Simultaneous impact of the presence of foreign MNEs on indigenous firms' exports and domestic sales.

VerfasserWang, Jue
PostenRESEARCH ARTICLE - Multinational enterprises

Abstract Incorporating the global production network approach and competitor analysis, this paper establishes an analytical framework with two hypotheses for the role of foreign multinational enterprises (FMNEs) in indigenous firms' exports and domestic sales. First, the presence of FMNEs as a whole is likely to have a negative impact on indigenous firms' domestic sales but a simultaneous positive impact on their exports in an emerging economy like China. Second, the presence of MNEs from Hong Kong, Macau and Taiwan (HMT MNEs) is more likely to generate this pattern of impact than MNEs from other countries (Other FMNEs). The foreign direct investment-led export strategy contributed to the dominance of the scenario described by the first hypothesis in China, while a higher degree of market commonality and resource similarity of HMT MNEs with that of indigenous Chinese firms than Other FMNEs leads to the second hypothesis. These novel hypotheses are tested and supported by a very large and recent firm-level panel dataset from Chinese manufacturing.

Keywords Global production network approach * Competitor analysis * Presence of foreign MNEs * Domestic sales * Exports * Indigenous Chinese firms

1 Introduction

This paper examines whether and how foreign direct investment (FDI) by foreign multinational enterprises (FMNEs) simultaneously affects indigenous firms' exports and domestic sales. The existing vast literature on FDI spillovers has largely concentrated on the final effects of FMNE presence on the productivity of indigenous firms (for surveys, see Crespo and Fontoura 2007; Gorg and Greenaway 2004; Gorg and Strobl 2001; Irsova and Havranek 2013; Meyer and Sinani 2009; Smeets 2008; Wooster and Diebel 2010). There is some research on the impact of FMNEs' activities on indigenous firms' exports (Aitken et al. 1997; Anwar and Nguyen 2011; Buck et al. 2007; Faruq 2012; Greenaway et al. 2004; Karpaty and Kneller 2011; Nguyen and Sun 2012; Sun 2010), but no study has been conducted on how the presence of FMNEs affects indigenous firms' domestic sales and exports simultaneously.

It has only recently been emphasized that exports and domestic sales need to be simultaneously examined as a firm maximizes the sum of profits from both export and domestic markets and exports and domestic sales are interdependent (Salomon and Shaver 2005). If exports and domestic sales are based on economies of scale and scope in intangible assets such as research and development (R&D) and marketing that can be transferred across markets with little or no modification, exports and domestic sales may grow simultaneously. On the other hand, a negative relationship between exports and domestic sales is likely to be observed if firms need to make a trade-off strategic decision when constrained by resources. However, exporting could mitigate investment liquidity constraints as it 'signals more stable expected cash flows and quality, which can increase external capital providers' willingness to fund investments' (Shaver 2011), which may in turn stimulate domestic sales. Given the interdependency between exports and domestic sales, the impact of FMNE presence on indigenous firms' exports and domestic sales could be subject to four possible scenarios: simultaneous positive impacts on exports and domestic sales, a positive impact on exports but a simultaneous negative impact on domestic sales, a negative impact on exports but a simultaneous positive impact on domestic sales, and simultaneous negative impacts on exports and domestic sales. Integrating the global production network (GPN) approach and competitor analysis, we establish a general analytical framework for the simultaneous impact of FMNE presence on indigenous firms' domestic and foreign sales. While this framework can be adapted to any business environment with FMNE presence, we choose China as our case study to test novel hypotheses derived from the framework.

China provides an opportunity for a nuanced analysis. China's impressive economic growth over the past 30 years or so is often attributed to its investment- and export-led growth strategy (Lemoine 2013; Razmi 2010). Based on this strategy, China's average annual export growth rate was as high as 25 % during 2000-2008 before the global financial crisis (PRC National Bureau of Statistics various years). China became the world's largest exporter accounting for 10 % of the global exports in 2009 (People's Daily, March 25, 2011). There is a general consensus that FDI has contributed significantly to export growth in China (Sun 2012; Wei and Wang 2009). FMNEs not only account for more than half of China's total exports (PRC National Bureau of Statistics various years), but also promote indigenous firms' exports via knowledge spillovers (Buck et al. 2007; Ma 2006; Sun 2010; Swenson 2008). While existing research sheds some light on export externalities generated by FMNEs to indigenous firms in China, these studies fail to take into account the endogeneity of exports and domestic sales, which may result in a potential bias in estimation. Furthermore, an investigation of the impact of FMNE presence on indigenous firms' domestic sales is important as "the shift in focus on domestic-demand-led growth is necessary both in developed and emerging-market economies" (UNCTAD 2010, p. I).

China, as the largest host of inward FDI in the developing world, attracts two main groups of foreign investors: Ethnic Chinese from Hong Kong, Macau and Taiwan (HMT MNEs) and other foreign investors, mainly from OECD countries (Other FMNEs). Their average shares in China's total inward FDI flows during 2000-2008 were 40 and 60 % respectively (PRC National Bureau of Statistics various years). (1) In addition, the Chinese domestic sector encompasses firms with different types of ownership, including state-owned enterprises (SOEs), collectively-owned enterprises (COEs), and privately-owned enterprises (POEs). SOEs have been subject to extensive institutional transformation since China's opening up in 1978. They still receive government subsidies and special support and face soft budget constraints, but they are generally inefficient and the most costly to operate. COEs, which are mainly owned by local governments and include numerous township-and-village enterprises, receive some local government assistance and are more market-driven than SOEs. However, overall, COEs, given their ownership structure and governance system, are similar to SOEs and suffer from the agency problem. POEs on the other hand do not enjoy any privileges of government support and have to rely on the market for resources, but have the advantage of being flexible in decision-making and are very much profit- and market-driven. Therefore, it is reasonable to expect different effects of FMNE presence on indigenous Chinese firms with different ownership.

Although there are already numerous studies on FDI productivity spillovers in China, how FMNE presence (HMT and Other FMNE presence) simultaneously influences indigenous firms' domestic sales and exports as a whole or as separate groups (i.e., SOEs, COEs and POEs) remains under-explored. Based on our general analytical framework, we develop explicit hypotheses in the context of an emerging economy like China where GPNs are organized predominantly by FMNEs (Koopman et al. 2012). The hypotheses are tested using a very large firm-level panel dataset covering over 357,000 manufacturing firms over the period 2001-2002 and 2005-2007 in China. This study, to the best of our knowledge, is the very first investigation of whether and how FMNE presence simultaneously affects indigenous firms' exports and domestic sales, given the possible endogenous relationship between these two activities. This enables a better understanding of FDI externalities on indigenous firms' sales behavior. We also hope this study will prompt rethinking of the analytical approaches adopted in existing studies of the effect of FMNE presence on firm performance.

The paper proceeds in the following way. The next section draws on the literature on the GPN approach and competitor analysis to develop our analytical framework. Section 3 explains data and methodology. Section 4 discusses empirical results. Finally, Sect. 5 offers our conclusions.

2 Theory and Hypotheses

2.1 Global Production Networks (GPN)

A global or international production network is a concept used to capture the phenomenon that leading MNEs have progressively shifted their internationalization strategies towards systemic globalization, defined as the international dispersal and integration potentially of all elements of the value-added chain (Ernst 1997; Ernst and Guerrieri 1998; Ernst and Kim 2002; Ernst and Ravenhill 1999; Hanson 2012; Kam 2013; Kim 2012; Wang et al. 2007). This is also termed the 'global factory system' by Buckley (2011). The international dispersion, coordination and integration often draw on the organizational capacity and geographic reach of MNEs and make necessary substantial FDI and international trade (Buckley 2011; Levy 2008). In the process, the focus of MNEs has transformed from 'stand-alone' overseas investment projects as described in Dunning (1981) to 'global network flagships' which incorporate their dispersed supply, knowledge and customer bases into regional or GPNs (Ernst and Kim 2002).

In recent years, knowledge transfer (both directly and indirectly) (2) has been emphasized in GPN research (Ernst and Kim 2002; Kim 2011; Rugman and D'Cruz 2000). Ernst and Kim (2002) suggest that GPNs contain a parallel process of integration of hierarchical layers of network participants, creating new opportunities for international knowledge transfer that lower-tier network suppliers may be able to exploit. Kim (2011) argues that the nature of GPN linkage is characterized by intense knowledge- and technology-based interactions aimed at developing new products and processes. MNEs as...

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