Entry decisions of multinational firms: The role of competition threats

• Date: 01 July 2019
• Published date: 01 July 2019
• DOI: http://doi.org/10.1111/twec.12776
• Author: Cathy Ge Bao

ORIGINAL ARTICLE

Entry decisions of multinational firms: The role of

competition threats

Cathy Ge Bao

University of International Business and Economics, Beijing, China

KEYWORDS

entry decisions, FDI news, threats

1

|

INTRODUCTION

How do multinational corporations (MNCs) influence each other's foreign entry decisions? An

extensive literature has examined the role of country, industry and firm characteristics—including,

for example, country market size and factor endowment, industry factor intensity, and firm produc-

tivity—in MNCs' location patterns, stressing MNCs' motives to improve market access and lower

production costs. However, are there any interactions in MNCs' foreign market entry decisions?

Existing theories suggest that MNCs could influence each other's location decisions in two main

ways. On the one hand, MNCs could derive a variety of agglomeration benefits—including

reduced trade costs between suppliers and customers, labour and capital‐good market externalities,

and knowledge spillover—as they locate close to each other. On the other hand, geographic prox-

imity between MNCs could intensify competition in product and factor markets, raising production

costs and reducing markups. Consequently, the direction of the interaction effect depends on

whether the agglomeration benefits outweigh the competition effect.

In this paper, I examine the interactions in MNCs' location decisions by exploring a unique data

set of foreign investment news and investigating how MNCs respond to competition threats from

their peer MNCs. Specifically, I ask: Would MNCs take the threats into consideration and preemp-

tively enter the same city? How would MNCs respond if they already own foreign affiliates in the

same city and the same industry? What about MNCs in the same city but a different industry? To

illustrate the research question, consider the following example. In 2000, six MNCs—Advanced

Semiconductor Engineering, First International Computer, Inc, Grace T.H.W. Group, Intel Corp,

International Business Machines, Quanta Computer, Inc, and Teco Electric & Machinery Co Ltd—

announced to invest in Shanghai, China, and produce Electronic Components and Accessories (US

SIC 367), as reported by news sources such as Dow Jones International News, Taiwan Business

News, South China Morning Post, Xinhua News Agency and Reuters News. In 2001 and 2002,

nine MNCs (excluding the above six firms) entered Shanghai and built plants in the same industry.

Were there any connections between the investment news and the entry of peer MNCs? Were the

entry of peer MNCs in Shanghai driven by the competition threats made by peer MNCs? And do

competition threats and actual competition among MNCs exert similar effects? To answer these

Received: 5 January 2018

|

Revised: 10 December 2018

|

Accepted: 15 December 2018

DOI: 10.1111/twec.12776

2144

|

© 2019 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2019;42:2144–2171.

questions, I merge the constructed foreign multinational competition threats data with a large cross‐

country firm data set drawn from Bureau van Dijk's Orbis, which reports worldwide foreign affili-

ates' location, industry, establishment year, as well as their owners' information. FDI News data

document 20,432 competition threats of 3,731 MNCs from 77 countries that invest in 123 countries

(2,463 cities/towns) and in 142 manufacturing industries. A significant proportion of news

announcements are actually not materialised in the end or within the anticipated time frame. Even

after a project is announced or even approved by the government or board of directors, the project

often does not occur as planned, for example, due to unanticipated financial shocks or corporate

decision changes. In fact, by tracking FDI news, I find that only about 60% of foreign multinational

entry described in the news can be identified in the actual multinational entry data. It leads me to

believe that FDI news is not just a measure of “increase in expected competition”, but a measure of

“entry threat”.

The analysis shows that competition threats, on average, encourage peer MNCs to take preemp-

tive actions and invest in the same city while actual competition of MNCs discourages peer MNCs

to establish foreign affiliates in the same city. The effect is more pronounced for competition

threats with a larger investment size, as measured by investment value, expected employment and

expected output. Further, while threats of new entry encourage peer MNCs to enter, threats of

expansion by incumbent MNCs discourage peer MNCs' entry. In the meantime, MNCs do not

respond at all to competition threats made by domestic non‐MNC firms.

MNCs respond differently to competition threats, depending on each of its own existing activity

and production network within the region. If an MNC already has affiliates in the same city and

same industry, it is less likely to establish a new affiliate as a response to competition threats. The

incumbent foreign affiliates respond to competition threats by increasing productivity instead.

1

In

contrast, if an MNC already owns other affiliates in a different industry and in the same city, it is

more likely to establish a new affiliate in the threatened industry. If an MNC already owns affili-

ates in another city of that country and in the same industry, it is not likely to establish a new

affiliate in the threatened city and industry.

MNCs also respond differently to competition threats' source country. I find that competition

threats have a larger impact on peer MNCs' from the same headquarter country. First, MNCs from

the same headquarter country are more likely to pay attention to each other's investment activity.

Second, their products are more substitutable, which makes preemptive actions more profitable. In

contrast, MNCs are less likely to invest in the same city, if their home country peers actually

invested in the same city previously.

The effect of competition threats also varies with news source characteristics. It is larger for

more influential news, as measured by news publication city and news source country. Specifi-

cally, news publication country's own MNCs are more likely to be affect ed by the competition

threats reported. Also, MNCs from the news publication city are more likely to respond. These

findings are expected since the information published by MNCs' own headquarter country news

sources and published at MNCs' own headquarter city is more likely to be read by these MNCs,

and hence generate a large impact. Second,

When examining the time path of MNCs' entry decision, I find MNCs' entry decision this year

is not affected by competition threats due this year. In contrast, an MNC is more likely to preemp-

tively enter in response to peer threats that will be due in 1–3 years. The effect of competition

threats due in 3 years is largest, followed by threats due in 2 years and threats due in 1 year. It

suggests that preemptive action is only taken before FDI news expire. I further explore whether

1

MNC news count is associated with 6% increase in domestic incumbent MNCs' productivity.

BAO

|

2145