Past Interactions and New Foreign Direct Investment Location Decisions: Firm-Specific Analysis in the Global Tire Industry

Article excerpt

Abstract:

* Analyzing the nature of competitive interaction among multinational firms in the tire industry, we find that the histories of the interactions between particular rivals matter.

* The decision to enter a new foreign market in the era of global consolidation is related to the identities of rivals in the market, characteristics of the firm and the market, and the extent of past competitive interactions with the international pioneering firm.

* Results suggest that, in an oligopolistic environment, aspects of multimarket competition are important to foreign direct investment decisions.

Keywords: Oligopolistic reaction. Firm-specific interactions' Multimarket competition-Pioneer vs. late-mover. FDI

Introduction

Assume that companies A and B are active players in a global oligopoly. Company A is considering adding a new country to its foreign direct investment (FDI) portfolio. Company B already has an established subsidiary in that country. If the two companies have competed with each other repeatedly in other markets, does this affect Company A's decision regarding the potential new investment?

A large global company that operates in an oligopolistic industry tends to compete with its primary rivals in many different locations. We analyze the relationship between a firm's past interactions with particular rivals and its decisions regarding new FDI locations, using the frameworks of multimarket contact, oligopolistic reaction and herding behavior, first-mover advantages, and FDI. Our research contributes to the literature by incorporating a consideration of interaction histories with specific rival firms, investigating the phenomenon of how firms compete aggressively with particular rivals while remaining relatively passive with respect to others.

Examining the FDI behaviors of leading firms in the world tire industry, we consider factors related to the location of foreign subsidiaries. Binomial logistic regression modeling provides evidence that strategic behaviors differ, depending on both the presence of individual rival firms and the history of interactions between firms. Our results suggest that rivals pay particular attention to the investment decisions of, and past interactions with, the international pioneer, which was the first firm to establish an extensive network of international subsidiaries. The international investment behaviors of large tire companies imply a consideration of the extent of competition in individual markets. These insights into the strategies of the major firms in an important global industry enrich the literature related to international competition.

This paper is organized as follows. In the next section, we review the literature on FDI and multimarket contacts, in the context of oligopolistic reaction, herding behavior, and first-mover advantages. We also provide a brief background on the history of consolidation in the global tire industry. The following section describes our modeling approach, along with the data used in the logistic regressions. The results are then discussed, and the paper concludes with a summary and discussion of our findings.

FDI and Multimarket Contact

Bases of the FDI Literature

Nearly half a century of research has provided some important insights into why, how, where, and when firms may be expected to undertake FDI. Much of the theoretical underpinning associated with FDI is based on the work of Hymer (1960/1976), who noted the relationship between competitive conditions and foreign investment, and argued that foreign market entry must be supported by firm-specific or ownership advantage that allows the investing company to compete successfully against local firms, overcoming domestic firms' inherent advantages stemming from their superior knowledge of conditions in the host country. This argument forms the basis of our understanding of why FDI occurs (Pitelis 2006). …