4Why Do MNCs Divest or Retain Foreign Subsidiaries?Approaches from Dependency and Redundancy in Subsidiary Networks Naoki Yasudasubsidiaries exchange resources across these networks (Ghoshal & Bartlett, 1990; Gupta & Govindarajan, 1991). The activities of subsidiaries can be described by a network, which is an intrafirm system of incorporated units (Zschoche, 2016). Prior studies on operational flexibility have suggested the inter-related effects among subsidiary network (e.g., Kogut & Kulatilaka, 1994). MNCs seek flexibility to manage uncertainties, such as an increase in labor cost or movement of exchange rate in host countries, and flexibility contributes to the development of overall MNC value creations. MNCs can enhance flexibility in capacity utilization by diversifying investment across locations (Fisch & Zschoche, 2012). Among the various types of subsidiary networks, such as human resources or knowledge and information flows, this study focuses on trade networks. Subsidiary networks are presumed to form through importing and exporting. Prior studies suggest that subsidiaries export and import to and from other subsidiaries, and that foreign subsidiaries construct subsidiary networks. For instance, Lee and Song (2012) conceptualized intra-MNC effects and found that an increase (decrease) in production at a focal MNC subsidiary can lead to decreased (increased) production in the MNC’s other subsidiaries. Song (2015) found that environmental uncertainty in a foreign subsidiary’s host country engenders increased intrafirm sales to subsidiaries in less uncertain countries. Previous studies have suggested the subsidiary network effects on subsidiary divestment. For instance, Song (2014a) showed that subsidiaries actively engaging in intra-firm transactions are less likely to be divested. Belderbos and Zou (2009) found that MNCs divest subsidiaries when macroeconomic conditions of other countries are similar to those of a focal host country. However, in this study, by synthesizing the argument in the operational flexibility literature, I argue that dependency and redundancy in subsidiary networks are the antecedents of divestment.Foreign Direct Investment and Functions of Subsidiaries Prior studies argue that the functions of subsidiaries have been complicated. Dunning and Lundan (2008) showed that MNCs expand production overseas to access markets (i.e., horizontal integration) and reduce transaction costs (i.e., vertical integration). Rugman, Verbeke, and Yuan (2011) draw a distinction between subsidiaries with respect to innovation, production, sales, and administration. However, in the field of international economics, scholars argue that these dimensions no longer encompass the motivations for FDI. For instance, Hanson, Mataloni, and Slaughter (2005) classified subsidiaries into three categories: (1) those that produce goods for export to third-party countries, (2) those that process raw materials from the parent company and add value, and (3) those that sell goods locally. Yeaple (2003) calls simultaneous horizontal and vertical integration by foreign subsidiaries “complex FDI.” Ekholm et al. (2007: 793) found that foreign subsidiaries are export platforms rather than makers of goods for sale in host countries. Blonigen, Davies, Waddell, and Naughton (2007) theorized that subsidiaries in neighboring or surrounding countries significantly influence host country FDI. Most affiliates purchase some (but not all)
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