Location strategies and performance of developing country MNCS

LOCATION STRATEGIES AND PERFORMANCE OF DEVELOPING COUNTRY MNCS YUAN LIN (B.A. (Hons.) Finance, M.A. Economics, NanKai University) A THESIS SUBMITTED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY DEPARTMENT OF STRATEGY AND POLICY NATIONAL UNIVERSITY OF SINGAPORE 2009 ACKNOWLEDGEMENTS I would first and formost like to thank to my supervisor Nitin Pangarkar for his insightful guidance and his support throughout this process, without which I could not have completed the study. He has encouraged me to research in the international business area, and has constantly shaped the development of my research agenda. I am thankful that he was there to answer any question, to provide valuable feedback on my papers, and to lead me forward. The knowledge he imparted is priceless, invaluable and can never be found in a textbook. To me he is not only a great scholar and mentor, but also a wonderful person, being generous, patient, nice, thoughtful and reliable. I can never thank him enough for his help and guidance in the past five years. I am also indebted to my committee members for their pointed comments and suggestions, and for improving the quality of my dissertation. Prof. Andrew Delios’ optimistic outlook, energetic working style and critical scholarship have served as a model throughout my time at NUS. I thank Prof. Sai Yayavaram for guiding me to improve the research with insightful advice, and reviewing my work on a short notice. Additionally, I extend my sincere appreciation to Marleen Dieleman, XiaoHui Lu and WenZhen Lu for their warm encouragement and mentorship at i different stages during my PhD study. The Business Policy Department’s administrative staff, Woo Kim and Koon Cheng, have helped me a lot with administrative issues. I am thankful to each of them for their support. I also would like to express my gratitude to my friends in the PhD and MBA programs, for their emotional support and encouragement. Thank you for being wonderful friends and colleagues with me. Last, but most importantly, my parents, JiTang Yuan and XinZhi Wang, and sister, Yu Yuan, always encouraged me to persevere in my efforts to achieve my goals. By firmly and lovingly keeping me on track, they have been my greatest resource and also been enormous sources of strength. With their unwavering love, my journey is fulfilled with blessing and happiness. I dedicate my dissertation to them. ii TABLE OF CONTENTS ACKNOWLEDGEMENTS . i  SUMMARY . vi  LIST OF TABLES ix  LIST OF FIGURES xi  CHAPTER ONE 1  INTRODUCTION 1  BACKGROUND 1  UNIQUE CHARACTERISTICS OF DEVELOPING COUNTRY MNCS . 2  TRENDS IN CHINA’S OUTWARD FDI 5  LOCATION CHOICE OF CHINESE MNCS: TWO CASES . 7  ORGANIZATIONAL LEARNING THEORY 10  Overview of Organizational Learning Theory 10  Application in IB Literature 12  OVERVIEW OF RESEARCH QUESTIONS 13  CONTRIBUTIONS 15  Contributions . 15  Empirical Findings 17  STRUCTURE OF THE DISSERTATION . 20  CHAPTER TWO . 26  INTERNATIONALIZATION LOCATIONS AND PERFORMANCE OF DEVELOPING COUNTRY MNCS . 26  INTRODUCTION 26  LITERATURE REVIEW . 30  Internationalization-performance Relationship 30  HYPOTHESES . 32  Resource-based Ownership Advantage, Transaction Cost-minimizing Ownership Advantage and Institution-based Ownership Advantage . 32  Product Diversification and Internationalization Strategies . 34  iii Firm Size and Internationalization Strategies . 37  Ownership Identity and Internationalization Strategies 38  Dynamic Explanation of Performance 40  Short-term Performance 42  Longer-term Performance Improvement 46  METHODOLOGY . 50  The Sample . 50  Variables and Measures 52  Dependent Variables . 52  Independent Variables 53  Control Variables 54  Models . 56  Statistical Methods 57  RESULTS AND DISCUSSION . 60  Robustness Checks 64  DISCUSSION AND CONCLUSION . 66  CHAPTER THREE . 93  EXPLOITATION VERSUS EXPLORATION IN LOCATION CHOICES BY DEVELOPING COUNTRY MULTINATIONALS 93  INTRODUCTION 93  LITERATURE REVIEW . 97  Location Choice in Internationalization 97  CONCEPTUAL DEVELOPMENT AND HYPOTHESES . 98  Uncertainty and FDI Location 98  Exploitation and Location Choice 100  Exploration and Location Choice . 103  Exploitation versus Exploration in Location Choice 104  Economic Openness as a Moderating Factor 108  Economic Stability as a Moderating Factor 110  METHODOLOGY . 111  The Sample . 111  Variables and Measures 112  Dependent Variable 112  Independent Variables 112  Control Variables 114  Model 116  iv RESULTS AND DISCUSSION . 117  DISCUSSION AND CONCLUSION . 122  CHAPTER FOUR 135  DISCUSSION AND CONCLUSION . 135  CONCLUSION . 135  CONTRIBUTIONS 139  FUTURE DIRECTIONS 143  BIBLIOGRAPHY 145  v SUMMARY This dissertation aims to contribute to the study of foreign direct investment (FDI) location, one of the most important and complex decisions facing multinational companies (MNCs). Drawing from the organizational learning theory (OLT), I model international location selection by developing country MNCs as a tradeoff between exploitation and exploration considerations. The dissertation comprises two essays, both of which are based on organizational learning theory. I use a unique database, and identify the differences between developing and developed country MNCs and their (differences’) implications for location choices. My study raises questions concerning the generalizability of traditional International Business (IB) theories, which are draw from developed country MNCs. In the first paper, I analyze the antecedents and consequences of different location strategies of developing country MNCs. Theoretically I identify institution-based ownership advantage from resource-based and transaction costminimizing ownership advantages. Empirically, I find that higher degree of product diversification, larger size and non-SOE ownership identity will lead to higher degree of internationalization into developed countries than into vi developing countries. I also argue that, to systematically evaluate the benefits from internationalization, it is important to consider immediate performance as well as longer-term performance improvement, which has been ignored by prior studies. I predict that internationalization into developing countries has a positive effect on immediate performance, while the immediate effect of internationalization into developed countries is negative. Moreover, I predict that internationalization into developed countries might deliver greater longer term benefits than internationalization into developing countries. My analysis of international entries by Chinese listed MNCs between 1992 and 2005 strongly supports my hypotheses. My results show that, while choosing internationalization strategies, developing country MNCs should attempt to balance immediate benefits with potential longer-term gains. In the second paper, I draw mainly from organizational learning theory, and model the trade-offs between exploitation and exploration in location choice. I develop a series of hypotheses predicting positive relationships between prior selection of the particular host country by a focal firm and its key rivals and the likelihood that the focal firm will select that FDI location. I test the hypotheses on a unique and comprehensive panel dataset including 661 new market entries (FDI location choices) by 207 listed Chinese MNCs between 1992 and 2005. My analyses provide strong support for the hypothesized relationships. Specifically I vii find that firms are affected by exploitation considerations (i.e., they leverage their own prior experience) as well as exploration considerations (i.e., leveraging of rivals’ experiences) in choosing FDI location. However, the positive effect of exploration considerations on firm’s location choice is much weaker than the exploitation considerations. I also find that exploitation and exploration considerations are substitutable to each other in location choice. My analyses also reveal that the exploitation as well as exploration effects are stronger in more uncertain country environments—countries that are less open and characterized by lower stability. The theoretical arguments, based on organizational learning theory, and the findings I present in this dissertation enrich our understanding about the location strategies of developing country multinationals. viii LIST OF TABLES Table 2.1: Summarizing the Argument for Performance Effects 72 Table 2.2: Location of Chinese FDI 1992-2005…………………………………73 Table 2.3: Descriptive Statistics and Correlations……………………………….74 Table 2.4: Results of 2SLS Regressions of Listed Chinese MNCs: First stage…75 Table 2.5: Results of 2SLS Regressions of Listed Chinese MNCs for Performance: Second stage…………………………………………………………………… 76 Table 2.6: Results of 2SLS Regressions of Listed Chinese MNCs for Performance Improvement: Second stage…………………………………………………… .78 Table 2.7: Robust Test 1: Results of 2SLS Regressions of Listed Chinese MNCs: First stage……………………………………………………………………… .79 Table 2.8: Robust Test 1: Results of 2SLS Regressions of Listed Chinese MNCs for Performance: Second stage………………………………………………… 80 Table 2.9: Robust Test 1: Results of 2SLS Regressions of Listed Chinese MNCs for Performance Improvement: Second stage……………………………………82 Table 2.10: Robust Test 2: Results of Random Effects Regressions Analysis of Location Strategies of Listed Chinese MNCs: ………………………………… 83 Table 2.11: Robust Test 3: Results of 2SLS Regressions of Listed Chinese MNCs: First stage……………………………………………………………………… .84 Table 2.12: Robust Test 3: Results of 2SLS Regressions of Listed Chinese MNCs for Performance: Second stage………………………………………………… 85 Table 2.13: Robust Test 3: Results of 2SLS Regressions of Listed Chinese MNCs for Performance Improvement: Second stage……………………………………87 Table 3.1: Descriptive Statistics and Correlations…………………………… .127 Table 3.2: Location of Chinese FDI 1992-2005 by Countries…………………129 ix Hitt M. 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Organization Science, 13(3): 339-35. 170 [...]... of developing country MNCs may vary from those of developed country firms due to distinct resource advantages/disadvantages, and different home country environments and makes it important and worthwhile research undertaking to study and understand developing country MNCs strategies as well as performance attained TRENDS IN CHINA’S OUTWARD FDI The past two decades have witnessed significant rise of. .. We still have little knowledge of the effect of organizational learning on developing country MNCs international strategies and performance and hence this will be focus of my dissertation OVERVIEW OF RESEARCH QUESTIONS This dissertation aims to contribute to the study of FDI location choice, one of the most important and complex decisions facing MNCs, both theoretically and empirically I develop two... further explore the questions of what factors affect developing country firms’ location strategies and how to evaluate the performance implication of their location strategies The two essays in this dissertation draw from the organizational learning theory to study different factors affecting international location choices of developing country firms I argue that developing country firms enter overseas... antecedents and performance implications of developing country MNCs location strategies as well as incorporate the firm level ownership advantages arising from home country institutional environment I believe that this chapter will be an appropriate place to summarize some of the key aspects of the dissertation including my motivating factors (a function of the unique characteristics of the developing country. .. performance implications of developing country MNCs location strategies The second paper (Chapter Three) examines how two conflicting forces (exploitation and exploration) affect the location choice of developing country MNCs The last chapter (Chapter Four) combines the findings from the two papers and discusses the managerial implications I also discuss the limitations and conclusions of my research in... country MNCs as well as the increasing importance of China’s outward FDI); two brief case studies to illustrate some typical location strategies of Chinese MNCS as well as to motivate the research topic and its importance; the theoretical perspective deployed; the specific research questions addressed by the study and, finally, the contributions of the study UNIQUE CHARACTERISTICS OF DEVELOPING COUNTRY MNCS. .. implications for the relevance and usefulness of my studies The literature on developing country MNCs has identified some unique advantages and disadvantages versus their developed country counterparts especially in terms of resources Developing country MNCs disadvantages include: weaker research capability/ technology base (Tolentino, 1993; Nachum, 1999; Luo and Tung, 2007), smaller size (and the consequent... each addressing a different aspect of internationalization In the first paper, I examine two research questions: (1) What factors drive developing country MNCs to choose different location strategies (entering developed countries versus entering developing countries)? and (2) How do firms’ location strategies influence their immediate performance and longer-term performance improvement? To answer the... applicable to many developing country firms In the first study, I find that developing country MNCs may be driven to expand more broadly in developed countries than developing countries by large firm size, high degree of product diversification and ownership identity I also find that developing country MNC’s internationalization into developing countries is positively related to its short-term performance; ... developed country firms I will explain these differences in detail in Essay 2 Regarding the level of analysis, the first study uses parent-firm level data to examine how parent firms’ ownership advantages affect their location strategies, and how location strategies influence performance I differentiate between two kinds of location strategies in this paper: entering developed countries and entering developing . LOCATION STRATEGIES AND PERFORMANCE OF DEVELOPING COUNTRY MNCS YUAN LIN (B.A. (Hons.) Finance, M.A. Economics, NanKai University) A THESIS SUBMITTED FOR THE DEGREE OF DOCTOR OF. understanding about the location strategies of developing country multinationals. ix LIST OF TABLES Table 2.1: Summarizing the Argument for Performance Effects 72 Table 2.2: Location of. Results of Random Effects Regressions Analysis of Location Strategies of Listed Chinese MNCs: ………………………………… 83 Table 2.11: Robust Test 3: Results of 2SLS Regressions of Listed Chinese MNCs: First