Xia, Ma, Lu, & Yiu 2014

OUTWARD FOREIGN DIRECT INVESTMENT BY EMERGING MARKET FIRMS: A RESOURCE DEPENDENCE LOGIC

Abstract

Outward foreign direct investment (OFDI) activities by emerging market firms <- the resource dependence logic of diversification

+ The diversification logic is bounded by state ownership, an important but less considered component of interdependence

Panel data analysis of Chinese listed firms 

1) The level of interdependence between Chinese and foreign firms in China in multiple forms, including symbiotic, competitive, and partner interdependencies, is positively associated with the level of the Chinese firms’ OFDI activities. 

2) However, Chinese firms with higher levels of state ownership are less susceptible to the pressures imposed by foreign firms to invest abroad.

* Introduction

The resource dependence logic of diversification (or simply the diversification logic), as noted by Pfeffer (1976: 39), is for a firm ‘to diversify operations and thereby lessen dependence on the present organizations with which it exchanges.’

Although Pfeffer and Salancik (1978) theorize interdependence both through exchange and through ownership, existing research on diversification largely focuses on the impact of interdependence through the exchange (Birnbaum, 1985; Pfeffer, 1972a, 1976), thus neglecting the bounded effect of interdependence through ownership

Limits application of the diversification logic and the precision of its predictions

1) Rooted in earlier studies on power dependence defined by exchange (Blau, 1964; Emerson, 1962; Jacobs, 1974), RDT assumes that all exchange actors have the discretion to diversify so as to reduce the constraining dependence on their current exchange partners. This assumption, however, may be less realistic since some actors do not have such discretion due to a lack of ownership control over the use and allocation of the firm’s resources (Pfeffer and Salancik, 1978).

2) Ownership that ties two actors together against others may alter the power imbalance between these two coalition actors and their exchange actors (Emerson, 1962). Once a coalition is formed through ownership ties, there may be variations in the predicted actions based solely on interdependence through the exchange.

Ownership ties may serve as a boundary condition to the functionality of the diversification logic

How home-country dependence conditions influence the extent to which emerging market firms (EMFs) engage in outward foreign direct investment (OFDI) activities that can be regarded as a form of diversification in the context of internationalization.

In their home country, EMFs operate in an environment in which foreign firms and local governments are powerful actors (Guler, Guille ́n, and Macpherson, 2002; Hoskisson et al., 2000; Peng, 2003).

Our study distinguishes between EMF-foreign firm interdependence through exchange and EMF-state interdependence through ownership, as informed by RDT

1) How different forms of EMF-foreign firm interdependence influence the level of EMF OFDI 

2) How such relationships are bounded by state ownership

Contributions

1) our RDT approach provides a unique lens to study EMF internationalization

Interdependence has multiple forms (Hillman, Withers, and Collins, 2009). We extend the diversification logic by incorporating three forms of interdependence between EMFs and foreign firms — symbiotic, competitive, and partner interdependencies (Pfeffer and Salancik, 1978), thus allowing us to systematically investigate the extent to which the diversification logic predicts EMF OFDI

Foreign firms are often more powerful than local firms (Inkpen and Beamish, 1997; Yan and Gray, 1994) and EMFs are often unable to absorb the constraints imposed by foreign firms in emerging markets, the EMFs may escape by investing abroad to avoid the dependence constraints at home.

2) Emphasizes a triadic relationship, beyond the dyadic interdependence between EMFs and foreign firms, by introducing state ownership as a boundary condition of the diversification logic.

State ownership: a unique type of interdependence between the government and state-owned EMFs.

Although the relationship between government dependence and corporate action is important in RDT research (Pfeffer and Salancik, 1978), it has been largely overlooked in the literature (Hillman et al., 2009).

However, state ownership is pervasive in transition economies (Hoskisson et al., 2000; Peng, 2003).

An examination of the moderating role of state ownership in the diversification logic may offer new insights into RDT.

Ownership ties with a powerful actor allow a firm to enhance its power relative to other external actors with which it has exchange relationships.

This is known as the ‘coalition’ effect (Emerson, 1962).

State ownership may alter the relative power between EMFs and foreign firms due to the coalition effect that undermines the influence of the diversification logic.

2-1) The diversification logic predicts that EMFs will actively engage in OFDI activities to increase their power relative to that of foreign firms at home, 

2-2) EMFs with higher levels of state ownership may be less responsive to this logic because EMF-state coalitions allow these firms to balance the power of the foreign firms by providing nonmarket resources, industrial protection, or bargaining power.

Although RDT emphasizes diversification as an important way to reduce exchange constraints, the empirical analysis remains sparse (Finkelstein, 1997)

More research to inform applications of RDT beyond the U.S. context (Hillman et al., 2009).

Fill this gap by investigating OFDI activities of listed firms in China.

China provides an ideal laboratory for testing the theoretical relationships we outlined because it is a popular destination for foreign firms and state ownership remains pervasive. 

Moreover, Chinese firms are beginning to play an increasingly important role in shaping the landscape of EMF OFDI activities (Child and Rodrigues, 2005). 

This empirical setting allows for a better understanding of this emerging phenomenon (Luo and Tung, 2007; Ramamurti and Singh, 2009) which, in turn, helps advance our theory.