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Strategic investments by US firms in transition economies

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Abstract

Studies in international business have considered both theoretical and empirical analyses of investment strategies by multinational firms in transition economies. However, there is scant research on the impact of firm-specific factors on the likelihood, timing, and mode-of-entry decisions in these economies. We provide evidence on three aspects of the strategic decisions by US firms to invest in transition economies. First, we find that firms entering the region have greater advertising intensity and sales growth than industry peers that did not enter the region, suggesting that market-seeking considerations motivate expansion. Second, we find that earlier entry is undertaken by firms with fewer industry competitors and higher sales growth, suggesting that the desire to secure market share ahead of competitors motivates entry timing. Finally, we investigate the choice of entry mode into the region, and find that firms from concentrated industries are more likely to enter the region with high-equity commitment, consistent with market-seeking motives. We also find that firms incorporate the degree of progress with market-oriented reforms in making decisions concerning entry timing and mode.

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Notes

  1. See, for example, Bevan and Estrin (2004). For a good review of the theoretical trade and FDI literature that relies on non-stochastic models see Markusen and Maskus (2001). For a good review of the literature on the determinants of FDI see Blonigen (2005).

  2. Based on recommendations by the International Monetary Fund in the early 1990s, market-oriented reforms in transition economies have broadly included price stabilization, privatization, investment, and trade liberalization, as well as reforms intended to restore and promote fiscal discipline, micro- and macroeconomic stability (Fischer & Gelb, 1991).

  3. The dominance of the market-seeking motive is also supported by cross-country survey results in Meyer (1998) and Svetlicic and Rojec (1994) as well as survey studies of FDI in Slovenia (Rojec & Svetlicic, 1993) and Italian multinationals investing in transition economies (Mutinelli & Piscitello, 1997).

  4. Firm-specific (also known as intangible) assets may, for example, include superior technology, proprietary managerial and organizational know-how, patents, trade secrets, and reputation for quality. These assets are in nature akin to a “public good” when used within the firm's structure. Thus the theory predicts that FDI will take place when corporate governance and transaction cost structures are such that internalization of ownership advantages is more beneficial than the formation of licensing agreements with foreign firms (Morck & Yeung, 1991).

  5. Related literature by Brenton et al. (1999) shows that, in the long run, higher FDI flows from the European Union to transition economies may be the direct result of deepening integration between these economies.

  6. The directory is published by Uniworld Business Publications, Inc.: http://www.uniworldbp.com/. Listing information is from annual reports of US parent companies, press releases, and other public and private publications. Firm-specific data collected and used in this analysis are for the US parent companies that established a presence in transition economies rather than for the resulting affiliates of these companies in transition economies.

  7. Indeed, univariate comparisons between the sample of firms used in this study and the small set of firms that we were able to determine were in the region prior to 1990, indicate that pre-1990 firms are significantly more employee intensive and have significantly fewer intangible assets.

  8. Eleven percent of our sample firms entered the region via establishment of a new subsidiary or plant, 33% entered via joint venture arrangement with a local partner, 19% entered via acquisition of existing local firms, and 37% entered by establishing a sales or service office.

  9. All empirical results are obtained by estimating Eqs. (1), (2) and (3) in LIMDEP 8.0, and all p-values are computed for two-tailed tests with heteroskedastic robust standard errors.

  10. As a sensitivity analysis, we estimate logistic models for the estimates in Table 4, and we find results that are qualitatively the same as for the probit models of entry likelihood.

  11. The specification in columns 3 and 4 is estimated with CLI, which is available only for the subsample of firms entering in 1997 or earlier. As a robustness check, we estimate the specification in columns 1 and 2 for this subsample of 148 firms and find that the significant and negative coefficient on sales growth persists, indicating that the result is not sensitive to the inclusion of CLI or FORSUBS in the model. Rather, it obtains primarily for the subsample of firms that enter the region prior to 1998.

  12. Stock price data are employed in the estimation of cumulative abnormal returns from such announcements. In a second-stage generalized least-squares estimation, cumulative abnormal returns are regressed on a set of firm, country, and mode-of-entry characteristics in an effort to explain what factors contribute to the creation of shareholder wealth.

  13. As an additional sensitivity test we estimate a multinomial logit model of Eq. (3) where the benchmark entry mode of entry is “sales office” (see Agarwal & Ramaswami, 1992; Buckley & Casson, 1998, for a similar approach). The dependent variable equals 0 if a firm announced investment via a representative sales office, 1 if via joint venture, 2 if via acquisition, and 3 if via establishment of subsidiary or new plant. Results are qualitatively the same as those reported in the paper. All untabulated results are available from the authors upon request.

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Acknowledgements

We are grateful for helpful comments and suggestions from Bruce Blonigen, Lorraine Eden (JIBS Departmental Editor), two anonymous referees, and participants at the Southern Finance Association Meeting (2003), Washington State University and Marquette University seminars (2004), the Western Economic Association Meetings (2005), the Midwest International Economics Conference (2005), and the Financial Management Association Meetings (2006). The authors acknowledge financial support from the International Business Institute, Washington State University (Paul), the Glavin Center for Global Management, Babson College (Paul), and the College of Social Sciences and Interdisciplinary Studies, California State University, Sacramento (Wooster).

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  1. Department of Finance, Insurance & Real Estate, Washington State University, Pullman, WA, USA

    Donna L Paul

  2. Department of Economics, Portland State University, Portland, OR, USA

    Rossitza B Wooster

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  1. Donna L Paul
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Correspondence to Rossitza B Wooster.

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Accepted by Arie Y Lewin, Editor-in-Chief, 15 December 2006. This paper has been with the authors for two revisions.

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Paul, D., Wooster, R. Strategic investments by US firms in transition economies. J Int Bus Stud 39, 249–266 (2008). https://doi.org/10.1057/palgrave.jibs.8400334

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