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The Impact of Regional Trade Agreements on the Global Orientation of Emerging Market Multinationals

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Abstract

  • We analyze how an aspect of institutional change—regional integration in the form of regional trade agreements (RTAs)—affects the degree of global orientation (DGO) of emerging market (EM) multinational enterprises (MNEs).

  • We decompose regional integration into three key dimensions reflecting variations among RTA member countries—RTA Diversity, RTA Potential Market Size, and RTA Experience. We conceptualize and test how these three RTA characteristics determine firms’ DGO on a sample of 421 MNEs from 27 EMs worldwide during 2000–2006.

  • We find that greater RTA Diversity and RTA Experience increase EM MNEs’ global orientation, while greater RTA Potential Market Size influences the EM MNEs to be more regionally oriented. Conversely, our post-hoc analyses revealed that the results do not hold for MNEs based in the three most developed nations in the European Union—Germany, France, and the UK—emphasizing important differences of the effects of RTA characteristics on EM vs. Triad MNEs’ DGO.

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Notes

  1. Bilateral relationships (between 2 members) are typically short-term oriented and are not comparable with the more complex multilateral RTAs at the core of our study.

  2. These included Saudi Arabia before its entry to GAFTA in 2005; Croatia before its entry to CEFTA in 2003; and China before its entry to the Bangkok Agreement in 2002.

  3. For example, there is more diversity and inequality in the institutional shares in an RTA with, e.g., 3 members with shares 0.6, 0.3, and 0.1 of the RTA (i.e., 0.6^2+0.3^2+0.1^2=0.46) than in an RTA where the members have equal shares (0.33^2+0.33^2+0.33^2=0.33). Thus, we use diversity and disparity of the RTA members’ institutional shares interchangeably.

  4. Additionally, the Chartered Financial Analyst (CFA) Institute reported that 75% of the Asia Pacific Corporate Disclosure Survey respondents find footnote disclosure to the financial statements as “most important” (CFA Institute 2005). Footnote disclosure is fundamental to our research, as segment reporting information typically can be found in the footnotes to the financial statements. Malaysia is ahead of its Asian neighbors in terms of quality of financial reporting, which explains why Malaysian firms were the most numerous and best reporting companies in our sample.

  5. We thank an anonymous reviewer for suggesting this point.

  6. We note that we did not use R&D Intensity as an FSA in our EM MNE sample, because EM MNEs have been shown to have different types of FSAs than their Triad counterparts (Wells 1983; Yiu et al. 2007). Thus, following previous research, we controlled for FSAs in the EM context with Firm Slack (Tan and Peng 2003). Lastly, even if we wanted to test our EM MNE sample with R&D Intensity instead of Slack for FSAs, we would not have been able to perform the regression analysis, as only 157 firm-year observations (or 68 EM MNEs) had reported R&D data for 2000–2006.

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  1. International Business and Strategy Group, College of Business Administration, Northeastern University, Boston, USA

    Elitsa R. Banalieva, Gary Gregg &  Ravi Sarathy

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  1. Elitsa R. Banalieva
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Banalieva, E.R., Gregg, G. & Sarathy, R. The Impact of Regional Trade Agreements on the Global Orientation of Emerging Market Multinationals. Manag Int Rev 50, 797–826 (2010). https://doi.org/10.1007/s11575-010-0060-1

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