Subsidiary Types, Activities, and Location: An Empirical Investigation
Subsidiary Types, Activities, and Location: An Empirical Investigation Subsidiary Types, Activities, and Location: An Empirical Investigation
Location-Specific FactorsA number of features of national economies have been shown to influence foreign investment ingeneral and foreign investment in different activities. For instance, UNCTAD’s WorldInvestment Reports argue that rank countries in terms of the ease of doing business and ingeneral, the relative attractiveness of different locations to attract foreign investment frommultinationals. More academic works Caves, (1996), Dunning (1998, 2000), Ghemawat (2007),and Ricart et al (2004) have identified several host economy characteristics that may influence thelocations of FDI include the size and growth of the market, level of development, openness of theeconomy and tax rates.In general, studies indicate that market size and growth rates would have an influence on the typeof investment activities (Agarwal & Ramaswami, 1992; Kobrin, 1976; Root & Ahmed, 1978;Terpstra & Yu, 1988; Woodward & Rolfe, 1993). Firms have a strong attraction to establishsales, production, and customer service activities in large and growing markets (Dunning, 1993).Finally, market size and growth could also be positively related to the tendency to invest inresearch and development, perhaps in applied research and development activities to tailorproducts to local demands. These arguments result in the following hypotheses:• Hypothesis 4: Market size will have a positive influence on the likelihood thatsubsidiaries will be differentiated in terms of activities and roles within the multinationalfirm.• Hypothesis 5: Market growth will have a positive influence on the likelihood thatsubsidiaries will be differentiated in terms of activities and roles within the multinationalfirm.13
The level of development of an economy should also influence the types of subsidiaries found inan economy. The leading destinations for FDI have consistently been the countries from thedeveloped world with as much as three-quarters of the annual FDI targeted into the developedworld (UNCTAD). High levels of development, as measured by per capita income, can bepositively associated with activities such as research and development given the need foradvanced skills and capabilities. (Ghemawat, 2007; Porter, 1990; Ricart et al., 2004). The level ofdevelopment may be inversely related to activities like production due to high input costs, butpositively related to others, like sales and R&D, as labor costs and skill levels may be directlyrelated to the level of development. Together the implication is that the level of development willhave a positive influence on activities such as research and development, with potentially anegative or ambiguous influence on activities such as production. The following hypothesesresult:• Hypothesis 6: The level of development of an economy will have a positive influence onthe likelihood that subsidiaries will be differentiated in terms of activities and roleswithin the multinational firm.Greater openness may reflect a generally friendly environment for information flows that mayhave implications for location of certain activities such as research and development. On the otherhand, firms often invest in activities such as production in order to get around trade barriers(Caves & Mehra, 1986; Dunning, 1998; Root & Ahmed, 1978). This leaves us with the followinghypotheses:14
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- Page 20 and 21: METHODS AND RESULTSThe results repo
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- Page 30 and 31: ReferencesAgarwal, S., & Ramaswami,
- Page 32 and 33: Enright, M. J. 2005a. Regional mana
- Page 34 and 35: Johanson, J., & Vahlne, J-E. 1977.
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The level of development of an economy should also influence the types of subsidiaries found inan economy. The leading destinations for FDI have consistently been the countries from thedeveloped world with as much as three-quarters of the annual FDI targeted into the developedworld (UNCTAD). High levels of development, as measured by per capita income, can bepositively associated with activities such as research <strong>and</strong> development given the need foradvanced skills <strong>and</strong> capabilities. (Ghemawat, 2007; Porter, 1990; Ricart et al., 2004). The level ofdevelopment may be inversely related to activities like production due to high input costs, butpositively related to others, like sales <strong>and</strong> R&D, as labor costs <strong>and</strong> skill levels may be directlyrelated to the level of development. Together the implication is that the level of development willhave a positive influence on activities such as research <strong>and</strong> development, with potentially anegative or ambiguous influence on activities such as production. The following hypothesesresult:• Hypothesis 6: The level of development of an economy will have a positive influence onthe likelihood that subsidiaries will be differentiated in terms of activities <strong>and</strong> roleswithin the multinational firm.Greater openness may reflect a generally friendly environment for information flows that mayhave implications for location of certain activities such as research <strong>and</strong> development. On the otherh<strong>and</strong>, firms often invest in activities such as production in order to get around trade barriers(Caves & Mehra, 1986; Dunning, 1998; Root & Ahmed, 1978). This leaves us with the followinghypotheses:14
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