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

Contrasting perspectives of strategy making: applications in 'Hyper' environments

We revisit the original meaning of turbulence in the socioecological tradition of organization studies and outline a perspective on strategy making grounded in that tradition. This entails a contrast of the socioecological perspective with the more well-known neoclassical perspective on strategy, based on their core decision premises and their different understandings of environmental turbulence. We argue that while some mainstream strategy approaches have taken important strides toward addressing advanced turbulence, many others remain tethered to the neoclassical origins of the strategy discipline and are insufficiently responsive to the new landscape of strategy that now characterizes many industries. This new landscape is construed as the ‘hyper environment’, in which positive feedback processes and emergent field effects produce high volatility. We use two case illustrations from the US healthcare sector to examine how neoclassical and socioecological perspectives contribute to strategizing in hyper environments. Implications for strategic management theory and practice flow from this analysis

Firm Ownership Preferences and Host Government Restrictions: An Integrated Approach

Two approaches may explain how multinational enterprises (MNEs) select ownership structures for subsidiaries. The first argues that MNEs prefer structures that minimize that transaction costs of doing business abroad. The second argues that ownership structures are determined by negotiations with host governments, whose outcomes depend on the bargaining power of the firm. This paper presents a framework integrating these two approaches and uses statistical methods to separate their effects empirically.The statistical analysis supports an important hypothesis of bargaining school—that attractive domestic markets increase the relative power of host governments. But it finds no support for other hypotheses of this school, such as those predicting that firms in marketing- and R&D-intensive industries have more bargaining power than others. These latter factors were apparently more important in determining firm ownership preferences. Furthermore, the paper measures when government ownership restrictions deter firm entry, concluding that relatively large firms, and those with high intra-system sales are deterred more than others.© 1990 JIBS. Journal of International Business Studies (1990) 21, 1–22