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Past Interactions and New Foreign Direct Investment Location Decisions

Firm-specific Analysis the Global Tire Industry

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Abstract

  • Analyzing the nature of competitive interaction among multinational firms in the tire industry, we find that the histories of the interactions between particular rivals matter.

  • The decision to enter a new foreign market in the era of global consolidation is related to the identities of rivals in the market, characteristics of the firm and the market, and the extent of past competitive interactions with the international pioneering firm.

  • Results suggest that, in an oligopolistic environment, aspects of multimarket competition are important to foreign direct investment decisions.

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Notes

  1. While each country has its own first-mover, we use the term “pioneer” to represent the first company to establish an overall global presence in an industry. In the case of the tire industry, this was Goodyear.

  2. Baum and Korn (1999) analyzed the dyadic interactions of California commuter airlines, and found an inverted U-shaped relationship between firms’ entry into and exit from each other’s markets and the level of multimarket contact.

  3. Note that the i and m subscripts are dropped for ease of exposition.

  4. We used the reported dollar values if firms disclosed them. When dollar values were not reported, we computed them based on the average exchange rates reported by the International Monetary Fund (1993), for the years concerned.

  5. A conceptually logical addition to the control variables could involve information on automobile plants. However, FDI undertaken by tire companies does not appear to have a direct relationship with the locations in which home country automobile companies establish plants. This is probably due to the nature of the sourcing process in the original equipment market during the time we are considering. It was essentially an auction process, in which tire manufacturers were asked to submit bids for particular vehicle models. Since the car manufacturers would then pressure all firms to match the lowest bid, this system led to extremely low prices. The supply contracts typically lasted for about three years, with annual price re-negotiation (Cool/Chahid-Mouraï 1994, p. 7). The short-term nature of OEM contracts meant that there was little economic justification for tire companies to follow specific auto manufacturers to new production locations.

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Acknowledgements

We acknowledge research support from the CIBER at the University of Hawai’i at Manoa, and are extremely grateful for the suggestions of the editors and two anonymous reviewers.

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Authors and Affiliations

  1. Department of Marketing and Management, Helsinki School of Economics, Helsinki, Finland

    Elizabeth L. Rose

  2. Department of Management, Shidler College of Business, University of Hawai’i at Manoa, Honolulu, HI, USA

    Kiyohiko Ito

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  1. Elizabeth L. Rose
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  2. Kiyohiko Ito
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Correspondence to Elizabeth L. Rose.

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Rose, E., Ito, K. Past Interactions and New Foreign Direct Investment Location Decisions. Manag Int Rev 49, 641–669 (2009). https://doi.org/10.1007/s11575-009-0010-y

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