Academic journal article Management International Review

Spatial Dependence of the FDI Entry Mode Decision: Empirical Evidence from Emerging Market Enterprises

Academic journal article Management International Review

Spatial Dependence of the FDI Entry Mode Decision: Empirical Evidence from Emerging Market Enterprises

Article excerpt

1 Introduction

Globalization and the worldwide growth of foreign direct investment (FDI) have attracted considerable interest among management researchers who focus on the FDI strategies of multinational enterprises (MNEs). A core feature of these studies is analyzing how a multinational company tackles the disadvantages compared with national firms that possess better information about their country, such as the economy, language, law, and politics (Hymer 1960). Among the strategic concerns, where to invest and how to select an appropriate entry mode are two fundamental decisions that must be made by MNEs.

In international business (IB) research, the entry mode decision and location choice have usually been studied separately as two independent decisions. However, to some extent, they appear to be correlated, as shown in previous studies (e.g., He 2003; Li and Li 2010; Strange et al. 2009). However in IB research, the location has been considered at the country level (space) rather than using a distinct "regional" (place) approach (Beugelsdijk et al. 2010; Dunning 2009). A similar limitation is also found in studies of the entry mode about the assumption that the behavior of MNEs is homogeneous within a foreign country (Shen et al. 2017). Recent explanations of the foreign location choices of MNEs have aimed to achieve deeper integration among disciplines such as IB and economic geography (Kim and Aguilera 2016). Another limitation is that most previous studies were based on FDIs from developed economies; thus, it is unclear whether the strategic decisions of MNEs from developed economies are similar to those of emerging market enterprises (EMEs), especially when the home country institutional context is distinct from that of the host country (Madhok and Keyhani 2012; Peng et al. 2008).

In the present study, we aimed to obtain insights into the aforementioned issues by focusing on the entry mode trends of MNEs from EMEs in developed countries by considering the locations of the economic activity. In particular, we compared the effects of two important but structurally different types of places, i.e., industry and origin clusters, on both the establishment mode and ownership structure of MNEs in their FDIs. Previous studies have tried to determine why firms tend to colocate with other related firms, including considerations of their agglomeration externalities (Alcacer and Chung 2014; Chang and Park 2005; Jain et al. 2016). We extended these studies by addressing the following questions. How might a colocation strategy influence entry mode choice of foreign investors? Under what circumstances might this influence exist?

We examined the location and establishment modes of foreign investors at the subnational level. We selected 162 Chinese-owned subsidiaries in Germany for the empirical analysis. Our particular context comprised Chinese firms investing in Germany because of the following reasons. First, Chinese firms have been expanding their overseas investments rapidly in the last few years (Clegg and Voss 2012). Due to initial resistance to Chinese investment in the USA, especially via acquisitions, China has increasingly invested in Europe and particularly in Germany, which is Europe's dominant economy and its "locomotive". Second, unlike some other European economies, Germany contains a number of regions and cities where firms cluster, e.g., Munich, Hamburg, and Berlin (Hanemann and Huotari 2015), rather than having one dominant pole. Third, Hennart and Park (1993) criticized many previous entry mode studies because they did not consider the confounding effects of multiple home and/or host countries and they recommended single-country designs by focusing on parent, subsidiary, or industry level factors.

This study makes three main contributions. One, it contributes to the IB literature by bridging two fundamental FDI strategies. The demonstration of "patial dependence" suggests a geo-strategic perspective in the entry mode strategy. …

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