Regional economic integration and multinational firm strategies

This paper analyzes the effects of regional economic integrations on investment patterns among multinational firms. We develop a model in which heterogeneous firms decide on the optimal foreign direct investment (FDI) strategies for serving trade-integrated regions consisting of asymmetric countries: developed and developing nations. Following reduced trade costs within the trade-integrated region, our model shows that integrating into a regional economic zone affects firms with relatively low productivity levels to enter developing nation within the region via complex FDI – a firm activity of engaging in multiple types of FDI. Specifically, we show that depending on the size of the region respective to the home country, complex FDI involves different investment patterns. Using Korean firm- and plant-level data, we specify a binary choice model to link firms’ choice of FDI strategies with their productivity levels and trade-integrated regions. Our empirical results are consistent with the theoretical implications.     

中国ODI 在金砖国家的区位选择研究 ——基于传统经济因素和制度因素

本文旨在将制度观点和由折衷理论演变出的传统经济因素做一整合,尝试构建出一个基本的对外直接投资分析框架,对中国进行对外直接投资的企业在其他金砖国家的区位选择行为作出解释,以期提供合理的投资建议。研究结果发现,在影响中国企业进行对外直接投资行为的因素中,经济效率因素的确起到了不容忽视的重要作用,但制度因素的作用更大。因此,在考虑跨境投资区位时,经济效率因素和制度因素两者都不可忽视。     

Explaining variability in the investment location choices of MNEs: An exploration of country,industry and firm effects

This paper examines the variation in foreign direct investment (FDI) location decisions of European multinational enterprises (MNEs.) An innovative empirical approach is applied to a new data set which contains over 15,000 individual FDI location decisions in 25 European countries over a 17-year period and combines country-, industry- and firm-level factors. The empirical results show that the responsiveness of FDI location choices to country-level factors is heterogeneous both across sectors and across firms of different characteristics as well as unobserved factors. For example, the results show that the importance of market size increases with investing firm’s size and skill intensity, while proximity between countries, as well as cultural and linguistic ties are more important for smaller firms.     

The right tree for the right bird: Location choice decision of Taiwanese firms’ FDI in China and Vietnam

Firms have to invest in foreign markets to maintain their competitive advantage, but a popular location for foreign direct investment (FDI) may not be suitable for everyone. Available literature as to location choice is mainly based on developed countries and large multinational enterprises (MNEs). However, this study investigates the location choice behaviour of firms originating in newly industrialized economies (Taiwanese firms) investing in emerging countries (China and Vietnam). According to the national economic development of China (further divided into South China and East China) and Vietnam, we divide the location into more developed and less developed regions. Through an empirical firm-level data collection and conditional logit analysis, this study found that: (1) firms with stronger ownership advantages prefer to invest in more developed than less developed regions; (2) firms occupying favourable positions in their network prefer to invest in more developed than less developed regions; (3) firms with a high degree of networking prefer to invest in less developed than more developed regions; (4) firms choose to invest in more developed than less developed regions to gain access to a large market; and (5) firms with strong resource-seeking motives prefer to invest in more developed than less developed regions to access their resources.     

Entry Modes and Firm Performance in a Transition Economy: Evidence from Inward FDI to Romania

The article analyzes the characteristics and performance of foreign direct investment (FDI) to Romania since the 1990s. We provide evidence for some of the commonly advanced propositions about FDI in transition economies, namely the selection of entry and firms’ performance over time and across economic sectors. Contrary to the FDI literature, multinational enterprises in Romania favored greenfield FDI over acquisitions, although this does not apply to oligopolistic and technology intensive industries. Specific relationships between the nationality of the investor, the location and the entry modes decisions are also analyzed. We observed that acquisitions exhibited higher profit margin and turnover compared to greenfield FDI.     

Does religion influence location choice in the hotel industry?

Relying on data from the Spanish hotel industry, this paper analyzes the role of informal institutional factors (IIF) in location choice. Earlier studies mostly use an aggregate level of cultural differences as informal institutional factors. We, however, go deeper into this concept and study the impact of two distinct but interrelated informal institutional factors, religion and language, on the location decisions of hotel chains. We resolve the overlapping problem between these two highly correlated IIF by means of a ‘layer’ measurement in Confirmatory Factor Analysis. Our results show that the higher the informal institutional differences (IID), the lower the presence of the hotels in the foreign country. While physical distance plays a key moderating role, formal institutional differences (FID) did not show any effect. We contribute by unravelling the role of language and religion in location choice in the internationalization process of service firms. Moreover, we test the moderating role of formal institutions in these decisions, thus combining the impact of formal and informal institutions on location choices in service firms.     

The FDI location decision: Distance and the effects of spatial dependence

We investigate how different conceptions of distance impact upon one of the fundamental decisions made by foreign investors, the choice of foreign direct investment (FDI) location within the selected host country. We argue that the attractiveness of host country locations to foreign investors depends not only upon location-specific attributes such as labor costs, but also upon the location's proximity to alternative locations. We provide theoretical rationales for how and why alternative concepts of distance might impact upon firms’ FDI location decisions, and explicitly model different measures of geographic, economic and administrative distance. Empirically we illustrate the use of a number of spatial regression models with a new dataset on FDI in Chinese prefecture-cities, and have shown, in this context, that geographic distance is not the ‘best’ measure of distance to use. We find clear evidence of spatial dependence between the cities based upon economic distance, with weaker evidence related to administrative distance. The distinctive contribution of this paper is to emphasize that city-level policy to attract FDI is more likely to succeed if the prefecture-city is economically (and administratively) close to alternative city locations, while any policy expenditure may fail to attract FDI inflows if the prefecture-city is distant from other city locations.     

The Location Choices of Foreign Investors: A District‐level Analysis in India

This paper analyses the determinants of the location choices made by foreign investors at the district level in India to gauge the relative importance of economic geography factors, local business conditions, institutional conditions and the presence of previous foreign investors. We employ a discrete‐choice model and Poisson regressions to control for the potential violation of the assumption of independence of irrelevant alternatives. Our sample includes about 19,500 foreign investment projects approved in 447 districts from 1991 to 2005. We find that foreign investors strongly prefer locations where other foreign investors are. This effect is significantly positive and robust across different years, sectors and different types of foreign direct investment (FDI). Moreover, path dependence remains significantly positive when controlling for institutional conditions at the state and district level. Foreign investors tend to follow not only previous investors from the same country of origin but also investors from other countries of origin. They are also attracted to industrially diverse locations and to districts with better infrastructure and institutional conditions, although these findings are less robust. Surprisingly, districts in the neighbourhood of large metro areas do not benefit, in terms of attracting more FDI, from having easier access to these markets than remote Indian districts. On the contrary, our results suggest that large metro areas divert FDI projects away from neighbouring districts, thereby perpetuating or even widening the urban–rural divide. We conclude that the concentration of FDI in a few locations could fuel regional divergence in post‐reform India.     

The Location Choices of Multinational Firms: The Role of Internationalisation Experience and Group Affiliation

This paper investigates whether location choices of multinational firms depend on their past export, import or Foreign Direct Investment (FDI) experience on foreign markets or the experience of other affiliated firms. Regardless of locations' characteristics, we find that exporting in a given country, and to a smaller extent importing from it, significantly increases the probability of investing in that particular country the following year. This preliminary exporting phase appears more important for firsttime investors. Moreover, location choices not only depend on the investor's own international experience, but also on the international experience of other affiliated firms: firms tend to invest in countries where the group already exports or owns a local affiliate. These last findings suggest the existence of coordinated strategies and/or information sharing between affiliated firms.     

Migrants and multinational firms: The role of institutional affinity and connectedness in FDI

We examine how, and to what extent, migrants in a host country attract foreign direct investment (FDI) from firms based in their country of origin (CO). Introducing the notion of institutional affinity, we argue that increased institutional affinity and increased connectedness of institutional environments of migrants’ CO and country of residence, make a location attractive to CO firms. Empirical analysis of FDI and migration panel data shows that in addition to the traditional factors influencing FDI patterns, there is a collective migrant effect on FDI, and this effect is statistically significant and economically meaningful for migrants from developing countries.     

Industrial clusters, transactions costs and the institutional determinants of MNE location behaviour

This paper discusses the institutional and organizational assumptions underlying many of the currently popular notions of industrial clustering. By adopting a transactions costs perspective, we explain that there are three fundamentally different types of industrial cluster. We then discuss how the institutional differences between each of these clusters provide different possibilities for the location behaviour of the multiplant or multinational firm. Using two examples from the global semiconductor industry, we show that observations of industrial clusters must be interpreted very carefully when we are discussing multinational firms. The reason for this is that many simple clustering notions are predicated on assumptions which are often incompatible with multinational firms. The potential advantages of industrial clustering can only be understood when location strategies are considered with respect to the organizational and institutional logic of both the firm and the cluster.     

Bring institutions into FDI spillover research: Exploring the impact of ownership restructuring and institutional development in emerging economies

Extant studies exploring the influences of foreign direct investment (FDI) spillovers on the productivity of local firms have provided conflicting evidence. In particular, they have largely overlooked the important role of institutional mechanisms in the host market in understanding the sources of the variation in FDI spillover effects on the productivity of local firms, especially in the context of emerging markets. Using a comprehensive panel data set of manufacturing firms in China during 1998–2007, our paper presents an integrative framework of how FDI spillovers affect the productivity of local firms in emerging markets. We identify an inverted U-shaped relationship between FDI spillovers and the productivity of local firms in China. This result suggests the coexistence of and the interplay between the opposing mechanisms of FDI spillover learning opportunity and adverse competition. Drawing on the institution-based view, this study also develops contingency frameworks and arguments to explore the question of if FDI spillover effects are contingent on, or independent of, a local institutional context especially in emerging markets. We find that institutional mechanisms, such as the institutionally determined ownership restructuring and the different levels of subnational institutional development within the host emerging market, significantly shape the variation of FDI spillover effects on the productivity of local firms. This research highlights the importance of incorporating institutional effects in understanding the FDI spillover effects in emerging markets.     

Subsidiary strategy of emerging market multinationals: A home country institutional perspective

We examine the effects of home country institutional factors, namely, home country government support, domestic institutional weaknesses, and state ownership on the subsidiary-level strategy of global integration (I) and local responsiveness (R) of emerging market multinational enterprises (EMNEs). We draw upon the home country institution-based view and the I/R framework to develop our theoretical model. We empirically test our hypotheses using an original new survey data collected from Chinese multinational subsidiary managers supplemented with parent-level and country-level data. We find that home country government support and domestic institutional weaknesses have significant and negative effects on global integration strategy of Chinese multinational subsidiaries. On the other hand, domestic institutional weaknesses push foreign subsidiaries to pursue local responsiveness strategy. Nevertheless, those with greater degree of state ownership in their parent firms are neither willing to disintegrate from their parent firms nor motivated to pursue local responsiveness strategy in order to deal with home country institutional deficiencies and develop new sources of competitiveness in foreign markets. Our findings have advanced the literature on subsidiary strategy in the context of EMNEs, and provide important implications for subsidiary managers and policy makers.     

Escapism FDI from developed economies: The role of regulatory context and corporate taxation

In this paper, we extend the conceptualisation of escapism Foreign Direct Investment (FDI) holding for emerging economies to developed economies that face specific institutional failures, such as weak or incomplete regulations, along with high taxation. We combine this literature with the recent development of Dunning’s eclectic paradigm, which includes institutional aspects regarding location factors. We argue that in developed economies with problematic regulations and high taxation, sound institutions and lower tax rates abroad are extremely significant for domestic firms’ internationalisation. A central result regards the moderating effect of host regulatory quality on taxation, which highlights the crucial role of institutions for firms originating in developed economies that lack sound institutions. Additionally, the results challenge the available theorising and evidence on the moderating role of institutions in the prior experience of a firm at a location. We instead provide evidence that once firms establish a subsidiary abroad, they acquire substantial knowledge about the host institutional environment, which translates into an Ot advantage, providing an additional motive for further expansion. This work uses a unique database of the total population of Greek MNEs – released for the first time – for an extended time period, 2001–2010. The results could be generalised to similar developed economies facing analogous regulatory failures and high taxation, such as the southern European Union countries, as well as even for northern European Union countries, such as Germany, according to Bundesbank’s report.     

Like it or not? How the economic and institutional environment shapes individual attitudes towards multinational enterprises

This paper analyses the determinants of people's attitudes towards foreign direct investment (FDI) using a survey‐based data set that covers a wide range of rich and poor countries. We find that both individual socioeconomic characteristics and macroeconomic and institutional factors shape agents’ attitudes towards multinational firms. Moreover, we find that the influence of an individual's characteristics—such as education and the status as an entrepreneur—on her/his perspective on multinationals depends on the respective country's per‐capita income. Our results confirm the conjecture that relative individual attitudes towards multinationals reflect distributional interests as suggested by economic theory.     

Ownership effects on direction of multinationality: Evidence from Indian EMNEs

An essential yet challenging decision that emerging market multinational enterprises (EMNEs) must make when setting up a subsidiary abroad is whether to do it in developed or emerging market economies. The extant literature has rarely probed what influences the location choice of EMNEs' outward investments. This paper aims to address this gap and hypothesizes that large shareholdings by promoters or foreign institutional investors negate agency problems (due to managerial risk aversion) and enhance the propensity to pursue risky but value-accrediting upmarket strategies. Furthermore, this paper argues that these beneficial effects of large owners are significantly weaker for group-affiliated firms compared to their standalone counterparts. We test our proposed hypotheses using a proprietary, longitudinal dataset during 2007–2013 for 213 Indian multinational firms and find support for our arguments.     

国际贸易与投资理论的新发展: 新制度经济学分析

新制度经济学在国际贸易和投资相关研究领域的渗透并非一个新现象,内部化理论就是在新制度经济学的影响下产生的。21世纪初,新制度经济学和国际贸易与投资理论出现了新的融合趋势,从原来的简单运用发展到将不完全契约直接融入不完全竞争条件下的跨国公司组织形式选择的一般均衡模型分析,甚至直接在新制度经济学的产权理论框架下分析跨国公司的组织选择行为。这一理论上的整合对于分析跨国公司在发展中国家的直接投资及其组织形式具有重要意义。     

A new tale of two cities: Japanese FDIs in Shanghai and Beijing, 1979–2003

Transitional economies can be characterized by considerable sub-national variation in economic and political characteristics. We investigate how this variance influences the timing of entry, entry mode, industrial traits, and survival rates for Japanese foreign direct investments (FDIs) made in China's two major metropolises—Shanghai, the economic center, and Beijing, the political capital. Using a sample of 1610 subsidiaries of Japanese firms established during the 1979–2003 period, our empirical results show that Japanese multinational enterprises (MNEs) tended to choose an economic-oriented rather than a political-oriented city as their investment location, with the consequence being higher survival likelihoods in Shanghai than in Beijing. This location choice helped Japanese firms avoid policy uncertainty and political hazards in China's transition economy. Our findings highlight the point that fundamental features of institutional environments at sub-national levels should be analyzed when looking at investment strategy and performance in transitional economies.     

Foreign Firms and Chinese Employment

This paper examines the effect of foreign direct investment (FDI) on employment in the Chinese manufacturing sector. As one of the world's largest recipients of FDI, China has arguably benefited from foreign multinational enterprises in various respects. However, one of the main challenges for China, and other developing countries, is job creation, and the effect of FDI on employment is uncertain. The effect depends on the amount of jobs created within foreign firms as well as the effect of FDI on employment in domestic firms. We analyse FDI and employment in China using a large sample of manufacturing firms for the period 1998–2004. Our results show that FDI has positive effects on employment growth. The relatively high employment growth in foreign firms is associated with their firm characteristics and their high survival rate. Employment growth is also relatively high in private domestic Chinese firms. There also seems to be a positive indirect effect of FDI on employment in private domestically‐owned firms, presumably caused by spillovers.     

Global networks as a mode of balance for exploratory innovations in a late liberalizing economy

This article suggests that under weak institutional arrangements, adverse economic conditions, and institutional voids in a late liberalizing economy, local firms that are part of the global value chains of multinational enterprises develop international networks as a balancing strategy to engage in exploratory innovations. We argue that local firms do so in order to counter the negative influences of local institutions on exploratory innovations. Using exploratory in-depth qualitative analysis, we study the suppliers of motorcycle parts in Pakistan that are working with leading Japanese and Chinese motorcycle assemblers. The results suggest that in adverse economic situations local institutional factors can sustain only the development of exploitative innovations. As a balancing strategy, motorcycle part suppliers develop international networks with global Tier 1 suppliers, international trade fairs, and international institutions. This strategy helps circumvent the negative influence of home institutional factors on developing exploratory innovations. Our study highlights the importance of global networks as a balancing strategy for creating exploratory innovations by firms in a late liberalizing economy.