Insider Control and the FDI Location Decision

Abstract

This paper examines the FDI location strategies of firms from one of the Asian NIEs (Taiwan) in a rapidly emerging market (China). Although there is a substantial literature on FDI location choice, most studies model the choice as a function of a range of location-specific attributes such as local market size, labour costs etc. Few studies consider the impact of firm-specific characteristics, other than potential country-of-origin effects. Yet locations, and especially those in emerging markets where institutions are weak and capital markets are immature, also differ in terms of their risk. Different shareholder constituencies within the parent company will typically have different preferences with regard to risk, and are therefore likely to favour some locations over others. We find that the ownership structure of the parent company matters with regard to its FDI location decision and, in particular, that both family and non-family insider shareholders exert influence over the choice of location. Furthermore we show that firms? location and entry mode choices are inter-related, and establish that the extent of their resource commitments in their foreign affiliates leads parent companies to favour locations where the perceived risks are lower. Finally we show that the efficacy of firms? external relational linkages varies according to the strength of the cultural and historic ties between the location of the foreign affiliate and the home country.