Issue 13, August 2007

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Research Impact and Funding Outlook
Beyond 2007
Examining the Interdependent Behaviour of MNCs in Foreign Direct Investment
New Cancer Drug Breakthrough for
Hong Kong
Cooperative Nasopharyngeal Carcinoma Research Centre Established In Hong Kong
The Case for Better Corporate Governance
Gene Mapping fights "Cantonese" Cancer
The Effects of Culture on Decision Making and Judgement
A "Rising Star" in
Hong Kong
Research projects funded in Central Allocation 2006/2007 exercise

Entering a foreign market is an important strategic decision for any company to make. Obvious economic benefits such as larger market share and greater profitability need to be carefully balanced against lack of knowledge of the local market, unfamiliar cultural values as well as different legislative environments.

As would be expected and as research has shown, organizations dealing with these uncertainties seek to increase their own chances of survival by following the practices and strategies of the more established or "legitimate" firms in the market. A recent award-winning project conducted by the University of Hong Kong, the Chinese University of Hong Kong and Kobe University in Japan, took this concept further forward by examining the interdependent foreign market entry decisions made by multi-national corporations (MNCs).

Discussing the project, principal investigator Dr Christine Chan of the University of Hong Kong said, "In our study we specifically examined two issues – the extent to which the prior entry and exit decisions of other MNCs influence the subsequent entry decisions of an organization, and the extent to which an MNC's own prior entry and exit decisions influence its subsequent entry decisions."

"Our study differs from previous research in a couple of ways. Providing a more comprehensive understanding of the situation, our research focuses on interdependent market entry decisions in multi-level institutional environments. We looked at the host country; the global industry defined as an industry that spans host countries; local industry as an industry that is separately defined within each host country; and the parent firm seen as a firm with a network of foreign operations that are under common control and ownership. Previous research in this area has focused primarily on one particular industry or a single host country."

"Our study also differs from others in that it examines both prior entry and exit decisions as determinants in foreign market entry decisions. Although recent studies have focused on the role of prior entry decisions in influencing subsequent market entry decisions, they have ignored the effects of prior exits."

The study was based on a sample of 4,349 subsidiaries established by eight leading Japanese electronic firms over ten years from 1988 to 1998. It covered 110 countries, 18 global industries and 1,980 local industries. The results supported the study's hypotheses that the number of prior entries and exits made by MNCs in the market have an inverted U-shaped relationship to an organization's decision to enter the market. The establishment of an

increasing number of foreign subsidiaries by multinationals in a focal market enhances the legitimacy of market entry. This in turn signals the attractiveness of the market triggering similar behaviour in other MNCs. However once these entries reach a certain level, they are seen as intense market competition and the likelihood that these organizations will continue their market entry decision is reduced.

Increasing understanding of external and internal institutional environments, the research showed that external influences come not only from the host country's institutional environment but also from global and local industry levels, as opposed to previous studies which show organizational action as based on a host country's or parent firm's legitimating requirements. At the same time, while existing literature explains why a previously adopted organizational practice increases its successive adoption, there is limited information on whether a previously abolished practice or structure leads to the same result. This research clearly demonstrated that the abolition of foreign operations by other MNCs do have an impact on the subsequent entry decision of the organization in question.

This research, which aims to provide a greater understanding of foreign investment decisions by MNCs and the inherent benefits and risks involved, has had its results published both in the Journal of International Business Studies and Strategic Management Journal. The published findings won the Best Paper as well as the Best Dissertation Award, the first time both awards have been given to one project at the same time, at the 2003 Academy of Management Annual Meeting, the world's largest annual research conference in management. It also won the Best Paper Award at the 2004 Asia Academy of Management Biennial Meeting.

Dr. Christine M K Chan
School of Business, The University of Hong Kong