Do geographic distances proxy a high probability of foreign divestment? Evidence from Japanese multinational firms

• Published date: 01 January 2024
• Author: Yanwen Jiang,Mikiharu Noma
• Date: 01 January 2024
• DOI: http://doi.org/10.1002/jcaf.22656

Received: 16 July 2 023 Accepted: 4 September 2023

DOI: 10.1002/jcaf.22656

RESEARCH ARTICLE

Do geographic distances proxy a high probability of foreign

divestment? Evidence from Japanese multinational firms

Yanwen Jiang Mikiharu Noma

Graduate School of Business

Administration, Hitotsubashi University,

Toky o, Japa n

Correspondence

YanwenJiang, Graduate School of

Business Administration, Hitotsubashi

University, Tokyo, 101-8439, Japan.

Email: bd21f003@g.hit-u.ac.jp

Funding information

JSPS KAKENHI, Grant/AwardNumber:

JP20H01540,JP21K01781

Abstract

We aim to provide an unambiguous explanation for the positive influence of

the geographic distance between a firm’s home and host country on divestment

decisions of Japanese multinational firms’ outbound merger and acquisition

(M&A). Our analysis of 868 acquisitions made by 496 firms in 45 countries and

regions from 2005 to 2015 highlights the importance of drawing a clear distinc-

tion among various foreign divestment motives before inferring the impact of

geographic distances rashly,especially whether it is failure-driven or global busi-

ness strategy-driven. We further find that its impact hinges on parent firm- and

deal-level attributes, that is, geographic distance is less salient for large firms,

young firms, and foreign operations under a complete control mode; however,

the opposite was the case for firms with a high debt burden.

KEYWORDS

finance, mergers and acquisitions, strategy

1 INTRODUCTION

Based on the theory of costs of doing business abroad intro-

duced by Hymer (1976), the deterrent effect of geographic

distance on international expansion has been extensively

examined in the literature and accepted as a key deter-

minant of the direction of a firm’s diversification strategy.

Geographic distance deters outbound investment because

it leads to significant spatial separation costs (Boeh &

Beamish, 2012; Ghemawat, 2001; Grosse & Trevino, 1996;

Jiang, 2023;Lietal.,2020; Ojala & Tyrväinen, 2007;

Ragozzino, 2009; Zaheer, 1995) and information asymme-

try problems—both ex ante and ex post (Ragozzino, 2009;

Ragozzino & Reuer, 2011).Further, in the context of strate-

gic location decisions, a growing number of studies has

concentrated on the role of firm-level characteristics, such

as capability, learning, size, age, and tax fundamentals

in overcoming these geographic distance obstacles based

on the resource-based theory (RBT) (e.g., Belderbos et al.,

2011;Jiang,2023;Lietal.,2020;Makinoetal.,2002).

The negative influence of geographic distance as a

proxy of additional costs is closely associated with failures

that trigger foreign divestments. Additionally, as foreign

divestment decision is a frequent and complex corpo-

rate occurrence, it can be undertaken not only because

of external factors but also internal factors, such as firm-

level characteristics (Belderbos & Zou, 2009;Benito,2005;

Delios & Beamish, 2001;Haynesetal.,2003; Kim et al.,

2010, 2012; Kolev, 2016;Nguyenetal.,2013) and deal-level

characteristics (Gaur & Lu, 2007; Papyrina, 2007;Park&

Yoon, 2022;Wang&Larimo,2020). Despite that, there

are significant gaps in our understanding with respect to

the relationship between foreign divestment decisions and

geographic distances, as well as potential firm- or deal-

level moderating effects because more emphasis has been

placed on the influence of geographic distance on foreign

acquisitions than foreign divestments.

We aim to address these gaps by examining how the

likelihood of exiting varies over geographic distance. We

distinguish the motive of divestments first and then

146 © 2023 Wiley Periodicals LLC. J Corp Account Finance. 2024;35:146–165.wileyonlinelibrary.com/journal/jcaf

JIANG and NOMA 147

explore whether the effects of geographic distance on for-

eign divestment decisions are contingent on three firm

attributes (firm size, firm age, and firm’s debt burden)

and one deal attribute (ownership structure, i.e., shared-

ownership or complete acquisition).

Using data from a sample of 868 Japanese firms’ out-

bound acquisitions in 45 countries and regions from 2005

to 2015, we prove that contrary to investment decisions,

additional ex post costs associated with geographic dis-

tance are not considered a key determinant of strategic

divestment decisions for exit cases resulting from the need

for restructuring.

In addition, firm size and age have an extremely pro-

found effect on strategic decisions (Bakker & Josefy, 2018;

Fuentelsaz et al., 2002;Haveman,1993; Josefy et al.,

2015; Le Mens et al., 2015;Lietal.,2020; Lieberman &

Montgomery, 1998; Miller & Chen, 1996). We find that geo-

graphic distances do not concern large or young firms

because they are more likely to take big risky moves in

global strategy (Kolev, 2016; Le Mens et al., 2015; Miller

& Chen, 1996; Sapienza et al., 2006). Even in a situation

in which a subsidiary has prior poor performance, slack

resources enable managers in large firms to maintain the

status quo (Kolev, 2016; Palmer & Wiseman, 1999).

On the other hand, the agency cost perspective (Jensen,

1986) suggests that debt significantly limits managers’

capacities to allocate resources to unprofitable or dis-

tressed business units. The level of debt negatively affects

survival because (1) financing large new investments to

pursue growth opportunities may be an extremely serious

problem for highly indebted firms; (2) a high debt bur-

den limits a firm’s competitiveness; and (3) a high level

of leverage forces inefficient firms to liquidate (Bolton &

Scharfstein, 1990; Harris & Raviv, 1990; Myers, 1977;Stulz,

1990;Zingales1998). The results of many studies reveal that

less leveraged firms are less likely to exit (e.g., Mata & Fre-

itas, 2012). As a parent company’s poor financial health

is more likely to trigger a failure-driven divestment, we

find that geographic distances push firms with a high debt

burden to undertake foreign divestment.

Moreover, discussions on the interaction between own-

ership strategies in foreign acquisitions and foreign invest-

ment survival are active (e.g., Makino & Beamish, 1998;

Gaur & Lu, 2007; Papyrina, 2007;Nguyenetal.,2013)

because the control mode is related to the level of orga-

nizational control that an acquiring firm can exercise and

the cost of resource commitment under exogenous uncer-

tainty in host countries (Chari & Chang, 2009; Malhotra

et al., 2018;Wang&Larimo2020). We employ transac-

tion cost economics (TCE) as the theoretical basis and find

that geographic distance is less salient for complete acqui-

sitions when making foreign divestment decisions. This

is because integration benefits ensure that firms would

not encounter relational hazards in geographically dis-

tant countries that might occur in the shared-ownership

mode (Anderson & Gatignon, 1986). Even in the con-

text of strategy-driven foreign divestment, the flexibility of

involving foreign subsidiaries in global strategy execution

increases with equity shareholdings.

Our study is different from existing international busi-

ness literature. Most of the existing empirical studies on

the positive effect of geographic distance on foreign divest-

ment decisions are underpinned by the idea of liabilities

of foreignness (LOFs) introduced by Zaheer (1995). LOFs

refer to the additional costs that foreign firms incur when

entering a host country compared with indigenous firms.

The concept is closely related to the institutional theory

that focuses on external factors and specific surround-

ing environments (Amin, 1999; Eisenhardt, 1988). Later,

EdenandMiller(2001) classified Zaheer (1995)’s LOFs into

three hazard categories—unfamiliarity,relational, and dis-

crimination hazards. In particular, as geographic distance

increases, additional costs associated with unfamiliarity

hazards and relational hazards (e.g., supervision and man-

agement of employees) increase (Eden & Miller, 2004;

Hennart, 2010). Therefore, as long as a firm operates in

an unfamiliar host country, there will be competitive dis-

advantages resulting from LOFs, while those operating in

host countries that are more geographically distant end

up facing greater internationalization challenges (Buck-

ley et al., 2007; Ghemawat, 2001). However, the existing

literature that emphasizes the notion of LOFs compared

the survival of foreign firms with that of domestic firms

but pulled in different directions. One stream of litera-

ture reports that foreign firms have a greater likelihood

of exiting (e.g., Bernard & Sjöholm, 2003;Mata&Fre-

itas, 2012; Zaheer & Mosakowski, 1997). In contrast,

another stream of literature found no significant diver-

gence between the survival rates of foreign and domestic

firms (e.g., Kronborg & Thomsen, 2009; Mata & Portugal,

2002).

As discussed previously, the logic behind the deterrent

effect of geographic distance on international expansion

is that it causes significant additional costs, which is a

key concern of businesses operating in a foreign country.

All that said, divestments driven by restructuring tend to

entail orchestrated strategicmaneuvers with dramatic con-

sequences for a corporate network that involves many cor-

porate units performing different activities in a variety of

locations (Benito, 2005). Accordingly, Hennart et al. (2002)

pointed out that the presence of LOFs that would seriously

handicap foreign investors is mixed because the gross exit

rates are a noisy index of poor performance. The mixed evi-

dence on the impact of LOFs is due to the improper use

of gross exit rate as an indicator. Although they further

illustrated that a significant number of exits are not due to