The Role of FDI Motives in the Link between Institutional Distance and Subsidiary Ownership Choice by Emerging Market Multinational Enterprises

Jie Wu,Zaheer Khan,Nan Zhou,Martin Meyer,Seung Ho Park

doi:10.1111/1467-8551.12508

Abstract

AbstractThis study advances the limited generalizability of previous studies that have focused on developed market multinational enterprises and explores the link between institutional distance and ownership choice of emerging market multinational enterprises (EMNEs). Such studies in the EMNE context have been rare, and we provide key theoretical explanations for EMNEs’ distinct foreign direct investment motives to act as important contingencies in the link between institutional distance and EMNEs’ ownership choices. Analyses of longitudinal data of Chinese firms’ internationalization from 2001 to 2017 reveal that the higher the institutional distance, the lower the level of EMNE subsidiary ownership control with market‐seeking motives; while the higher the institutional distance, the higher the level of EMNE subsidiary ownership control with knowledge‐seeking motives.

Highlights

Brouthers and Hennart, 2007; Hernández and Nieto, 2015; Morschett, Schramm-Klein and Swoboda, 2010; Slangen and Hennart, 2007; Tihanyi, Griffith and Russell, 2005). This perspective has generated a paramount but neglected research question: Whether and to what extent could this mechanism be applied to the context of emerging market multinational enterprises (EMNEs) given that such firms are in the early stage of internationalization and thereby different from developed market multinational enterprises (DMNEs)? EMNE possess distinct types of foreign direct investment (FDI) motives that are different from DMNEs (Ahammad et al, 2017; Arslan, Tarba and Larimo, 2015; Brouthers and Nakos, 2004; Dunning, 1993; Erramilli and D'Souza, 1993), such as, for example, EMNEs expand in foreign markets to overcome institutional constraints in their home markets
We focus on two types of FDI motives—market-seeking motives vs. knowledge-seeking motives—that are highly relevant for EMNEs as they are expanding into both developed and developing markets, which is clearly illustrated by the case of Chinese investment in Africa and other developed economies
After the baseline model of firm-level control variables and institutional distance (Model 1), Model 2 presents the main effects of market-seeking FDI and knowledge-seeking FDI, and Models 3–5 present their interactions with institutional distance

Summary

Introduction

Scholars of global strategy and international business (IB) have become increasingly interested in examining the impact of cross-national distance (Berry, Guillén and Zhou, 2010; Kostova et al, 2020; Werner, 2002) and foreign subsidiary ownership choice (Agarwal and Ramaswami, 1992; Ahammad et al, 2017; Ahammad et al, 2018; Baik et al, 2013; Bhaumik, Driffield and Pal, 2010; Delios and Beamish, 1999; Moalla and Mayrhofer, 2020; Powell and Lim, 2017). The majority of previous studies on this topic have examined developed market multinational enterprises (DMNEs) by positing that such enterprises tend to choose low levels of foreign subsidiary ownership as distance increases in order to reduce market uncertainty and unfamiliarity (cf Brouthers and Hennart, 2007; Hernández and Nieto, 2015; Morschett, Schramm-Klein and Swoboda, 2010; Slangen and Hennart, 2007; Tihanyi, Griffith and Russell, 2005) This perspective has generated a paramount but neglected research question: Whether and to what extent could this mechanism be applied to the context of emerging market multinational enterprises (EMNEs) given that such firms are in the early stage of internationalization and thereby different from DMNEs? These specific FDI motives make EMNEs react to the same institutional distance by adopting different strategies, which in turn is reflected in their subsidiary ownership choice (cf. Reinda et al, 2019)—a topic that has received inadequate research effort (e.g., Ahammad et al, 2018; Dikova, Panibratov and Veselova, 2019; Li et al, 2018; Rienda, et al, 2019)

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