Multinational Performance and the Geography of FDI: Evidence from 46 Countries

Yong Yang
University of Essex

Pedro Martins
Queen Mary University of London

Nigel Drield
University of Aston

Dec, 2011

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Intro

Motivation

The study of multinationality and rm performance has increasingly gained importance in economic implication of globalization. Does the increasing multinationality subsequently boosts performance linear or curvilinear shapes? Does location choice of FDI matter? Possible drivers: Heterogeneous economies (developed and developing country locations) Dierent returns (protability, productivity) - Drield and Yang (2011)

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Literature and Hypotheses

Literature - Multinationality, location and rm performance The theoretical literature are rmly rooted in the seminal work of Buckley and Casson (1976) and Dunning (1979, 1981, 1998), and are recently updated by Buckley and Casson (2009), Dunning and Lundan (2008), Hennart (2009) and Verbeke and Greidanus (2009). Much of the empirical literature is based on Kogut (1985), Benvignati (1987), Grant (1987). A positive correlation A negative correlation The U-shaped pattern The inverted U-shaped pattern S pattern Contractor et al, (2007) discuss in detail their interpretation of the "curvilinear hypothesis". Recent Survey/Meta paper: Li IJMR 2007, Yang and Drield MIR 2011. Few papers on the Location choice of FDI. Exception: Pantzalis JIBS 2001, Berry SMJ 2006, Qian et al. JIBS 2008. Beuelsdijk et al JEG 2010
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Literature and Hypotheses

Hypotheses

Hypothesis 1: There is a positive relation between multinationality and rm performance. Hypothesis 2: the relationship between multinationality and performance is U shaped. The returns to internationalization only occur once the initial costs of internationalization have been incurred. As such, the relationship is initially negative, but increases after a given level of internationalisation. Hypothesis 3: Multinational rms have a higher return to investing in developing countries than in developed countries, and the turning points in the nonlinear relationship occurs earlier Hypothesis 4: Developing country rms will gain through investing in other developing countries, though these gains occur at a slower rate than for developed country rms.

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Literature and Hypotheses

This paper - contributions

A wider range of countries 46 countries, including developing countries Scope for greater heterogeneity - less likely to nd eects?! Focus on the heterogeneity between locations of developed and developing countries Several robustness tests Extension: parent and subsidiary linkages

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Data

Orbis
Detailed accounting and nancial info from largest rms across the world. Sourced from company reports by dierent providers. Variables include: return on sales, expenditure on investment, employees, assets, rm age, number of subsidiaries (including overseas subsidiaries), sales and capital, sector. Info on subsidiaries of each company (25% or more shares control). Multinationality I: OSTS - the ratio of the number of overseas subsidiaries in relation to all subsidiaries Multinationality II: OSTS D ed - the ratio of the number of overseas subsidiaries in developed countries in relation to the rms total subsidiaries Multinationality III: OSTS D ing - the ratio of the number of subsidiaries in developing countries in relation to the rms total subsidiaries Limited access: only subset of large rms 16,835 multinationals 4,904 rms have more overseas subsidiaries in developing than developed countries. 1996-2007 period. In most cases are 2005 and 2006. Bhaumik, Drield, Pal JIBS 2010, Mallick and Yang FMII 2011 use the Orbis. Budd, Konings, Slaughter REStats 2005 use European version of these data (Amadeus). See Ribeiro et al. OECD 2010 for more information on the Orbis data.
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Data

Scatterplot of numbers of overseas subsidiaries in developed and developing countries

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Data

Descriptive statistics

Variable Sales Return on Sales Subsidiaries Overseas Subsidiaries OSD ed OSD ing OSTS OSTSD ed OSTSD ing Firm Age Employment Firm Asset Foreign Ownership Dev

Multinational Firms Mean Std. Dev. Obs 1071.77 4202.84 16835 0.07 0.10 16835 21.31 53.58 16835 9.90 29.05 16835 7.03 2.86 0.56 0.38 0.19 37.04 4676.67 1515.60 12.33 0.96 22.65 8.88 0.32 0.34 0.27 34.89 23037.09 6040.92 27.20 0.19 16835 16835 16835 16835 16835 16835 16835 16835 16835 16835

Mean 363.92 0.05 5.69 0 0 0 0 0 0 28.90 1591.54 599.87 8.74 0.90

Domestic Firms Std. Dev. 1306.43 0.11 17.69 0 0 0 0 0 0 29.19 5745.33 3172.23 26.30 0.30

Obs 22345 22345 22345 22345 22345 22345 22345 22345 22345 22345 22345 22345 22345 22345

T test 23.70 11.76 40.73 0 0 0 0 0 0 25.12 19.24 19.39 13.18 22.43

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Results

The empirical specication

Yit = 1 OSTSit + Xit + t + eit ,
D Yit = 2 OSTSit ed D + 3 OSTSit ing

(1) (2) (3)

+ Xit + t + eit ,

Yit = 1 OSTSit + 2 (OSTSit )2 + Xit + t + eit , and

D Yit = 3 OSTSit ed D + 4 (OSTSit ed 2 D ) + 5 OSTSit ing D + 6 (OSTSit ing 2

) + Xit + t + eit , (4)

Yit : the return on sales of rm i in year t

D OSTSit = OSTSit ed D + OSTSit ing

Xit : assets, rm age, ownership structure, dierent combinations of xed eects, including industries and countries and year eects (t ). Robust standard errors Signicance levels: *:0.10 **:0.05 ***:0.01
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Results

OLS results

OSTS OSTS 2 OSTS D ed (OSTS

D ed 2

(1) .0062 (.002)

(2) -.0145 (.010) .0183 (.009)

(3)

(4)

.0027 (.003) )

.0033 (.008) -.0017 (.008)

OSTS D ing (OSTS D ing )2 Employment Total Assets Firm Age Foreign Obs. Adj R 2 -.0162 (.001) .0243 (.001) .0056 (.001) .0019 (.003) 16835 .200

.0132 (.003)

-.0158 (.008) .0339 (.009) -.0161 (.001) .0245 (.001) .0057 (.001) .0017 (.003) 16835 .201

-.0161 (.001) .0243 (.001) .0056 (.001) .0019 (.003) 16835 .200

-.0163 (.001) .0244 (.001) .0056 (.001) .0018 (.003) 16835 .201

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Results

The importance of home country eects

OSTS OSTS 2 OSTS

D

(1) .0058** (.003)

Developed Country MNEs (2) (3) -.0151 (.010 ) .0185** (.009)

(4)

(5) -.0035 (.015)

Developing Country MNEs (6) (7) -.0519 (.061) .0434 (.051)

(8)

ed )

.0030 (.003)

.0028 (.008) -.0007 (.008)

-.0246 (.018)

.0232 (.073) -.0588 (.066)

(OSTS

ed 2

OSTS D ing (OSTS

ing 2

.0120*** (.003)

-.0152* (.009) .0321*** (.010) -.0163*** (.001) .0248*** (.001) .0057*** (.001) .0012 (.003) 16176 .196

.0097 (.017)

-.0748 (.055)

Employment Total Assets Firm Age Foreign Obs. Adj R 2

-.0164*** (.001) .0246*** (.001) .0056*** (.001) .0013 (.003) 16176 .195

-.0165*** (.001) .0247*** (.001) .0056*** (.001) .0012 (.003) 16176 .196

-.0163*** (.001) .0246*** (.001) .0056*** (.001) .0013 (.003) 16176 .196

-.0107** (.005) .0145*** (.005) .0054 (.007) .0366 (.028) 659 .286

-.0108** (.005) .0153*** (.005) .0059 (.007) .0360 (.028) 659 .289

-.0105** (.005) .0145*** (.005) .0057 (.007) .0374 (.028) 659 .286

.0840* (.047) -.0106** (.005) .0149*** (.005) .0060 (.007) .0370 (.028) 659 .293

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Robustness

Robustness

Consistent results from three four sub-samples: MNEs MNEs MNEs MNEs who who who who have have have have predominantly expanded into developed nations. predominantly expanded into developing nations expanded only into developed nations expanded only into developing countries

Consistent results from robustness tests: consider an alternative set of multinationality measures: the number of foreign subsidiaries introduce a variable which measures the average GDP per capita for the nations in which each rm has overseas subsidiaries (EDV). We nd the interaction between OSTS and EDV is negative. re-estimate the MP relationship, including rms which have at least one domestic subsidiary

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Robustness

Extension: A subsample (6442 multinationals, 19070 overseas subsidiaries

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Conclusions

Conclusions

The results presented here extend MP literature by highlighting the distinction between types of FDI location, and anticipated outcome. We interpret these results as indicating that the potential of globalisation, in particular in terms of increasing investments in developing countries, has not yet been met by multinational rms. The most promising expansion strategies may involve setting up more subsidiaries in developing countries. The returns to investing in developing countries then occur more quickly for western MNEs investing in developing countries. A good deal of learning is required for gains from internationalisation to be realised by developing countries MNEs. Our limitations: Cross-sectional nature of our data set. Our estimates does not consider sample selection issue (Heckman Two Step), and also do not rule out some form reverse causality (IV estimation).

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