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FDI Experience Location and Subsidiary Mortality

Differences in National Culture and the Expansion of Korean MNEs

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Abstract

Purpose: This study examines the relationship between an MNE’s experience with foreign direct investments (FDI) and subsidiary mortality when considering learning limitations that an MNE are susceptible to under the influence of national cultural differences.

Methods: We apply event history analysis on a sample of subsidiaries of Korean MNEs during 1990–2006.

Results: We find that subsidiary mortality has a negative relationship with FDI experience from countries culturally similar to both the MNE’s home country and the focal host country; an inverse U-shaped relationship with both experience from countries culturally similar to the home country but different from the focal host country, and experience from countries culturally different from the home country but similar to the focal host country. Experience from countries culturally dissimilar to both the focal host country and the home country has a negative effect when a subsidiary is located in countries dissimilar to the home country, and an insignificant effect when a subsidiary is located in countries similar to the home country.

Conclusions: Our findings show that prior experience has different effects depending on where it is accumulated and that MNEs are susceptible to limitations both when drawing inferences from their FDI experiences and when applying these experiences toward subsequent FDIs.

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Notes

  1. Grouping an MNE’s experience is necessary in order to capture the two types of cultural differences simultaneously, since it is empirically impractical to examine the effect of individual prior FDI experiences on a subsequent focal FDI.

  2. https://www.cia.gov/library/publications/the-world-factbook/.

  3. Since both host-proximate and home-proximate experiences have an inverted U-shaped effect on the mortality of a subsequent FDI in a dissimilar country, one may argue that the underlying mechanism of the detrimental effect of these two types of experience may be the same. However, if the detrimental effect of host-proximate experience is caused by experience misapplication as opposed to a low learning ability of the MNE that we suggested in the paper, we should also expect a similar detrimental effect of double-proximate experience since there is no evidence showing that an MNE may more likely misapply experience in dissimilar cultures. Furthermore, if the detrimental effect of home-proximate experience is caused by a low learning ability of the MNE as opposed to experience misapplication that we suggested, we should also see a detrimental effect of double-proximate experience since it is also a type of home-proximate experience. Our finding of a beneficial effect of double-proximate experience does not validate these two possibilities, supporting our arguments that the mechanisms underlying the detrimental effects of host and home-proximate experience are different.

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Acknowledgements

We thank Editor Joachim Wolf and three anonymous reviewers for their constructive comments and suggestions. Our appreciation also goes to Dr. Dean Xu for his helpful comments on an earlier version of the paper. This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2012-S1A3A2-2012S1A3A2033412). Sangcheol Song was the recipient.

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Authors and Affiliations

  1. School of Business, Southern Illinois University Edwardsville, Edwardsville, IL, USA

    Yuping P Zeng

  2. Fisher College of Business, The Ohio State University, Columbus, OH, USA

    Oded Shenkar

  3. Haub School of Business, Saint Joseph’s University, Philadelphia, PA, USA

    Sangcheol Song

  4. Jindal School of Management, University of Texas at Dallas, Richardson, TX, USA

    Seung-Hyun Lee

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  1. Yuping P Zeng
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Correspondence to Yuping P Zeng.

Appendix: “Additionally Analysis” (All Results are Available from the Authors upon Request)

Appendix: “Additionally Analysis” (All Results are Available from the Authors upon Request)

We conducted several additional robustness tests on our results. First, in order to test if the effects of the four types of experience vary with the ownership of a subsequent FDI, we added interaction terms between the dummy variable identifying WOSs and the experience variables. Host-proximate experience had a less detrimental effect on WOSs. This may be due to the possibility that WOSs are less dependent on the MNE’s learning about local culture. Additionally, double-distant experience had a stronger beneficial effect on WOSs than on JVs located in countries dissimilar to South Korea. Since JVs typically encounter more cultural issues than WOSs (Barkema et al. 1996), this finding supports our argument that a large portion of the knowledge gained from a third cultural cluster may lose value in a different cultural cluster.

Second, in order to examine if WOS and JV experiences have different learning effects (Barkema et al. 1996; Vermeulen and Barkema 2001), we reran all the models in Tables 1 and 2 using only the MNE’s WOS experience or JV experience. For the subsample including FDIs in countries dissimilar to South Korea, the effects of the three types of JV experience and three types of WOS experience were similar to those in Table 3, except that the effect of the first order of host-proximate WOS experience (the MNE’s WOS experience in other countries within the focal host country’s cultural cluster) was not significant. For the subsample including FDIs in countries similar to South Korea, double-distant WOS experience and double-distant JV experience had very different effects. While double-distant WOS experience had a significantly positive relationship with subsidiary mortality, double-distant JV experience had a significantly negative relationship with subsidiary mortality. Additionally, host country specific JV experience does not have a significant effect while host country specific WOS experience has a detrimental effect.

Third, in order to capture the possible effect of time on the effectiveness of learning, we measured the four types of experience using the total number of subsidiary-year that an MNE had operated in the host country’s cluster, the home country’s cluster, or other cultural clusters (Delios and Beamish 2001; Gaur and Lu 2007). A subsidiary-year represented 1 year of operations by one FDI project. The results were very similar to those reported in Tables 1 and 2, except that the coefficient of double-proximate experience lost significance.

Fourth, due to data limitations, we were not able to determine the reasons that an FDI was terminated. It is possible, however, that an FDI project might be terminated after the parent company achieved its goals in the FDI. In this case, the exit of the FDI is an indicator of success instead of failure. In order to ensure that our results were not affected by falsely defining FDI exit, following Delios and Beamish (2001), we coded the dependent variable as 1 only if the FDI was less than 10 years old when it exited from the data and reran the regressions. The results remained largely unchanged except that the coefficient of double-distant experience lost significance in the subsample including FDIs in culturally dissimilar countries and the coefficient of host country specific experience lost significance in the subsample of FDIs in culturally similar countries.

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Zeng, Y., Shenkar, O., Song, S. et al. FDI Experience Location and Subsidiary Mortality. Manag Int Rev 53, 477–509 (2013). https://doi.org/10.1007/s11575-013-0169-0

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