Skip to main content
SpringerLink
Log in

Rapid FDI expansion and firm performance

  • Article
  • Published:
Journal of International Business Studies Aims and scope Submit manuscript

Abstract

Today, more firms are expanding rapidly into foreign markets to reach global scale quickly, and to capture or nullify first-mover advantages. These trends run counter to the conventional theory of gradual internationalization, which suggests that firms maximize the benefits of learning from prior experience, thereby minimizing the hazard of failure. We argue that this conventional wisdom does not consider the risk of being a perennial late mover in the face of increased global competition. This study explores the circumstances under which rapid FDI expansion, a strategy of undertaking FDI expansion at an accelerated speed, can be a viable strategy. Using data on Korean firm expansion, we find that rapid FDI expansion enhances firm performance in industries where globalization pressures are high, and when it is done by firms with superior internal resources and capabilities.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1
Figure 2

Similar content being viewed by others

Notes

  1. A contrasting approach views multinational firms as efficient agents for transferring resources, thus minimizing transaction costs (Buckley & Casson, 1976; Hennart, 1982, 1991; Rugman, 1981).

  2. Firms often make subsequent investments in countries where they have already invested (Chang, 1995; Kogut, 1983; Kogut & Chang, 1996). We do not include those within-country FDI expansions in this study.

  3. See the home pages of Hyundai and Kia Motors (http://www.hyundai.com and http://www.kia.co.kr).

  4. As we have financial data for 1980–2003, we use the 2-year average for firms in the year of 1980. We perform a robustness test by using the performance, measured at time t+1, to avoid the possibility of reverse causality. The results are consistent with the 3-year average, although the R2 values are lower, owing to yearly fluctuation. We also perform a robustness test by using the count of exits at the firm level or the exit hazard at the individual subsidiary level as a dependent variable (Shaver, 1998; Shaver, Mitchell, & Yeung, 1997). The results from the negative binomial regressions of exit count at the firm level and the hazard model of exit decision at the individual subsidiary level are consistent with those using firm profitability.

  5. Alternatively, we also measure industry globalization based on the global integration index by Kobrin (1991). The results are consistent with those reported in this study.

  6. As speed is defined by the accumulated FDI count divided by duration of time since its first entry, we can include a combination of speed and the time since a firm's first entry or a combination of the number of foreign subsidiaries and the time since its first entry as independent variables. These results are consistent with those presented in the paper.

  7. Whereas Vermeulen and Barkema (2002) measure geographic scope with a number of different countries, our measure of geographic dispersion reflects physical distance in order to reflect the challenges in managing foreign subsidiaries in distant geographic locations. In fact, we control for the number of foreign countries a firm is operating in at time t.

  8. We experiment with the interaction effect between speed and investment size. This effect is negatively significant, whereas the main effect of speed is weakly positive and significant. These results suggest that speed's main effect on firm performance can be positive, but it may also lead to poor performance when a firm pursues rapid FDI expansion with large investments. We experiment with other interaction effects of speed with geographic distance, cultural distance, and whether the subsidiary was wholly owned. These effects are generally insignificant. The results are available on request.

  9. We cannot show the F-statistics in models in Table 3, where we use robust standard errors. When some firms appear only once in the data, the robust covariance matrix does not have a full rank, and an overall model F-statistic cannot be computed. Thus, we have to run regressions without clustering option, and calculate the improvement of a model fit between Model 1 (without interaction terms) and the rest of models (with interaction terms). The F-tests confirm improvement of a fit of Models 2–4 over Model 1 at the 5% significance level.

References

  • Andrews, K. 1971. The concept of corporate strategy. Homewood, IL: Irwin.

    Google Scholar 

  • Arrow, K. 1962. The economic implications of learning by doing. Review of Economic Studies, 29 (3): 155–173.

    Article  Google Scholar 

  • Baker, T., Miner, A., & Eesley, D. 2003. Improvising firms: Bricolage, account giving and improvisational competencies in the founding process. Research Policy, 32 (2): 255–276.

    Article  Google Scholar 

  • Barkema, H., & Drogendijk, R. 2007. Internationalising in small, incremental or larger steps? Journal of International Business Studies, 38 (7): 1132–1148.

    Article  Google Scholar 

  • Barkema, H., Bell, J., & Pennings, J. 1996. Foreign entry, cultural barriers, and learning. Strategic Management Journal, 17 (2): 151–166.

    Article  Google Scholar 

  • Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17 (1): 99–120.

    Article  Google Scholar 

  • Bourgeois, L. 1981. On the measurement of organizational slack. Academy of Management Review, 6 (1): 29–39.

    Google Scholar 

  • Bourgeois, L., & Singh, V. 1983. Organizational slack and political behavior within top management groups. Academy of Management Proceedings: 43–49.

  • Boyd, J. L., & Bresser, R. K. 2008. Performance implications of delayed competitive responses: Evidence from the US retail industry. Strategic Management Journal, 29 (10): 1077–1096.

    Article  Google Scholar 

  • Bromiley, P. 1991. Testing a causal model of corporate risk taking and performance. Academy of Management Journal, 34 (1): 37–59.

    Article  Google Scholar 

  • Buckley, P., & Casson, M. 1976. The future of the multinational enterprise. London: Macmillan.

    Book  Google Scholar 

  • Buckley, P., & Ghauri, P. 2004. Globalization, economic geography and the strategy of multinational enterprises. Journal of International Business Studies, 35 (2): 81–98.

    Article  Google Scholar 

  • Carow, K., Heron, R., & Saxton, T. 2004. Do early birds get the returns? An empirical investigation of early-mover advantages in acquisitions. Strategic Management Journal, 25 (6): 563–585.

    Article  Google Scholar 

  • Caves, R. 1971. International corporations: The industrial economics of foreign investment. Economica, 38 (149): 1–27.

    Article  Google Scholar 

  • Caves, R. 1982. Multinational enterprise and economic analysis. Cambridge: Cambridge University Press.

    Google Scholar 

  • Cha, D., Kim, K., & Perkins, D. 1997. The Korean economy 1945–1995: Performance and vision for the 21st century. Seoul: The KDI Press.

    Google Scholar 

  • Chang, S. J. 1995. International expansion strategy of Japanese firms: Capability building through sequential entry. Academy of Management Journal, 38 (2): 383–407.

    Article  Google Scholar 

  • Chang, S. J. 2003. Financial crisis and transformation of Korean business groups. New York: Cambridge University Press.

    Book  Google Scholar 

  • Chen, M. -J. 1996. Competitor analysis and interfirm rivalry: Toward a theoretical integration. Academy of Management Review, 21 (2): 100–134.

    Google Scholar 

  • Chen, M. -J., & MacMillan, I. 1992. Nonresponse and delayed response to competitive moves: The roles of competitor dependence and action irreversibility. Academy of Management Journal, 35 (3): 539–571.

    Article  Google Scholar 

  • Cockburn, I., Henderson, R., & Stern, S. 2000. Untangling the origins of competitive advantage. Strategic Management Journal, 21 (10–11): 1123–1145.

    Article  Google Scholar 

  • Cohen, M., Eliashberg, J., & Ho, T. H. 1996. New product development: The performance and time-to-market tradeoff. Management Science, 42 (2): 173–186.

    Article  Google Scholar 

  • Cohen, W., & Levinthal, D. 1990. Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35 (1): 128–152.

    Article  Google Scholar 

  • Cyert, R., & March, J. 1963. The behavioral theory of the firm. Englewood Cliffs, NJ: Prentice Hall.

    Google Scholar 

  • Davidson, W. 1980. The location of foreign direct investment activity: Country characteristics and experience effects. Journal of International Business Studies, 11 (2): 9–22.

    Article  Google Scholar 

  • Dierickx, I., & Cool, K. 1989. Asset stock accumulation and sustainability of competitive advantage. Management Science, 35 (12): 1504–1513.

    Article  Google Scholar 

  • Dunning, J. 1988. The eclectic paradigm of international production: A restatement and some possible extensions. Journal of International Business Studies, 19 (1): 1–31.

    Article  Google Scholar 

  • Economist. 1999. The death of Daewoo. 19 August.

  • Froot, K., Scharfstein, D., & Stein, J. 1994. A framework for risk management. Journal of Applied Corporate Finance, 7 (3): 22–33.

    Article  Google Scholar 

  • Fuentelsaz, L., Gomez, J., & Polo, Y. 2002. Followers’ entry timing: Evidence from the Spanish banking sector after deregulation. Strategic Management Journal, 23 (3): 245–264.

    Article  Google Scholar 

  • George, G. 2005. Slack resources and the performance of privately held firms. Academy of Management Journal, 48 (4): 661–676.

    Article  Google Scholar 

  • Graham, E. 1978. Transatlantic investment by multinational firms: A rivalistic phenomenon. Journal of Post-Keynesian Economics, 1 (1): 82–99.

    Article  Google Scholar 

  • Hennart, J. -F. 1982. The theory of the multinational enterprise. Ann Arbor: University of Michigan Press.

    Google Scholar 

  • Hennart, J. -F. 1991. The transaction costs theory of joint ventures: An empirical study of Japanese subsidiaries in the United States. Management Science, 37 (4): 483–497.

    Article  Google Scholar 

  • Hsiao, C. 1986. Analysis of panel data. New York: Cambridge University Press.

    Google Scholar 

  • Hymer, S. 1960. The international operations of national firms: A study of direct foreign investment. Cambridge, MA: MIT Press.

    Google Scholar 

  • Ito, K., & Rose, E. 2002. Foreign direct investment location strategies in the tire industry. Journal of International Business Studies, 33 (3): 593–602.

    Article  Google Scholar 

  • Johanson, J., & Wiedersheim-Paul, F. 1975. The internationalization of the firm: Four Swedish cases. Journal of Management Studies, 12 (3): 305–322.

    Article  Google Scholar 

  • Knickerbocker, F. 1973. Oligopolistic reaction and the multinational enterprise. Cambridge, MA: Harvard University Press.

    Google Scholar 

  • Knight, G., & Cavusgil, S. 2004. Innovation, organizational capabilities, and the born-global firm. Journal of International Business Studies, 35 (2): 124–141.

    Article  Google Scholar 

  • Knight, G., Madsen, T., & Servais, P. 2004. An inquiry into born-global firms in Europe and the USA. International Marketing Review, 21 (6): 645–665.

    Article  Google Scholar 

  • Kobrin, S. 1991. An empirical analysis of the determinants of global integration. Strategic Management Journal, 12 (Summer Special Issue): 17–31.

    Article  Google Scholar 

  • Kogut, B. 1983. Foreign direct investment as a sequential process. In C.P. Kindleberger & D. Audretsch (Eds), The multinational corporation in the 1980s: 35–56. Cambridge, MA: MIT Press.

    Google Scholar 

  • Kogut, B. 1985. Designing global strategies: Profiting from operating flexibility. Sloan Management Review, 27 (1): 27–38.

    Google Scholar 

  • Kogut, B., & Chang, S. J. 1991. Technological capabilities and Japanese foreign direct investment in the United States. Review of Economics and Statistics, 73 (3): 401–413.

    Article  Google Scholar 

  • Kogut, B., & Chang, S. J. 1996. Platform investments and volatile exchange rates: Direct investment in the US by Japanese electronic companies. Review of Economics and Statistics, 78 (2): 221–231.

    Article  Google Scholar 

  • Kogut, B., & Singh, H. 1988. The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19 (3): 411–432.

    Article  Google Scholar 

  • Lambkin, M. 1988. Order of entry and performance in new markets. Strategic Management Journal, 9 (Summer Special Issue): 127–140.

    Article  Google Scholar 

  • Lee, G. 2008. Relevance of organizational capabilities and its dynamics: What to learn from entrants’ product portfolios about the determinants of entry timing. Strategic Management Journal, 29 (12): 1257–1280.

    Article  Google Scholar 

  • Lee, H., Smith, K., Grimm, C., & Schomburg, A. 2000. Timing, order and durability of new product advantages with imitation. Strategic Management Journal, 21 (1): 23–30.

    Article  Google Scholar 

  • Levinthal, D. 1997. Adaptation on rugged landscapes. Management Science, 43 (7): 934–950.

    Article  Google Scholar 

  • Lieberman, M., & Montgomery, D. 1988. First-mover advantages. Strategic Management Journal, 9 (Summer Special Issue): 41–58.

    Article  Google Scholar 

  • Lopez, L., Kundu, S., & Ciravegna, L. 2009. Born global or born regional? Evidence from an exploratory study in the Costa Rican software industry. Journal of International Business Studies, 40 (7): 1228–1238.

    Article  Google Scholar 

  • Makadok, R. 1998. Can first-mover and early-mover advantages be sustained in an industry with low barriers to entry/imitation? Strategic Management Journal, 19 (7): 683–696.

    Article  Google Scholar 

  • Makhija, M., Kim, K., & Williamson, S. D. 1997. Measuring globalization of industries using a national industry approach: Empirical evidence across five countries and over time. Journal of International Business Studies, 28 (4): 679–710.

    Article  Google Scholar 

  • Mascarenhas, B. 1992. Order of entry and performance in international markets. Strategic Management Journal, 13 (7): 499–510.

    Article  Google Scholar 

  • McDougall, P. 1989. International versus domestic entrepreneurship: New venture strategic behavior and industry structure. Journal of Business Venturing, 4 (6): 387–400.

    Article  Google Scholar 

  • Melin, L. 1992. Internationalization as a strategy process. Strategic Management Journal, 13 (Winter Special Issue): 99–118.

    Article  Google Scholar 

  • Mitchell, W. 1991. Dual clocks: Entry order influences on incumbent and newcomer market share and survival when specialized assets retain their value. Strategic Management Journal, 12 (2): 85–100.

    Article  Google Scholar 

  • Mitchell, W., Shaver, M., & Yeung, B. 1992. Getting there in a global industry: Impacts on performance of changing international presence. Strategic Management Journal, 13 (6): 410–432.

    Article  Google Scholar 

  • Mitchell, W., Shaver, M., & Yeung, B. 1994. Foreign entrant survival and foreign market share: Canadian companies’ experience in United States medical sector markets. Strategic Management Journal, 15 (7): 555–567.

    Article  Google Scholar 

  • Moen, O. 2002. The born globals: A new generation of small European exporters. International Marketing Review, 19 (2): 156–175.

    Article  Google Scholar 

  • Morck, R., & Yeung, B. 1991. Why investors value multinationality. Journal of Business, 64 (2): 165–187.

    Article  Google Scholar 

  • Morck, R., & Yeung, B. 1992. Internalization: An event study test. Journal of International Economics, 33 (1–2): 41–56.

    Article  Google Scholar 

  • Nohria, N., & Gulati, R. 1996. Is slack good or bad for innovation? Academy of Management Journal, 39 (5): 1245–1264.

    Article  Google Scholar 

  • Pacheco-de-Almeida, G., Hawk, A., & Yeung, B. 2010. Speed and Tobin's q, Working paper, New York University.

  • Penrose, E. 1959. The theory of the growth of the firm. New York: Wiley.

    Google Scholar 

  • Porter, M. 1980. Competitive strategy. New York: Free Press.

    Google Scholar 

  • Riolli-Saltzman, L., & Luthans, F. 2001. After the bubble burst: How small high-tech firms can keep in front of the wave. Academy of Management Executive, 15 (3): 114–124.

    Article  Google Scholar 

  • Rugman, A. 1981. Inside the multinationals: The economies of internal markets. London: Croom Helm.

    Google Scholar 

  • Salomon, R., & Martin, X. 2008. Learning, knowledge transfer, and technology implementation performance: A study of time-to-build in the global semiconductor industry. Management Science, 54 (7): 1266–1280.

    Article  Google Scholar 

  • Schoenecker, T., & Cooper, A. 1998. The role of firm resources and organizational attributes in determining entry timing: A cross-industry study. Strategic Management Journal, 19 (12): 1127–1143.

    Article  Google Scholar 

  • Shaver, M. 1998. Do foreign-owned and US-owned establishments exhibit the same location pattern in US manufacturing industries? Journal of International Business Studies, 29 (3): 469–492.

    Article  Google Scholar 

  • Shaver, M., Mitchell, W., & Yeung, B. 1997. The effect of own-firm and other-firm experience on foreign direct investment survival in the United States, 1987–92. Strategic Management Journal, 18 (10): 811–824.

    Article  Google Scholar 

  • Shrader, R., Oviatt, B., & McDougall, P. 2000. How new ventures exploit trade-offs among international risk factors: Lessons for the accelerated internationalization of the 21st century. Academy of Management Journal, 43 (6): 1227–1247.

    Article  Google Scholar 

  • Singh, T. V. 1986. Performance, slack, and risk taking in organizational decision making. Academy of Management Journal, 29 (3): 562–585.

    Article  Google Scholar 

  • Song, X., Di Benedetto, C., & Zhao, Y. 1999. Pioneering advantages in manufacturing and service industries: Empirical evidence from nine countries. Strategic Management Journal, 20 (9): 811–836.

    Article  Google Scholar 

  • Spanos, Y., Zaralis, G., & Lioukas, S. 2004. Strategy and industry effects on profitability: Evidence from Greece. Strategic Management Journal, 25 (2): 139–165.

    Article  Google Scholar 

  • Stalk, G. 1988. Time: The next source of competitive advantage. Harvard Business Review, 66 (4): 41–51.

    Google Scholar 

  • Starr, J., & MacMillan, I. 1990. Resource cooptation via social contracting: Resource acquisition strategies for new ventures. Strategic Management Journal, 11 (4): 79–92.

    Google Scholar 

  • Stinchcombe, A. 1965. Social structure and organizations. In J.G. March (Ed), Handbook of organizations: 142–193. Chicago: Rand McNally.

    Google Scholar 

  • Tan, J., & Peng, M. W. 2003. Organizational slack and firm performance during economic transitions: Two studies from an emerging economy. Strategic Management Journal, 24 (13): 1249–1263.

    Article  Google Scholar 

  • Vermeulen, F., & Barkema, H. 2002. Pace, rhythm, and scope: Process dependence in building a profitable multinational corporation. Strategic Management Journal, 23 (7): 637–653.

    Article  Google Scholar 

  • Voss, G., Sirdeshmukh, D., & Voss, Z. 2008. The effects of slack resources and environmental threat on product exploration and exploitation. Academy of Management Journal, 51 (1): 147–164.

    Article  Google Scholar 

  • Wernerfelt, B. 1984. A resource-based view of the firm. Strategic Management Journal, 5 (2): 171–180.

    Article  Google Scholar 

  • Wiersema, M., & Bowen, H. 2008. Corporate diversification: The impact of foreign competition, industry globalization, and product diversification. Strategic Management Journal, 29 (2): 115–132.

    Article  Google Scholar 

  • Wooldridge, J. M. 2002. Econometric analysis of cross section and panel data. Cambridge, MA: MIT Press.

    Google Scholar 

  • Yu, C. 1990. The experience effect and foreign direct investment. Weltwirtschaftliches Archiv, 126 (3): 560–579.

    Article  Google Scholar 

  • Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38 (2): 341–363.

    Article  Google Scholar 

  • Zahra, S., Ireland, R., & Hitt, M. 2000. International expansion by new venture firms: International diversity, mode of market entry, technological learning, and performance. Academy of Management Journal, 43 (5): 925–950.

    Article  Google Scholar 

  • Zajac, E., & Bazerman, M. 1991. Blind spots in industry and competitor analysis: Implications of interfirm (mis)perceptions for strategic decisions. Academy of Management Journal, 16 (1): 37–56.

    Google Scholar 

Download references

Acknowledgements

We thank two anonymous reviewers and the Area Editor, Myles Shaver, for helpful comments and suggestions. We also thank Hyesun Kang, Gihyuk Shin, and Katie Brown for excellent research assistance. Sea-Jin Chang appreciates financial support from the National University of Singapore, Research Grant No. R313-000-086-133. Jay Hyuk Rhee appreciates financial support from the SK Research Fund, Korea University Business School.

Author information

Authors and Affiliations

  1. NUS Business School, National University of Singapore, Singapore

    Sea-Jin Chang

  2. School of Business Administration, Korea University, Seoul, Korea

    Jay Hyuk Rhee

Authors
  1. Sea-Jin Chang
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Jay Hyuk Rhee
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Sea-Jin Chang.

Additional information

Accepted by Myles Shaver, Consulting Editor, 23 May 2011. This paper has been with the authors for three revisions.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Chang, SJ., Rhee, J. Rapid FDI expansion and firm performance. J Int Bus Stud 42, 979–994 (2011). https://doi.org/10.1057/jibs.2011.30

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/jibs.2011.30

Keywords

Search

Navigation