Profitability and Ownership Structure of U.S. Ventures Abroad: Why Are Majority-Owned Affiliates More Profitable Than Other U.S. Affiliates?

Abstract This paper explores a striking empirical pattern that has gone unnoticed in the literature: U.S. multinationals' majority-owned ventures abroad are more profitable than their minority-owned and 50-50 joint ventures. On average, majority-owned foreign affiliates in manufacturing earned a 6.4% return on assets in 1977-2003, compared to 3% for other U.S. affiliates abroad. This pattern is found across most sectors and countries. We explain these findings with a new theoretical framework that views both the ownership structure and the profitability of a foreign venture as functions of the value created by the ownership-specific capabilities that the MNC brings to a host country. These capabilities can give it a competitive advantage against the local firms. Where these capabilities are strong, the MNC is likely to choose whole or majority ownership; its profits are also likely to be highest in these activities. Where the firm's capabilities are weak, it is likely to seek additional capabilities from local firms through a joint venture; these investments are also likely to yield lower profits. We test these theoretical predictions by constructing measures of the revealed international competitive advantage of U.S. MNCs. Our analysis confirms that the profitability gap is significantly higher in sectors where U.S. MNCs are more competitive. We also test for the possible effects of affiliate size, age, non-dividend payments and host country characteristics including tax rates, GDP per capita and policies towards foreign direct investment

A New Order of Things: Network Mechanisms of Field Evolution in the Aftermath of an Exogenous Shock

This study examines the role of a major environmental shock in triggering change in the social structure of an organizational field. Based on the longitudinal analysis of changing network configurations in the global airline industry, we explore how logics of attachment shift before, during and after an exogenous shock and how the rewiring of network ties in response to the shock may act as a countervailing force to the network dynamics that drive field stratification. Using the terrorist attacks of September 11, 2001 as a natural experiment, our work reveals how shocks may affect key mechanisms of network evolution thus altering tie distribution and access among members of the field. Overall this article contributes to emergent literature on field dynamics by exposing the evolution of interorganizational dynamics when external events produce unsettled times that render extant logics brittle and open prospects for change

Growing with the market : how changing conditions during market growth affect formation and evolution of interfirm ties

Research Summary: Market conditions are known to matter for firm performance and growth. This study explores how changing levels of uncertainty and competition affect interfirm ties of entrepreneurial firms as markets transition from nascent to growth stage. Tracing 6 entrepreneurial game publishers during the growth stage of the US wireless gaming market, the findings reveal that in a growth stage market, as uncertainty decreases, certain ties of entrepreneurial firms are terminated. First, existing partners may cut ties and become competitors after entering the market directly. This is a “winner's curse” as more successful firms are more likely to entice their partners to enter the market directly. Second, ties may be terminated as prominent firms that are “overwhelmed” with too many partners cut ties with low to mediocre performance while their remaining partners enter a positive spiral of tie strength and performance. Finally, as uncertainty decreases, new firms may enter the market as competitors to prominent firms. While entrepreneurial firms with high and low performing ties to prominent partners may find ties with these new entrants attractive, those with mediocre ties to few prominent partners find this move too risky and wait for a first mover to legitimate it. Overall, the findings show that changing levels of uncertainty and competition in growth stage markets can have different consequences for firms due to heterogeneity in their ties and power relative to partners. The findings provide several contributions to literature regarding the relationship between interfirm ties, firm performance, and market evolution. Managerial Summary: Based on interviews at 6 entrepreneurial game publishers in the US and their partners, this study shows how changing levels of uncertainty and competition in growing markets can have different consequences for firms based on the different types of alliances in their portfolio and their power relative to partners. The findings highlight the importance of managing partners differently based on alliance type and goal of the partner. They advocate remaining flexible in alliance management as information asymmetries, intentions and bargaining power of partners can change and lead to abrupt alliance dissolution. They show that alliance portfolio management goes beyond a firm's capability of managing individual alliances, and provide a tool for managers to evaluate their alliance portfolios and take the necessary precautions

Are Foreign-Owned Firms More Likely to Pay Bribes than Domestic Ones? Evidence from Emerging Markets

An extensive literature exists on the adverse effects of corruption on inward FDI and the impact this may have on economic development but the reverse causality has not been fully explored. Legislation in the US and the EU prohibits firms from engaging in corrupt practices in foreign countries and this suggests that foreign-owned firms might be less likely to pay bribes. However, such legislation may be ineffective because foreign firms have to adapt to local market conditions or risk being uncompetitive. Using firmlevel data for 41 emerging countries, a probit model estimates the probability that a firm pays bribes. To allow for possible endogeneity this probit analysis is repeated with an instrument to proxy for endogenous foreign ownership. Then, a propensity score matching technique tests for differences in the propensity to pay bribes by domestic and foreign firms. The paper finds no difference in the behavior of foreignowned and domestic firms with respect to corrupt practices. Results are robust to different levels of foreign ownership and support the view that foreign-owned firms adapt to local practices and are neither more nor less likely to pay bribes than comparable domestic firms. The paper finds that other variables including bureaucracy, government contracts, and perceived difficulties with civil society (legal and political) do have statistically significant effects on increasing bribery and that some others, such as per capita GDP, tend to reduce bribery. The study concludes that there is no evidence that foreign ownership, after investment has occurred, tends to reduce bribery but it does support the view that foreignowned firms adopt local behavioral norms

Absorptive capacity and ambidexterity in R&D : linking technology alliance diversity and firm innovation

The aim of this study is to examine how firms realize the benefits associated with a diverse range of technology alliances. We propose and test the hypothesis that firms’ knowledge combination capabilities mediate the relationship between technology alliance diversity innovation. Using panel data for Spanish manufacturing companies during the period 2004-2011, we provide evidence that firms’ absorptive capacity and ambidexterity in R&D serve as mediating mechanisms between technology alliance diversity and innovative performance Our study advances the literature on technology alliances by showing how firms use their portfolios of technology alliances to form their combination capabilities, and subsequently, to enhance innovation outcomes

Entry mode deviation: a behavioral approach to internalization theory

We explore when and why decision makers choose international entry modes (e.g., hierarchies or markets) that deviate from internalization theory’s predictions. By applying a cognitive perspective on entry mode decision making, we propose that the performance of prior international activities influences decision makers’ behavior in different ways than assumed in internalization theory. More specifically, due to a representativeness bias, underperforming (overperforming) past ventures influence the decision to change (continue using) the previous entry mode choice, which may result in an entry mode deviation. In addition, the propensity to deviate from theoretical predictions is stronger when the experience is recent and/or salient due to an availability bias. In conclusion, we argue that internalization theory can benefit from incorporating more systematically important behavioral assumptions on how firms enter international markets. In so doing, we contribute to the recent conversation on how variations in human behavior influence internalization theory