* To address mixed results regarding the value of multinationality, we take into account some important but less explored contingent factors related to country and subsidiary asset specificity.
* From our analyses using a panel dataset of Korean FDI, we find that subsidiaries' local commitment in terms of FDI depth and local sales are negatively associated with multinationality value, whereas their intra-firm trade links to other affiliates are positively associated with the value.
* We conclude from our findings that in addition to dispersed operations across countries, other country- and subsidiary-specific factors moderate the effect of FDI breadth on multinationality value.
* We believe our study contributes to the literature by its fine-grained analysis of the environmental and organizational conditions wherein MNCs' multinationality generates value.
Keywords: Multinational corporations * Market uncertainty * Flexibility * Multinationality value * Intra-firm trade
Managing uncertainty is critical for multinational corporations (MNCs) because they cannot anticipate future uncertainties associated with their initial investments and the level of their preparation for uncertain future events may affect their performance and survival (Chung et al. 2010; Cuypers and Martin 2010; Lee and Makhija 2009a, b; Tong and Reuer 2007). Therefore, the recent literature on MNCs' foreign direct investment (FDI) focuses more on the multinational flexibility inherent in international investments. This literature explains why and how firms invest under the influence of high uncertainty level in foreign host countries. MNCs can transfer resources and rearrange their value chain activities such as production and sales across countries, using their international portfolio of foreign subsidiaries (Chung et al. 2010; Fisch and Zschoche 2011, 2012; Huchzermeier and Cohen 1996; Kogut and Kulatilaka 1994; Lee and Song 2012, Pantzalis et al. 2001).
Prior studies relevant to this area argue that high FDI breadth (i.e., dispersed operations in multiple countries) enables MNCs to take advantage of the additional country options that are available for coordinating their scattered subsidiaries and exploiting multinational operational flexibility. For example, Allen and Pantzalis (1996), Tang and Tikoo (1999), and Lee and Makhija (2009b) support the value of multinationality. These studies assume that MNCs will achieve higher value because they have the option of switching production or sales in a quicker, more timely, and less costly manner, by coordinating their subsidiaries located in multiple countries.
However, what if MNCs are unable to take advantage of multinational flexibility despite their dispersed operations? We suggest this possibility because deriving benefit from multinational flexibility is not as easy as many past studies have assumed. Although the association of high FDI breadth with high multinationality value is explicitly assumed, the point that realizing multinational flexibility may be costly and difficult to coordinate is not assumed. However, having the potential to exercise operational flexibility is very different from actually doing it (Reuer and Leiblein 2000; Tong and Reuer 2007). In other words, operational flexibility comes at a price. Since operational flexibility can be retained and realized between at least two different subsidiaries, an MNC can best achieve flexibility when it can coordinate its subsidiaries for its own benefit. Relevantly, Rangan (1998) does not find any significant advantage of multinationality. Similarly, Reuer and Leiblein (2000) and Tong and Reuer (2007) argue that multinationality does not necessarily provide real options for firms seeking to remain flexible. Why does previous research yield such mixed results?
Regarding these inconclusive results on the value of multinationality, we argue that prior studies have not fully considered key organizational and environmental conditions for multinational flexibility. Specifically, some location- and subsidiary-specific factors may hinder the global coordination of MNCs, which would allow them multinational flexibility. Their subsidiaries' production and sales commitment to local markets may hamper the global flexibility of MNCs. On the other hand, the assumption of multinational flexibility is valid when subsidiaries in the same MNC network are effectively coordinated by their parent MNC and are linked to each other operationally and flexibly. However, in prior studies on MNC flexibility, little attention has been paid to these two contrasting issues.
Additionally, the potential endogeneity related to FDI breadth has not been addressed, considering the possibility that an MNC may choose to invest only in those regions with which it is familiar, the firm's superior knowledge of conditions in countries within such regions reduces its uncertainty and influences the real options value of its international investment portfolio. When studying the value associated with international investments, it is important to consider endogeneity problems because unobserved variables influence both strategy and performance simultaneously (Lee and Makhija 2009b; Shaver 1998; Tong and Reuer 2007), thereby creating a potential correlation between independent variables and the main error term. However, none of the studies in the multinational flexibility literature addresses this endogeneity issue, which may be the main reason for the present inconclusive results. Consequently, measures evaluating an MNC's FDI breadth or geographic country dispersion need to be scrutinized.
In the light of these problems with prior studies, we suspect that the degree of flexibility inherent in the mere dispersion of an MNC's operations was overstated. The purpose of this paper is to address these concerns. First, in addition to the breadth of foreign operations, we consider both geographic subsidiary concentration and local market commitment as barriers to an MNC's actualization of its multinational flexibility value. Additionally, we consider foreign subsidiaries' cross-border intra-firm trade as a trigger for boosting an MNC's value, Intra-firm trade reflects the operational links within the same MNC network (Feinberg and Gupta 2009; Kiyota et al. 2008).
To perform our empirical test, we use a sample of 2,340 observations from 125 publicly traded manufacturing MNCs listed on the Korean Stock Exchange from 1990 to 2007 and find support for all our hypothesized relationships. We believe that this study contributes to the MNC flexibility literature by its fine-grained analysis of organizational and environmental contexts, wherein MNCs are able to exploit their international network to cope with environmental uncertainty in foreign host countries.
Theoretical Background and Hypotheses
Exogenous Uncertainty and Multinational Flexibility
An MNC facing unexpected changes in macro-economic factors may find it difficult to manage its foreign operations (Chung and Beamish 2005; Cupyers and Martin 2010; Lee and Makhija 2009a). Abrupt changes in a factor and product market are exogenous (i.e., outside the firms' control) and thus require firms to quickly adjust or radically reconfigure their value chains (Buckley and Casson 1976; Cuypers and Martin 2010; Huchzermeier and Cohen 1996), MNCs' flexibility in responding to evolving environmental situations is an important managerial concern (Chung et al. 2010; Kogut 1991; Kogut and Kulatilaka 1994; Huchzermeier and Cohen 1996).
The multinational flexibility perspective argues that firms investing in different countries are able to exploit value or cost differentials on a global scale by using their networks of foreign subsidiaries dispersed among multiple countries where fluctuations in macroeconomic conditions vary (Chung et al. 2010; Huchzermeier and Cohen 1996; Kogut and Kulatilaka 1994; Panzalis et al. 2001). This operational flexibility can be due to MNCs' structuring the investments in a manner that permits multiple courses of action, depending on how circumstances unfold. Investments structured for flexibility enable firms to adapt their strategies more easily to deal with any unforeseen circumstances that may arise, rather than being restricted to a single course of action that does not fit new environmental conditions.
Therefore, it is valuable to have prior-built-in investments that are structured in such a manner that MNCs can change their strategies in response to environmental fluctuations across countries rather than only in response to those within countries (Allen and Pantzalis 1996; Tang and Tikoo 1999). Investments characterized by cross-country switching options enable firms to preserve upside potentials and limit downside risks corresponding to economic exposure, which effect changes in relative factor costs across national environments (Allen and Pantzalis 1996; Chung et al. 2010; Kogut and Chang 1996; Lee and Chung 2007). In contrast, a firm that faces difficulty in adapting its strategy to new circumstances will suffer detrimental effects if it is operating in an environment that is characterized by unpredictability (Lee and Makhija 2009a, b; Rivoli and Salario 1996). Hence, past research has identified external uncertainty as the key to MNCs enjoying the benefits of operational flexibility (Kogut and Kulatilaka 1994; Allen and Pantzalis 1996; Tang and Tikoo 1999).
Below, we discuss the association between higher value and the dispersed operations of MNCs, which experience market uncertainty within their international network. We also examine how the investment characteristics of subsidiaries affect MNCs' value due to multinational flexibility.
Host Market Uncertainty, Geographic Country Dispersion, and Multinationality Value
The FDI literature findings show that among various macro-economic factors, market uncertainty influences MNCs given that MNCs' presence in their host...