Actualization of growth potential in international joint ventures: The moderating effects of localization strategies

We employ the growth options perspective to examine how multinational corporations’ localization strategies facilitate the actualization of growth potential preserved in international joint ventures (IJVs). This study uses a data of Korean IJVs; it accounts for the endogeneity associated with a firm’s decision to exercise growth options through a two-stage model. We find that the enlarged IJVs, via conversion to majority ownership under reduced host market demand uncertainty, performed better. We also find that the realized growth potential are larger for IJVs that have more local business ties with other firms, or that hire more local employees. This study contributes to the growth options literature by examining the strategies that enable firms to exploit evolved exogenous uncertainty, and thus actualize upside growth potential.     

Endogenous market structures and the gains from foreign direct investment

This paper discusses the gains from liberalizing foreign direct investment (FDI) in a two-country setting with endogenous market structure. We investigate two different scenarios. In the first scenario, headquarters costs are large in the foreign country so that the industry is located in the domestic country only. In this case, multinational and national firms may coexist and market concentration may make FDI welfare improving for the foreign country and welfare reducing for the domestic country. In the second scenario, headquarters costs are symmetric and firms will be located in both countries. Here, profitable FDI activities lead to mutual welfare gains, irrespective of market structure effects.     

Licensing versus direct investment: implications for economic growth

We develop a symmetric two country model of foreign direct investment (FDI) that captures the internalization decision and its implications for both the rate and magnitude of innovations. When mode choice (licensing versus FDI) is fixed, a subsidy to multinational production increases the rate but decreases the size of innovations. When mode can switch, the rate and size of innovations both increase, provided the subsidy is not too large. Although innovation size decreases for industries where firms already were choosing FDI, innovation size increases for industries where firms switch from licensing to FDI because multinationals choose larger innovations than licensors.     

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.     

Financial market development in host and source countries and their effects on bilateral foreign direct investment

We study an underexplored research question, namely whether financial market development in both host and source countries has an effect on bilateral stocks of foreign direct investment (FDI) and, particularly, whether the effect of financial market development in one member of the country pair conditions the effect of financial market development in the other member. We estimate gravity-type models in a global sample of 43 source and 137 host countries over the period 2001–12. We address reverse causality concerns by restricting the sample to observations where reverse causality, if existent, should be less relevant. Our major and robust findings are that bilateral FDI increases with better developed financial markets in both the host and the source country and that for developing host countries, financial market development in source and host countries functions as substitutes for each other.     

Reverse importing and asymmetric trade and FDI: a networks explanation

This paper considers the impact of business and social networks on international trade and FDI. I propose that differences in the strength of network effects across countries can produce asymmetric trade and investment flows that may lead to trade friction. A firm from a country with strong network effects has a cost advantage in selling to buyers from its own country. This advantage results in lower inward FDI, lower total imports but larger volumes of reverse imports into the country with strong network effects. The model’s predictions match observed asymmetric trade and investment flows that sometimes lead to US-Japan trade friction.     

A knowledge-and-physical-capital model of international trade flows, foreign direct investment, and multinational enterprises

This paper addresses two important issues at the nexus of the literatures on international trade, foreign direct investment (FDI), foreign affiliate sales (FAS), and multinational enterprises (MNEs). First, the introduction of a third internationally-mobile factor (physical capital) to the standard 2 × 2 × 2 “knowledge-capital” model of MNEs with skilled and unskilled labor allows us to resolve fairly readily the puzzle in the modern MNE literature that foreign affiliate sales among two identical economies completely displace their international trade. Intra-industry trade and intra-industry FDI (and FAS) can coexist for national and multinational firms (with identical productivities) in identical countries. Second, the introduction also of a third country to the model suggests a formal N-country theoretical rationale for estimating gravity equations of bilateral FDI flows and FAS, in a manner consistent with estimating gravity equations for bilateral trade flows.     

Emerging market multinationals and internalisation theory

There is ongoing debate about the applicability of internalisation theory to Emerging Market Multinationals (EMNEs). Internalisation theory normally describes multinationals exploiting superior knowledge directly abroad rather than licensing its use to foreign firms. We argue that EMNEs can be explained readily in terms of internalisation theory. This involves internalisation in the opposite direction: knowledge is internalised by EMNEs which then exploit it utilising home-country cost advantages. However, this is normally achieved by means that avoid the licensing of key technologies from leading firms. This clarifies the theoretical basis of EMNE strategic asset seeking investment. Market-seeking investments are also linked to technology-seeking investments through fixed costs. A model formalises the arguments, establishing conditions leading to different types of equilibria when an advanced-economy firm competes with an emerging-economy firm. The range of factors that it incorporates means that it is also compatible with other theories of the EMNE.     

Seeking greener pastures: a theoretical and empirical investigation into the changing trend of foreign direct investment flows in response to institutional and strategic factors

A generic theoretical model is proposed that provides a holistic conceptualization of the phenomenon of changing trend of FDI flows. Integrating both institutional and strategic factors, a rationale for such a change is provided, and the circumstances under which future shifts might take place are identified. A collection of criteria and incentives that various host governments and their agencies must provide to attract FDI are outlined. Several propositions that lead to empirically testable hypotheses are developed from this model. Statistical evidence is then provided of a shift in FDI flows, and the change in their determinants, by empirically analyzing investment by US multinational enterprises into Western Europe and Asia over the 20-year period, 1981–2000.     

International strategy: From local to global and beyond

To survive and thrive, multinational enterprises (MNEs) have had to adapt to dramatic changes and increasing complexity in the global competitive landscape over the past 50 years. MNEs’ international strategies and the academic research on the various attributes and outcomes of these strategies have evolved accordingly. This work reviews the evolution of international strategy research over the past five decades. In particular, the research on international diversification and the timing and speed of entering international markets is closely examined. In recent years, the influence of formal and informal institutions on international strategy has become a central research topic. Furthermore, MNEs’ strategies often seek to explore and exploit critical capabilities to build advantages in international markets. Finally, emerging research themes, such as institutional complexity, business sustainability, emerging economy firms and international new ventures are highlighted.     

Investigating the causality links between environmental quality,foreign direct investment and economic growth in MENA countries

This paper investigates the causal relationship between environmental quality, Foreign Direct Investment and economic growth using simultaneous-equation panel data VAR model a panel of 17 MENA countries over the period 1990–2012. Our empirical results pointed out that there is a unidirectional causality running from both FDI stocks and CO₂ emissions to economic growth. They also indicate the existence of unidirectional causality running from economic growth to CO₂ emissions. However, the results support the occurrence of unidirectional causality from FDI stocks to CO₂ emissions. Our empirical result confirms the hypothesis of neutrality for the Environment-GDP link. There is bidirectional causality from ${\text{CO}}_2$emissions and economic growth, and a bidirectional causal relationship between FDI stocks and CO₂ emissions. For the global panel, we show that the existence of a unidirectional causality running from FDI stocks to economic growth; a bidirectional causality between economic growth and CO₂ emissions; as well as a bidirectional causality between FDI stocks and ${\text{CO}}_2$emissions.     

Real call options to enlarge foreign subsidiaries – The moderating effect of irreversibility on the influence of economic volatility and political instability on subsequent FDI

This paper develops a real option model to explain the decision of enlarging a new foreign subsidiary by subsequent investment. The model is tested on a panel of 1148 subsidiaries in 22 host countries. The findings complement the traditional process model of firm internationalization. Rather than abiding by an incremental pattern of investment, internationalizing firms seem to keep foreign investment strategies flexible and build up their subsidiaries contingent upon the interaction of economic volatility and irreversibility of investment. However, the moderating effect of irreversibility on the relationship between uncertainty and investment may not hold for downside risks such as political instability.     

FDI and economic growth: the role of local financial markets

In this paper, we examine the various links among foreign direct investment (FDI), financial markets, and economic growth. We explore whether countries with better financial systems can exploit FDI more efficiently. Empirical analysis, using cross-country data between 1975 and 1995, shows that FDI alone plays an ambiguous role in contributing to economic growth. However, countries with well-developed financial markets gain significantly from FDI. The results are robust to different measures of financial market development, the inclusion of other determinants of economic growth, and consideration of endogeneity.     

Pro-market institutions and outward FDI of emerging market firms: An institutional arbitrage logic

We offer new theory and evidence regarding the effects of pro-market institutions on outward foreign direct investment (FDI) of emerging market firms (EMFs). Drawing on the logic of institutional arbitrage, we integrate the escapism and exploitation mechanisms of EMF internationalization into a unified theoretical context. We propose an inverted U-shaped relationship between host market-supporting institutions (MSI) and the investment scale of an EMF’s FDI project in the country, showing an escape-driven upward slope for low-to-medium MSI levels and an exploitation-driven downward slope for medium-to-high MSI levels. We supplement this main argument with two boundary conditions: the alleviating effect of home market liberalization (HML) and the strengthening effect of home government subsidies (HGS), demonstrating the coexistence and variation of pro- and anti- market institutions in an emerging market. Using information on 1,450 FDI projects conducted by 288 Chinese listed firms in 116 host countries, we obtain supportive evidence for the predicted relationships between the three institutional forces. This study enriches the literatures on institutional arbitrage and pro-market institutions with evidence from EMFs.     

Foreign direct investment productivity premium and foreign affiliates' heterogeneity: A comparison between advanced and emerging market overseas investments in the EU

This paper aims to investigate the existence of productivity heterogeneity among foreign‐owned firms (FOFs) based in the European Union (EU). Using firm‐level data for a sample of FOFs investing in the EU over the period 2006–14, we find that foreign affiliates from advanced countries (AFOFs) show a positive productivity gap compared to foreign affiliates from emerging countries (EFOFs). However, when we consider the type and the motivation of foreign direct investment, our results reveal that, while AFOFs always seem to be more productive than EFOFs in manufacturing sectors, EFOFs appear to enjoy a productivity premium compared to AFOFs in the services, when their activity occurs in the same industry as their parent and they operate in less knowledge‐intensive market sectors.     

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.     

Neither developed nor emerging: Dual paths for outward FDI and home country innovation in emerged market MNCs

Emerged market multinational corporations (EDMNCs) ? those based in emerged markets that have transitioned out of emerging economic status ? have received little research interest from the international business scholarship, despite their growing presence in the global market. EDMNCs face significant competitive pressure to leverage cross-border knowledge to innovate and leapfrog their middle-zone status between emerging and developed market multinational corporations. Analyzing 174 publicly listed South Korean MNCs and their outward foreign direct investment (OFDI), we find that an EDMNC’s OFDI into developed and emerging markets contributes unequally to its home-country innovation. We also elaborate on the moderating effect of industry peers’ OFDI into developed countries through crowding out and spillover effects. These findings have implications for the OFDI and innovation literature in general, and particularly for international business scholarship focusing on an under-investigated category of MNCs that are increasingly becoming successful in international competition.     

Responses of FDI to geopolitical risks: The role of governance,information, and technology

We show that rising geopolitical risk and geopolitical uncertainty (GPR) deter foreign direct investment (FDI). We further explore the role of governance, information, and technology in shaping the responses of FDI to GPR and document three main findings. First, effective governance in the destination market safeguards FDI against GPR. Second, multinational corporations with better information gained from closer geographic, cultural, and commercial ties choose to delay FDI in response to rising GPR instead of managing it. Third, FDI in more R&D-intensive industries is more resilient to GPR because intangible technology can more easily be transferred across borders.