The effect of foreign firms’ population density on exit likelihood in a host country

Abstract

PurposeThe purpose of this paper is to examine the relationship between a foreign firm’s likelihood to exit a host country and the population density of foreign firms in its industry in that county, as well as the moderating influences of this relationship. The authors hypothesize that a foreign firm’s likelihood to exit has a U-shaped relationship with foreign firms’ population density in the industry and this relationship will be weakened when: the foreign firm is located in a region where foreign firm presence is high; the foreign firm is in an industry that has a longer history of foreign direct investment; the firm has a longer tenure in the host country; and the firm is more adapted to the market and institutional environments of the host country.Design/methodology/approachThe authors test the hypotheses using a data set containing over 45,000 foreign firms in China between 1998 and 2007.FindingsThe results show that the exit likelihood of a foreign firm has a U-shaped relationship with foreign firms’ population density in the firm’s industry in the host country. Furthermore, this relationship is moderated by the population density of foreign firms in the region where the firm resides, the length of time since the first foreign entrant in the industry and the extent of the focal firm’s local adaptation.Originality/valueThe study contributes to organizational ecology theory and the international business literature by extending the density-dependence model to the study of foreign firm survival/exit. Whereas a foreign firm’s fate in the host country is heavily influenced by the population density of foreign firms in its industry, it can borrow legitimacy from other sources, or try to create legitimacy through its own actions, to reduce the impact of such density effects.