DOI QR코드

DOI QR Code

Host Country's Non-economic Factors, Local Managers, and Foreign Affiliate Performance

  • Kim, Sung Ryong (School of Economics and Trade, Kyungpook National University) ;
  • Lee, Seungrae (Division of International Studies, Hankuk University of Foreign Studies)
  • Received : 2018.09.05
  • Accepted : 2019.03.20
  • Published : 2019.04.30

Abstract

Purpose - This paper examines the effects of host country's non-economic factors on foreign affiliate's financial and operational performance. Design/Methodology - Using Korean-owned foreign affiliate-level data, we employ various measures that represent host country's non-economic factors and examine their effects on foreign affiliate's performance. We further investigate the effects of local top managers and local middle managers on the impact of country's non-economic factors on foreign affiliate's performance. Findings - We find that local top managers are effective in increasing foreign affiliate's financial performance by dealing with institutional and cultural factors, particularly in high-income countries, while local middle managers are effective in increasing affiliate's operational performance by responding to the changes in doing business factors, particularly in low-income countries. Originality/value - Considering that most of previous FDI studies focus on examining host country's economic factors on firm's FDI decision, our findings suggest that country's non-economic factors are strongly associated with actual business performance of foreign affiliates.

Keywords

Acknowledgement

This work was supported by the Hankuk University of Foreign Studies Research Fund of 2018.

References

  1. Ahn, Se-Hwa (2017), "Relationship between Foreign Agent Operations and Performance in SME Exporters: Mediating Effects of Adaptive Capability", Journal of Korea Trade, 21(4), 274-291. https://doi.org/10.1108/JKT-05-2017-0052
  2. Alan, Y., G. P. Gao and V. Gaur (2014), "Does Inventory Productivity Predict Future Stock Returns? A Retailing Industry Perspective", Management Science, 60(10), 2416-2434. https://doi.org/10.1287/mnsc.2014.1897
  3. Arbatli, E. (2011), Economic Policies and FDI Inflows to Emerging Market Economies (IMF Working Paper, No. 11/192), Washington, DC: International Monetary Fund.
  4. Barlett, C. and S. Ghoshal (1988), "Organizing for Worldwide Effectiveness: The Transnational Solution", California Management Review, 31(1), 54-75. https://doi.org/10.2307/41166538
  5. Barrell, R. and N. Pain (1999), "Domestic Institutions, Agglomerations and Foreign Direct Investment in Europe", European Economic Review, 43(4-6), 925-934. https://doi.org/10.1016/S0014-2921(98)00105-6
  6. Beaudreau, B. C. (1987), Managers, Learning and the Multinational Firm: Theory and Evidence (Doctoral Dissertation), London, Ontario: University of Western Ontario.
  7. Billington, N. (1999), "The Location of Foreign Direct Investment: An Empirical Analysis", Applied Economics, 31(1), 65-76. https://doi.org/10.1080/000368499324561
  8. Blalock, G. and P. J. Gertler (2009), "How Firm Capabilities Affect Who Benefits from Foreign Technology", Journal of Development Economics, 90(2), 192-199. https://doi.org/10.1016/j.jdeveco.2008.11.011
  9. Blonigen, B. A. (1995), Explaining Japanese Foreign Direct Investment in the United States (Doctoral Dissertation), Davis, CA: University of California, Davis.
  10. Borensztein, E., J. D. Gregorio and Jong-Wha Lee. (1998), "How Does Foreign Direct Investment Affect Economic Growth?", Journal of International Economics, 45(1), 115-135. https://doi.org/10.1016/S0022-1996(97)00033-0
  11. Brainard, S. L. (1993), A Simple Theory of Multinational Corporations and Trade with a Trade-off between Proximity and Concentration (NBER Working Paper, No. 4269), Cambridge, MA: National Bureau of Economic Research.
  12. Brunetti, A. and B. Weder (1998), "Investment and Institutional Uncertainty: A Comparative Study of Different Uncertainty Measures", Weltwirtschaftliches Archiv, 134(3), 513-533. https://doi.org/10.1007/BF02707928
  13. Busse, M. (2004), "Transnational Corporations and Repression of Political Rights and Civil Liberties: An Empirical Analysis", Kyklos, 57(1), 45-65. https://doi.org/10.1111/j.0023-5962.2004.00242.x
  14. Caves, R. E. (1974), "Causes of Direct Investment: Foreign Firms' Shares in Canadian and United Kingdom Manufacturing Industries", The Review of Economics and Statistics, 56(3), 279-293. https://doi.org/10.2307/1923965
  15. Caves, R. E. (1989), "Exchange-rate Movements and Foreign Direct Investment in the United States". In D. Audretsch and M. Claudon (Eds.), The Internationalization of US Markets, New York, NY: New York University Press, 199-238.
  16. Culem, C. G. (1988), "The Locational Determinants of Direct Investments among Industrialized Countries", European Economic Review, 32(4), 885-904. https://doi.org/10.1016/0014-2921(88)90051-7
  17. Delios, A. and W. J. Henisz (2003), "Political Hazards, Experience, and Sequential Entry Strategies: The International Expansion of Japanese Firms, 1980-1998", Strategic Management Journal, 24(11), 1153- 1164. https://doi.org/10.1002/smj.355
  18. Dow, D. and S. Ferencikova (2010), "More Than Just National Cultural Distance: Testing New Distance Scales on FDI in Slovakia", International Business Review, 19(1), 46-58. https://doi.org/10.1016/j.ibusrev.2009.11.001
  19. Doz, Y. and C. K. Prahalad (1986), "Controlled Variety: A Challenge for Human Resource Management in the MNC", Human Resource Management, 25, 55-71. https://doi.org/10.1002/hrm.3930250105
  20. Drabek, Z. and W. Payne (2002), "The Impact of Transparency on Foreign Direct Investment", Journal of Economic Integration, 17(4), 777-810. https://doi.org/10.11130/jei.2002.17.4.777
  21. Du, L. Y. and Z. Tao (2012), "Institutions and FDI Location Choice: The Role of Cultural Distances", Journal of Asian Economics, 23(3), 210-223. https://doi.org/10.1016/j.asieco.2010.11.008
  22. Evans, P., V. Pucik and J. Barsoux (2002), The Global Challenge: Frameworks for International Human Resource Management, Irwin, NY: McGraw-Hill.
  23. Flamm, K. (1984), "The Volatility of Offshore Investment", Journal of Development Economics, 16(3), 231-248. https://doi.org/10.1016/0304-3878(84)90076-2
  24. Franko, L. G. (1971), Joint Venture Survival in Multinational Corporations, New York, NY: Praeger Publishers.
  25. Froot, K. A. and J. C. Stein (1991), "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach", Quarterly Journal of Economics, 106(4), 1191-1217. https://doi.org/10.2307/2937961
  26. Gastanaga, V. M., J. B. Nugent and B. Pashamova (1998), "Host Country Reforms and FDI Inflows: How Much Difference Do They Make?", World Development, 26(7), 1299-1314. https://doi.org/10.1016/S0305-750X(98)00049-7
  27. Geletkanycz, M. A. and D. C. Hambrick (1997), "The External Ties of Top Executives: Implications for Strategic Choices and Performance", Administrative Science Quarterly, 42, 654-681. https://doi.org/10.2307/2393653
  28. Gupta, V. K. (1983), "A Simultaneous Determination of Structure, Conduct and Performance in Canadian Manufacturing", Oxford Economic Papers, 35(2), 281-301. https://doi.org/10.1093/oxfordjournals.oep.a041596
  29. Han, C., Y. Dong and M. Dresner (2013), "Emerging Market Penetration, Inventory Supply, and Financial Performance", Production and Operations Management, 22(2), 335-347. https://doi.org/10.1111/j.1937-5956.2011.01311.x
  30. Hartarska, V. (2005), "Governance and Performance of Microfinance Institutions in Central and Eastern Europe and the Newly Independent States", World Development, 33(10), 1627-1643. https://doi.org/10.1016/j.worlddev.2005.06.001
  31. Hartman, D. G. (1984), "Tax Policy and Foreign Direct Investment in the United States", National Tax Journal, 37(4), 475-487. https://doi.org/10.1086/NTJ41791979
  32. Harzing, A. W. K. (2001), "Of Bears, Bumble-Bees, and Spiders: The Role of Expatriates in Controlling Foreign Subsidiaries", Journal of World Business, 36(4), 366-379. https://doi.org/10.1016/S1090-9516(01)00061-X
  33. Hein, S. (1992), "Trade Strategy and the Dependency Hypothesis: A Comparison of Policy, Foreign Investment, and Economic Growth in Latin America and East Asia", Economic Development and Cultural Change, 40(3), 495-521. https://doi.org/10.1086/451958
  34. Helpman, E. (1984), "A Simple Theory of International Trade with Multinational Corporations", Journal of Political Economy, 92(3), 451-471. https://doi.org/10.1086/261236
  35. Henisz, W. J. (2000), "The Institutional Environment for Multinational Investment", The Journal of Law, Economics, and Organization, 16(2), 334-364. https://doi.org/10.1093/jleo/16.2.334
  36. Hines, J. R. and E. M. Rice (1994), "Fiscal Paradise: Foreign Tax Havens and American Business", Quarterly Journal of Economics, 109(1), 149-182. https://doi.org/10.2307/2118431
  37. Hofstede, G. (1980), Culture's Consequences: International Differences in Work-Related Values, Beverly Hills, CA: Sage Publications.
  38. Holmes, R. M., T. Miller, M. A. Hitt and M. P. Salmador (2013), "The Interrelationships among Informal Institutions, Formal Institutions, and Inward Foreign Direct Investment", Journal of Management, 39(2), 531-566. https://doi.org/10.1177/0149206310393503
  39. Hyun, Hea-Jung (2018), "Institutional Quality and Trade in Intermediate Goods", Journal of Korea Trade, 22(2), 162-186. https://doi.org/10.1108/JKT-02-2018-0009
  40. Jacobs, B. W., R. Kraude and S. Barayanan (2016), "Operational Productivity, Corporate Social Performance, Financial Performance, and Risk in Manufacturing Firms", Production and Operations Management, 12(25), 2065-2085.
  41. Jaspersen, F. Z., A. H. Aylward and A. D. Knox (2000), "Risk and Private Investment: Africa Compared with Other Developing Areas", In P. Collier and C. Pattillo (Eds.), Investment and Risk in Africa, New York, NY: St. Martin's Press, 71-95.
  42. Kaufmann, D., A. Kraay and M. Mastruzzi (2010), The Worldwide Governance Indicators: A Summary of Methodology, Data and Analytical Issues (World Bank Policy Research Paper, No. 5430), Washington, DC: World Bank.
  43. Kemsley, D. (1998), "The Effect of Taxes on Production Location", Journal of Accounting Research, 36(2), 321-341. https://doi.org/10.2307/2491480
  44. Kobrin, S. J. (1988), "Expatriate Reduction and Strategic Control in American Multinational Corporations", Human Resource Management, 27, 411-432. https://doi.org/10.1002/hrm.3930270104
  45. Kogut, B. and S. J. Chang (1991), "Technological Capabilities and Japanese Foreign Direct Investment in the United States", The Review of Economics and Statistics, 73(3), 401-413. https://doi.org/10.2307/2109564
  46. Lee, Seung-Hyun, O. Shenkar and J. Li (2008), "Cultural Distance, Investment Flow, and Control in Cross-Border Cooperation", Strategic Management Journal, 29(10), 1117-1125. https://doi.org/10.1002/smj.685
  47. Lee, Chang-Soo and Sang-Hyup Shin (2009), "The Impacts of the EU Enlargement on FDI Inflows", Journal of Korea Trade, 13(2), 89-107.
  48. Lee, Jaeho and Yong-Joon Jang (2016), "The Effect of Comparative Advantage of Host Country's Industry on Multinationals' M&A vs Greenfield FDI Decisions", Journal of Korea Trade, 20(3), 229-258. https://doi.org/10.1108/JKT-09-2016-013
  49. Lee, Seung-Rae and Jae-Hong Park (2015), "Firm Heterogeneity and Choice of Various Patterns of FDI: Evidence from Korea", Journal of Korea Trade, 19(2), 75-95.
  50. Levinsohn, J. and A. Petrin (2003), "Estimating Production Functions using Inputs to Control for Unobservables", Review of Economic Studies, 70(2), 317-341. https://doi.org/10.1111/1467-937X.00246
  51. Li, Q. and A. Resnick (2003), "Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries", International Organization, 57(1), 175-211. https://doi.org/10.1017/S0020818303571077
  52. Li, J. J., L. Poppo and K. Z. Zhou (2008), "Do Managerial Ties in China Always Produce Value? Competition Uncertainty, and Domestic vs. Foreign Firms", Strategic Management Journal, 29(4), 383-400. https://doi.org/10.1002/smj.665
  53. Liang, H., N. Saraf, Q. Hu and Y. Xue (2007), "Assimilation of Enterprise Systems: The Effect of Institutional Pressures and the Mediating Role of Top Management", MIS Quarterly, 31(1), 59-87. https://doi.org/10.2307/25148781
  54. Lipsey, R. E. (1999), The Location and Characteristics of US Affiliates in Asia (NBER Working Paper, No. 6876), Cambridge, MA: National Bureau of Economic Research.
  55. Lunn, J. (1980), "Determinants of US Direct Investment in the EEC: Further Evidence", European Economic Review, 13(1), 93-101. https://doi.org/10.1016/0014-2921(80)90048-3
  56. Luo, Y. (2007), "Are Joint Venture Partners more Opportunistic in a more Volatile Environment?", Strategic Management Journal, 28(1), 39-60. https://doi.org/10.1002/smj.564
  57. Markusen, J. R. (1984), "Multinationals, Multi-plant Economics, and the Gains from Trade", Journal of International Economics, 16, 205-226. https://doi.org/10.1016/S0022-1996(84)80001-X
  58. Markusen, J. R. and K. H. Zhang (1997), Vertical Multinationals and Host-country Characteristics (NBER Working Paper, No. 6203), Cambridge, MA: National Bureau of Economics Research.
  59. North, D. (2005), Understanding the Process of Economic Change, Princeton, NJ: Oxford University Press.
  60. Okafor, L. E., M. Bhattacharya and H. Bloch (2017), "Imported Intermediates, Absorptive Capacity and Productivity: Evidence from Ghanaian Manufacturing Firms", The World Economy, 40(2), 369-392. https://doi.org/10.1111/twec.12467
  61. Owen, R. F. (1982), "Inter-Industry Determinants of Foreign Direct Investments: A Canadian Perspective". In A. M. Rugman (Ed.), New Theories of Multinational Enterprise, London, United Kingdom: Croom Helm.
  62. Palokangas, T. (2003), Foreign Direct Investment, Labour Market Regulation and Self-Interested Governments (IZA Discussion Paper, No. 793), Bonn, Germany: Institute of Labor Economics.
  63. Peng, M. W. and Y. Luo (2000), "Managerial Ties and Firm Performance in a Transition Economy: The Nature of a Micro-Macro Link", Academy of Management Journal, 43(3), 486-501. https://doi.org/10.2307/1556406
  64. Riedl, A. (2010), "Location Factors of FDI and the Growing Services Economy", Economics of Transition, 18(4), 741-761. https://doi.org/10.1111/j.1468-0351.2010.00391.x
  65. Root, F. R. and A. A. Ahmed (1978), "The Influence of Policy Instruments on Manufacturing Direct Foreign Investment in Developing Countries", Journal of International Business Studies, 9(3), 81-94. https://doi.org/10.1057/palgrave.jibs.8490670
  66. Rosenzweig, P. and J. Singh (1991), "Organizational Environments and the Multinational Enterprise", Academy of Management Review, 16, 340-361. https://doi.org/10.2307/258865
  67. Sader, F. (1993), Privatization and Foreign Investment in the Developing World (World Bank Working Paper, No. 1202), Washington, DC: World Bank.
  68. Saunders, R. S. (1982), "The Determinants of Interindustry Variation of Foreign Ownership in Canadian Manufacturing", Canadian Journal of Economics, 15, 77-84. https://doi.org/10.2307/134670
  69. Scaperlanda, A. E. and L. S. Mauer (1969), "The Determinants of U.S. Direct Investment in the E.E.C.", American Economic Review, 59(4), 558-568.
  70. Schmitz, A. and J. Bieri (1972), "EEC Tariffs and US Direct Investment", European Economic Review, 3(3), 259-270. https://doi.org/10.1016/0014-2921(72)90007-4
  71. Schneider, F. and B. S. Frey (1985), "Economic and Political Determinants of Foreign Direct Investment", World Development, 13(2), 161-175. https://doi.org/10.1016/0305-750X(85)90002-6
  72. Serpa, J. C. and H. Krishnan (2017), "The Impact of Supply Chains on Firm-level Productivity", Management Science, 2(64), 511-532.
  73. Shamsuddin, A. F. (1994), "Economic Determinants of Foreign Direct Investment in Less Developed Countries", Pakistan Development Review, 33(1), 41-51. https://doi.org/10.30541/v33i1pp.41-51
  74. Siegel, L. A. and S. Schwartz (2013), "Egalitarianism, Cultural Distance, and Foreign Direct Investment", Organization Science, 24(4), 1174-1194. https://doi.org/10.1287/orsc.1120.0776
  75. Jun, K. W. and H. Singh (1996), "The Determinants of Foreign Direct Investment in Developing Countries", Transnational Corporations, 5(2), 67-105.
  76. Stopford, J. M. and L. T. Wells (1972), Managing the Multinational Enterprise: Organization of the Firm and Ownership of the Subsidiaries, New York, NY: Basic Books.
  77. Swedenborg, B. (1979), The Multinational Operations of Swedish Firms, Stockholm, Sweden: Almquist & Wiskell.
  78. Torrisi, C. R. (1985), "The Determinants of Direct Foreign Investment in a Small LDC", Journal of Economic Development, 10(1), 29-45.
  79. Tsai, P-L. (1994), "Determinants of Foreign Direct Investment and its Impact on Economic Growth", Journal of Economic Development, 19(1), 137-163.
  80. Tung, R. (1993), "Managing Cross-National and Intra-national Diversity", Human Resource Management, 32(4), 461-477. https://doi.org/10.1002/hrm.3930320404
  81. Wei, S-J. (2000), "How Taxing is Corruption on International Investors?", Review of Economics and Statistics, 82(1), 1-11. https://doi.org/10.1162/003465300558533
  82. Wooldridge, B., T. Schmid and S. W. Floyd (2008), "The Middle Management Perspective on Strategy Process: Contributions, Synthesis, and Future Research", Journal of Management, 34(6), 1190-1221. https://doi.org/10.1177/0149206308324326
  83. Xin, K. R. and J. L. Pearce (1996), "Guanxi: Connections as Substitutes for Formal Institutional Support", Academy of Management Journal, 39(6), 1641-1658. https://doi.org/10.2307/257072