Internationalization and survival of foreign subsidiaries of emerging economy multinationals

ACKNOWLEDGEMENTS I would like to thank my guide and Thesis Supervisor Associate Prof Andrew Delios for his guidance and his interest in this area of research From the beginning, Prof Andrew motivated me to explore the possibilities within the topic and guided me during the research process He was very supportive and encouraged me to think in the right direction As my Thesis Supervisor and the Head, Department of Business Policy, Prof Delios helped me in accessing relevant resources related to the literature review and gave key suggestions regarding the process of research which were very helpful In addition, I would like to thank Assoc Prof Peter Hwang, A/P Sai Yayavaram, Assoc Prof Vivien Lim Kim Geok, Assoc Prof Nitin Pangarkar, Assoc Prof Ishtiaq Pasha Mahmood and A/P Soh Pek Hooi for their advice and invaluable suggestions I am grateful to Dr Abhirup Chakrabarti for conducting lectures on statistics I am grateful to all my friends and would like to extend a special thanks to:Angeline, Ruan Yi, Zhou Nan, Wang Pengji, Yuan Lin, Xu Weiwei, Issac, Cao Yi, Kelvin, Sankalp, Zhonghua and Phillip I am also thankful to my husband for his kind and encouraging words and emotional support throughout the coursework and research work I would like to express my heartfelt gratitude to my parents for their help in conducting fieldwork and collecting data in India I am also grateful to officials at the Indian Embassy i (Singapore), and India Investment Center (India) for information regarding the data sources and their insights on the topic I would like to acknowledge the support I received from the National University of Singapore in the form of the research scholarship and Fieldwork Funding Award from the Asia Research Institute (ARI) National University of Singapore Most importantly I would like to express my gratitude to the IT staff, library staff and office staff especially Ms Hamidah Bte Rabu, Ms Ang Chin Teng at the Ph.D office and Ms Wendy Ng and Ms Teo Woo Kim and Ms Jenny See at the Department of Business Policy I thank them for their constant support and assistance I am grateful to the examiners for taking out time from their hectic schedule to read and examine the thesis Last but not the least, I would like to thank the National University of Singapore for creating a conducive research environment with an excellent network of libraries and a friendly atmosphere ii SUMMARY Survival of foreign ventures of multinational firms forms an interesting and significant part of international studies; however, most of the contribution in this area emanates from studies conducted in the developed country context This has led to a lack of understanding of the factors expected to influence the survival of foreign subsidiaries of multinational firms from emerging economies Along with this empirical gap, the internationalization of firms from emerging economies especially Third World countries represents a theoretical puzzle arising from the application of the conventional theories of FDI to the phenomenon of Third World Multinationalism This research obtains its theoretical framework from this debate arising from the application of the theories of FDI to this phenomenon The study explores the factors expected to influence survival, especially firm specific resources such as affiliation to a business group, which originate due to the institutional environment of the home country It explores the location specific variables and the interaction between the location and firm specific resources that evolve due to the institutional environment of the country-of-origin It studies the institutional environment, which contributed to the internationalization of Indian firms and tries to understand the benefits accrued by affiliation to a business group Business Groups form an important part of emerging economies Business group affiliated firms internationalize due to several reasons like exploration of new resources and the exploitation of existing iii resources and capabilities The study tests whether business group affiliation- a domestic firm specific resource is transferable internationally The study employs Cox regression to conduct the data analysis This technique is suitable for discrete time or grouped time event history analysis and addresses the problems of duration dependency and time varying covariates The raw data for the study was obtained from the annual records published by the India Investment Center This data is substantiated with data obtained from electronic databases and annual reports The longitudinal dataset of foreign ventures of Indian firms that are investing abroad and internationalizing their operations from the mid 1980s until date consists of 110 firms with 377 cases of FDI through joint ventures, acquisitions, and wholly owned subsidiaries The dataset provides information on the year of formation of the foreign subsidiary, year of exit as well as parent firm size, industry of the parent firm, country level variables amongst others The study has three main findings The firm specific resource-business group affiliation- was not found to be significant and has no effect on the rate of exit of foreign subsidiaries of emerging economy multinationals The development stage of the host country was found to be significant indicating that the rate of exit of the foreign subsidiary depends on the development stage of the host country The interaction of firm specific resources and development stage of the host country was found to be significant indicating that the rate of exit of business group affiliated firms depends on the development stage of the host country The empirical results lend sufficient support for the central ideas of the research iv TABLE OF CONTENTS ACKNOWLEDGEMENTS i SUMMARY iii LIST OF FIGURES viii LIST OF TABLES viii CHAPTER INTRODUCTION 1.1 Background 1.2 Objectives 1.3 Contribution .6 1.4 Organization of Chapters CHAPTER LITERATURE REVIEW 2.0 Terminology .9 2.1 Review of literature on Third World Multinationals .11 2.2 Theoritical Aspects 13 2.2.1 Review of Theory of Monopolistic Advantages 13 2.2.2 Business Group Affiliation 21 2.2.3 Review of Ownership-Location-Internalization Paradigm 18 2.3 The Institutional Environment and Indian Multinationals .21 2.4 Survival related studies 24 2.5 Summary 27 CHAPTER HYPOTHESES DEVELOPMENT 30 3.1 Business Group Affiliation and Survival of Subsidiaries 30 3.2 Host Country Development Stage and Survival of Subsidiaries .33 v 3.3 Interaction between firm specific resources & Development stage of the host country 34 3.4 Other Factors 35 3.4.1 Organizational Learning 36 3.4.2 Time Related Variables 37 CHAPTER DATA AND METHODOLOGY .39 4.1 Data and Sample 39 4.2 Description of Variables 41 4.2.1Dependent Variable 41 4.2.2 Independent Variables 43 4.2.3 Control Variables 45 4.3 Methodology 47 4.3.1 Model Specification for Cox Regression 50 4.3.2 Model Statistics 53 i) Interpretation of the Coefficient Estimates 53 ii) Interpretation of Model Estimates .55 CHAPTER RESULTS 56 5.1 Results for Model 56 5.1.1 Model Statistics 56 5.1.2 Coefficient Statistics 57 5.1.3 Control Variables 58 5.2 Results for Hypotheses 59 vi 5.2.1 Results for Hypothesis 59 5.2.2 Results for Hypothesis 61 5.2.3 Results for Hypothesis 62 5.3 Summary 63 CHAPTER CONCLUSION 64 6.1 Theoretical Implications of the Study 64 6.2 Limitations of the Research .68 6.3 Future directions for Research 70 REFERENCES 91 vii LIST OF FIGURES Figure Foreign Direct Investment by emerging economy multinationals Figure Framework indicating the relationship between the covariates Figure LML plots Figure Plots showing comparison of Cum Survival and Hazard Rates LIST OF TABLES Table 2.1 Summary of Literature on Third World Multinational Firms Table 4.1 List of Symbols and description of Variables Table 4.2 List of Studies related to Survival Table 4.3 Hypotheses with expected signs Table 4.4 Correlation Matrix of Variables in Cox Regression Analysis Table 5.1 Results for Cox Regression Analysis Table 5.2 Summary of Results for Hypotheses viii CHAPTER INTRODUCTION CHAPTER INTRODUCTION This study examines the relationship between firm specific resources shaped by the characteristics of the home country institutional environment and the subsequent survival of the international venture (joint ventures, wholly owned subsidiary, or acquisitions) of firms from less developed countries (LDCs) The research also examines the effect of the development stage of the host country and the interrelationship between the development stage of the host country and firm specific resources and their influence on the survival of the foreign venture The phenomenon of internationalization of domestic firms from less developed countries termed as ‘Third World Multinationals’ (Scheman 1973; Heenan and Keegan, 1979; Wells, 1983) or ‘emerging economy multinationals’ was first noted in the early seventies An extensive review of the extant literature on Third World Multinationals reveals that while several studies have been conducted to determine the pattern of FDI, the competitive advantages of Third World Multinationals, and their motivations to internationalize, few empirical studies examine the subsequent survival of the foreign subsidiaries (Wells, 1998) of these ‘unconventional multinationals’(Giddy and Young, 1982) Therefore, this study responds to the call for empirical research on the factors expected to influence the survival of foreign ventures of multinationals from emerging economies and extends the scope of survival related studies to the emerging economy context CHAPTER INTRODUCTION Furthermore, Yeung (1999) notes that most of the studies of TNCs from emerging economies not have an explicit theoretical underpinning This study tries to overcome this by discussing and applying the conventional theories of FDI to the overseas expansion and internationalization of Third World Multinationals to determine the role of firm specific resources, which evolve due to the institutional environment of the home country This study applies the conventional theories of FDI to the expansion and internationalization of third world multinationals to determine the role of firm specific resources, which arise due to the institutional environment of the home country Business Group affiliation is one such firm specific advantage that develops due to the institutional environment of the home country Multinational firms from emerging economies not possess absolute or monopolistic firm specific advantages (Erramilli, Agarwal and Kim, 1997) and therefore their firm specific advantages differ from those of developed country ownership specific advantages Prior literature on Third World Multinationals (Heenan and Keegan, 1979; Kumar, 1982; Wells 1983, Yeung 1988) depicts a picture of firms, which apparently not possess an absolute monopolistic advantage like proprietary technology, unique production knowledge, or brand name, which may motivate their entry into other countries Third World multinationals possess a range of firm-level advantages like labor intensive and small-scale manufacturing, low cost of establishment and production, conglomerate identity and machinery and managerial skills customized to the less developed country environment Table 4.2 List of Survival Related Studies Survival analysis studies Methodology Sample Size Observation years Beamish and Delios, (2001) Parametric Event History analysis 1986-96 Li (1995) Hazard Rate Model Delacroix (1993) Time series Logistic regression models Indonesian Manufacturing firms, two limit Tobit Estimator Binomial Logistic regression Log Linear maximum likelihood Accelerated event time regression Accelerated failure time with Weibull Distribution Event History Modeling using pooled data Log Linear Accelerated failure time models Binomial Logistic Regression 3080 Subsidiaries of Japanese firms (641 exits) 267 U.S firms (82 exits) 3372 firms Deolalikar and Behrman (1989) Singh and Mitchell(1996) Mitchell, Shaver and Yeung(1992) Barkema, Shenkar & Vermeulen(1997) Mitchell, Shaver, & Yeung (1994a) Mitchell, Shaver and Yeung(1994b) Shaver, Mitchell, and Yeung(1997) Bane and Neubauer (1981) Harvard Multinational Enterprise Database 86 1974-1989 1903-1974 7469 firms (45.5% 1975-85 exits) 973 firms 1961-91 111 firms 1975-89 1493 Subsidiaries of 25 firms 1966-1994 Medical Sectors 1954-1988 31 Canadian Businesses(10 exits) 354 entries of 311 firms 1968-1989 1942 entries of 85 firms (175 exits) 1945-1970 1987-1992 Table 4.3 List of Hypotheses with Expected Signs Hypotheses Results Hypothesis 1: The rate of exit of business group Not affiliated foreign ventures will be higher than the rate Supported of exit of foreign ventures of non-business group affiliated foreign ventures Sign of Covariate Not Supported Hypothesis 2: Foreign Ventures of Emerging Economy firms investing in developed countries will have a higher rate of exit than foreign ventures of Emerging Economy multinationals investing in developing countries Supported (+) Hypothesis 3: The rate of exit of non-business group affiliated foreign ventures in developed countries will be higher than the rate of exit of business group affiliated foreign ventures in developed countries Supported (+) 87 Table 4.4 Correlations Matrix of Variables in Cox Regression Mean Duration of Survival Development Stage of the Host Country Developed Country=1 Business Group Affiliation=0 Interaction between Development Stage & Business Group Affiliation Total Number of Subsidiaries Industry Classification Benchmark-2digit Market Attractiveness Index Log of Total Assets Std Deviation 5.5040 5.06127 71 456 -.175** 74 441 077 -.200** 4451 49774 -.094 613** 585** 7.07 4.393 -.064 -.202** 020 -.148** 49.83 29.172 074 095 334** 342** -.054 25423.55 13212.451 -.167** 854** -.174** 540** -.172** 550** 5.6313 84265 243** -.120* -.043 -.137* 307** -.063 112 ** Correlation is significant at the 0.01 level (2-tailed) * Correlation is significant at the 0.05 level (2-tailed) 88 Table 5.1 Results from Cox Regression Analysis Variables Host Country Development Stage Developed Country=1 Interaction between Development Stage & Business Group Affiliation Business Group Affiliation Non-Business Group Affiliated firm=1 Number of Recorded Subsidiaries Firm Size Total Assets(Log of) Year Industrial Classification Benchmark-Parent Firm Industrial Classification Benchmark digit (1) Industrial Classification Benchmark digit (2) Industrial Classification Benchmark digit (3) Industrial Classification Benchmark digit (4) Industrial Classification Benchmark digit (5) Industrial Classification Benchmark digit (6) Industrial Classification Benchmark digit (7) Industrial Classification Benchmark digit (8) Industrial Classification Benchmark digit (9) Industrial Classification Benchmark digit (10) Market Attractiveness Index (GDP/Capita) Dummy Variable for Year 1991 Model Model Model 2.833* (8.911) -2.039** (4.692) 3.153* (9.174) -1.896** (4.016) 2.791* (6.768) -1.714 (3.098) 1.021 (1.696) -.205+ (6.422) 713 (.845) -.190+ (6.079) 654 (.550) -.211* (6.915) 1.037** (5.452) (12.214) -12.991 (.002) -10.908 (.001) -1.140 (3.207) -11.873 (.000) -2.791 (5.505) -1.053 (1.184) 1.274 (2.179) -10.973 (.000) -13.259 (.042) -.752 (.558) 886** (4.330) (11.685) -13.893 (.001) -11.498 (.000) -1.040 (2.838) -11.824 (.000) -2.792 (5.546) -.964 (1.084) 1.168 (2.021) -11.108 (.000) -13.743 (.017) -.896 (.826) 000 (.288) 932** (4.808) (9.394) -14.055 (.001) -11.910 (.000) -1.116 (3.156) -12.004 (.000) -2.346 (3.757) -.876 (.918) 965 (1.346) -11.534 (.000) -13.419 (.017) -.990 (1.008) 000 (.306) 1.444 (1.086) 45.698 17 000 163.557 45.642 44.438 Model Chi-Square 15 16 Degrees of Freedom 000 000 Significance 166.391 164.743 -2Log Likelihood Notes: 1) Numbers In brackets are the Wald Statistic 2)*p[...]... business groups and non-business group firms by considering the influence of business group affiliation and whether this decreases the cost of foreignness when firms expand internationally The study also examines the influence of the interaction of firm specific advantages and development stage of the host country and whether it influences the survival of foreign subsidiaries of emerging economy multinationals. .. types of firms ‘survive’ A study of this nature contributes to the literature on emerging economy multinationals and responds to the call for more research on the subsequent survival of foreign subsidiaries of Emerging Economy Multinationals Hoskisson et al (2000), White (2002) emphasize on the need for more research in the emerging economy context Wright et al (2005) identify four strategic options of. .. research studies the role of the development stage of the host country and its influence on the survival of foreign ventures of emerging economy firms According to Itaki, 1991 firm specific advantages of a firm may be contingent on the location of the foreign subsidiaries I expect that firm specific resources of these firms will be contingent on the development stage of the host country and their interaction... chances of survival of an international venture The form of diversification whether in related or unrelated lines of business also influences the probability of survival Diversification in an unrelated product area is usually a risky strategy and influences the probability of survival negatively Beamish and Delios (2001) analyze the effect of entry mode and intangible assets on the survival and profitability... economy and assists in the survival of their foreign investment Secondly, the study explores the relationship between the development stage of the host country and the rate of exit of foreign subsidiaries Lastly, the research tries to determine whether development stage of the host country and firm specific resources are inter-related This aspect can be considered important in the case of internationalization. .. the pattern of internationalization of Indian Multinationals Encarnation (1982) discusses the motivating factors, growth patterns and characteristics of Indian joint ventures and their political impact in the parent and host countries He examines the foreign investment activities of leading business groups and the role of domestic regulatory policies that led to the internationalization of Indian firms... the subsequent survival of subsidiaries, most of these are on developed country firms Survival and financial performance are both measures of firm performance, amongst which survival is a prerequisite for success in other terms, such as market share and profitability (c.f Suarez and Utterback, 1995) A few of the prominent studies (Li, 1995; Beamish and Delios, 2001; Mitchell, Shaver and Yeung, 1994;... of tied observations is few (Allison, 1984) This technique allows for the inclusion of time constant and time varying covariates expected to influence the duration of survival as well as duration dependency and the discrete or grouped nature of the data This research extends the scope of survival studies to the internationalization of firms from an emerging economy context i.e specifically to the internationalization. .. order to understand the competitive advantages of firms from emerging economies A further extension to their analysis is to incorporate country -of- origin effects like family-ownership and operated conglomerates in many Asian economies and corporate owned and operated businesses on one hand and the effect of location on the other Hoskisson et al (2000) note that the competencies of emerging economy MNEs... contingent on the development stage of the host country and their interaction will affect the probability of survival of foreign ventures of firms from an emerging economy I test the effect of firm specific resources and the development stage of the host country on a sub-sample of foreign ventures of Indian firms using event history modeling for longitudinal data The event history modeling technique ... influence of the interaction of firm specific advantages and development stage of the host country and whether it influences the survival of foreign subsidiaries of emerging economy multinationals. .. probability of survival of foreign ventures of firms from an emerging economy I test the effect of firm specific resources and the development stage of the host country on a sub-sample of foreign. .. the rate of exit of foreign subsidiaries of emerging economy multinationals The development stage of the host country was found to be significant indicating that the rate of exit of the foreign