New perspectives on subsidiaries in the transition economy of China

Drawing upon new institutional economics and contracting theory, this chapter extends the concept of headquarter (HQ)-subsidiary relationships to capture unconventional types of subsidiary organizations in transition economies. A conceptual framework is first developed to examine how the interplay between institutions and subsidiaries shapes HQ-subsidiary relations in rapidly changing institutional environments. It is then applied to study contractual joint ventures in China, an important, yet often misunderstood, form of multinational subsidiary operation. The research sheds new light on how parent firms design contract provisions, credible commitments, and contract renegotiation mechanisms for the effective management of joint venture subsidiaries. These findings have important implications for future inquiry into the interplay between institutions and organizations in safeguarding subsidiary operations in transition economies.