Multi-market contact and foreign entry location decisions in China.
| Verfasser | Yao, Fiona Kun |
| Posten | RESEARCH PAPER - Report - Statistical data |
Abstract Location decisions of foreign subsidiaries in China were studied from the multi-market contact (MMC) perspective. Two sets of data in different industries, data on 1096 location decisions by US manufacturing ventures from 1979 to 1995 and data on 1108 location decisions by international hotels from 1990 to 2012, were analyzed. Contacts between an entrant and the incumbent firms in a target market were studied, but also contacts among those incumbent firms themselves. The two types of contact were shown to have distinct and interactive effects on foreign entry location choices across both samples. Besides, the influence of multi-market contact on foreign entry decisions was contingent upon the cultural distance between the home and host countries. These results promise to improve our understanding of the impact of multi-market competition on location decisions in the international setting.
Keywords Multi-market contact * Foreign entry * Location choice * Cultural distance * China
1 Introduction
The importance of locations had earlier been neglected in international business studies (Dunning 1998). However, increased globalization has put the location factor back onto the map of international business (Asmussen et al. 2011). In this paper, we explore location decisions in foreign direct investment (FDI). Previous research has mainly embraced two perspectives to explain FDI location decisions (Alcacer and Chung 2007; Caves 1996; Flores and Aguilera 2007; Head et al. 1995; Henisz and Delios 2001; Kulchina 2014; Makino et al. 2002; Nachum et al. 2008; Shaver and Flyer 2000). A first research stream in the FDI location decisions highlights the importance of economic drivers (see Caves 1996 for a review), including factors associated with the gravity model (Tinbergen 1962) and economies of agglomeration (Marshall 1920). A second tradition emphasizes the institutional driving force, such as the political system (Flores and Aguilera 2007; Henisz and Delios 2001).
But such studies have not fully incorporated insights from the work on multi-market contact (MMC), and thus have not delineated a comprehensive picture of the motivations underlying FDI location decisions of multinational enterprises (MNEs). Multi-market contact refers to firms' competition with each other simultaneously in more than one market (Baum and Korn 1996, 1999; Haveman and Nonnemaker 2000; Korn and Baum 1999). While the economic perspective (agglomeration economy) has emphasized knowledge spillover among MNEs that drives FDI location decisions (Marshall 1920), the institutional perspective has highlighted legitimacy spillovers among MNEs (Henisz and Delios 2001). Neither of these perspectives, however, has paid sufficient attention to the competitive dynamics among MNEs (but see Yu and Cannella 2007; Yu et al. 2009 for exceptions), particularly the influence of such competitive dynamics on FDI location decisions.
However, the extension of multi-market competition into international markets (Yu and Cannella 2007; Yu et al. 2009) has not examined FDI location decisions. Multi-market competition should have an important impact on location decisions or geographic market entries, as market entries are central to the process of inter-firm rivalry (Caves 1984; Fernandez and Marin 1998; Haveman and Nonnemaker 2000; Porter 1980). More importantly, the international context contains factors that have no ready counterparts in home-country settings (Kostova and Zaheer 1999). As a result, some assumptions of multi-market competition in domestic settings, such as tight control over foreign subsidiaries by the headquarters, and relatively homogeneous markets and competitors, are called into question when one examines the impact of multi-market competition on FDI location decisions.
To begin filling this gap, this study investigates how multi-market competition among MNEs affects location decisions in the international setting. Drawing on the awareness-motivation-capability (AMC) framework (Chen 1996, 2009, 2010), this study identifies three factors, two levels of MMC--firm MMC and market MMC, and a factor germane to the international context--cultural distance. According to the framework, three behavioral drivers influence a firm's competitive behavior: the awareness of inter-firm competitive relationships; the motivation to act; and the capability to do so (Chen 1996). Each of the three factors selected in this study affects one or more of the three dimensions of the awareness-motivation-capability framework.
In particular, firm MMC refers to a focal firm's own multi-market contact with the incumbents in a target market, and market MMC refers to how other incumbent firms in the target market (excluding the focal firm) maintain multi-market contact with each other. Cultural distance refers to the differences in national cultural values between the home and the host countries (Kogut and Singh 1988). Firm MMC influences a firm's awareness of a competitive relationship and motivation to act (Chen 1996, 2009), market MMC affects other market incumbents' capability to respond, and the cultural distance from the focal firm's home country determines the firm's capability to compete. Because this awareness, motivation and capability may interactively determine competitive activities (Chen et al. 2007; Upson et al. 2012), this study suggests that firm MMC interact with market MMC and cultural distance in affecting FDI location decisions.
This study promises to make three contributions. First, this study is one of the first to investigate how multi-market contact among MNEs affects FDI location decisions. Research of multi-market contact and location decisions has thus far been essentially limited to domestic settings. Second, by exploring the distinct and interactive effects of firm MMC and market MMC on FDI location decisions, this study contributes to the integration of the two levels of MMC. Most scholars in strategy and economics have previously examined MMC at the firm and market levels separately (Gimeno and Jeong 2001), but inadequate attention has been paid to addressing the implications of multi-market contact simultaneously across levels in FDI location decisions. Third, by highlighting the moderating role cultural distance plays in multi-market competition, our study extends the contingency perspective on multi-market competition in the international setting. Cultural distance has been a prominent topic in international business research but never linked to the impact of multi-market contact on location decisions.
This study tests the hypotheses using two sets of data, data on 1096 provincial level location decisions by US manufacturing ventures in China from 1979 to 1995 and data on 1108 city level location decisions by international chain hotels in China from 1990 to 2012. The two samples complement each other in industries, levels of analysis, and time periods. Firm MMC and market MMC were shown to have distinct and interactive effects on foreign entry location choices across both samples. Besides, the influence of multi-market contact on foreign entry decisions was contingent upon the cultural distance between the home and host countries.
Below the AMC framework is first presented, followed by the hypotheses about the distinct and interactive effects of firm MMC and market MMC on FDI location decisions, and the moderating influence of cultural distance in multi-market competition. The two samples, regression results, contributions and limitations are then discussed.
2 Theoretical Background and Hypotheses
2.1 Awareness, Motivation, and Capability
Based on the AMC framework, there are three dimensions that are associated with a firm's rivalry behavior: the awareness of inter-firm rivalry relationships; the motivation to compete; and the capability to do so (Chen 1996). Individual AMC components can be manifested in a range of variables. For instance, awareness is conditioned by market commonality (Chen 1996), firm size and action visibility (Chen and Miller 1994); motivation is reflected by territorial interests in different markets (Gimeno 1999) and a rival's attack volume (Chen et al. 2007); and capability depends on resource similarity (Chen 1996; Upson et al. 2012), execution difficulty and information processing (Smith et al. 1991). In addition, prior research suggests that the individual aspects of the AMC components may interactively affect competitive behavior (Chen et al. 2007; Upson et al. 2012; Young et al. 2000). For instance, Chen's group uncovered interactions among awareness (reflected by relative scale), motivation (indicated by a rival's attack volume), and a rival's competitive capability. Market commonality and resource similarity, the motivation and capability components, were shown to interactively predict the frequency and speed of competitive moves (Young et al. 2000).
Applying the AMC framework (Chen 1996, 2009, 2010), this study emphasizes three factors related to multi-market competition in the international context, (1) firm MMC which affects the awareness and motivation dimensions, (2) market MMC which shapes the capability of market incumbents to compete, and (3) the cultural distance between an MNE's home country and a given host country, which influences the capability of the firm to act.
2.1.1 Firm MMC and Market MMC
This study first differentiates between two levels of MMC, firm MMC and market MMC, which relate to different components of the AMC framework. Firm MMC focuses on a focal firm's own interaction with market incumbents, whereas market MMC stresses the interactions among other market incumbents that do not include the focal firm. The implications of the co-examination of the two levels of multi-market contact can be intriguing. In particular, the theoretical distinction between firm MMC and market MMC hinges on the question: "In what directions does the level of multi-market contact among...
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