Strategic Response to Inward Foreign Direct Investment: A Study of Indian Family Firms.

VerfasserMondal, Arindam

1 Introduction

How inward FDI (IFDI) impacts host country firms? This question has spawned a decent volume of international business scholarship over the years. Available research broadly suggests that IFDI imparts positive (knowledge spillover) as well as negative (competitive threat and crowding out) influence on local firms (Dau et al. 2015; Li et al. 2012; Spencer 2008). The last two decades witnessed significant growth in IFDI targeting various emerging markets, prompting scholars to theorize and examine how emerging market firms (EMFs) respond to foreign investments. In order to counter the competitive threat ushered by the investing MNCs, EMFs have been known to increase productive capacity, develop and market niche products, or engage in imitative innovation. EMFs have also been known to adopt a reactive stance and lower cost of existing products, become MNCs* strategic partners or gradually yield to foreign competition by ceding market share (Chittoor et al. 2009; Dau et al. 2015; Dawar and Frost 1999; Nuruzzaman et al. 2019).

Our purpose in this paper is to contribute to the literature on how EMFs respond to IFDI. EMFs are known to possess less sophisticated firm-specific assets (technical, reputational, financial, relational, managerial) compared to the foreign MNCs. Lack of strategic assets make EMFs vulnerable to foreign competition (Dau et al. 2015). However, such assets are often not available or easily accessible in the EMFs' home countries owing to historical or institutional reasons (Li et al. 2017). Consequently, EMFs often resort to or increase outward FDI (OFDI) in order to tap useful assets and new markets and, in the process, enhance competitiveness (Jormanainen and Koveshnikov 2012; Luo and Wang 2012; Tang et al. 2020). Few years ago Xia and colleagues (2014, p. 1359) observed that "[although over the last decade EMFs increasingly have been investing internationally, whether and how inward FDI by foreign firms influences EMF OFDI surprisingly has been understudied". In this study we seek to obtain deeper understanding of OFDI strategy that EMFs undertake in response to MNC-initiated IFDI.

Interestingly, although few emerging market studies have examined IFDI-OFDI association at the macro level (e.g., Liu et al. 2005; Stoian 2013) as well as firmlevel (e.g., Cui et al. 2014; Li et al. 2012, 2017; Luo and Wang 2012), no study has examined if and how family firms (FFs) in these markets respond to IFDI by implementing OFDI strategy. FFs are businesses that are owned and controlled by one or more family (Carr and Bateman 2009; De Massis et al. 2018), and are a common organizational form in many countries including the emerging markets. FF's contribute significantly to the creation of employment and national wealth and thus their long-term sustenance is of vital importance to their home countries. Although FFs are somewhat unique owing to the presence of family in business (Hennart et al. 2019; Miller et al. 2009) such firms encounter IFDI-initiated competitive threats just like firms that are not owned or controlled by families (e.g., large private/public firms with no family presence, state-owned enterprises, foreign-invested enterprises). Not knowing how FFs in emerging markets (EMFFs hereafter) respond to MNC IFDI represents a crucial shortcoming in the current literature.

In this study we begin to eliminate this gap by pursuing a pertinent research question: Do EMFFs engage in or increase current OFDI in response to MNC IFDI? If (and when) EMFFs decide to increase OFDI as a strategic response it is illogical to expect that all such firms in a given industry will respond similarly. An important question, therefore, arises: What factors determine variation in EMFFs' OFDI response? Prior research suggests that FFs possess wide heterogeneity in their resources and capabilities and this heterogeneity impacts important organizational outcomes (Hennart et al. 2019; Ray et al. 2018; Verbeke et al. 2019). Drawing on this notion we conjecture that important resource-based factors may be responsible for how EMFFs differ in their OFDI response strategy. Thus the second research question of this study is: how resource-based heterogeneity in EMFFs influence the relationship between MNC IFDI and OFDI growth?

We draw on several strands of relevant scholarship--competitive dynamics of EMFs, institutional development in emerging markets, and FFs--to elaborate our rationale that lead to hypotheses development. Our multi-year analysis in the context of India suggest that in response to IFDI announcements EMFFs in respective industries respond by increasing their current levels of OFDI. Our findings also demonstrate that the relationship between MNC IFDI and OFDI growth varies across Indian FFs. Specifically, the relationship is stronger for FFs (a) that are managed by professional managers compared to those that are managed by family-managers, (b) that have high foreign institutional ownership compared to those with low ownership, and (c) whose family CEOs possess international experience compared to those whose family CEOs do not possess such experience. Nature of management, ownership, and CEO are important characteristics of FFs, and they play crucial roles in important strategic organizational outcomes such as internationalization or OFDI (Arregle et al. 2012, 2017; D'Angelo et al. 2016; Hennart et al. 2019; Ray et al. 2018).

The study contributes to FDI research in general and FF research in particular. In the domain of FDI our findings clearly demonstrate that indigenous firms in emerging markets augment their current level of OFDI in response to investment announcements by foreign MNCs. We argue that this response is due to perceived competitive threats from foreign MNCs. As noted earlier, only a handful studies have examined IFDI-OFDI association in the context of emerging markets. This study adds to this line of research. Within FF research, this study sheds new light on the overseas expansion of FFs through FDI (De Massis et al. 2018; Hennart et al. 2019; Sestu and Majocchi 2020). Relatedly, this study contributes to the scholarship that deals with FF heterogeneity and its effect on FF outcomes (Chua et al. 2012; Ray et al. 2018). Finally, this study contributes to the growing literature on emerging markets and the outward expansion of local EMFs (Jormanainen and Koveshnikov 2012; Peng et al. 2008; Tang et al. 2020).

The remainder of the paper is structured as follows. The next section reviews the relevant literature, and explains our logic that lead to the development of hypotheses. This section is followed by description of our empirical model, data, and methodology. The subsequent section presents results of empirical analysis, and the following concluding section discusses the theoretical and practical implications of the study, highlights few limitations, and outlines directions for future research.

2 Theoretical Background and Hypotheses Development

2.1 OFDI by EMFs

A wealth of insight exists on why firms undertake FDI (see Paul and Feliciano-Cestero 2020 for review). Drawing on the notion that emerging markets and developed economies vary in their (a) institutional frameworks, and (b) indigenous firms' resource attributes and competitive behaviour, several scholars have theorized why EMFs engage in internationalization and, in particular, OFDI (Cui and Xu 2019; Gaur et al. 2018; Stoian and Mohr 2016; Wang et al. 2012a). Inherent in this body of work is the influence of IFDI-induced competitive pressure that EMFs experience.

Foreign MNCs, exploiting superior firm-specific assets and processes can introduce differentiated goods and services in their host emerging markets in a better and efficient manner compared to the local EMFs. Moreover, global brands, advanced marketing capabilities and overall reputation readily enables MNCs to attract local customers and establish legitimacy (Paul and Feliciano-Cestero 2020). These developments can make the relatively less-powerful EMFs in respective industries to lose market share, accumulate excess capacity, experience squeeze in revenues and become marginalized (Gu and Lu 2011; Li et al. 2017). Rising competition can also gradually threaten the very sustenance of EMFs and may eventually force them to go out of business. To enable suitable response to imminent and future IFDI and maintain competitive foothold in the respective industries, OFDI gradually becomes an important capability-building and catching-up strategy for EMFs (Cui et al. 2014; Tang et al. 2020). Table 1 highlights salient scholarly observations linking competition on the home soil, and EMFs' consequent OFDI response.

A dominant lens that scholars use to understand EMF internationalization is the institutional perspective. Institutions represent 'rules of the game' in a country (North 1991). Those adopting this lens posit that resources that local firms use and strategic choices that they possess are dependent on the home country institutions (Cuervo-Cazurra et al. 2018; Gaur et al. 2018; Nuruzzaman et al. 2020). For a long time EMFs were shielded from international competition and resources available in their home countries were adequate to prepare them for competing with domestic rivals. However, several emerging markets liberalized their economies in the past decades and moved away from export promotion policies (inward-looking) to export substitution policies (outward-looking). Opening up of economies provided impetus to numerous MNCs who began entering the emerging markets using various entry modes to take advantage of huge opportunities that these markets presented (large customer base, low cost labour, cheap human capital) (Lahiri et al. 2014; Luo et al. 2019; Meyer et al. 2009).

For EMFs, increasing IFDI and consequent influx of better-endowed new entrants translates into increased rivalry on the home turf. IFDI also meant EMFs' heightened recognition of the...

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