Market seeking orientation and performance in China: the impact of institutional environment, subsidiary ownership structure and experience.
| Verfasser | He, Xinming |
| Posten | RESEARCH ARTICLE |
Abstract Many foreign firms tend to follow the market-seeking mandate in China. However this orientation alone does not guarantee superior performance. From the perspectives of strategic fit and institutional theory, this research seeks to reveal several conditions under which market-seeking MNEs can achieve superior performance in China. We identify three performance contributors to marketing seeking FDI: the host country's favorable formal institutions towards FDI, the subsidiaries' operational experience and absorptive capacity in the host country, and the ownership structure of the subsidiary. Using data of 5,080 foreign invested subsidiaries in 2003-2010, our findings support the hypotheses that market-seeking orientation becomes more profitable for foreign subsidiaries in China when (1) the host country provides a more favorable institutional framework towards FDI; (2) the subsidiary has a longer history of FDI operation in the host country that leads to stronger absorptive capacity; and (3) the subsidiary is organized in a wholly owned manner.
Keywords FDI motivation * Performance * Institutions * WOS * Market seeking * Experience * China
1 Introduction
International firms expanding into foreign countries can focus on either the local market, seeking benefits from market growth by selling locally, or export markets, pursuing benefits from sales outside the host country (Brouthers et al. 2008; Luo 2002; Nachum and Zaheer 2005). In the literature, the former is termed as market seeking, versus the latter as resource seeking (Luo 2003; Luo and Park 2001; Nachum and Zaheer 2005; Wadhwa and Sudhakara 2011); market seeking orientation is used to describe a foreign firm's strategic intention to sell locally as the share of domestic sale in total sales of the firm (Pan and Chi 1999; Song 2002). Market seeking is often the primary strategy of foreign direct investment (FDI) in less developed economies to grab local market opportunity and growth (Luo 2001; Luo and Park 2001). China has become one of the biggest markets for both raw materials and manufactured products/services, such as crude oil, iron ore, steel and motor vehicles, etc. MNEs not only export to but also emphasize making FDI in fast-growing markets such as China with the aim of seizing local sales opportunities (Dunning 2000, 2009). Many companies that initially came for low labor costs now want to stay because China has become a huge market in its own right, and the production cost has dramatically increased (The Economist 2013). As early as 1996, approximately 80 % of FDI in China was pursuing market seeking (Luo and Park 2001).
Past market seeking research sees different routes of inquiry. Some investigate the determinants to the local responsiveness of subsidiaries, including environmental factors, and firm network resources (Luo 2001). Chen et al. (2006) find that liability of foreignness increases the likelihood of adopting market-seeking strategies. Some use market seeking MNEs as the general research context while exploring the performance drivers, such as environment uncertainty-offsetting competitive strategy (Luo and Park 2001), diversification and majority ownership (Zhao and Luo 2002), parent-subsidiary links (Luo 2003), and resource commitment (Luo 2003). Brouthers et al. (2008) suggest that market attractiveness can mitigate negative impact of corruption on market-seeking FDI. Some research reveals that market seeking firms use less joint ventures for new venture formation (Gil et al. 2006). Lastly, market seeking FDI will impact local economy by creating more jobs among linked partners (Hansen et al. 2009). Table 1 presents a summary of recent market seeking research.
Despite these research efforts, our knowledge of how market-seeking orientation enhances subsidiary performance remains limited (Pan and Chi 1999). The existing studies suffer from several limitations. First, they simply focus on firm resources/ capabilities or competitive strategies (e.g., Luo 2003; Luo and Park 2001; Zhao and Luo 2002) without considering important influence by the host country's institutional forces, and the interaction between these forces and the firm's strategy and capabilities. Recent development in institutional theory suggests that the institutional forces drive international strategy and performance (Peng et al. 2008). Moreover, the institutions are evolving, and the impact on businesses is also changing. Ignoring the host country's dynamic institutions can risk an MNE's legitimacy, deepening its liability of foreignness, and dampening subsidiary performance (Xu et al. 2004).
Second, these studies do not fully consider the strategic fit of this strategy and other external and internal factors, assuming that market seeking is equally effective in different conditions (Gil et al. 2006). The strategic fit perspective asserts an important co-alignment between the strategy, the environment and organization structure, where the strategy is organized and implemented with the aim of enhancing performance (Olson et al. 2005; Venkatraman 1989; Venkatraman and Camillus 1984; Xu et al. 2006b). For example, when fulfilling FDI, wholly owned subsidiaries (WOSs) and joint ventures (JVs) are different along a range of attributes (Brouthers et al. 2008); Making FDI, an MNE needs to understand that the use of a different subsidiary structure can make market seeking more or less effective (Venkatraman and Camillus 1984).
We overcome these limitations and address the focal question by using lenses of the strategic fit paradigm (Venkatraman 1989; Venkatraman and Camillus 1984) and the institutional theory (North 1990; Oliver 1991; Peng et al. 2008; Venkatraman and Prescott 1990). Following Zajac et al.'s (2000) argument that strategic fit is affected by multiple environmental and organizational contingencies, we combine MNEs' market-seeking strategy with several critical factors, including the host country's institutional forces, subsidiary experience and operating ownership structure, all of which can influence the strategic fit in an attempt to explain FDI performance (Brouthers and Hennart 2007; Delios and Beamish 2001; Luo 2001; Peng et al. 2008). These specific environmental and organizational factors provide unique time- and organization-specific predictions regarding the strategic fit in FDI (Murray et al. 2009; Zajac et al. 2000).
This research makes three important contributions to the literature. First, with the combination of institutional thinking and strategic fit perspective, we depart from the existing FDI market seeking literature which merely emphasizes firm resources or competitive orientation (e.g., Luo 2003; Luo and Park 2001) by advocating a comprehensive and integrative approach that explores the way in which external forces (host country's FDI institutions) and organizational factors (FDI experience and operational ownership structure) interact with each other in influencing market-seeking firms' performance.
Second, our study addresses an important but not yet fully answered question of how FDI performance can be improved by matching market seeking orientation with multiple factors. Drawing on the strategic fit perspective and the strategic response theme of institutional theory, we suggest that organizations can react to the institutional challenges by aligning operational structure and resources to them in order to develop a strategic fit. The match will have significant positive effects on market-seeking subsidiaries' performance. Despite this notion's appeal and centrality in strategic management, there is limited research targeting the extent to which fit for market-seeking MNEs can explain inter-firm performance differences in international operations. Our research is one of the few empirical attempts designed explicitly to examine the existence, nature, and performance outcomes of fit among market-seeking orientation, experience, and the institutional environment and subsidiary ownership in which it is implemented. By addressing the effect of strategy match on performance, we tackle an important issue: whether fit matters and, if so, the extent to which and when it matters. We explore these aspects within the context of MNCs' marketing seeking operations on the basis of its coalignment with institutional environment, subsidiary structure and international experience, and the performance consequences.
Third, this research extends the institutional change perspective (Cantwell et al. 2010; North 1990; Peng 2003) by considering the time effect of evolving institutions with the aid of a sizable longitudinal data set. (1) We develop and test a hypothesis about the evolutionary relationship between institution change and market-seeking strategy-performance. This marks a novel and significant contribution to this stream of research.
2 Literature Review and Hypotheses
2.1 Market Seeking Orientation
Market seeking in emerging markets has become more and more attractive, with MNEs increasingly turning to these as key locations for future growth while developed world markets are becoming saturated (London and Hart 2004). The size and increasing wealth of an economy are key factors that make local markets attractive, because they create opportunities for new entrants, as well as higher returns, and allow for specialization, market segmentation, and the potential for scale of economies (Brouthers et al. 2008). During the last four decades, China has enjoyed huge economic development and become a major market for a wide range of industrial and consumer products. The country also has a vast potential untapped market opportunity. Downstream integration into distribution and marketing activities has become a widely practiced strategy for MNEs operating in China (Li 1994). These market seekers intend to sell products in the Chinese market to get their share of the constantly fast-growing consumer and industrial markets (Brouthers et...
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