Academic journal article Management International Review

FDI Structure, Investment Specificity, and Multinationality Value under Host Market Uncertainty

Academic journal article Management International Review

FDI Structure, Investment Specificity, and Multinationality Value under Host Market Uncertainty

Article excerpt

Abstract:

* To address mixed results regarding the value of multinationality, we take into account some important but less explored contingent factors related to country and subsidiary asset specificity.

* From our analyses using a panel dataset of Korean FDI, we find that subsidiaries' local commitment in terms of FDI depth and local sales are negatively associated with multinationality value, whereas their intra-firm trade links to other affiliates are positively associated with the value.

* We conclude from our findings that in addition to dispersed operations across countries, other country- and subsidiary-specific factors moderate the effect of FDI breadth on multinationality value.

* We believe our study contributes to the literature by its fine-grained analysis of the environmental and organizational conditions wherein MNCs' multinationality generates value.

Keywords: Multinational corporations * Market uncertainty * Flexibility * Multinationality value * Intra-firm trade

Introduction

Managing uncertainty is critical for multinational corporations (MNCs) because they cannot anticipate future uncertainties associated with their initial investments and the level of their preparation for uncertain future events may affect their performance and survival (Chung et al. 2010; Cuypers and Martin 2010; Lee and Makhija 2009a, b; Tong and Reuer 2007). Therefore, the recent literature on MNCs' foreign direct investment (FDI) focuses more on the multinational flexibility inherent in international investments. This literature explains why and how firms invest under the influence of high uncertainty level in foreign host countries. MNCs can transfer resources and rearrange their value chain activities such as production and sales across countries, using their international portfolio of foreign subsidiaries (Chung et al. 2010; Fisch and Zschoche 2011, 2012; Huchzermeier and Cohen 1996; Kogut and Kulatilaka 1994; Lee and Song 2012, Pantzalis et al. 2001).

Prior studies relevant to this area argue that high FDI breadth (i.e., dispersed operations in multiple countries) enables MNCs to take advantage of the additional country options that are available for coordinating their scattered subsidiaries and exploiting multinational operational flexibility. For example, Allen and Pantzalis (1996), Tang and Tikoo (1999), and Lee and Makhija (2009b) support the value of multinationality. These studies assume that MNCs will achieve higher value because they have the option of switching production or sales in a quicker, more timely, and less costly manner, by coordinating their subsidiaries located in multiple countries.

However, what if MNCs are unable to take advantage of multinational flexibility despite their dispersed operations? We suggest this possibility because deriving benefit from multinational flexibility is not as easy as many past studies have assumed. Although the association of high FDI breadth with high multinationality value is explicitly assumed, the point that realizing multinational flexibility may be costly and difficult to coordinate is not assumed. However, having the potential to exercise operational flexibility is very different from actually doing it (Reuer and Leiblein 2000; Tong and Reuer 2007). In other words, operational flexibility comes at a price. Since operational flexibility can be retained and realized between at least two different subsidiaries, an MNC can best achieve flexibility when it can coordinate its subsidiaries for its own benefit. Relevantly, Rangan (1998) does not find any significant advantage of multinationality. Similarly, Reuer and Leiblein (2000) and Tong and Reuer (2007) argue that multinationality does not necessarily provide real options for firms seeking to remain flexible. Why does previous research yield such mixed results?

Regarding these inconclusive results on the value of multinationality, we argue that prior studies have not fully considered key organizational and environmental conditions for multinational flexibility. …

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