AREFIRM-SPECIFICADVANTAGESLOCATION-SPECIFICTOO? M. KrishnaErramilli* Nanyang TechnologicalUniversity

SanjeevAgarwal** Iowa State University

Seong-SooKim*** Samsung Corporation

Abstract.Muchof theresearchontheroleof firm-specificadvantageson firms' subsidiaryownershippreferenceshas been undertakenin the context of advanced-country multinationals,specificallyU.S. MNCs. Researchhas foundthat U.S. firmsderiveownershipadvantagesfrom their size, experience,and technologicaland marketingsuperiority. Perhapshavingoperatedin the most-developed andsophisticatedhome market,manyU.S. firmsgenerateuniqueskills that givethemabsolute advantageoverfirmsin almostall foreignhost locations.DevelopingcountryMNCs do not haveabsoluteownershipadvantagessimilarto those of the U.S. firms. The relevanceof a particularfirm-specific characteristicfora developing-country MNC maybecontingentnotonly uponthehome-country characteristics,as in thecaseof U.S.MNCs,but also upon host-countrycharacteristics.This study investigatesthe subsidiaryownershippreferencesamongKoreanMNCs andfindsthat the influenceof threefirm-specificadvantages-technologicalintensity, productdifferentiationand capitalintensity-n subsidiaryownership levelsis contingentuponwhetherthesubsidiaryis locatedin a relatively less-developedor a more-developed countryas comparedto the home

*M. Krishna Erramilli is Senior Lecturer at the Nanyang Business School, Nanyang TechnologicalUniversity (NTU), Singapore.He is also the Associate Director for the Leadershipand ManagementProgramorganizedby NTU and DuPont Asia Pacific. His researchinterestsarein marketentrystrategiesand internationalbusinesstheory.This is his third publicationin JIBS. He has also publishedin the Journalof Marketing,Columbia Journalof WorldBusiness,ManagementInternationalReview,and the Journalof Business Research,amongothers. **SanjeevAgarwalis AssociateProfessorof Marketingat IowaStateUniversity,Ames,Iowa. His currentresearchinterestspertainto internationalmarketingissuesin entry,organization, and strategy.His work has appearedin the Journalof ConsumerResearch,Journalof the Academyof MarketingScience,Journalof PersonalSellingandSales Management,Journalof InternationalBusiness Studies, Journalof InternationalMarketing,IndustrialMarketing Managementand InternationalMarketingReview,amongothers. ***Seong-Soo Kim is the Managerfor InternationalCooperationin the Semiconductor Division of SamsungCorporation,Korea. Received: April 1995; Revised: September 1996; April & May 1997; Accepted: May 1997. 735

Palgrave Macmillan Journals is collaborating with JSTOR to digitize, preserve, and extend access to Journal of International Business Studies ® www.jstor.org

736

JOURNAL OF INTERNATIONALBUSINESS STUDIES, FOURTHQUARTER1997

country.Althoughsome authorshavesuggestedthat the influenceof firm-specificadvantagesmaybe contingentuponthe characteristicsof bothhome-andhost-countrylocations,empiricalinvestigationsto this effecthavebeennonexistent. INTRODUCTION termedas monopolisticadvantages, Firm-specificadvantages,interchangeably ownership advantages or competitive advantages, have constituted the buildingblocks of foreigndirectinvestment(FDI) researchsince the sixties [Hymer 1960].Their influenceon a firm'sdecision to engage in FDI (e.g., Dunning[1980];Lall [1980,1983];TerpstraandYu [1988];Yu and Ito [1988]) and on parent firms' ownershippreferencesfor foreign subsidiaries(e.g., Agarwaland Ramaswami[1992];Erramilli[1991];Erramilliand Rao [1993]; Anderson and Gatignon [1986];Gatignon and Anderson [1988];Kim and Hwang [1992]) has been intensively investigatedboth theoretically and empirically. Another group of factors, centralto the explanationof MNCs' investment decisions,is location-specific.Location-specificfactorsrepresentthe special advantagesaccruingto firmsoperatingat a particularlocation.FDI theories suggestthatfirmswill investmoreand/orselecthigher-equitymodesin those countrieswhich providegreaterlocation-specificadvantages.Though it has been knownthat both firm-and location-specificadvantagesseparatelyand jointly influence the parent firms' ownership preferences for foreign subsidiaries,recent theoretical developmentshave expanded the role of location-specificadvantagesby suggestingthat firm-specificadvantagesmay be tiedto a location. One streamof researchsuggeststhat a firm'sownershipadvantagesmay be shapedby the characteristicsof its homecountry.Dunning[1980,p. 10],for instance,notes that "the abilityof enterprisesto acquireownershipendowmentsis clearlynot unrelatedto the endowmentsspecificto the countriesin whichthey operate-and particularlytheircountryof origin."Accordingto Porter[1990],competitiveadvantagesare createdby the interactionof firmspecificfactorswith the home-country'sresourceendowments,demandconditions and industry characteristics.The observation that firm-specific advantagesare molded by home-countryenvironmenthas received some empirical scrutiny and support (e.g., Kim and Lynn [1987]; Lall and Siddharthan[1982];Schroath,Hu and Chen [1993]; Shan and Hamilton [1991]).In particular,Lalland Siddharthan[1982]foundthatthe type of firmspecificadvantagesenjoyedby non-AmericanMNCs may be very different from those of U.S. firms.For example,while high technology and product differentiationtend to drivethe growthof U.S. MNCs overseas,the authors found neitherplays an importantrole in the investmentdecisionsof foreign

ARE FIRM-SPECIFICADVANTAGESLOCATION-SPECIFIC?

737

MNCs operatingin the United States.Along similarlines,a varietyof studies have identifiedunique advantagespossessedby ThirdWorldmultinationals, such as small-scaleand labor-intensivetechnology,undifferentiatedproducts, and low costs, all resultingfromthe particularresourceendowmentsin their home countries(e.g., Giddyand Young[1982];Wells[1983];Kumarand Kim [1984];Lecraw[1993]).Thoughnot explicitlystated,home-countryinfluences are very much at the heart of investigationsinvolving U.S. and other developed-countryMNCs as well (e.g., Stopfordand Wells[1972];Gatignon andAnderson[1988]). Another, more limited, stream of researchsuggests that the relevanceor importanceof a particularfirm-specificadvantagemaybe contingentuponthe characteristicsof host locations. Severalauthors,includingBuckley [1990], Casson[1987]and Dunning[1980,1988a],havestressedthata multinational's firm-specificadvantagesshouldbe consideredin relationto competingenterprises or in referenceto the competitive environmentin host countries. Accordingly,a givenfirmcharacteristicor resourcemay representan advantageto the firmonly in the contextof a particularhost location.Forinstance, a technologically-intensiveU.S. MNC may conceivably enjoy a greater advantageover firms in less-developedcountries than those in developed countries.The host countrybecomesespeciallyimportantin studiesdealing with FDI, when the differentconfigurationof host country factor endowments, demand conditions and competition can either strengthena firm's advantagesor renderthemredundant[Dunning1995;Itaki 1991]. However,little empiricaleffort has been expended to test this argument. Perhapsthis is because of the historicalfocus of empiricalstudies on U.S. MNCs, whose technological superiority and experience in the mostsophisticateddomestic marketgive them absoluteadvantagesin almost all foreignhost locations.But firms from other countries,especiallythe newly industrializingcountries(NICs),facetwo typesof host locations-those more developedthantheirsand those less developed.Thesefirmsmayfindthat the firm-specificadvantagesnecessaryto operatein less-developedcountriesare differentfrom those requiredin more-developedcountries. The fact that developedand developingcountriesrepresentdifferentexternalenvironments posing differentlevels of complexityfor foreigninvestors[Beamish1985]is particularly significant to globally operating MNCs from developing countries,includingthe NICs. The presentstudy,therefore,investigatesthe contingenteffect of home and host locationalfactors on the natureof firm-specificadvantagesenjoyedby MNCs. It focuses on MNCs based in South Korea, a newly industrializing country,whose domestic-marketconditionsare quite differentfromthose of the advanced-countrymultinationalsthat have dominated past research attention.At the same time, KoreanMNCs offer the perfectopportunityto

738

JOURNAL OF INTERNATIONALBUSINESSSTUDIES, FOURTH QUARTER1997

test the hypothesisthatthe strengthof firm-specificadvantagesvariesby host location. This is becauseKorea is neitheran advancedcountrynor a lessdevelopedcountry.As Leeand Beamish[1995,p. 638]note: The newly industrializedcountriesare unique as sourcesof foreign directinvestment.In the case of Koreawith 1993per capitaGNP of $7,670,it is too economicallydevelopedto be calleda less-developed country,but too recentlydevelopedto be includedamong the traditionalranksof the industrializedor developedcountries. Equallypertinent,KoreanMNCs havebeen investingin host countriesboth more and less developed than Korea. The total amount of Korean manufacturingFDI from1968to 1990was 1,173millionU.S.dollarsof which 843 millionU.S. dollars(close to 72%)wereinvestedbetween1988and 1990. Between 1968 and 1990, Koreanfirms had established295 subsidiariesin Southeast Asia, 7 in the Middle East, 82 in North America, 61 in South America,26 in Europe,9 in Africa,and20 in Oceania[Bankof Korea1991]. Specifically,the presentpaperproposesthat the natureof influenceof firmspecificadvantageson the ownershiplevelsof KoreanMNCsinvestingin lessdeveloped countries is different from those investing in more-developed countries.The paperexaminesthreefactors,namely,technologicalintensity, productdifferentiation,andcapitalintensity,thatpotentiallyrepresentsources of firm-specificadvantagesto MNCs. It developshypothesesto explainhow preferencesin lessthesefactorsinfluenceKoreanfirms'subsidiary-ownership developedcountries(LDCs) and in more-developedcountries(MDCs). The hypothesesaretestedusingdatafromKoreanMNCs. THEORETICAL BACKGROUND

Internationalbusinessliteratureover the past three decades has produced rivetingexplanationsas to what causes MNCs to enter foreignmarketsvia foreigndirectinvestmentand as to how they choose the levelof theirownershipin foreignsubsidiaries.One of the morecommonexplanationscenterson firm-specificadvantages.Firm-specificor ownershipadvantagesstem from "the exclusive privileged possession of or access to particular income generatingassets"[Dunning1988a;p. 2]. Thistheoreticalstreamsuggeststhat in orderto profitablyexploittheircompetitivesuperiority,firmstransfertheir firm-specificadvantagesto host marketsvia foreigndirectinvestment.More importantlyfor the present study, these transfersare accomplishedwithin internalizedgovernance(whollyowned) structures.Whollyowned structures (or sole ventures)offerthe opportunityto betterappropriateand controlthe use of assetsbecausetheyenableMNCs to close marketsand increasemarket power [Hymer1960].This explanationenjoys substantialempiricalsupport. The most commonfirm-specificadvantages,suchas technology(R&D intensity), productdifferentiation(advertisingintensity),multinationalexperience

ARE FIRM-SPECIFICADVANTAGESLOCATION-SPECIFIC?

739

and firm size, have all been found to favorhigher-equityinvestmentmodes [Agarwaland Ramaswami1992;Gatignon and Anderson 1987;Kogut and Singh 1988;Stopfordand Wells 1972].Generallyspeaking,the strongerthe firm-specific advantages of a firm, the greater is the tendency to seek higherequity investmentmodes.

Some scholarshavesuggestedthat the relevanceof a particularfirm-specific advantageis contingentupon host-countrycharacteristics.This is becausea particularadvantageexists in relation to capabilitiesof competitors and peculiarcharacteristicsof host countries.Lall and Siddharthan[1982,p. 679] note: In more generalterms,our study points to the need to considerthe relativeadvantagesof foreignand local investorsin conductinganalyses of MNC characteristics,and so also to consider the peculiar characteristicsof eachhost country. Similarly,Itaki [1991]arguedthat a particularset of firm-specificadvantages possessedby a firmmay not yield the same type of competitiveedge in each andeveryhost location.Thestrategyliteraturealsopointsout thata firmmust determineif its competitiveposition based on existingstrategiccapabilities (i.e., firm-specificadvantages)is sustainableat a particularhost location [Nohriaand Garcia-Pont1991].Basically,a firmcould investmore and seek greaterequityin country'X whereit enjoysstrongeradvantages,butinvestless and settle for lower equity in country 'B' whereits advantagesare weaker. Whilethereareseveralfirm-specificadvantages,the ensuingsectionexamines the roleof threespecificsourcesof firm-specificadvantages,viz. technological intensity, product differentiation,and capital intensity.' Hypotheses are developedpredictinghow their influencewill vary dependingupon whether the Koreanfirminvestsin a LDC or a MDC country. HYPOTHESES TechnologicalIntensity

Previousresearchpertainingto firm-levelFDI patternshas revealeda positive correlationbetween researchand developmentexpendituresand the proportion of subsidiariesorganizedas sole venturesratherthanjoint ventures [Stopfordand Wells 1972]. According to Hymer [1960], sole ventures are desiredin orderto appropriatefully the returnson certainskills and ability. Kindleberger[1984]addedthat high-techfirmschoose sole venturesin order to squeezeout the maximumrentpossiblefromtheirtechnologies.Additionally, concerns about loss of proprietaryknowledge2drive firms developing path-breakinginnovationsto keeptheirproprietaryassetsintact[Kindleberger 1984]. In a study involving1,267 foreigndirectinvestmentdecisionsby 180 of the largest U.S. multinationals during the period between 1960 and 1975,

JOURNAL OF INTERNATIONALBUSINESSSTUDIES, FOURTH QUARTER1997

740

GatignonandAnderson[1988]foundstrongsupportfortheirhypothesisthat the probabilityof establishingwhollyownedsubsidiariesincreaseswith R&D intensity,a surrogatefor technologicalintensity.Davidsonand McFetridge [1985]also found that U.S. firmscharacterizedby high technologicalintensitiestendto reservetheirproprietaryknowledgeforhigher-equitymodes. Previous researchershave generallyargued that NIC MNCs do not have significantadvantagesin technologicallyintensiveindustriesin relationto the MNCs fromadvancedcountries[Jo1981;KumarandKim 1984;Tallmanand Shenkar1990;Wells1983].Jun[1995]arrivesat thesamegeneralconclusionin particularreferenceto the Koreanelectronicsindustry.In spite of the impressiveaccomplishmentsof NIC MNCs in many high-technologysectors recently,technologyrepresentsa weak source of firm-specificadvantageto NIC multinationalsrelativeto firms in more advancedcountries.For this reason,weexpectthattechnologicalintensityshouldnot haveanyeffecton the KoreanMNCs' ownershippreferencesin MDCs. However,becauseNICs aretechnologicallymoredevelopedthanmost LDCs, theirMNCsenjoysuperiortechnologicalcapabilitiesrelativeto firmsin LDCs. Technologicallyintensive Korean MNCs should, therefore,have stronger advantages and, consequently, higher ownership levels than their lowtechnologycounterpartsenteringLDC markets.Thus: Hi:

For KoreanMNCs, technologicalintensityis positivelyrelated to the levelof ownershipin LDCs but has no relationshipwith the levelof ownershipin MDCs.

Product Differentiation

Productdifferentiationis an importantfirm-specificadvantagethatcanensure highereconomicrent. Firmsattemptto differentiateproductsin manyways, but an importantcomponentis creationof positivebrandimagesthroughthe use of marketingpromotionsincludingadvertising.Empiricalevidencebased on advanced-countrymultinationalssuggeststhat higheradvertisingintensities leadto greateruse of higher-equitymodes[GatignonandAnderson1988; Stopford and Wells 1972]. Both Dunning [1981] and Caves [1982] have suggestedthat protectionof brandimageis difficultif the firmdoes not fully controlthe subsidiary. MNCshavelackedfinancialresources[Giddy Historically,developing-country andYoung1982]andmarketingskills[Wells1983]neededto competesuccessfully and survivein industriesdominatedby developed-countryMNCs that haveestablishedstrongbrand-images.Jun[1995,p.185]notedthatthe lack of global recognitionof own brandnames is one of the weakestlinks of the firms'valuechain.Lackingdifferentiatedbrands, Koreanconsumer-electronics Koreanfirmshavein the past survivedon the abilityto makeundifferentiated or generic products and sell them at low prices [Wells 1983]. The cost-

ARE FIRM-SPECIFICADVANTAGESLOCATION-SPECIFIC?

741

leadershipstrategyhas been pragmaticbecause NIC MNCs have usually produced mature products and entered a particularproduct market as a follower.So, insteadof investingin advertisingto createbrandidentities,NIC MNCshavetraditionallyfocusedtheireffortson creatinga low-costadvantage [Porter1990]. But,competitionformarketdominancein MDC marketsis heavy,andKorean companiesenteringthesemarketswill be at a severedisadvantageif they did not practise differentiationstrategies.While cost-based strategiesare still important,some modicumof brand differentiationis needed to createand sustain competitive advantage.The Economist[1996] reports that Korean firms,such as Hyundaiand Daewoo, are unhappythat they "do not seemto havethe globalcachetof, say,Guccior evenPanasonic."Onestrategytheyare following,therefore,is purchasingcompaniesthatdo. Samsungis particularly acquisitive:in 1994,it purchasedLux,a Japaneseproducerof hi-fiequipment, and in 1995it bought Rollei, a leadingGermancameramaker.In addition, companiessuch as Hyundai, Samsungand Daewoo are attemptingto gain brandrecognitionin the U.S. and other advancedcountries through advertising while simultaneouslypursuinglow-cost strategy.Thus, a marketing strategybased on high name recognitionseems to be a more advantageous positionfor NIC MNCs in MDCs. While the wealthier customers in MDC markets demand differentiated products,demandin LDC marketstends to be relativelyelastic.In fact, cost leadership,in and of itself,maybe the keyto successin LDC markets.Thus: H2: For KoreanMNCs, productdifferentiationis positivelyrelated to the levelof ownershipin MDCs but negativelyrelatedto the levelof ownershipin LDCs. Capital Intensity

Severalauthors have observed that experiencein using and adapting low capital,labor-intensivemanufacturingtechnologyrepresentsa majorsourceof competitiveadvantagefor Third-WorldMNCs in relationto local as well as multinationalcompetitorsin host countries[Diaz-Alejandro1977;Jo 1981; Porter1990;Steers,Shin and Ungson 1989].Multinationalsfrom the newly industrializingcountries,suchas Korea,however,do not fit this mold exactly. Not all Koreanfirmsemphasizesmall-scale,labor-intensiveproduction.Many of these firms achieve low-cost production through mass production of standardizedproducts.Such productionrequireslargecapitalinvestmentin large-scale,modern facilities. Many Korean firms are willing to make big capitalinvestmentsin orderto implementsucha strategy[Porter1990,p.471]. Consequently,we find an arrayof firms that span the spectrumof capital intensity.In the Korean context, industriessuch as consumer electronics, computerperipherals,and deep-seafishingexhibithigh-capitalor low-labor

742

JOURNAL OF INTERNATIONALBUSINESSSTUDIES, FOURTH QUARTER1997

intensity[Porter1990].Otherindustries,suchas textiles,exhibitlow-capitalor higherlevelsof laborintensity. Dunning [1981]arguesthat firm-specificadvantagesof MNCs, generatedin responseto the home-countrymarketconditions,maynot proveto be advantageous in host countries having differentmarketconditions. This is one reason why the traditionaladvanced-countryMNCs tend to invest more extensivelyin relativelyhigh-incomecountries.Accordingto Dunning[1988b], in 1985, 96% of the foreign investmentstake was owned by MNCs from developedcountries,and aboutthreequartersof thiswas locatedin the other developedcountries.Extendingthis logic, it is easy to see why high laborintensive(less capitalintensive)Koreanfirmsmay enjoyadvantagesin LDC markets,but not in MDCs. On the otherhand, less labor-intensive(or more capital-intensive)KoreanMNCs may enjoy relativelygreateradvantagesin MDCs.Thus: H3: For KoreanMNCs, capitalintensityis positivelyrelatedto the levelof ownershipin MDCsbutnegativelyrelatedto thelevelof ownershipin LDCs. METHODOLOGY Data Collection and Sample

The data for this study were obtainedfrom the ForeignExchangeControl Departmentat the Bankof Korea,whichapprovesand monitorsFDI activities of Koreanfirms.The data includedthe name of the investingfirm, the name of the host country,the name of the foreignsubsidiary,the approval date, the amountof foreigndirectinvestment,and the percentageof ownership.The dataexaminedwererestrictedto subsidiariesestablishedduringthe 1988-90 period because of unprecedentedoverseas expansion of Korean MNCs duringthatperiod.The three-yearwindowalso minimizedthe impact of longitudinaleffectson subsidiaryownershippatterns.Furthermore,only those MNCswereincludedforwhichfirm-specificfinancialinformationcould be procuredfrom the "FinancialReport of Korean Companies"[Korean InvestorsService 1991],whichis wellrecognizedforits comprehensivecoverage of dataon Koreanfirms. Table1 summarizesthe salientcharacteristicsof the sample.Onehundredand seventy seven Korean MNC subsidiaries(establishedby 132 firms) were eventuallyincluded in the sample. Of these subsidiaries,about 72% were locatedin LDCs,andthe remainderin MDCs.The MNCs in the samplewere drawnfrom a widerangeof manufacturingindustries,includingfood, beverages, textiles, apparels,leather,wood, furniture,paper,printing,chemicals, petroleum,plastics,mineralproducts,basicmetal,machinery,and equipment (includingelectricalandelectronicproducts).The samplecontainedfirmsthat representeda wide range of values on technologicalintensity, degree of

743

ARE FIRM-SPECIFICADVANTAGESLOCATION-SPECIFIC?

TABLEI Salient Characteristics of the Sample Sample Size=177 Foreign Subsidiaries of Korean Manufacturing MNCs Belonging to 132 Parent Companies Classification of Subsidiaries by Parent MNC's Industry Textiles, Apparels & Leather Fabricated Metal Parts, Machinery etc. (including Electrical & Electronics) Chemicals, Rubber & Plastics Food and Beverages Wood & Furniture Paper, Printing Miscellaneous

(Percentage of Sample) 29.4 35.0 13.6 4.0 3.4 3.4 11.2

Location of Subsidiaries (Percentage of Sample) Less Developed Markets (LDCs) More Developed Markets (MDCs)

72.3 27.7

Ownership Patterns of Subsidiaries (Percentage of Sample) Equity Ownership < 50% Equity Ownership = 50% Equity Ownership > 50% < 100% Equity Ownership 100%

24.9 11.3 28.8 35.0

% of Subsidiaries Belonging to Parent with Conglomerate Membership

39.0

% of Subsidiaries Belonging to Parent with: FDI in Both LDCs and MDCs FDI in Either LDCs or MDCs But Not Both

20.7 79.3

product differentiation,and capital intensity. The sample was also wellbalancedin termsof subsidiaryownershippatterns.KoreanMNCs held less than 50%equity in approximately25%of the subsidiaries,50%equity in approximately11%of the subsidiaries,majorityownership(i.e., greaterthan 50%but less than 100%equity)in approximately29%of the subsidiaries,and sole (100%)ownershipin approximately35%of the subsidiaries. Model

The purposeof this study is to assess the moderatingrole of host-country (HC) on the relationships between firm-specificvariables-technological intensity (TI), productdifferentiation(PD), and capital intensity(CI)-and the type of organizationalstructure(MODE)chosenby a Koreanfirmfor its overseassubsidiaryduringthe periodunderstudy.The analyticalmodel can be writtenas follows: MODE=f (TI, PD, CI, HC, HC*TI, HC*PD, HC*CI)

(1)

where,MODEis a four-levelresponsevariableindicatingthe typeof organizationalstructureor modechosenby a firmfor an overseassubsidiary.The four

744

JOURNAL OF INTERNATIONALBUSINESSSTUDIES, FOURTHQUARTER1997

choicesareminorityjoint venture,equaljoint venture,majorityjoint venture, andsoleventure.The fourchoiceswerecodedas 1, 2, 3, and4, respectively.TI is a measureof a firm'stechnologicalintensityandhasbeenoperationalizedas the ratio of the firm'sR&D expendituresto its sales revenuein accordance with previous research [Davidson and McFetridge 1985; Gatignon and Anderson1988;StopfordandWells1972].PD is a measureof a firm'sproduct differentiationand, as in many studies [Gatignonand Anderson 1988;Lall 1980;Wells 1983],is representedby the ratio of the firm'sadvertisingexpendituresto its total sales revenue.CI is a measureof a firm'scapitalintensity andhas beenoperationalizedas a ratioof a firm'sfixedassetsto salesrevenue in accordancewithpreviousresearch[KimandLynn1987;ErramilliandRao 1993].Conceptually,capital intensitycan be viewed as the inverseof labor intensity.To verifythis view,the capitalintensityforeach industrygroupwas calculatedforthesample.In general,it wasfoundthatthecapitalintensitywas smallfor industrieswhicharetypicallyconsideredhighin laborintensity(e.g., Textiles) and large for those regarded as low in labor intensity (e.g., Chemicals).HC is a dummyindicatorof host-countrylocation.It wascoded0 for LDCs (i.e.,countriesthatareless developedthan Korea)and 1 for MDCs (i.e.,countriesthataremoredevelopedthanKorea).Themodelincludedthree interactiontermsinvolvingHC andthethreeownershipvariables(TI, PD, and CI). The three interactiontermswere includedin the model to test for the moderatingrole of HC on the relationshipbetweenthe three firm-specific variablesand MODE. While the model mentionedabove contains the basic variablesto test our hypotheses,the questionaboutotherpossiblefirm-and location-specificvariablesmust be addressed.Among the firm-specificvariables,the two, besides the ones alreadyincludedin this study,thathavebeenwidelyexaminedin the previousliteraturearesizeandmultinationalexperienceof firms(e.g.,Agarwal and Ramaswami[1992];Gatignonand Anderson[1988]).Unfortunately,the datadidnot containinformationon multinationalexperienceof Koreanfirms. Previousresearchon size (generallymeasuredas worldwidesales)indicatesa positiverelationshipbetweenfirmsize and the level of FDI or the choice of higher-equitymodes [Agarwaland Ramswami1992; Buckley and Casson 1976;Cavesand Mehra 1986;Yu and Ito 1988;Terpstraand Yu 1988].The rationaleis that size providesthe resourcesneededto absorbthe highcost of producingandmarketingin a foreigncountry.In otherwords,a largerfirmis "capable"of undertakinga higherlevelof investment.Changingtechnological and competitiveenvironments,however,are forcing scholarsto rethinkthe traditionalrole of size. Such changeshave led some commentators,notably Naisbitt [1994], to assert that large firms are tomorrow'sdinosaurs.These commentsare based on a belief that small and mediumsize firmsare more nimblein respondingto today'scompetitiverealitiesthantheirlargercounterparts.Accordingto Harrison[1994]and Dunning[1995],however,Naisbitt's

ARE FIRM-SPECIFICADVANTAGESLOCATION-SPECIFIC?

745

contention is flawed.They believe that largerfirms are restructuringand replacing traditional hierarchical relationships with modern "alliance" relationships.As a result,largerfirmsareincreasinglyestablishingboth equity and non-equity-basedorganizationalarrangementsrather than just sole ventures.Althoughthiscontentionhasnot beenempiricallyexamined,thereis considerabledescriptiveevidenceto this effect. Besides,Woodcock,Beamish and Makino [1994]havechallengedthe theoreticalreasonfor hypothesizing the positive relationshipbetween size and higher ownershipbased on the "'capability" argument.The rationale,accordingto them, shouldbe rootedin how size can be a source of advantagethat is worth protectingwithin the hierarchicalstructure.However,for lack of a clear prescription,we did not hypothesizethedirectionalityof therelationshipbetweensizeandmodein this particularstudy. Among the location-specificvariables,variablesexaminedin previousliteraturehaveincludedindicatorsof marketattractiveness.Marketattractivenessis determinedby marketpotential(e.g., GDP/capita),externaluncertainty(e.g., political risk and governmentrestrictions),and internal uncertainty(e.g., culturaldistance).As a generalrule,the greaterthe marketattractivenessof a host country, the greaterthe propensityto choose a higher-equitymode. Researchhas foundthatmarketpotentialhas a positiverelationship,whereas both externalandinternaluncertaintieshavea negativerelationship,withFDI or the levelof equityparticipation[Agarwaland Ramaswami1992;Gatignon and Anderson1988].In this study,data on GDP/capita (MP) was obtained from InternationalFinancial Statistics, a publication of the International Monetary Fund [1991].Theinformationwasalsousedto classifycountriesinto LDCs (HC=O) and MDCs (HC=1) for the KoreanMNCs. Data on political risk (PR) was obtainedfrom BERI (1990);on governmentrestrictions(GR) fromContractor[1990];and on culturaldistance(CD) fromHofstede[1980]. GR is a measureof the proportionof Americanaffiliatesin a givencountry reportinglimitationson the parentcompany'sequity.The greaterthe number, the morerestrictiveis the host country.Whilethis measurereflectsexperience of AmericanMNCs, in ourjudgmentit is broadlyreflectiveof the policiesof host governmentsto all FDI. CD is a measureof theculturaldistancebetween South Koreaand the host country,and is calculatedfrom data providedin Hofstede [1980] using Kogut and Singh's [1988] approach.A large value indicatesthereexists a largeculturaldistancebetweenthe host countryand South Korea. PR is a composite measureof socio-politicalconditions in a country.The dataobtainedfromBERI [1990]was transformedso thata large valueindicatedhigh politicalrisk and a smallervalue indicatedlow political risk. It was expectedthat Koreanfirmswill choose greaterequityin markets characterizedwith greatermarketpotential,low governmentrestrictions,low politicalrisk,and low culturaldistance.The model, statedin equation1, was consequentlymodifiedas follows:

JOURNAL OF INTERNATIONALBUSINESSSTUDIES, FOURTH QUARTER1997

746

MODE=f (SIZE, TI, PD, CI, MP, GR, PR, CD, HC, HC*TI, HC*PD, HC*CI),

(2)

where, MODE =Typeof OrganizationalStructure(1:MinorityJoint Venture;2: EqualJointVenture;3: MajorityJointVenture; and4: Sole Venture) SIZE =Firm Size TI =TechnologicalIntensity PD =ProductDifferentiation CI =CapitalIntensity MP =MarketPotential GR =GovernmentRestrictions PR =PoliticalRisk CD =CulturalDistance HC =Host CountryDummy(H=1 for MDCs andH=0 for LDCs) HC*TI =Interactionof HC andTI HC*PD=Interactionof HC andPD HC*CI =Interactionof HC and CI Analysis

A multinomiallogistic regressionwas deployedto examinethe effect of the firm-and location-specificadvantageson the choice of organizationalstructure chosen by KoreanMNCs in their overseassubsidiaries.The model, as describedin equation2, takesthe followingform: log

Pr

i x)

-a1+ (MODE? t 1-Pr (MODE?i Ix)

x,

2?i?4

(3)

where a,, a2 and a3 are three interceptparameters(one less than the four choices),,Bis the vectorof slope parameters,andx is a vectorof independent variablesas notedin equation2. The probabilityof a particularchoice,say,4 (sole venture)with respectto the probabilityof all otherchoicesis calculatedusingequation3 as follows: Pr (MODE=4 Ix)

-exp

1-Pr (MODE=4 1x)

(al1 +

fi x) .

(4)

Basedon equation4, the probabilityof choosinga sole venture,as compared to anyof the otherforms,will be higherwhenthe coefficientfiassociatedwith a particularindependentvariablex is positiveandviceversa. Furthermore,the probabilityof choosing4 (sole venture)or 3 (majorityjoint venture)with respectto the probabilityof otherchoicescan be calculatedas follows:

ARE FIRM-SPECIFICADVANTAGESLOCATION-SPECIFIC?

Pr (MODE=3 or 41 x)

-

--

1-Pr (MODE=3 or 41 x)

=e~~~,.xp) (aC2+ X) .

747

(5)

Basedon equation5, the probabilityof choosinga majorityjoint ventureor a sole venture,as comparedto minorityor equaljoint ventures,will be higher when the coefficient,Bassociatedwith a particularindependentvariablex is positiveandviceversa. And, the probabilityof choosing4 (sole venture)or 3 (majorityjoint venture) or 2 (equaljoint venture)with respectto the probabilityof minorityjoint venturecan be calculatedas follows: Pr (MODE=2, 3 or 41 x) 1-Pr (MODE=2, 3 or 41 x)

=exp (a3 + / x).

(6)

Based on equation6, the probabilityof choosing a sole venture,a majority joint venture, or an equal joint venture, as compared to minority joint ventures,will be higherwhen the coefficient,Bassociatedwith a particular independentvariablex is positiveandvice versa. RESULTS Wheneverinteractionsareincludedin regressionmodels,thereis a possibility of multicollinearitybecausethe interactionterms are expectedto correlate highly with their componentvariables.A popular solution is to use meancenteredtransformationof the interval-scalevariables(whichin our case are TI, PD and CI)beforemultiplyingthemwith the dummyvariable(HC). The resultingcorrelationmatrixis reportedin Table2. The correlationsbetween HC*PD and PD and between HC*TI and TI are still high (>.5). The possibilityof multicollinearitywas also expectedto be high amonglocationspecificvariables(e.g., MP, GR, PR, CD, and HC) as correlationsamong them are high (>.5). To check for multicollinearity,we examinedVariance InflationFactors(VIF),tolerancelevels,conditionindex,and variancedecompositionproportionsof the independentvariablesincludedin equation2. As expected,the testsindicatedpresenceof multicollinearityamongthe locationspecificfactors.Therefore,we decidedto drop all location-specificvariables except HC.3 Basically,MDCs (HC= 1) representedcountriesthat weremore attractivelocations for FDI. These countrieshad higher marketpotential, lower governmentrestrictionsand lower political risks. Interestingly,these countries were culturallydistant from Korea. LDCs (HC=0) represented countriesthatwereless attractivelocations.Thesecountrieshad lowermarket potential,highergovernmentrestrictions,higherpoliticalrisk,but lowercultural distance. Usually, we do not expect countries to be attractivewhen culturaldistanceis high but it seems that other factors are more important than cultural distance in determining location attractivenessfrom the viewpointof KoreanMNCs.

748

JOURNAL OF INTERNATIONALBUSINESSSTUDIES, FOURTHQUARTER1997

TABLE2 Correlation Matrix TI SIZE -.03 TI PD C/ HC MP GR PR CD HC*TI HC*PD HC*CI

PD

C/

HC

MP

.05 .29a

.08 .02 .10

.15 .02 .09 .00

.13 -.04 .04 .02 .93a

GR

PR

CD HC*TIHC*PDHC*CI MODE

-.14 .01 .09 -.02 -.02 -.06 .01 -.03 .56a .12 -.04 .08 .12 .13 .63a -.09 -.03 -.02 -.02 -.05 _.56a .82a .78a .02 .10 -.56a .84a .73a -.09 .03 -.58a -.41 a _.02 -.07 .64a .01 .07 .01 .11 -21a

-.02 -.05 -.13 .25a -.01 .01 -.00 -.09 -.02 _.09 -.21 a

-.27a -.02 -.14 _.07 .09 .11 -.18 b -.14 .16b

_.07 .01 -.12

MODE :1=Minority Joint Venture; 2=Equal Joint Venture; 3=Majority Joint Venture; 4=Sole Venture

SIZE: FirmSize TI: PD: C/: MP GR PR: CD HC:

Technological Intensity Product Differentiation Capital Intensity Gross Domestic Product per Capita of Host Country Government Restrictions of Host Country Political Risk of Host Country Cultural Distance Host Country Dummy (1= MDC;O=LDC)

a significant at p<.O1 (two-tailed); b significant at p<.05 (two-tailed)

The largest VIF, after excluding MP, GR, PR, and CD, was 1.92 and the associatedtolerancelevelwas 0.52, both well withinthe limitsrecommended by Neter et al. [1990].The largestconditionindex was 2.81, well below the cutoffpoint of 30 recommendedby Belsley,KuhandWelsch[1980]. Equation 3 was analyzedwith and without the interactionterms to assess whetherthe marginalcontributionof interactiontermswas significant.The changein %2 afterincludinginteractionswas 39.41for 6 degreesof freedom. This is a significantchangeat .01 level, suggestingthat the interactionterms should be included in the model. The results of the multinomiallogistic regressionmodel with interactiontermsfor MODE are reportedin Table3. The modelis statisticallysignificant(2 (16 dj)=61.56;p<0.0001). Individually,SIZE has a negativecoefficient(b= - .72;p .01),suggestingthat the largerthe parent'ssize,the loweris the probabilityof higher-equitymodes in comparisonto the lower-equitymodes (as per equations4, 5 and 6). This findingis not consistentwithfindingsfor advanced-countryMNCs.However, it is consistentwith Dunning[1995],in whichhe has arguedthat largerfirms are more likely to form joint ventures as opposed to sole ventures, and minorityjoint venturesas opposed to equal or majorityjoint venturesin today'sglobal-businessenvironment.

ARE FIRM-SPECIFICADVANTAGESLOCATION-SPECIFIC?

749

The location variable, HC, has a positive coefficient (b=0.71; p<.05), suggestingthatthe propensityto choose higher-equitymodesas comparedto lower-equitymodes is high in more attractivelocations(i.e., MDCs). This is consistentwith the expectedimpactof location-specificfactors. In orderto interprettheimpactof thethreestudyvariables,TI,PD and CI,we must examinethe combinedeffect of the main and interactioncoefficients, especially because all three interaction terms are statistically significant. Specifically,results(seeTable3) showthatthe interactionbetweenHC and TI is statisticallysignificant(-1.48; p<0.05) supportingthe basicnotion thatthe impactof TIis contingentupon host location.Thecombinedeffect(mainand interaction)of TIon MODEshouldbe representedas (0.65-1.48*HC)*TI.In LDCs(i.e.,whenHC=0), thisreducesto +0.65*TI,suggestingthatthe higher the TI, the higherthe probabilityof higher-equitymodes relativeto lowerequity modes. This observationis consistentwith HI. In MDCs (i.e., when HC= 1), however,the combinedcoefficientis -0.83* TI, implyinga negative relationship.In other words,the higherthe TI, the higherthe propensityof choosing lower-equitymodes relativeto higher-equitymodes in MDCs. The latterresult,obviously,does not supportHI. Results(seeTable3) showthattheinteractionbetweenHC andPD is statistically significant(p<0.05), supportingthe notion that the impact of PD is contingentupon host location. The combined effect of PD on MODE, is TABLE3 Logistic Regression Results (Dependent Variable MODE) (TI, CD and PD are mean centered)

Intercept1 a, Intercept2 a2 Intercept3 a3

SIZE TI PD

C/

b

SE

-0.63 0.70 1.32

.19 .19 .22 .20 .51

-0.72

0.65

-0.24

HC HC*TI HC*PD HC*CI

-0.17

0.71 -1A48

0.33 2.17

/

-3.68a

-0.05

-0.55

-0.23

.33 .91

0.17 -0.17

.18

1.21

3.25a 3.57a 6.09a

-0.32 0.13

.11

.30

z-score

1.27c

-2.13b

2.16b

-1.62b 1.83b

0.20

0.16

1.79b

MODE :1=Minority Joint Venture; 2=Equal Joint Venture; 3=Majority Joint Venture; 4=Sole Venture SIZE: FirmSize

TI: Technologicalintensity PD : Product Differentiation Cl: Capital Intensity HC: Host Country (1-MDC; Q=LDC) astatistically significant atp <.001 (one-tailed); b statisticallysignificantatp<.5

cstatisticallysignificantat p<.1 0 (one-tailed)

(one-tailed);

750

JOURNAL OF INTERNATIONALBUSINESS STUDIES, FOURTHQUARTER1997

(-0.24+0.33*HC)*PD. Thus,the effectof PD in LDC marketsis -0.24*PD, implyingthat the higherthe PD, the lower the probabilityof higher-equity modesrelativeto lower-equitymodes.In MDCs, however,the effectof PD is +0.09*PD, implyingthat the higherthe PD, the higherthe probabilityof higher-equitymodesrelativeto lower-equitymodes.Both resultssupportH2. Resultsin Table3 also indicatethatthe interactiontermHC*CIis statistically significant(p<0.05), suggestingthatthe impactof CIis also contingentupon host-location.Computations,similarto the ones presentedabove,yield -0.17 as the coefficientfor CI in LDCs and +2.00 in MDCs.Theseresultsindicate that the higherthe CI, the higherwill be the probabilityof choosinghigherequitymodesrelativeto lower-equitymodesin MDCsandviceversain LDCs. Theseresultsprovidesupportfor H3. DISCUSSION Since the late 1960s, MNCs based in developingcountries,especiallythose having large industrial sectors such as Argentina, Brazil, Mexico, South Korea,Hong Kong, India, Singapore,and Malaysia,haveemergedas major participantsin FDI activities[Lall 1983;Wells1983].The estimatedoutward FDI by ThirdWorldmultinationalsfrom thirty-fourselectedcountrieswas reportedto be about$50 billionby the mid-eighties[Fujita1990].The riseof ThirdWorldMNCs,andspecificallyNIC MNCs,thusraisesissuespertaining to generalizationof the existingtheoriesof foreigndirectinvestment.Some recentstudies on KoreanMNCs [Lee and Beamish 1995]show that results MNCsdo not necessarilyholdtrueforKorean observedforadvanced-country MNCs.Thereinlies the importanceof this study. The three firm-specificadvantagesexaminedin this study,namely technologicalintensity,productdifferentiation,and capitalintensity,werefound to influencethe level of ownershipchosen by the KoreanMNCs. However,as hypothesizedin the study,the influenceof the firm-specificadvantageson the levelof ownershipis contingentupon the locationof the investment.Weshall now examineeachof the findings. TechnologicalIntensity

HypothesisHI contemplatedthat Koreanfirms,whichhave highertechnologicalintensity,havean advantagein LDCs becauseof theirrelativelybetter technologicalcapability.The high-techKoreanfirms,therefore,will choose higher-equitymodes in LDCs, comparedto theirlow-techKoreanfirms.On the other hand, Korean firms' technologicalcapabilitycan be considered inferior to that of the advancedcountry firms and hence, even high-tech Korean firms find that they cannot leverage technologicalcapability for higher-equityin MDCs. Hence, high-tech Korean firms will not demand higher control in MDC subsidiaries.The results are consistent with the expectedresponseof Koreanfirmsin the LDC case but not the MDC case.

ARE FIRM-SPECIFICADVANTAGESLOCATION-SPECIFIC?

751

Whilenothingin the resultssuggeststhe precedingassumptionsareinvalid,it appearsthat Koreaninvestmentsmay be drivenby strategicconsiderations other than those envisaged in this paper. Dunning [1995], for instance, contemplatesthatfirmsmayforma numberof minority-ownedjoint ventures to "gain speedyentry into unchartedand unfamiliarterritories."This may explain why firms are not leveragingtheir technologicalintensity to seek higher equity in MDC subsidiaries.However,there needs to be a better explanationfor why high-tech Korean firms are formingjoint venturesin MDCs. Perhapsfirmsmay be enteringinto collaborativearrangementswith MDC firmsto gainnewproprietaryor firm-specificadvantages.Accordingto Steers,Shin and Ungson [1989],Koreanhigh-techcompaniesestablishjoint ventures,even minorityventures,with MDC firms in an attemptto access advancedtechnology.Thismaybe especiallytrueof firmsthatalreadypossess higherdegreeof technologicalintensitiesas theymaybe morecompatiblewith joint venturepartners.Porter[1990,p. 467] too notes that Koreanfirmstake "an aggressiveorientationtowardpursuinglicensesand other agreementsin order to acquire advanced technology."This may explain why high-tech Korean firms have been more willing than their low-tech counterpartsto acceptlowerownershipandcontrolin theirMDC subsidiaries. Product Differentiation

According to H2, we expected low product differentiation(or low-cost strategy)to representa source of competitiveadvantageto KoreanMNCs investingin LDCs; and high productdifferentiationto representa sourceof competitiveadvantagewhen investingin MDCs. The resultsare consistent with our expectationsfor both LDCs and MDCs. Sincecompetitionin MDC marketsis heavy,Koreancompaniesenteringthesemarketswill be at a severe disadvantageif they did not differentiate.Whilecost-basedstrategiesare still important,somemodicumof branddifferentiationis perhapsneededto create and sustaincompetitiveadvantage.Such is not necessaryin the LDCs. The inverse relationshipin LDCs suggests preferencefor an undifferentiated strategy,presumablybased on low-cost leadership.In developingcountries, where cost-based considerationsare predominant,firms with a low-cost approachfindgreateradvantage. Capital Intensity

Accordingto H3, we expectedlow capitalintensity(or highlaborintensity)to representa source of competitiveadvantageto KoreanMNCs investingin LDCs;andhighcapitalintensity(or low laborintensity)to representa source of competitiveadvantagefor investmentsin MDCs. The resultssupportthe notion that high capital-intensivefirms enjoy greateradvantagesin MDCs and, therefore,demand higher levels of ownershipthan their low capitalintensive counterparts.In LDCs, the exact opposite holds true. The data supportthe hypothesis.

752

JOURNAL OF INTERNATIONALBUSINESSSTUDIES, FOURTHQUARTER1997

Clearly,these resultsreinforcethe importanceof location-specificityFroma theoreticalperspective,this studyvalidatesto some degreethe applicationof existingtheoriesof foreigndirectinvestmentto NIC MNCs.The notion that certain firm-specificadvantagesdrive foreign direct investmentdecisions, particularlyownershipquestions,appearsto be as relevantto NIC MNCsas it is to advanced-countryMNCs. However,ratherthanassumethatfirm-specific advantagesareuniversalor absolute,the studyattemptsto showthatthefirmspecificadvantagesarecontingentuponboth home-andhost-countryfactors. The resultsrevealthat Americanand Koreanmultinationalsare drivenby differentfirm-specificadvantagesdue to differencesin the nature of their domesticenvironments.Moreimportantly,the studysuggeststhat the nature of the influenceof these advantageson subsidiaryownershipare shapedby host-countryfactors as well. While previousliteraturehas examinedinteraction effects of firm- and location-specificadvantages [Agarwal 1994; Agarwaland Ramaswami1992;ErramilliandRao 1993],the propositionthat ownershipadvantagesmay vary by host-countrylocations had not been empiricallytested. Although only three firm-specificadvantageswere examined,partlydueto datalimitations,the resultsreportedheresuggestthatthe impactof thesethreefirm-specificadvantagesis location-specific. Note thatthelabels"less"or "more"wereusedto indicatetherelativelevelsof economicdevelopmentof the countries.Countriesclassifiedas less developed wereless developedonly with referenceto Koreaand countriesclassifiedas moredevelopedweremoredevelopedonlywithreferenceto Koreaat the time of this study.This distinctionis necessarybecauseindividualcountriesmay move from one classificationto anotherovertime.In this case, the so-called immobilelocation-specificadvantagesmay changeand consequentlychange the relationshipbetweenthe so-calledmobilefirm-specificadvantagesof the investingfirm (whichmay also changeover time) and the ownershippreference.As Dunning[1988c,p. 165]asserts,"Thenatureof theOLIconfiguration willvaryboth overtimeand betweendevelopingcountriesat a givenmoment of time." This study is particularlyinterestingin this context because by classifyingcountriesinto less and more developed(in relationto Korea), it maintainsgeneralizabilityovertime.The resultsshouldnot changeevenif the compositionof whatwas a less developedor moredevelopedset of countries in this studychangesin the future.The resultsshouldalso be generalizableto investingNIC countriesotherthanKorea,eachone of whichmayhaveits own set of countriesthatfall in the LDC and MDC categories. Managerially,the study has useful implications. It reveals the kinds of ownershipadvantagesthatmaybe valuableto firmsinvestingin less-as wellas more-developedcountriesrelativeto the homecountry.It shows,for example, thatNIC MNCscharacterizedby hightechnologicalintensity,low advertising intensity,and low capitalintensityexertgreatercontrolovertheirinvestments in less-developedcountries.On the otherhand,NIC MNCs characterizedby

ARE FIRM-SPECIFICADVANTAGESLOCATION-SPECIFIC?

753

low technological intensity, high advertisingintensity, and high capital intensity exert greater control over their investmentsin more-developed countries.NIC MNCs that have high technologicalintensity are willing to enter into low-equitymodes in MDCs in pursuitof highertechnologyand accessto advancedcountrymarkets. Althoughwe speculatedearlierthat resultsshould be generalizableto other NIC MNCs,futureresearchis neededto verifythis.CandidatesincludeBrazil, Hong Kong,Mexico,Singapore,andTaiwan.Tocomplementearlierresearch, it may also be useful to examinethe sourcesof firm-specificadvantagesof multinationalsfrom other developingcountries,such as Argentina,India, Malaysia,Thailand,andcountriesin EasternEurope. Experts predict that foreign direct investmentactivity is likely to expand betweennewly industrializingcountriesand relativelyless-developedcountries,especiallyin Asia. Theseinvestmentswillbe motivatedboth by the desire to employ cheaperresourcesand to capturemarketsharesof some rapidly expandingeconomies.The fact that this phenomenonwill createnumerous types of host- and home-countrycombinationsraisesthe potentialfor complex interactions of firm-specificand location-specificfactors. Given the cultureof family-ownedand operatedconglomeratesin many of the Asian countrieson one hand and corporate-ownedand operatedbusinesseson the other,it is importantto examinethe implicationsfor ownershippreferencesin cooperative and strategic alliances involving firms from these countries. Researchis needed to understandthe relationshipbetween a parent firm's ownership levels in its foreign subsidiary and the performanceof that subsidiary.In particular,the contingentimpact of the characteristicsof the host-countrylocationmayexplainthe variationin subsidiaryperformance. Researchis also neededto incorporatewithin-firmdynamicsor decisionsthat influencea firm'sownershipadvantagesovertime.It is imperativethatownershipadvantagesat anypointin timeareshapedby the firm'spriorresponseto the locational advantagesnot only of its home country but of the other countriesin which it has invested.A time-seriesexaminationof changesin ownershipadvantagesand their interactionwith locational advantagesis a highly complex issue [Dunning 1993] but is a critical missing link in the explanationof foreigndirectinvestments. NOTES 1. Note that theremay be other sourcesof competitiveadvantagefor KoreanMNCs. The threefactorschosen in this studymay not be the most importantsourcesof advantagefor Koreanfirms.The selectionof the factorswas influencedby the empiricalliteratureon the choice of foreign-marketentrymode (cf., Agarwaland Ramaswami[1992];Erramilli[1991]; Gatignon and Anderson [1988];Terpstraand Yu [1988]).The choice of the factors was further restrictedby the availabilityof empirical data. This study, unlike other studies involvingKoreanMNCs, does not purportto specificallyexplaincompetitiveadvantagesof

JOURNAL OF INTERNATIONALBUSINESSSTUDIES, FOURTH QUARTER1997

754

KoreanMNCs. The choice of Koreanfirmsis incidentalto our primaryfocus which is to empiricallytest the location-specificityhypothesis. 2. One can arguethat the rightto exploitknowledgecan be separatedfrom the processof developingand owningit if a firmis able to protectits proprietaryknowledgethroughthe international system of property rights. However, the reality is that the geographical protectionaffordedby the internationalpatentsystemis painfullylimited.In addition,the patent system does not preventothers from using the patentedproprietaryknowledgein furtherresearch[Casson1987]. 3. The final equation was regressedon each one of the location-specificvariablesby substitutingHC with one location-specificvariableat a time. The resultspertainingto our hypothesesremainedbroadlyunchanged.The effect of each location-specificvariablewas consistentwiththe effectfoundin thecorrelationmatrix(Table2). Specifically,highermarket potentialandhigherculturaldistanceledfirmsto choosehigher-equitymodeswhereashigher governmentrestrictionsand politicalriskled firmsto choose lower-equitymodes.Exceptfor the effectof culturaldistance,the effectof othervariablesis consistentwithpast research.

REFERENCES Agarwal,Sanjeev.1994.Socio-culturaldistanceandthechoiceof jointventures:A contingency perspective. Journalof InternationalMarketing, 2 (2): 63-80.

& SridharN. Ramaswami.1992. Choice of foreign marketentry mode: Impact of

ownership, location, and internalization factors. Journal of International Business Studies,

23(1):1-27. Anderson,Erin& HubertGatignon.1986.Modesof foreignentry:A transactioncost analysis and propositions. Journalof InternationalBusiness Studies, 17(3): 1-26.

Bank of Korea. 1991. A chroniclestatistical recordofforeign direct investment.Seoul, Korea.

Beamish,Paul W 1985. The characteristicsof joint venturesin developedand developing countries. ColumbiaJournalof WorldBusiness, 20(3): 13-19.

Belsley, David A., Edwin Kuh & Roy E. Welsch. 1980. Regression diagnostics: Identifying influentialdata and sources of collinearity.New York:John Wiley.

Buckley,PeterJ. 1990.Problemsanddevelopmentsin thecoretheoryof internationalbusiness. Journalof InternationalBusiness Studies, 21(4): 657-66.

& Mark C. Casson. 1976. Thefuture of multinational enterprise.New York: Holmes &

Meier.

BusinessEnvironmentRiskIntelligence.1990.Politicalriskindex.LongBeach,Calif.:BERI. Casson,MarkC. 1987.Thefirmandthemarket.Oxford:BasilBlackwell. Caves, Richard E. 1982. Multinational enterpriseand economic analysis. New York: Cambridge

UniversityPress.

& SanjeevK. Mehra. 1986. Entry of foreignmultinationalsinto U.S. manufacturing industries.In M.E. Porter, editor, Competitionin global industries.Boston: Harvard UniversityPress. Contractor,Farok J. 1990. Ownershippatterns of U.S. joint ventures abroad and the liberalizationof foreigngovernmentregulationsin the 1980s:Evidencefromthe benchmark survey.Journalof InternationalBusiness Studies, 21(1): 55-74.

Davidson,WilliamH. & Donald G. McFetridge.1985. Key characteristicsin the choice of

international technology transfer mode. Journal of International Business Studies, 16(2):

5-22.

ARE FIRM-SPECIFICADVANTAGESLOCATION-SPECIFIC?

755

Diaz-Alejandro,CarlosF. 1977.Foreigndirectinvestmentby LatinAmericans.In T.Agmon& C.P Kindleberger,editors,Multinationalsfrom small countries.Cambridge,Mass.: MIT Press. Dunning,JohnH. 1980.Towardsaneclectictheoryof internationalproduction:Someempirical tests. Journalof InternationalBusiness Studies, 11(1): 9-31.

. 1981. Internationalproductionand the multinationalenterprise.London: Allen and Unwin.

. 1988a. The eclectic paradigmof internationalproduction:A restatementand some

possible extensions. Journalof InternationalBusiness Studies, 19(1): 9-3 1.

* 1988b. Multinationals, technologyand competitiveness.London: Unwin Hyman. 1988c. Explaining internationalproduction.London: Unwin Hyman. . 1993. Multinational enterprisesand the global economy. Wokingham, England: Addison-

Wesley.

. 1995. Reappraisingthe eclecticparadigmin an age of alliancecapitalism.Journalof InternationalBusiness Studies, 26(3): 461-92.

Economist,The.1996.Asia'sbrandbaronsgo shopping.August10:45-46. Erramilli,KrishnaM. 1991.The experiencefactorin foreignmarketentrybehaviorof service firms. Journalof InternationalBusiness Studies, 22(3): 479-501.

& C.P.Rao. 1993.Servicefirms'internationalentrymode-choice:A modifiedtransactioncost analysisapproach.Journalof Marketing,57 (July):19-38. Fujita,Masataka.1990.Small-andmedium-sizeTNCs.CTCReporter,30 (Autumn):37-45. Gatignon,Hubert& ErinAnderson.1988.The multinationalcorporations'degreeof control overforeignsubsidiaries: An empiricaltestof a transactioncostexplanation.Journalof Law, Economics,and Organization,4 (2): 305-36.

Giddy, Ian H. & Stephen Young. 1982. Conventional theory and unconventional multinationals:Do new forms of multinationalenterpriserequirenew theories?In A.M. Rugman, editor, New theories of the multinational enterprise. New York: St. Martin's Press, 55-78.

Harrison, Bennet. 1994. Lean and mean: The changinglandscapeofpower in the age offlexibility.

New York:BasicBooks.

Hofstede, Geert. 1980. Culture'sconsequences:International differences in work related values.

BeverlyHills,Calif.:Sage.

Hymer, Stephen H. 1960. The international operations of national firms: A study of direct

investment. Ph.D. thesis,MIT(publishedby MITPressunderthe sametitlein 1976).

InternationalMonetaryFund. 1991.Internationalfinancial statistics.Washington,D.C.:IMF. Itaki, Masahiko. 1991. A critical assessmentof the eclectic theory of the multinational enterprise.Journalof InternationalBusiness Studies, 22(3): 445-60.

Jo, Sung-Hwan.1981. Overseasdirect investmentby South Korean firms: Direction and pattern. In K. Kumar & M.G. McLeod, editors, Multinationalsfrom developing countries.

Lexington,Mass.:LexingtonBooks,53-77.

Jun,Yongwook.1995.Strategicresponsesof Koreanfirmsto globalizationandregionalization forces:Thecaseof Koreanelectronicsindustry.In D.F.Simon,editor,Corporatestrategiesin the Pacific Rim: Global versusregional trends.London: Routledge.

Kim, W Chan& PeterHwang.1992.Globalstrategyand multinationals'entrymode choice. Journalof InternationalBusiness Studies, 23(1):29-54.

JOURNAL OF INTERNATIONALBUSINESSSTUDIES, FOURTHQUARTER1997

756

Kim,Wi Saeng& Esmeralda0. Lynn.1987.Foreigndirectinvestmenttheories,entrybarriers, and reverseinvestmentsin U.S. manufacturingindustries.Journalof InternationalBusiness Studies, 19(2): 53-66.

excursions.Cambridge,Mass.:MITPress. CharlesP. 1984.Multinational Kindleberger, Kogut,Bruce&HarbirSingh.1988.Theeffectof nationalcultureon thechoiceof entrymode. Journalof InternationalBusiness Studies, 19(3):411-32. Korean Investment Services Inc. 1991. Financial statement of Korean companies. Seoul, South

Korea:Dong-APublishingCo.

Kumar,Krishna& Kee YoungKim. 1984.The Koreanmanufacturingmultinationals.Journal of InternationalBusiness Studies, 15 (1): 45-61.

Lall, Sanjaya.1980.Monopolisticadvantagesand foreigninvolvementby U.S. manufacturing industry. OxfordEconomic Papers, 32 (March): 102-22.

& S. Siddharthan.1982.The monopolisticadvantagesof multinationals:Lessonsfrom foreigninvestmentin the U.S.EconomicJournal,92 (September):668-83. 1983. Thenew multinationals:Thespreadof thirdworldenterprises.New York:John Wiley.

Lecraw,DonaldJ. 1993.OutwarddirectinvestmentbyIndonesianfirms:Motivationandeffects. Journalof InternationalBusiness Studies, 24(3): 589-600.

andperformanceof Koreanjointventures Lee,Chol&PaulBeamish.1995.Thecharacteristics in LDCs. Journalof InternationalBusiness Studies, 26(3): 637-54.

Naisbitt, John. 1994. Global paradox: The bigger the world economy, the more political its smallest players. New York:William Morrow.

Neter, John, Michael H. Kutner,ChristopherJ. Nachtsheim& WilliamWasserman.1990 (fourth edition). Applied linear statistical models. Chicago: Irwin.

Nohria, Nitin & CarlosGarcia-Pont.1991.Global strategiclinkagesand industrystructure. Strategic ManagementJournal, 12 (Summer): 105-24. Porter,Michael E. 1990. Competitiveadvantageof nations. New York:The Free Press.

Schroath,FrederickW, MichaelY Hu & HaiyangChen. 1993.Country-of-origineffectsof foreigninvestmentsin the People'sRepublicof China. Journalof InternationalBusiness Studies,24(2):277-90. Shan, Weijan & William Hamilton. 1991. Country-specificadvantage and international cooperation. Strategic ManagementJournal, 12 (September):419-32.

Steers,RichardM., Yoo Keun Shin & GerardoR. Ungson. 1989. Thechaebol:Korea'snew industrialmight. New York: Harper & Row.

Stopford, John M. & Louis T. Wells. 1972. Managing the multinationalenterprise:Organization of thefirm and ownershipof the subsidiaries.New York: Basic Books.

Tallman,StephenB. & Oded Shenkar.1990. Internationalcooperativeventurestrategies: Review,30 (4): Outwardinvestmentand smallfirmsfromNICs. ManagementInternational 299-315. Terpstra,Vern& Chwo-MingYu. 1988.Determinantsof foreigninvestmentof U.S.advertising agencies. Journalof InternationalBusiness Studies, 19(1): 33-46.

Wells, Jr., Louis T. 1983. Third world multinationals: The rise of foreign investmentfrom developingcountries.Cambridge, Mass.: The MIT Press.

entrymode Woodcock,C. Patrick,PaulW Beamish& ShigeMakino.1994.Ownership-based strategies and international performance. Journal of International Business Studies, 25(2):

253-73.

ARE FIRM-SPECIFICADVANTAGESLOCATION-SPECIFIC?

757

Yu, Chwo-Ming&KiyohikoIto. 1988.Oligopolisticreactionandforeigndirectinvestment:The case of the U.S. tire and textile industries. Journal of International Business Studies, 19(3):

449-60.