Literature survey and research hypotheses

According to the definition of information theory, a piece of information is considered to have “information content” if it influences recipients’ ideas and decisions. Ding and Sun (1997) find that the stock return responses to the announcements of foreign direct investments by Singaporean corporations are

international joint ventures render a significantly positive effect on the shareholder wealth of the investing firms. Gupta (1991) also points out that announcements of investments in China by multinational corporations in the US affect their shareholder wealth positively and significantly. Pan and Chi (1999) suggest that when investing in China, companies enjoy higher profit levels if they operate on equity joint ventures as opposed to 100% foreign owned subsidiaries or cooperative operations.

With regards to various investment types, related studies of domestic capital investments find that share prices on the capital market react most to R&D investments, followed by joint ventures, product/market diversification, and capital expenditures (Woolridge and Snow, 1990). Furthermore, Jones et al. (2004) point out that share prices react stronger for firms investing in R&D, product diversification, and market expansion that boost growth opportunity as compared to “exercise” types of investments such as plants, machines, and equipment.

There are two most commonly purposes for firms to purse FDI advantages; one is market expansion and the other is cost reduction (He and Long, 2003). Generally speaking, the market-expansionary FDI is defined as an “internationalization”strategy by which firms tap into foreign markets to expand sales and local market. Firms usually adopt a horizontal FDI type to seek host market shares (Chen and Ku, 2000;

Hakkala et al., 2008). The cost-reducing FDI is defined as a “defensive”strategy by which firms could fight the uncontrollable operating cost increase in their home base.

Firms often use a vertical FDI type to access lower factor costs for export sales (Braconier et al., 2005; Hakkala et al., 2008).

While the European Union, U.S., and Japan supply 90% of global FDI and China is the second largest FDI recipient in the world, most FDI into China came from Taiwan and Hong Kong (Zhang, 2005). Zhang (2005) find that FDI from Taiwan and Hong Kong was primarily motivated by low labor costs while FDI from the European

Union, U.S., and Japan was market-oriented. In order to obtain the inexpensive labor force to reduce the production cost, we infer that Taiwanese corporations could obtain larger FDI benefits through vertical industrial investment. We hence formulate hypothesis 1.

Doukas and Lang (2003) examine whether geographic diversification is more profitable for U.S. firms that expand their core business than non-core business, and find that non-core-related FDI is associated with negative announcement effects, whereas core-related FDI is associated with positive short-term performance. In order to obtain the inexpensive labor force to reduce the production cost, we infer that Taiwanese corporations could obtain larger FDI benefits through non-core business investment. We hence formulate hypothesis 2.

H1: When a Taiwanese high-tech firm announces investment in China (FDI), the capital market reacts more strongly to share prices to vertical industry investments than horizontal industry investments.

H2: When a Taiwanese high-tech firm announces investment in China (FDI), the stock market reacts more strongly to non-core business investments than to core business investments.

For a firm, the occurrence of major events or the disclosure of operations information not only affects its stock price butalso therivals’share performance.

Researchers refer to the positive association between the abnormal share price returns

announcements of bankruptcy, the contagion effect generally dominates the competitive effect. That is to say, share prices of competitors react in the same direction as that of the announcing firm. Zantout and Tsetsekos (1994) indicate that a firm’svoluntary announcement of increasing R&D investment adversely affects the abnormal return on the rivals’share prices, signaling a competitive effect. Erwin and Miller (1998) suggestthatafirm’sannouncementofa treasury stock buyback results in a competitive effect, while Akhigbe and Martin (2000) point out that a firm’s announcement of overseas M&A plan leads to a positive spill-over effect on the abnormal return on competitors’shareprices. In addition, researchers find that the competitive effect dominates in both cases over announcements of new products launches (Chen et al., 2005) and the disclosure of capital expenditure by US corporations (Chen et al., 2007).

When a firm announces a foreign capital investment plan, how do stock prices of home-market rivals react? Do they react in the same direction as those of the announcing firm? Or do competitors’sharepricesmove counter to the announcer’s share prices? Previous studies confirm that afirm’sannouncements of major events haveasignificanteffecton competitors’shareprices, but consensus as to the direction of the influence has yet to be reached. This study infers that a firm’s FDI announcement poses significant influence on the abnormal return of home-market rivals’shareprices. We hence formulate hypothesis 3.

H3a: When a Taiwanese high-tech firm announces investment in China, the contagion effect dominates the competitiveeffect.A firm’sannouncement of FDI has a significantly positive effect on abnormal returns of home-market rival firms.

H3b: When a Taiwanese high-tech firm announces investment in China, the

competitive effect dominates the contagion effect. A firm’sannouncement of FDI has a significantly adverse effect on abnormal returns of home-market rival firms.