FIGSIB DOCTORAL COURSE ”THEORIES AND

RESEARCH IN INTERNATIONAL BUSINESS”

at the University of Turku/TSE

Professor Jorma Larimo

THEORIES AND RESEARCH FOCUSING ON FDIs

23.10.2015 PART 2

FDI ESTABLISHMENT MODE (EM) RESEARCH

• Key forms/modes: greenfield /start-up vs. acquisition • Key differences between forms/modes: ? • Form/Mode of Investment Strategy: Theoretical Explanations

– Transaction cost economics – Organizational learning – Resource based view – Behavioral perspective – Information economics (information asymmetry) – Institutional theory Somewhat different expectations depending on the theory Methodology in empirical establishment mode studies: mainly binomial, sometimes multinomial logistic regression

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GREENFIELD INVESTMENTS VS ACQUISITIONS IN GLOBAL FDI

FLOWS 2003-2014 (WIR 2015)

23.10.2015 Vaasan yliopisto | Yksikkö | Kalvosarjan nimi 3

ESTABLISHMENT MODE THEORIES: TCT/Internalisation

• Most commonly used in EM studies; see Slangen & Hennart (2007) article

• The extended TCT/internalisation perspective contends that an MNE´s choice between greenfield and acquisition depends on a comparison of costs associated with exploiting or obtaining intermediate inputs through these two establishment modes

• R&D: if owned, management wants to exploit, TCs lower in greenfields if the firm does not have the knowledge, time consuming and high costs to develop – prefer acq

• International and target country knowledge: such knowledge to a large extent experiential; inexperienced firms try to acquire this knowledge; experienced firms exploit gained knowledge and use greenfields

• Product knowledge: similar line of reasoning • Widely diversified MNE´s: prefer acquisitions because the main

advantage of such firms consists of advanced management control systems

• Cultural distance: large distance means problems and costs with transferring intangible assets and managerial practices, firms prefer greenfields

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ESTABLISHMENT MODE THEORIES

Organizational learning theory: • Firms operating in many different settings are exposed to a wide variety of

events and ideas that strenghthen their knowledge base and tech capabilities – internationally experienced MNE´s prefer greenfields,

inexperienced prefer acquisitions to strenghten their knowledge – same type of reasoning concerning industry experience: however, after

certain level of diversity firms start to prefer again acquisitions (Barkema & Vermeulen)

– establishment mode experience: preference of the used mode Information economics: focuses on information asymmetries • Usually exist in acquisitions; difficulties to evaluate the value and culture of

the targets in firms lacking information/TC experience – preference for greenfields; experienced firms can better evaluate this information and prefer acquisitions

Theory of the growth of the firm: • Firms are constrained in their growth – can recruit and train only a limited

number of managers ; the larger the unit the more probable preference of acquisition

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ESTABLISHMENT MODE THEORIES

Industrial organization perspective:

- EM choice is influenced by the industry entered

- Greenfield increases supply – acquisition not

- Concentrated industries acquisition if local government allows

- Industry growth rate: slow (or decline) and very fast – acquisition, gr medium

- Availability of potential acquisition candidates

Institutional theory:

• Firms tend to conform to the rules and norms prevailing in their environment to gain legitimacy and survive

• Subsidiaries experience conformity pressures from both their internal (parent) and external (host country) environments : pressures for global integration and local responsiveness

• MNEs following global strategy: internal conformity – preference for greenfields

• MNEs following multilocal strategy: external conformity – preference for acquisitions

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PREDICTIONS OF THE DOMINANT THEORIES ABOUT THE ESTABLISHMENT MODE

Source: Greenfield or acquisition entry: A review of foreign establishment mode literature by Slangen

& Hennart, Journal of International Management 13(2007); 403-429

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ESTABLISHMENT MODE RESULTS

Slangen & Hennart (JIM 2007): review based on 15 comparable studies

- Only five of the 22 variables that had been included in more than one study had fully consistent significant results

- TCT theory: R&D intensity increases preference for greenfields - Growth of the firm: large relative size increases pref for acquisitions - Ind org literature: industry growth increases preference for greenfields - Econ level of TC: high per capita income increases pref for acquisitions - Timing of FDIs: more recent time period – preference for acquisitions

Findings for other variables have been inconsistent like for international experience, cultural distance and unit relatedness Potential causes for inconsistent results:

- Unrecognized moderating effects - Research design related problems Results based on Finnish data

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IMPACT OF VARIOUS FIRM-, INDUSTRY-, TARGET COUNTRY-, AND

INVESTMENT SPECIFIC VARIABLES ON THE CHOICE OF ESTABLISH-

MENT MODE IN FINNISH FDIs

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parent size increases probability of greenfield investment

R & D intensity increases probability of greenfield investment

economic growth high growth increases probability of greenfield investment

cultural distance increases probability of greenfield investment

economic level of the target country increases probability of acquisition

type of investment unrelated increases probability of acquisition

ownership mode WOS increases probability of acquisition

diversity of the parent no clear impact

international experience no clear impact

target country experience no clear impact

timing of the investment no clear impact

GOOD TO REMEMBER: IN TOTAL THE GREAT PREFERENCE FOR USING ACQUISITIONS

- ESPECIALLY IN OECD COUNTRIES

- IN FIRST FDIs ALMOST EQUALLY GRs AND ACQUISITIONS

SYNERGY, INTEGRATION AND AUTONOMY

Synergy effects: 2+2 = 4 or too often less in foreign acquisitions

Which functional areas (sourcing, production etc. ) and level of integration (low, medium, high)

A. Integration strategies by White & Poynter (1984)

1) Miniature replica, 2) Rationalized manufacturer, 3) Product specialist, 4) Strategic independent [and 5) Marketing satellite]

B. Integration strategies by Haspeslagh & Jemison (1991)

1) Prereservation, 2) Symbiosis, 3) Holding, and 4) Absorption

C. Integration strategies by Lindgren/ Lindgren & Spångberg (1982)

1) Blitzkrieg, 2) Trojan horse, 3) Infiltration, 4) Cooperation, 5) Allies, and 6) Do nothing - Leave alone

SOME OF THE KEY FINDINGS (see e.g. Shimizu et al. 2004 p. 332)

- The cultural differences associated with acquirer and acquired firms´ home countries create additional challenges for post M & A acquisition

- The preferences for types of integration processes and control systems are different depending on the acquirer´s nationality

- The success/performance of acquisitions depends on the integration process and adopted control systems

LEVEL OF INTEGRATION AND ESTABLISHMENT MODE (Slangen & Hennart JIBS )

DEVELOPMENT OF SUBDIARIES OVER TIME : POTENTIAL CHANGES IN THE ROLE AND LEVEL OF INTEGRATION (see e.g. Birkinshaw 1998 and Birkinshaw & Hood 1998)

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DIFFERENT WAYS TO ORGANIZE INTERNATIONAL PRODUCTION

(Haspeslagh and Jemison 1991; Dicken 1998)

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BEST OF BOTH

BEST OF BOTH: Additive from both sides – cultural integration

DIFFERENT WAYS TO ORGANIZE INTERNATIONLAPRODUCTION

(Dicken 1998)

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DIFFERENT WAYS TO ORGANIZE INTERNATIONLAPRODUCTION

(Dicken 1998)

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DETERMINANTS OF MNC SUBSIDIARY EVOLUTION

(Based on Birkinshaw and Hood 1998)

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FOCUS ON OWNERSHIP AND MODE DECISIONS • Larimo J. : FDI behaviour and performance. An analysis of Finnish manufacturing investments in

OECD countries. UV 1993. • Arslan A.: Institutional distance-Market conforming values in the host country and FDI choices of

MNEs. UV. 2011 FOCUS MAINLY ON ACQUISITIONS • Stenberg, E. : Steering of Foreign Subsidiaries. HSE 1992. • Lohrum, C. : Post-acquisition integration. Towards an understanding of employee reactions.

Hanken 1996. • Marschan, R. : New structural forms and inter-unit communication in multinationals. HSE 1996. • Santala, R. :Post-Acquisition Integration of Strategic Management in an MNE. TSE 1996. • Madureira, R. : Coordinating HQ – Subsidiary relationships. Portugal. UJ 2004. • Li, L. : Knowledge Transfer Within Western Multinationals´ Subsidiary Units in China and

Finland. Hanken 2004. • Irrman, O. : Intercultural communication and the integration of cross-border acquisitions. HSE

2006. • Antila, E. : Essays on the Roles of the Human Resource Function and Managers in International

Mergers and Acquisitions. UV 2006.

• Sarala, R. : The impact of cultural factors on post-acquisition integration. Hanken 2008.

• Junni, P. : Knowledge transfer in acquisitions. Socio-cultural perspective. Hanken 2012.

• Oguji, N.: Foreign acquisition entry strategies and performance of Finnish multinationals: The role of entry motives, institutions and host country capabilities. UV 2015.

EXAMPLES FROM FOREIGN ACQUISITIONS AND HQ-SUBSIDIARY

RELATIONSHIP RELATED DISSERTATIONS IN FINLAND

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INTERNATIONALIZATION/MULTINATIONALITY –

PERFORMANCE RELATIONSHIP

WHAT’S THE SHAPE OF THE RELATIONSHIP

- Linear : positive

- Linear: negative

- U-shaped: upward open

- U-shaped: downward open

- S-curve

- No relationship

KEY QUESTION: OPTIMAL LEVEL OF INTERNATIONALIZATION!

Stable or changing level?

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THREE-STAGE SIGMOID MODEL

(Contractor, 2003)

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FDI PERFORMANCE: MEASUREMENT OF PERFORMANCE

• SEVERAL DIFFERENT ALTERNATIVES: - objective measures

• stock market and other financial measures • other objective measures

– subjective measures • management evaluations

– survival/divestments

• HOW THE PERFORMANCE SHOULD BE MEASURED?

• Advantages and disadvantages of various measures – objective – subjective – Existence-survival/ longevity/divestment

• Measures used by the managers based on various studies

– overall performance, ROI, budget compared to plan, value of sales, net profit, market share

• Some special issues in IJV studies: from whose point of view and measures like stability

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POST-ACQUISITION PERFORMANCE MODEL (Nupponen 1995)

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Performance is not described as an outcome at the end of the integration process as in previous models like Jemison and Sitkin (1986), Jemison (1986), Larsson (1990), but longitudinally as an evolving phenomenon.

RESULTS IN EMPIRICAL FDI STUDIES

• STOCK MARKET STUDIES: mixed results – Several studies indicate positive abnormal results – When stock reactions both to the acquired and acquiring firm are analyzed then in several

studies positive abnormal results for the target firm but not necessarily for the acquiring/investing firm

• BUSINESS INTERNATIONAL (Kitching 1973): Domestic and foreign acquisitions made by firms from different OECD countries in 1965-70 : – c. 25% of foreign acquisitions made in various European countries were failures and almost

20% were not successful • BUSINESS INTERNATIONAL (1988): Domestic and foreign acquisitions made by over 150

mostly European firms: 30% of the managers described their firms’ acquisition experience over the last three years as successful, 53% as satisfactory and 17% as unsatisfactory or disastrous

• Several studies focusing on international joint ventures indicate instability or

failure rates of 40 to 70 % of reviewed cases • Hu & Chen (1996): Managers evaluated that over 90% of the reviewed over 2 400 IJVs made

in China were not successful

• Very mixed results e.g. related to the impacts of parent size, experience, ownership and establishment mode, and cultural distance on FDI performance

• Results in Finnish stock market reaction studies

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RESULTS IN EMPIRICAL FDI STUDIES

• Very mixed results e.g. related to the impacts of parent size, experience, ownership and establishment mode, and cultural distance on FDI performance – Ownership mode: empirical support for better performance in some studies for WOS and

in some for IJVs - also support for no significant difference – Establishment mode –more support for better performance in greenfields than in

acquisitions : Slangen & Hennart the results depend on the level of integration • Finnish dissertations dealing with FDI performance:

– Larimo J. : FDI behaviour and performance. An analysis of Finnish manufacturing investments in OECD countries. UV 1993.

– Nupponen, P. : Post-Acquisition Performance. Combination, Management, and Performance Measurement in Horizontal Integration. HSE 1996.

– Nguyen H.L.: Foreign parent control and IJV performance. Evidence from Finnish MNEs. UV 2009.

– Wang, Y. Multilevel determinants of foreign direct investments entry mode strategies and subsidiary survival of multinationals in China: An analysis of Nordic firms. UV 2014.

• Kallunki, Larimo & Pynnönen (MIR 2001) – ca. 80 FDIs in the 1980s and 1990s both greenfield investments and acquisitions – positive value creation in general – none of the reviewed extra variables had any statistically significant influence on the value

creation (including parent size, FDI & TC experience, ownership & establishment mode, and cultural distance)

• Larimo & Pynnönen (later study) – 296 acquisitions made gfrom mid-1980s until 2006s – positive value creation in general (although in quite many cases also negative) – several of the reviewed variables had statistically significant influence on the results

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OUTOKUMPU – THYSSEN GROUP DEAL / ACQUISITION IN FEB 2012

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OUTOKUMPU ANNOUNCEMENT OF THE SELL OF MAJORITY OF SHARES IN THE SHANGHAI LOCATED UNIT ON OCTOBER 19th 2015

IJV PERFORMANCE MEASURES AND PERFORMANCE

(Buckley & Glaister Organisation Studies 1998; Glaister & Buckley OS 1998)

1. Objective performance measures of IJVs include financial indicators like

– profitability, IJV survival, IJV duration, instability of IJV ownership indicating significant changes in the ownership and renegotiations of the IJV contract

2. Often difficult to receive financial data related to the IJV because financial results are usually subsumed into the partners’ accounts

3. JVs are often used to engage in a high level of complex tasks that have uncertain outcomes and so their financial performance is only relevant in the longer run (Anderson, 1990)

4. Objective indicators like IJV duration or survival may measure both success and failure of the relationship :

– usually long duration and survival regarded as success but also termination may reflect IJV success when its objectives have been achieved – and an IJV that ends is necessarily not a failed one; longevity does not apply in all contexts and it does not capture learning and other goal-related activities

– in spite of poor performance an unit may have met the goals set and in spite of good financial performance all goals set may not have been reached

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MODEL OF INTERNATIONAL STRATEGIC ALLIANCE PERFORMANCE

(Christoffersen, 2013)

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RESEARCH ON DIVESTMENTS OF FOREIGN DIRECT INVESTMENTS

• The significant increase in the amount of FDIs has also meant an clear increase in the amount of divestments

• Motives for divestments / Influencing factors

– OLI framework

• Always a failure or not?

• Empirical Studies focusing on divestments relatively few:

- Problems in divestment research

• Different modes of divestment

– Sell-Off vs. Closure

– Potential differences in the influencing factors

• Is the decision making process in investments and divestments similar? Influential factors?

– Boddewyn JIBS (1979) Divestment decision process

Methods in the survival/divestment studies: binomial logistic regression, Cox´s proportional hazard model , event history method

Relocation of subsidiaries and potential re-entry to the exited markets

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FINAL NOTE AND DISCUSSION

• A lot of studies have been made: several different theories and several different methods have been used depending on the decision analyzed

• A lot of mixed results – partly explained by samples, methodologies,

operationationalizations, timing

• Usually only direct effects have been analyzed – not so much interaction and mediating/moderating effects

• Thus still a need for several more studies:

- Lack or limited stock of knowledge from several issues - Problems with methodological issues - Problems with operationalizations of variables used - Need for the analysis of moderating /mediating effects - Need for more dynamic/longitudinal studies - Need for more cross-country studies

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Important: Several of the discussed issues do not concern only FDI studies but are also relevant in other fields of International Business or

e.g. cooperation in general.

SUMMARY: COMMONLY USED THEORIES IN FDI

STUDIES

Several different theories have been used depending on the decision – the most common ones:

• LOCATION: location, growth, PLC, OLI

• OWNERSHIP MODE: TCT, RBV, INST

• ESTABLISHMENT MODE: TCT, RBV, INST,

• PERFORMANCE & DIVESTMENT: TCT, RBV, financing, OLI

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SUMMARY: COMMONLY USED METHODOLOGIES IN FDI STUDIES

Several different methdologies have been used depending on the decision:

• LOCATION: regression analysis

• OWNERSHIP MODE: REGRESSION ANALYSIS: mainly binomial, sometimes multinomial regression analysis

• ESTABLISHMENT MODE : binomial regression

• PERFORMANCE/SURVIVAL/DIVESTMENT : binomial logistic regression, event history , Cox´s proportional hazard model

DOMINATED BY STUDIES USING QUANTITATIVE METHODS – INCREASING EXISTENCE OF QUALITATIVE STUDIES PUBLISHED IN LEADING IB JOURNALS

MIXED METHODS STUDIES ARE STILL RELATIVELY RARE

FINNISH FDI RELATED DISSERTATIONS: CASE BASED STUDIES RELATIVELY COMMON, MIXED METHOD STUDIES START TO INCREASE

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RECOMMENDATIONS FOR ADDITIONAL READING

- Journals: JIBS, SMJ, MIR, IBR, JWB, GSJ - Dunning, J. & S. M. Lundan (2008). Multinational Enterprises and the Global

Economy. 2nd ed. Edward Elgar. - Dunning, J. (2010): New Challenges for International Business Research. Back to the

Future. Edward Elgar - Ietto-Gilles, G. (2005): Transnational Corporations and International Production:

Concepts, theories and effects. EE. - Krug, J. & J. Daniels (eds.) : Multinational Enterprise Theory. SAGE library in

business & management. Three volumes. - Pitelis, C. & R. Sugden (eds.)(1991, 2000). The Nature of the Transnational Firm.

Routledge - Punnett, B. & O. Shenkar (eds.)(2007). Handbook for International Management

Research. University of Michigan Press. - Ramamurti, R. & N. Hashai (eds.)(2011). The Future of Foreign Direct Invesment

and the Multinational Enterprise. Emerald Books. - Rugman, A. (2009): The Oxford Handbook of International Business. 2nd ed. Oxford

University Press - Verbeke, A. & H. Merchant (eds.)(2012): Handbook of Research on International

Strategic Management. Edward Elgar. - Palgrave AIB UKI Chapter conference based books - Elsevier EIBA Annual Conference based books: Progress in International Business

Research - Larimo, L. , Nummela, N. & Mainela, T. (eds.)(2015): Handbook on International

Alliance and Network Research. Edward Elgar.

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Think the issues discussed during the day from

your own point of view

Hopefully this day gave new ideas to you and

increased your critical thinking

Thank you for your attention!

Any questions and comments?

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