Academic journal article Multinational Business Review

The Location Strategy and Firm Value Creation of Chinese Multinationals

Academic journal article Multinational Business Review

The Location Strategy and Firm Value Creation of Chinese Multinationals

Article excerpt

Introduction

[21], [22] Dunning (2006, 2009) and [10] Cantwell (2009) observe that many recent studies have neglected the importance of location strategy in firms' internationalization and point out location choice has new meanings for emerging economy MNEs (EEEs). Mainstream FDI theories tend to assume that MNEs internationalize to exploit their existing competitive advantages and FDI usually flows from developed to developing countries ([50] Vernon, 1966) or between developed countries ([52] Wells, 1977; [32] Lall, 1983).

What is less understood is why an increasing number of EEEs, which do not possess traditional competitive advantages, are investing in other emerging countries as well as developed countries and how they have been performing. Studies on Chinese OFDI have not adequately addressed the above issues and instead have focused primarily on antecedents, motivations, strategies and macro-economic drivers ([18] Deng, 2012; [55] Yang, Jiang, Kang and Ke, 2009).

There is a need to extend existing theories to explain the investment behavior of these firms, especially their strategic goals, location choices and the performance implications thereof ([14] Child and Rodrigues, 2005). Our study investigates FDI types related to their strategic goals, location choices and their link to firm value creation. The following questions are addressed in this study:

- Does OFDI create value for Chinese firms? If so, how?

- How is location choice related to firm value creation?

Previous studies suggest that internationalization creates value for Chinese firms, as evidenced in [6] Boateng et al. (2008) and [13] Chen and Young (2010); announcements of cross-border merger and acquisitions (M&As) by Chinese listed companies produce positive abnormal return for their shareholders. However, little research has explored whether the value created varies among different types of FDI. We draw on the reconciled FSA/CSA framework with Dunning's four motives ([42], [43] Rugman, 1981, 2010; [45] Rugman and Verbeke, 2008) to differentiate two types of FDI: traditional FDI and strategic asset-seeking FDI.

The differentiation is made based on their requirements for the MNE's firm-specific advantages (FSAs) and host country-specific advantages (CSAs). Strong CSAs of the host country are the main prerequisite for traditional FDI, including natural resource-seeking, market-seeking and efficiency-seeking FDI, while strong FSAs of the MNE and strong CSAs of the host country are both prerequisites for strategic asset-seeking FDI.

Further, we draw on [49] Verbeke's (2009) FSA/CSA recombination process model to analyze the differentiated value creation of traditional FDI and strategic asset-seeking FDI for the Chinese MNEs. [35] Makino et al. (2002) and [24] Galan et al. (2007) argue that MNEs need to align strategic motivations with FDI location choices in order to maximize firm value. We posit that the amount of value creation is positively correlated with the degree of alignment between location strategy and FDI types.

This research contributes to the understanding of the internal mechanisms through which MNEs create value when they engage in different types of FDI, and of how different value is created in traditional FDI and strategic asset-seeking FDI vis-à-vis location choice. We empirically demonstrate that more value is created when Chinese MNEs align location strategies with FDI types.

In the next section of the paper, the literature is reviewed and hypotheses are constructed followed by a discussion of methods and results. We conclude with a discussion and implications for future research.

Theory and hypotheses

Theoretical background

The FSA/CSA framework

According to [44] Rugman and Verbeke (2001), an MNE is defined as a firm engaging in value-added activities in at least two countries. Firm-specific advantage (FSA) and country-specific advantage (CSA) are core components of international theories, which are crucial to describe the international expansion patterns of any MNE ([44] Rugman and Verbeke, 2001). …

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