International transfer pricing and subsidiary performance: The role of organizational justice

International intrafirm trade is increasingly important in the global economy. Intrafirm transactions are governed by transfer‐pricing policies mandated by parent companies. Economic and accounting theories have long prescribed policies that maximize the parent company's short‐term profits but may have other, unintended outcomes. These outcomes are explored in a single‐case study. Based on this case study and organizational justice theory, a theoretical framework is developed to show how frequently used transfer‐pricing policies, through their impact on subsidiary managers' perceptions of justice, can significantly affect the subsidiary's strategic performance. First, the conditions under which transfer‐pricing policies can be perceived as procedurally, interactionally, or distributively unfair are presented. Second, it is proposed that those justice perceptions have an impact on subsidiary managers' commitment, trust in the parent company, neglect, ethical behavior, productivity, work quality, and compliance, and that the magnitude of this impact is moderated by the quality of relations between the parent company and subsidiary managers. Finally, it is predicted that such attitudes and behaviors may generate important agency and transaction costs that jeopardize the expected outcomes of international strategies of vertical integration. © 2009 Wiley Periodicals, Inc.