Foreign Direct Investment Entry Mode Research Articles

Climate Risk and Foreign Direct Investment Entry Mode

ABSTRACTThe paper examines how climate risk impacts the strategic entry mode choices—between greenfield investments and cross‐border mergers and acquisitions (M&As)—of multinational enterprises (MNEs) into foreign markets. Our study adds to existing literature through a cross‐countries empirical analysis and uses a newly developed dataset, the Multinational Revenue, Employment, and Investment Database (MREID), that accounts for how both physical and transition risks of climate change affect MNEs' entry mode choice. Physical risk refers to the tangible impacts of climate change such as extreme weather events, while transition risk involves regulatory and policy changes associated with moving towards a low‐carbon economy. Using data for 139 source countries and 134 destination countries over the period from 2010 to 2021, we find that an increase in the physical risk of climate change leads to MNEs choosing greenfield investment when entering a new market while a higher level of transition risk discourages greenfield investment. Physical risk has a negative and significant influence on MNEs' entry choice of using cross‐border M&A. There is a positive and significant correlation between transition risk and cross‐border M&A though such a relationship is not robust. Industrial‐level evidence shows a similar pattern in the majority of the industries. Our findings provide policymakers with guidelines helping to mitigate the negative impact of climate change on business decisions at the global level.

The contribution of cross-border capital flow towards decarbonisation

This study examines the effects of greenfield foreign direct investment, mergers and acquisitions, and net foreign direct investment inflows, on carbon dioxide emissions in 68 countries from 1996 to 2018. The investigation adopts an augmented Stochastic Impacts by Regression on the Population, Affluence, and Technology (STIRPAT) framework and employs an instrumental variable approach and instrumental variable-quantile regression models for the sampled nations. Whilst several Foreign Direct Investment entry modes are shown to have varying effects, the results demonstrate that capital inflows via greenfield foreign direct investment and net foreign direct investment raise emissions in all nations, confirming the Pollution Haven Hypothesis. Also, the unrestricted inflows of capital via greenfield projects could increase environmental degradation overtime and the detrimental impact could spread to other sectors of the economy. Moreover, our study demonstrates that capital inflow through cross-border mergers and acquisitions is a significant contributor to decarbonisation throughout the analysed nations, confirming the halo hypothesis, with quantile results revealing diverse effects across national emission profiles. The results are robust to different model specifications of the independent variables and estimation methods. Based on the empirical findings, several policy implications are suggested for theory and practice on cleaner production and sustainability in the countries and multinational companies. This study recommends policy measures to regulate the inflow of polluting assets and incentives to contribute to decarbonisation solutions.

Foreign direct investment by multinational corporations in emerging economies: a comprehensive bibliometric analysis

PurposeThis study introduces a comprehensive bibliometric analysis of the foreign direct investment (FDI) literature by multinational corporations (MNCs) focusing on emerging economies to identify the most influential authors, journals and articles in FDI research and reveals the fields' conceptual and intellectual structures. The purpose of this paper is to address these issues.Design/methodology/approachThe study analyzed 533 articles published between 1974 and 2020 in 226 academic journals indexed in the Web of Science (WoS) and Scopus databases. We used the R language for statistical computing to map author collaboration, co-word and develop a conceptual and intellectual map of the field.FindingsThe results show that, although the FDI literature has many authors, few dominate the field. The International Business Review (IBR) and International Journal of Emerging Markets (IJoEM) are the main sources of the publications. Moreover, bibliometric laws show that our dataset follows the Lotka law of scientific productivity and Bradford law of scattering, identifying the core journals. Finally, FDI by MNCs in emerging economies research is divided into four sub-research themes related to (1) FDI determinants, (2) entry mode, (3) MNCs and FDI performance and (4) the internationalization process.Originality/valueThe current article provides several starting points for practitioners and researchers investigating FDI. It contributes to broadening the vision of the field and offers recommendations for future studies.

Foreign direct investment entry mode and China’s carbon productivity based on spatial econometric model

As the world’s largest developing country and the largest carbon emitter, China must consider economic growth and carbon emission reduction in development. Therefore, improving carbon productivity is an important goal of China at present. At the same time, China’s foreign capital inflow has always been at the forefront of the world, and foreign direct investment (FDI) has had various impacts on China’s carbon productivity. Based on the panel data of 25 provinces in China from 2007 to 2019, this paper uses a spatial econometric model to study the difference in the impact of FDI on China’s carbon productivity under different entry modes. The study found that: when FDI enters China in the mode of joint ventures, there is a positive spatial spillover effect, which is conducive to improving China’s carbon productivity; while when FDI enters China in the mode of wholly foreign-owned enterprises, there is a negative spatial spillover effect, which will inhibit the improvement of China’s carbon productivity. Therefore, when introducing foreign capital, the Chinese government should formulate differentiated foreign investment policies according to the different entry modes of FDI, and encourage more FDI to enter China in the mode of joint ventures.

Level of development, foreign direct investment and domestic investment in food manufacturing.

Background: Whilst the literature on the complementarity and substitutability of foreign direct investment (FDI) on domestic investment (DI) is not uncommon, the facet of food manufacturing is non-existent. This paper fills this void by investigating the effect of FDI on DI in the food manufacturing sector for developing, economies in transition and developed countries. Methods: Using an unbalanced panel data of 49 countries from 1993 to 2016, from FAOSTAT, estimated by the system generalised method of moments (GMM), the Wald statistics for the short and long-run effects of FDI on DI were computed for the development groups. Results: Developed economies experienced a crowd-out effect of FDI on DI in the short run, whilst the others experienced no significant effect. In the case of the long run, the food manufacturing sectors of all three development groups exhibited a crowd-out effect. The effect in the long run for all development groups together is a crowd-in. Analysing all country groups together could mask the results of the various country groups. Conclusions: A review of investment policies to prioritise FDI entry mode that favour domestic investment is needed. Improvement of the investment regulatory and administrative efficiency among others are recommended.

Determinants of outward foreign direct investment entry mode choice: evidence from Chinese-listed companies

PurposeThe purpose of this paper is to investigate the impact of the nature of firm heterogeneity and factors of the host country on the choice of entry modes in greenfield investments and cross-border mergers and acquisitions.Design/methodology/approachAn empirical analysis was conducted of 450 outward foreign direct investment (OFDI) cases of Chinese-listed companies from 2001 to 2015. A regression analysis was conducted to determine the influence of the heterogeneous nature of enterprises and host country factors on the choice of entry mode.FindingsFirst, the nature of a firm’s heterogeneity differs in terms of their mobile or immobile capabilities, which may affect entry strategies. Second, although Chinese multinational companies do not have a strong ownership advantage when compared with multinational companies in developed countries, they have certain marketing capabilities, such as innovations, aimed at customer needs that make it possible to implement their internationalization strategy. Third, factors such as cultural distance and investment risk of the host country significantly influence the choice of OFDI entry modes.Originality/valueThe authors discuss the mobility of a firm’s resource heterogeneity in determining Chinese firms’ entry mode choices and emphasize that Chinese marketing-intensive firms seek complementary resources from the firms of the host countries to achieve competitive advantages. The authors further divide heterogeneous enterprise resources into research and development resources and marketing resources according to the degree of international mobility and examine what kind of firm heterogeneity could help in the selection of different entry modes.

Digital media, control of corruption, and emerging multinational enterprise’s FDI entry mode choice

The impact of freedom of digital media in host countries has been under-researched in the literature of the internationalization decisions of emerging multinational enterprises (EMNEs). Through integrating the stakeholder perspective with transaction cost economics, we examine the role of host-country digital media in influencing the foreign direct investment (FDI) entry mode choice of EMNEs and its boundary conditions associated with internal and external corruption-controlling efforts. Using a panel dataset of Chinese listed manufacturing firms’ outward FDI between 2010 and 2016, our empirical analyses indicate that freedom of digital media in a host country has positive impact on an EMNE’s wholly owned subsidiary choice as FDI entry mode. This main relationship is strengthened by EMNE transparent information disclosure and external control of corruption in the host country.

Level of development, foreign direct investment and domestic investment in food manufacturing.

Background: Whilst the literature on the complementarity and substitutability of foreign direct investment (FDI) on domestic investment (DI) is not uncommon, the facet of food manufacturing is non-existent. This paper fills this void by investigating the effect of FDI on DI in the food manufacturing sector for developing, economies in transition and developed countries. Methods: Using an unbalanced panel data of 49 countries from 1993 to 2016, from FAOSTAT, estimated by the system generalised method of moments (GMM), the Wald statistics for the short and long-run effects of FDI on DI were computed for the development groups. Results: Developed economies experienced a crowd-out effect of FDI on DI in the short run, whilst the others experienced no significant effect. In the case of the long run, food manufacturing sectors of all three development groups exhibited a crowd-out effect. The effect in the long run for all development groups together is a crowd-in. Analysing all country groups together could mask the results of the various country groups. Conclusions: A review of investment policies to priorities FDI entry mode that favour domestic investment is needed. Improvement of the investment regulatory and administrative efficiency among others are recommended.

Level of development, foreign direct investment and domestic investment in food manufacturing

Background: Whilst the literature on the complementarity and substitutability of foreign direct investment (FDI) on domestic investment (DI) is not uncommon, the facet of food manufacturing is non-existent. This paper fills this void by investigating the effect of FDI on DI in the food manufacturing sector for developing, economies in transition and developed countries. Methods: Using an unbalanced panel data of 49 countries from 1993 to 2016, from FAOSTAT, estimated by the system generalised method of moments (GMM), the Wald statistics for the short and long-run effects of FDI on DI were computed for the development groups. Results: Developed economies experienced a crowd-out effect of FDI on DI in the short run, whilst the others experienced no significant effect. In the case of the long run, food manufacturing sectors of all three development groups exhibited a crowd-out effect. The effect in the long run for all development groups together is a crowd-in. Analysing all country groups together could mask the results of the various country groups. Conclusions: A review of investment policies to priorities FDI entry mode that favour domestic investment is needed. Improvement of the investment regulatory and administrative efficiency among others are recommended.

Spatial Dependence of the FDI Entry Mode Decision: Empirical Evidence From Emerging Market Enterprises

The entry mode and location choices are two fundamental decisions made by firms after they decide to proceed with foreign direct investment (FDI). In previous studies, these two strategic concerns have usually been studied separately as independent decisions. Following recent claims, we extend beyond the macro-environment of the host country or geographical space to study the interdependence between these two decisions by comparing the effects of two different colocation strategies on the establishment mode and ownership structure of investors in FDI. We tested our hypotheses based on a sample of 162 Chinese-owned subsidiaries in Germany and found spatial dependence in the entry mode strategies, where the existing theories regarding ownership structure prediction for the sampled firms had limited explanatory power. We also observed that the experience of investors had a negative moderating effect on these interactions. Our results suggest the following: (1) the FDI strategies of foreign investors consider conditions that vary among countries as well as within the host economy and place; (2) the entry mode and location choices can be alternative strategies for overcoming barriers to entry in FDIs where a trade-off between both is required; and (3) more efforts are still needed to interpret the FDI behaviors of investors from emerging economies.

Intellectual Property Rights as Determinant of Foreign Direct Investment Entry Mode: The Case of Greece

Foreign direct investment continues to expand rapidly, enlarging the role of international production in the world economy. This expansion in business activity reflects trade and investment liberalization in many countries. The location decisions on FDI depend on a country's broader set of factors such as market openness and deregulation, competition regimes, development policies and intellectual property rights, that influence not only international foreign direct investment, trade but also the transfer of technology. Patents are one form of the exclusive intellectual property rights conferred by the state in order to promote science and technology. International technology transfer comes through three channels, FDI, joint ventures and licenses. The increase of international technological diffusion has enhanced the importance of intellectual property rights and particularly of patents. This paper aims at providing evidence linking the patent protection to technology transfer and inward foreign direct investment in different industry sectors in Greece. Strengthening Greece's IPR regime is seen as a prerequisite for the attraction of foreign multinationals to transfer technology, increasing the growth and the innovative activity. It also examines the role of other factors in attracting more FDI as the market openness, country risks and so on. A proper understanding of the above relationship will help firms and government to create appropriate intellectual property policy in order to encourage the growth and expansion of FDI in Greece.

Foreign Direct Investment Entry Modes, Development and Technological Spillovers

This paper illustrates how wholly owned entry modes of multinational companies (MNCs) are jointly determined by both the strategic objectives of the MNC and the local firms' assets in the creation of value. In particular, the entry mode chosen is based on the potential reciprocal technological spillovers between local firms and MNC subsidiaries. M&As are preferred when host countries exhibit a certain level of development in their local systems of innovation, especially for technologically leading MNCs. Otherwise, for technological laggard MNCs, greenfield investments prevail and M&As may be carried out for meeting demand motives in developing local systems of innovation.

Consumer animosity and foreign direct investment: An investigation of consumer responses

This study proposes the concepts of host identity and foreign identity to explain the effect of foreign direct investment (FDI) entry modes and branding strategies on foreign subsidiary product purchases in an animosity context. Two experiments were conducted in two host countries with varying animosity levels toward the home country of a foreign entrant. Experiment 1 examined consumer purchase intentions toward products launched through three FDI modes (greenfield, acquisition joint venture [AJV], and greenfield joint venture [GJV]). Experiment 2 further examined consumer purchase intentions toward an equal-equity GJV subsidiary adopting a co-brand with different brand orders (foreign-local [F-L]) and local-foreign [L-F]). Results show that in a high-animosity host country, consumers prefer products launched through an entry mode and with a brand having a higher host identity (lower foreign identity). In a low-animosity host country, the FDI entry mode and branding strategy have no effect.

Choosing the Mode for FDI Entry to China's Port Market based on Two-stage Game between the Foreign-funded Enterprises and Government

Together with Foreign Direct Investment (FDI) entering the port market in China, some important relationships emerge among three principle parts, foreign-funded enterprises, government, and the existing port enterprises. Among these three relationships, the relationship between the foreign-funded enterprises and government is the main basis in port FDI entry mode choice. The foreign-funded enterprises will consider the FDI to choose a desirable mode through either new investment or acquisitions, in order to achieve profit maximization. The Chinese government has the choice to make incentives or restrictions policies on FDI, with the objective of maximizing its social welfare. This paper applies Game Theory to analyze FDI entry mode by using a two-stage Game model between foreign-funded enterprises and government. In the first stage, this paper builds the government's utility function and the foreign-funded enterprises’ Cobb-Douglas production function, analyzing the optimal strategy for foreign-funded enterprises and government. In the second stage, this paper analyzes the equity allocation of port FDI.

Chinese Firms’ Outward FDI Entry Mode Choice: The Role of Ownership and Network

What determines the Chinese firms’ outward FDI (foreign direct investment) entry mode choice, and do they behave differently from the firms from developed countries? To answer this question, this exploratory study firstly summarizes the attributes of the FDI entry modes, including greenfield investment, acquisition, and joint venture. Further based on the different attributes of these three modes, we analyze how Chinese firms choose the entry mode from the role the ownership and network perspectives, which are the important characteristics of Chinese firms.

The Influence of Host-Country’s Enviroments on the FDI Entry Mode Choice of Chinese Companies

Based on a sample of 280 China’s listed companies with foreign direct investment (FDI) during 2005-2009, this paper examines how the country-specific factors influence these firms’ FDI entry mode choice between mergers and acquisitions (M&As) and greenfield investment. Our results show that in the presence of higher country risk or more rapid economic growth, the Chinese enterprises prefer the greenfield investment. When the host country has stronger national innovation ability or a higher level of human capital, the enterprises tend to choose the entry mode of cross-border M&As. An increase in the cultural distance, excluding the effect of other variables, appears to induce the enterprises to select M&A entry mode. However, when factor endowments and other institutional environments are taken into consideration, the cultural distance produces no significant effect on FDI entry mode choice of these Chinese firms.

The internationalisation of Malaysian‐based multinational banks

PurposeGiven the importance of understanding the dynamics of the internationalisation and expansion process, it is surprising that – in reviewing the extensive literature – that little attention has been paid to service organisations. This paper attempts to shed light on business strategies and the international entry modes of the services sector in general, and the area of banking which form a significant and substantive proportion of global trade. Therefore, this paper aims to address this omission by exploring the behaviour of Malaysian multinational financial and banking service industries in their international expansion in terms of their motivation, mode of entry strategies, selection of target markets, and their strategic thrusts.Design/methodology/approachThe paper follows an exploratory approach utilising qualitative multiple case studies. Empirical data are presented from case study of four large Malaysian‐based multinational commercial banks through interviews with managers from the banks' headquarters as well as managers responsible for and/or engaged in the development and implementation of international marketing strategies.FindingsIt is inferred that Malaysian multinational commercial banks are entering foreign markets, employing a foreign direct investment entry mode, by creating branches and representative offices, and in some cases by acquiring part of the share or the whole capital of existing local financial institutions. These expansions have been motivated by several factors related to both their domestic markets (push factors: government initiatives, small size, low and limited growth) and the attractiveness of their target markets (pull factors/location advantages: high market growth, low to moderate levels of competition).Research limitations/implicationsThe case study has inherently limited the capacity to offer generalisations concerning other service companies.Practical implicationsThis paper is rich in its practical implications. As this study was concerned with the practical experience and behaviour of Malaysian‐based multinational banks on their choice of entry modes and organisational forms when internationalising, Malaysian banking and marketing practitioners can use the analysis and results as a means of comparing their current tactical and strategy foreign entry behaviour with that of other internationalising banks.Originality/valueThe paper offers new insights into the emergence and international expansion of Malaysian‐based multinational commercial banks, and sheds light on the internationalisation process associated with services per se.

Greek banks' internationalisation: a suggested modelling approach

PurposeThis research aims to examine the importance of Greek banks' internationalisation. Further, it seeks to identify the entry modes and organisational forms adopting Greek banks when crossing borders as well as to suggest a modelling approach.Design/methodology/approachEmpirical data were collected by using secondary and primary data sources. Primary data sources included semi‐structured interviews with the key stakeholders in the industry.FindingsThis research identified that Greek banks, adopt foreign direct investment entry mode and organisational forms such as branches and representative offices (internal growth), as well as subsidiaries and affiliates (external growth). It also was found that the participating in this research Greek banks, combine the two types of growth in their foreign markets entry. This study identified that the balance of combination is dependent upon a number of reasons and factors.Research limitations/implicationsThe study contains several shortcomings. The empirical study, for example, contains only three cases, which naturally raises the problem of generalization. Further, the theoretical view may contain conceptual elements, which hinder more specific observations. However, despite these limitations, the study contains some theoretical and managerial implications.Originality/valueThe paper reports on the findings of the one of the first in its kind research study carried out in Greece in the Greek banking sector. The findings that emerged set the foundation for helping the various stakeholders in the sector to contribute towards building strong international presence to help them sustain the fierce competition from foreign banks.

What Drives Economic Growth? The Case of Cross‐Border M&A and Greenfield FDI Activities

SUMMARYThe effect of aggregate foreign direct investment (FDI) on economic growth remains uncertain in the literature. We revisit this FDI–Growth relation by analyzing the components of FDI – greenfield investment and cross‐border mergers and acquisitions (M&As). Our analysis contributes to the existing literature by focusing on potentially heterogeneous growth effects of different FDI entry modes. Using a sample of 84 countries from 1987 to 2001, we separately examine the growth effects of greenfield investment and M&As. We find that greenfield investment and M&As have different impacts on economic growth. Greenfield investment promotes economic growth while M&As can be beneficial only when the host country has an adequate level of human capital. Our results provide support for receiving M&As when policymakers allocate more resources for human capital accumulation.

FDI entry mode choice of Chinese firms: A strategic behavior perspective

This study investigates the determinants of foreign direct investment (FDI) entry mode choice between a wholly owned subsidiary and a joint venture by Chinese firms that invest overseas. We argue that the FDI entry mode choice of a Chinese firm is primarily influenced by the variables related to the firm's strategic fit in host industry and its strategic intent of conducting FDI. Using survey data of a sample of 138 Chinese firms, the results suggest that a Chinese firm prefers wholly owned subsidiary entry mode when it adopts a global strategy, faces severe host industry competition, and emphasizes assets seeking purposes in its FDI. A joint venture is preferred when the firm is investing in a high growth host market.