Performance of multinational firms' subsidiaries: influences of cumulative experience.
| Verfasser | Gao, Gerald Yong |
| Posten | RESEARCH ARTICLE |
Abstract and Key Results:
* In this study, we examine the impact of cumulative experience that arise from a series of sequential entries on the performance of foreign subsidiaries of multinational firms. Drawing upon the literature on organizational learning, we propose that multinational firms acquire different types of experience at the firm level, including general entry experience, entry specific experience, and exporting experience, which exert different influences on their performance. We also investigate the effect of experience on performance at the subsidiary level.
* Using a dataset of 245 subsidiaries of 81 large U.S. firms in China, we find that firms' entry specific experience, exporting experience, and subsidiary level experience exhibit significant effects on the return on sales of foreign subsidiaries.
* Further, the effect of exporting experience gets weaker as firms accumulate more entry specific experience. Firms' general entry experience, however, is not related to subsidiary performance.
Keywords: Organizational Learning. Sequential Entries. Experience. Performance
Introduction
How to achieve better performance in foreign markets has long been a core question in the field of international business and strategy. Researchers have sought to understand the ways to reduce the liability of foreignness and sustain competitive advantages in foreign markets (Hymer 1976, Peng 2004, Zaheer 1995). Despite decades of effort, significant challenges still remain, as indicated by the divergence of answers offered. Multinational firms usually have multiple entries into a single host country following a sequential entry process (Kogut 1983, Kogut/Kulatilaka 1994). According to the organizational learning perspective, foreign firms learn from their previous entry experience and they make foreign investments not only to exploit existing specific advantages but also to develop new competitive advantages (Chang 1995, Shan/Song 1997, Makino/Lau/Yeh 2002). Therefore, experience accumulation in foreign markets can help firms develop new capabilities and enhance their performance. A large volume of research has focused on the performance implications of entry mode choices and timing of entry by foreign firms. However, the performance implication of organizational experience is under-researched and existing studies have not closely examined the effects of different types of experience on performance in foreign markets.
In this study, we investigate whether multinational firms' experience accumulation contributes to high performance in foreign markets. Among the few studies on the effect of foreign firms' learning on performance, most of them exclusively examined the performance measure of survival rate or subjective measures (e.g., Barkema/Bell/Pennings 1996, Luo/Peng 1999, Makino/Delios 1996, Shaver/Mitchell/Yeung 1997). However, dissolution of a foreign subsidiary is not a perfect proxy of performance and survival may not always signal success (Barkema/Bell/Pennings 1996). Moreover, perceptual measures of performance may be biased and reflect desired, rather than actual performance (Brouthers/Brouthers/Werner 2003). Objective measure of performance is rarely adopted because of the difficulty of collecting performance data at the subsidiary level. We aim to contribute to the literature through examining an objective performance measure. Specifically, we investigate the effects of cumulative experience in foreign markets on subsidiary performance using the measure of return on sales.
In the existing literature on the effect of learning on foreign firms' performance, firm experience was measured either by the cumulative number of previous entries (e.g., Chang 1995, Kogut/Chang 1996) or by the number of years of operation in a foreign market (e.g., Luo/Peng 1999, Hennart/Reddy 1997). However, firms usually have different experience profiles that lead to different levels of learning about foreign markets (Delios/Henisz 2003). Therefore, it is important to move beyond an aggregated measure of experience. Through observing the whole foreign market entry sequence of multinational firms from the start, we can develop measures of experience including general entry experience, entry specific experience, and exporting experience. Thus, we are able to differentiate and investigate the effects of different types of experience on subsidiary performance accurately. We also examine two levels of experience effects, including parent firm and subsidiary levels. Previous studies either examine the experience effect at the firm level or at the subsidiary level (Barkema/Bell/Pennings 1996, Li 1995, Luo/Peng 1999, Shaver/Mitchell/Yeung 1997). Both firm level experience and subsidiary level experience are crucial parts of multinational firms' learning process in foreign markets (Luo/Peng 1999). We trace the experience accumulation process at both parent firm and subsidiary level. Particularly, we are interested in whether the effect of experience at the parent firm level can be transferred to individual foreign subsidiaries.
We test our hypotheses using a sample of 245 foreign subsidiaries of 81 large U.S firms in China. As the world's fastest growing consumer market, China has been attracting enormous foreign direct investment (FDI) over the past two decades. The FDI volume to China continues to grow, reaching $72 billion in 2005, only behind the United Kingdom and United States (World Investment Report 2006). China began allowing foreign firms to enter the country in 1979, which provided a starting point for observing the entry sequence of foreign firms. Therefore, the Chinese market provides an appropriate research context to investigate the effects of cumulative experience on subsidiary performance of multinational firms. We trace the entry sequence of these multinational firms, from 1979 to 2002, to develop different measures of experience and investigate whether firm experience at parent firm and subsidiary levels exhibits significant effects on subsidiary performance. The empirical results show that entry specific experience has a strong impact on subsidiary performance while general entry experience exhibits no significant effect. Moreover, exporting experience and subsidiary experience also have significant effects on subsidiary performance.
Literature Review
Organizational Learning and Performance
Organizational learning is defined as "organizations' encoding inferences from history into routines that guide behavior" (Levitt/March 1988, p. 319 et seq.). There exist four basic constructs related to organizational learning: knowledge acquisition, information distribution, information interpretation, and organizational memory (Huber 1991, Sinkula 1994). Generally, organizational learning involves the acquisition of knowledge that is potentially useful to the organization (Huber 1991). Consequently, the learning ability can be a major source of a firm's competitive advantage. Firms can learn from different sources, including from their direct experience, from previous decision outcomes, and from observing the experience of other firms. Learning-by-doing is one of the most important mechanisms of organizational learning. Organizational learning incorporates better understandings of making decisions, and as a result, organizational behaviors or the range of potential behaviors can be changed. An extensive literature has provided supporting evidence for the positive effect of experience on performance and non-linear experience-based learning curves (e.g., Argote/Beckman/Epple 1990). In terms of organizational learning in foreign markets, foreign firms generate and accumulate knowledge from their own entry experience incrementally (Johanson/Vahlne 1997, 1990). Consequently, firms can reduce the level of liability of foreignness and overcome operation uncertainties. Therefore, organizational learning can help firms to develop their capabilities in foreign markets and enhance subsidiary performance.
International expansion is an efficient means to acquire strategic assets such as technology, marketing, and management expertise from the host market (Makino/Lau/Yeh 2002). Moreover, setting up foreign subsidiaries may lead to innovations in products, marketing, and organizational practices (Barkema/Vermeulen 1998). Therefore, beyond the exploitation of firm-specific advantages, international operations also imply considerable benefits from the exploration of new knowledge and acquisition of valuable strategic assets (Chang 1995, Makino/Lau/Yeh 2002, March 1991, Shan/Song 1997). There exist a few studies empirically addressing the effect of organizational learning on firm performance in foreign markets. Li (1995) studied foreign subsidiaries in the U.S. computer and pharmaceutical industries and found that entrants with previous experience are more likely to survive than first-time entrants. Barkema, Bell, and Pennings (1996) examined the longevity of foreign entries and found that firms' prior foreign expansion experience positively influences the longevity of foreign ventures. Shaver, Mitchell, and Yeung (1997) also found that firms with prior experience in a host country, have a higher survival rate than firms with no prior experience. Luo and Peng (1999) showed that the intensity and diversity of host country experience have positive effects on subunit performance of foreign firms.
This study attempts to extend the literature through a thorough consideration of the effects of experience of multinational firms in foreign markets. We develop measures of experience including general entry experience, entry specific experience, and exporting experience through observing the complete entry sequences of multinational firms.
We also examine each subsidiary's experience in a host market. We further investigate possible non-linear effects of firm experience and the interaction effects between different types of experience on...
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