MNEs Perspectives

MNEs for smooth operations of their business in foreign market must build interpersonal relations with host countries firms as well as with the government officials. Managers by maintaining interpersonal ties with top executives of other firms as well as with government officials will help to improve the performance of organizations (Peng & Luo, 2000).

Especially, during times of rapid technology change, building of business ties will be more efficient than political ties (Sheng et al., 2011).

Furthermore, firms with higher board independence (Koh, 2011) to attain profit maximization (Jing et al., 2003) would engage in lobbying activities in both home and host countries. Along with encouraging FDI with treaty partners MNEs would lobby for tax treaties so that, lower withholding taxes on cross-border payments of dividends, interest and loyalties from host country can be obtained (Louie & Rousslang, 2008).

From the above related literatures it can be said that MNEs by maintaining good relations with both host government and firms will facilitate their chances of success in FDI.

Thus proposition 3a is proposed as:

Proposition 3a: MNEs that have political/business ties in host country are more likely to succeed while engaged in FDI.

Business ties are inter-organizational ties that firms build with main business partners in

order to gain access to a much wider scope of knowledge, resources and complementary capabilities of partners engaged in innovative activities whereas political ties are informal social connections of firm’s with government administrative levels (Wu, 2011; Peng and Luo, 2000). The information accumulated from such ties will increase absorptive capacities and knowledge utilization of firms since such knowledge can be incorporated with the firm’s present knowledge. Building strong business ties enable MNEs to have close interactions with suppliers, manufacturers as well as with foreign counterparts they do business with, hence leading to transfer of knowledge and technology acquisition. MNEs by maintaining strong ties with suppliers will enhance their own innovative capabilities and strong relation with consumers, this will enable MNEs to adapt to the changing market trends through identification of new market needs.

Maintaining good relations with business partners and suppliers is not sufficient to keep the organization running, what is more important is MNEs must also maintain strong network ties with government officials, this will provide investors with industrial information such as bank loans, tax breaks, and subsidies which are not easy to obtain without government support. Gaining an easy access to crucial information will increase the confidence of firms and they will be less hesitant to develop new products or technologies. Thus we can see that political ties plant a positive impact on firm’s performance. For example, Sheng et al. (2011) in their studies on 241 Chinese firms found that business ties are more affective in times of inefficient legal enforcement and rapidly changing technology. Conversely, political ties will lead to better performance only in times of weak governmental support and low technological turbulence.

Too much political interference tends to reduce MNEs innovative capabilities as too much reliance on favorable treatment by government will decrease their incentives to improve their innovative efficiency and motivate MNEs to undertake illegal activities such as giving bribes to government officials that reduces their ethnic standards.

MNEs apart from maintaining strong ties with both their business partners and host country government often chose to lobby with the government also. Lobbying is mainly a communication technique utilized by interest groups to create an influence on government

officials privately or to get access to information within the same interest groups (Vercic &

Vercic, 2012), it is normally conducted by both private and public sectors. Before undertaking any lobbying activities the lobbyist must be registered with the respective government agencies that they intend to influence. Lobbying activities conducted by foreigners will reduce imports trade barriers and hence shift trade policy in a direction that will enhance surplus of domestic consumers (Gawande et al., 2006). For example, the tobacco lobby enacted in the U.S. states legislature was a campaign held by tobacco industries for minimizing tax increase and legislation of clean indoor air to preserve company’s freedom in selling and advertising tobacco related products. The campaigns held by the tobacco lobbyist had excelled in preventing the states or government in enacting strict tobacco control laws and policies, and thus benefiting the tobacco industries, but causing harm to public health (Givel & Glantz, 2001).

On the whole, it can be seen that maintaining strong business ties strengthen firm’s profitability, whereas too much reliance on political ties with government officials impede firm’s profitability and undertaking lobbying activities lead to maximization of firm’s profit but often at a cost.

International experience is the knowledge accumulated by conducting business operations in foreign markets. The knowledge gathered from conducting business activities in different countries will help in the development of institutional knowledge (Chetty et al., 2006) and raise foreign investor’s equity position (Delios & Beamish, 1999), this will serve as a tool for enhancing alliance performance of firms through inter-firm knowledge transfer (Emdena et al., 2005). The experience of the top management plays an most important role in coping with the complexities caused by cultural distance (Hutzschenreuter & Horstkotte, 2012) and is considered as one of the most important factors as far as appointment of large corporations CEO are concerned (Magnusson & Boggs, 2006).

Thus, it is sufficed that experience gathered by firms in conducting overseas business operations will help in facilitating MNEs’ success in FDI. Thus proposition 3b is proposed as:

Proposition 3b: MNEs possessing good international experience are more likely to succeed while engaging in FDI

MNEs during their initial stage of entrance into foreign market are often faced with liability of foreignness in the host country due to differences in geographical, political and cultural aspects from their home country. MNEs throughout their investment period are often encountered with the challenge of communication (linguistics) with domestic firms, local suppliers and management, as well as discrimination by host country government, suppliers and consumers. For instance, the difficulties faced by Japanese affiliates in managing their U.S. employees have forced the exit of Japanese affiliates due to lack of experience in conducting their business operations in U.S. (Hennart et al., 2002).

MNEs to build up their market presence must have a prior experience in host or other countries, for the knowledge accumulated will serve as valuable resources during MNEs expansion process which is often very expensive due to huge cultural gap between host and home countries firms. The experience gathered will help MNEs in obtaining accurate information of local market conditions, suppliers, and consumer demand in host countries.

This will reduce the administrative costs of MNEs during their foreign operations and increased their preference for the existing projects in the country as compared with other investment options (Davidson, 1980). The international experience gained by MNEs is not sufficient for the success of any foreign investments, but instead sharing of international experience by top management level can help to remove complexity caused by cultural distance, hence enhance management team performance in FDI. Conversely, as firms get a better knowledge about host country market due to their long term of operation they tend to divert from the current market to a more distant market that are culturally less similar with their home country and thus have a negative impact on home country FDI level as put forward by Erramilli (1991) in his study on service firms in the U.S..

The knowledge of host market will also create a significant influence on MNEs mode of entrance that varies across family and non-family firms. Family firms due to lack of managerial capabilities would choose to partner with local firms through joint ventures

whereas non-family firms, to keep an eye on their foreign subsidiaries would often adopt wholly owned subsidiaries, instead of seeking help from their local partners. For example, Kuo et al. (2012) in their study on public listed companies in Taiwan found that family firms while deciding on their mode of entrance are much more subjected to the influence of international experience than non-family firms.

Overall, international experience possess by MNEs will increase their chances in FDI as they are in a much better position to acquire necessary information related to suppliers, local market conditions and demand due to good connection with partner firms in host countries as compared with MNEs with no prior experience in foreign market.

While engaging in FDI, culture and ethnic ties also play a very important role in enhancing MNEs success in FDI. Host countries governed by low levels of uncertainty avoidance and high levels of trust will serve as attractive location for MNEs. But MNEs when undertaking FDI in the host country must maintain good diplomatic relationships (Tse et al., 1997) with their foreign counterparts. To increase their chances of success the presence of ethnic ties (Jean et al., 2011) and “Diasporas” (Tung & Chung, 2010) are very important as they serve as a channel of information exchange across national boundaries by lowering FDI cost. Therefore, it can be said that the presence of cultural similarities or/and ethnic ties with host countries firms will increase the chances of survival of MNEs in a foreign market. Thus raises proposition 3c as:

Proposition 3c: MNEs having cultural similarities or/and ethnic ties with host countries are more likely to succeed while engaging in FDI.

To understand proposition 3c more clearly it is mandatory to have a thorough discussions as to whether MNEs bearing similarity in culture or/and ethnic ties with host countries will increase their chances of success. In today’s world, the role played by culture is gaining significant importance in international trade as firms bearing cultural similarities (linguistics, custom, or religion) are much more trustworthy and easy to communicate, since they often have certain things in common, especially in historical ties (e.g. US vs UK; Taiwan

vs Japan and China). MNEs to avoid chances of failure when investing in foreign market must bear strong social network and ethnic ties with host countries firms.

Ethnic ties are informal social or personal networks bearing certain features like speaking a common language, nationality, ethnic groups and country of birth (Zaheer et al., 2009). The presence of ethnic ties in foreign countries serves to be an important channel for MNEs in home countries in obtaining accurate information about market condition, consumers taste and demand, business practices, rules and norms, supplier and buyers’ details, resource availability and so on in the host countries. The information obtained will be valuable resources for MNEs undertaking investment in foreign market due to their better understanding about host countries environment. Zaheer et al. (2009) in their study on ITEs industries of India found that Indian entrepreneurs in choosing FDI location will set up their industries in regions that have presence of ethnic ties. For smooth running of business operations in a foreign market, managerial ethnic ties are also important. Managers are the key personnel’s in a company that maintains regular contact with suppliers for ensuring continuous flows of goods, and interacts with customers to keep track on change in consumer’s demand and taste.

The impact brought about by culture, especially linguistics links between home and host countries plays a very significant role especially in international trade where frequent interactions between MNEs in both countries are necessary. Most important of all, speaking the same native language in countries that bear certain similarities such as religion or historical ties, and speaking in common trade language (English) will be an added advantage when undertaking FDI (Oh et al., 2011), it can enhance bilateral trade flows by 40% (Egger

& Lassman, 2012). Speaking a different language is an obstacle in international trade as in accordance with the Language Barriers Index (LBI), a 10% decrease in LBI might cause 7-10% down in trade flows between countries (Lohmann, 2011). The influence of language on international trade will differ in accordance with countries of origin, it might increase or decrease countries import and export levels. Guo (2004) found that language similarity will encourage exports in China but it increases import level in U.S. In summation it can be said that cultural similarities or/and ethnic ties are positively related with FDI.

Though ethnic ties is one of the important factor that will help increase MNEs success in FDI, having strong networks tend to hamper MNEs performance sometimes. This is because firms can only see the demands of those within their network, as a result firms are uninformed about other better business opportunities otherwise is possible, if MNEs have a diverse network instead of restricted network. Hence referral benefits are omitted in ethnic ties (Burt, 1997).

In summation, we can say that chances of success are higher in MNEs coming from same cultural background because people normally prefer to trade with those who speak in the same mother tongues due to cultural and historical ties and can trust them more as compared with people from different cultural background. Moreover, the presence of ethnic ties in foreign countries will act as a mechanism for MNEs in obtaining accurate information about host countries business, social and political environment.