The moderating role of local embeddedness on the performance of foreign and domestic firms in emerging markets |
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| Institution: | 1. RWTH Aachen University, Germany;2. TU Dortmund University, Germany;1. MK Business News, 190 Toegye-ro, Jung-gu, Seoul 04627, South Korea;2. Korea University, School of Business, 145 Anam-ro, Seongbuk-gu, Seoul 02841, South Korea;1. Analytic Focus, LLC, San Antonio, USA;2. SolBridge International School of Business, South Korea;3. St. Mary''s University, San Antonio, USA;1. Korea University Business School, Anam-Dong, Seongbuk-Gu, Seoul 136-701, Republic of Korea;2. Oregon State University, College of Business, Corvallis, OR 97331, United States;3. Management and Organization, Great Valley School of Graduate Professional Studies, The Pennsylvania State University, Malvern, PA 19355-1443, United States;4. Department of Management, Information Systems, and Entrepreneurship, College of Business, Washington State University, Pullman, WA 99164-4736, United States |
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| Abstract: | This paper examines the impact of the firm’s degree of local embeddedness on its performance in emerging markets using the World Bank’s Enterprise Survey Manufacturing Sector Module data on 15,715 firms covering 78 emerging markets. We use the degree of localization of sourcing and sales to measure the degree of embeddedness in the host country market. We argue that since embeddedness brings the firm into closer interaction with local firms and institutions, the costs of embeddedness should be lower for local firms than for MNE subsidiaries, since local firms can be assumed to be better able to decipher local institutions. We find that both dimensions are subject to a reversed U-shaped function. That is, by extending the degree of local sales and local sourcing up to a certain percentage, a firm can realize positive performance growth by becoming more embedded into the emerging market, but beyond this point, the performance impact is negative. We also find that foreign firms involved in local sales seem to lose part of their ability to exploit their ownership advantages as compared to foreign firms that export their production. |
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| Keywords: | Emerging market FDI FDI motives Institutional environment |
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