Foreign affiliate performance: independence, location and parental control

This paper examines the causes of foreign affiliate performance, exploring the importance of the relationships between affiliates and parents in explaining apparent performance differences. By making use of a large firm level database, linking firm level data to numerous sources of official country level data, we explore the importance of headquarters effects, affiliate level effects, and location effects in terms of firm performance. Further, we contrast the effects in terms of both productivity and profitability. Affiliate-level factors explain most of affiliate performance. There are parent-level influences on affiliate performance, but not from the parent’s location. Our analysis provides insights into the interaction of parent (i.e. HQ) attributes with those of the foreign affiliate, as well as the locations of both HQ and affiliate, and thus provides insights into the complexity of these relationships. • We employ multilevel modelling to understand the drivers of foreign affiliate productivity. • We explore the importance of headquarters effects, affiliate-level effects, and location effects. • Affiliate-level factors explain most of affiliate performance. • There are parent-level influences on affiliate performance, but not from the parent’s location. • Affiliates productively combine local and parental knowledge, and benefit from agglomeration effects in the host location.