Institutional environment and subsidiary survival.
| Verfasser | Dhanaraj, Charles |
| Posten | RESEARCH ARTICLE |
Abstract:
* We examine the effect of the institutional environment (IE) on the mortality of overseas subsidiaries. We develop hypotheses to study the impact of political openness and social openness, two dimensions of the institutional environment and how joint venture status moderates these relationships. We test our hypotheses using a sample of 12,000+ Japanese overseas investments from 1986--1997 in 25 countries, using Cox hazard models.
* Our results suggest that the sociopolitical context has a strong influence on the mortality of overseas subsidiaries. We theorized a negative main effect for political and social openness and positive interaction effects with openness when the FDI is through a JV. The results are consistent with the hypotheses. However, political and social openness show significantly different influences on subsidiary mortality.
Keywords: Institutional environment. Political openness * Social openness * International joint venture * Subsidiary survival * Mortality risk
Introduction
A country's economic environment is an important determinant of the extent and performance of the foreign direct investment (FDI) in that country (Dunning 1993). Research has also shown that several other factors that relate to the political and social structure in a host country can also significantly influence FDI, in terms of quantity and performance. However, the absence of a unifying conceptual framework has limited the development of theory in this area. Given the diverse institutional environments that are common in many of the studies in the international business arena, this absence is conspicuous. In this paper, we attempt to provide one such framework leveraging insights from institutional economics to demonstrate how the institutional environment, which is an agglomeration of the political and social structure of a host country, can exert significant influence on the legitimacy and survival of these investments (1) (Gomes-Casseres 1990, Zaheer/Mosakowski 1997). We address the general question characterizing and operationalizing institutional environments by considering a specific question: "What is the effect of institutional environments in a host country on the performance of foreign subsidiaries in the country?"
The study of institutional environments is most apparent in the treatment of MNEs because these firms operate in multiple institutional environments (Kostova/Zaheer 1999, Rosenzweig/Singh 1991). In the international business (IB) literature, two distinct approaches have been used to understand the effect of institutional environments on organizations. The political economy stream emphasizes the risk and complexity of investing in a country arising from the regulatory policy, and uses an array of variables such as political risk, political hazard, and restrictiveness (Boddewyn 1988, Gomes-Casseres 1990, Henisz 2000). The cultural or sociological stream posits that similarity or distance between the home and host country cultures can influence a firm's choice in selecting the investment destination as well as the mode. Psychic distance and cultural distance have been predominantly used for empirical operationalization of culture (Hofstede 1980, Johanson/Vahlne 1977, Kogut/Singh 1988).
Traditionally, researchers have approached the study of the impact of institutional environment on FDI in two stages: The link between the institutional environment and the entry mode and that between entry mode and performance. In both these streams, partnerships with local firms are seen as a way to mitigate the risk and enhance the performance of the investment (Brouthers 1995, Gomes-Casseres 1990, Kobrin 1979, Kogut/ Singh 1988). However, empirical evidence for the phenomenon is sparse as most studies have focused either on the institutional effects on entry mode choices or on the impact of the entry mode choice on the performance. In this paper, we present a systematic study of the combined effects the IE and entry modes have on the survival of the overseas subsidiaries.
Understanding the effect of IE and entry mode on the survival of overseas subsidiaries is critical for two reasons. Extant research on the survival of foreign investment has leaned heavily on firm-level factors, such as a firm's resource endowment and the accumulated learning in the foreign markets (Barkema/Vermeulen 1997, Li 1995, Shaver 1998, Shaver/Mitchell/Yeung 1997). Since much of the FDI survival research has focused on subsidiaries in a single country environment, the role of institutional environment on FDI survival across multiple countries remains understudied. By undertaking an empirical study of foreign subsidiaries in multiple countries, we seek to address this problem. Secondly, such a study could potentially validate the prescription of partnering strategies, which have been implicitly assumed to offset the liabilities of foreigness or to mitigate the exposure to the institutional environment. The endogenous nature of the entry mode and the institutional environment when considering subsidiary survival presents a challenging problem, requiring research to tease out the direct effect of IE, if any, on the survival of the foreign subsidiaries (Li 1995, Shaver 1998).
We start with a brief review of subsidiary survival as studied in the IB literature. We then build our conceptual model by elaborating on the concept of institutional environment and link it to subsidiary survival, in four theoretical propositions. Next, we provide the empirical section starting with the data and methods and then present the results. We conclude by summarizing our contribution and highlighting the limitations of our work and some potential avenues for future research.
A Brief Review of Overseas Subsidiary Survival
Post-entry survival of foreign-owned subsidiaries has received much attention in the literature for two reasons. First, survival is often the only available measure to understand the performance of foreign direct investment in a country. Studies focusing on IJVs have found that longevity correlates well with financial performance as well as investor satisfaction with the venture. Secondly, mortality rates along with founding rates provide very good information on the dynamics of the population of foreign-owned ventures in a country, which can be useful for policymakers (Caves 1998).
Survival studies of overseas subsidiaries have suggested a firm's entry mode strategy, i.e., acquisition vs. greenfield, its prior market experience and resource endowment can be significant factors in determining the survival of foreign subsidiaries (Li 1995, Mitchell/Shaver/Yeung 1993, Mitchell/Shaver/Yeung 1994, Pari/Chi 1999, Shaver 1998, Woodcock/Beamish/Makino 1994, Yamawaki 1994). Studies that have focused solely on international joint ventures (IJVs), have found strategy or industry growth levels as well as equity distribution between the partners or cultural differences between the partners can play a significant role in instability of the IJVs (Dhanaraj/Beamish 2004, Gomes-Casseres 1987, Harrigan 1985, Hennart/Kim/Zeng 1998, Park/Russo 1996, Park/Ungsen 1997, Xu/Lu 2007, Yan/Zeng 1999).
As Hennart et al. (1998) suggest, survival studies of IJVs make very little sense unless they are done in relation to a comparable population of wholly owned subsidiaries; recent studies have made such attempts (Dhanaraj/Beamish 2004, Delios/Beamish 2004). Survival in the case of wholly-owned subsidiaries is easier to operationalize; survival of IJVs is a problematic construct to measure. IJVs can be terminated by liquidation, or they may be acquired by one of the partners. For example, the foreign partner may choose to buy out the stake of its local partner or sell its stake to the local partner (Kogut 1989, Park/Russo 1996). For a foreign firm investing in a host country, termination by liquidation or complete sale would imply exiting that particular venture. Ina similar manner, partial or full buyouts would suggest an ongoing venture with a changed level of ownership equity. Thus, by using mortality rates of these subsidiaries, we consider terminations, both exits by divestiture to the local partner or dissolution by liquidation. From the foreign partner's point of view, both of these suggest a cessation of operations in that subsidiary. Such a focus brings clarity to the study of subsidiary survival and provides a comparable measure that can be consistently applied to WOSs and IJVs. We define mortality rate, or hazard rate of exit, as the probability that a subsidiary that is in an organizational population under observation will exit at a particular time (Dhanaraj/Beamish 2004, Hennart et al. 1998, Kogut 1989, Park/Russo 1996).
The population ecology tradition (Hannan/Carroll 1992) is a theoretical framework that has linked institutional environment to organizational mortality. Environmental influence on the organization is theorized to occur through two fundamental processes: Legitimation and competition. Legitimation of an organizational population refers to the process by which an organizational form acquires the "taken-for-granted" status that is necessary for the population to draw on the resources from its environment. Competition refers to constraints arising from the joint dependence of multiple organizations on the same set of finite resources for building and sustaining organizations. We utilize the strong empirical orientation of the organizational ecology methodology. It complements well the theoretical richness of the institutional economics perspective pioneered by North (1990).
Institutional Environments and Multinational Investment
We use two major research traditions to build our arguments linking institutional environments to the survival of multinational investments: Institutional economics and organizational ecology. As suggested earlier, the IB literature has a strong focus on the role host government's policy has in the...
Um weiterzulesen
FORDERN SIE IHR PROBEABO ANCOPYRIGHT GALE, Cengage Learning. All rights reserved.
