Skip to main content
SpringerLink
Log in

Country-of-origin and industry FDI agglomeration of foreign investors in an emerging economy

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

Abstract

Foreign investors access local knowledge by co-locating with other foreign direct investment (FDI) firms. However, different aspects of local knowledge can be obtained from different local businesses. Thus some foreign investors co-locate with FDI firms from the same country of origin, while others co-locate with foreign industry peers. We argue that, relative to industry FDI agglomeration, country-of-origin agglomeration provides an effective channel for the sharing of sensitive and tacit knowledge about local business environments. Therefore foreign investors in need of such local knowledge are more likely to locate in country-of-origin agglomerations. Empirical evidence based on FDI in Vietnam indicates that foreign investors who perceive local institutions as particularly weak, and those with a high degree of outsidership in the local environment, are more likely to seek country-of-origin agglomerations than industry FDI agglomerations.

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

Similar content being viewed by others

Notes

  1. Exceptions are the studies by Filatotchev, Strange, Piesse, and Lien (2007) and Strange, Filatotchev, Lien, and Piesse (2009), which find that an investor’s equity share in its overseas affiliate increases with its economic and cultural links with the affiliate’s location. Another exception is found in Meyer and Nguyen (2005), who show that an investor’s use of the greenfield entry mode increases with the development of market-supporting institutions in a local market.

  2. In emerging economies, indigenous firms are less likely to be major sources of local knowledge for foreign investors, because they are typically technologically backward. In some cases, foreign investors entering emerging economies may deliberately avoid locating near indigenous firms to prevent knowledge leakage.

  3. We thank an anonymous reviewer for this insight.

  4. We obtained consistent findings when we included the entire set of locations in the model estimation.

  5. In the case of acquisitions, location choice largely follows the location of the acquired firm, such that there is no “location decision” of the sort that is analyzed in this study. The proportion of acquisitions in the sample is small, because legal constraints made them very difficult to implement before the time of the survey. The partial acquisitions in the sample were, in fact, established through the creation of a JV and the transfer of the local firms’ operations to the new legal entity.

  6. For a given foreign entrant in our sample, the average number of same country & industry FDI activity is 0.45. This figure is relatively low compared with the average number of same country FDI activity (7.45) or the average number of same industry FDI activity (1.87). Although the figure appears small, it is highly correlated with same country FDI activity (ρ=0.68) and with same industry FDI activity (ρ=0.52), indicating that factors leading to a foreign investor’s choice to co-locate with compatriots or foreign industry peers also lead the investor to co-locate with FDI firms from the same industry and in the same industry if such a choice is available. As we are unable to disentangle the factors that lead to either country-of-origin agglomeration or industry FDI agglomeration, we leave the variable out of the estimation, to avoid multicollinearity.

  7. An investor’s perception may change several years after entry. To reduce memory bias, we explicitly asked respondents to rate the environment at two points in time (initial entry and current), and used only the value related to the initial entry for this study.

  8. We do not include firm-level control variables in the specification. As they do not vary across alternatives, their effects cannot be estimated using a conditional logit formulation (Shaver & Flyer, 2000).

  9. Given the limited sample size, we use two-year intervals rather than one-year intervals. For instance, for the location, Hanoi, there are four Hanoi-specific time trends: Hanoi 93–94, Hanoi 95–96, Hanoi 97–98, and Hanoi 99–00. We remove province-specific time trends in which there are no investors entering the province within the time interval.

  10. Splitting the sample based on the median value of institution yields identical results.

References

  • Adler, P., & Kwon, S. W. 2002. Social capital: Prospects for a new concept. Academy of Management Review, 27 (1): 17–40.

    Google Scholar 

  • Ai, C., & Norton, E. C. 2003. Interaction terms in logit and probit models. Economics Letters, 80 (1): 123–129.

    Article  Google Scholar 

  • Almeida, P., & Kogut, B. 1997. The exploration of technological diversity and the geographic localization in innovation: Start-up firms in the semiconductor industry. Small Business Economics, 9 (1): 21–31.

    Article  Google Scholar 

  • Anand, J., & Delios, A. 2002. Absolute and relative resources as determinants of international acquisitions. Strategic Management Journal, 23 (2): 119–134.

    Article  Google Scholar 

  • Bresman, H., Birkinshaw, J., & Nobel, R. 2010. Knowledge transfer in international acquisitions. Journal of International Business Studies, 41 (1): 5–20.

    Article  Google Scholar 

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

    Book  Google Scholar 

  • Chang, S.-J., & Park, S. 2005. Types of firms generating network externalities and MNCs’ co-location decisions. Strategic Management Journal, 26 (7): 595–615.

    Article  Google Scholar 

  • Chung, W., & Alcácer, J. 2002. Knowledge seeking and location choice of foreign direct investment in the United States. Management Science, 48 (12): 1534–1554.

    Article  Google Scholar 

  • Chung, W., & Song, J. 2004. Sequential investment, firm motives, and agglomeration of Japanese electronics firms in the United States. Journal of Economics and Management Strategy, 13 (3): 539–560.

    Article  Google Scholar 

  • Cuervo-Cazurra, A., Maloney, M. M., & Manrakhan, S. 2007. Causes of the difficulties in internationalization. Journal of International Business Studies, 38 (5): 709–725.

    Article  Google Scholar 

  • Dhanaraj, C., Lyles, M. A., Steensma, H. K., & Tihanyi, L. 2004. Managing tacit and explicit knowledge transfer in IJVs: The role of relational embeddedness and the impact on performance. Journal of International Business Studies, 35 (5): 428–442.

    Article  Google Scholar 

  • Dunning, J. H. 1998. Location and the multinational enterprise: A neglected factor? Journal of International Business Studies, 29 (1): 45–66.

    Article  Google Scholar 

  • Feldman, D., & Bolino, M. 1999. The impact of on-site mentoring on expatriate socialization: A structural equation modelling approach. International Journal of Human Resource Management, 10 (1): 54–71.

    Article  Google Scholar 

  • Filatotchev, I., Strange, R., Piesse, J., & Lien, Y.-C. 2007. FDI by firms from newly industrialized economies in emerging markets: Corporate governance, entry mode and location. Journal of International Business Studies, 38 (4): 556–572.

    Article  Google Scholar 

  • Folta, T. B., Cooper, A. C., & Baik, Y.-S. 2006. Geographical cluster size and firm performance. Journal of Business Venturing, 21 (2): 217–242.

    Article  Google Scholar 

  • Forman, C., Goldfarb, A., & Greenstein, S. 2008. Understanding the inputs into innovation: Do cities substitute for internal firm resources? Journal of Economics and Management Strategy, 17 (2): 295–316.

    Article  Google Scholar 

  • Ghemawat, P., & Thomas, C. 2008. Strategic interaction across countries and multinational agglomeration: An application to the cement industry. Management Science, 54 (12): 1980–1996.

    Article  Google Scholar 

  • Greene, W. H. 2003. Econometric analysis. New York: Macmillan.

    Google Scholar 

  • Hansen, M. T. 1999. The search-transfer problem: The role of weak ties in sharing knowledge across organizational subunits. Administrative Science Quarterly, 44 (1): 82–111.

    Article  Google Scholar 

  • Hansen, M. T., & Løvås, B. 2004. How do multinational companies leverage technological competencies? Moving from single to interdependent explanations. Strategic Management Journal, 25 (8–9): 801–822.

    Article  Google Scholar 

  • Hanson, G. 2000. Firms, workers, and the geographic concentration of economic activity. In G.L. Clark, M.P. Feldman, & M.S. Gertler (Eds), The Oxford handbook of economic geography: 477–494. New York: Oxford University Press.

    Google Scholar 

  • Hausman, J., & McFadden, D. 1984. Specification tests for the multinomial logit model. Econometrica, 52 (5): 1219–1240.

    Article  Google Scholar 

  • Head, K., & Ries, J. 1996. Inter-city competition for foreign investment: Static and dynamic effects of China's incentive areas. Journal of Urban Economics, 40 (1): 38–60.

    Article  Google Scholar 

  • Head, K., Ries, J., & Swenson, D. 1995. Agglomeration benefits and location choice: Evidence from Japanese manufacturing investments in the United States. Journal of International Economics, 38 (3–4): 223–247.

    Article  Google Scholar 

  • Head, K., Ries, J., & Swenson, D. 1999. Attracting foreign manufacturing: Investment promotion and agglomeration. Regional Science and Urban Studies, 29 (2): 197–216.

    Article  Google Scholar 

  • Hoetker, G. 2007. The use of logit and probit models in strategic management research: Critical issues. Strategic Management Journal, 28 (4): 331–343.

    Article  Google Scholar 

  • Hymer, S. H. 1968. The large multinational “corporation”. In M. Casson (Ed.), Multinational corporations: 6–31. London: Edward Elgar.

    Google Scholar 

  • Johanson, J., & Vahlne, J.-E. 1977. The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8 (1): 23–32.

    Article  Google Scholar 

  • Johanson, J., & Vahlne, J.-E. 2009. The Uppsala internationalization model revisited: From liability of foreignness to liability of outsidership. Journal of International Business Studies, 40 (9): 1411–1431.

    Article  Google Scholar 

  • Khanna, T., & Palepu, K. 2010. Winning in emerging markets. Cambridge, MA: Harvard Business School Press.

    Google Scholar 

  • Kostova, T. 1999. Transnational transfer of strategic organizational practices: A contextual perspective. Academy of Management Review, 24 (2): 308–324.

    Google Scholar 

  • Kostova, T., & Zaheer, S. 1999. Organizational legitimacy under conditions of complexity: The case of the multinational enterprise. Academy of Management Review, 24 (1): 64–81.

    Google Scholar 

  • Krugman, P. 1991. Increasing returns and economic geography. Journal of Political Economy, 99 (3): 483–499.

    Article  Google Scholar 

  • Lane, P. J., & Lubatkin, M. 1998. Relative absorptive capacity and interorganizational learning. Strategic Management Journal, 19 (5): 461–478.

    Article  Google Scholar 

  • Lane, P. J., Salk, J. E., & Lyles, M. A. 2001. Absorptive capacity, learning, and performance in international joint ventures. Strategic Management Journal, 22 (12): 1139–1161.

    Article  Google Scholar 

  • Li, P.-Y., & Meyer, K. E. 2009. Contextualizing experience effects in international business: A study of ownership strategies. Journal of World Business, 44 (4): 370–382.

    Article  Google Scholar 

  • Li, S. 2004. Location and performance of foreign firms in China. Management International Review, 44 (2): 151–169.

    Google Scholar 

  • Liker, J., Fruin, M., & Adler, P. S. 1999. Bringing Japanese management systems to the US: Transplantation or transformation? In J. Liker, M. Fruin, & P. Adler (Eds), Remade in America: Transplanting and transforming Japanese management systems: 3–38. New York: Cambridge University Press.

    Google Scholar 

  • Linehan, M. 2000. Senior female international managers: Why so few? Burlington, VT: Ashgate Publishing.

    Google Scholar 

  • Long, J. S. 1997. Regression models for categorical and limited dependent variables. Thousand Oaks, CA: Sage.

    Google Scholar 

  • Lord, M. D., & Ranft, A. L. 2000. Organizational learning about new international markets: Exploring the internal transfer of local market knowledge. Journal of International Business Studies, 31 (4): 573–589.

    Article  Google Scholar 

  • Luo, Y., & Peng, M. W. 1999. Learning to compete in a transition economy: Experience, environment, and performance. Journal of International Business Studies, 30 (2): 269–296.

    Article  Google Scholar 

  • Manev, I. M., & Stevenson, W. B. 2001. Nationality, cultural distance and expatriate status: Effects on the managerial network in a multinational enterprise. Journal of International Business Studies, 32 (2): 285–303.

    Article  Google Scholar 

  • Mariotti, S., & Piscitello, L. 1995. Information costs and location of FDIs within the host country: Empirical evidence from Italy. Journal of International Business Studies, 26 (4): 815.

    Article  Google Scholar 

  • Marsden, P. 1990. Network data and measurement. Annual Review of Sociology, 16: 435–463.

    Article  Google Scholar 

  • Marshall, A. 1920. Principles of economics, (8th ed.). London: Macmillan.

    Google Scholar 

  • McCann, B. T., & Folta, T. B. 2008. Location matters: Where we have been and where we might go in agglomeration research. Journal of Management, 34 (3): 532–565.

    Article  Google Scholar 

  • McFadden, D. 1974. Conditional logit analysis of qualitative choice behavior. In P. Zarembka (Ed.), Frontiers in econometrics: 105–142. New York: Academic Press.

    Google Scholar 

  • Meyer, K. E., & Nguyen, H. V. 2005. Foreign investment strategies and sub-national institutions in emerging markets: Evidence from Vietnam. Journal of Management Studies, 42 (1): 63–93.

    Article  Google Scholar 

  • Meyer, K. E., & Peng, M. W. 2005. Probing theoretically into central and Eastern Europe: Transactions, resources and institutions. Journal of International Business Studies, 36 (6): 600–621.

    Article  Google Scholar 

  • Meyer, K. E., Estrin, S., Bhaumik, S. K., & Peng, M. W. 2009a. Institutions, resources, and entry strategies in emerging economies. Strategic Management Journal, 30 (1): 61–80.

    Article  Google Scholar 

  • Meyer, K. E., Wright, M., & Pruthi, S. 2009b. Managing knowledge in foreign entry strategies: A resource-based analysis. Strategic Management Journal, 30 (5): 557–574.

    Article  Google Scholar 

  • Miller, S. R., Thomas, D. E., Eden, L., & Hitt, M. 2008. Knee deep in the big muddy: The survival of emerging market firms in developed markets. Management International Review, 48 (6): 645–665.

    Article  Google Scholar 

  • Mitchell, W., Shaver, J. 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 

  • Nachum, L., & Wymbs, C. 2005. Product differentiation, external economies and MNE location choices: M&As in global cities. Journal of International Business Studies, 36 (4): 415–434.

    Article  Google Scholar 

  • Owen-Smith, J., & Powell, W. W. 2004. Knowledge networks as channels and conduits: The effects of spillovers in the Boston biotechnology community. Organization Science, 15 (1): 5–21.

    Article  Google Scholar 

  • Parkhe, A. 1991. Interfirm diversify, organizational learning and longevity in global strategic alliances. Journal of International Business Studies, 22 (4): 579–602.

    Article  Google Scholar 

  • Peng, M. W., Wang, D., & Jiang, Y. 2008. An institution-based view of international business strategy: A focus on emerging economies. Journal of International Business Studies, 39 (5): 920–936.

    Article  Google Scholar 

  • Pérez-Nordtvedt, L., Kedia, B. L., Datta, D. K., & Rasheed, A. A. 2008. Effectiveness and efficiency of cross-border knowledge transfer: An empirical examination. Journal of Management Studies, 45 (4): 714–744.

    Article  Google Scholar 

  • Polanyi, M. 1962. Personal knowledge. Chicago, IL: University of Chicago Press.

    Google Scholar 

  • Porter, M. E. 1998. Clusters and the new economics of competition. Harvard Business Review, 76 (6): 77–90.

    Google Scholar 

  • Pouder, R., & St John, C. H. 1996. Hot spots and blind spots: Geographical clusters of firms and innovation. Academy of Management Journal, 21 (4): 1192–1225.

    Google Scholar 

  • Saxenian, A. 1994. Regional advantage. Cambridge, MA: Harvard University Press.

    Google Scholar 

  • Shaver, J. M. 1998. Accounting for endogeneity when assessing strategy performance: Does entry mode choice affect FDI survival? Management Science, 44 (4): 571–585.

    Article  Google Scholar 

  • Shaver, J. M., & Flyer, F. 2000. Agglomeration economies, firm heterogeneity, and foreign direct investment in the United States. Strategic Management Journal, 21 (12): 1175–1193.

    Article  Google Scholar 

  • Shaver, J. 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 

  • Steensma, K., & Lyles, M. A. 2000. Explaining IJV survival in a transitional economy through social exchange and knowledge-based perspectives. Strategic Management Journal, 21 (8): 831–852.

    Article  Google Scholar 

  • Strange, R., Filatotchev, I., Lien, Y., & Piesse, J. 2009. Insider control and the FDI location decision: Evidence from firms investing in an emerging market. Management International Review, 49 (4): 433–454.

    Article  Google Scholar 

  • Szulanski, G. 1996. Exploring internal stickiness: Impediments to the transfer of best practice within the firm. Strategic Management Journal, 17 (special issue): 27–43.

    Article  Google Scholar 

  • Train, K. 1986. Qualitative choice analysis: Theory, econometrics, and an application to automobile demand. Cambridge, MA: MIT Press.

    Google Scholar 

  • Tsui-Auch, L. S., & Möllering, G. 2010. Wary managers: Unfavorable environments, perceived vulnerability, and the development of trust in foreign enterprises in China. Journal of International Business Studies, 41 (6): 1016–1035.

    Article  Google Scholar 

  • Tung, R. L. 1998. American expatriates abroad: From neophytes to cosmopolitans. Journal of World Business, 33 (2): 125–144.

    Article  Google Scholar 

  • Wang, X., & Kanungo, R. N. 2004. Nationality, social network, and psychological well-being: Expatriates in China. International Journal of Human Resource Management, 15 (4): 775–793.

    Article  Google Scholar 

  • Wei, Y., Liu, X., Parker, D., & Vaidya, K. 1999. The regional distribution of foreign direct investment in China. Regional Studies, 33 (9): 857–867.

    Article  Google Scholar 

  • Wright, M., Filatotchev, I., Hoskisson, R. E., & Peng, M. W. 2005. Strategy research in emerging economies: Challenging the conventional wisdom. Journal of Management Studies, 42 (1): 1–33.

    Article  Google Scholar 

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

    Article  Google Scholar 

Download references

Acknowledgements

Earlier versions of this paper were presented at the Academy of International Business Annual Meeting and the European International Business Academy Annual Meeting. The authors wish to thank Hung Vo Nguyen for permission to use the data from Meyer and Nguyen (2005). The authors also thank Department Editor Myles Shaver, three anonymous reviewers, Biing-Shen Kuo, Jean-Hong Tang, and Tina Pedersen for their comments and suggestions.

Author information

Authors and Affiliations

  1. Department of International Business, National Chengchi University, Taipei, Taiwan

    Danchi Tan

  2. School of Management, University of Bath, Bath, UK

    Klaus E Meyer

Authors
  1. Danchi Tan
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Klaus E Meyer
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Danchi Tan.

Additional information

Accepted by Myles Shaver, Consulting Editor, 19 November 2010. This paper has been with the authors for two revisions.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Tan, D., Meyer, K. Country-of-origin and industry FDI agglomeration of foreign investors in an emerging economy. J Int Bus Stud 42, 504–520 (2011). https://doi.org/10.1057/jibs.2011.4

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/jibs.2011.4

Keywords

Search

Navigation