International experience and FDI location choices of Chinese firms: The moderating effects of home country government support and host country institutions

We examine the extent to which Chinese government support of foreign direct investment (FDI) projects and host country institutional environments interact with prior entry experience by Chinese firms, and how this interrelationship affects FDI undertaken by Chinese firms. We hypothesize that home country government support and well-established host country institutions enhance organizational capabilities to take risks in FDI. As such, they reduce the need to accumulate experiential knowledge and capabilities relating to entering host countries based on prior entry experience in a particular country when undertaking follow-up investment projects. Using a unique, hand-collected panel data set of Chinese publicly listed firms during 2002–2009, we find that home government support and well-developed host country institutions reduce the importance of prior entry experience and significantly increase the likelihood of FDI entry into a host country. Further, from our subsample analyses we identify differences between entering developed and developing host countries in terms of the impact of home country government support and quality of host country institutions. Our findings help explain the puzzle concerning why emerging economy firms have rapidly internationalized in a short period of time and do not follow the pattern predicted by classical IB theories

knowledge spillovers congestion effects and long run location patterns

We introduce an evolutionary two-country model to characterize long run location patterns of the manufacturing activities of competing multinational enterprises. Firms located in country 1 can decide to offshore their manufacturing activities to country 2. The profitability of production in a country depends on several factors: unitary costs of production, the number of firms that are located in each country, within-country spillovers, and cross-border spillovers. Furthermore, profits in country 2 are influenced by congestion costs. Country 1 is assumed to be technologically advanced and has an advantage in terms of internal spillovers. In contrast, country 2 offers lower production unit cost which, however, may be offset by congestion costs. The firms' (re)location choices are based on a simple comparison of current production costs obtained in the two countries and the dynamics of switching is modeled by a simple replicator dynamics. The global analysis of the resulting one-dimensional dynamical system reveals that a large advantage in terms of unitary production costs encourages the firms to off-shore manufacturing activities to country 2. This off-shoring process stops when congestion costs offset this advantage of country 2, even though congestion costs do not cause all manufacturing activities to be re-shored to country 1. The re-shoring process can be accelerated by an increase of within-country spillovers in country 1, while cross-border spillovers tend to favor a geographic dispersion of manufacturing activities and make location patterns that lead to suboptimal long run outcomes less likely

Catching-up in the global factory: analysis and policy implications

MNEs shape the location of activities in the world economy, linking diverse regions in what has been called the global factory. This study portrays the evolution of incomes and employment in the global factory using a quantitative input–output approach. We find emerging economies forging ahead relative to advanced economies in income derived from fabrication activities, handling the physical transformation process of goods. In contrast, convergence in income derived from knowledge-intensive activities carried out in pre- and post-fabrication stages is much slower. We discuss possible barriers to catching-up and policy implications for emerging economies in developing innovation capabilities, stressing the pivotal role of MNEs

Regulator Vulnerabilities to Political Pressure and Political Tie Intensity: The Moderating Effects of Regulatory and Political Distance

This study applies the institution-based view and neo-institutional theory in addressing how managerial perceptions of regulator vulnerabilities to political pressure, and institutional distance, influence intensification of political ties. Our analysis of 181 wholly owned foreign subsidiary (WOFSs) operating in the Philippines suggests that managerial perceptions of regulator vulnerability to political pressures positively enhance the intensification of political ties. Our results also reveal that regulatory distance and, more importantly, the simultaneous presence of political and regulatory distance diminish the positive relationship between managerial perceptions of regulator vulnerability to political pressures and a WOFS’s propensity to enhance the intensification of political ties. Managerial implications and future research directions are discusse

a dynamic model of firms strategic location choice

This paper analyzes the optimal location choice of a firm in a dynamic Cournot framework, in which firms' absorptive capacities may depend on their knowledge stock. The firm decides whether to locate irreversibly in a cluster or in isolation. In the cluster the firm benefits from inward spillovers from its competitors, but also generates outward spillovers. If the firm chooses to locate in isolation no knowledge flows occur. All firms' production costs are determined by their knowledge stocks, which evolve over time due to own R&D investments and potentially inward spillovers. It is shown that, if absorptive capacity is constant, the incentive to locate in the cluster decreases with respect to the firm's knowledge stock. Conversely, if absorptive capacity depends positively on knowledge stock, the firm's incentive to join the cluster is larger the more knowledge it has. It is also shown that qualitative properties of the equilibrium paths of R&D investments and knowledge stocks differ substantially depending on whether absorptive capacities are constant or knowledge dependent

Risk propensity in the foreign direct investment location decision of emerging multinationals

A distinguishing feature of emerging economy multinationals is their apparent tolerance for host country institutional risk. Employing behavioral decision theory and quasi-experimental data, we find that managers’ domestic experience satisfaction increases their relative risk propensity regarding controllable risk (legally protectable loss), but decreases their tendency to accept non-controllable risk (e.g., political instability). In contrast, firms’ potential slack reduces relative risk propensity regarding controllable risk, yet amplifies the tendency to take non-controllable risk. We suggest that these counterbalancing effects might help explain observation that risk-taking in FDI location decisions is influenced by firm experience and context. The study provides a new understanding of why firms exhibit heterogeneous responses to host country risks, and the varying effects of institutions

Policy monitoring in the EU: The impact of institutions, implementation, and quality

Policy monitoring is often seen as a crucial ingredient of policy evaluation, but theoretically informed empirical analyses of real-world policy monitoring practices are still rare. This paper addresses this gap by focusing on climate policy monitoring in the European Union, which has a relatively stringent system of greenhouse gas monitoring but a much less demanding approach to monitoring policies. It explores how institutional settings, policy implementation, and the quality of information may impact the practices and politics of policy monitoring. Drawing on quantitative regression models and qualitative interviews, it demonstrates that policy monitoring has evolved over time and is itself subject to implementation pressures, but also exhibits learning effects that improve its quality. In further developing both everyday policy monitoring practices and academic understanding of them, there is a need to pay attention to their design—specifically, the impact of any overarching rules, the institutional support for implementation, and the criteria governing the quality of the information they deliver. In short, policy monitoring should be treated as a governance activity in its own right, raising many different design challenges

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