Academic journal article Multinational Business Review

Location in Internationalization Strategy: Determinants and Consequences

Academic journal article Multinational Business Review

Location in Internationalization Strategy: Determinants and Consequences

Article excerpt

Abstract:

In this study, we examine the location strategies (e.g., developing versus developed countries) of Chinese multinational firms (Pantzalis 2001). We argue that domestic firm-specific ownership advantages of a firm, in the form of larger size and higher degree of diversification, will induce internationalization into developed countries rather than into developing countries. We also predict that internationalization into developed countries will help performance, but internationalization into developing countries will hurt performance. Based on an analysis of data on 154 Chinese-listed MNCs from 1992 to 2002, we find support for our predictions.

Keywords: Location strategies, internationalization, performance

INTRODUCTION

The past two decades have witnessed a significant rise of foreign direct investment (FDI) from developing countries with multinational corporations (MNCs) from China, India, Brazil, Malaysia, and South Africa being among the most active and aggressive investors from around the world (UNCTAD 2005). The flow of outward FDI from developing economies reached $174 billion, up from only $494 million 20 years before - an increase of 352 times at a compounded annual growth rate of 32% (UNCTAD 2006). The cumulative stock of outward FDI from developing countries is also impressive at US$1600 billion. Many more developing country MNCs are also attaining global prominence, as suggested by membership in the Fortune 500 listing. In 1990, only 19 firms from developing and emerging countries are featured in Fortune 500, but the number increases to 47 in 2005 (UNCTAD 2006). China, in particular, has played an important role in the trend of growing investment by developing country MNCs. In 1982, the FDI outflow from China amounted to only $44 million; but by 2005, the value exceeded $16 billion and the stock of FDI exceeded $73 billion (see Figures 1 and 2) (UNCTAD 2006). Clearly, developing country MNCs, in general, and Chinese MNCs, in particular, are playing an increasingly important role in the global economy (Pillania 2009a).

Choice of location is probably one of the critical, and also one of most complex, decisions confronting MNC managers (Galan et al. 2007). In this paper, we deploy longitudinal data to examine the location strategies (as in the choice of FDI destinations) of Chinese multinationals, as well as the performance implications of their location choices. Specifically, we aim to empirically answer the following research questions: How do Chinese firms' ownership advantages influence their location choice, specifically among developing and developed countries? How do Chinese firms' location choices influence their performance? Our analysis is based on a unique data set about the internationalization of 154 Chinese firms over the period 1992-2002. We believe that our study is of particular interest since, as argued earlier, Chinese MNCs are playing an increasingly important role and, as argued below; our study fills a gap in the existing literature on location choice.

Though many empirical papers examine the factors that might influence a firm's location choice, there are three key issues with the existing literature. Prior literature has typically focused on how inter-organizational level factors, such as mimetic or imitation forces (Henisz and Delios 2001; Gimeno et al. 2005) and country-level factors like market potential (Zhou et al. 2002) and country risk (Buckley and Casson 1998) can influence a firm's location choice; but firm-level factors such as the ownership advantages possessed by a firm, which may be quite important, are seldom included in the analysis. Secondly, very few papers (other than Pantzalis 2001) have gone beyond the determinants of location choice to examine performance implications - a central concern in IB and strategy research. Thirdly, many papers examining location choices do not model the choice between alternative locations, for instance, studies focusing on inward investment into a particular country such as the US. …

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