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Exploitation, exploration, and how learning affects strategic intent in multinational enterprises' foreign direct investment decisions: A commentary essay
Journal of Business Research 65 (2012) 1295–1297
Contents lists available at SciVerse ScienceDirect
Journal of Business Research
Exploitation, exploration, and how learning affects strategic intent in multinational enterprises' foreign direct investment decisions: A commentary essay Kamal Fatehi a,⁎, Paula Danskin Englis b, c a b c
Coles College of Business, Kennesaw State University, United States Campbell School of Business, Berry College, United States Nikos (Dutch Institute for Knowledge Intensive Entrepreneurship), The University of Twente, The Netherlands
a r t i c l e
i n f o
Article history: Received 1 September 2011 Received in revised form 1 October 2011 Accepted 1 October 2011 Available online 29 November 2011 Keywords: FDI Organizational learning Strategic intent Exploration Exploitation
a b s t r a c t Research on foreign direct investment is a rich vein of inquiry in international business and management literature. Scholars explore various aspects of FDI including the reasons for location selection. Chen and Yeh's research is in that tradition. Under the title of “Re-examining location antecedents and pace of foreign direct investment: Evidence from Taiwanese investment in China”, they explore Taiwanese investment in China and re-affirmed previous findings of other scholars that organizational learning alters the trajectory of investment. The essay here comments on their contributions, impact on practice and policy, and limitations. Finally, the essay discusses implications for future research and recommends relevant readings on the topic. © 2011 Elsevier Inc. All rights reserved.
1. Introduction Business enterprises from the emerging markets of Asia, Middle East and Latin America are going global and posing formidable challenges to existing rivals from industrialized countries. In these markets that are home to the majority of the world population, the emerging global firms have an advantage of being insiders. These are the future firms in the future markets. For example, Arvind Subramanian of the Peterson Institute says that China will account for over 23% of the world GDP by 2030 (Economic focus, 2011). These markets are growing at much faster rates than their counterparts in developed countries. A case in point, China's per capital income grew about 45% during 2005–2010 (Subramanian, 2010). Operating in these markets successfully requires understanding their uniqueness that is due to systemic and cultural differences. Learning about the complexity and intricacy of these markets and their people who often are as exotic as they are mysterious to the un-initiated would be valuable. Toward that end, Chen and Yeh (forthcoming) make a compelling presentation on how Taiwaneselisted firms (TLFs) choose their location investment in China. According to Chen and Yeh's findings, antecedents of TLFs investment in China are very much similar to those of other multinational enterprises. Their examination of TLFs foreign direct investment ⁎ Corresponding author at: Coles College of Business, Management and Entrepreneurship Department, Kennesaw State University, 1000 Chastain Road, Kennesaw, GA 30155-5591, United States. Tel.: + 1 770 423 6785. E-mail address: [email protected] (K. Fatehi). 0148-2963/$ – see front matter © 2011 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2011.10.031
(FDI) in China provides yet another piece of evidence that organizational learning effects alter the trajectory of investment. While a considerable body of literature on FDI is available, most have argued that multinational enterprises (MNEs) develop templates in their FDI decision making and follow one path or another (e.g., Schreyögg & Sydow, 2010). Chen and Yeh's paper presents longitudinal data that tracks Taiwanese multinationals' direct investment (TDI) in the China. Their results show that MNEs FDI trajectories may change over time from exploitation to exploration due to organizational learning. The paper is very timely, as China has grown not only as a production location but also in terms of market development and FDI destination. For example, the inflow of FDI to China has increased dramatically from almost zero in the late 1970's to $40–50 billion per year in the second half of 1990s, accounting for 25–30% of FDI inflow to all developing countries (Tseng & Zebregs, 2002).
2. Impact on theory FDI arises from activities of multinational firms that operate across countries. MNEs that engage in FDI possess special advantages to overcome the inherent disadvantages of foreignness. Based on the “OLI” paradigm (Dunning, 1981), firms with certain ownership advantages (e.g., patent or brand name) would open a subsidiary in a foreign country with location advantages (e.g., cheap labor or growing market) to maximize their profits. The best way to capture ownership and location advantages is by the
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K. Fatehi, P.D. Englis / Journal of Business Research 65 (2012) 1295–1297
internalization of production (not exporting or licensing) via direct investment in the foreign country. The OLI theory builds primarily on the behavior of large multinational firms either in the U.S. or other industrialized countries. FDI is associated with intangible assets such as technology, knowledge base, organizational capabilities and brand names. An interesting facet of this study is that Taiwanese MNEs may not be on the cutting edge of organizational and technological sophistication. The ownership advantages of Taiwanese direct investment (TDI) might be from other sources such as specialization in timely delivery of uniform quality parts and products to Western markets (Wells, 1993). Other advantages may include the ability to adapt more mature technologies to Chinese raw materials and the labor intensive context (Vernon, 1979). Yet another unique advantage is the ethnic connections between Taiwan and China that reduces cultural distance between the two. They share the same culture and language which makes negotiations and operations much easier to facilitate TDI. Given the shift in global FDI over the past decade, the location choice of MNEs deserves the attention within the unique context of this study (Chadee, Qiu, & Rose, 2003). The major theoretical contribution of the paper concerns organizational learning and how MNEs strategic intentions change their actions in FDI locations over time. The authors use longitudinal data that moves beyond treating FDI investment on a case by case basis (Benito & Gripsrud, 1992) and brings strategic intent under closer examination. They note that, “Internationalization is a function of MNE's experience/knowledge, managerial intentionality and other factors such as institutional forces.” This echoes some earlier work by Hedberg (1981) when he suggested that for knowledge seeking FDI to be considered a legitimate strategy for capability building, firms had to change or unlearn the dominant logic created by domestic operational experience. Thus, Chen and Yeh bring temporal context into theoretical play in two ways (or in terms of learning over time and pace of investments). First, they stir the debate about the duality of exploitation and exploration as fundamental firm learning behaviors (Raisch, Birkinshaw, Probst, & Tushman, 2009). Their finding that TFLs sequentially emphasize exploitation then exploration in downstream FDI does not support the duality argument. Instead, the finding shows that through organizational learning, TFLs develop absorptive capacity for FDI in China which has strategic and cross cultural implications for managers. Indeed, the debate on duality versus sequential exploration/exploitation may rest on the capability of the firm to develop absorptive capacity. Firms differ in their learning capabilities especially in acquiring and integrating new knowledge into their knowledge base (Makino & Inkpen, 2003). This difference is particularly salient when it occurs in a cross cultural context (Bhagat, Kedia, Harveston & Triandis, 2002). The second temporal consideration is pace of investment over time. The findings show that as TFLs increase their FDI experience, the pace of their investment also increases. That is, more experience equals less time between investments. The nature of these investments also changes. When combined with organizational learning, TFLs not only increase their pace of investment but also shift from exploitation to exploration. As they learn, TFLs' investment patterns increase and shift from exploiting labor costs, infrastructure, openness and market size to emphasizing labor quality and R&D capabilities. Thus, experience and learning impact TFL investment behavior. This finding shows that components of strategy may change over time as the organization learns and behaviors change. 3. Impact on practice The paper has several implications for managers. Consistent with previous literature, Chen and Yeh recommend that, in initial FDI, managers of MNEs should seek to exploit their existing competences.
When engaging in exploitation, the strategic intent should be to make location decisions that emphasize access to low cost labor, market size, infrastructure, and openness. However, Chen and Yeh break from previous findings by suggesting to managers that as time passes, the strategic intent behind FDI decisions will change due to organizational learning. Thus managers and the firms they lead should shift to FDI strategies that emphasize exploration. As organization learning occurs through accumulated experience, managers should be prepared to increase the pace of their investment and to choose locations with higher labor quality and R&D capability in order to help the firms leverage their competitiveness. Chen and Yeh also suggest that both exploitation and exploration are essential for firm survival. By taking advantage of entering first into Chinese markets, these Taiwanese firms gain access to both public and private sources of new strategic assets through their network of local industrial players and political agents. Assuming that the primary goal of foreign R&D subsidiaries is to source new technological capabilities in a host country, and manufacturing subsidiaries to exploit the existing technological capabilities in local production, the process of exploitation and exploration of technology should coevolve in feedback effects among affiliates in neighboring functional activities in the host country. 4. Impact on policy Chen and Yeh offer three main findings for Chinese industrial policy to attract new FDI. This research shows that both the initial FDI and the growth of FDI are affected equally by policy incentives. Thus, policy incentives are always important to MNEs whether dealing with exploration or exploitation. The key to creating policy incentives that work is to understand what location antecedents are important to MNEs, given their strategic intent. By understanding what MNEs want to accomplish, policy makers can tailor incentives to encourage FDI. Policy makers must also understand that incentives appeal to MNEs may change over time; thus, they may have to change their incentives in order to encourage FDI expansion and growth. For example, developing labor quality (later FDI) may become much more important vs. labor cost (initial FDI). A second finding is tied to agglomeration. Again this was found to be equally important for initial and growth FDI. FDI investments may reach the tipping point where other firms are attracted due to geographic concentration in region (Wei, Liu, Parker, & Vaidya, 1999). 5. Limitations Several limitations occur in Chen and Yeh's study, some of which they acknowledge. First, the two countries are close in terms of language, physical proximity (across the Taiwan Straight) and culture. If we compare FDI patterns of Swedish or US investment in China, the results may be much different and the learning that occurs may take much longer because there is so much to learn. A second limitation is that the data is limited to publically traded firms and contains no small and medium sized private enterprises. Several researchers have found that a substantial amount of FDI in China stems from SMEs (i.e., Hou & Zhang, 2002). A third limitation is more subtle. The paper does not consider that FDI by Taiwanese firms is also very beneficial to China — perhaps more so than other FDI by any other country. The benefits for China to keep Taiwanese MNEs engaged in large FDI flows are two-fold. Not only will they enhance China's economic growth by the introduction of advanced technology and knowledge spillovers, but through increasing economic integration, it may also keep Taiwan from pursuing independence (Zhang, 2005). Given how important public policy is in China, this is a unique aspect of the Taiwanese direct investment in China that is unlikely to be replicated in other country contexts.
K. Fatehi, P.D. Englis / Journal of Business Research 65 (2012) 1295–1297
Political risk literature (e.g., Busse & Hefeker, 2007; Fatehi & Safizadeh, 1994; Tuman & Emmert, 2004) indicates that FDI is influenced by political instability and risk. Whether or not this influence varies from exploitation stage to exploration stage remains unclear. While, the authors make a passing remark and echo the concern of Forsgren and Hagström (2007), they leave the issue unexplored. In criticizing previous research that assumes a model of FDI that changes preference from assets-exploitation to assets-exploration, Chen and Yeh suggest that these two streams are presented as static analyses, and do not account for the accumulated FDI experience that might have an impact on the motives of MNEs and their location. However, analyzing their own data they conclude that “….TLFs change their preference for location antecedents in the FDI trajectory due the organizational learning effect and altered strategic intention …As the knowledge related to China grows, the strategic objectives of TLFs evolve from exploitation to exploration …” In measuring certain variables, the use of previously employed methods by other scholars provides continuity and makes comparison possible. However, this practice may cause repeating the same error if those methods do not accurately measure the phenomenon under consideration. This may be the case in measuring “openness”. Similar to Sun, Tong, and Yu (2002), Chen and Yeh use the ratio of import value over GDP. Certain economic imperatives may necessitate a host country to increase imports, without having an “open” policy. In such a case, the increased imports has very little to do with the openness of the market. Host government policies that are restrictive could hamper certain business activities and be the opposite of openness. We cannot draw a valid conclusion from such method and data.
6. Implications for future research We can expand on Chen and Yeh's paper and make appropriate advances in theory and empirical testing. The most obvious is an expansion of research to analyze sequential FDI in different contexts (i.e., language, physical proximity, culture) to move beyond the limitations we discuss above between China and Taiwan. The second possible avenue of further research concerns a closer examination of the duality versus the sequential timing of exploration/exploitation. We can expand this debate to a logical conclusion. Other findings in the study, particularly the negative results warrant further investigation. For instance, the finding that production efficiency is more important for the later stage investment vs. the earlier stage seems counter intuitive. Another example is that agglomeration policy incentives appear to be important for both exploitation and exploration. Finally future
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research should consider cross cultural challenges more closely. When considering organizational learning, cross cultural knowledge management is difficult. Many firms experience the difficulty of transferring learning across borders easily (Bhagat et al., 2002). We should explore this aspect of organizational learning cross-culturally. Consider reading the following articles (Hou & Zhang, 2005; Makino & Inkpen, 2003; Zhang, 2005). References Benito GRG, Gripsrud G. The expansion of foreign direct investments: Discrete rational location choices or a cultural learning process? J Int Bus Stud 1992;23(3):461–76. Bhagat RS, Kedia BL, Harveston PD, Triandis H. Cultural and strategic considerations of cross-border organization knowledge transfer. Acad of Man Rev 2002;27(2): 204–21. Busse M, Hefeker C. Political risk, institutions and foreign direct investment. Eur Jour of Pol Econ 2007;23(2):397–415. Chen C-I, Yeh C-H. Re-examining location antecedents and pace of foreign direct investment: Evidence from Taiwanese investment in China. J of Bus Res, forthcoming. Chadee DD, Qiu F, Rose EL. FDI location at the subnational level: A study of EJVs in China. J Bus Res 2003;56(10):835–45. Dunning JH. International production and the multinational enterprise. London: Allen and Unwin; 1981. Economic focus | The celestial economy, Economist, September 10th 2011, 86. Fatehi K, Safizadeh MH. The effect of sociopolitical instability on the flow of different types of foreign direct investment. J of Bus Res 1994;31(1):65–73. Forsgren M, Hagström P. Ignorant and impatient internationalization? The Uppsala model and internationalization patterns for internet-related firms. Crit Perspect Int Bus 2007;3(4):291–305. Hedberg B. How organizations learn and unlearn. In: Nystrom PC, Starbuck WH, editors. Handbook of org des: Adapt orgs to their env, 1. New York: Oxford University Press; 1981. p. 3-26. Hou JW, Zhang KH. A location analysis of Taiwanese manufacturing branch-plants in mainland China. Int Rev of Bus 2005;6(2):53–66. Makino S, Inkpen A. Knowledge seeking FDI and learning across borders. In: EasterbySmith M, Marjory L, editors. The handbook of organizational learning and knowledge management. MA.: Blackwell Publishing; 2003. p. 233–52. Raisch S, Birkinshaw J, Probst G, Tushman ML. Organizational ambidexterity: Balancing exploitation and exploration for sustained performance. Org Sci 2009;20(4):685–95. Schreyögg G, Sydow J. Organizing for fluidity? Dilemmas of new organizational forms. Org Sci 2010;21(6):1251–62. Subramanian A. New PPP-based estimates of Renminbi undervaluation and policy implications. Pol Brief PB 10-8, Peterson Institute for International Economics; 2010. Sun Q, Tong QW, Yu Q. Antecedents of foreign direct investment across China. J Int Money Finance 2002;21(1):79-113. Tseng W, Zebregs H. Foreign direct investment in China: Some lessons for other countries. IMF Pol Dis Paper; 2002. April. Tuman JP, Emmert CF. The political economy of U.S. foreign direct investment in Latin America: A reappraisal. Latin Am Res Rev 2004;39(3):9-28. Vernon R. The product cycle hypothesis in a new international environment. Oxford Bull of Econ and Stats 1979;41:255–67. Wei Y, Liu X, Parker D, Vaidya K. The regional distribution of foreign direct investment in China. Reg Stud 1999;33(9):857–67. Wells L. Mobile exporters: New foreign investors in East Asia. In: Froot KA, editor. Foreign direct investment. Chicago, IL: The University of Chicago Press; 1993. Zhang KH. Why does so much FDI from Hong Kong and Taiwan go to mainland China? China Econ Rev 2005;16(3):293–307.
Contents lists available at SciVerse ScienceDirect
Journal of Business Research
Exploitation, exploration, and how learning affects strategic intent in multinational enterprises' foreign direct investment decisions: A commentary essay Kamal Fatehi a,⁎, Paula Danskin Englis b, c a b c
Coles College of Business, Kennesaw State University, United States Campbell School of Business, Berry College, United States Nikos (Dutch Institute for Knowledge Intensive Entrepreneurship), The University of Twente, The Netherlands
a r t i c l e
i n f o
Article history: Received 1 September 2011 Received in revised form 1 October 2011 Accepted 1 October 2011 Available online 29 November 2011 Keywords: FDI Organizational learning Strategic intent Exploration Exploitation
a b s t r a c t Research on foreign direct investment is a rich vein of inquiry in international business and management literature. Scholars explore various aspects of FDI including the reasons for location selection. Chen and Yeh's research is in that tradition. Under the title of “Re-examining location antecedents and pace of foreign direct investment: Evidence from Taiwanese investment in China”, they explore Taiwanese investment in China and re-affirmed previous findings of other scholars that organizational learning alters the trajectory of investment. The essay here comments on their contributions, impact on practice and policy, and limitations. Finally, the essay discusses implications for future research and recommends relevant readings on the topic. © 2011 Elsevier Inc. All rights reserved.
1. Introduction Business enterprises from the emerging markets of Asia, Middle East and Latin America are going global and posing formidable challenges to existing rivals from industrialized countries. In these markets that are home to the majority of the world population, the emerging global firms have an advantage of being insiders. These are the future firms in the future markets. For example, Arvind Subramanian of the Peterson Institute says that China will account for over 23% of the world GDP by 2030 (Economic focus, 2011). These markets are growing at much faster rates than their counterparts in developed countries. A case in point, China's per capital income grew about 45% during 2005–2010 (Subramanian, 2010). Operating in these markets successfully requires understanding their uniqueness that is due to systemic and cultural differences. Learning about the complexity and intricacy of these markets and their people who often are as exotic as they are mysterious to the un-initiated would be valuable. Toward that end, Chen and Yeh (forthcoming) make a compelling presentation on how Taiwaneselisted firms (TLFs) choose their location investment in China. According to Chen and Yeh's findings, antecedents of TLFs investment in China are very much similar to those of other multinational enterprises. Their examination of TLFs foreign direct investment ⁎ Corresponding author at: Coles College of Business, Management and Entrepreneurship Department, Kennesaw State University, 1000 Chastain Road, Kennesaw, GA 30155-5591, United States. Tel.: + 1 770 423 6785. E-mail address: [email protected] (K. Fatehi). 0148-2963/$ – see front matter © 2011 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2011.10.031
(FDI) in China provides yet another piece of evidence that organizational learning effects alter the trajectory of investment. While a considerable body of literature on FDI is available, most have argued that multinational enterprises (MNEs) develop templates in their FDI decision making and follow one path or another (e.g., Schreyögg & Sydow, 2010). Chen and Yeh's paper presents longitudinal data that tracks Taiwanese multinationals' direct investment (TDI) in the China. Their results show that MNEs FDI trajectories may change over time from exploitation to exploration due to organizational learning. The paper is very timely, as China has grown not only as a production location but also in terms of market development and FDI destination. For example, the inflow of FDI to China has increased dramatically from almost zero in the late 1970's to $40–50 billion per year in the second half of 1990s, accounting for 25–30% of FDI inflow to all developing countries (Tseng & Zebregs, 2002).
2. Impact on theory FDI arises from activities of multinational firms that operate across countries. MNEs that engage in FDI possess special advantages to overcome the inherent disadvantages of foreignness. Based on the “OLI” paradigm (Dunning, 1981), firms with certain ownership advantages (e.g., patent or brand name) would open a subsidiary in a foreign country with location advantages (e.g., cheap labor or growing market) to maximize their profits. The best way to capture ownership and location advantages is by the
1296
K. Fatehi, P.D. Englis / Journal of Business Research 65 (2012) 1295–1297
internalization of production (not exporting or licensing) via direct investment in the foreign country. The OLI theory builds primarily on the behavior of large multinational firms either in the U.S. or other industrialized countries. FDI is associated with intangible assets such as technology, knowledge base, organizational capabilities and brand names. An interesting facet of this study is that Taiwanese MNEs may not be on the cutting edge of organizational and technological sophistication. The ownership advantages of Taiwanese direct investment (TDI) might be from other sources such as specialization in timely delivery of uniform quality parts and products to Western markets (Wells, 1993). Other advantages may include the ability to adapt more mature technologies to Chinese raw materials and the labor intensive context (Vernon, 1979). Yet another unique advantage is the ethnic connections between Taiwan and China that reduces cultural distance between the two. They share the same culture and language which makes negotiations and operations much easier to facilitate TDI. Given the shift in global FDI over the past decade, the location choice of MNEs deserves the attention within the unique context of this study (Chadee, Qiu, & Rose, 2003). The major theoretical contribution of the paper concerns organizational learning and how MNEs strategic intentions change their actions in FDI locations over time. The authors use longitudinal data that moves beyond treating FDI investment on a case by case basis (Benito & Gripsrud, 1992) and brings strategic intent under closer examination. They note that, “Internationalization is a function of MNE's experience/knowledge, managerial intentionality and other factors such as institutional forces.” This echoes some earlier work by Hedberg (1981) when he suggested that for knowledge seeking FDI to be considered a legitimate strategy for capability building, firms had to change or unlearn the dominant logic created by domestic operational experience. Thus, Chen and Yeh bring temporal context into theoretical play in two ways (or in terms of learning over time and pace of investments). First, they stir the debate about the duality of exploitation and exploration as fundamental firm learning behaviors (Raisch, Birkinshaw, Probst, & Tushman, 2009). Their finding that TFLs sequentially emphasize exploitation then exploration in downstream FDI does not support the duality argument. Instead, the finding shows that through organizational learning, TFLs develop absorptive capacity for FDI in China which has strategic and cross cultural implications for managers. Indeed, the debate on duality versus sequential exploration/exploitation may rest on the capability of the firm to develop absorptive capacity. Firms differ in their learning capabilities especially in acquiring and integrating new knowledge into their knowledge base (Makino & Inkpen, 2003). This difference is particularly salient when it occurs in a cross cultural context (Bhagat, Kedia, Harveston & Triandis, 2002). The second temporal consideration is pace of investment over time. The findings show that as TFLs increase their FDI experience, the pace of their investment also increases. That is, more experience equals less time between investments. The nature of these investments also changes. When combined with organizational learning, TFLs not only increase their pace of investment but also shift from exploitation to exploration. As they learn, TFLs' investment patterns increase and shift from exploiting labor costs, infrastructure, openness and market size to emphasizing labor quality and R&D capabilities. Thus, experience and learning impact TFL investment behavior. This finding shows that components of strategy may change over time as the organization learns and behaviors change. 3. Impact on practice The paper has several implications for managers. Consistent with previous literature, Chen and Yeh recommend that, in initial FDI, managers of MNEs should seek to exploit their existing competences.
When engaging in exploitation, the strategic intent should be to make location decisions that emphasize access to low cost labor, market size, infrastructure, and openness. However, Chen and Yeh break from previous findings by suggesting to managers that as time passes, the strategic intent behind FDI decisions will change due to organizational learning. Thus managers and the firms they lead should shift to FDI strategies that emphasize exploration. As organization learning occurs through accumulated experience, managers should be prepared to increase the pace of their investment and to choose locations with higher labor quality and R&D capability in order to help the firms leverage their competitiveness. Chen and Yeh also suggest that both exploitation and exploration are essential for firm survival. By taking advantage of entering first into Chinese markets, these Taiwanese firms gain access to both public and private sources of new strategic assets through their network of local industrial players and political agents. Assuming that the primary goal of foreign R&D subsidiaries is to source new technological capabilities in a host country, and manufacturing subsidiaries to exploit the existing technological capabilities in local production, the process of exploitation and exploration of technology should coevolve in feedback effects among affiliates in neighboring functional activities in the host country. 4. Impact on policy Chen and Yeh offer three main findings for Chinese industrial policy to attract new FDI. This research shows that both the initial FDI and the growth of FDI are affected equally by policy incentives. Thus, policy incentives are always important to MNEs whether dealing with exploration or exploitation. The key to creating policy incentives that work is to understand what location antecedents are important to MNEs, given their strategic intent. By understanding what MNEs want to accomplish, policy makers can tailor incentives to encourage FDI. Policy makers must also understand that incentives appeal to MNEs may change over time; thus, they may have to change their incentives in order to encourage FDI expansion and growth. For example, developing labor quality (later FDI) may become much more important vs. labor cost (initial FDI). A second finding is tied to agglomeration. Again this was found to be equally important for initial and growth FDI. FDI investments may reach the tipping point where other firms are attracted due to geographic concentration in region (Wei, Liu, Parker, & Vaidya, 1999). 5. Limitations Several limitations occur in Chen and Yeh's study, some of which they acknowledge. First, the two countries are close in terms of language, physical proximity (across the Taiwan Straight) and culture. If we compare FDI patterns of Swedish or US investment in China, the results may be much different and the learning that occurs may take much longer because there is so much to learn. A second limitation is that the data is limited to publically traded firms and contains no small and medium sized private enterprises. Several researchers have found that a substantial amount of FDI in China stems from SMEs (i.e., Hou & Zhang, 2002). A third limitation is more subtle. The paper does not consider that FDI by Taiwanese firms is also very beneficial to China — perhaps more so than other FDI by any other country. The benefits for China to keep Taiwanese MNEs engaged in large FDI flows are two-fold. Not only will they enhance China's economic growth by the introduction of advanced technology and knowledge spillovers, but through increasing economic integration, it may also keep Taiwan from pursuing independence (Zhang, 2005). Given how important public policy is in China, this is a unique aspect of the Taiwanese direct investment in China that is unlikely to be replicated in other country contexts.
K. Fatehi, P.D. Englis / Journal of Business Research 65 (2012) 1295–1297
Political risk literature (e.g., Busse & Hefeker, 2007; Fatehi & Safizadeh, 1994; Tuman & Emmert, 2004) indicates that FDI is influenced by political instability and risk. Whether or not this influence varies from exploitation stage to exploration stage remains unclear. While, the authors make a passing remark and echo the concern of Forsgren and Hagström (2007), they leave the issue unexplored. In criticizing previous research that assumes a model of FDI that changes preference from assets-exploitation to assets-exploration, Chen and Yeh suggest that these two streams are presented as static analyses, and do not account for the accumulated FDI experience that might have an impact on the motives of MNEs and their location. However, analyzing their own data they conclude that “….TLFs change their preference for location antecedents in the FDI trajectory due the organizational learning effect and altered strategic intention …As the knowledge related to China grows, the strategic objectives of TLFs evolve from exploitation to exploration …” In measuring certain variables, the use of previously employed methods by other scholars provides continuity and makes comparison possible. However, this practice may cause repeating the same error if those methods do not accurately measure the phenomenon under consideration. This may be the case in measuring “openness”. Similar to Sun, Tong, and Yu (2002), Chen and Yeh use the ratio of import value over GDP. Certain economic imperatives may necessitate a host country to increase imports, without having an “open” policy. In such a case, the increased imports has very little to do with the openness of the market. Host government policies that are restrictive could hamper certain business activities and be the opposite of openness. We cannot draw a valid conclusion from such method and data.
6. Implications for future research We can expand on Chen and Yeh's paper and make appropriate advances in theory and empirical testing. The most obvious is an expansion of research to analyze sequential FDI in different contexts (i.e., language, physical proximity, culture) to move beyond the limitations we discuss above between China and Taiwan. The second possible avenue of further research concerns a closer examination of the duality versus the sequential timing of exploration/exploitation. We can expand this debate to a logical conclusion. Other findings in the study, particularly the negative results warrant further investigation. For instance, the finding that production efficiency is more important for the later stage investment vs. the earlier stage seems counter intuitive. Another example is that agglomeration policy incentives appear to be important for both exploitation and exploration. Finally future
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research should consider cross cultural challenges more closely. When considering organizational learning, cross cultural knowledge management is difficult. Many firms experience the difficulty of transferring learning across borders easily (Bhagat et al., 2002). We should explore this aspect of organizational learning cross-culturally. Consider reading the following articles (Hou & Zhang, 2005; Makino & Inkpen, 2003; Zhang, 2005). References Benito GRG, Gripsrud G. The expansion of foreign direct investments: Discrete rational location choices or a cultural learning process? J Int Bus Stud 1992;23(3):461–76. Bhagat RS, Kedia BL, Harveston PD, Triandis H. Cultural and strategic considerations of cross-border organization knowledge transfer. Acad of Man Rev 2002;27(2): 204–21. Busse M, Hefeker C. Political risk, institutions and foreign direct investment. Eur Jour of Pol Econ 2007;23(2):397–415. Chen C-I, Yeh C-H. Re-examining location antecedents and pace of foreign direct investment: Evidence from Taiwanese investment in China. J of Bus Res, forthcoming. Chadee DD, Qiu F, Rose EL. FDI location at the subnational level: A study of EJVs in China. J Bus Res 2003;56(10):835–45. Dunning JH. International production and the multinational enterprise. London: Allen and Unwin; 1981. Economic focus | The celestial economy, Economist, September 10th 2011, 86. Fatehi K, Safizadeh MH. The effect of sociopolitical instability on the flow of different types of foreign direct investment. J of Bus Res 1994;31(1):65–73. Forsgren M, Hagström P. Ignorant and impatient internationalization? The Uppsala model and internationalization patterns for internet-related firms. Crit Perspect Int Bus 2007;3(4):291–305. Hedberg B. How organizations learn and unlearn. In: Nystrom PC, Starbuck WH, editors. Handbook of org des: Adapt orgs to their env, 1. New York: Oxford University Press; 1981. p. 3-26. Hou JW, Zhang KH. A location analysis of Taiwanese manufacturing branch-plants in mainland China. Int Rev of Bus 2005;6(2):53–66. Makino S, Inkpen A. Knowledge seeking FDI and learning across borders. In: EasterbySmith M, Marjory L, editors. The handbook of organizational learning and knowledge management. MA.: Blackwell Publishing; 2003. p. 233–52. Raisch S, Birkinshaw J, Probst G, Tushman ML. Organizational ambidexterity: Balancing exploitation and exploration for sustained performance. Org Sci 2009;20(4):685–95. Schreyögg G, Sydow J. Organizing for fluidity? Dilemmas of new organizational forms. Org Sci 2010;21(6):1251–62. Subramanian A. New PPP-based estimates of Renminbi undervaluation and policy implications. Pol Brief PB 10-8, Peterson Institute for International Economics; 2010. Sun Q, Tong QW, Yu Q. Antecedents of foreign direct investment across China. J Int Money Finance 2002;21(1):79-113. Tseng W, Zebregs H. Foreign direct investment in China: Some lessons for other countries. IMF Pol Dis Paper; 2002. April. Tuman JP, Emmert CF. The political economy of U.S. foreign direct investment in Latin America: A reappraisal. Latin Am Res Rev 2004;39(3):9-28. Vernon R. The product cycle hypothesis in a new international environment. Oxford Bull of Econ and Stats 1979;41:255–67. Wei Y, Liu X, Parker D, Vaidya K. The regional distribution of foreign direct investment in China. Reg Stud 1999;33(9):857–67. Wells L. Mobile exporters: New foreign investors in East Asia. In: Froot KA, editor. Foreign direct investment. Chicago, IL: The University of Chicago Press; 1993. Zhang KH. Why does so much FDI from Hong Kong and Taiwan go to mainland China? China Econ Rev 2005;16(3):293–307.