Multinational performance and the geography of FDI: evidence from 46 countries.
| Verfasser | Yang, Yong |
| Posten | RESEARCH ARTICLE - Foreign direct investment |
Abstract:
* The literature on multinationality and firm performance has generally disregarded the role of geography. However, the location of FDI assumes particular importance in terms of the link between multinationality at the firm level. The purpose of this paper is to consider the multinationality-performance relationship within the context of greater emphasis on the importance of location, but also emphasising the importance of the location decision.
* This paper draws on firm-level data covering over 16,000 multinationals from 46 countries over the period of 1997-2007 and allows for different effects upon the performance of the multinational firm depending on the level of development of the host economy.
* In our results, we find a clear positive relation between multinationality and firm performance. However, investment in developing countries is associated with larger effects on performance than in the case of investment in developed countries. We also find that the return to investing in developing countries is U-shaped.
* This indicates that multinationals are likely to lace losses in the early stage of their investment in developing countries before the positive returns are realized. Overall, our results suggest that the net gains for multinationals from greater geographical diversification have not yet been fully explored. Geographical diversification into developing countries may be an important source of competitive advantages that deserves more serious consideration from business leaders and academics alike.
Keywords: Multinationality * Firm performance * Location choices * Source country
Introduction
This paper seeks to link the importance of location to the well understood debate concerning the multinationality-performance (MP) relationship. To date, critiques of the multinationality-performance (MP) literature have largely focussed on the measures of internationalisation that are employed, such as the scope of geographic dispersion, and measures of assets dispersion across countries on the one hand, and the measures of performance on the other. Equally, attempts to link this issue to the theory of international business have tended to focus on whether the link between these two measures is linear, (see recent surveys by Li (2007) and Contractor (2007) and Meta-analysis by Yang and Driffield (2012)).
However, the literature in general ignores the importance of location. One of the most enduring contributions to international business has been the plea of Dunning (1998) for scholars to consider fully the importance of location. Location advantages are at the centre of IB theory, in that multinationality allows firms to exploit economies of scale and scope, while internalising their tangible and intangible assets and to relocate activities to reduce cost (Buckley and Casson 1976; Rugman 1986; Dunning 1988; Helpman et al. 2004). Indeed, this is at the heart of the MP debate, with well established empirical studies providing evidence of such a positive link between multinationality and performance, in particular when drawing on firm-level data (Tallman and Li 1996; Goerzen and Beamish 2003; Pangarkar 2008). However, while the existing literature has made an important contribution, one shortcoming is that it has generally disregarded the role of location choices, opting instead for an aggregate view of overseas investment.
One important aspect in this context is that these new FDI destinations in developing countries typically exhibit considerable heterogeneity, particularly in terms of indicators typically associated with the likely success of inward FDI. This includes infrastructure, political stability and transportation costs, as well as labour quality and trade flows. In this context, an important question for academics and practitioners alike is whether performance gains from FDI differ with respect to the location choice made by multinational firms.
In this paper, we focus specifically on the role of the host country's level of economic development, in particular, whether the returns to investment in developing countries are different from the returns in developed countries. We employ a data set covering some 16,000 multinational firms with headquarters in 46 different countries, and investments in 202 host countries.
As in previous related research, we find a clear positive relation between multinationality and firm performance (Tallman and Li 1996; Goerzen and Beamish 2003; Pangarkar 2008). However, investment in developing countries is associated with larger improvements in performance than investment in developed countries. In addition, the return to investing in developing countries is U-shaped. We interpret these results as indicating that while the investment in developing countries is riskier (with potentially a higher spread of returns) than the investment in developed countries (Berry 2006; Qian et al. 2008), the potential of globalisation in terms of net gains from greater geographical diversification most likely has not yet been fully explored by multinational firms.
The remainder of our paper is organized as follows. We continue with a brief review of the relevant literature and build our hypotheses, after which Section 3 discusses our approach, data and empirical methodology. Section 4 then presents the results and robustness checks. Finally, Sect. 5 concludes.
Literature and Hypotheses
The theoretical paradigm on which this paper is based is the one presented by Dunning (1979, 1998). As is well understood, this outlines not only the motivation for firms to engage in FDI, but presents the benefits of becoming a multinational. This focusses on the ability of the firm to arbitrage in capital markets, combine different firm specific and location specific advantages, instigate international division of labour, and exploit market failures in terms of internal scale economies and market structures. Multinational firms have opportunities to achieve greater returns from international exploitation of intangible assets. Allied to this are the benefits of internalisation, including economies of scale and scope, and the ability to relocate activities to reduce costs. These features of multinationality lower the costs and increase productivity, leading to increased financial performance (Buckley and Casson 1976; Rugman 1986; Dunning 1988; Tallman and Li 1996; Helpman et al. 2004).
Within this, location plays a key role, as re-stated by Dunning (1998). More recently however, analysis has turned to a wider range of location factors, both in explaining location of FDI, and also the relationships between location and performance. Work that seeks to link multinationality to performance attempts to determine how widely such technology can be managed and exploited before returns start to decline (Mariotti and Piscitello 1995). However, it is important here to distinguish between tangible firm-specific assets, and more intangible assets, which by their nature are harder to exploit through the market mechanism. The importance of intangible assets in relating multinationality to performance is often ignored.
This extends the traditional OLI paradigm, and re-emphasises the role of location, but combined with the importance of non-material assets. Multinationality allows firms to transfer intangible assets more easily, such that the emphasis then turns to the creation of these assets, and the location of activities such as innovation. This then offers a general framework emphasizing transactions costs, and has recently been extended by Dunning and Lundan (2008), Dunning (2009), Buckley and Casson (2009, 2010), Hennart (2010). Cantwell et al. (2010) then extend this to consider the co-evolution of firms and locations, considering institutional development in its broadest form. This presents two general conclusions; firstly that growing complexity of organizational structures may lead to higher transaction costs, and therefore greater autonomy of subsidiaries, but secondly that firms most able to interact successfully with the host economic and institutional environment will be those that gain most from multinationality. This literature also however presumes that the boundaries of the firm are in some sense "correct", in that the firm is able to identify the point at which the marginal benefit of international diversification is zero, and that in terms of seeking to examine the MP relationship, one has to control for the sample selection effect, of "better firms making better decisions" (Dastidar 2009).
The purpose of this paper is then to consider the multinatilonality-performance relationship within the context of greater emphasis on the importance of location, but also emphasising the importance of the location decision. Previous analyses suggest several reasons why increased multinationality should be linked to firm performance, see for example Kogut (1985), Benvignati (1987), Grant (1987), Tallman and Li (1996), Gomes and Ramaswamy (1999) and Contractor et al. (2003). Greater geographic dispersion facilitates the undertaking of domestic ventures that are high-risk but also highly profitable. A linear and positive correlation was evidenced in Kim et al. (1993), Grant (1987), Goerzen and Beamish (2003), Castellani and Zanfei (2007) and Pangarkar (2008). On a theoretical level, this is consistent with firms having opportunities to achieve greater returns from internalizing their intangible assets, leveraging their market power, achieving economies of scale, or drawing on less expensive inputs from foreign locations. On the other hand, other studies find a negative correlation between multinationality and performance (Michel and Shaked 1986; Collins 1990). These results are consistent with the view that multinational firms face liabilities from increased coordination and management costs and from cultural diversity.
However, there is considerable evidence that this may not be linear...
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