Academic journal article Management International Review

Negative Multi-Market Spillover Effects of Foreign Direct Investment in Response to Investment Incentives: The Challenge for MNCs

Academic journal article Management International Review

Negative Multi-Market Spillover Effects of Foreign Direct Investment in Response to Investment Incentives: The Challenge for MNCs

Article excerpt

Abstract

* Multi-market competition occurs when many multinational companies simultaneously invest in many developing countries in a few industries like cars or electronic goods, for which investment incentives exist.

* Resulting negative multi-market spillover effects have largely been ignored in theories of foreign direct investment leading to a need of combining industrial organization models with the theories of foreign direct investment.

Key Results

* Based on theoretically deduced hypotheses and empirical testing, reducing product substitution and/or the diseconomies of scale and scope within and between such MNCs are the resulting managerial challenges.

Introduction

During the "globalization wave" since the beginning of the 1990s, many multinational companies set up production capacities in the growth markets outside the Triad countries. Their rational expectation was to obtain economic rents for individual direct investment decisions due to high investment incentives consisting of high import barriers and a booming domestic market. What was not taken into account, however, was that multi-market competition occurs when many multinational companies simultaneously invest in many developing countries in a few industries with standardized products like cars or electronic goods, for which production methods are no longer secret. Such multi-market competition causes over capacities that lead to export pressure and--given the slow growth in markets for standard products--to a pressure on prices. Therefore foreign direct investment decisions that are made in response to investment incentives have an impact on markets in other countries and lead to what are called "multi-market spillover effects" (see Bulow et al. 1985), which in general are negative. They are negative since they negatively affect the parent company's overall profits.

However, these negative--but even positive--multi-market spillover effects have largely been ignored in theories of foreign direct investment and consequently in globalization strategies. Therefore it is important to extend existing theoretical models. Background analyses on the subject of multi-market competition exist only in industrial organization models that have till now been used only in marketing research (see Jayachandran et al. 1999). There is no known effort to combine these industrial organization models with the theories of foreign direct investment. As Buckley (1996, p. 29) puts it: "international business theory is very successful in describing, predicting and to a limited extend prescribing foreign market entry and development strategies. However, in general, this works best when a single foreign market is being examined. Interaction or knock-on effects between markets are largely unexamined and inadequately modelled".

This article tries to close the existing research lacuna. In the first section of this paper the emergence of negative multi-market spillover effects caused by foreign direct investment taking place due to investment incentives is analysed. The paper demonstrates that previous explanations of foreign direct investment in response to investment incentives only consider single markets while neglecting multi-market spillover effects. The third section therefore focuses on negative multi-market spillover effects that occur when such foreign direct investment take place and develops three hypotheses about factors that influence these effects. Empirical evidence regarding the validity of the hypotheses and the explanations for multi-market spillover effects as a response to investment incentives are provided in the next section, while the concluding fifth section discusses the managerial challenges for MNCs.

Emergence of Negative Multi-market Spillover Effects Due to Foreign Direct Investment in Response to Investment Incentives

Multi-market competition arises due to the setting up or expansion of a growing number of subsidiaries by a growing number of MNCs in a restricted number of industrial sectors in a growing number of developing countries in response to massive investment incentives. …

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