Foreign Subsidiary Exit from Africa: The Effects of Investment Purpose Diversity and Orientation

DOIhttp://doi.org/10.1002/gsj.1142
Date01 February 2017
Published date01 February 2017
FOREIGN SUBSIDIARY EXIT FROM AFRICA: THE
EFFECTS OF INVESTMENT PURPOSE DIVERSITY
AND ORIENTATION
YAMLAKSIRA S. GETACHEW
1
*and PAUL W. BEAMISH
2
1
Ivey Business School, Western University, London, Ontario, Canada
2
Canada Research Chair in International Business, Ivey Business School,
Western University, London, Ontario, Canada
Research summary: This study considers the exit likelihood of foreign subsidiaries
operating in Africa and identies strategic orientations that can improve their chances
of survival. We nd that, on average, subsidiaries entering the African market have a
greater exit likelihood than those entering the OECD market. However, those subsidi-
aries entering the African market with diverse investment purposes or greater market-
seeking orientation are less likely to exit, as they tend to enjoy exibility, adaptability,
and learning advantages useful in mitigating economic challenges and/or tapping into
strategic opportunities.
Managerial summary: This study examines how the decision to enter African markets
relates to the exit probability of MNE subsidiaries. Using a longitudinal, paired-sample
design of Japanese foreign subsidiaries operating in Africa and OECD countries, we
nd that entry to Africa increases the hazard rate of subsidiaries, but that subsidiaries
entering with more diverse investment purposes and greater market-seeking orientation
have a better survival likelihood. Consistent with the institutional-based theory of cor-
porate diversication, our ndings introduce purpose diversity and market-seeking ori-
entation as potential mechanisms to mitigate the hazards of institutional voids/
instability. Also, by looking at the phenomenon of within-subsidiary diversity
(of purposes) and its interaction with institutional conditions, we advance the notion of
subsidiary scope and its implications. Copyright © 2016 Strategic Management
Society.
INTRODUCTION
Emerging markets are places of striking contrasts.
On the one hand, they are characterized by institu-
tional voids(Santangelo and Meyer, 2011), where
market-supporting institutions are absent, weak, or
fail to accomplish the role expected of them (Mair
and Marti, 2009) and institutional instability,
resulting from such exogenous forces as a sudden
change of government (Hoskisson et al., 2000;
Walsh, 2015; Zoogah, Peng, and Woldu, 2015).
These institutional conditions are, in large part,
responsible for the exceedingly high levels of
uncertainty multinational enterprises (MNEs) face
when conducting business there (Dai, Eden, and
Beamish, 2013; North, 1991; Santangelo and
Meyer, 2011; Williamson, 2000; Xu and Meyer,
2012). Yet, with established markets fast becoming
saturated, MNEs are increasingly turning to
Keywords: entry to Africa; investment purpose; market-
seeking orientation; institutional voids; institutional instability
*Correspondence to: Yamlaksira S. Getachew, Ivey Business
School, Western University, 1255 Western Road, N6G ON1,
London, ON, Canada. E-mail: ygetachew@ivey.ca.
Copyright © 2016 Strategic Management Society
Global Strategy Journal
Global Strategy Journal, 7:5882 (2017)
Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1142
emerging markets for future growth potential. As
well, the lack of institutions to foster competition
in those markets means that MNE subsidiaries
already operating in those markets are more likely
to develop market power and, thus, generate super-
normal prots (Chacar, Newburry, and Vissa,
2010; Chacar and Vissa, 2005; Miller and
Eden, 2006).
Underlying these arguments regarding the insti-
tutional context of emerging markets are two con-
trasting mechanisms: economizing and strategizing.
The economizing mechanism emphasizes increased
transaction and transformation costs associated with
performing in locations with high levels of institu-
tional voids/instability; the strategizing mechanism
supports the opposite view, that missing/unstable
institutions act as entry barriers, which afford MNE
subsidiaries already operating in those locations
with greater market power and rent-seeking oppor-
tunities (Porter, 1981; Williamson, 1991). Do the
strategizing upsides more than offset the economiz-
ing downsides associated with operating in loca-
tions of high institutional voids/instability? Do the
economic implications outweigh the market power
benets? Or, do the effects cancel out? Answers to
these questions are likely to be context dependent
and contingent on several boundary conditions. In
this research, we seek to shed light on the issue by
examining the exit implications of entry to the Afri-
can context and considering the effects of relevant
boundary conditions.
By emphasizing the remarkable degree of heter-
ogeneity among emerging markets, recent research
in the area calls for future research to advance a
more ne-grained understanding of institutions and
their performance implications (Hoskisson et al.,
2013). Africa, for example, has distinct characteris-
tics. Generally, the level of institutional voids is
greater in Africa than in any other region in the
world (Azzimonti and Sarte, 2007; Zoogah et al.,
2015). Also, highly unstable institutional environ-
ments and discontinuous institutional transitions
beset foreign investment in Africa, perhaps more so
than in any other part of the world (Azzimonti and
Sarte, 2007; Henisz, 2000). The combined presence
of such institutional hazards in the African markets
makes for a complex operating environment for
foreign subsidiaries (Jackson, 2004). Whereas
economizing challenges abound, so do strategizing
opportunities. In other emerging markets such as
China and India (countries on which existent emer-
ging markets research disproportionately relies),
institutional voids and instability are not nearly as
high as in Africa and, thus, economizing challenges
and strategizing opportunities are relatively limited
(Hoskisson et al., 2013; Zoogah et al., 2015). The
African market, therefore, presents an interesting
setting to generate fresh insights about the
inuences of institutional voids and dynamics on
the performance of MNE subsidiaries. As well,
research in a context that has largely been ignored
by global strategy scholars can promote better
understanding of what Hoskisson et al. (2013)
called the traditional emerging markets.
Relatedly, we consider relevant boundary condi-
tions that may enable some subsidiaries operating
in Africa to better deal with, mitigate, or even capi-
talize on the lack and/or instability of institutions.
Specically, we consider two such conditions
namely subsidiary purpose diversity and purpose
orientationto understand whether/how these stra-
tegic factors can help mitigate the hazards of insti-
tutional voids and instability. Research on
investment purpose has a strong presence in the
investment motives literature. Dunning (1998), for
example, identied four major categories of
motives that underlie MNEsforeign investment:
resource seeking, market seeking, efciency seek-
ing, and strategic asset seeking. This classication
not only indicates the limitation in a wholesale
treatment of MNEsforeign investment, but also
fosters a better understanding of the inherent, stra-
tegic heterogeneity among MNE subsidiaries.
A related line of research on subsidiary mandate/
charter has rened this insight further
(e.g., Birkinshaw, 1996; Birkinshaw and Hood,
1998). Building on the investment motives litera-
ture, research on subsidiary mandates/charters
looks at, among other things, the performance
implications of the specic purposes for which sub-
sidiaries are established (Birkinshaw and Hood,
1998). It also provides theoretical arguments and
empirical evidence suggesting that some subsidiar-
ies may be responsible for a diverse group of pur-
poses (Birkinshaw, 1996).
By integrating insights from these related
streams of literature, we examine whether purpose
diversity of subsidiaries operating in Africa inu-
ences their exit likelihood. Following a similar
logic from the institutional-based view of diversi-
cation, we argue that subsidiaries that enter Africa
with diverse investment purposes are in a better
position to deal with institutional challenges than
their counterparts. Also, we consider whether the
Foreign Subsidiary Exit from Africa 59
Copyright © 2016 Strategic Management Society Global Strategy Journal, 7:5882 (2017)
DOI: 10.1002/gsj

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