Determining investment size and local embeddedness under host market uncertainty and growth rates

This study employs a growth options perspective to examine how multinational corporations (MNCs) design their investment attributes under the influence of host market uncertainty and growth rates. It specifically examines MNCs’ decisions on investment size and local embeddedness under host market conditions. Using data on Korean overseas manufacturing subsidiaries, we find that MNCs choose either more-local-embedded small investments or less-locally-embedded large investments under high demand uncertainty and GDP growth rates. We also find that this choice is moderated by host market political risk and competition. Our findings imply that MNCs consider both uncertainty-driven flexibility and growth rate-induced commitment when selecting international investment modes. This consideration allows MNCs to gain flexibility as well as an enhanced ability to expand in the future. This study contributes to the literature on real options and entry modes in the international business area by showing how host market conditions and investment decisions are related.     

Institutional and transaction cost influences on MNEs’ ownership strategies of their affiliates: Evidence from an emerging market

This paper examines the impact of institutional, and transaction cost specific variables on MNEs’ choice of equity ownership in their foreign affiliates. We consider the determinants of the choice of foreign investors between full ownership (setting up a wholly owned greenfield subsidiary or engaging in a full acquisition) and sharing ownership with a local firm (establishing a greenfield joint venture or making a partial acquisition). Drawing on both transaction cost and institutional theories, a number of hypotheses are developed. Based on a dataset of 6838 foreign affiliates in Turkey, the empirical analysis reveals that institutional variables are important in explaining the equity composition of foreign affiliates. Particularly important in determining equity ownership were found to be political risk, cultural distance, linguistic distance, agglomeration, location and the size of the affiliate. A distinguishing feature of the paper is that we examine the marginal effects of the independent variables in explaining ownership patterns of MNEs.     

Interstate competition in the US South for South Korean auto investments: a US perspective

Multinational corporations (MNCs) recognize the importance of optimizing their international site-selection decision(s). Similarly, host regions recognize the potential economic benefits of securing ‘greenfield’ investment projects. Thus, there is intense intra-regional competition to secure ‘trophy investments’. The extant research offers little insight to the very final stages of the site-selection negotiation process. No previous study has examined in detail the final stages of international site-selection negotiations involving South Korean MNCs. This paper focuses on the role of US government officials and Southern state stakeholders seeking to secure investments by Hyundai Motors and Kia Motors. It offers an exploratory eclectic theory to explain site-selection decisions.     

Weathering storms – Technological exploration of MNCs in times of financial crisis

We generate new knowledge about financial crises and their consequences for MNC technological development, thereby addressing a largely uncharted issue at the crossroads of the organization, strategy and international business literatures. Drawing on threat-rigidity theory, we argue that financial crises have an overall negative effect on MNC technological exploration and that the strength of the effect differs across greenfield and acquired subsidiaries. Results from an empirical investigation of 21 MNCs over the 1890–2008 period suggest that the dampening effect of financial crises on technological exploration is confined to home-country units and greenfield subsidiaries, whereas it is found to be of less significance among acquired foreign subsidiaries. We suggest that such differentiation within the MNC is indicative of a previously unobserved advantage from multinationality, which allows it to smoothen the effects of financial crises on long-term technological development and corporate growth.     

The effect of host country Internet infrastructure on foreign expansion of Korean MNCs

This study examines the effect of host country Internet infrastructure on a multinational corporation (MNC) foreign expansion. Using Heckman’s selection model on a sample of 2589 subsidiaries of 487 Korean MNCs between 1990 and 2011, we find that host country Internet infrastructure is important in MNC expansion decisions. In addition, we find that a well-developed Internet infrastructure within a host country leads to more investments from MNCs producing consumer over industrial goods and is more attractive to domestic market followers than market leaders. We find that the host country’s Internet infrastructure is important for an MNC foreign expansion decision, suggesting that efficient communication within an MNC is critical in coordinating globalized MNC subsidiary operations.     

Do the Right Thing: The Imprinting of Deonance at the Upper Echelons

This study expands the application of deonance theory into organizations’ upper echelons by examining how CEOs imprinted with a sense of duty can influence managerial decision-making. We hypothesize an imprint of bounded autonomy, an ought-force that constrains their decision-making and understanding of behavioral freedom, influences duty-bound CEOs to self-report errors in past financial reporting. We test deonance theory propositions of instrumentality for behavioral expansion, namely loss avoidance and gain attainment, related to institutional ownership concentration and CEO equity ownership. We use CEOs that are graduates of U.S. service academies as a proxy for duty-bound executives and find firms they lead are more likely to issue a financial restatement to correct a previous reporting error. This finding is robust to alternate explanations such as being error-prone, earnings management, auditor oversight, and risk behaviors. We also find evidence that deonance may be subject to behavioral expansion. The likelihood of issuing a restatement decreases as institutional ownership concentration and CEO equity ownership increases. This study shows imprinted deonance within the C-suite influences important organizational outcomes.

     

Safety risk and international investment decisions

We identify and demonstrate the merit of a novel institutional factor, safety risk, which likely affects multinational corporations’ (MNCs’) international investment decisions. Safety risk refers to the extent to which security and physical well-being are endangered due to normalized aggression and criminality in society. Despite concerns from executives and policymakers, safety risk has attracted little research attention. We validate a safety risk measure and evaluate the construct’s effect on MNCs’ investments. The findings indicate that countries’ safety risk deters MNCs from investing. Further, in post hoc analyses, firms’ prior experiences with safety risk and countries’ private security investments moderated this relationship.     

Impacts of International Greenfield Investment on Firm Valuation

Our study examines the announcement effects of 343 international greenfield investments by 289 U.S. firms for their impact on shareholder wealth. This paper develops five hypotheses based on the positive‐multinational‐network hypothesis. The evidence indicates that market reactions to announcements by firms entering developing countries are more favorable than those entering developed countries. In addition, the results show that the wealth effect for firms entering a host country for the first time is greater than for those that are already operating within the country. As for the long run, greenfield firms have shown improvement in their operating performance and stock performance. Copyright © 2012 ASAC. Published by John Wiley & Sons, Ltd.     

MNC strategies and linkage effects in developing countries

The study addresses the implications MNC strategies have for linkage effects in developing countries. Two contrasting MNC strategies, which reflect an integration-responsiveness dichotomy, are scrutinized in terms of their effects on jobs among local linkage partners in developing countries. It is hypothesized that the investments of MNCs pursuing local responsiveness create more jobs among local linkage partners, but imply less job upgrading, when compared to investments undertaken by MNCs following strategies of global integration. The hypotheses are tested on a sample of Danish MNCs with extensive investments in developing countries.     

The leverage of foreigners: Multinationals in South Africa

This article argues that foreign multinational corporations (MNCs) in South Africa cannot evade an ethical choice, how best to exercise their leverage against apartheid? Disinvestment is only one, ambiguous option. MNCs need clear ethical goals and an effective strategy. Both arise from the political economy of the MNC (1). It involves 3 relationships, between the MNC parent and its subsidiary; the MNC home society and host society; and the MNC home state and host state. That political economy explains the MNC's dependency (1a) and modernization effects (1b). Those effects give foreigners some leverage against apartheid; but an effective and ethical MNC strategy is needed (2). It involves four goals: dismantling apartheid, a mixed economy, full democracy, and a negotiated peace (2a). It suggests a sequence of MNC/home state options from Do Nothing or Divest to More Corporate Activism, Home State Support, and International Sanctions (2b). But victory is not around the corner; rather, we are all condemned to freedom.     

Firm-level political risk and implied cost of equity capital

I find a strong positive association between firms' implied cost of equity capital and firm-level political risk. This effect is above and beyond the firm-level cost of equity implications of economywide political risk. Firm-level political risk contributes to elevating stock illiquidity, increases dispersion of analyst forecasts and dampens analyst coverage and these attributes, in turn, have positive cost of equity capital implications. Overall, the findings of this study suggest firm-level political risk has a non-trivial effect on increasing equity market illiquidity, increasing dispersion of earnings forecasts and decreasing analyst coverage thus increasing financing costs.     

Entering the last frontier: expansion by US multinationals to Africa

Literature on multinationalism, even that which focuses on economic development and incentives for foreign direct investment (FDI), largely ignores the African continent despite its market of over 700 million inhabitants and its unique challenges for foreign firms. However, the African continent provides an important arena for examining the effects of infrastructure, wealth, and political differentials across countries and the effects of these variables on the expansion decisions of US multinational corporations (MNCs). In this paper we examine the US stock market reaction to announcements of US firms entering African markets through both FDI and Non-FDI modes. Finally, we investigate the accounting performance implications of these expansions. Our results show that, on average, firms experience negative wealth effects when expanding to Africa. Further analysis shows that expansions to South Africa produce losses, while expansion to the rest of Africa produce positive gains. We also show that firms with higher return on equity perform better than firms with lower return on equity when they expand to Africa in countries other than South Africa.     

Family Control,Socioemotional Wealth and Earnings Management in Publicly Traded Firms

We examine the unique nature of agency problems within publicly traded family firms by investigating the earnings management decision of dominant family owners relative to non-family. To do so, we draw upon literature demonstrating that family owners are loss averse with respect to the family’s socioemotional wealth, or the affective endowment derived from firm ownership and control. Our theory and findings suggest that potential reputational consequences of earnings management lead family principals to engage in less of this practice relative to non-family firms, and that founder family firms are less likely than non-founder family firms to use earnings management. Moreover, the family-firm effect varies with the firm size, the degree of CEO entrenchment, and the firm’s stock structure. We provide important insights regarding differences between family and non-family principals in the use of unethical accounting practices, thereby extending agency theory and advancing an underdeveloped research area.     

The choice of master international franchising – A modified transaction cost model

This study develops and tests a novel transaction cost model of master international franchising. Based on data from international franchise firms headquartered in six countries, we show that master international franchising is the franchisor’s preferred governance mode under the following conditions: large bilateral franchisor’s and franchisees’ transaction-specific investments, high institutional uncertainty and high behavioral uncertainty. Our model extends the literature by presenting a modified transaction cost model of master international franchising that investigates the bonding effect of bilateral transaction-specific investments and environmental uncertainty as determinants of the franchisor’s choice of international governance mode. In addition, by using primary data from international franchise companies, our study contributes to the transaction cost literature in international business and international franchising that is mainly based on secondary data.     

Why did the equity home bias fall during the financial panic of 2008?

Investors tend to put most of their wealth in local stocks; theories of portfolio choice and uncertainty aversion jointly predict that this home bias should increase during a financial crisis. Yet, using a sample of 45 countries, I document that the equity home bias fell during the financial panic of 2008. Exploiting bilateral stock holdings, I find that investors actively increased their home bias, but large valuation changes subsumed these trades. Across countries, the change in home bias is consistent with partial portfolio rebalancing and increased information asymmetries during the crisis.     

CEO regulatory focus and myopic marketing management

This study details the mechanisms on how CEO regulatory focus affects the salience of the gains versus losses involved in myopic marketing decision-making, and how such CEO psychological attributes interact with internal equity-based compensation, external pressure from equity analysts, and environmental turbulence to affect firms’ myopic marketing management propensities. We find that when faced with short-term earnings pressure to meet earnings expectations and when time is no longer a resource, predominantly promotion-focused are more likely to engage in myopic marketing management to benefit from the temporary stock price increase, which comes from meeting or beating earnings expectations. Conversely, predominantly prevention-focused CEOs are less prone to such short-termist actions which results in long-term value loss. For the moderating variables, we find that: (1) equity-based compensation tends to attenuate myopic marketing tendencies of promotion-focused CEOs but have no impact on prevention-focused CEOs, (2) whether equity analysts improve monitoring or aggravate short-term earnings pressure depends on the CEO’s regulatory focus, and (3) environmental turbulence does not increase the myopic marketing management tendencies of predominantly promotion-focused CEOs but rather intensifies the relunctance of prevention-focused CEOs to take short-termist actions. We further find that myopic marketing management mediates the impact of CEO regulatory focus on future firm performance. These findings have important implications for firms and boards when selecting new CEOs and structuring the compensation of existing CEOs. Firms need to simultaneously consider the fit between the CEOs’ regulatory focus, firms’ needs, the business environment, as well as CEO compensation structure.     

Cultural distance,political risk,or governance quality? Towards a more accurate conceptualization and measurement of external uncertainty in foreign entry mode research

It is well accepted that multinational enterprises (MNEs) prefer equity joint ventures (JVs) over wholly owned subsidiaries (WOSs) in foreign countries where the formal and informal external environment is highly uncertain. Many entry mode studies have modeled the external uncertainty faced by MNEs in foreign countries as the cultural distance to these countries (thus focusing on the informal environment), or as their political risk level (thus focusing on the formal environment). We argue that both approaches are suboptimal because (1) cultural distance not only reflects the external uncertainty associated with WOSs but also the internal uncertainty associated with JVs, and (2) political risk covers only one aspect of the formal external environment. We contend that the governance quality of foreign countries is a better proxy for external uncertainty. The lower this quality, we hypothesize, the higher the likelihood that MNEs will choose JVs over WOSs. An analysis of 231 entries by Dutch MNEs into 48 countries offers support for this hypothesis. We also find that cultural distance has no impact on entry mode choice and that political risk has the weakest impact of all aspects of governance quality.     

The aftermarket performance of small firm initial public offerings

The dream of many entrepreneurs is to some day take his or her growing small firm public and, to thereby become the CEO of a publicly-traded corporation. Currently, entrepreneurs are continuing to utilize initial public offerings (IPOs), as a viable source of venture financing. IPOs also represent a viable mechanism for harvesting venture capital and entrepreneurial investments. The touted entrepreneurial benefits of taking a company public include the abilities to borrow additional funds; return to the public equity market; negotiate mergers without depleting cash; the potential for enhanced personal wealth and so forth. Investors in small firm public equity issues are often motivated by the potential for discovering another Apple Computer, or perhaps an IBM at the “ground floor.”This study empirically examines the aftermarket returns of small publicly-held firms that have issued initial public offerings. Aftermarket returns refers to stock returns immediately after a stock begins trading. The study specifically examines two questions. First, “Is there a positive risk-return relationship for small firm aftermarket returns, where higher firm risk will generate higher aftermarket return?” Second, “Will aftermarket returns show on industry effect, where certain industries will automatically generate higher returns?” Answers to these questions will affect the strategic financial alternatives available to entrepreneurs both before and after going public and, will also affect the decisions of investors interested in financing small public corporations.The research findings indicate that entrepreneurs planning to take younger firms public will probably not have available to them numerous subsequent financial alternatives, utilizing corporate stock, if the true aftermarket performance of their stock is taken into consideration. Likewise, investors in small firm public issues may also be disappointed in the aftermarket performance of younger firms. A positive risk-return relationship, where age was a proxy measure of risk, did not exist. This was true even though the initially quoted returns of these same younger firms may have been substantial. On the other hand, the aftermarket performance of older firms is typically favorable.Finally, the study suggests that neither entrepreneurs nor investors should bet solely on a particular industry categorization to “carry” their aftermarket stock performance. While certain industries indicated significant positive initial returns, aftermarket returns based on industry classification were generally not statistically significant. Investors should therefore always exercise firmspecific due diligence and research before investing in small firm public equity issues, since the variance of their aftermarket market returns tends to be large.     

Launching reverse-innovated product from emerging markets to MNC’s home market: A theoretical framework for MNC’s decisions

A reverse-innovated product is a new product that is originally developed for an emerging market by MNCs. The increasing number of MNCs engaging in reverse innovation and the criticality of new products to an MNC’s performance and competitive advantage make reverse innovation an important area for academic research and managerial practices. This paper integrates relevant literature and proposes a theoretical framework to understand the mechanisms by which the characteristics of a reverse-innovated product affect management’s decision to launch that product in a developed market (e.g., the MNC’s home market). By means of literature review, the paper identifies two underlying evaluation mechanisms through which the reverse-innovated product characteristics are linked to management’s reverse launch decision: the perceived degree of needed adaptation and the perceived risk of cannibalization. The authors also derive several propositions for future empirical research and discuss implications for future research.     

HRM in Western Subsidiaries in Russia and Poland

Abstract

This study analyzes the Human Resource Management (HRM) practices in joint ventures and wholly-owned subsidiaries of Western MNCs located in Russia and Poland. Different hypotheses are developed, testing whether or not MNCs are more likely to implement standardized practices in Poland and Russia. The effects on HRM practices of MNC equity share, non-financial resources provided by MNCs to the focal unit, and mode of establishment of the foreign unit are also investigated. Implications for future research and managers are discussed.