Back to roots: TMTs’ country-specific experience,FDI preference,and political center favoritism

This paper investigates how the origin experience and work experience of top management teams (TMTs) affect foreign direct investment (FDI) decisions of multinational enterprises (MNEs), drawing on learning theories and social capital view. Using data from Standard and Poor’s firms operating in China during 2014–2016, we find that TMTs’ country-specific origin experience and work experience have a positive impact on the extent of FDI in the focal country, while we find that the former has a greater impact. Consistent with the consideration of being deeply anchored in the specific country, we find that TMTs with origin experience, relative to work experience, are more likely to choose FDI locations in the political center. We further find that the effect of origin experience on the extent of FDI and the preference for political centers will be more pronounced for MNEs with low levels of profitability. This study contributes to the literature on international business and provides practical implications for international expansion.     

Can Intellectual Property Rights Affect Multinational Enterprises’ Entry Modes? The Chilean Case

Abstract

Multinational Enterprises (MNEs) can choose between exporting, introducing foreign direct investment (FDI), and licensing to a domestic firm among other modes of entry to a new market. Yet, this decision may be affected by the strength of intellectual property rights (IPR). Thus, this paper analyzes the effect of stronger IPR on the entry modes chosen by MNEs. We propose a theoretical model that predicts that in the presence of stronger IPR, MNEs would choose licensing instead of FDI as an entry mode. We test the predictions of the model using plant-level data for Chile for the period 2001–2007. We exploit the exogenous reform of IPR in 2005, controlling for the activities of industries where high levels of technology transfer and imitation are important factors. The main results show that stronger IPR change the mode of entry chosen by MNEs. In this case, FDI is replaced by licensing. This is explained by Chile’s high absorptive capacity during this period. We test whether this effect differs across high- and low-tech industries and conclude that the displacement of FDI is less severe in high-tech industries.     

Is there an advantage of emergingness? A politico-regulatory perspective

The source(s) of competitive advantage of emerging-economy multinational enterprises (MNEs) remains a puzzle in international strategy scholarship, with some arguing that such firms are at a disadvantage compared to developed-economy rivals. Drawing on the concept of institutional advantage and using a sample of 233 foreign subsidiaries operating in 25 emerging economies over the period of 2000–2017, we find that foreign subsidiaries of emerging-economy MNEs are more adept than foreign subsidiaries of developed-economy MNEs at deploying their fixed asset management capabilities in emerging-economy host countries, especially when host-country politico-regulatory institutions are underdeveloped. Likewise, we find that subsidiaries of emerging-economy MNEs are more adept at deploying their tax planning capabilities when host-country politico-regulatory institutions become increasingly volatile. We discuss how these findings contribute to scholarly thought regarding the performance of emerging-economy MNEs.     

The limits of firm-level globalization: Revisiting the FSA/CSA matrix

Multinational enterprises (MNEs) engaging in foreign direct investment (FDI) need advantages allowing them to offset the liability of foreignness in host countries. This liability of foreignness gives rise to additional operational costs related to economic, institutional, and cultural differences between home and host countries. MNEs therefore need to own or control firm-specific advantages (FSAs) that, along with country-specific advantages (CSAs) and internalization advantages, affect international business transactions. In this paper, we revise Rugman’s classic FSA/CSA matrix to better reflect how firms bundle their assets with CSAs. We further contribute to the prior debate on the linkages between the global factory paradigm and internalization theory by empirically evaluating the validity of a key proposition associated with the global factory, namely that FDI becomes relatively less important as a building block of the modern MNE. We do so using data on FDI and cross-border mergers and acquisitions, a major component of FDI.     

What changes the rules of the game in wholly owned subsidiaries? Determinants of knowledge acquisition from parent firms

We examine key factors affecting the extent of knowledge acquisition from multinational enterprises (MNEs) in their wholly owned subsidiaries (WOSs). As the volume of foreign direct investment (FDI) by MNEs is rapidly growing, empirical studies dealing with knowledge acquisition from parent firms in subsidiaries are in the limelight. However, as far as we know, none has attempted to identify primary mechanisms influencing subsidiary learning by dividing WOSs based on ‘investment mode’ and ‘investment direction’. We believe WOSs are characterized by these two issues and thus this research contributes to current literature by providing a detailed picture of learning mechanisms in subsidiaries. We advance a series of propositions to achieve the research objective by using a sample of WOSs established by MNEs in Korea. By doing this, we reveal that subsidiary learning depends significantly on absorptive capacity in learning organizations, relational capital and parent firms’ behavior. Also, we confirm that factors facilitating knowledge acquisition are influenced by investment mode and investment direction. Based on the results, this study provides some useful implications for MNEs and policy makers in local markets.     

The complementarity of human capital and language capital in foreign direct investment

Integrating the literature on language-MNEs (multinational enterprises) in international business and economic theory of human capital (HC), we establish an analytical framework to systematically examine how HC and language capital (LC) jointly determine foreign direct investment (FDI). We contend that the extent to which MNEs can leverage HC in a host country for FDI depends on LC. Based on an extensive bilateral dataset covering 3315 country pairs during 1995–2008, we reveal clear evidence on the moderating role played by LC in HC-FDI relationship and such evidence is robust to different measures used for different variables, the inclusion of more control variables and different samples.     

The Influence of Firm's Size and International Experience on the Ownership Structure of Italian FDI in Manufacturing

The literature on foreign direct investment (FDI) has analysed the entry mode choice by multinational enterprises (MNEs) from several theoretical viewpoints. Nevertheless, previous studies have mainly focused on the behaviour of large and established MNEs while little attention has been given to small- and medium-sized firms.The paper aims at providing further empirical evidence on the role of firm size and international experience in influencing the ownership structure of FDI. The main hypothesis is that smaller firms, characterised by financial and managerial constraints, as well as firms lacking experience in managing foreign operations, suffer from a condition of adverse asymmetry in information costs, compared to their competitors. Therefore, they are forced to act prudently, minimising risk and thus preferring a less control arrangement of foreign subsidiaries.A binomial logistic model is developed with reference to manufacturing foreign direct investments undertaken by Italian firms in the period 1986–1993.     

Investment History and Market Orientation Effects in the TFP–FDI Relationship1

This paper examines the robustness of previous stochastic dominance tests that find significant total factor productivity (TFP) heterogeneity between firms that export abroad and multinational enterprises (MNEs). We extend this literature by focusing on how ‘within‐MNE’ heterogeneity affects the extent to which one can identify the TFP threshold in the exporter–MNE TFP relationship. Within‐MNE heterogeneity is established by determining both the number and location of the foreign affiliates established by each MNE. In this way, we separate single‐affiliate MNEs from those with multiple affiliates, as well as analyse the role played by vertical FDI, a topic typically ignored in previous stochastic dominance tests of the Helpman et al. (2004, American Economic Review, 94, 300–16) hypothesis. Our empirical tests employ Japanese firm‐level FDI and TFP data for the period 1975–2000. Using Kolmogorov–Smirnov tests to determine stochastic dominance, we find significant TFP heterogeneity within the MNE group based on investment history and affiliate geographic location. While our results confirm the standard HMY three‐tiered classification to exist for Japanese firms, exporter–MNE ‘between‐group’ TFP heterogeneity is sensitive to the ‘within‐MNE’ investment history heterogeneity. We note that single‐ and two‐affiliate MNEs are statistically more similar to exporting firms than to MNEs with greater foreign affiliate totals. This shows the exporter–MNE TFP threshold to be not as explicit as Helpman et al. (2004, American Economic Review, 94, 300–16) suggest. In fact, our results allow us to identify the MNE‐side width of Girma et al.’s (2005, Economic Letters, 83, 317–24) ‘uncertainty region’ surrounding this threshold. Finally, we also find a strong TFP–market orientation relationship exists where the most productive firms follow complex integration strategies, lesser TFP firms do horizontal FDI, and the least productive MNEs do vertical FDI.     

The merits of horizontal versus vertical FDI in the presence of uncertainty

We examine the impact of uncertainty on vertical and horizontal FDI. Our model shows that greater supply uncertainty reduces the expected income from vertical FDI but increases the expected income from horizontal FDI. Greater demand uncertainty adversely affects the expected income under both production modes. Uncertainty about predatory actions by the host country is more costly to the multinational under vertical than under the horizontal mode. We examine sales by foreign affiliates of U.S. parent companies. Conditioning on host-country characteristics thought to influence FDI, we find evidence that volatility and sovereign risk have a greater negative impact on vertical FDI than on horizontal FDI.     

Does distance matter in foreign direct investment sub-national location choice? Evidence from China

Multinational enterprises (MNEs) make investment decisions according to the distance factors at a sub-national level. This paper made estimates using the gravity model with provincial foreign direct investment (FDI) data from 2000 to 2012 and employed three concepts of distance. Our empirical results indicate that geographic distance and cultural distance have significant negative effects on FDI flow, whereas economic distance has a significant positive effect. It suggests that FDI prefers to locate in regions that are geographically and culturally close but economically distant from the home country, which further implies that FDI in China is dominated by vertical FDI. Our findings suggest that Chinese provincial governments should place emphasis on attracting FDI from culturally close countries and provide institutional support to encourage and promote horizontal FDI.     

Intermediary Products: FDI Strategies,Imports, Exports,and Trade Balances in Developed Economies

Has the relationship between the dominant investment motives of multinational enterprises (MNEs) and national trade balances, imports, and exports changed over time? A 1996 study hypothesized and found that the MNE market versus resource seeking investment motives in developed countries (DCs) resulted in different aggregate impacts on national trade balances, imports, and exports. In this study, we ask whether the increased use of intermediary products, a major change in the way MNEs conduct business, affect the previously found patterns. Because firm‐level data on intermediary products is not widely available across countries, we indirectly test their impact, hypothesizing that the rise in use of intermediary products has changed MNE investment motives in DCs, resulting in stronger relationships between foreign direct investment (FDI) and imports/exports in high‐FDI DCs but weaker links between FDI and national trade balances. Implications and future research directions are discussed. © 2015 Wiley Periodicals, Inc.     

Should I stay or should I go now? Understanding terrorism as a driver of institutional escapism

Prior empirical research has examined the effects of terrorism on foreign direct investment. These studies reveal the negative impact of terrorism on national economies, but neglect to theorize and examine how terrorism drives institutional escapism by promoting outward foreign direct investment (OFDI) to countries with lower risk levels. This study proposes and tests a rationalist explanation that builds on the concept of institutional escapism for how terrorism encourages increased levels of OFDI, particularly to countries with reduced risk. Drawing on the resilience, political violence, and international business literatures, we demonstrate through a unique global dataset of 22,873 observations, 5584 home-host country pairs, and 153 countries over 16 years (1995–2010) that terrorism induces institutional escapism in terms of OFDI.     

The effect of non-conventional outbound foreign direct investment (FDI) on the domestic employment of multinational enterprises (MNEs)

Using a sample of 787 Japanese MNEs operating in 60 countries from 1996 to 2010, this study examines the impacts of MNEs’ three most commonly observed forms of non-conventional outbound FDI (i.e., as a means to counter trade barriers, to achieve a financial hedge, or to obtain tax breaks) on domestic employment levels of MNEs at home. We build on a conceptual classification of ‘motivation-activity’ of MNEs as a theoretical framework, and evaluate the impacts of MNEs’ non-conventional outbound FDI on their domestic employment levels in relation to the MNEs’ specific combination of ‘motivation’ and ‘activity’ as they conduct outbound FDI in host countries. The 3SLS regression results show strong evidence that non-conventional outbound FDI in core business activities reduces MNEs’ domestic employment levels when the investment is primarily for responding to country-specific conditions, such as circumventing host country restrictions (e.g., FDI to counter trade barriers) or escaping from home country restrictions (e.g., FDI for tax incentive packages), while FDI in non-core business activities (e.g., FDI for financial hedging or FDI in tax havens) has either a positive or insignificant effect on MNEs’ domestic employment levels depending on whether it aims to develop FSAs or not. We conclude the study with public policy implications from these findings.     

From structural to transition effects: Institutional dynamism as a deterrent to long-term investments by MNEs

The effect of institutional change on foreign direct investment is often conceptualized through the lens of an improving or deteriorating level of institutional quality that alters transaction costs. However, in the context of comprehensive government intervention in the past decades, this perspective ignores the potential uncertainties and costs associated with the process of institutional change. We propose that institutional change causes structural changes in transaction costs as well as accompanying transition effects due to uncertainty and learning costs. The extent of such transition effects is linked to the process characteristics of institutional change, e.g., institutional dynamism. In this paper, we examine the effects of institutional dynamism on foreign direct investment in long-term capital commitments and hypothesize a negative relationship between institutional dynamism and FDI, and a moderating effect of institutional dynamism on the relationship between institutional quality and FDI. Using investment data by US MNEs aggregated on the host country level, we find support for our hypotheses with some qualifications. We derive implications for the middle-income trap discussion as well as the ongoing fast-paced transition towards a sustainable global economy that is bound to shift attention from differences in the level of institutional quality towards differences in transition processes.     

Analysis of government policies,institutions, and inward foreign direct investment: Evidence from sub‐Saharan Africa

This article examines the effects of government policies and institutions on foreign direct investment (FDI) inflows in sub‐Saharan African context using both quantitative and qualitative approaches. On the quantitative approach, we analyzed the effects of institutions on FDI using two statistical techniques—canonical cointegration regression (CCR) and fully modified ordinary least square (FMOLS)—over the period of 1984–2012. We find that political instability, democratic accountability, and investment risk have significant impact on inward FDI in Nigeria. Using a trend analysis, our results provide evidence to suggest that liberal government investment policies have positive influence on FDI inflows. Our qualitative analysis over the 1962–2012 period supports the results of the quantitative analysis.     

Spatial Econometric Analysis of Foreign Direct Investment Determinants in Russian Regions

Using a spatial autoregressive model of cross‐sectional and panel data, we study the determinants and dominant strategies of foreign direct investment (FDI) inflows into Russia before and after the 1998 financial crisis. The important determinants of FDI inflows into Russian regions since the start of transition appear to be market size, the presence of large cities and sea ports, oil and gas availability, proximity to European market, and political and legislative risks. Since 1998, it appears the importance of big cities, the Sakhalin region, oil and gas resources, proximity to European markets, and legislation and political risks has increased. Our results also reveal a shift from horizontal FDI strategy to vertical FDI strategy in the post‐crisis period. Using a multiple spatial lags approach, we show that neighbouring port‐endowed regions tend to have emerged in the post‐crisis era as competitors for FDI.     

Political risk and the internationalization of firms: An empirical study of Canadian‐based export and FDI firms

Political risk analysis primarily receives attention for foreign direct investment (FDI) but only rarely for exporting. We examine how exporters and foreign direct investors evaluate the relative importance of political risk factors. We provide a rationale for exporters to evaluate political risk factors for FDI and for foreign direct investors to evaluate political risk factors for exporting. Survey data were collected from Canadian exporters and foreign direct investors and capture the distinctive nature of salient factors for exporting and FDI. We offer unique insights on the evolutionary character of political risk that are of practical value for both exporting and FDI. Copyright © 2007 ASAC. Published by John Wiley & Sons, Ltd.     

Networks of foreign affiliates: Evidence from Japanese micro-data

The paper provides evidence of the investment patterns of Japanese multinational enterprises (MNEs) across countries and industries and analyses the main drivers of their location strategies, using detailed micro-data on Japanese parents and their affiliates including the final destination of affiliate sales. The breakdown of affiliate sales by destination market reveals that Japanese MNEs establish services affiliates primarily to maximise proximity to local customers, while foreign affiliates in manufacturing sectors tend to engage more widely with third countries. Yet, some economies emerge as strategic gateways to other destinations in their region. The empirical analysis delves into the drivers of host country attractiveness for FDI seeking new markets, production efficiency and to act as regional or global platforms. Important factors shaping Japanese FDI decisions include trade and investment policies in goods and services, deep FTAs, as well as streamlined customs procedures. Furthermore, well-calibrated rules for digital commerce and investments in digital infrastructure and innovation contribute to attracting MNEs. Overall, the paper stresses the factors behind better integration into global production networks and the policy priorities to attract various types of FDI inflows.     

Economic and Political Determinants of the Effects of FDI on Growth in Transition and Developing Countries

This study investigates the role of human capital and political development in determining the magnitude of the effects of foreign direct investment (FDI) on growth for a panel of 61 transition and developing countries for the period 1989 to 2013. A baseline growth model incorporating these variables is tested and then extended to include FDI interaction effects with human capital (measured using secondary school enrollment data) and political development (based on Economist Intelligence Unit Democracy Index scores). These growth interaction effects between FDI and human capital vary according to regime type. Political development in conjunction with FDI appears to suppress the effects of FDI on growth in authoritarian countries while enhancing them in hybrid democracies. For more democratic countries, domestic investment is a more important driver of growth. The effects of FDI on growth in the ten transition economies included in the sample data set are found to be insignificant. Although this result might seem to differ from a priori expectations, it is in line with the findings of most earlier studies that cover the period up to 2004. The paper also provides no strong evidence that a critical threshold of human capital is required to generate beneficial spillover growth effects from inflows of FDI. The paper provides new and more detailed insights into the effects of FDI on growth with particular respect to human capital and political regime covering a large number of transition and developing countries based on an up‐to‐date data set covering a 25‐year period to 2013. © 2016 Wiley Periodicals, Inc.     

Environmental risks and the bargaining power of multinational corporations

Government policies are integral to the internalization theory of foreign direct investment (FDI). However, the role of government policies in affecting FDI as a strategic choice of firms has not been fully explored. This article therefore expands the analysis of the role of government policy in the internalization theory of FDI. Some government policies reduce market imperfections while others create them. Some of those policies and their effects on market imperfections furthermore make FDI less attractive as a strategic alternative, while other policies and their effects on market imperfections make FDI more attractive. This study also argues that a comprehensive integration of political variables in FDI theory requires several levels of analysis of both political and economic variables.