Interdependent Behavior in Plant Location Choice: Japanese Auto-Parts Firms' Entry in China
As firms accumulate firsthand information about a host country directly and accumulate knowledge about the local market, uncertainty around the firms is also reducing. Similarly, they can reduce uncertainty in entering emerging markets by forming a joint venture (JV) with a trading company or local firm.
This research sought to address these questions by formulating hypotheses regarding the impact of interorganizational effects on plant location choices. The dataset covers Japanese auto parts suppliers’ location choices in China between 1988 and 2005.
We used the conditional logistic method to test the impact of regional characteristics on region choices among Japanese auto parts manufacturers’ FDI in China. We found that interorganizational factors affect plant location choices at the industry and product levels. Thus, other firms’ entries positively impact focal firms’ entries. Additionally, the interdependency of region choice is not likely to occur at the product level when firms enter subsequently or invest with a trading company. Region choice through JV with a local firm then seemed to follow that of other manufacturers.
This analysis has implications for firms contemplating FDI. First, our results showed that other-firm experience at the industry and product levels influences focal firms’ FDI behavior. Uncertainty complicates firms’ abilities to make rational decisions. Our evidence suggests that foreign entries by other auto parts firms into the Chinese market boost an entry’s legitimacy and provide knowledge about local markets and institutes (e.g. government, courts, and financial systems).
Second, we identified which conditions negatively impact interdependent behavior. As firms operate their business in the local market directly, they accumulate firsthand information about the host country and knowledge about local markets. JVs with local firms and trading companies also provide firms with such knowledge. This consequently reduces uncertainty. Our findings showed that our own experience and relationships with trading companies positively influence interdependent FDI behavior, but also that JVs with local firms do not influence interdepedent FDI behavior. Our findings suggest that JVs do not improve the legitimacy of the market entry and don’t provide knowledge about local markets and institutes.