Internationalization and survival of foreign subsidiaries of emerging economy multinationals

CHAPTER 1 INTRODUCTION This study examines the relationship between firm specific resources shaped by the characteristics of the home country institutional environment and the subsequent

I would like to thank my guide and Thesis Supervisor Associate Prof Andrew Delios for his guidance and his interest in this area of research From the beginning, Prof Andrew motivated me to explore the possibilities within the topic and guided me during the research process He was very supportive and encouraged me to think in the right direction As my Thesis Supervisor and the Head, Department of Business Policy, Prof Delios helped me in accessing relevant resources related to the literature review and gave key suggestions regarding the process of research which were very helpful

In addition, I would like to thank Assoc Prof Peter Hwang, A/P Sai Yayavaram, Assoc Prof Vivien Lim Kim Geok, Assoc Prof Nitin Pangarkar, Assoc Prof Ishtiaq Pasha Mahmood and A/P Soh Pek Hooi for their advice and invaluable suggestions I am grateful to Dr Abhirup Chakrabarti for conducting lectures on statistics I am grateful to all my friends and would like to extend a special thanks to:Angeline, Ruan Yi, Zhou Nan, Wang Pengji, Yuan Lin, Xu Weiwei, Issac, Cao

Yi, Kelvin, Sankalp, Zhonghua and Phillip

I am also thankful to my husband for his kind and encouraging words and emotional support throughout the coursework and research work I would like to express my heartfelt gratitude to my parents for their help in conducting fieldwork and collecting data in India I am also grateful to officials at the Indian Embassy

I would like to acknowledge the support I received from the National University

of Singapore in the form of the research scholarship and Fieldwork Funding Award from the Asia Research Institute (ARI) National University of Singapore Most importantly I would like to express my gratitude to the IT staff, library staff and office staff especially Ms Hamidah Bte Rabu, Ms Ang Chin Teng at the Ph.D office and Ms Wendy Ng and Ms Teo Woo Kim and Ms Jenny See at the Department of Business Policy I thank them for their constant support and assistance

I am grateful to the examiners for taking out time from their hectic schedule to read and examine the thesis Last but not the least, I would like to thank the National University of Singapore for creating a conducive research environment with an excellent network of libraries and a friendly atmosphere

Survival of foreign ventures of multinational firms forms an interesting and significant part of international studies; however, most of the contribution in this area emanates from studies conducted in the developed country context This has led to a lack of understanding of the factors expected to influence the survival of foreign subsidiaries of multinational firms from emerging economies Along with this empirical gap, the internationalization of firms from emerging economies especially Third World countries represents a theoretical puzzle arising from the application of the conventional theories of FDI to the phenomenon of Third World Multinationalism This research obtains its theoretical framework from this debate arising from the application of the theories of FDI to this phenomenon

The study explores the factors expected to influence survival, especially firm specific resources such as affiliation to a business group, which originate due to the institutional environment of the home country It explores the location specific variables and the interaction between the location and firm specific resources that evolve due to the institutional environment of the country-of-origin

It studies the institutional environment, which contributed to the internationalization of Indian firms and tries to understand the benefits accrued by affiliation to a business group Business Groups form an important part of emerging economies Business group affiliated firms internationalize due to several reasons like exploration of new resources and the exploitation of existing

The study employs Cox regression to conduct the data analysis This technique is suitable for discrete time or grouped time event history analysis and addresses the problems of duration dependency and time varying covariates The raw data for the study was obtained from the annual records published by the India Investment Center This data is substantiated with data obtained from electronic databases and annual reports The longitudinal dataset of foreign ventures of Indian firms that are investing abroad and internationalizing their operations from the mid 1980s until date consists of 110 firms with 377 cases of FDI through joint ventures, acquisitions, and wholly owned subsidiaries The dataset provides information on the year of formation of the foreign subsidiary, year of exit as well as parent firm size, industry of the parent firm, country level variables amongst others

The study has three main findings The firm specific resource-business group affiliation- was not found to be significant and has no effect on the rate of exit of foreign subsidiaries of emerging economy multinationals The development stage

of the host country was found to be significant indicating that the rate of exit of the foreign subsidiary depends on the development stage of the host country The interaction of firm specific resources and development stage of the host country was found to be significant indicating that the rate of exit of business group affiliated firms depends on the development stage of the host country The empirical results lend sufficient support for the central ideas of the research

ACKNOWLEDGEMENTS i

SUMMARY iii

LIST OF FIGURES viii

LIST OF TABLES viii

CHAPTER 1 INTRODUCTION 1

1.1 Background 3

1.2 Objectives 5

1.3 Contribution 6

1.4 Organization of Chapters 8

CHAPTER 2 LITERATURE REVIEW 9

2.0 Terminology 9

2.1 Review of literature on Third World Multinationals 11

2.2 Theoritical Aspects 13

2.2.1 Review of Theory of Monopolistic Advantages 13

2.2.2 Business Group Affiliation 21

2.2.3 Review of Ownership-Location-Internalization Paradigm 18

2.3 The Institutional Environment and Indian Multinationals 21

2.4 Survival related studies 24

2.5 Summary 27

CHAPTER 3 HYPOTHESES DEVELOPMENT 30

3.1 Business Group Affiliation and Survival of Subsidiaries 30

3.2 Host Country Development Stage and Survival of Subsidiaries 33

3.4 Other Factors 35

3.4.1 Organizational Learning 36

3.4.2 Time Related Variables 37

CHAPTER 4 DATA AND METHODOLOGY 39

4.1 Data and Sample 39

4.2 Description of Variables 41

4.2.1Dependent Variable 41

4.2.2 Independent Variables 43

4.2.3 Control Variables 45

4.3 Methodology 47

4.3.1 Model Specification for Cox Regression 50

4.3.2 Model Statistics 53

i) Interpretation of the Coefficient Estimates 53

ii) Interpretation of Model Estimates 55

CHAPTER 5 RESULTS 56

5.1 Results for Model 56

5.1.1 Model Statistics 56

5.1.2 Coefficient Statistics 57

5.1.3 Control Variables 58

5.2 Results for Hypotheses 59

5.2.3 Results for Hypothesis 3 62

5.3 Summary 63

CHAPTER 6 CONCLUSION 64

6.1 Theoretical Implications of the Study 64

6.2 Limitations of the Research 68

6.3 Future directions for Research 70

REFERENCES 91

Figure 1 Foreign Direct Investment by emerging economy multinationals

Figure 2 Framework indicating the relationship between the covariates

Figure 3 LML plots

Figure 4 Plots showing comparison of Cum Survival and Hazard Rates

LIST OF TABLES

Table 2.1 Summary of Literature on Third World Multinational Firms

Table 4.1 List of Symbols and description of Variables

Table 4.2 List of Studies related to Survival

Table 4.3 Hypotheses with expected signs

Table 4.4 Correlation Matrix of Variables in Cox Regression Analysis

Table 5.1 Results for Cox Regression Analysis

Table 5.2 Summary of Results for Hypotheses

CHAPTER 1 INTRODUCTION

This study examines the relationship between firm specific resources shaped by

the characteristics of the home country institutional environment and the

subsequent survival of the international venture (joint ventures, wholly owned

subsidiary, or acquisitions) of firms from less developed countries (LDCs) The

research also examines the effect of the development stage of the host country and

the interrelationship between the development stage of the host country and firm

specific resources and their influence on the survival of the foreign venture

The phenomenon of internationalization of domestic firms from less developed

countries termed as ‘Third World Multinationals’ (Scheman 1973; Heenan and

Keegan, 1979; Wells, 1983) or ‘emerging economy multinationals’ was first noted

in the early seventies An extensive review of the extant literature on Third World

Multinationals reveals that while several studies have been conducted to

determine the pattern of FDI, the competitive advantages of Third World

Multinationals, and their motivations to internationalize, few empirical studies

examine the subsequent survival of the foreign subsidiaries (Wells, 1998) of these

‘unconventional multinationals’(Giddy and Young, 1982)

Therefore, this study responds to the call for empirical research on the factors

expected to influence the survival of foreign ventures of multinationals from

emerging economies and extends the scope of survival related studies to the

emerging economy context

Furthermore, Yeung (1999) notes that most of the studies of TNCs from emerging

economies do not have an explicit theoretical underpinning This study tries to

overcome this by discussing and applying the conventional theories of FDI to the

overseas expansion and internationalization of Third World Multinationals to

determine the role of firm specific resources, which evolve due to the institutional

environment of the home country This study applies the conventional theories of

FDI to the expansion and internationalization of third world multinationals to

determine the role of firm specific resources, which arise due to the institutional

environment of the home country Business Group affiliation is one such firm

specific advantage that develops due to the institutional environment of the home

country

Multinational firms from emerging economies do not possess absolute or

monopolistic firm specific advantages (Erramilli, Agarwal and Kim, 1997) and

therefore their firm specific advantages differ from those of developed country

ownership specific advantages Prior literature on Third World Multinationals

(Heenan and Keegan, 1979; Kumar, 1982; Wells 1983, Yeung 1988) depicts a

picture of firms, which apparently do not possess an absolute monopolistic

advantage like proprietary technology, unique production knowledge, or brand

name, which may motivate their entry into other countries Third World

multinationals possess a range of firm-level advantages like labor intensive and

small-scale manufacturing, low cost of establishment and production,

conglomerate identity and machinery and managerial skills customized to the less

developed country environment

The research studies the role of the development stage of the host country and its

influence on the survival of foreign ventures of emerging economy firms

According to Itaki, 1991 firm specific advantages of a firm may be contingent on

the location of the foreign subsidiaries I expect that firm specific resources of

these firms will be contingent on the development stage of the host country and

their interaction will affect the probability of survival of foreign ventures of firms

from an emerging economy I test the effect of firm specific resources and the

development stage of the host country on a sub-sample of foreign ventures of

Indian firms using event history modeling for longitudinal data

The event history modeling technique used for the data analysis is the Cox

Regression, which is suitable for discrete longitudinal event data analysis when

the number of tied observations is few (Allison, 1984) This technique allows for

the inclusion of time constant and time varying covariates expected to influence

the duration of survival as well as duration dependency and the discrete or

grouped nature of the data This research extends the scope of survival studies to

the internationalization of firms from an emerging economy context i.e

specifically to the internationalization of Indian firms The next section elaborates

upon the background for the research

1.1 Background

Foreign Direct Investment by multinational firms from emerging economies

(LDCs and NICs) forms the backdrop of this study Scheman (1973), Heenan and

Keegan (1979) and Wells (1983) identified the Third World Multinational

phenomenon and pioneered the study of these multinational firms from less

developed countries (LDCs) in the early 1970s Since then domestic firms from

several emerging economies such as India, China, Brazil, Mexico, Argentina etc

have emerged as participants in outward FDI The increase of FDI activity from

less developed countries (LDCs) has raised several issues of interest such as how

well the traditional theories of FDI explain the rise of these TNCs and what their

competitive advantages are (UN Report, 1993) Foreign Direct investment by

firms from less developed countries constituted 12% of the global FDI outflows in

2002 (UN Report, 2003) and has witnessed a steady increase in the past few

decades FDI from developing countries, while a small fraction of global flows,

has increased more rapidly (14% p.a.) than outflows from industrialized countries

(10% p.a.).This increase in investment by Third World Multinationals is also

known as the Third Wave of FDI (Industry & Energy Dept Working Paper,

1989)

India is one of the few semi-industrialized countries that serve as an important

source of FDI (Encarnation, 1982) The growth of Indian MNEs began in the

1950s The first Indian multinational was established in 1956 by a leading

business house in Ethiopia The number of approvals for joint ventures, wholly

owned subsidiaries and other forms of investments has been steadily increasing

since then Indian Multinationals operate in a wide range of industries, including

engineering products, textiles, pharmaceuticals, paper and pulp, cement and

turnkey projects, in addition to financial and non-financial services (Agarwal and

Weekly, 1982) The internationalization of firms from countries with large and

unexplored domestic markets was influenced by the institutional environment

The liberalization of the protectionist economy in the 1990’s exerted further

pressure on Indian firms to seek opportunities overseas since inward FDI in

several sectors was permitted The institutional environment of the Indian

economy also contributed to the formation of large business groups Legislation

controlling the competitive environment contributed to the internationalization of

Indian domestic firms The key objectives of this study is to examine the survival

of foreign operations of Third world Multinationals with a focus on firm specific

resources and development stage of the host country

1.2 Objectives

The main objectives of this study are delineated here Firstly, the research

examines whether a firm specific resource like business group affiliation accrues

an ownership specific advantage on internationalizing firms from an emerging

economy and assists in the survival of their foreign investment

Secondly, the study explores the relationship between the development stage of

the host country and the rate of exit of foreign subsidiaries

Lastly, the research tries to determine whether development stage of the host

country and firm specific resources are inter-related This aspect can be

considered important in the case of internationalization of emerging economy

firms since ownership advantages of these firms are neither absolute nor

monopolistic (Erramilli, Agarwal and Kim 1997; Wong, 1985) like those of firms

from developed economies

1.3 Contribution

This research contributes to the study of firm specific resources such as business

group affiliation Business groups form an integral part of the emerging economy

business scenario and have been studied by several authors with respect to their

precedents like ownership and antecedents like performance etc (Qian, 2005)

However not a great deal of research has been conducted on the effect of business

group affiliation on the internationalization and survival of foreign affiliates

Therefore, this study contributes to the extant literature on international

diversification of business groups and non-business group firms by considering

the influence of business group affiliation and whether this decreases the cost of

foreignness when firms expand internationally

The study also examines the influence of the interaction of firm specific

advantages and development stage of the host country and whether it influences

the survival of foreign subsidiaries of emerging economy multinationals

Empirical studies on the survival of foreign ventures of multinational firms from

emerging economies are few in number This study helps in filling this empirical

gap Wells (1998) notes that the literature on Third World Multinational

Enterprises suffers from the fact that the rapid growth and rapid change in

investment was occurring as research was being carried out Therefore, there is no

sense of which types of firms ‘survive’ A study of this nature contributes to the

literature on emerging economy multinationals and responds to the call for more

research on the subsequent survival of foreign subsidiaries of Emerging Economy

Multinationals

Hoskisson et al (2000), White (2002) emphasize on the need for more research in

the emerging economy context Wright et al (2005) identify four strategic options

of research: entry of firms from developed countries to other developed countries,

domestic firms competing within their own economies and firms from developing

countries entering developed and emerging economies (Figure 1) They note that a

great deal of emphasis has been laid on the first two strategic options, and call for

attention to the last option

They assert that for strategy research to flourish and make a lasting contribution in

this area there is a need to consider the extent to which theories and

methodologies used to study strategy in mature, developed economies are suited

to the unique social, political, and economic environment as well as firm

characteristics of emerging economies

Therefore, the study contributes to the theoretical aspects by discussing the views

of several authors regarding the application of the theories of FDI in explaining

the phenomenon

1.4 Organization of Chapters

This study has been divided into 6 chapters The first chapter introduces us to the

phenomenon to be studied and the objectives, background and contribution of the

study It also outlines the structure of the thesis and the organization of the

chapters Chapter 2 reviews and summarizes the previous literature on Third

World multinationals describing their comparative advantages, the application of

conventional theories of FDI, the institutional environment and advantages of

business group affiliation It also summarizes previous studies pertaining to Indian

multinationals and empirical research on survival of firms from developed

economies The literature review concludes with the theoretical framework for the

research Chapter 3 develops and states the hypotheses based on the theoretical

framework developed in the previous chapter Chapter 4 describes the data and

the research methodology of the study, elaborates on the measures used for the

dependent, independent, and control variables It concludes with a description of

the model and coefficient statistics The fifth chapter is used to discuss the results

of the empirical analysis obtained by testing the hypotheses stated in Chapter 3

Chapter 6 concludes the study by summarizing the findings and discussing the

theoretical implications of the study and directions for future research

CHAPTER 2 LITERATURE REVIEW

This chapter provides the theoretical framework for the study by reviewing the

literature on the theories of Foreign Direct Investment and relevant literature

concerning firm specific advantages conferred by Business Group affiliation and

their influence on the internationalization and survival of firms from an emerging

economy Besides the literature on the theoretical discussions regarding the

conventional theories of FDI: the Theory of Monopolistic Advantage (Hymer

1960) and the Ownership-Location-Internalization paradigm (Dunning 1981) and

their applicability to Third World Multinationals I also review the literature on

‘Third World Multinationals’ and the literature on the survival of foreign

subsidiaries of firms

The literature review has been subdivided into Sections 2.1 to 2.5 for ease of

comprehension The chapter concludes with the summary outlining the conceptual

underpinnings of the study, which form the basis for the development of

hypotheses in Chapter 3

2.0 Terminology

The term ‘Third world multinationals or Third World Multinational Enterprises

(TWMNE)’ has gained wide usage in literature (Yeung, 1994).The term is used to

describe firms which originate in countries with GNP less than 3000 USD per

capita or less developed countries (LDCs) Yeung (1994) states that though the

title ‘Third World Multinational’ has gained wide prevalence in literature, a

relatively neutral term ‘Developing Country Transnational’, defined as ‘domestic

enterprises headquartered in developing countries which control assets and/or

exert influence in the decision making process of one or more cross-subsidiaries

under and/or (sic) affiliates’ is better suited to describe such firms Due to the

rapid growth rate of these economies, researchers also describe these countries as

‘Emerging Economies’ and multinational firms from these countries can be

termed as ‘Emerging Economy Multinationals’ (Ghemawat and Khanna, 1998)

These firms are also referred to as ‘Latecomers’ since they represent the Third

wave of Industrialization (Industry and Energy Department, Working Paper,

1989) or as ‘Dragon Multinationals’ (Mathews, 2001) In this research, the terms

‘Third World Multinationals,’ and ‘Emerging Economy multinationals’ will be

used interchangeably to describe MNEs from LDCs

The term ‘internationalization’ refers to either all the stages of FDI including

incremental stages like exporting or one particular stage of investment of FDI for

instance exporting, setting up of joint ventures, acquisitions or wholly owned

subsidiaries (Vardaraj, 1987) Giddy and Young (1982) describe these MNEs as

‘Unconventional Multinationals’ and delineate the characteristics that distinguish

these ‘deviate multinationals’ They distinguish the FDI from these countries in

terms of (1) Source of FDI (2) Size of FDI, and (3) Level of technological

advancement of the firm According to the authors, these firms differ from

developed country multinationals since the size of FDI is usually smaller, the

sources of FDI are more diffused and encompass a number of small and

low-income countries, and the technological intensity of these firms is not comparable

to that of developed country multinationals

Most of the literature in this area dwells on explaining the phenomenon of this

‘unconventional FDI’ (Giddy and Young, 1982) and describing the comparative

advantage and motivations for globalization A few authors have examined the

relevance of the contemporary theories of foreign direct investment to this

phenomenon of ‘reverse direct investment’ (Jun, 1997) The following section

discusses the literature and theoretical arguments of this literature

2.1 Review of literature on Third World Multinationals

The bulk of literature on Third World Multinationals (Wells, 1983) or firms from

less developed countries (Kumar 1982) has been growing since the 1970’s and

reflects the interdisciplinary nature of the research (Yeung, 1994) The focus of

the studies conducted in this field of research has been on explaining the

multinational activity and pattern of investment of firms from low income or less

developed countries (LDCs), their motivations for internationalization and the

competitive advantages of these firms as compared to local firms and developed

country MNEs A majority of these articles and books used primary data and

qualitative methods to describe the phenomenon of Third World Multinationalism

and focused on describing the comparative advantage of such firms Critically

assessing the articles and books by several authors on various areas related to

emerging country multinationals, Yeung (1999) has presented a clear and concise

picture of the Third World Multinational phenomenon Since the inclusion of an

in-depth review of the literature is not feasible in this section, the extant literature

based on the collection of studies by Yeung (1999) has been summarized in Table

2.1 attached to the end of this document

A few authors (Ghymn 1980; Chen 1983; Giddy and Young 1982; Kumar 1982;

Wong, 1985; Vardaraj, 1987; Yeung 1999) have examined the relevance and

application of contemporary theories of foreign direct investment to this

phenomenon of ‘reverse direct investment’ (Jun, 1997) Macroeconomic models

like the 4-stage investment model which relate outward and inward investment to

the stage of development of the country developed by Dunning’s (1981) and the

technological accumulation model (Tolentino, 1993), location-specific advantage

theory (Lall, 1982; Giddy and Young, 1982) provide adequate explanations for the

phenomenon However, several authors question whether conventional theories of

FDI are adequate to explain the overseas expansion of these ‘non-conventional’

MNEs, or whether new paradigms are warranted (Giddy and Young, 1982;

Ghymn 1980; Chen, 1983) Ghymn (1980) states that there is no simple theory to

explain the dynamics of the Third World Multinational phenomenon and several

studies offer only partial explanation Chen (1983) notes that a careful synthesis of

the theories related to FDI is required to explain the phenomenon of

internationalization Vardaraj (1987) notes that most of the theories of Foreign

Direct Investment focused on explaining the internationalization by developed

country firms from an economic viewpoint Giddy and Young (1982) embark on a

re-examination of the theories of FDI and their application to Third World

Multinationals Interpreting the existing theory, they examine the conventional

theory of the growth of the MNE and its application to Third World

Multinationals

Since this study is based on the theoretical debate surrounding the emergence of

Third World Multinationals, I discuss the application of some conventional

theories to these ‘unconventional multinationals’ and the theoretical

underpinnings of the research

2.2 Theoretical Aspects

2.2.1 Review of Theory of Monopolistic Advantages

Hymer’s dissertation forms the building block for explaining outward FDI by

firms The monopolistic advantage theory of FDI advanced by Hymer (1960)

states that multinationals must possess a rent yielding asset (for example,

production know-how) which gives them a competitive edge over firms in their

home markets, as well as over indigenous firms abroad Firms must possess a

monopolistic advantage in the form of a brand, proprietary R&D or technological

advantage This advantage moreover should be transferable internationally

Erramilli, Agarwal and Kim (1997) and Lall (1982) note that the application of the

theory of monopolistic advantage is not as straightforward to developing country

multinationals since the advantages which they posses are not the same as those

possessed by developed country firms Erramilli, Agarwal and Kim (1997)

suggest that MNEs from developed countries possess firm specific advantages that

differ from the firm specific advantages of developing country firms; in that, firm

specific advantages possessed by developing country firms are not absolutely akin

to those of firms from developed countries While developed country firms obtain

their advantages from their size, experience, and technological and marketing

superiority, developing country firms possess a varied set of advantages of

indigenous technology, adaptive and low cost production facilities, skilled work

force and marketing and sales prowess Wong (1985) terms these advantages as

‘oligopolistic advantages’ since they are diverse and many in number rather than

an absolute or monopolistic advantage

Several firm level resources specific to Third World Multinationals have been

studied by researchers According to Erramilli, Agarwal and Kim (1997) factors,

which arise due to the home country institutional environment, should be

considered in order to understand the competitive advantages of firms from

emerging economies A further extension to their analysis is to incorporate

country-of-origin effects like family-ownership and operated conglomerates in

many Asian economies and corporate owned and operated businesses on one hand

and the effect of location on the other Hoskisson et al (2000) note that the

competencies of emerging economy MNEs develop in an environment of less

munificence, with a lack of strong market institutions, shortage of raw materials

and qualified manpower, poor access to technological inputs and poor intellectual

property rights Firms from emerging economies overcome these problems related

to a poor institutional environment by organizing themselves into large diversified

business groups Business groups facilitate the allocation of product, capital, and

human resources in the absence of well-developed market institutions (Khanna

and Palepu, 1997)

2.2.2 Business Group Affiliation

Diversified Business Groups are an important feature of emerging economies

These are defined as gatherings of formally independent firms under common

administrative and financial control (Khanna and Rivkin, 2001) Business groups

are a specific type of organization characterized by being (a) a collection of

legally separate firms operating in multiple strategically unrelated activities (b)

that are under common family ownership and control through a legal entity In

addition to unrelated product diversification and familial control, some authors

(Peng, Lee and Wang, 2005) consider institutional relatedness an important

feature of Business Groups

Ghemawat and Khanna (1998) explore some of the idiosyncratic characteristics of

the institutional environment of the Indian economy that led to the formation of

large business groups According to the authors, the dominance of business groups

has continued through the 1990s, with companies affiliated to business groups

contributing up to 89% of the total sales and assets of over 4000 publicly listed

companies in the private sector The authors suggest that policy distortions have

influenced the formation of business groups They suggest that group structures

can evolve in response to such distortions, even ones that are not explicitly

intended to encourage them Some of the policies that they discuss are the

imposition of import controls in India in the fifties that forced trading-based firms

to enter new businesses In the early 1960s, enforcement of licensing policies led

to significant additional diversification The Industries Act (1951) required the

issuance of a license to set up a plant, to expand or relocate production, or to

introduce a new product

The Monopolies and Restrictive Trade Practices Act (MRTP Act, 1969) was

enacted to control the dominance of a few large firms and encourage the smaller,

newer entrepreneurial ventures The legislation required large firms to register as

MRTP Companies The Monopolies and Restrictive Trade Practices legislation

(1969) forced large firms to expand into only prescribed priority sectors

Throughout this period, regulatory restrictions on exit meant that if a group

entered an unprofitable business, it was forced to continue with it This led to the

expansion of firms from one sector to another and formation of large groups,

controlled by a few families, which were diversified and controlled a major chunk

of the nation’s wealth

Chang (2000) discusses in detail the domestic advantages that business group

affiliation confers on its affiliates Some of these are (1) Sharing of Intangible

resources (2) Joint R&D expenses (3) Group wide Advertising (4)

Cross-subsidization by either direct transfer of wealth or by subsidizing the transfer price

of intermediate goods (5) Investing in new ventures (6) Managerial talent and

other human resources Hu (1995) studies the relationship between a firm’s

domestic advantages and its advantages internationally He studies the

transferability of firm specific resources that develop in the domestic context

Wan (2005) notes the role of environmental differences amongst countries in the

study of international diversification He describes economies as developed

economies, emerging economies, institution-driven economies and factor-driven

high growth economies as dissimilar country environments provide firms with

dissimilar country resources: factors (physical infrastructure: land, labor and

capital) and institutions (legal systems which provide resources for conducting

transactional activities between actors) Based on his framework he postulates that

the competitive strength of diversified firms are essentially institution based and

principally based on their capabilities in fostering social ties among a small,

closed group of economic or political actor These capabilities are localized in

nature and are likely to dissipate in foreign countries because firms cannot transfer

their non-market capabilities to other countries

Wright et al (2005) suggest that business groups from emerging economies with

unrelated diversification engaged in exploration rather than exploitation of

knowledge in developed economies will be less successful than business groups

that are have a network structure or related diversification structure since a

decentralized structure is better suited to the emerging economies Guillen (2000)

notes that many of the resources of large business groups may be situation specific

which evolve due to the relative underdevelopment of their home country

However, anecdotal evidence (Encarnation 1982; Lall, 1982) suggests that

conglomerate identity plays an important role in the internationalization and

survival of firms, leading to the interesting question discussed by Hu (1995)

regarding the transferability of domestic firm-specific advantages internationally

Whether this firm specific feature of being affiliated to a business group results in

an internationally transferable competitive advantage and whether it assists in the

survival of international subsidiaries is the first key question of this study

2.2.2 Review of Ownership-Location-Internalization Paradigm

The ownership-location-internalization paradigm, propounded by Dunning (1973)

is the umbrella paradigm used to explain the determinants of FDI The main tenets

of the OLI paradigm are that firms must possess ownership specific advantages

vis-à-vis other competitive firms in serving foreign markets These ownership

advantages result from the possession of intangible assets that are exclusive to the

firm for a length of time Assuming that the first criteria is met with, it must be

more beneficial to the enterprise possessing these advantages to use them itself

rather than sell or lease them to foreign firms, i.e it must be more profitable for

the firm to internalize these advantages through the extension of their own

activities rather than to lease or sell them Assuming that both these conditions are

fulfilled, it must be profitable for the multinational enterprise to utilize these

advantages in conjunction with at least some factor inputs (including natural

resources) outside its home country; otherwise foreign markets would be served

entirely by exports and domestic markets by domestic production

Itaki (1991) suggests that the concept of ‘advantage’ is a relative concept i.e

advantages of a firm vis-à-vis the others tautologically means their disadvantage

vis-à-vis the other firm and ownership advantage are exogenous to the firm In his

review of the OLI paradigm Itaki (1991) proposes that firm specific advantages

can be considered inseparable from location specific advantages Using examples,

he suggests that whether firm specific characteristic are advantageous may be

considered contingent on the location of the firm’s subsidiaries This aspect is

especially valuable in understanding the expansion of unconventional

multinationals which do not possesses an absolute advantage that would assist

them in overcoming local competitors or other developed country competitors

When these firm specific advantages are combined with location (Buckley, 1988)

the interaction may explain the internationalization of these unconventional

multinationals

Vardaraj (1987) states that the theories of FDI aim to explain the

internationalization of firms from developed countries Most theories that explain

FDI by firms from emerging economies use the OLI paradigm; by retaining

Internalization advantages as the central paradigm and exploring the firm specific

and location specific advantages of Third World Multinationals Kumar (1982)

discusses the application of the theories of FDI to Third World Multinationals and

isolates a few of the ownership and location variables specific to developing

country multinationals He ascertains that ownership advantages for firms from

less developed countries stressed as assets of multinational corporations can

hardly explain the overseas expansion of Third World firms He finds that

contrary to the ownership assets of developed country firms which emerge from

access to capital resources, familiar brand names and consumer loyalties, or new

product technology, developing country firms possess advantages related to the

suitability of their operating technology, lower overhead and expatriate payments,

familiarity with the conditions and problems of developing countries, and their

less threatening position He concludes that the ownership advantages of Third

World multinationals lie in their less advanced, though not necessarily less

efficient, manufacturing technologies, which function well in other developing

countries (Wells, 1977, 1978; Lecraw, 1977; Agarwal, 1985) He concludes that

ownership advantages are necessary though not a sufficient condition for FDI

They do not explain why a firm chooses to set up a plant outside the country,

rather than license or import and why it chooses a particular location To explain

this several location specific variables like low labor costs, availability of raw

materials, market size, etc must be considered

In terms of location specific variables Lall (1982) finds that emerging economy

firms are attracted to countries with resources, which they lack like raw materials,

or low production costs or where there is similarity between the cultural and

economic systems of the country A second attractive feature of the location can

be the comparative political and economic stability of the country as compared to

the home environment Developing countries often have a high degree of political

upheavals and economic uncertainty Based on this analysis he concludes that the

ownership specific advantages and location specific advantages of emerging

economy multinationals differ from those of developed country multinationals and

both must be considered to explain the growth of these multinationals

Giddy and Young (1982) note that lower the firm’s monopolistic advantage, more

the attention it must pay to minimizing the cost of foreignness by seeking the

following location specific advantages The authors expect that firms will try to

increase their location specific advantages by investing in countries where main

competitors are domestic firms, the strength of domestic competition is low, and

the nature of competition is well understood They expect firms to invest in

countries where the conditions are similar to the home nation or invest in

neighboring countries where distance costs are reduced or invest directly in secure

markets Utilizing these location specific advantages would influence the pattern

of FDI from less developed countries

2.3 The Institutional Environment and Indian Multinationals

According to Yeung (1999), political institutions (the other being social

organization) are an important contextual feature of emerging economies which

affect the mechanism and process of globalization of business firms from

emerging economies The economic motivations underlying the Third World FDI

cannot be distinguished from domestic and international political considerations

In several emerging economies especially India, the state is a potent force

particularly when it is actively pursuing either an import-substitution or an export

promotion policy The restrictive policies of the Indian government in the past

resulted in a strong preference for equity participation among Indian TNCs abroad

(Encarnation, 1982; Agarwal and Weekly, 1982)

The Monopolies and Restrictive Trade Practices (MRTP) Act of 1969 played an

important role in the growth of Indian companies overseas, since it imposed

certain limits on the growth and expansion of large Indian companies Special

government permission was required for substantial expansion or establishment of

new undertakings This constrained the growth of Indian companies’ especially

large diversified groups within India, and forced them to look for opportunities

abroad Viewed in the context of these restrictions, FDI from India can be

considered as ‘a disguised form of capital flight from India’ (Lall, 1986)

Although these regulations have been liberalized over time, the basic rationale and

FDI pattern remain largely unaltered (Yeung, 1999)

Encarnation (1982), Kumar (1982), Agarwal and Weekly (1982), Lall R (1986),

Varadaraj (1987), studied the pattern of internationalization of Indian

Multinationals Encarnation (1982) discusses the motivating factors, growth

patterns and characteristics of Indian joint ventures and their political impact in

the parent and host countries He examines the foreign investment activities of

leading business groups and the role of domestic regulatory policies that led to the

internationalization of Indian firms He notes that the pattern of Indian FDI is not

similar to that of Latin American or Asian countries; in that, Indian firms have a

large domestic market to cater too, unlike the Asian or Latin American country

firms He finds that the stringent domestic policies and the technological

collaborations of Indian firms are important factors that led to the early

internationalization of Indian firms Lall R (1986) conducts an empirical analysis

to study the policy and performance of Indian direct investment at an industry and

firm level Varadaraj (1987) studies the internationalization of Indian firms in

relation to technology acquisition

Kumar (1982) examines the growth and development of Indian multinationals

According to him, the internationalization of Indian firms began in the early 1960s

with the advent of a few Indian firms to countries like Sri Lanka, Iran, Kenya, and

Nigeria Most of these firms were involved in light engineering products and

textiles; industries with ‘low technology inputs’ where production know-how is

widely diffused, small scale operations are profitable and ‘learning by doing’ was

possible The early 1970s to 1978 saw a period of rapid increase in equity exports

of almost all kinds The government though not encouraging accepted the growth

in international investments No efforts were made to liberalize foreign exchange

availability for investment, travel, or promotion The year 1979 and 1980s was a

dramatic improvement in government policies and subsequently an increase in

foreign activity The Indian Government encouraged internationalization by

speeding up the approval procedures, allowing majority participation and allowing

wholly owned subsidiaries in trading and services The 1990s saw an

unprecedented increase in the Indian ventures abroad Greater numbers of high

technology firms and established business group and non-business group firms set

up their subsidiaries and joint ventures and acquired firms abroad Using several

examples of Indian firms that are investing abroad, Kumar (1982) demonstrates

the role of country, firm and industry specific factors, which led to the

internationalization of Indian firms

2.4 Survival related studies

Though several studies have been conducted to determine the factors influencing

the subsequent survival of subsidiaries, most of these are on developed country

firms Survival and financial performance are both measures of firm performance,

amongst which survival is a prerequisite for success in other terms, such as market

share and profitability (c.f Suarez and Utterback, 1995) A few of the prominent

studies (Li, 1995; Beamish and Delios, 2001; Mitchell, Shaver and Yeung, 1994;

Shaver, Mitchell and Yeung, 1997) are discussed in this section

Li (1995) studies the influence of mode of entry-joint venture, wholly owned

subsidiary, or acquisition on the survival rate of the international firms in the U.S

computer and pharmaceutical industry He finds that firms entering the country

through acquisition or joint ventures have a greater rate of exit than firms that set

up wholly owned subsidiaries Organizational learning from previous experience

in the country improves the chances of survival of an international venture The

form of diversification whether in related or unrelated lines of business also

influences the probability of survival Diversification in an unrelated product area

is usually a risky strategy and influences the probability of survival negatively

Beamish and Delios (2001) analyze the effect of entry mode and intangible assets

on the survival and profitability of 3080 subsidiaries of 641 Japanese Firms They

advertising expenditure while performance is not The effect of the mode of entry

on the foreign subsidiary survival and profitability is also studied By entering into

joint ventures with local firms, foreign subsidiaries can acquire information

regarding the local market and sales networks of the local firm These assets may

reduce the foreign subsidiary’s dependence on its previous foreign experience

However, the management of a joint venture is more complex than other forms of

FDI and therefore may become unstable This could prove to be a major barrier

for successful foreign investment This capability of managing a joint venture can

be acquired through previous experience with joint ventures However, with

organizational experience this barrier may be overcome Greater experience with

joint ventures leads to better chances of survival of the joint venture

A second way to improve the probability of survival is to acquire operational

experience in the host country The experience of a firm in a particular host

country contributes to the development of new knowledge and capabilities, and

this development influences a firm's strategy and performance (Beamish and

Delios, 2001) However, knowledge and capabilities tend to be specific to the host

country in which the experience was acquired

Hence, knowledge generated in one context has less applicability when transferred

across borders (Barkema et al., 1997; Johanson & Vahlne, 1977, Madhok, 1997)

Shaver, Mitchell and Yeung (1997) also study the relationship between

organizational learning and the likelihood of survival of firms The probability of

survival is greater if the firm has acquired knowledge in that country through

previous experience and if there are previous foreign entrants in that industry The

presence of foreign firms creates knowledge spillovers that new entrants can

benefit from However, the amount of learning depends upon the amount of

previous experience the firm has in that particular host country Host country

experience generates general knowledge and capabilities applicable to the local

environment, multinational firms that have accumulated host country experience

reduce the scope of their competitive disadvantage and face fewer operational

difficulties in the local market hence improving the chances of survival (Beamish

and Delios 2001) They are also capable of using the information spillovers

created by previous entrants However greater previous experience, leads to poor

additional learning from the experience of previous foreign entrants

Mitchell, Shaver, and Yeung (1994) test the relationship between the presence of

foreign players in a market and the likelihood of survival amongst start-up of 31

Canadian firms entering 24 American medical sector markets They find that

moderate foreign presence decreased the dissolution rate of foreign entrants rather

than high or low presence

As mentioned earlier, very few studies have been conducted to study the survival

rates of firms from a developing country Wells (1998) notes that because research

was being conducted as the firms were internationalizing there is not much sense

about what type of firms ‘survive.’ A few studies conducted in the LDC

environment study the survival of foreign firms from developed countries in the

LDC environment

In the following section, I summarize the literature review and develop the

theoretical framework based on the literature review This theoretical framework

describes the conceptual underpinnings of the study and forms the basis for the

development of the hypotheses to test the relationships between the factors that

are expected to influence survival of international ventures of emerging economy

multinationals

2.5 Summary

The theories of FDI explain the motivations for internationalization of a firm

Firms must possess absolute monopolistic advantages, which motivate their entry

into foreign markets Several authors (Lall, 1982; Erramilli, Agarwal and Kim,

1997) note that the competitive advantages of emerging economy multinationals

differ from those of developed country multinationals Previous literature on Third

World Multinationals (Heenan and Keegan, 1979; Kumar, 1982; Wells 1983,

Yeung 1988) suggests that these firms do not possess an absolute monopolistic

advantage like proprietary technology, unique production knowledge, or brand

names which may motivate their entry into other countries, but a range of

advantages like labor intensive and small scale manufacturing, low cost of

establishment and production, and machinery and managerial skills customized to

the LDC environment Therefore instead of a monopolistic advantage sustaining

the internationalization of the firm as suggested by Hymer (1960) authors predict

several firm level factors to give rise to oligopolistic advantages (Wong, 1985)

Several researchers have conducted studies to understand the nature of these

oligopolistic advantages, which assist in overcoming the cost of foreignness and

result in a competitive advantage These firm specific resources may arise due to

the characteristics of the home country (Dunning, 1980; Erramilli, Agarwal, Kim,

1997) Business Groups are an important organizational form for firms from

emerging economies (Yiu, Bruton, and Liu, 2005) and evolve due to the

institutional environment of these countries (Khanna and Palepu, 1997) Lall

(1982) states that the advantages significant for Indian Multinationals are their

large size, conglomerate identity, access to domestic capital markets, political

muscle, efficient and aggressive management These are the characteristics of

large dominant foreign investors and business groups Diversified business group

firms may be motivated to internationalize for several reasons, like access to

newer markets, sharing of technology, use of products manufactured by affiliates,

as production base for export and diversification of business risk or as a growth

strategy To test whether a firm specific resource like business group affiliation

exerts a positive influence on survival of the international ventures is the first

objective of the study

The development stage of the host country of Emerging Economy Multinationals

also plays a role in the survival of foreign subsidiaries, as firms from LDCs prefer

to enter institutionally proximate countries (Peng, 2002) In addition to this, Itaki

(1991) postulates that firm specific advantages can be considered inseparable from

location specific advantages Using examples, he suggests that whether a firm

specific characteristic is advantageous can be considered contingent on the

location of the firm’s subsidiaries Buckley (1988) also notes that in the case of

low technology firms, often ownership advantages are not sufficient in sustaining

the internationalization Lall (1982) reviews the ownership and location specific

advantages of Third World Multinationals and finds that firstly, they differ from

developed country multinationals, and secondly, each alone is not sufficient in

explaining the internationalization phenomenon Based on this literature, I expect

that firm specific resources of these firms will be contingent on the location and

the interaction of ownership and location related advantages would improve the

probability of survival of foreign ventures of firms from an emerging economy

The theoretical framework that has been discussed in this chapter forms the basis

of the hypotheses development described in the next chapter The relationships

between the main covariates are shown in Figure 2 attached at the end of this

research

CHAPTER 3 HYPOTHESES DEVELOPMENT

This chapter discusses the hypotheses, which establish the expected relationship

between the probability of survival or rate of exit of foreign ventures of emerging

economy multinationals and various factors expected to influence survival These

hypotheses are developed based on the theoretical and empirical literature

discussed in the literature review in the previous chapter

The first two hypotheses discuss the influence of business group affiliation and

location on the probability of survival of firms that are internationalizing

Hypothesis 3 discusses the interaction effect of these variables Other factors

expected to influence the probability of survival of foreign ventures of

multinational firms from a less developed country are discussed in the remainder

portion of this chapter

3.1 Business Group Affiliation and Survival of Subsidiaries

According to Hoskisson et al (2004), the competencies of emerging economy

MNEs develop in an environment of less munificence, with a lack of strong

market institutions, shortage of raw materials and qualified work force, poor

access to technological inputs and poor intellectual property rights Firms from

emerging economies overcome these problems related to a weak institutional

environment by organizing themselves into large diversified Business Groups

in the absence of well-developed market institutions (Khanna and Palepu, 1997)

and are an important organizational form in emerging economies

As discussed in the literature review, a firm specific characteristic like Business

Group affiliation may accrue several advantages to a firm Some of these

advantages are (1) an internationally recognized brand name and group

advertising (2) equity capital to invest in international markets and cross subsidize

activities (3) political influence (4) decreased transaction costs by internal

exchange of goods and other benefits Diversified firms have large heterogeneous

asset bases and a large pool of talent, which may assist in internationalization and

improve their chances of survival Business Group affiliated firms may also be

motivated to invest internationally for reasons such as sharing of technology, use

of products manufactured by affiliates, as production base for export and

diversification of business risk etc

Wan (2005) postulates that the competitive strength of diversified firms are

essentially institution based and principally based on their capabilities in fostering

social ties among a small, closed group of economic or political actor These

capabilities are localized in nature and are likely to dissipate in foreign countries

because firms cannot transfer their non-market capabilities to other countries

Wright et al.(2005) suggest that business groups from emerging economies with

unrelated diversification engaged in exploration rather than exploitation of

knowledge in developed economies will be less successful than business groups

that have a network structure or related diversification structure Guillen (2000)

notes that many of the resources of large business groups may be situation specific

and develop due to the relative underdevelopment of the institutional environment

of their home country

However, anecdotal evidence (Encarnation 1982; Lall, 1982) suggests that

conglomerate identity plays an important role in the internationalization and

survival of firms, leading to the interesting question discussed by Hu (1995)

regarding the transferability of firm’s domestic advantages Hu (1995) questions

the link between a firm’s home advantage and its advantages internationally He

studies the transferability of firm specific resources that develop in the domestic

context, which is an under-explored area of the competitive advantage paradigm

Based on the literature review, I expect that business group affiliation will be an

important factor in the successful internationalization and subsequent survival of

foreign venture for firms from an emerging economy like India Studies conducted

on the internationalization of firms from the Indian Sub-continent by various

authors (Encarnation, 1982; Lall, 1982) finds that business group affiliated firms

are more successful in surviving the initial pitfalls associated with

internationalization than non-business group firms Therefore, I expect that firms

that are associated with a business group will have a lower rate of exit than firms

that are not affiliated to a business group Hypothesis 1 describes this expected

relationship between business group affiliation and the hazard rate or rate of exit

of foreign subsidiaries of emerging economy multinationals