This paper examines the impact of ownership structures of emerging-market firms, which are shaped by local institutions, on the decision of these firms to undertake outward FDI. Our results suggest that family firms and firms with concentrated ownerships (both ubiquitous in emerging markets) are less likely to invest overseas, and that strategic equity holding by foreign investors facilitates outward FDI. We conclude that organisational forms such as family firms, which are optimal outcomes of institutions prevailing in emerging markets, may be suboptimal in a changing business environment in which outward FDI is necessary for access to resources and markets.
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Recent evidence suggests that the internationalisation strategies of EMNEs are consistent with the predictions of the LLL paradigm (Ge & Ding, 2008).
We thank a referee for pointing this out to us.
Note that in econometric terms this implies that the marginal impact of family ownership – defined later in the paper – on outward FDI is negative. But this marginal impact can be offset by other firm characteristics, such as profitability, that constitute control variables in the regression model, such that our hypothesis is not inconsistent with the prominence of family-owned MNEs.
Sarkar and Sarkar (2000) demonstrated that foreign investors have an impact on the performance of domestic India firms after they reach the threshold of about 25% equity ownership.
There are no firms in the automotive sector that have 25% foreign holdings and are also family firms. There are, however, business group affiliated firms with this level of foreign-held equity.
Standard VIF tests confirm that the multicollinearity is not a problem: the value of the test statistic is 3.4, well under the normal threshold of 5.
We also experimented with an alternative specification, one that includes both the continuous and discrete measures in the same regression, effectively testing whether an increased family holding has an additional effect over and above the fact that there is a majority holding. We do not report the results in this paper, but they can be made available upon request. The baseline results of this specification are not sensitive to these changes. However, the continuous variables become insignificant, with t values less than 1, such that they add nothing to the explanatory power of the regression.
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The authors acknowledge support from the ESRC under award RES-062-23-0986. They would like to thank Stijn Classens and Jayesh Kumar for the use of the ownership data, Nina Blossinger and Yama Temouri for excellent research assistance, and session participants at the 2008 AIB (UK) conference, four anonymous referees, special issue editor Mike Peng and editor-in-chief Lorraine Eden for helpful comments. The authors remain responsible for all remaining errors.
Accepted by Mike Peng, Guest Editor, 9 April 2009. This paper has been with the authors for three revisions.
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Bhaumik, S., Driffield, N. & Pal, S. Does ownership structure of emerging-market firms affect their outward FDI? The case of the Indian automotive and pharmaceutical sectors. J Int Bus Stud 41, 437–450 (2010). https://doi.org/10.1057/jibs.2009.52
- ownership/control structures
- family firms
- foreign investors
- outward FDI
- emerging-market MNEs