Management at a distance

Multinationals (MNCs) are key drivers of economic growth, accounting for 33% of global output (OECD 2018).

However, within MNCs, the economic performance of foreign affiliates declines markedly with distance from headquarters (HQ).

This pattern implies the existence of frictions that restrict how much economic growth foreign direct investment (FDI) can generate in host countries. Understanding the underlying mechanisms has important implications for the economic benefits of FDI and FDI policy. Yet, they remain little understood.

In this project, I propose a novel explanation: management problems at a distance. Management problems can be severe even in purely local settings (e.g., Gibbons and Roberts 2013).

It is plausible that principal-agent (PA) problems between HQ and the foreign subsidiary manager rise disproportionately when different countries, cultures, languages, and institutions are involved.

As previous research has been severely restricted by the scarcity of global organizational data on MNCs, so far, there exists no systematic evidence on PA problems within MNCs and how they can be resolved.I will focus on two solutions: the employment of foreign subsidiary managers that have a certain connection to HQ, and the use of information and communication technology (ICT) to improve monitoring problems.

I have been able to identify several novel data sources that can be combined to create the first comprehensive datasets on managers and ICT use within multi-location firms in three historical and contemporaneous settings.

Combined with innovative empirical approaches, this allows me to provide the first tests for the existence of PA problems within MNCs and study several channels through which PA problems can affect economic growth: managerial compensation, changes in risk-taking, and career incentives of middle managers.

I will estimate how these channels affect the economic performance of subsidiaries, firms, and host economies.