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

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Abstract

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.

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Fig. 1

Source: own elaboration

Fig. 2

Source: adjusted from Chen (2008, 2010)

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Notes

  1. The aim was to isolate other potential effects.

  2. Administrative divisions may isolate one firm from a corresponding cluster region, so we compared both the LQs in cities and the Nomenclature of Territorial Units for Statistics (NUTS) II in Germany to increase the accuracy of measurement. Note, that the NUTS classification is a hierarchical system used for dividing up the economic territory of the EU, which has three layers. Moreover, in our mapping of the clusters, we used the NACE Rev. 2 (Statistical Classification of Economic Activities in the European Community) as the industry definitions (Sternberg and Litzenberger 2004). We also controlled the number of target firms to avoid potential measurement bias such as the possibility of a high LQ but few actual target firms in the area.

  3. The types of companies in ORBIS are as follows. (1) Very large companies meet at least one of the following criteria: operating revenue (turnover) ≥ 100 M. EUR, total assets ≥ 200 M. EUR, number of employees ≥ 1000; (2) large companies meet at least one of the following criteria: operating revenue (turnover) ≥ 10 M. EUR, total assets ≥ 20 M. EUR, number of employees ≥ 150; (3) medium sized companies meet at least one of the following criteria: operating revenue (turnover) ≥ 1 M. EUR, total assets ≥ 2 M. EUR, number of employees ≥ 15; (4) Small companies are those not classified according to any of the preceding categories.

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Acknowledgements

The authors thank the editors and reviewers for valuable comments on the revision of this paper. This research was funded by the Research Project UV-INV-AE16-488900 of the University of Valencia (Spain).

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    Zhi Shen & Francisco Puig

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  1. Zhi Shen
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Shen, Z., Puig, F. Spatial Dependence of the FDI Entry Mode Decision: Empirical Evidence From Emerging Market Enterprises. Manag Int Rev 58, 171–193 (2018). https://doi.org/10.1007/s11575-017-0332-0

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