Regional Trust and Multinational Firms

Abstract: Rapid international migration of the past decade has led to significant movement of people and firms between countries. As a result, people and business entities with different cultural values have to work together, often under the roof of one organization. Of all cultural components, trust is particularly important for multinational ventures since foreign parties often rely on informal agreements due to difficulty in implementation and enforcement of formal contracts. Trust normally determines the level of authority delegated to other individuals. In this paper, we examine how the asymmetry of generalized trust between home and host regions affects the performance of international firms. Specifically, we focus on the relationships between foreign owners and host country managers in multinational organizations and investigate what happens to firm performance when an owner and a manager come from regions with different levels of generalized trust and presumably have different trust to each other. We find that such trust asymmetry has a significant impact on organizational performance: firms with “under-trusted” managers do worse than other similar ventures. Providing a manager with a “credit” of trust, however, has no negative implications. We attribute the detrimental impact of “under-trust” to a lack of authority delegation, limited information sharing, excessive monitoring and micro-management, and reduced work motivation of managers.