Local sourcing and MNC subsidiary performance: A legitimacy perspective

Purpose – Based on a legitimacy perspective, this study aims to investigate when local sourcing, as a strategic legitimacy action, improves or impairs subsidiary performance. The authors investigate the moderating role of regulatory/normative institutional distance in the relationship between local sourcing and subsidiary performance. Particularly, departing from prior relevant research, the authors reflect on the direction of institutional distance, categorizing it as either upward or downward institutional distance. Design/methodology/approach – Using Japanese governmental data, this study performs a panel data analysis using a sample of 1,054 Japanese subsidiaries operating in 37 host countries over a 5-year observation period. Findings – The authors reveal that downward regulatory/normative institutional distance more positively moderates the relationship between local sourcing and subsidiary performance than upward regulatory/normative distance. Originality/value – There is little research that specifically discusses the performance effects of local sourcing while considering legitimacy concerns. Moreover, the results of analyses of the relationship between local sourcing and subsidiary performance in existing studies are inconsistent, suggesting that it is necessary to identify the boundary conditions under which local sourcing improves or impairs subsidiary performance. To fill these gaps, this study clarifies when local sourcing improves or impairs subsidiary performance based on a legitimacy perspective. The authors’ finding makes a clear contribution to the literature on strategic legitimacy actions and input localization in multinational corporations.