Multinational firms and host country market structure: A review of empirical literature

We address the impact of multinationals on host country market structure through reviewing existing empirical literature. Our main conclusion is that the majority of studies focus on samples of manufacturing industries/firms, neglecting the service sector, despite its importance. Future research should be directed to this sector and explore the possibility of bidirectional causality between foreign presence and host country industry concentration. Studies concerning the impact of multinationals on entry, exit and survival of host country firms must use more recent data, investigate the role of vertical linkages and taking into account other control variables that may affect the exit rate. Finally, future work should take into account the mode of foreign firm establishment in the host country.     

How do firms evolve? The patterns of technological evolution of semiconductor subsidiaries

This study draws on concepts from international strategy and evolutionary economics to investigate the development of innovative ability within multinational subsidiaries. The paper develops hypotheses regarding the evolution of subsidiary innovative abilities, and the changes across time of their knowledge sourcing and sharing patterns with other parts of the multinational enterprise and host country firms.The paper analyzes patent data pertaining to foreign subsidiaries of US semiconductor firms and finds support for subsidiary technological development—there are positive changes in the scale and scope of innovative activity across time. The results also suggest that subsidiaries are increasingly embedded in host country knowledge networks—as they mature, subsidiaries increasingly learn and share knowledge locally. Evidence of increasing integration with other firms within the multinational enterprise is weaker.     

Spillovers from foreign direct investment and firm growth: technological,financial and market structure effects

This article examines spillover effects from inward investment on domestic firm growth in the case of a developed host country. The emphasis is placed on the role of the technological gap between domestic and foreign firms in identifying the importance of technology diffusion from the presence of multinationals. An augmented production function is employed to account for technological, financial and market structure effects. Based on a sample of 2589 manufacturing firms operating in Greece between 1992 and 1997, the analysis provides evidence that the significance of spillovers varies with the relative technological position of domestic firms and is higher in the middle and upper quantiles of the growth distribution. It was estimated that a unit increase in the foreign presence in Greek industry raises output growth by 7% on average, in a five‐year period, after controlling for technological differences among firms. This result is consistent with the ‘absorptive capacity’ hypothesis that the technological capability of the host country relates positively to FDI spillover benefits.     

Firm heterogeneity and location choice of Taiwanese multinationals

This paper examines the extent to which production location decisions of Taiwanese multinationals reflect underlying patterns of firm productivity. In our theoretical model, heterogeneous firms in a middle-income country decide on the optimal production locations for serving three geographically separate markets: domestic, foreign high-income and foreign low-income. The model shows that the equilibrium decision of a firm depends on the fixed investment costs of establishing foreign subsidiaries, production costs, transportation costs, market size and its own productivity level.

Using firm-level data in 2000, Taiwanese electronics firms are divided into four different categories: non-FDI, investors in China only, investors in the U.S. only, investors in both China and the U.S. We use a multinomial logit model to link firms' location choices with their productivity, controlling for country, industry and other firm characteristics. Our empirical results are consistent with the predictions of the theoretical model. We show that more productive firms engage in outward FDI, with the most productive ones investing in both China and the U.S. We also provide evidence indicating that Taiwanese multinationals investing only in the U.S. are more productive than those investing exclusively in China due to smaller fixed investment costs in China relative to the U.S.     

Firm heterogeneity and location choice of Taiwanese multinationals

This paper examines the extent to which production location decisions of Taiwanese multinationals reflect underlying patterns of firm productivity. In our theoretical model, heterogeneous firms in a middle-income country decide on the optimal production locations for serving three geographically separate markets: domestic, foreign high-income and foreign low-income. The model shows that the equilibrium decision of a firm depends on the fixed investment costs of establishing foreign subsidiaries, production costs, transportation costs, market size and its own productivity level.Using firm-level data in 2000, Taiwanese electronics firms are divided into four different categories: non-FDI, investors in China only, investors in the U.S. only, investors in both China and the U.S. We use a multinomial logit model to link firms' location choices with their productivity, controlling for country, industry and other firm characteristics. Our empirical results are consistent with the predictions of the theoretical model. We show that more productive firms engage in outward FDI, with the most productive ones investing in both China and the U.S. We also provide evidence indicating that Taiwanese multinationals investing only in the U.S. are more productive than those investing exclusively in China due to smaller fixed investment costs in China relative to the U.S.     

Firm heterogeneity and location choice of Taiwanese multinationals

This paper examines the extent to which production location decisions of Taiwanese multinationals reflect underlying patterns of firm productivity. In our theoretical model, heterogeneous firms in a middle-income country decide on the optimal production locations for serving three geographically separate markets: domestic, foreign high-income and foreign low-income. The model shows that the equilibrium decision of a firm depends on the fixed investment costs of establishing foreign subsidiaries, production costs, transportation costs, market size and its own productivity level.Using firm-level data in 2000, Taiwanese electronics firms are divided into four different categories: non-FDI, investors in China only, investors in the U.S. only, investors in both China and the U.S. We use a multinomial logit model to link firms' location choices with their productivity, controlling for country, industry and other firm characteristics. Our empirical results are consistent with the predictions of the theoretical model. We show that more productive firms engage in outward FDI, with the most productive ones investing in both China and the U.S. We also provide evidence indicating that Taiwanese multinationals investing only in the U.S. are more productive than those investing exclusively in China due to smaller fixed investment costs in China relative to the U.S.     

Emerging versus advanced country MNEs investing in Europe: A typology of subsidiary global–local connections

This paper empirically investigates how subsidiaries of multinationals from both emerging (EMNEs) and advanced (AMNEs) economies investing in Europe learn from the local context and contribute to it as much as they benefit from it. To explore this we classify the behavior of MNE subsidiaries into different typologies on the basis of how knowledge is transferred within the multinational and on the nature of the local innovative connections. The empirical analysis relies on an entirely new, subsidiary-level dataset in the industrial machinery sector in Italy and Germany. Results show that EMNEs and AMNEs undertake different strategies for tapping into local knowledge and for transferring it within the company. We identify a new typology of EMNE subsidiary that contributes through its significant local innovative efforts to development processes in the host country. This result suggests possible win-win situations from which novel policy implications may be drawn.     

Regulative Distance,Cultural Distance,Host Country Risk,and the Choice of Subsidiary Activity: Evidence from Brazilian Multinationals

This study examines the relationship between regulative distance, cultural distance, and host country risk, as well as the choice of production or distribution activities by emerging country multinationals when establishing a subsidiary abroad. The study uses a sample of 280 subsidiaries of 133 Brazilian firms in 39 countries. Binary logistic regression was used to test the research hypotheses. The impact of regulative distance on the decision on subsidiary activity follows the predictions in the literature. However, findings on cultural distance and host country risk showed an inverted sign, suggesting that Brazilian firms tend to establish production facilities in countries with higher cultural distance and higher cultural risk.     

Subsidies for FDI: Implications from a model with heterogeneous firms

This paper analyzes the welfare effects of subsidies to attract multinational corporations when firms are heterogeneous in their productivity levels. I show that the use of a small subsidy raises welfare in the FDI host country, with the consumption gains from attracting more multinationals exceeding the direct cost of funding the subsidy program through a tax on labor income. This welfare gain stems from a selection effect, whereby the subsidy induces only the most productive exporters to switch to servicing the host's market via FDI. I further show that for the same total subsidy bill, a subsidy to variable costs delivers a larger welfare gain than a subsidy to the fixed cost of conducting FDI, since a variable cost subsidy also raises the inefficiently low output levels stemming from each firm's markup pricing power.     

State ownership and internationalization: The advantage and disadvantage of stateness

We critically review the literature on state-owned multinationals to clarify previous arguments and guide future studies. The content analysis of prior research reveals that state-owned firms differ from private firms in their internationalization: they are motivated by national strategic objectives, select more challenging countries, and use acquisitions more intensively despite adverse market reactions. The analysis also reveals conflicting predictions on the level of internationalization; some studies find that state-owned multinationals internationalize more while others find the contrary. We introduce one solution to these conflicts by classifying theories into two camps based on the balance between the costs and benefits of state ownership. One camp suggests a disadvantage of stateness (agency theory, resource dependence theory, and neo-institutional theory). Another camp promotes an advantage of stateness (economic development, resource-based view, and institutional economics). We conclude by outlining three promising relationships in the study of these firms: (1) relationships internal to state-owned multinationals and the balancing of stakeholder demands; (2)relationships between state-owned multinationals and government and the influence of the political system; and (3) relationships between home and host country governments and the impact of their dynamics on state-owned multinationals.     

The challenge of Chinese state‐affiliated multinationals in benefiting from foreign subsidiary knowledge transfer: A criticism of light‐touch integration

Acknowledging the sharp growth of Chinese state‐affiliated multinationals and their strategic asset‐seeking investments abroad, this study investigates the effects of headquarters' home‐country political ties on the multinational‐wide benefits gained from subsidiary knowledge transfer in Chinese multinationals. It also looks at how these effects are mediated by organizational distance and social integration between headquarters and subsidiary. Based on a survey of 177 subsidiaries of 99 Chinese multinationals, we find that headquarters' political ties trigger organizational distance and hinder social integration between headquarters and foreign subsidiaries and these, in turn, hamper the potential benefits that Chinese multinationals derive from subsidiary knowledge transfer. This study identifies new challenges related to political ties and light‐touch integration in gaining benefits from subsidiary knowledge transfer.     

Explaining variation in reverse diffusion of HR practices: Evidence from the German and British subsidiaries of American multinationals

This paper examines the phenomenon of ‘reverse diffusion’ of HR practices in multinational companies, defined as the diffusion of practices from the foreign operations of MNCs to the home country. Drawing on research incorporating fieldwork in the British and German subsidiaries of US-based multinationals, we identify sources of variation in the incidence of reverse diffusion both between firms and between subsidiaries of the same firm.     

Revisiting the external impact of MNCs: An empirical study of the mechanisms behind knowledge spillovers from MNC subsidiaries

The majority of studies of knowledge spillovers from the presence of multinational corporations (MNCs) have focused on whether or not, rather than how knowledge spillovers occur from MNC subsidiaries to local host country firms. Using survey data from 210 MNC subsidiaries in Sweden, a composite model is developed examining the impact of two different environmental conditions on the occurrence of knowledge spillovers arising from innovation transfer within MNCs. We distinguish between horizontal knowledge spillovers (i.e., to competitors) and vertical knowledge spillovers (i.e., to customers and suppliers), and emphasise the conceptually important distinction between the two. The former are largely unintentional by nature whereas the latter can be considered as intentional knowledge diffusion. The results show that competitive pressure in the recipient subsidiary's local environment gives rise to unintentional knowledge spillovers, whereas it is negatively related to intentional knowledge diffusion. The results also support the notion that the degree of embeddedness of in a subsidiary's business network in the host country is positively related to intentional knowledge diffusion. An important finding of the study is that there is a positive relationship between intentional knowledge diffusion and unintentional knowledge spillovers.     

Firm Heterogeneity and FDI in Distribution Services

Distribution services play a large role in intermediating production and consumption across borders. Using firm‐level data on Japanese multinationals in wholesale and retail sectors, this study examines FDI decisions of distribution firms for local distribution services at the extensive and intensive margin. Consistent with the model of heterogeneous firms on multinational production, I find that more productive multinationals are more likely than less productive multinationals to enter a larger number of markets, to penetrate less attractive markets and to generate larger sales per each market. While these findings are consistent with previous evidence on manufacturing multinationals, I find some distinctive determinants of FDI in distribution services.     

Efficiency‐Seeking Emerging Market Firms: Resources and Location Choices

We study the efficiency‐seeking location choices of Indian software firms. In particular, we investigate the influence of heterogeneity in their resources on their location choices. The resource‐based view posits that firms face difficulties in transferring their resources in dissimilar host‐country environments. Prior research has investigated this phenomenon primarily for market‐seeking motives of multinational firms. With the help of hierarchical linear modeling, we analyze 650 location choices of Indian software firms and find that efficiency‐seeking firms face difficulties in locating in host countries with dissimilar and challenging labor environments. We find that the firms with core competence manifested through capability maturity model integration (CMMI) accreditation are able to overcome issues related to resource fungibility in dissimilar host‐country environments. © 2014 Wiley Periodicals, Inc.     

Firm configuration and internationalisation: A model

We present a discrete choice model that analyses the location and control dilemmas of internationalising firms. The model relates simultaneously to a foreign market and to a foreign resource abundant country, and distinguishes between costs of performing specific value adding activities, costs of transportation and knowledge flows cost. The model also offers an economics-based dynamic dimension to firm internationalisation and reflects the role of host country knowledge resources.     

Competition for firms in an oligopolistic industry: The impact of economic integration

We set up a model of generalised oligopoly where two countries of different size compete for an exogenous, but variable, number of identical firms. The model combines a desire by national governments to attract internationally mobile firms with the existence of location rents that arise even in a symmetric equilibrium where firms are dispersed. As economic integration proceeds, equilibrium taxes initially decline, but then rise again as trade costs fall even further. A range of trade costs is identified where economic integration raises the welfare of the small country, but lowers welfare in the large country.     

Strategy and structure of service multinationals and their impact on linkages with local firms

Drawing on case studies of two leading UK service firms in five host countries (Argentina, Brazil, China, Korea and Malaysia), we examine how the strategy and organization of service multinationals shape the development of linkages with local firms in host economies. We find that there is reduced autonomy of subsidiaries to engage with local firms as a result of relatively centralized strategies of multinationals. Because of global policies ensuring consistency of services or global sourcing policies to reduce costs, service multinationals tend to prefer global suppliers. Backward linkages occur in a few cases when the relationship can be a vehicle for market expansion for the multinational in a particular host market. Local governments play an important role in the cases where backward linkages are developed.     

Introducing Western-style HRM practices to China: Shopfloor perceptions in a British multinational

The management of host country employees is often portrayed as a particularly fraught dimension for multinational firms. The problems involved are considered exponentially greater when there are substantial institutional differences and “cultural distance” between the host country and a multinational firm's parent country, as is assumed to be the case for Western firms operating in mainland China. Based upon detailed case study research conducted at a UK-invested firm in China between 1999 and 2003 and a comparative study of a Chinese state-owned firm, this paper explores the veracity of such assumptions. The findings indicate that Western human resource management (HRM) practices can be transplanted successfully and questions the degree to which foreign-invested enterprises (FIE) need to adopt “the Chinese way of doing things”. Indeed, such practices can be innovative in the Chinese context and provide a competitive source of differentiation for multinationals as employees.     

The internationalization of Nigerian firms: Motivations and location patterns

Despite the increased number of studies of the internationalization of emerging‐market multinationals (EMNCs), Latin American and Asian firms have dominated the focus of such studies, while the study of the internationalization process of sub‐Saharan African firms in the international business literature is quite limited. Therefore, this article examines the motivations and location patterns of the internationalization process of four Nigerian firms through a multiple case study approach. The findings show that the internationalization of the Nigerian firms is a recent phenomenon, but the foreign investment pattern reflects a pan‐African investment strategy. However, the findings also reveal that the firm‐specific advantages that had been accumulated in the domestic market, coupled with home‐country factors and regional‐/host‐market factors, were key determinants of the motivations and location patterns in the internationalization process of Nigerian firms.