Academic journal article Management International Review

Performance of Multinational Firms' Subsidiaries: Influences of Cumulative Experience

Academic journal article Management International Review

Performance of Multinational Firms' Subsidiaries: Influences of Cumulative Experience

Article excerpt

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). …

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