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Attributes of Foreign Subsidiaries and The Location Strategy of Multinational Firms in Global Cities in Latin America PDF
Attributes of Foreign Subsidiaries and The Location Strategy of Multinational Firms in Global Cities in Latin America PDF
Paulo Kazuhiro Izumi, Pedro Carvalho Burnier, Mário Henrique Ogasavara &
Júlio César Bastos de Figueiredo
To cite this article: Paulo Kazuhiro Izumi, Pedro Carvalho Burnier, Mário Henrique Ogasavara
& Júlio César Bastos de Figueiredo (2017): Attributes of Foreign Subsidiaries and the Location
Strategy of Multinational Firms in Global Cities in Latin America, Latin American Business Review,
DOI: 10.1080/10978526.2017.1354707
none defined
particularly the city level. Through a binomial logistic regression Accepted 4 July 2017
of data from 254 foreign subsidiaries of 10 Latin American KEYWORDS
global cities between 2006 and 2012, we found that specific Foreign subsidiaries; global
attributes of the firm related to the industrial sector, subsidiary cities; Latin America;
control, and ownership level have a positive effect on the location strategy; subsidiary-
location choice in cities. In addition, we found that in the specific attributes
previous period and during the international financial crisis,
MNEs exploited their internalization advantages more intensely
by exerting greater control over their subsidiaries in global
cities.
RESUMEN
Las investigaciones sobre los negocios internacionales han
concentrado su atención en la dimensión subnacional de las
Empresas Multinacionales (MNEs, sigla en inglés), especialmente
al nivel de la ciudad. A través de la regresión logística
binomial basada en datos de 254 subsidiarias extranjeras de
diez ciudades globales latinoamericanas entre 2006–2012,
verificamos que ciertos atributos específicos de la empresa
relacionados al sector industrial, control de las subsidiarias y
nivel de propiedad afectan positivamente la selección de su
ubicación en las ciudades. Además, también constatamos que
en el período anterior y durante la crisis financiera internacional,
las MNEs aprovecharon con más firmeza las ventajas obtenidas
con la internacionalización, mediante control más riguroso de
sus subsidiarias situadas en ciudades globales.
RESUMO
As pesquisas em negócios internacionais têm voltado sua
atenção para a dimensão subnacional das MNEs (Empresas
Multinacionais, na sigla em inglês), em especial no nível de
cidade. Por meio de regressão logística binomial com dados
de 254 subsidiárias estrangeiras, em 10 cidades globais
latino-americanas, do período de 2006 a 2012, descobrimos
que atributos específicos de empresas relativos a setor
industrial, controle de subsidiária e nível de propriedade têm
efeito direto na escolha da localização nas cidades. Além
Introduction
The analysis of the interaction between specific attributes of multinational
enterprises (MNEs) and location decisions has received increasing attention
in international business studies (Alcacer & Chung, 2007; Kravis & Lipsey,
1982). Some research has found that companies have heterogeneous motiva-
tions in assessing location advantages (Belderbos & Carree, 2002; Chung &
Alcácer, 2002; Shaver & Flyer, 2000), aiming to improve or maintain their
competitive position in the industry. Location advantages are not generalizable
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because they do not represent the same value for all MNEs; indeed, they vary
according to different specific attributes of the firm and this interaction conse-
quently influences location choices (Nachum & Wymbs, 2007). The location of
MNEs has become the focus of a growing area of research (Beugelsdijk &
Mudambi, 2013; Chadee, Qiu, & Rose, 2003; Enright, 2009). Nevertheless,
traditional international business literature, unlike economic geography
(Beugelsdijk, McCann, & Mudambi, 2010; McCann & Mudambi, 2005), often
uses a country and its national borders as the unit of analysis to debate MNE
location strategies, without providing a more precise differentiation of existing
nuances in locational characteristics in a smaller geographical scope.
Only in recent years have researchers begun to investigate the regional or
subnational dimensions of location decisions, strategies, and performances
of MNEs (Chadee et al., 2003; Chan, Makino, & Isobe, 2010; Ricart, Enright,
Ghemawat, Hart, & Khanna, 2004; Rugman & Verbeke, 2003). In line with
this perspective, this study analyzes MNE location choices in global cities.
London, New York, Tokyo, Paris, Chicago, Frankfurt, Hong Kong,
Singapore, Mexico City, Buenos Aires, and São Paulo, for instance, are con-
sidered global cities according to the Globalization and World Cities Research
Network (GaWC, 2012). These sites are important centers of decision making,
coordination, and economic concentration; they are constituents of a global
hierarchy of cities that emerged with globalization and the development of
a postindustrial economy. Global cities (GCs) are strategic places for the
formation and reproduction of the international economic system based on
the status of their position within transnational networks (Sassen, 2001;
Sheppard, 2002). Metropolitan areas characterized by high levels of links with
local and global markets, they offer cosmopolitan cultural environments and
an agglomeration of corporate services companies (also known as advanced
producer service firms) in such fields as consulting, advertising, accounting,
law, and finance (Goerzen, Asmussen, & Nielsen, 2013; Sassen, 2001, 2005).
LATIN AMERICAN BUSINESS REVIEW 3
countries was 32% of global FDI inflows and 19% of outflows (UNCTAD,
2015). Despite the opportunities and challenges posed by the rise of emerging
economies to MNE strategies for researchers (Xu & Meyer, 2013), and
notwithstanding highlights from the initiatives of certain scholars (Hoskisson,
Eden, Lau, & Wright, 2000; Meyer & Peng, 2005; Wright, Filatotchev,
Hoskisson, & Peng, 2005), little attention has been devoted to this field
(Singh, 2012). If FDI location studies focusing on GCs are considered
important, albeit incipient (Izumi, Couto, & Ogasavara, 2017), research on
location decisions in emerging market GCs is simply non-existent.
Prior research investigating the influence of firm-specific attributes on
location choices has highlighted the importance of different types of factors,
including the strength of technological competence (Pelegrin & Bolancé,
2008; Shaver & Flyer, 2000), company size, the intensity of production factors
(Kravis & Lipsey, 1982), technical and technological capabilities (Alcacer &
Chung, 2007; Chang, Hayakawa, & Matsuura, 2014), the geographic
scope of the firm, innovation capabilities, international experience, and
differentiation (Nachum & Wymbs, 2005). However, a question that remains
unanswered by the empirical literature is what the effects are of the firm’s
attributes on location decisions for specific regions of emerging markets,
particularly to GCs located in Latin America (LATAM GCs). This study
aimed to investigate the effects of ownership and internalization factors on
location decisions in LA global cities.
The study contributes to the international business literature in the follow-
ing ways. First, by adding the specific approaches of LATAM GCs to the
growing research on foreign direct investment locations in subnational
regions (Chan et al., 2010; Meyer & Nguyen, 2005). Some LATAM GCs are
striving to gain prominence by fostering the economic conditions to attract
foreign direct investment. Research focusing on location decisions for this
particular region is still rare, however (Korez-Vide, Voller, & Bobek, 2014).
4 P. K. IZUMI ET AL.
These include features and physical capabilities (e.g., technology used, equip-
ment, plant, and geographic location); human resources (e.g., knowledge,
experience, confidence, innovation, talent, and the competence of managers
and employees); and resources and organizational capabilities (e.g., systems,
structures planning, control and coordination, and culture and reputation).
For firms to create a sustainable competitive advantage in implementing their
strategies, resources must meet four conditions: value, rarity, imperfect
imitability, and organization, known as the VRIO model (Barney &
Hesterly, 2008).
Second, there must be some internalization advantages leading the MNEs to
consider that their specific ownership advantages will be better used internally
rather than through market transactions such as sales to foreign companies or
contractual or constitution partnerships through joint ventures (Dunning,
1988). This theoretical thread suggests that in order to exploit competitive
superiority, companies transfer their specific advantages to host markets
through FDI (Erramilli et al., 1997). By transferring within an internalized
governance structure, firms have full ownership control over subsidiaries.
Third, a foreign market should offer location advantages that make it more
profitable to serve a client through local production than export. Location
advantages offer attractive features for the investments of MNEs and consist
of a host country’s specific advantages (Dunning, 1988). They include the
natural resources of the host country, its market size, factors of production,
educational system and governance structures, as well as formal and informal
institutional factors such as culture, political stability, regulation, and tariff
and non-tariff barriers. Trevino, Mixon Jr., and Upadhyaya (2005) observed
that elements of institutional building in Latin America such as political risk,
capital markets liberalization, and privatization had an impact on the increase
in FDI inflows. We used the bases of OLI framework to develop the
conceptual model proposed in Figure 1.
6 P. K. IZUMI ET AL.
these locations can improve the performance of the subsidiary due to the
cultural control that allows the transfer of company-specific resources
through these expatriates (Gong, 2003). The number of expatriates present
in a subsidiary reflects the level of control that a MNE wants to engage in
the subsidiary to influence its performance (Konopaske, Werner, & Neupert,
2002). In fact, prior research has found that cultural distance increases the
propensity of subsidiaries to use expatriates (Boyacigiller, 1990; Colakoglu
& Caligiuri, 2008; Gong, 2003; Harzing, 2001).
The different mechanisms of control and coordination of foreign subsidi-
aries an MNC can use is what the agency theory refers to as monitoring or
behavioral control strategies. In this sense, the use of expatriate managers
can be viewed as a headquarters strategy to monitor their subsidiaries
(Björkman, Barner-Rasmussen, & Li, 2004).
The use of expatriates by MNEs in GCs to manage foreign operations
expands the scope of control, coordination, and knowledge transfer beyond
the traditional relationship between the parent firm and subsidiaries.
The migration of foreign skilled workers has become a key mechanism of
increasing the coordination capacity of these cities insofar as it is performed
within a complex relationship between local and global interconnected cities
(Beaverstock, 2002). That such international assignment is possible due to the
network of a qualified workforce has already been observed in studies on
migration processes and the use of elite expatriates in industrial sectors,
financial services, and other activities in GCs (Beaverstock et al., 2002;
Findlay et al., 1996). This new international labor brought about by
economic globalization is only one of the reasons for which companies need
to transfer management skills and techniques around the world, making the
formation of a community of expatriates a prerequisite and a result of the
attractiveness of GCs (Beaverstock et al., 2002; Findlay et al., 1996). MNEs
choose to locate in GCs using expatriates due to the better subsidiary control
8 P. K. IZUMI ET AL.
Firm resources
In her GC model, Sassen (2001, 2005) explained that the geographic
dispersion of economic activities and their simultaneous integration that
characterizes globalization contribute to growing importance of a number
of complex and non-standard functions requiring highly specialized skills.
Such skills include specializations in finance, investment, telecommunica-
tions, advertising, and information technology, which tend to cluster in
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GCs. The fact that firms increasingly source such services or components
from other companies rather than produce them at headquarters leads to less
market uncertainty, enabling them to select any location (Sassen, 2005).
Therefore, GCs offer advantages for MNEs in terms of the availability of
specialized advanced producer services connected to local and global net-
works. Such firms serve as critical specialized producers that help optimize
the production networks of enterprises that are geographically dispersed.
Producing these specialized services requires skills and experience; from this
perspective, GCs are nodes in the command and control of the global
economy. Advanced producer services tend to agglomerate in GCs (Taylor,
Derudder, Faulconbridge, Hoyler, & Ni, 2014) creating knowledge clusters
of firms (Porter, 2000) engaged in similar activities that can help MNEs to
reduce their liability of foreignness (Goerzen et al., 2013).
By combining the main features of GCs—international connectivity,
advanced services to producers, and a cosmopolitan atmosphere—with the
components of liability of foreignness, Goerzen and colleagues (2013)
observed that the presence of advanced producer services in GCs benefits
MNEs by reducing costs related to uncertainty, discrimination, and
complexity in three ways. First, they accelerate learning by providing MNEs
consultancy and advice and facilitate access to partners with local and global
knowledge. Second, they legitimize foreign firms with global service providers
that also generate local credibility for the MNE. Finally, they reduce the need
to import basic services, allowing the MNE to work with the same service
providers across borders, thus, reducing coordination costs (Goerzen et al.,
2013).
Nachum and Wymbs (2007) investigated the determinants of GC location
choices; however, they limited their research scope to financial and
professional service industries, including banking, insurance, advertising,
software and information services, accounting, management consulting,
LATIN AMERICAN BUSINESS REVIEW 9
MNEs via the impact on the needs of firms for complementary resources that
they do not possess. “Large firms tend to internalize certain activities and are
less dependent on external resources than their smaller counterparts”
(Nachum & Wymbs, 2007, p. 229).
Building from our discussion, we propose the following hypothesis:
H2: Firm resources have a negative effect on the propensity of MNEs to locate their
foreign subsidiaries in global cities.
relationship exists between the ownership level chosen and the number of
possible foreign partners. Thus, the lower the shareholdings of the parent
company in a subsidiary composition, the greater the participation of one
or more partners.
A parent firm has full and exclusive property rights for managing the
operation in a WOS. Conversely, in a JV, local and foreign partners share
the equity ownership, management, risks, and rewards of the incorporated
organization (Ogasavara & Hoshino, 2007). On the one hand, the greater
the ownership level in a foreign subsidiary, the greater the operational control
by the parent firm—the greater resource commitment, investment, and risk
not withstanding (Agarwal & Ramaswami, 1992; Barkema, Bell, & Pennings,
1996; Luo, 2001; Parola, Satta, Persico, & Bella, 2013). On the other hand, if
a MNE enters a foreign market through partnership, it not only needs to
control its local managers and protect its intellectual property, it must also
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Methods
Sample
This is a quantitative study using a sample of Japanese MNE subsidiaries
operating in Latin America. Japanese firms were chosen for several reasons.
First, the Japanese economy during the period of analysis was the world’s
second largest. Second, a secondary database at the subsidiary level was
available. Third, the choice of Japanese investment in Latin American was a
way to analyze MNEs operating in emerging markets, as only a few studies
have investigated this particular region (Ogasavara & Hoshino, 2007).
Secondary data from Japanese subsidiaries were obtained from the printed
editions of the 2006–2012 database called Kaigai Shinshutsu Kigyou Souran,
a publication of the Toyo Keizai Company. This data source, published
annually since 1970, provides extensive information on the overseas activities
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differentiates between GCs and NGCs. It should be noted that the number of
observations in the sample is different for each year analyzed since they
correspond to the subsidiaries in operation with available data in that
respective year.
Variables
Dependent variable
Measured by the GC location considering a dummy variable. Subsidiaries
located in a GC equal 1, while subsidiaries located in a NGC equal 0. As
mentioned earlier, the GaWC classification (2012) was used because it is
considered a theoretically transparent and empirically rigorous GCs rating
(Beaverstock et al., 1999). LATAM GCs are Mexico City, São Paulo, Caracas,
Santiago, Buenos Aires, Rio de Janeiro, Bogota, Lima, Montevideo, and
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Brasília. NGCs consist only of other cities appearing in the Toyo Keizai
database from the eight countries that have GCs (Mexico, Brazil, Venezuela,
Chile, Argentina, Colombia, Peru, and Uruguay).
Statistical analysis
The quantitative analysis is based on binary logistic regression. This method,
like multiple linear regression, analyzes the relationship between a dependent
variable and one or more independent variables. This regression is the
most recommended analytical tool when the dependent variable is binary
(dummy), independent variables are qualitative or quantitative, and
multivariate normality assumptions are not met (Ball & Tschoegl, 1982;
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Cox, 1972). The regression model including four independent variables and
one control variable is as follows:
Y ¼ bh þ b1ðSubsidiary ControlÞ þ b2ðFirm ResourcesÞ
þ b3ðOwnership LevelÞ þ b4ðManagerial ComplexityÞ þ b5ðIndustryÞ
classification accuracy table of the validation sample for each year. The results
reveal that overall classification accuracy of the training sample and the
holdout sample are relatively similar, thus attesting to the predictive capacity
of the model.
in these locations.
The other ownership advantage, Firm Resources, shows a significant effect
on GC location choice in the years 2006, 2007, 2011, and 2012, which
supports H2. The negative sign indicates that large subsidiaries tend to
be located outside of GCs, while smaller ones are located in GCs, which is
consistent with the theoretical framework cited in this study.
In terms of Internalization Advantages, the results show that the relation-
ship between Ownership Level and GC location decision is marginally
significant in 2006, 2008, and 2009—in the period before and during the
international economic crisis. The results imply that MNEs internalized their
resources, possibly to minimize investment risks. This finding provides partial
support for H3.
For the findings related to Managerial Complexity, the coefficients are
negative and marginally significant only for the years 2010 and 2012. The
complexity of contractual governance is associated to post-economic crisis
period. Thus, the results partially support H4. Regarding the control variable
Industry, found to be significant at p < 0.10, the negative sign indicates that
subsidiaries of the industrial sector (manufacturing) tend to be located outside
GCs, and that non-industrial enterprises (nonmanufacturing) seek to locate in
GCs. Service sectors in GCs are predominantly non-manufacturing.
The findings are consistent with the characterizations of previous research
(Goerzen & Beamish, 2003; Sassen, 2001, 2005; Taylor et al., 2014). Advanced
producer services tend to cluster in GCs, forming knowledge clusters, which
can help MNEs reduce the liability of foreignness (Goerzen & Beamish,
2003). Conversely, manufacturing firms tend to locate outside of GCs in an
attempt to minimize operating costs. Costs of locating in a GC city are often
too high for manufacturing firms, which need much more space than service
firms. Therefore, to reach their customers, they often rely on distributors and
distribution channels located in GCs.
16 P. K. IZUMI ET AL.
Conclusions
This article addressed a topic of emerging relevance in international business
studies, which is the factors influencing decision making by MNEs to locate
their international subsidiaries in GCs. More specifically, it provided the first
evidence of the effect of specific attributes of subsidiaries on location decisions
in LATAM GCs. Attributes of ownership and internalization advantages
influence the GC location decisions. Subsidiary-level variables can explain
the location decisions of MNEs, a finding counter to that of most studies,
which focus on location factors, such as market size, labor cost, or the tax rate
of a country. Empirical research with a focus on GCs is quite recent, yet still
scarce in international business studies. Analyses at levels of smaller
geographical areas are considered increasingly important, since location
characteristics have relative importance vis-à-vis other firm-specific attributes.
This study contributes to the growing research that focuses on a regional or
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ture, government support, and other institutional aspects that could also
contribute to a better discussion of the location decision. Moreover, further
research could examine how location-specific and firm-specific characteristics
interact in the determination of location choice, which could identify and
enlighten as to motivations behind specific location decisions made by MNEs
in GCs. Such recommendations are a promising agenda for further integrated
perspectives of international business and economic geography.
ORCID
Mário Henrique Ogasavara http://orcid.org/0000-0001-8988-5762
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