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«ABSTRACT This study mainly assesses the joint effects of country diversification and regional diversification on enterprises’ performance with the ...»

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The Joint Effects of Geographical Diversification to MNEs’

Performance Through China Investment

Wei-Hwa Pan, Associate Professor of Business and Administration,

National Yunlin University of Science and Technology, Taiwan

Yuang-Shiang Chao, candidate of PH.D program in international business and strategy, College of

Management, National Yunlin University of Science and Technology & Senior Lecturer,

Department of Finance, Yu Da University, Taiwan

ABSTRACT

This study mainly assesses the joint effects of country diversification and regional diversification on enterprises’ performance with the publicly-listed Taiwanese Multinational Enterprises (TMNEs). We choose two special diversification variables (country and regional diversification factors) to analyze within the general theory of the TMNEs. We test our hypotheses using official data collected between 1999 and 2008. We find that through China investment (CI) can enhance TMNEs’ performance. We find strong support for the argument that aspects of the methodology and multinational-diversification theory help to explain the CI of TMNEs in China. Furthermore, TMNEs adopt geographical diversification strategy through china investment will result in better performance. In addition, middle level country diversification and regional diversification is the best diversification portfolio for TMNEs to expand overseas and obtain better performance. The results show low positive relationship at high level country and regional diversification on performance. Furthermore, geographically-diversified TMNEs through middle level china investment is apparently associated with better performance.

Keywords: Geographical Diversification, China Investment strategy, Performance, Joint Effects, Taiwanese Multinational Enterprises (TMNEs)

INTRODUCTION

Most TMNEs had been export-oriented manufactures which played as the pioneers that starting to move to countries with relatively low cost in the factors of production in order to lower the labor, energy, land and capital associated expenses since 1980s. Several multi-nationalists suggest that geographical diversification provide diversified firms with the potentials to exploit more market opportunities, to spread market risks, and to seek less expensive inputs and less price-sensitive markets (Buckley and Casson 1976;Delios and Beamish 1999).In another words, geographical diversification in some way can be viewed as another international diversification strategy to some degrees and could be defined as expansion across borders of global regions and countries into different geographic locations or markets (Hill et al. 1992). Conceptually, geographical diversification provides firms with benefits but have to pay high costs (Tallman and Li 1996). However, transaction cost theory (Williamson, Paez, and Sanders,

1988) suggests that geographical diversification will incur heavy costs (including market entry costs, coordination costs among business units in different countries, and information-processing costs, etc).

Under certain conditions, these costs might surpass the benefits (Sambharya, 1995). Geographical diversification has become increasingly an important issue these ten years, in the meanwhile, from the prior research reviewed, geographical diversification has positive impacts on diversified firms’ performance to high percentage. Ramaswamy (1993) went further and found that interactions between different measures of geographical diversification had more significant effects on MNEs’ performance.

Strategic management literature has studied extensively the costs and the benefits of diversification strategy and its effect on competitive advantage for an organization (Chakrabarti, Singh, & Mahmood, 2007; Palich, Cradinal, & Miller,2000). Researchers have particularly focused on the effect of business diversification which is defined as the synergy in different lines of business and international diversification or geographical diversification in a different market (Fang, Wade, Delios, & Beamish, 2007; Kim, Hwang & Burgers, 1989) on firm performance. The sample industries in our study are electronic manufacturing industry and machinery industry, in addition, electronic and machinery products occupied for nearly 64.87% of total exporting value. Therefore, electronic and machinery industry could be viewed as representative to Taiwanese industries, and we also believe that both industries can provide good example for academic research. It will be an crucial issue to explore for the reason that TMNEs have apparent increasing percentage investments in China from 1999 but decreasing from 2008, and have close relationship with China’ economic development these ten years. Comparative with the existing geographical diversification literatures we have reviewed, the research model has some differences from the current diversification literature shown in two dimensions. This study mainly examines the jointed effects of among country and region diversification on TMNEs’ performance and provide our crucial findings to the related literatures in several ways and from the final findings to reconcile somewhat conflicting evidence on the relation between geographic diversification and performance. The moderating role of “china investment usage” is used to be a moderator to examine the joint effects between geographical diversification and performance to see whether china investment usage has better enhancing effect to TMNEs’ performance or not.





LITERATURE REVIEW AND THE THEORETICAL HYPOTHESES BUILDING

Applied Theory on Geographical Diversification and Financial Performance Geographical diversification is often termed as another international diversification strategy for multinational researchers. From our research which shown was mainly focused on these two dimensions-country diversification (Daniels and Bracker 1989; Kim et al, 1989; Ramaswamy et al.,1996 ;

Sullivan, 1994; Lu et al., 2004) and regional diversification (Li and Qian, 2005). Ramaswamy (1993) found that interactions between different measures of geographical diversification had more significant effects on MNEs’ performance. It’s believed that diversification across countries within a region incurs much lower costs than diversification across regions. The concept of geographic diversification may be more important given the need for most firms to expand markets overseas in Asia. Hitt, Hoskisson, and Kim (1997) classify firms that are horizontally or vertically integrated across different national markets as firms with international market diversification and suggest that firms often become internationalized in a step-by-step process in which investment opportunities in the least psychically distant foreign locations are developed first. Geographical/international diversification can improve firm performance by increasing sales in foreign markets, reducing the risk of economic downturn in the home market, lowering costs through economies of scale in manufacturing, R&D, marketing and distribution system (Sarathy, Terpstra and Russow,2006 ; Contractor, 2007).

Theory and Separate Effect of Geographical Diversification to Performance Transaction cost theory suggests that geographical diversification will lead to produce heavy costs which were included market entry costs, costs of coordination among business units in different countries, and information-processing costs. Under certain conditions, these costs might surpass the benefits (Sambharya, 1995).We would try to find out the effect within every independent variable to TMNEs’ performance, respectively. The scholars stated that country diversification is defined as the expansion into individual foreign countries, like Egypt or Vietnam. We will intend to draw mainly on three relevant theories (i.e., multinational theory, transaction cost theory, and organizational learning theory) to develop the analytical framework. Ramaswamy (1993) defined diversification as corporations operate in several different business fields simultaneously. From some international scholars’ research (Tallman and Li 1996; Li and Qian, 2005), geographical diversification also drew researcher’s attention to study these ten years. According to our research, we find that high levels of country diversification might not necessarily face risky or costly condition if a MNE could restrict its operations in a particular region where most of countries share with similar demand patterns and cultures. Wide country diversification provides the opportunities for multinational manufacturers to exploit market imperfections (e.g., differences in capital charges and labor costs) by performing many activities internally (Buckley and Casson 1976). In addition, wide country diversification can help a firm to build up its internal capital market and then to increase the performance by degrees (Hill et al. 1992).

As countries in the same geographic area share many similar market characteristics, customers there may accept similar product features. Standardization would incur by way of regional diversification, and standardization would save costs as it will result in providing economies of scale and scope (Hitt et al.

2006; Phene, and Almeida, 2008). Rugman & Oh (2008) chose 60 cases and were examined to establish the robust nature of this regional effect at the firm level. It was also demonstrated that whenever data on assets were provided by firms, the upstream production data also revealed a regional rather than a global effect. In addition, the employment data of large South Korean firms confirms the regional effect.

Furthermore, multinational researchers suggested that similar market environments within a region help firms make it possible for diversified firms to standardize their products and rationalize production in the particular region (Tallman and Li 1996; Sarathy, Terpstra, Russow, 2006). Yamin and Forsgren (2006) consider that the preponderance of regional MNEs (it could also be viewed as TMNEs adopt regional diversification strategy) is consistent with Hoskisson, Hitt and Moesel (1993).

The Joint Effects of Geographical Diversification to Performance The Effects and Joint Effects of Diversification Configuration to Performance Transaction cost theory is suggested that such similarities could reduce coordination costs, distribution costs, management costs, information searching costs, and information processing costs, as the similarities reduce both managerial, technological, and coordination complexities and facilitate communications between different business unites which were located in different countries. Whereas, low country diversification will limit market opportunities and growth potential for each product line to grow within a diversified firm as low country diversification limits market size (Chatterjee, & Wernerfelt, 1991; Delios and Beamish,1999 ; Goerzen, & Beamish, 2003). Because geographically diversified firms will meet with difficulty in achieving large volumes with low country diversification, therefore, they can hardly spread R&D costs and promotion costs of each product line over a large volume and then lead to suffer high costs and possibly decrease their performance (Sarathy, Terpstra, Russow, 2006). Stulz(2005) emphasizes that country-diversification specific characteristics still matter a great deal in international financial markets although the barriers to international investment have fallen abruptly. Yeung (2002) develops a geographical perspective on economic globalization. Li and Qian (2005) propose the configuration model for international diversification, if MNEs diversify into various countries within a region, they could enjoy increased market opportunities and growth potential. According to our findings, country diversification has positive effect on the firm performance at low level of regional diversification but becomes negative with high regional diversification. From the point view of country and regional diversification, it has positive effect on firm performance when level of regional diversification is middle.

Organizational learning theory is suggested that low regional diversification might facilitate business diversification and increase operations which were resulted from operations in various countries and possibly lead to produce/increase knowledge spillover effects between product lines. Furthermore, low regional diversification will also expose MNEs to similar environments but at the same time might not necessarily restrict the MNEs’ market opportunities if the MNE diversifies into various countries within a particular region (Morck and Yeung 1991, Saloner et al. 2001). Low level regional diversification might also minimize the disadvantages of business diversification as MNEs face the environmental similarities and then reduce coordination costs between different product lines (Geringer et al. 2000). When MNEs diversify into various different regions, they have to deal with great varieties of environments and experience high complexities and managerial constraints and high diversification may dilute MNEs’ focus to concentrate on their main target (Eddleston, Kellermanns, and Sarathy, 2008 ;

Geringer et al. 2000; Rugman, 2007). For lack of focus which was combined with high levels of complexities and managerial constraints might make diversified MNEs vulnerable to cost competition from formidable competitors. There are related empirical literatures on globalization and regionalization were found that through regional diversification strategy can increase international trade amount and obtain better business performance between member countries, in the meanwhile, would not harm non-member countries’ trade benefits (Baldwin & Venables, 1995; Zheng and Zhang, 2004). The effects of trade agreements on the level of regional diversification and foreign direct investment (FDI) will vary across the agreements and result in good performance (Fratianni & Oh, 2009).



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