Reducing uncertainty in follow‐up foreign direct investment: Imitation by family firms

• Published date: 01 November 2020
• DOI: http://doi.org/10.1002/gsj.1331
• Date: 01 November 2020

RESEARCH ARTICLE

Reducing uncertainty in follow-up foreign direct

investment: Imitation by family firms

Sebastian P. L. Fourné

1

| Miriam Zschoche

2

1

Lazaridis School of Business & Economics,

Wilfrid Laurier University, Waterloo, Ontario,

Canada

2

Strategic and International Management,

University of Erfurt, Erfurt, Germany

Correspondence

Sebastian P. L. Fourné, Lazaridis School of

Business & Economics, Wilfrid Laurier

University, 75 University Avenue West

(LH 4108), Waterloo, Ontario N2L 3C5, Canada.

Email: sfourne@wlu.ca

Funding information

Fritz Thyssen Stiftung

Research Summary:This paper examines to what extent

family firms rely on imitation when deciding on foreign

investment growth, highlighting the role of mimetic iso-

morphism and social categories. We propose that family

firms pursue trait-based imitation to reduce uncertainty in

follow-up foreign direct investment (FDI), and test our

predictions on a large sample of German family firms. We

find that family firms imitate successful peers that are also

owned by a family. A family firm's tendency to imitate is

strengthened during the initial years in a foreign market or

when the firm is publicly listed. Performance below or

above social aspiration strengthens or weakens imitation,

respectively. We discuss the implications for research at

the nexus of foreign investment growth, social categories,

and the pursuit of imitation by family firms.

Managerial Summary:Experience in a foreign market

helps firms to reduce uncertainty in follow-up FDI.

Besides experience gathered from own investments, firms

might also learn from investment decision of peers in this

market. By examining the foreign investment strategies of

family firms over time, this study identifies mimetic

behavior in follow-up FDI. The inclination to imitate visi-

ble, family-owned peer firms is stronger during the initial

years in a foreign market, when underperforming relative

to competitors, and when there are outside shareholders.

Family firm managers rely less on imitation when outper-

forming their competitors.

KEYWORDS

family firms, foreign direct investment growth,

imitation, institutional isomorphism, uncertainty

Received: 1 April 2017 Revised: 1 October 2018 Accepted: 7 October 2018

DOI: 10.1002/gsj.1331

Global Strategy Journal. 2020;10:839–860. wileyonlinelibrary.com/journal/gsj © 2018 Strategic Management Society 839

1|INTRODUCTION

Substantial research focuses on foreign market entry decisions (Agarwal & Ramaswami, 1992;

Brouthers, 2002; Shaver, 2013), but few studies analyze foreign follow-up investments (Forsgren,

2002; Johanson & Vahlne, 2006). One prominent theoretical contribution is the model of incremen-

tally increasing market commitment by the Uppsala school (Johanson & Vahlne, 1977, 2009). Its

basic notions are that market knowledge can be gathered, uncertainty is reduced, and new opportuni-

ties may become visible as the commitment to foreign markets increases. However, firms not only

learn from their own investments but also vicariously learn through observing the investment deci-

sions of other visible firms.

Imitation has been identified as a viable approach for mitigating uncertainty in foreign direct

investment (FDI) decisions (e.g., Brouthers, O'Donnell, & Hadjimarcou, 2005; Guillén, 2003;

Henisz & Delios, 2001; Lu, 2002). Firms follow the FDI decisions of other organizations that are

assumed to have superior information (Delios, Gaur, & Makino, 2008). Thereby, imitation reduces

search costs for firms when making their strategic decisions (Cyert & March, 1963). In addition,

when large, reputable firms are being followed, trait-based imitation legitimates strategic choices vis-

à-vis stakeholders inside and outside the firm (DiMaggio & Powell, 1983; Haunschild & Miner,

1997). A growing body of literature emphasizes social comparison pressures (e.g., Ang, Benischke, &

Doh, 2015; Durand & Jacqueminet, 2015; Mazzelli, Kotlar, & De Massis, 2018), and thus the impor-

tance of imitation strategies (Bruton, Ahlstrom, & Li, 2010; Xia, Tan, & Tan, 2008).

Previous studies reveal that publicly listed firms use imitation when making (initial) FDI choices

(Böckem & Tuschke, 2010; Delios et al., 2008). However, there are no insights into how different

ownership characteristics affect imitation strategies in FDI decisions. Given the importance of family

firms in the global business environment (Anderson & Reeb, 2003, 2004), this study focuses on

family-owned firms when analyzing imitation behavior in foreign follow-up investment decisions.

Family-owned firms deviate from conventional internationalization strategies (Arregle, Duran,

Hitt, & van Essen, 2017; Pukall & Calabrò, 2014; Zahra, 2003). They enter fewer countries

(Banalieva & Eddleston, 2011), have a narrow geographic scope (Arregle et al., 2017), invest less

(Gómez-Mejía, Makri, & Larraza-Kintana, 2010), and maintain long-lasting foreign partnerships

(Bertrand & Schoar, 2006; Miller, Lee, Chang, & Le Breton-Miller, 2009). In terms of investment

growth, they also follow the Uppsala model of (slowly) increasing commitment (Graves & Thomas,

2008), first “exporting”and then “as knowledge and resources accumulate”expanding their presence

abroad (Kontinen & Ojala, 2010; Olivares-Mesa & Cabrera-Suárez, 2006; Pukall & Calabrò, 2014,

p. 111). Beyond these insights into the internationalization of family firms, little is known about how

they make follow-up FDI decisions and why they may increase commitment to some markets but not

others as uncertainty persists in these decisions (Buckley & Casson, 1998; Fisch, 2008). In this study,

we investigate to what extent family-owned firms rely on imitation in their FDI growth decisions.

Our empirical analysis covers all German family firms (broadly coded as family owned or not)

that have foreign operations with a balance sheet value exceeding €3 million. German firms are often

controlled by the founders or their descendants, even when they attain a substantial size and interna-

tional presence (Faccio & Lang, 2002). They are the backbone of the German economy (Bergfeld &

Weber, 2011). Thus, the German economy provides an interesting context, from which insights can

be gained into the FDI growth of family firms.

This study makes two major contributions. First, while previous studies about (family firm) inter-

nationalization focus on entry mode and location choice (Banalieva & Eddleston, 2011; Delios et al.,

2008; Guillén, 2002; Yiu & Makino, 2002), this study focuses on family firms' foreign follow-up

840 FOURNÉ AND ZSCHOCHE