Journal of International Business Studies (2006) 37, 642–665
& 2006 Academy of International Business All rights reserved 0047-2506 $30.00
www.jibs.net
Interdependent behavior in foreign direct
investment: the multi-level effects of prior entry
and prior exit on foreign market entry
Christine M. Chan1,
Shige Makino2 and
Takehiko Isobe3
1
School of Business, The University of Hong
Kong, Pokfulam, Hong Kong; 2Department of
Management, The Chinese University of Hong
Kong, Shatin, Hong Kong; 3Research Institute for
Economics and Business Administration, Kobe
University, Japan
Correspondence:
Dr Christine M. Chan, The University of
Hong Kong, School of Business, Pokfulam,
Hong Kong
Tel: þ 852 2241 5226;
Fax: þ 852 2858 5614;
E-mail: [email protected]
Abstract
This paper examines the interdependent foreign market entry decisions of
multinational corporations (MNCs). Based on the argument that legitimacy
and competition are two important forces in foreign market entry decisions, we
hypothesize that an MNC’s market entry decisions are influenced by its own
prior entry and prior exit decisions and those of other MNCs. We examine this
general proposition at four levels of analysis: the host country, global industry
(an industry that spans host countries), local industry (an industry that is
separately defined within each host country), and parent firm level. Our
analysis of a panel data of over 4000 market entry decisions that were made by
Japanese MNCs shows that an MNC’s market entry decision has a stronger
inverted U-shaped relationship with the prior entry and exit decisions of other
MNCs at the local industry level than the prior entry and exit decisions of other
MNCs at the host country and global industry levels. We also find that both the
prior entry and prior exit decisions of an MNC have a marginal influence on its
own subsequent market entry decisions at the parent firm level.
Journal of International Business Studies (2006) 37, 642–665.
doi:10.1057/palgrave.jibs.8400216
Keywords: interdependent behavior in foreign market entry; legitimacy and competition in external and internal environments; prior entry and prior exit decisions as a signal
to potential entrants; multi-level analysis
Received: 18 July 2003
Revised: 2 November 2005
Accepted: 30 December 2005
Online publication date: 20 July 2006
Introduction
Foreign market entry is an important strategic decision for
multinational corporations (MNCs) because of the consequences
that it has for international presence. Most research has depicted
the investment behavior of firms as being driven by a primarily
economic rationale, as they seek to increase market power, gain
access to resources, and minimize transaction costs (Buckley and
Casson, 1976; Rugman, 1981; Casson, 1982; Hennart, 1982; Teece,
1986). Although firms make economically rational choices that are
motivated by ‘efficiency and profitability’, they also make
normatively rational choices that are motivated by ‘historical
precedent and social justification’ (Oliver, 1992: 701). More recent
research has emphasized the sociological perspective, and has
examined the legitimating effects of the foreign market entry
decisions of firms (Guillén, 2002).
The sociological perspective, which acknowledges the importance
of market competition, assumes that the behavior of firms is nested
Interdependent behavior in foreign direct investment
Christine M. Chan et al
643
within a highly structured historical and cultural
context, and that firms lack information about the
efficiency and effectiveness of their strategies ex ante
(Meyer and Zucker, 1989). Under this condition of
uncertainty, firms increase their chance of survival
by following the organizational practices or strategies of other firms that are perceived to be legitimate
(DiMaggio and Powell, 1983; Scott, 2001). In the
case of foreign market entry, firms that are less
familiar with a foreign market tend to refer to and
imitate the actions of other firms that operate in the
same market, because of the legitimacy of highly
visible entry decisions (Guillén, 2002).
To extend this line of research, our study
examines interdependent foreign market entry
decisions between and within MNCs. Specifically,
we examine two issues: the extent to which the
prior entry and exit decisions of other MNCs
influence the subsequent entry decisions of an
MNC, and the extent to which an MNC’s own prior
entry and exit decisions influence its subsequent
entry decisions. This study differs from previous
research in two ways. First, it focuses on interdependent market entry decisions in multi-level
institutional environments: host country, global
industry (an industry that spans host countries),
local industry (an industry that is separately
defined within each host country), and parent firm
(a firm with a network of foreign operations that
are under common control and ownership). Several
studies have examined the interorganizational
effects of foreign market entry in the context of
buyer–supplier relationships (Hennart and Park,
1994; Martin et al., 1998) and business groups
(Guillén, 2002). The level of analysis in these
studies, however, is limited to the context of a
particular industry or a single host country. Given
that the foreign operations of MNCs are embedded
in multiple levels of institutional environments
with different sources of authority and different
sets of legitimating requirements to which they
must conform (Sundaram and Black, 1992; Ghoshal
and Westney, 1993; Kostova and Zaheer, 1999), an
analysis of the multiple-level influences of institutional environments will provide a more comprehensive understanding of interdependent foreign
market entry behavior.
The second way in which this study differs from
others is that it focuses on both prior entry and
prior exit decisions as the key determinants of
foreign market entry decisions. Although recent
studies have made significant contributions to
explaining how prior entry decisions influence
subsequent market entry decisions (Guillén,
2002), they have ignored the effects of prior exits,
as they assume these effects to be constant. To
understand the dynamics of foreign market entry
strategy, we need to take into account the processes
of both market entry and exit. Our study is novel in
that it addresses the questions of the relevant levels
of analysis for the investigation of interdependent
foreign market-entry behavior, and also the extent
to which the prior entry and exit decisions of an
MNC and other MNCs influence subsequent foreign market entry decisions.
We focus on foreign market entry through foreign
direct investment, rather than through arm’s
length contractual modes, such as licensing and
exporting or importing. Building on institutional
and organizational ecology theory, we argue that
the behavior that is associated with foreign market
entry represents an organizational response that is
executed to selectively enter a host country, global
industry, or local industry markets in which the
form of market entry is perceived to be legitimate.
To test our arguments, we use a sample of 4349
subsidiaries that were established by eight large
Japanese electronics MNCs over the period of 1988–
1998 that operate in 110 countries, 18 global
industries (two-digit SIC), and 1980 local industries.
The use of panel data that consists of 156,451 spells
allows us to examine both the effects of prior entry
and prior exit decisions on subsequent foreign
market entry decisions at the host country, global
industry, local industry, and parent firm levels.
Literature review
Research in different disciplines has sought to
explain when and why firms invest in foreign
countries. Industrial organization economists view
foreign direct investment as the strategic response
of firms to both domestic competition and opportunities in foreign countries. They suggest that
firms engage in foreign direct investment to gain
greater market power, especially when they possess
monopolistic advantages over local competitors
that outweigh the disadvantages of being foreign
(Hymer, 1976), when they can eliminate oligopolistic competition through alliances with – or
acquisitions of – local firms (Caves and Mehra,
1986), and when their close rivals initiate foreign
direct investment in a host country (Knickerbocker,
1973; Flowers, 1976; Graham, 1978; Yu and
Ito, 1988). Transaction cost economists view
foreign direct investment as an organizational
response to imperfections in the intermediate
Journal of International Business Studies
Interdependent behavior in foreign direct investment
Christine M. Chan et al
644
goods, knowledge and capital markets. They argue
that firms use foreign direct investment to minimize market transaction costs by internalizing
transactions and other interdependent economic
activities across borders (Buckley and Casson, 1976;
Rugman, 1981; Hennart, 1982). Scholars of trade
theory, economic geography and, more recently,
strategic management view foreign direct investment as a platform from which firms can gain
access to location-specific assets, such as factor
endowments, location-based externalities, and strategic assets that are owned by other firms in
particular regions and countries (Dunning, 1995;
Kuemmerle, 1999).
Although most of the early studies assume the
foreign market entry of a firm to be an independent
decision, Knickerbocker (1973) pioneered the
notion of interdependent foreign market entry
behavior that is modeled on the oligopolistic
reaction theory. Underlying this theory is the
proposition that the investment decisions of pioneering firms are imitated by their close competitors in the same industries, which is a competitive
response to prevent the pioneering firms from
monopolizing the market (Flowers, 1976; Yu and
Ito, 1988). More recent studies have provided
evidence that the likelihood that a firm will enter
a market is influenced by the previous decisions of
other firms on market entry in the context of the
foreign expansion of suppliers and business groups
(Martin et al., 1998; Guillén, 2002). In addition to
the influence of the previous actions of other firms,
some studies have found that firms follow their
own previous investment decisions, which are a
coherent part of their international strategy (Kogut,
1983; Kogut and Chang, 1991; Chang, 1995;
Barkema et al., 1996). These studies typically
suggest that the foreign investment decisions of
firms are critically influenced by both their own
prior investment decisions and the prior investment decisions of other firms.
Although previous studies provide economic
explanations of interdependent foreign market
entry behavior, they leave little scope for the
sociological explanations that underlie this behavior. Given that a firm’s choice of action is
influenced by economic rationality and normative
rationality (Oliver, 1997), the motivation to engage
in foreign direct investment should rest not only
on an economic rationale, but also on social
considerations. One notable exception that pays
explicit attention to the sociological rationale of
interdependent foreign market entry behavior is
Journal of International Business Studies
Guillén’s (2002) study. Drawing on the cognitive
view of institutional theory, he suggests that the
entry of other firms into a foreign market enhances
the legitimacy of such a market entry, and thereby
encourages subsequent market entries by new
firms. The basic assumption that underlies this
argument is that firms operate within a social
framework of values, norms, and assumptions
about acceptable economic behavior. As economic
activities are socially embedded (Granovetter,
1985), and are structured in unique institutional
environments within both industries and countries
(North, 1990; Henisz, 2000a, b; Aoki, 2001; Scott,
2001), firms make normatively rational choices by
imitating the market entry decisions of other firms
that are considered to be legitimate. In extending
this stream of research, this study develops a
conceptual model of interdependent foreign market entry behavior using legitimacy as a key
concept in the model.
Theoretical development
Legitimacy is defined as ‘a generalized perception
or assumption that the actions of an entity are
desirable, proper, or appropriate within some
socially constructed system of norms, values,
beliefs, and definitions’ (Suchman 1995b: 574).
The bases of legitimacy vary with the regulative,
normative, and cultural-cognitive pillars of institutional theory (Scott, 2001). The regulatory view
emphasizes conformity to rules and laws, the
normative view emphasizes normative support that
results from a congruence in values, and the
cultural-cognitive view emphasizes the adoption
of a common frame of reference (Scott, 2001).
Although there are different mechanisms to
achieve legitimacy, we focus here on the culturalcognitive view of institutional theory.
Firms pursue legitimacy because they require
social acceptance and credibility to succeed and
survive in challenging environments (DiMaggio
and Powell, 1983; Aldrich and Fiol, 1994; Scott,
1995; Scott et al., 2000). In uncertain situations,
firms can gain legitimacy by imitating the organizational structure that is perceived to be appropriate to their organizational field, or by employing
the orthodox organizational practices that are
adopted by a large number of other firms in their
institutional environment (Meyer and Rowan,
1977; DiMaggio and Powell, 1983; Tolbert and
Zucker, 1983; Scott, 1995; Suchman 1995a, b;
Haunschild and Miner, 1997; Henisz and Delios,
2001; Chan and Makino, 2002; Kostova and Roth,
Interdependent behavior in foreign direct investment
Christine M. Chan et al
645
2002; Lu, 2002; Yiu and Makino, 2002). The general
belief is that the prevalence of an organizational
form enhances its legitimacy in the eyes of the
legitimating actors, who determine whether it is
desirable, proper, and appropriate within a given
institutional context. When legitimating actors are
more familiar with an organizational form, they
perceive the kinds of activity that are performed
within that form to be legitimate (DiMaggio and
Powell, 1983; Tolbert and Zucker, 1983; Orru et al.,
1991). Legitimacy gives firms the ability to perform
their activities with relatively less constraint, to
acquire the resources that they need to sustain their
operations in competitive markets, and to fend off
challenges to their right to provide specific products or services (Meyer and Rowan, 1977; DiMaggio and Powell, 1983; Suchman 1995b; Ahlstrom
and Bruton, 2001; Scott, 2001). This argument runs
parallel to the institutional bandwagon theory,
which states that an increase in the number of
firms using a particular type of innovation causes
other firms to adopt the same innovation to avoid a
loss of legitimacy or the support of their stakeholders (Abrahamson and Rosenkopf, 1993). Organizational ecologists have also embraced the
cultural-cognitive conception of institutions, and
have found that at low levels of organizational
density (or the number of organizations of a given
form), any growth in density enhances the legitimacy of the organizational form, and therefore
increases the founding rate (Carroll and Hannan,
1989).
In the case of foreign market entry, firms behave
not only strategically, by increasing their economic
rents, market power, or transactional efficiency, but
also socially, by mimicking the decisions of other
firms in the same market to cope with market
uncertainty and to gain legitimacy (Guillén, 2002,
2003). Firms perceive greater uncertainty about the
outcome of foreign market entry when they lack
the information and the cognitive capacity that are
required to estimate present and future market
conditions in the host country (Johanson and
Vahlne, 1977). When little prior information is
available about the idiosyncrasies of a local market
and the costs and benefits of expansion into that
market, firms run a greater risk of making irreversible mistakes when choosing markets to enter
(Mitchell et al., 1994). To mitigate the chance of
business failure that arises from market uncertainty,
firms tend to observe and follow the prior entry
decisions of other firms that share similar attributes or belong to the same cognitive category
(Haveman, 1993; Greve, 2000; Guillén, 2002).
Furthermore, firms that enter a local market are
exposed to different sources of authority and
different sets of legitimating requirements, which
are imposed by legitimating actors, such as the
government of the host country or local activist
groups (Sundaram and Black, 1992; Ghoshal and
Westney, 1993; Kostova and Zaheer, 1999). When
there are few foreign establishments in a local
market, these legitimating actors are unable to
bestow legitimacy on new foreign operations
because of a lack of understanding about the nature
of these operations (Dobrev, 2001). Foreign firms
may also lack the contextual knowledge to respond
to local legitimating requirements, and may therefore be less able to gain legitimacy from, or negotiate with, legitimating actors (Henisz, 2000b).1 To
make sense of legitimacy requirements, foreign
firms tend to observe the behavior of other foreign
firms because legitimating actors judge the legitimacy of new foreign operations by referring to the
legitimacy of other foreign operations that belong
to the same group when both the foreign firms and
the legitimating actors operate under conditions of
bounded rationality (Kostova and Zaheer, 1999). To
avoid legitimacy problems, firms often choose to
enter a local market that other similar foreign firms
have already entered, because an increase in the
number of foreign entrants in a market not only
heightens the visibility of foreign operations, but
also enhances the legitimacy of establishing foreign
operations in that market (Guillén, 2002). With this
enhanced legitimacy, new entrants find it easier to
overcome resistance from local stakeholders who
are adversely affected by the establishment of
foreign operations (Guillén, 2002). The prior entry
decisions of other foreign entrants in a market
therefore serve as a signal to potential entrants that
the market is attractive because of the enhanced
legitimacy of foreign market entry.
The propensity to imitate the entry decisions of
other firms, however, may decrease beyond a
certain threshold, because the continued acceptance of legitimate organizational actions or behavior cannot be presumed (Zucker, 1988; Oliver,
1992; Scott, 1995, 2001; Ang and Cummings,
1997). Firms may not continually reproduce
taken-for-granted organizational actions or behavior if they change their perceptions of what
constitutes legitimate organizational actions or
behavior (Oliver, 1992; Scott, 2001). The weakening
of organizational consensus on the value of legitimate organizational actions or behavior can be a
Journal of International Business Studies
Interdependent behavior in foreign direct investment
Christine M. Chan et al
646
result of changes in the internal and external
environments of a firm, such as the introduction
of new technology (Barley, 1986), a change in
institutional logic (Scott et al., 2000), a change in
industrial regulations (Fligstein, 1990), a shift in
cultural beliefs (Frank et al., 1999), or increased
competition among firms (Oliver, 1992; Greenwood and Hinings, 1996). The tendency to follow
the market entry behavior of other firms may
mount to the top when firms observe many other
foreign firms entering the same market. A large
number of new entrants serves as a signal of
increased competition to both potential entrants
and entrenched firms, and means that the competition for resources (for example, skilled labor and
access to local distribution and supplier networks)
and customers will inevitably be intensified (Mitchell et al., 1992, 1994). The increase in the intensity
of market competition not only drives entrenched
firms to attempt to create entry barriers to new
entrants, but also deters potential entrants from
establishing foreign operations in the market. In
organizational ecological terms, when the organizational density becomes relatively high, the
legitimation process gives way to a competitive
process as the number of firms of a given form
increases (Carroll and Hannan, 1989; Hannan and
Carroll, 1992). Following this logic, we expect that
the tendency to imitate the foreign market entry
decisions of other firms in a market will decrease
beyond a certain threshold as the number of new
entrants in the market increases.
Although recent studies have made significant
contributions to the examination of mimetic
behavior in the context of alliance formation and
foreign expansion (Garcia-Pont and Nohria, 2002;
Guillén, 2002, 2003), their focus has been on either
the proportion of prior entries or the density of
firms as the measure of imitation. However, the
dynamics of foreign market entry represent a
process of both entry into and exit from a market.
Studies that examine the effects of prior entry may
underestimate the influence of prior exit on the
imitative entry behavior of a firm, because the exit
of other firms sends a signal to potential entrants
that the resources and customers that were previously tapped by the exiting firms have been
released, and can now be taken over by new
entrants (Delacroix and Carroll, 1983; Delacroix
et al., 1989; Messallam, 1998). As new entrants can
claim the finite resources and customer base that
have been released by the exiting firms, prior exits
mitigate the intensity of competition and therefore
Journal of International Business Studies
induce new entrants to capture the potential of a
market. However, firms may change their perceptions of foreign market entry behavior as a result of
changes in the perceived instrumental value of
organizational activities (Oliver, 1992). The perceived value of entering a market may become
questionable when firms observe a large increase in
the number of foreign operations exiting a given
market, as a large number of exits serves as a signal
that the market is too hostile for new entrants
(Delacroix and Carroll, 1983; Messallam, 1998).
The hostility of a market may be due to foreign
operations being regarded as an illegitimate organizational form (Kostova and Zaheer, 1999). When
a hostile market does not offer sufficient benefits
for new entrants to cover the costs of foreign
market entry, firms find the market less attractive
for the establishment of foreign operations, which
thus deters entry.
In contrast to previous studies, we examine the
impact of both the prior entry and prior exit of
other MNCs on an MNC’s entry behavior, and
suggest two sets of hypotheses. First, we propose
that the number of prior entries that have been
made by other MNCs in a market has an inverted Ushaped relation to an MNC’s decision to enter the
same market. Our main argument is that MNCs are
likely to follow the market entry decisions of other
MNCs, because prior entrants enhance the legitimacy of foreign operations in a local market, which
thus makes the market more attractive for investment. However, when the number of entrants in a
market reaches a certain high level, any further
increase in the number of entrants sends a signal of
increased competition, and thereby discourages
any further MNCs from entering the market. We
also propose that the number of prior exits that
have been made by other MNCs from a market has
an inverted U-shaped effect on an MNC’s decision
to enter the same market. The rationale behind this
proposition is that exits from a market mitigate the
extent of competition in a market, and therefore
create space for new entrants. However, large
numbers of exits from a market signal the hostile
nature of the market, and thus discourage MNCs
from entering it.
The argument that is discussed here applies not
only to interdependent foreign market entry behavior among MNCs, but also to interdependent
foreign market entry behavior within an MNC,
because the market entry decisions of an MNC are
also influenced by its own market entry decisions
that were made in the past. Our main argument is
Interdependent behavior in foreign direct investment
Christine M. Chan et al
647
that, when facing uncertainty in doing businesses
in foreign countries, firms tend to repeat past
routines and standard operational activities because
these approaches have been legitimized over time
(Porter, 1990). Many organizational activities are
supported by the shared social belief systems,
traditions, and corporate culture of a firm (Berger
and Luckmann, 1967; Zucker, 1983; Oliver, 1992;
Scott, 2001). These organizational activities are so
taken for granted that firms may not question their
appropriateness or usefulness (Oliver, 1997). Organizational members within firms therefore develop
a social consensus on the propriety of re-enacted
activities that is resistant to change (Zucker, 1983;
Ashforth and Fried, 1988; Weick, 1995; Scott,
2001). However, we argue that the tendency of
MNCs to repeat their own previous market entry
decisions may decrease beyond a certain threshold.
Firms may not be willing to reproduce previously
legitimate organizational activities and actions
because changes in their internal institutional
environments cause them to reconsider the value
of what were once considered to be legitimate
organizational activities and actions (Oliver, 1992).
The impetus for change may be poor firm performance, incongruence between social and economic
objectives, or increased internal disagreement over
appropriate organizational processes or practices
(Oliver, 1997). In the case of foreign market entry,
MNCs may be less likely to repeat their prior entry
decisions when they recognize that the internal
resources that are used to support such entries have
reached a limit. These internal resources include
capital, knowledge, technology, human resources,
and expertise (Gupta and Govindarajan, 1991;
Rosenzweig and Singh, 1991). A large number of
prior entries of an MNC implies that there are
reduced available internal resources to support any
subsequent market entries, which thereby discourages the MNC from repeating its own prior
entry decisions. We also argue that the exit of the
foreign subsidiaries of an MNC from markets
implies a release of internal resources. As the
foreign subsidiaries of an MNC form part of a large
organizational system (Delacroix, 1993), the exits
of foreign subsidiaries allow the MNC to redeploy
the released internal resources to support subsequent entries into new markets. However, a further
increase in the number of exits implies that the
foreign subsidiaries may not have received the
support of their stakeholders. The foreign subsidiaries of an MNC are subject to different pressures in
the local environments in which they operate
(Rosenzweig and Singh, 1991; Westney, 1993;
Kostova and Zaheer, 1999). Each local environment
is for or against a foreign operation based on its
own set of requirements (Rosenzweig and Singh,
1991). A large number of exits of foreign subsidiaries sends a signal that the MNC as a whole may be
unable to adapt to and maintain legitimacy in all of
its local environments, which thereby deters any
further attempts to enter new markets. We therefore propose that the number of prior entries and
exits that are made by an MNC has an inverted Ushaped relation to the MNC’s own subsequent
decisions to enter a market. The conceptual model
that is used in this study is presented in Figure 1.
Although our proposed model is akin to the
density dependence model of organizational
founding (Carroll and Hannan, 1989; Hannan and
Freeman, 1989; Hannan and Carroll, 1992; Carroll
et al., 1993; Hannan, 1997), in that both models
focus on legitimacy and competition as the key
determinants of market entry,2 our model differs
from the density dependence model in a significant
way. The density dependence model treats an
increase or a decrease in the aggregated number of
firms (or the density) as a proxy for legitimacy and
competition, and implicitly posits that all prospective entrants make entry decisions primarily by
observing the ‘stock’ (or absolute number) of
incumbents in a focal market. Our model posits
that prospective entrants make entry decisions
primarily by observing the ‘flow’ of entries and
exits that have previously been made in a focal
market. We focus on the flow, rather than the stock,
because the use of the density measure obscures the
independent effects of prior entries and prior exits
on subsequent entries (Delacroix et al., 1989). Thus,
to provide a more detailed analysis of the dynamic
processes of foreign market entry decisions, our
model specifies the effects of prior entries and exits
on foreign market entry.
Our study also contributes to the understanding
of the multi-level effects of legitimacy and competition on foreign market entry. Although legitimacy
and competition represent two very important
forces in foreign market entry decisions, previous
studies have paid little attention to the choice of
appropriate levels of analysis, or to what specific
firms MNCs tend to follow. We take other MNCs
from a given home country to be the reference
group for an MNC from the same home country
(Martin et al., 1998; McKendrick, 2001), as foreign
firms tend to pay more attention to the behavior of
other entrants from their home country than to
Journal of International Business Studies
Interdependent behavior in foreign direct investment
Christine M. Chan et al
648
Subsequent entry
a
External institutional environment:
increased market attractiveness due to
the enhanced legitimacy of foreign
entry
Internal institutional environment:
legitimized entries
External institutional environment:
increased market competition due to
decreased available local resources
and overlapping customer base
Internal institutional environment:
decreased available internal resources
due to resource constraints
Small
Large
Number of prior entries
Subsequent entry
b
External institutional environment:
decreased market competition due to
resource release
Internal institutional environment:
increased available internal resources
due to resource release
Small
Figure 1
External institutional environment:
decreased market attractiveness because
of market hostility
Internal institutional environment:
decreased support from stakeholders
Number of prior exits
Large
Conceptual model: (a) prior exit and prior entry and subsequent entry; (b) prior exit and subsequent entry.
those from other countries (Shaver et al., 1997;
Shaver, 1998). In addition, an MNC consists of
multiple foreign subsidiaries that operate in multiple industries in multiple host countries, and hence
faces diverse internal and external institutional
environments. A related issue is the appropriate
institutional environment levels at which foreign
market entry behavior occurs. Based on the regulative, normative, and cultural-cognitive pillars of
the institutional environment that are suggested by
Scott (1995), we consider host country, global
industry, local industry, and parent firm to be the
relevant levels of analysis for the study of foreign
market entry behavior. The regulatory pillar
emphasizes regulating, monitoring, and sanctioning activities; the normative pillar places an
Journal of International Business Studies
emphasis on the preferred values and shared
norms; and the cultural-cognitive pillar stresses
the socially constructed common framework of
meaning. Hence a key question to be addressed is
whether or not the market entry decisions of MNCs
are more likely to be influenced by the prior entry
and prior exit decisions of other MNCs in the same
host country, global industry, or local industry; or
are more likely to be influenced by their own prior
investment decisions. In the next section, we
develop hypotheses on the influence on an MNC’s
foreign market entry decisions of the prior market
entry and exit decisions of that MNC at the parent
firm level, and the same decisions of the other
specified MNCs in the reference group at the host
country, global industry, and local industry levels.
Interdependent behavior in foreign direct investment
Christine M. Chan et al
649
Hypotheses
Host country
Host countries constitute the external institutional
environments in which foreign entrants are
embedded, and consist of various authorities and
stakeholders, including states, local activist groups,
customers, supplier groups, labor unions, and
national trade associations, all of which constitute
institutional arrangements that shape economic
activities and bestow legitimacy on foreign firms.
Although institutional arrangements within countries are relatively stable over time, they differ
across countries, because each country has its own
regulatory, normative, and cultural-cognitive institutions (Westney, 1993; Murtha and Lenway, 1994).
Studies that embrace the regulatory perspective
show that countries differ in their national rules
and regulations, federal systems, and governance
mechanisms (North and Thomas, 1973; Skocpol,
1979; Cole, 1989; Delacroix, 1993; Ring et al.,
2005). Recent research suggests that variation in
rules and policies leads to variation in innovative
and mimetic behavior (Mahmood and Rufin, 2005),
and the market entry behavior of firms across
countries (Rodriguez et al., 2005). Theorists who
highlight the normative elements of institutions
suggest that countries differ in their development
of value systems, normative frameworks, and
standards. In a study of the diffusion of managerial
ideologies in the US, Spain, Germany, and the UK,
Guillén (1994) found that diffusion patterns vary
across countries, because managerial ideologies
receive different amounts of support from professional groups and state agents. Research on the
cultural-cognitive perspective suggests that each
country has its own conceptions that are shaped
through social interaction within the country.
Dobbin (1994) found differing cultural belief
systems that were constructed to support societal
policy strategies in the United States, England, and
France. In their study of the car industries of South
Korea, Taiwan, Spain, and Argentina, Biggart and
Guillén (1999), focusing on both normative and
cultural-cognitive institutions, provide evidence
that each country has its own distinctive institutional pattern of organization that promotes the
development of its own model of car manufacturing. As institutions are often country specific
(Rosenzweig and Singh, 1991; Whitley, 1992), the
distinctive rules of the market and business recipes
shape the perceptions and judgments of the host
country of the legitimacy of foreign operations
(Westney, 1993; Kostova and Zaheer, 1999). As each
country has its own set of legitimating requirements for foreign operations, MNCs that encounter
contextual uncertainty in a host country tend to
follow the prior market entry decisions of other
MNCs in the host country, because the increasing
presence of foreign subsidiaries enhances the
legitimacy of entry into such a market. Legitimacy
not only alleviates the opposition that arises from
local government and labor unions (Kostova and
Zaheer, 1999), but also gives a signal to other
foreign entrants that they can enjoy the benefits of
market entry. However, a greater number of foreign
subsidiaries of other MNCs in the same host
country market intensifies market competition,
and we therefore expect that the tendency of MNCs
to imitate the prior entry behavior of other MNCs
in a host country weakens when many other MNCs
enter the same host country market. We also expect
that the prior exits of foreign subsidiaries of other
MNCs from a host country market alleviate the
extent of competition among MNCs, because each
exit represents a release of resources that triggers
new MNCs to invest in the market. However, a high
level of exits from a host country signals a hostile
market, and thereby discourages subsequent market
entry. Thus, we hypothesize the following.
Hypothesis 1a: The founding of a subsidiary of
an MNC in a host country has an inverted
U-shaped relationship with the number of prior
entries of subsidiaries of other MNCs in the same
host country.
Hypothesis 1b: The founding of a subsidiary of
an MNC in a host country has an inverted
U-shaped relationship with the number of prior
exits of subsidiaries of other MNCs from the same
host country.
Global industry
An industry is taken to mean an external institutional environment in which firms offer similar
products or services and collectively develop common standards and legitimate ways of doing
businesses through continuous interaction with
customers and suppliers (Scott, 1995).3 Although
some governance systems and widely held cultural
beliefs influence firms in various industries, there
are substantial differences in the mechanisms that
govern individual industries and in the institutional logic that guides activities within an industry
(Scott, 2001). Previous research has found that
Journal of International Business Studies
Interdependent behavior in foreign direct investment
Christine M. Chan et al
650
governance arrangements differ greatly across
industries, because the state may manipulate
regulatory policies differently in different industries, authorities may impose common standards or
rules on firms in the same industry, and actors may
engage in a process to sustain a particular type of
governance structure in a given industry (Wilks and
Wright, 1987; Campbell and Lindberg, 1990; Oliver, 1997). Industries also differ in the institutional
logic that provides guidelines on carrying out
business and defines the taken-for-granted practices
that predominate in the industry or field (Powell
and DiMaggio, 1991; Oliver, 1997). As industries
vary in their governance structures, economic
policies, and institutional logics, industry incumbents have their own perceptions of what constitutes legitimate business practice and behavior,
which in return affect the mimetic behavior of
the firms within that industry. Studies on mimetic
isomorphism have found that, in uncertain situations, firms tend to pursue legitimacy by imitating
the actions of other firms in the same industry,
some examples of which are the diffusion of civil
service reform (Tolbert and Zucker, 1983), the
adoption of the hospital matrix management
design (Burns and Wholey, 1993), the geographical
expansion of commercial banks (Haveman, 1993),
the adoption of new formats by radio stations
(Greve, 1996), the use of investment bankers as
advisors on acquisition (Haunschild and Miner,
1997), and the establishment of wholly owned
plants (Guillén, 2003). A different but related
perspective is the theory of industrial organization
economics, which suggests that industry is an
appropriate level of analysis for understanding the
behavior and performance of firms, because the
structure of a given industry constrains the behavior of the firms within it and leads to differences in
firm performance between industries (Bain, 1959;
Porter, 1980). Research on oligopolistic imitation
also shows that the actions and reactions of close
rivals are highly interdependent, as the market
entry of a firm into a new industry prompts its
competitors to match the firm’s move into that
industry (Knickerbocker, 1973; Yu and Ito, 1988).
These two separate lines of research generally
support the argument that firms within the same
industry tend to recognize one another’s presence
and follow one another’s actions. In the context of
global competition, MNCs compete in global
industries that span national borders (Porter,
1990). As they spread their activities across countries to offer relatively standardized products and
Journal of International Business Studies
services worldwide, their competitive positions in
one country are influenced by the position of other
MNCs in other countries (Porter, 1990). Global
industries, therefore, are institutional environments in which MNCs tend to emulate one
another’s actions (Westney, 1993). Extending the
argument to the case of foreign market entry, we
argue that, in uncertain situations, the market
entry decisions of MNCs in a global industry are
influenced by the prior entries into and exits from
the same global industry by other MNCs. Thus, we
hypothesize the following:
Hypothesis 2a: The founding of a subsidiary of
an MNC in a global industry has an inverted Ushaped relationship with the number of prior
entries of subsidiaries of other MNCs in the same
global industry.
Hypothesis 2b: The founding of a subsidiary of
an MNC in a global industry has an inverted Ushaped relationship with the number of prior
exits of subsidiaries of other MNCs from the same
global industry.
Local industry
Institutional environments vary not only between
global industries, but also between industries within a host country, as each domestic industry has its
own national arrangements that govern ‘the way
business is done in an industry in a particular
country’ (Zaheer and Zaheer, 1997). National
industry arrangements derive from national regulatory conditions, from the industrial policy of the
government (Murtha and Lenway, 1994), and from
social relations between the local protagonists
(buyers, suppliers, legislative and political authorities, and research institutes) within and between
industries in a country (Porter, 1990; Kogut, 1991;
Bartholomew, 1997). Local industries therefore
form institutional environments in which different
firms offer similar products, satisfy similar customer
needs, and face a common set of legitimating
pressures that drive them to behave similarly (Koh
et al., 1990; McKendrick, 2001). A more recent
study provides evidence that firms tend to mimic
the behavior of other firms that belong to a specific
strategic group within an industry (local mimetism), rather than mimicking the behavior of all of
the firms in an entire industry (global mimetism)
(Garcia-Pont and Nohria, 2002). The findings from
this study suggest that mimetic processes are better
specified at the local level than at the global level,
Interdependent behavior in foreign direct investment
Christine M. Chan et al
651
as firms do not respond homogeneously to the
external environment. Organizational ecologists
also suggest that the processes of legitimation and
competition vary at different levels of analysis,
even within the same industry (Carroll and Wade,
1991; Swaminathan and Wiedenmayer, 1991; Hannan and Carroll, 1992; Baum and Singh, 1994;
Hannan et al., 1995; Lomi, 1995; Hannan, 1997).
For example, in studies that use density dependence models of organization to investigate American brewers, Italian rural cooperative banks, and
Tokyo banks, founding rates are found to be greater
when the institutional population is narrowly
defined than when it is broadly defined (Carroll
and Wade, 1991; Lomi, 1995, 2000; Greve, 2002).
The findings from these studies show that firms
tend to be responsive to localized processes of
legitimation and competition, because many firms
rely heavily on their immediate institutional and
competitive environments for support and
resources. Several empirical studies also provide
support for stronger competitive effects at the local
or regional level, which indicates that firms
compete more intensely in the local environment
(Baum and Singh, 1994; Hannan et al., 1995; Lomi,
1995; Baum and Oliver, 1996; Bigelow et al., 1997).
It is thus plausible to argue that the influences of
the prior market entry and exit decisions of other
MNCs in a local industry are stronger than the same
decisions at the host country and global industry
levels, because firms are more sensitive to the signs
of attractive and hostile markets at the local
industry level than at the host country and global
industry levels. We therefore expect that MNCs
monitor more closely the foreign market entry and
exit decisions of other MNCs that enter the same
industry within a host country, rather than homogeneously mimicking the behavior of other unspecified MNCs in their host country and global
industry. Thus, we hypothesize the following:
Hypothesis 3a: The founding of a subsidiary of
an MNC in a local industry has a stronger
inverted U-shaped relationship with the number
of prior entries of the subsidiaries of other MNCs
in the same local industry than with the aggregate number of prior entries of other MNCs in a
host country and global industry.
Hypothesis 3b: The founding of a subsidiary of
an MNC in a local industry has a stronger
inverted U-shaped relationship with the number
of prior exits of the subsidiaries of other MNCs
from the same local industry than with the
aggregate number of prior exits of other MNCs
from a host country and global industry.
Parent firm
MNCs not only follow the actions of other MNCs in
their external institutional environments, but also
take into account their own decisions that they
have made in the past. Parent firms, which form an
internal institutional environment in which their
subsidiaries are embedded, define the appropriate
ways of acting and develop the rules that justify
their past behavior and guide their current actions
(Ashforth and Fried, 1988; Westney, 1993; Weick,
1995; Kostova and Zaheer, 1999; Scott, 2001). To
maintain consistency within their internal institutional environments, MNCs impose coercive pressure on their foreign subsidiaries to adopt
mandated organizational practices (Kostova and
Roth, 2002), recruit new employees who share the
same interpretive and normative frameworks as
current employees to support ongoing activities
and behavior (Kilduff, 1993), and persist in adopting the taken-for-granted mode of entry that has
been used in the past (Lu, 2002; Yiu and Makino,
2002). In the case of early foreign market entry,
MNCs face primary uncertainty that arises from a
lack of familiarity with the local institutional
environment, such as local practices and preferences, which may not be easily interpreted or
observed (Koopmans, 1957; Sutcliffe and Zaheer,
1998; Kostova and Zaheer, 1999). Under such
uncertain conditions, firms tend to replicate the
routines and practices that they have enacted
previously and with which they are familiar. These
past actions and practices will be reinforced unless a
critical disruption occurs (Kelly and Amburgey,
1991; Amburgey and Miner, 1992). Following this
line of argument, we expect that the prior market
entries of the subsidiaries of MNCs in a focal market
stimulate their subsequent market entry decisions,
because their entry strategies are legitimized over
time. However, the process of repetitive entry slows
down when the internal resources that are available
to support foreign operations reach their limit. In
contrast, the prior exits of foreign subsidiaries
release the resource constraints within an MNC,
and with more resources available, MNCs can
redeploy their existing resources and reinvest them
in other foreign subsidiaries. Further exits of
foreign subsidiaries, however, signal that the foreign operations of the MNC may not be supported
by its stakeholders, which thus discourages the
Journal of International Business Studies
Interdependent behavior in foreign direct investment
Christine M. Chan et al
652
MNC from making subsequent entries in other
markets. Thus, we hypothesize the following:
Hypothesis 4a: The founding of subsequent
subsidiaries of an MNC has an inverted U-shaped
relationship with the number of prior entries of
its subsidiaries.
Hypothesis 4b: The founding of subsequent
subsidiaries of an MNC has an inverted U-shaped
relationship with the number of prior exits of its
subsidiaries.
Method
Data source
Our data come from annual volumes of Kaigai
Shinshutsu Kigyo Soran (‘Directory of Japanese Overseas Affiliates’), which lists the population of overseas subsidiaries that have been established by both
listed and non-listed Japanese MNCs. The directories have been used to examine the foreign direct
investment (FDI) decisions of Japanese MNCs (e.g.,
Hennart, 1991; Woodcock et al., 1994; Yamawaki,
1994; Makino and Beamish, 1998; Henisz and
Delios, 2001; Lu, 2002; Yiu and Makino, 2002).
We used the directories from 1989 to 1998 to create
a panel data set of the foreign direct investment of
eight large Japanese electronics MNCs: Hitachi,
Toshiba, Mitsubishi Electric, NEC, Fujitsu, Sharp,
Sony, and Sanyo. These firms compete closely with
each other in both the domestic and international
markets in a wide range of electronic appliances
and equipment. Thus, these firms are well informed
about – and are influenced by – the foreign market
entry and exit decisions of one another. We chose
electronics firms because they have a longer history
of international investment, and also have more
comprehensive international operations than other
industries in Japan. Our observation period takes
1989 as the staring point, because the yen appreciation due to the PLAZA agreement between Japan
and the US in September 1985 had sparked off an
increased amount of Japanese foreign investment
across the world.
To create a data set for analysis, we developed
a matrix of data in which each record represents
one observation per parent firm per host country
per industry per year. There are 158,400 records
in our sample (eight parent firms 110 host
countries 18 global industries 10 years), and
our data set shows that 4349 subsidiaries were
newly established during the period 1989–1998. We
Journal of International Business Studies
included the 110 countries that appear in the list of
the original database and have publicly available
country-level information used in our analysis. We
excluded some cases from the original data set
because of missing data. The final data set consists
of a sample of 156,451 observations.
Level of analysis
We focus on four levels of analysis: host country,
global industry, local industry, and parent firm. The
host country is defined according to the country
classification that was developed by the United
Nations Statistics Division. Regions that are not
considered to be legally independent countries but
that have relative autonomy over their political and
economic activities, such as Hong Kong, are treated
as independent host country units. Global industry
refers to an industry that spans many host countries, and is defined by a two-digit Standard
Industrial Classification (SIC). Local industry refers
to an industry that is defined separately in each
country, and is again described by a two-digit SIC
per host country. Parent firm refers to Japanese
MNCs that have their headquarters in Japan,
irrespective of whether the major owners of the
firm are Japanese or non-Japanese firms or individuals. We focus on eight parent firms, 18 global
industries, 110 host countries, and 1980 local
industries (18 global industries 110 host countries). Table 1 provides a list of the parent firms, the
global industries, and the host countries that are
examined in this study.
Variables
Dependent variable
Our dependent variable represents the frequency of
foreign market entry, which is measured by the
counts of Japanese foreign subsidiaries that were
established by each parent firm in each industry in
each host country for every year in the period
1989–1998.
Independent variables
We used the counts of prior entries and prior exits
as the two major independent variables in our
analyses. Prior entry is measured by the counts of
foreign subsidiaries that were established in the
preceding year, and prior exit is measured by the
counts of foreign subsidiaries that were terminated
in the preceding year. Both variables are measured
at the following four levels of analysis.
Interdependent behavior in foreign direct investment
Christine M. Chan et al
653
Table 1
List of parent firms, global industries, and host countries
Parent firm (8)
Global industry (18)
Hitachi
Chemical products
Toshiba
Electronic products
Mitsubishi Electric Glass, ceramics and stone products
NEC
Industrial machinery
Fujitsu
Instruments
Sharp
Investment office
Sony
Metal products
Sanyo
Movies, music, entertainment
Other manufacturing
R&D
Real estate
Services
Telecommunications
Transportation equipment
Warehouse services
Wholesale durable goods
Wholesale nondurable goods
Other services
Host country (110)
Argentina
Australia
Austria
Belgium
Brazil
Canada
Chile
China
Colombia
Costa Rica
Czech Republic
Denmark
El Salvador
Finland
France
Germany
Guatemala
Hong Kong
Hungary
India
Indonesia
Iran
Ireland
Italy
Ivory Coast
Korea
Kuwait
Malaysia
Mexico
Netherlands
New Zealand
Nigeria
Norway
Panama
Peru
Philippines
Poland
Portugal
Saudi Arabia
Singapore
Spain
Sweden
Switzerland
Thailand
UAE
UK
USA
Venezuela
Vietnam
Mongolia
Brunei
Cambodia
Laos
Pakistan
Sri Lanka
Bangladesh
Nepal
Bahrain
Israel
Jordan
Lebanon
Kazakhstan
Luxembourg
Russia
Greece
Romania
Bulgaria
Cyprus
Turkey
Ukraine
Slovakia
Slovenia
Croatia
Honduras
Bahamas
Jamaica
Trinidad and Tobago
Dominican Republic
Surinam
Ecuador
Bolivia
Paraguay
Uruguay
Morocco
Algeria
Tunisia
Egypt
Liberia
Ghana
Niger
Cameroon
Congo
Angola
Ethiopia
Kenya
Tanzania
Madagascar
Mauritius
Zimbabwe
South Africa
Zambia
Swaziland
Papua New Guinea
Vanuatu
Fiji
Solomon Islands
Palau
Malta
Dominica
Sierra Leone
Note: Local industry includes 1980 clusters (18 global industries 110 host countries).
(1) Host country level: prior entries and prior exits
made by other firms in the same country in
different industries.
(2) Global industry level: prior entries and prior
exits made by other firms in the same industry in
different countries.
(3) Local industry level: prior entries and prior exits
made by other firms in the same industry in the
same host country.
(4) Parent firm: prior entries and prior exits made
by the same parent firm.
Levels 1–3 represent the effects of other firms,
and level 4 represents the effects within a firm. The
effects at the host country level are measured by the
counts of prior entries and prior exits of other firms
in each host country. The effects at the global
industry level are measured by the counts of prior
entries and prior exits of other firms in each global
industry. The effects at the local industry level are
measured by the counts of prior entries and prior
exits of other firms in each local industry. The
counts of other firms at the host country and the
global industry levels exclude the counts of other
firms at the local industry level, and therefore the
prior entries and prior exits of other firms in the
same host country, global industry, and local
industry represent mutually exclusive reference
groups. The effects at the parent firm level are
measured by the counts of the prior entries and
prior exits of each parent firm.
To test the hypothesized inverted U-shaped
relationships between the variables, we included
both linear and quadric terms in the models. We
also included the density in the models, which is
the number of all Japanese subsidiaries in each
cluster at each level at the beginning of each year.
The effect of density is not tested in the analysis,
but needs to be controlled because it represents the
carrying capacity at each level of the population,
which has been found to influence both the
founding and disbanding rate in a population
(Hannan and Freeman, 1989).4 To make our
analysis consistent with prior organizational
Journal of International Business Studies
Interdependent behavior in foreign direct investment
Christine M. Chan et al
654
ecology research, we included both the linear and
quadric terms of density at each of the four levels of
analysis in the models.
Control variables
We included two parent firm-level control variables
in the analyses. First, we controlled for parent firm
size. Parent firm size represents either the size of the
available pool of resources or capabilities that can
be exploited for entry into a new market (Penrose,
1959; Hymer, 1976), or the organizational inertia
that constrains new changes (Aldrich, 1979; Hannan and Freeman, 1989). Some studies have found
evidence of a positive impact of firm size on foreign
direct investment (Caves and Mehra, 1986; Terpstra
and Yu, 1988), whereas other studies have found
that firm size is not necessarily a barrier to
internationalization (Coviello and McAuley, 1999;
Lu and Beamish, 2001). We included this variable
to control for the possible upward effects of parent
firm size on foreign market entry.
Second, we controlled for the research and
development (R&D) intensity of the parent firm,
which is measured by R&D expenses divided by
total sales. Previous studies have treated R&D
intensity as a proxy for the technological advantages of a firm (Caves, 1996), which constitutes a
part of the firm’s ownership advantages that drive
foreign direct investment (Dunning, 1988). A
positive association has been found between the
degree of R&D intensity of an investing firm and
the likelihood that the firm will engage in foreign
direct investment (Hennart and Park, 1994). Recent
studies also suggest that foreign firms with
advanced technological capabilities often use foreign direct investment as a means to enhance or
source locally available technology (Chang, 1995;
Florida, 1997; Kuemmerle, 1999). Thus, we
included this variable to control for the possible
upward effects of the technological advantages of
the parent firm on foreign market entry.
We also included two host country specific
control variables – political hazard risk and GDP
per capita – in our analysis. Political hazard risk is
derived from the political hazard index that was
developed by Henisz (2000a, b), which measures
the feasibility of policy change in a country.
Research has suggested that foreign firms face
more uncertainties in host countries in which the
political hazard risks are high. Such uncertainties
are expected to increase the perceived political
and expropriation risks in a host country, which
discourages inward foreign investment. We, there-
Journal of International Business Studies
fore, included this variable to control for the
possible downward effects of political hazard risks
on foreign market entry. A high value for this
variable indicates a low risk of political hazard in a
host country. GDP per capita represents the income
level of the economy in a host country. Traditional
foreign direct investment theory suggests that
foreign firms are more likely to engage in marketseeking foreign direct investment in host countries
in which the income level – and hence the
consumption power – is relatively high, and are
more likely to engage in labor-seeking foreign
direct investment in host countries in which the
income level, and hence the labor cost, is relatively
low. We included these variables to control for the
possible country-specific effects of the income level
of economies on foreign market entry. We also
controlled for year effects on new entries during the
observation period. A correlation matrix of all of
the variables is provided in Table 2.
Model estimation
As our dependent variable is derived from count
data and has zero counts in some clusters in host
countries and industries (both global and local) in
the observation period, we employed a zeroinflated negative binomial model (ZINB) to test
our hypotheses. As our sample consists of longitudinal panel data on Japanese foreign subsidiaries
that are clustered by host country, global industry,
local industry, and parent firm, our analyses need
to address two potential sources of bias: lack of
independence and unobserved heterogeneity (Allison, 1995, 1999). Lack of independence arises
because our sample contains repeated observations
across years, and unobserved heterogeneity arises
because our models cannot control for all of the
remaining host country, global industry, local
industry, and parent-firm-specific effects that influence foreign market entry. Both problems lead to
autocorrelation among the observations within and
between the levels of analysis, and hence to the
underestimation of the true standard errors, which
inflates the significance tests that are associated
with the parameter estimates.
To address these problems, we employ a randomeffects model of zero-inflated ZINB and report the
robust standard errors that are derived from the
robust variance estimator (White, 1980). The robust
variance estimator produces consistent standard
errors irrespective of the correctness of the correlation structure that is assumed by the regression
model. Using the robust standard errors allows us to
Interdependent behavior in foreign direct investment
Table 2
Descriptive statistics and correlations
Mean Std
Min
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
4.00
115.0
0.08*
7.00
0.07*
0.69*
27.00
0.05*
0.57*
306.0
0.48*
0.07* 0.06* 0.03* 0.04*
38.00
0.06* 0.04* 0.01* 0.02* 0.78*
22.00
0.06* 0.05* 0.01* 0.02* 0.83* 0.77*
46.00
0.21*
0.24*
0.18*
0.14* 0.32* 0.25* 0.27*
10.00
0.16*
0.18*
0.22*
0.11* 0.15* 0.17* 0.15*
0.54*
7.00
0.12*
0.11*
0.09*
0.09* 0.16* 0.14* 0.16*
0.42*
0.35*
89.00
0.00
0.02*
0.03*
0.02* 0.03* 0.05* 0.03*
0.01*
0.01*
0.01
31.00
0.00
0.01*
0.03*
0.03* 0.02* 0.06* 0.05*
0.01
0.01*
0.01* 0.47*
16.00
0.00
0.01*
0.03*
0.02* 0.01* 0.06* 0.03*
0.01
0.01*
0.01 0.32* 0.42*
13.31 0.01 0.04* 0.03* 0.03* 0.01* 0.00 0.00 0.02* 0.01* 0.00* 0.07* 0.07* 0.11*
4.31 0.01* 0.10* 0.06* 0.07* 0.02* 0.02* 0.01* 0.03* 0.02* 0.01* 0.31* 0.14* 0.16*
Christine M. Chan et al
0.08*
0.78
0.00
0.09*
0.02*
0.09* 0.01 0.00 0.00
0.04*
0.01*
0.03* 0.05* 0.01* 0.01* 0.01* 0.02*
49.67
0.03*
0.34*
0.18*
0.27* 0.00 0.00 0.00*
0.13*
0.07*
0.08* 0.02* 0.01* 0.01* 0.05* 0.10* 0.32*
5.00
0.00
0.05*
0.05*
0.03* 0.06* 0.08* 0.05*
0.02*
0.02*
0.01* 0.46* 0.21* 0.20*
0.05*
0.17* 0.13* 0.03*
N¼156,451; *Po0.01.
655
Journal of International Business Studies
1 Entry counts by host country, 0.00 0.06 0.00
global industry, and
parent firm at year t
2 Density in host country
4.48 11.28 0.00
at year t1
3 Entry counts in host
0.01 0.12 0.00
country at year t1
4 Exit counts in host country
0.31 1.31 0.00
at year t1
5 Density in global industry
30.71 70.26 0.00
at year t1
6 Entry counts in global
1.98 4.90 0.00
industry at year t1
7 Exit counts in global industry 0.98 2.79 0.00
country at year t1
8 Density in local industry
0.26 1.76 0.00
at year t1
9 Entry counts in local industry 0.02 0.21 0.00
at year t1
10 Exit counts in local industry
0.01 0.12 0.00
country at year t1
11 Density in parent firm
50.05 13.76 22.00
at year t1
12 Entry counts of parent firm
5.53 5.51 0.00
at year t1
13 Exit counts of parent firm
2.86 2.98 0.00
at year t1
14 R&D intensity at year t1
6.80 3.34 0.06
15 Parent firm size (net sales) in 2.30 1.00 0.33
trillion Japanese yen
at year t1
16 Political hazard index
0.29 0.22 0.00
at year t1
17 GDP per capita in US$/1,000 7.55 10.14 0.09
at year t1
18 Year (centered)
0.50 2.90 4.00
Max
Interdependent behavior in foreign direct investment
Christine M. Chan et al
656
relax the assumption that observations across years
are independent, and thus helps us to obtain better
estimates of the parameters.
Specifically, we estimated the following equation,
which fits into the zero-inflated ZINB model5 as
Entryit ¼b0 þb1 Entryt1 þ b2 ðEntryt1 Þ2 þ b3 Exitt1
þb4 ðExitt1 Þ2 þb5 Densityt1 þ b6 ðDensityt1 Þ2
þ b7 Zt1 þmi þ nit
ð1Þ
where Entryit represents the counts of foreign
market entries that are calculated for the ith
combination in the matrix that consists of 18
global industries, 1980 local industries, 110 host
countries, and 8 parent firms in year t. Entryt–1
represents the counts of entries and Exitt1 the
counts of exits in year t1 in each cluster at each of
the four levels of analysis. The variable Densityt1
represents the density, or the counts of all of the
existing (Japanese) subsidiaries in each cluster, at
each level of analysis at the beginning of year t1.
The term Z denotes the vector of the control
variables. The error term mi denotes the unobserved
effect in the ith combination, and vit denotes the
remainder disturbance.
Results
As a result of the strong correlations between the
independent variables across the levels, we conducted separate analyses for each of the four levels
of analysis. The first four models in Table 3 estimate
the effects of prior entry and prior exit at the host
country (Model 1), global industry (Model 2), local
industry (Model 3), and parent firm levels (Model
4), respectively. The last model includes the effects
of prior entry and prior exit at all of the levels
(Model 5). The results that are provided in Models 1
and 5 show that the linear terms of both prior entry
and prior exit at the host country level have a
positive and significant impact on foreign market
entry, and that the quadric terms of both prior
entry and prior exit have a negative and significant
impact. The inflection points of prior entry (9.9)
and prior exit (3.2) are both within the range of
observation. These results indicate that both prior
entry and prior exit have an inverted U-shaped
effect on new foreign market entry in the subsequent year, which supports Hypotheses 1a and 1b.
The results that are provided in Model 2 show
that, consistent with our hypothesis, the linear
terms of both prior entry and prior exit at the global
industry level have a positive and significant
impact and the quadric terms of both prior entry
Journal of International Business Studies
and prior exit a negative impact on foreign market
entry. However, the impact of the quadric term of
prior entry is not statistically significant. When the
density variables at all of the levels are removed
from the analysis, both prior entry and prior exit at
the global industry level have a significant inverted
U-shaped relationship with new foreign market
entry (see Model 5). The inflection points of prior
entry (15.2) and prior exit (5.9) are within the range
of observation, which indicates that the density
effect obscures the effect of prior entry on new
foreign market entry. In sum, Hypothesis 2a is
moderately supported, and Hypothesis 2b is fully
supported.
The results that are provided in Models 3 and 5
show that the linear terms of prior entry and prior
exit at the local industry level have a significant
and positive impact, and the quadric terms of prior
entry and prior exit a significant and negative
impact, on foreign market entry in the subsequent
year. The inflection points of both prior entry (5.3)
and prior exit (2.8) are within the range of
observation, which suggests that both prior entry
and prior exit have an inverted U-shaped relationship with new foreign market entry in the subsequent year. To test Hypotheses 3a and 3b, which
predict that the effects of prior entry and prior exit
on new foreign market entry at the local industry
level are stronger than the effects at the host
country and global industry levels, we examine
the relative effects of prior entry and prior exit at
the local industry, host country, and global industry levels by comparing the maximum value of
multipliers, inflection points, and the ratio of the
maximum value of multipliers over the inflection
points across these levels (see Table 4). The ratio
provides an indication of the extent to which
foreign market entry is elastic to prior entry and
prior exit: the higher the ratio, the more elastic the
market entry to prior entry and prior exit. Table 4
indicates that as the number of prior entries
increases from 0 to 9.9 in a host country, 0 to
15.2 in a global industry, and 0 to 5.3 in a local
industry, the ratio of elasticity increases by 1.0
times, 0.2 times, and 1.7 times, respectively. These
results show that the number of market entries at
the local industry level increases more quickly than
that at the host country and global industry levels,
as the multiplier reaches its maximum value (9.0)
when the number of prior entries is 5.3. Similarly,
Table 4 indicates that as the number of prior exits
increases from 0 to 3.2 in a host country, 0 to 5.9 in
a global industry, and 0 to 2.8 in a local industry,
Table 3
Results of zero-inflated negative binomial analyses
Variables
Level
Sign
Host
Host
Host
Host
Host
Host
country
country
country
country
country
country
Global
Global
Global
Global
Global
Global
Density
Density Density
Entryt1
Entryt1 Entryt1
Exitt1
Exitt1 Exitt1
Local
Local
Local
Local
Local
Local
Density
Density density
Entryt1
Entryt1 entryt1
Exitt1
Exitt1 exitt1
Parent
Parent
Parent
Parent
Parent
Parent
Wald w2
industry
industry
industry
industry
industry
industry
firm
firm
firm
firm
firm
firm
Parent firm
Parent firm
Host country
Host country
4.970**** (0.246)
3.219**** (0.771)
0.075**** (0.012)
0.001**** (0.000)
0.381**** (0.039)
0.019**** (0.003)
0.192** (0.085)
0.038* (0.021)
H3a+
H3a
H3b+
H3b
H4a+
H4a
H4b+
H4b
1000.24
5.874**** (0.314)
0.101*** (0.033)
0.003**** (0.001)
0.281**** (0.045)
0.023**** (0.005)
0.444**** (0.023)
0.010**** (0.001)
0.509**** (0.103)
0.020** (0.010)
0.465*** (0.168)
0.112*** (0.041)
0.016 (0.016)
0.148** (0.074)
0.454 (0.387)
0.024**** (0.003)
0.016 (0.016)
Model 5
0.466**** (0.056)
0.023**** (0.004)
0.368** (0.157)
0.056* (0.033)
0.032**** (0.009)
0.000**** (0.000)
0.081* (0.046)
0.001 (0.001)
0.191* (0.113)
0.008* (0.006)
H2a+
H2a
H2b+
H2b
+
+
+
+
Model 4
0.025 (0.016)
0.247**** (0.062)
0.916**** (0.251)
0.057**** (0.004)
0.061** (0.031)
739.27
0.000 (0.018)
0.146** (0.063)
0.402 (0.370)
0.024**** (0.006)
0.029 (0.022)
2742.97
0.828**** (0.145)
0.078**** (0.018)
0.794**** (0.241)
0.141*** (0.053)
0.070*** (0.025)
0.001** (0.000)
0.011 (0.031)
0.002* (0.001)
0.041 (0.057)
0.009* (0.005)
0.024
0.002
0.015
0.003
0.033** (0.014)
0.261**** (0.067)
0.895*** (0.341)
0.061**** (0.005)
0.124**** (0.039)
0.008 (0.019)
0.166*** (0.063)
0.702** (0.291)
0.028**** (0.005)
0.012 (0.022)
190.35
(0.031)
(0.001)
(0.066)
(0.006)
1971.48
N¼156,451; ****Po0.001; ***Po0.01; **Po0.05; *Po0.10.
a
The coefficient value of all of the independent variables is divided by 1,000. The estimates of the parameters are based on the robust standard errors, which are corrected for clustering foreign
affiliates (White, 1980).
b
The estimates for zero vector are the number of lagged density, lagged entry, and lagged exit.
Standard errors in parentheses.
657
Journal of International Business Studies
Control variables
R&D intensityt1
Parent firm sizet1
Political hazard riskt1
GDP per capitat1
Year
industry
industry
industry
industry
industry
industry
4.169**** (0.377)
Model 3
Christine M. Chan et al
Density
Density Density
Entryt1
Entryt1 Entryt1
Exitt1
Exitt1 Exitt1
H1a+
H1a
H1b+
H1b
Model 2
Interdependent behavior in foreign direct investment
3.624**** (0.361)
Intercept
Independent variablesa,b
Density
Density Density
Entryt1
Entryt1 Entryt1
Exitt1
Exitt1 Exitt1
Model 1
Interdependent behavior in foreign direct investment
Christine M. Chan et al
658
(A) Max
multiplier
Effects of prior entry
Host
10.2
country
Global
2.3
industry
Local
9.0
industry
a
(B) Inflection (C) Ratio of elasticity
point
[(A)/(B)]
9.9
1.0
15.2
0.2
5.3
1.7
Effects of prior exit
Host
1.8
country
Global
2.3
industry
Local
3.1
industry
3.2
0.6
5.9
0.4
2.8
1.1
Local industry level
(Reference group: same
country & same industry)
- Max multiplier: 9.0
- Inflection point: 5.3
Host country level
(Reference group: same country
& different industry)
- Max multiplier:10.2
- Inflection point: 9.9
Global industry level
(Reference group: different country
& same industry)
- Max multiplier: 2.3
- Inflection point: 15.2
8
6
4
2
0
b
0
5
10
3.5
2.5
2
1.5
1
0.5
0
15
20
25
Prior entries
30
35
40
Local industry level
(Reference group: same country
& same industry)
- Max multiplier: 3.1
- Inflection point: 2.8
Host country level
(Reference group: same country &
different industry)
-Max multiplier: 1.8
-Inflection point: 3.2
Global industry level
(Reference group: different
country & same industry)
- Max multiplier: 2.3
- Inflection point: 5.9
3
the ratio of elasticity increases by 0.6 times, 0.4
times, and 1.1 times, respectively. These results
suggest that the number of market entries at the
local industry level increases more quickly than the
number of entries at the host country and global
industry levels, as the multiplier reaches its maximum value (3.1) when the number of prior exits is
2.8. Our evidence thus implies that MNCs are more
sensitive to the prior entry and prior exit of other
MNCs in a specific local industry than they are to
the same behavior in a global industry or host
country. Figure 2 presents graphic illustrations of
the relative effects of prior entry and prior exit
between the three levels. The figure clearly shows
that the effects of both prior entry and prior exit at
the local industry level are far more elastic over the
range of observed counts of prior entry and prior
exit than the same effects at the host country and
global industry levels. This evidence provides
strong support for Hypotheses 3a and 3b.
Model 4 provides the results of the effects of prior
entry and prior exit at the parent firm level.
Contrary to our hypothesis, the results show that
the linear term of prior entry has a negative and
non-significant impact, and the quadric term of the
prior entry a positive and marginally significant
impact, on foreign market entry. The results also
show that the linear term of prior exit is positive
and the quadric term of prior exit is negative, yet
only the latter has a significant impact on foreign
market entry. Model 5 shows that neither the linear
nor the quadric terms of prior entry and prior exit is
statistically significant. These results suggest that
an MNC’s prior entry has only a marginal impact
Journal of International Business Studies
12
10
Multiplier of founding of
subsequent entries
Levels of
analysis
Multiplier and inflection point
Multiplier of founding of
subsequent entries
Table 4
0
5
10
15
20
25
Prior exits
Figure 2 Relative effects of prior entry and exit: between-level
comparison: (a) effects of prior entries made by other firms;
(b) effects of prior exits made by other firms.
on its subsequent market entry, which provides
limited support for Hypotheses 4a and 4b.6
We also compare the relative effects of prior entry
with those of prior exit on subsequent market entry
across levels. The graphic comparison of the multipliers of the foreign market entries within each
level of observation is presented in Figure 3, which
shows that the effects of prior entry are greater than
those of prior exit both at the host country and the
local industry levels. Figure 3a illustrates that the
effect of prior entry at the host country level
increases the multiplier to 10.2, whereas that of
prior exit increases the multiplier to 1.8. Similarly,
Figure 3c shows that the effect of prior entry at the
local industry level increases the multiplier to 9,
whereas that of prior exit increases the multiplier to
3.1. However, the deviation in the relative impact
of prior entry from that of prior exit is smaller at the
local industry than at the host country level. At the
global industry level, the effects of both prior entry
and prior exit increase the multiplier to 2.3 (see
Figure 3b). However, the effect of prior exit is more
elastic than that of prior entry, as the multiplier
reaches its maximum value when the number of
prior exits is 5.9 and when the number of prior
entries is 15.2. These observations suggest that the
Interdependent behavior in foreign direct investment
Christine M. Chan et al
659
Multiplier of founding of
subsequent entries
a
10
6
4
Multiplier of founding of
subsequent entries
Prior exit
- Max multiplier: 1.8
- Inflection point: 3.2
2
0
5
10
15
20
Prior entries,Prior exits
2.5
30
Prior exit
- Max multiplier: 2.3
- Inflection point: 5.9
1.5
1
0.5
0
5
10
15
20
25
Prior entries,Prior exits
10
30
35
40
Prior entry
- Max multiplier: 9.0
- Inflection point: 5.3
9
Multiplier of founding of
subsequent entries
25
Prior entry
- Max multiplier: 2.3
- Inflection point: 15.2
2
0
c
Prior entry
- Max multiplier: 10.2
- Inflection point: 9.9
8
0
b
this impact is statistically significant in only one of
the five models.
12
8
7
6
5
Prior exit
- Max multiplier: 3.1
- Inflection point: 2.8
4
3
2
1
0
0
1
2
3
4
5
6
7
Prior entries,Prior exits
8
9
10
Figure 3 Relative effects of prior entry and exit: within-level
comparison: (a) host country level; (b) global industry level; (c)
local industry level.
relative importance of prior entry and prior exit on
subsequent market entry vary across the levels of
observation.
With regard to the impact of the control
variables, the results show that the density of
foreign subsidiaries has an inverted U-shaped
relationship with subsequent foreign market entry
at all of the levels of observation, and that MNCs
are likely to engage in foreign direct investment
when they are smaller in size and invest in
countries with a high income level, or invest in
less advanced countries with a greater political
hazard risk. Although R&D intensity is found to
have a positive impact on subsequent market entry,
Discussion
One of the key motivations of this study is to
empirically examine interdependent foreign market entry behavior at the institutional environment
levels of host country, global industry, local
industry, and parent firm. Unlike most previous
studies that view the foreign market entry decisions
of MNCs as a series of independent choices that are
influenced mainly by economic factors, the longitudinal analyses of our study show that MNCs
make normatively rational choices by following the
previous investment behavior of other MNCs.
Specifically, our findings indicate that the foreign
market entry of an MNC has a strong inverted Ushaped relationship with the prior entry of other
MNCs in a host country, global industry, or local
industry. This evidence suggests that the establishment of an increasing number of foreign subsidiaries by MNCs in a focal market enhances the
legitimacy of this form of market entry, which
provides a signal of the attractiveness of the market
that triggers other MNCs to engage in mimetic
behavior. However, further entries into the market
beyond a certain level gives out a signal of intense
market competition, and therefore reduces the
likelihood that MNCs will imitate each other’s
market entry decisions.
Our study also provides evidence of the influence
of the prior exit decisions of other MNCs on the
market entry decisions of an MNC. As with the
effects of prior entry, our findings clearly show that
the foreign market entry decisions of an MNC have
a strong inverted U-shaped relationship with the
prior exit of other MNCs from a host country,
global industry, and local industry. As the exit of
other MNCs releases the finite resources that are
required for local operations (for example, pooled
skilled labor and access to infrastructure and
distribution networks) and frees up the customer
base that was previously tapped by the exiting
firms, the extent of competition for finite resources
and customers decreases, which thereby encourages
MNCs to establish foreign subsidiaries in the
market. However, further exits from the market
give out a signal of a hostile market, which thus
discourages MNCs from establishing foreign subsidiaries there.
Our study clearly indicates that MNCs do not
place an equal emphasis on the actions of other
MNCs in a host country, global industry, or local
Journal of International Business Studies
Interdependent behavior in foreign direct investment
Christine M. Chan et al
660
industry. MNCs are more sensitive to – and are more
likely to imitate – the decisions of other firms in a
specific industry in a host country (local industry)
than the decisions of firms in more broadly defined
segments (host country and global industry). These
findings provide additional evidence for the theory
of global and local mimetism (Garcia-Pont and
Nohria, 2002), which suggests that the reference
group to which firms match their actions is more
likely to be a narrowly defined business segment
(strategic group) that is composed of firms that
possess similar competence bases, use similar
resources, and serve similar groups of customers
than a broadly defined segment (industry) that
consists of multiple but separate business segments.
Our evidence advances the literature on external
and internal institutional environments (Rosenzweig and Singh, 1991; Westney, 1993). Previous
studies have shown that choice of organizational
structures and practices is subject to either host
country or parent firm isomorphic pulls (Rosenzweig and Singh, 1991; Westney, 1993; Kostova and
Zaheer, 1999; Davis et al., 2000). However, our
study shows that the source of external influence
comes not only from the host country level of the
institutional environment, but also from the global
and local industry levels. As the magnitude of
external influences varies significantly across different levels of analysis, future studies can contribute to the multi-level research7 by examining
which MNCs at each level of the institutional
environment have the greatest influence on the
subsequent market entry decisions of other MNCs,
and when this influence has the greatest impact.
Our analysis also indicates that, compared with the
impact of the prior entry and exit decisions of other
MNCs in a host country, global industry, and local
industry, the prior entry and exit decisions of the
parent firm have a relatively weak impact on its
subsequent foreign market entry decisions. This
evidence suggests that the foreign market entry
decisions of MNCs are influenced primarily by the
interdependence among foreign operations between
MNCs, rather than by the interdependence among
foreign operations within MNCs. One possible
explanation for this interesting finding is that
MNCs may face greater uncertainty when entering
a foreign market with which they are unfamiliar
than when repeating an organizational action with
which they are familiar. MNCs have insufficient
information on the local requirements imposed by
the legitimating actors, and have to compete for
finite resources in the external environments,
Journal of International Business Studies
whereas they define the legitimate choices of action
and deploy resources within their internal environments. Facing a high level of uncertainty regarding
the external markets, MNCs may be more attentive
to the signals from their external institutional
environments than to those from their internal
institutional environments. Future studies should
investigate whether MNCs put more emphasis on
the actions of other MNCs in other FDI decisions
(for example, the timing of and resource commitment to foreign market entry and the location
choice of FDI).
Our findings also advance the literature on
interorganizational imitation. Although the concept of interorganizational imitation has been
gaining popularity in the fields of strategic management (Haunschild and Miner, 1997), sociology
(Tolbert and Zucker, 1983), and finance (Scharfstein
and Stein, 1990), the application of the concept to
research on foreign market entry needs further
development. First, although research on interorganizational imitation primarily explains why a
previously adopted organizational practice or structure increases its successive adoption, it provides
limited insight as to whether a previously abolished
organizational practice or structure influences its
successive adoption. In the case of foreign market
entry, we find that the entry decisions of MNCs are
significantly influenced not only by the prior entry
decisions of other MNCs, but also by their prior exit
decisions. In fact, our analysis of the multipliers of
market entry demonstrates that the effect of prior
exit is as great as that of prior entry at the global
industry level. This evidence clearly shows that the
prior exits (or the abolition of foreign operations) of
other MNCs cannot be assumed to have a nonexistent or constant impact on the subsequent
entry decisions of an MNC. Future studies of
interorganizational imitation in foreign market
entry should incorporate the effects of both prior
entry and prior exit into the theoretical model, and
should identify the key contingent factors that
facilitate and constrain interdependent behavior in
foreign market entry.
Second, research into interorganizational imitation implicitly assumes a linear relationship
between the previous adoption of a particular
organizational practice or structure and its subsequent adoption. Underlying this assumption is the
notion that there is little or no limit to the
mimicking behavior of a firm. However, there are
boundary conditions for institutional explanations,
because firms may change their perceptions toward
Interdependent behavior in foreign direct investment
Christine M. Chan et al
661
what was once considered to be a legitimate
organizational practice or structure when their
situation changes (Scott, 2001). The simple application of the linear association of interorganizational
imitation to the context of international market
entry is problematic for two main reasons. First,
firms may not engage in mimetic foreign market
entry behavior when a large number of new
entrants provoke competition for the limited available resources and customers in the market.
Second, firms may change their perceptions of
legitimate foreign market entry behavior when
they have limited resources to allocate to foreign
market expansion. Our findings clearly confirm the
first reason, and suggest that the prior entry of
other firms has an inverted U-shaped relationship –
as opposed to a linear relationship – to the
subsequent entry of new MNCs.
An interesting extension of this study would be to
incorporate the theory of first-mover advantage
and the theory of internationalization into our
proposed model of foreign market entry. The
literature of first-mover advantage generally favors
the risk-taker’s viewpoint, and suggests that firms
that enter a foreign market faster than their rivals
tend to perform better than those that enter later
than their rivals (Isobe et al., 2000). In contrast, the
internationalization theory, which focuses on riskaverse behavior in foreign market entry, suggests
that firms initially make foreign direct investments
on a small scale, and successively increase their
resource commitment to the investment as the
psychic distance between their home country and
the host country is lessened through experience
(Johanson and Vahlne, 1977). Our study, however,
implicitly assumes that MNCs are risk neutral and
respond to legitimating and competitive pressures
in a relatively similar fashion. To better understand
the foreign market entry behavior of MNCs, future
studies could relax the risk-neutral assumption by
allowing heterogeneity among the attitudes of
firms toward uncertainty, and investigate which
MNCs are more (or less) likely to follow their own
prior foreign market entry decisions and which are
more likely to follow the decisions of other MNCs.
Our study has two limitations that suggest some
intriguing avenues for future theoretical refinement. First, the extent of the generalizability of the
findings of this study is an area of concern. By
drawing a sample from Japanese electronics MNCs,
this study finds that the decisions of these firms
regarding foreign market entry are influenced by
the previous investment decisions of other Japanese
MNCs. A reasonable question arises as to whether
these market-entry decisions are specific to Japanese electronics MNCs, especially as patterns in
international diversification differ across countries
and industries and the level of global integration of
Japanese MNCs is higher than that of their counterparts from other countries. These concerns provide
an opportunity for future research to choose other
organizational populations of MNCs, and to examine whether the findings can be generalized beyond
the context of Japan and the electronics industry.
Another potential limitation of the study lies in
the validity of the choice of the levels of analysis. In
this study, we focused on the host country, global
industry, local industry, and parent firm levels of
analysis. However, the different regions within a
host country, the business groups within an
industry, and the alliances and networks between
parent firms may also serve as appropriate levels of
analysis for the study of the dynamics of foreign
market entry. Although we believe that our study
contributes to the examination of foreign market
entry at multiple levels of analysis, we have not
made a detailed examination of other possible
levels. To precisely answer the question of which
firms should be followed in terms of market entry
decisions, future studies should explore the levels
of analysis that matter the most.
Acknowledgements
This paper is based on a chapter of the first author’s
dissertation, which was awarded Barry M. Richman
Best Dissertation Award at the Academy of Management conference in 2003. The authors would like to
thank our Departmental Editor, Professor Anand
Swaminathan, and three anonymous reviewers for
their constructive comments. We also thank the
participants at the Academy of Management meeting
for their valuable feedback on our study. We gratefully
acknowledge the helpful suggestions and comments
from the seminar participants at University of South
Carolina, Baruch College, Georgia State University,
International University of Japan, and City University of
Hong Kong. A special thank goes to Professor W.
Richard Scott for his continuous support and encouragement. This paper was supported by a grant from
the Research Grants Council of the Hong Kong Special
Administrative Region (Project No. HKU 7213/03H).
Notes
1
For example, Cargill Inc., which is a private
agricultural company, faced legitimacy problems
when entering the Indian market (Kostova and Zaheer,
Journal of International Business Studies
Interdependent behavior in foreign direct investment
Christine M. Chan et al
662
1999). Cargill encountered substantial resistance from
local farmers, producers, politicians, and environmentalists because its establishment was perceived to have
destroyed the traditional way of life and threatened
the country’s economic freedom.
2
The density dependence model proposes that, at
low levels of organizational density (or number of
firms) of a population, a growth in density enhances
the legitimacy of the organizational form, and therefore increases the founding rate. When the density of
the population is high relative to the carrying capacity
of the environment for organizational form, a growth
in density increases the intensity of competition, and
therefore depresses the founding rate.
3
DiMaggio and Powell (1983: 143) propose a
closely related concept of ‘organizational field’, which
refers to ‘those organizations that, in the aggregate,
constitute a recognized area of institutional life: key
suppliers, resource and product consumers, regulatory
agencies, and other organizations that produce similar
services or products’.
4
As density represents the number of firms in a
population, its value varies depending on the definition of the population boundary. Martin et al.
(1998: 571) argue that ‘firms offering similar products
that expand from a given home country represent
a distinct organizational population in the host
location. The population exists as a distinct set because
firms develop organizational forms influenced by
routines that are specific to the location where their
domestic development occurred.’ We follow their
argument and define density as the number of
Japanese subsidiaries in each cluster at each level of
observation.
5
The ZINB model first determines whether a case
has an outcome of zero with the probability of 1, then
models the nonzero outcomes. Long and Freese
(2003) provide detailed descriptions of the model
and the analytical procedure.
6
We conducted a sensitivity analysis by dividing our
sample parent firms into two groups according to firm
size (total sales). We performed the same regression
analysis for each group (Model 5) and found consistent results.
7
Recent studies have emphasized the multi-level
analysis of organizational phenomena in the context of
MNCs (e.g., Hawawini et al., 2004; Makino et al.,
2004; Ricart et al., 2004).
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About the authors
Christine M. Chan is Assistant Professor at the
University of Hong Kong. Her research interests
include foreign market entry, market entry mode,
foreign affiliate performance, and international
joint venture termination. She publishes in Strategic
Management Journal and Journal of International
Business Studies.
Shige Makino is Professor in Department of
Management at The Chinese University of Hong
Kong. His research is focused on strategies for
foreign market entry and survival and has been
published in Journal of International Business
Studies, Academy of Management Journal, Strategic
Management Journal, Organization Science, among
others.
Takehiko Isobe is Professor of International Business and Business Policy at Kobe University of
Japan. His research interests include the relationship between cross-country variations in institutions and behaviors and performance of
multinational enterprises. He has previously published in journals such as Strategic Management
Journal and Academy of Management Journal.
Accepted by Anand Swaminathan, Departmental Editor, 2 November 2005. This paper has been with the author for two revisions.
Journal of International Business Studies