Academic journal article Management International Review

Responses of Advanced Country MNEs to Low-Cost Country Imports in Their Home Markets

Academic journal article Management International Review

Responses of Advanced Country MNEs to Low-Cost Country Imports in Their Home Markets

Article excerpt

Abstract:

* There has been little exploration of the competition arising from low-cost countries' imports to the home markets of multinational enterprises (MNEs) headquartered in developed countries.

* This study presents theoretical and empirical analyses of the level of future MNE activities in LCCs due to the rising prevalence of LCC imports in the MNEs' home markets. Building upon oligopolistic parallel behavior theory, we analyze the impact of LCC competition intensity and LCC product quality.

* We test the model using data collected from a top management survey of 423 U.S. and German manufacturing firms.

* The intensity of competition from LCCs and the quality of products imported from LCCs significantly explain MNEs' subsequent responses to that competition.

* Cross-country comparisons show that while LCC product quality is important in both samples, the intensity of competition from LCCs is significant for MNEs' future activities in LCCs only in the U.S. sample.

* A stronger prior orientation toward LCCs and low logistics costs also lead to higher levels of future MNE activities in LCCs, while technological progress does not.

Keywords: Low-cost countries * Import competition * Oligopolistic parallel behavior theory

Introduction

The literature on international business has made only limited exploration of how Western multinational enterprises (MNEs) react to increasing competition from low-cost countries (LCCs). As LCC competition occurs, price-cost margins diminish, and the need for cost reduction intensifies. One frequent response of MNEs in advanced countries is to shift value-add to LCC regions in order to improve their cost position. Interestingly, this perspective has seldom been explored in academia. Thus far, the focus of investigation has frequently been on "active" rather than "reactive" motivations for offshoring and foreign direct investment (FDI) in LCCs. Our study augments the extant literature in this area in several ways: It is among the first to investigate LCC competition as a determinant of the extent to which Western MNEs shift their value-add to LCCs. In this, it complements the set of determinants investigated in previous studies and, moreover, takes a differentiated perspective on LCC competition by distinguishing between LCC competition intensity (especially relating to price pressure) and the product quality of LCC imports. To this end, the theoretical lenses applied are the cross-investment and follow-the-leader concepts found in oligopolistic parallel behavior theory. Both concepts are especially well suited for the purpose of this research, because each one specifically refers to one of the two distinct originations of LCC imports: The follow-the-leader concept in the case that LCC imports are triggered by Western subsidiaries operating in LCCs, and the cross-investment concept in the case of internationally expanding LCC businesses. We empirically test our conceptual model in a cross-country study of 423 U.S. and German manufacturing firms. Findings show that LCC product quality significantly explains the extent of future MNE activities in LCCs in both samples, while LCC competition intensity is a significant driver of future MNE activity in the U.S. sample only. Finally, we complement our base model with traditionally discussed determinants for offshoring and FDI. In this extended model, we continue to find LCC competition and LCC product quality as variables that significantly explain the future extent of LCC activities, next to the prior orientation toward LCCs and logistics costs. However, we do not find support for the contention that technological progress negatively affects offshoring decisions.

The nature of the competition between companies in LCCs and those in advanced economies differs fundamentally from the competition between companies within developed countries. Competition between advanced economies is more similar to domestic competition, since companies share comparable factor costs and access to technology and resources (Vernon 1966, 1979). …

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