The Foundations of International Business: Cross‐Border Investment Activity and the Balance between Market‐Power and Efficiency Effects

The foundational international business (IB) scholarship grappled with whether multinational enterprises (MNEs) are largely efficiency‐enhancing or market‐power inducing institutions. Contemporary scholarship, however, often associates foreign direct investment (FDI) with efficiency‐enhancing properties and thus neglects the market‐power interpretation of the MNE. Such an imbalance is problematic given that the theoretical and empirical justifications behind the field's embrace of the efficiency interpretation are not fully evident. Instead, both efficiency and market‐power effects are seemingly present in cross‐border investment activity. Based on a comprehensive sample of up to 4,361 cross‐border investments materializing between 1986 and 2010, we present theoretically‐grounded hypotheses with regard to when market‐power effects will tend to dominate efficiency effects. We find that cross‐border investments undertaken by emerging‐market MNEs in both developed and emerging markets tend to involve substantial efficiency effects and minimal market‐power effects when compared with the cross‐border investments undertaken by developed‐country MNEs in both developed and emerging markets.     

RISE OF THE FIDUCIARY STATE: A SURVEY OF SOVEREIGN WEALTH FUND RESEARCH

We survey the literature documenting the rise of sovereign wealth funds (SWFs), which, with assets under management of over $5.4 trillion at year‐end 2014, are a major force in global finance. Research papers have analyzed the evolution of SWFs from stabilization funds to stand‐alone wealth management funds; we both survey this research and show that more than 25 countries have launched or proposed new SWFs since January 2008. The most salient and controversial feature of SWFs is that they are state‐owned; we survey the existing literature on state ownership and discuss what this predicts about the efficiency and beneficence of government control of SWF assets. We discuss the documented importance of SWF funding sources (oil sales revenues versus excess reserves from export earnings) and survey the normative literature describing how SWFs should allocate funds. We then summarize the empirical literature studying how SWFs actually do allocate funds—across asset classes, geographically, and across industries. We document that most SWF equity investments in publicly traded firms involve cross‐border purchases of sizeable minority stakes (median around 20%) in target firms, with a strong preference for investments in the financial sector. Next, we assess empirical studies examining the impact of SWF stock investments on target firm financial and operating performance, and find universal support for a positive announcement period stock price increase of 1–3%. This, however, is significantly lower than the 5% abnormal return documented for stock purchases by comparable privately owned financial investors in recent studies, indicating a “sovereign wealth fund discount.” We conclude by summarizing the lessons of SWF research and pointing out unresolved issues.     

Effects of Industry‐ and Region‐Specific Acquisition Experience on Value Creation in Cross‐Border Acquisitions: The Moderating Role of Cultural Similarity

Based on a sample of 222 cross‐border acquisitions by US firms in the service sector, our study examines the effects of acquiring firms' prior cross‐border acquisition experience in the same industry and geographic region as the acquired firm on shareholder value creation. Using the BHAR (buy‐and‐hold abnormal returns) methodology, we find that higher levels of industry‐specific and region‐specific acquisition experience translate into greater shareholder value creation for acquiring firms in subsequent acquisitions. In addition, our results indicate that the effects of industry‐specific acquisition experience on acquisition performance are contingent on the level of cultural similarity between the acquiring and acquired firm countries, with the benefits of prior experience being greater in acquisitions undertaken in culturally similar countries. We also find that the moderating effects of cultural similarity on the relationship between industry‐specific acquisition experience and value creation are contingent on the level of prior region‐specific acquisition experience possessed by the acquiring firm.     

Cross-cultural perceptions of clan control in Korean multinational companies: a conceptual investigation of employees' fairness monitoring based on cultural values

While enjoying success in their home territory in terms of human resource management (HRM) and employee commitment, Korean multinational companies (MNCs) seem to struggle in their overseas subsidiaries to replicate this success in attracting/retaining talent. To explain the HRM challenges seen in many Korean MNCs, we adapt the notion of employees' fairness monitoring in developing a model which illustrates the relationships between clan control in Korean MNCs, employee's perceived fairness and the cultural values of individualism and collectivism. We offer our first set of propositions concerning associations between fairness monitoring and cultural values, before suggesting another set of propositions about relationships between employees' fairness judgement and clan control in Korean MNCs. Figures graphically illustrating of some of our propositions are also presented. Our model proposes that clan control in Korean MNCs may cause perceived low fairness judgement during employees' fairness monitoring in both individualistic and collectivistic cultures. We believe this paper should stimulate further enquiries in international HRM, cross-culture and fairness literatures.     

Viceroys or Emperors? An Institution‐Based Perspective on Merger and Acquisition Prevalence and Shareholder Value

We study how cross‐country variance in institutions that aim to address core agency problems influences consequential strategic decisions of firms around the world. Scholars frequently argue that the interests of minority shareholders are threatened by merger and acquisitions (M&As) due to principal‐agency problems. Rather than acting in shareholders’ best interests, managers potentially act as viceroys, using M&As to cushion themselves from risk and extract more pay. Yet equally salient is the issue of principal‐principal agency, where controlling shareholders can behave as emperors who use M&As to siphon off assets and profits, and appropriate wealth of shareholders with fewer control rights. Taking an institution‐based perspective on these ‘viceroy’ and ‘emperor’ problems, we conjecture that institutions aimed to address these agency problems can generate the desired outcome regarding M&A prevalence, but may also produce unintentional negative consequences for shareholder value as a side‐effect. Empirical evidence covering M&As from 73 countries supports our hypotheses.     

Hostile–vs.–white‐knight bidders

We examine the hypothesis that white knights enter control contests to spend free cash flow instead of paying it out to shareholders. Tobin's q is used to measure management's inclination to invest in negative NPV investments. We find that historically, white knights have over‐invested and their acquisition of the target is one more negative NPV investment. Alternatively, hostile bidders’ past investment decisions have increased shareholder wealth. Furthermore, white knights’ returns upon the announcement of their bid have a significant negative relationship with free cash flow, implying that their bid reveals information about white knights management's investment decisions. Copyright © 1999 John Wiley & Sons, Ltd.     

Foreign Direct Investment from Emerging Markets to Africa: The HRM Context

In this article, we explore what determines the decisions of emerging‐market multinational corporations (MNCs) to invest in Africa and whether this is any different from their counterparts in mature markets, focusing on the HRM context. More specifically, we explore the effect of potential host‐country wages, local capabilities, and the relative rights of owners versus workers on foreign direct investment (FDI) decisions, as well as other relevant factors such as mineral resources and corruption. We found that emerging‐market MNCs were not deterred by relatively weak property owner rights (as indeed, was also the case for their counterparts from mature markets); hence, any weakening of countervailing worker rights is unlikely to unlock significant new FDI. However, emerging‐market MNCs were more likely to invest in low‐wage economies and did not appear to be concerned by local skills gaps; the latter would reflect the relative de facto ease with which even partially skilled expatriate labor can be imported into many African countries. At the same time, a reliance on low‐wage, unskilled labor, coupled with the extensive usage of expatriates, brings with it a wide range of challenges for the HR manager, which a firm committed to cost‐cutting may lack the capabilities to resolve. © 2014 Wiley Periodicals, Inc.     

Wertsteigerung durch Sell-Offs: Eine Meta-Analyse

This paper reviews the empirical evidence on shareholder wealth effects of corporate sell-offs. Meta-analysis is used to aggregate the considerably heterogeneous findings of 64 event studies (1984–2010) on sell-off announcements. Fourteen hypotheses are tested (1) to examine effects on shareholder wealth of the announcement of sell-offs and (2) to identify factors that influence the wealth effects associated with the announcement of sell-offs. The overall results show that sell-off announcements have a positive impact on shareholder wealth. The shareholder wealth effects are higher, if the divested unit is large in terms of its relative size, if it is loss-making and domestic, if the sale proceeds are paid out to shareholders or bondholders, if the purchase price is disclosed and buyer equity is used for settling the purchase price. The results emphasize the importance for companies to constantly reassess their investment portfolio and execute sell-offs in a value enhancing way.     

Dynamism and embeddedness: towards a lower road? British subsidiaries of American multinationals

This article examines the effects of changes in the dynamics of the American national business system on industrial relations settlements in the UK subsidiaries of American multinational corporations (MNCs). While institutionalist analyses of country‐of‐origin and host‐country effects must take account of changes in national business systems, such as the rise of the shareholder value ideology in the USA, empirical analysis reveals a pattern of pathway adjustment rather than radical change in employment relations at the UK subsidiary level. This suggests that although US MNCs are embedded within the American business system, their subsidiaries are not passive ciphers but autonomous sites through which influences must pass.     

Trade union cross‐border alliances within MNCs: disentangling union dynamics at the local,national and international levels

This study identifies three types of workplace union strategy in the development of cross‐border relations within North American and European multinational companies: defensive isolation, risk reduction and proactive solidarity. Qualitative case studies of MNCs with operations in Canada and Mexico indicate that the nature and intensity of participation in cross‐border trade union alliances are shaped by the union dynamic at the local, national and international levels. A combination of greater workplace union power resources, notably discursive capacity, and of strong supportive approach of the national union, notably dedicated resources and space for bottom‐up initiatives, contributes to proactive solidarity strategies towards international union networks. The absence of these factors is associated with risk reduction and defensive isolation strategies.     

Growth opportunities,corporate governance and the market value of multinational joint ventures

This paper examines whether differences in investment opportunities and corporate ownership structure can explain the disparate findings of other researchers with regard to the market's price reaction to the announcement of international joint ventures. We study a sample of 320 joint ventures announced during the period 1987–92. The sample joint ventures involve at least one US partner and one or more international partners from emerging economies (former communist countries in Eastern Europe and China), as well as industrialized G7 countries. We find that international joint ventures are on average wealth creating when the foreign partner comes from an emerging economy but are wealth neutral when the partner is from an industrialized country. This finding supports the investment opportunity set hypothesis. However, we do not find support for the shareholder-management alignment hypothesis in that higher insider holdings or a greater level of outsiders on the board for the US partner will lead to joint venture investments that are more highly valued by investors, other things remaining the same. © 1998 John Wiley & Sons, Ltd.     

Uncovering competitive and institutional drivers of HRM practices in multinational corporations

Current international human resource management (IHRM) literature focusing on multinational corporations (MNCs) presents evidence of both similarities and differences in the HR practices adopted in different global locations. However, the drivers behind this duality require more detailed investigation. This article focuses on exploring why MNCs position themselves within global markets as they do, exploring how extant theory can help explain the drivers behind both global and national HR practices. Based on a worldwide sample of in‐depth interview‐based case studies of well‐known MNCs, we explore the ways in which different firms react to both institutional and competitive pressures in selecting their approach to HRM. The findings uncover a differentiation between external global competitive isomorphic pressures, external national institutional isomorphic pressures, and internal processes of strategic choice and competitive differentiation. It is suggested that MNCs face all three drivers of HRM simultaneously, leading to different patterns of practice adoption, adaptation and innovation.     

Seventh EACES Conference: Globalisation and Economic Governance, Forli, 6–8 June 2002: A selection of summaries

In the last decade, outward foreign direct investment (FDI) from transition countries (TCs) has emerged. The new multinational corporations (MNCs) from TCs are quite different from the former “red multinationals” (1), we describe the emergence of these new MNCs (2) and then provide econometric testing of the relationship between outward FDI and the level of economic development in home country that fits with TCs (3).     

Cross‐Border Merger & Acquisition Activity and Revealed Comparative Advantage in Manufacturing Industries

We estimate an important implication of oligopolistic international trade modeling for the predicted pattern of cross‐border mergers and acquisitions (M&As). Our core argument is that cross‐border M&As are, among other factors, driven by cross‐country differences in comparative advantage. We find strong evidence that acquiring firms operate in industries with a comparative advantage. We also report (less pronounced) evidence that this holds for target firms as well. We therefore add another explanation, rooted in international economics, to the industrial organization literature on M&As that emphasizes efficiency and strategic motives.     

Managerial Reaction to Takeover Bids: A Theory of Strategic Resistance

This paper develops a theory to explain the frequently observed resistance offered by the management of target firms to high-premium takeover bids. Contrary to the popular perception of managerial entrenchment at the expense of the shareholders' interests, such resistance may be strategically designed to increase shareholder wealth by threatening to initiate an informal auction process fur the target involving other potential bidders. Remarkably, this strategy can be effective even when it is common knowledge that the other bidders do not have a higher reservation price for the target. The analysis also offers insights into division of takeover gains and several other takeover-related issues.     

Voting rights and shareholder wealth the issuance of limited voting common stock

This paper investigates the shareholder wealth consequences of the public announcements of the proposed issuance of multiple classes of common stock with disparate voting rights. The evidence suggests that, for our sample of 70 firms which proposed dual-class recapitalizations over the period 1962–86, the creafion of dual classes of common stock, on average, leads to abnormal stock price increases. The data do not lend support to the hypothesis that the concentration of voting power with incumbent management is detrimental to shareholder interests.     

Do homeowners achieve more household wealth in the long run?

Despite the public’s faith in homeownership as a vehicle for wealth creation, there are surprisingly few empirical studies of the independent impact of homeownership and its duration on household wealth accumulation. This paper provides the first empirical evidence that homeownership, after controlling for other drivers of wealth accumulation, is positively and significantly associated with wealth accumulation over time. Using the Panel Survey of Income Dynamics, it examines the influence of housing tenure choices between 1989 and 2001 on household net wealth levels in 2001 after controlling for initial wealth in 1989, location, income, education, and other family and personal characteristics that might influence the rate of wealth accumulation. Importantly, the models used also control for the tendency of households to accumulate wealth between 1984 and 1989 (five years prior to the studied period). This approach is used to address the possibility that an unobserved variable—the propensity to save or accumulate wealth—may be associated with both the probability and duration of homeownership and the rate of wealth accumulation. All else equal, those who owned homes and owned for longer periods of time had significantly higher household net wealth by 2001. These results are compelling because house price appreciation over the period was near its long-run average while stock gains were above and real rent increases below their long-run averages. Hence, the findings are suggestive of a positive influence of ownership over long periods on net wealth, even during a period when alternative investments produced higher than normal returns and rents grew slowly. This is especially important because the overwhelmingly majority of households do not sell their homes shortly after buying them. In our sample, those who became owners typically owned for 7 years. Furthermore, most households that bought during a period of declining real home values in the early 1990s continued to own their homes for at least eight years and came out well ahead of those who did not own.     

Loan loss reporting,early disclosure,and investor reactions

Several prior studies present evidence that bank loan-loss announcements have a significant impact on shareholder wealth. There is no satisfactory explanation, however, as to why these announcements should change share prices. This paper examines loan-loss announcements in the context of the early disclosure literature. We find banks that publicly announce losses before releasing their quarterly earnings report have a significant increase in shareholder wealth following the loan-loss announcement. Banks that choose to publicly announce loan-loss increases with the release of quarterly-earnings report experience a significant decrease in shareholder wealth prior to the loan-loss announcement. Our results support the notion that the timing of the loan-loss announcement provides information to investors.     

FDI Location and Special Economic Zones in the Philippines

This paper analyzes the location behavior of foreign direct investments (FDIs) in the Philippines from 1987–1998 and points out the role special economic zones (SEZs) and infrastructure play in this location decision. The effects of real income, wages, skills, SEZs, highways and ports on the probability that a manufacturing FDI firm chooses a region are estimated using a negative binomial count model. Results yield expected signs and significant coefficients for all variables except for skills. Regressions were also run for 1987–1992 and 1993–1998 sub-periods to examine structural changes. The stark shift of investments from Metro Manila into other regions during the latter period shows some possible spillover effects of the SEZs as well as infrastructure development carried out in the previous transitional sub-period. Significant marginal effects are highest for paved highways and ports, which strongly indicate that improvement of these two regional factors increase the probability of FDI location.     

Chaebol,Unions, and the Profitability of Korean Firms Before and After the Crisis

Before the 1997 crisis, Korean firms destroyed shareholder value and chronically produced nonperforming loans for financial institutions. In particular, chaebol‐affiliated and unionized firms did so, with lower profitability among the financially unsound firms. Chaebol and unions thus functioned as institutional devices whereby managers and workers undermined the interest of taxpayers as well as shareholders. After the crisis, firms no longer destroy shareholder value or produce nonperforming loans. Chaebol‐affiliated and unionized firms have higher profitability among the financially unsound firms. Chaebol and unions have thus ceased to function as institutional devices whereby managers and workers undermine the interest of shareholders and taxpayers. Copyright © 2013 John Wiley & Sons, Ltd.