Balancing exploitation and exploration in FDI location choices

Abstract

In this paper, I examine the location trajectory of foreign direct investments by emerging economy firms. I consider entries into countries with low cultural distance as exploitation, and entries into countries with high cultural distance as exploration in the internationalization process. Building on the organizational learning literature, I argue that the internationalization process is composed of a series of alternating exploitative and exploratory activities for a firm over time. Empirically, I propose to measure this process by the magnitude of the divergence in added cultural distance (i.e. the cultural distance that each new entry incurs relative to prior entries). In support of my argument, I find that the divergence in added cultural distance over time is far greater than what is predicted by the Uppsala internationalization process model and the springboard perspective. Moreover, I find that several firm- specific attributes can explain a sizable portion of the volatility of the internationalization process. Specifically, firm size, firm age, firm performance and organizational slack are significant antecedents of the fluctuations in the internationalization process.