arealso influential political leaders. Our findings sug-gest that mayor turnover actually improves theperformance of foreign subsidiaries. This may be

due to the fact that mayors are often the seconddecision maker within the political hierarchy andare primarily responsible for policy implementa-tion. Mayor turnover won’t bring much changes inpolicies, but instead may improve the coordinationbetween the party secretary and mayor. Thisobservation was confirmed by our post hoc analysesin which we examined the scenario with mayorturnover only. Our findings show that when partysecretary remains in the position, the mayor turn-over reduces the exit likelihood of foreign firms,and improves foreign firms’ productivity and ROA.Interestingly, Wang, Du, & Marquis (2018) alsofound that city mayor play a different role fromparty secretary in appointing firmmanagers in localpolitical councils. They found that city mayors’political ideology affects firms’ political appoint-ment, but party secretary’s political ideology doesnot play a role there. Future research can providefine-grained analyses that allow separation of dif-ferent politician turnover effects, as well as how theinteractions between these politicians affect polit-ical market attractiveness, and in turn MNCsbehaviors and performance (Bonardi et al., 2005).

CONCLUSIONDoes politician turnover within municipal cities inChina affect the performance of foreign sub-sidiaries, and if so what exactly is the effect? Thisstudy departs from prior research on political risksby focusing on the role of political agents and theirturnover. We develop a multi-level framework andmediation model offering a fresh perspective on therelationship between politician turnover and per-formance of foreign subsidiaries. One importantmessage is that MNC managers must pay specialattention to the information asymmetry on policyuncertainties generated by politician turnover.Such managers would be well served to strategicallyemploy international joint ventures and marketintermediaries in order to increase their survivalrate and productivity during the shock of politicianturnover. This focus on political agents enrichesand also broadens our understanding of MNCperformance within host countries.

ACKNOWLEDGEMENTSThe study was funded by National Natural ScienceFoundation of China (Grant Nos. 71572005 and

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71632002) as well as Strategic Research Grant (No.7005201) at City University of Hong Kong.

NOTES

1We conducted a robustness check by examininganother dependent variable – the return on asset(ROA) of foreign firm performance. The findings areconsistent with the reported ones. As comparedwith ROA, firm productivity is a more relevant andproximate performance variable in our studybecause politician turnover is likely to result inuncertainty in factor markets such as capital sup-ply, tax policies, bank interest and licenses, as wellas other institutional markets in which foreignfirms are embedded.

2These five techniques are: (a) index numbers,(b) data envelopment analysis (DEA), (c) stochasticfrontiers, (d) instrumental variables (GMM), and(e) semi-parametric estimation.

3Since the marketization index developed by Fan,Wang, & Zhu (2006) is at the provincial level, wecollected additional data on the sub-dimensions ofmarket intermediary development at the city level.Our robustness check shows that technologicalservice as well as legal/accounting service at thecity level negatively moderates the positive rela-tionship between party secretary turnover and exitlikelihood. Further, technological service, legal/

accounting service, and industry association atthe city level help reduce the negative relationshipbetween party secretary turnover and productivity.

4We conducted post hoc analyses on the depen-dent variable of entry rate of new foreign sub-sidiaries. The findings suggest that party secretaryturnover does not significantly affect the entry rateof new foreign subsidiary. It is understandablebecause it is the existing foreign firms in the citythat are affected heavily by the politician turnover,whereas new foreign firms outside of the city oreven outside of China may not be aware of thisevent or do not understand the potential impact ofthe politician turnover, be it positive or negative.

5In Tables 3 and 4, the main effect of marketintermediary development reduces both failure rateand productivity. It may be caused by two forcessuch as institutional force (e.g., market protection,corruption) and market force (e.g., free marketcompetition). In developed regions with a highdegree of market intermediary development, for-eign firms face less institutional barriers, butintense market competition. Therefore, they couldreduce failure rate caused by institutional barriers,but may not be able to increase productivity in acompetitive market.

6The detailed keywords in Chinese are availableon request.

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ABOUT THE AUTHORSWeiguo Zhong (PhD, City University of HongKong) is an Assistant Professor of the Departmentof Organization and Strategy, Guanghua School ofManagement at Peking University, China. Hisresearch interests include innovation, non-marketstrategy, and internationalization of firms fromemerging markets. His research has been publishedin journals such as Journal of International BusinessStudies and Journal of Management.

Ya (Lisa) Lin (PhD, Hong Kong University of Sci-ence and Technology) is an Assistant Professor ofManagement at Hong Kong Baptist University. Herresearch interests are interfirm networks, innova-tion, and entrepreneurship. Her research has beenpublished in journals such as Strategic ManagementJournal, and Journal of Management.

Danxue Gao (PhD, Peking University) is a post-docresearch fellow at the Central University of Financeand Economics. Her research interests are politicalstrategy and firm innovation.

Haibin Yang (PhD, University of Texas at Dallas) isa Professor of Strategic Management at the Collegeof Business, City University of Hong Kong. Hisresearch interests are strategic networks, alliances,acquisitions, entrepreneurship, and market com-petition in China. His research has been publishedin top-tier journals such as Academy of Management,Strategic Management Journal, Management Science,and Journal of Management.

Publisher’s Note Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutionalaffiliations.

Accepted by Jiatao Li, Area Editor, 13 February 2019. This article has been with the authors for three revisions.

Foreign subsidiary performance Weiguo Zhong et al

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