On the genesis of multinational foreign affiliate networks |
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| Institution: | 1. ETH Zürich, KOF, Weinbergstrasse 35, WEH E6, 8092 Zürich, Switzerland;2. CEPR, United Kingdom;3. CESifo, Germany;4. Leverhulme Centre for Research on Globalisation and Economic Policy (GEP) at the University of Nottingham, United Kingdom;5. Oxford University Centre for Business Taxation (OUCBT), United Kingdom;6. University of Munich, Kaulbachstr. 45, 80539 München, Germany;7. University of Tübingen, Mohlstr. 36, 72074 Tübingen, Germany;8. NoCeT, Norway;1. Department of Solid State Engineering, University of Chemistry and Technology, 166 28 Prague, Czech Republic;2. Institute of Experimental Physics, Johannes Kepler University, A-4040 Linz, Austria;1. Department of Physics, Chemistry and Pharmacy, University of Southern Denmark, DK-5230 Odense M, Denmark;2. Department of Physics, University of Duisburg-Essen, D-47048 Duisburg, Germany;3. Institut für Experimentalphysik, Johannes Kepler Universität, A-4040 Linz, Austria;1. Deutsches Elektronen–Synchrotron, DESY, Platanenallee 6, D-15738 Zeuthen, Germany;2. Research Institute for Symbolic Computation (RISC), Johannes Kepler University, Altenbergerstraße 69, A-4040, Linz, Austria;3. PRISMA Cluster of Excellence, Institute of Physics, J. Gutenberg University, D-55099 Mainz, Germany;1. Università di Pisa, Dipartimento di Informatica, I-56125 Pisa, Italy;2. Software Competence Centre Hagenberg, A-4232 Hagenberg, Austria;3. Research School of Computer Science, Australian National University, Australia |
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| Abstract: | Multinational enterprises (MNEs) develop their networks of foreign affiliates gradually over time. Instead of exploring all profitable opportunities immediately, they first establish themselves in their home countries and then enter new markets stepwise. We argue that this behavior is driven by uncertainty concerning a firm's success in new markets. After entry, the firm collects information which is used to update its beliefs about its performance in a market. As conditions in different markets are correlated, the information gathered in one of them can also be used to update beliefs elsewhere – with the degree of correlation depending on issues such as the geographical or cultural distance between markets. This correlated learning may render it optimal to enter markets sequentially – investment in market A is only followed by entry in market B if the firm was sufficiently successful in A. The prediction that firms start their expansion in markets that are closer to their home base and then proceed step by step is supported by our empirical analysis, which features the universe of foreign affiliates held by German multinationals. Based on a rich set of benchmark estimates and sensitivity checks, we identify correlated learning across markets beyond alternative explanations as a key driver of gradualism in the genesis of MNEs' foreign affiliate networks. |
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| Keywords: | Multinational firms Foreign affiliates Location decision Learning Firm-level data |
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