Firm Experience and Interdependent Behavior in Plant Location Choice: Entry of Japanese Auto Parts Suppliers into China

Firms face uncertainty in entering emerging markets: cultural differences, variances in consumer preferences, and institutional uncertainty (Delios et al., 2007). This uncertainty places foreign firms in a disadvantageous position in the host country. Thus, it is necessary for firms that wish to expand offshore to deal with uncertainty. Firms may respond to uncertainty by observing and imitating the prior entries’ behavior. In fact, research on mimetic entry (Haveman, 1993) has become an important avenue of study in foreign direct investment (FDI) literature (Guillén, 2001; Henisz & Delios, 2001; Gimeno et al., 2005).

However not all firms equally imitate other firms’ behavior. As firms operate in a host country directly and accumulate knowledge about the host country, uncertainty around the firms is also declining. Accordingly, we make a distinction between first entries into a Chinese region and subsequent entries into additional region. We examine the impact of experience in the host country on interdependent FDI behavior - both at the auto parts industry and auto parts products levels (e.g., engine, transmission and lightning). The dataset covers the entries of Japanese auto parts suppliers into Chinese provinces during 1988 - 2005.

We use the conditional logistic method to test the impact of regional characteristics on region choices among Japanese auto parts suppliers’ FDI in China. The results are as follows. For first entries into China, interorganizational factors have a positive effect on entries into Chinese provinces at the industry level, but the impact decreases at higher agglomeration size. In addition, for subsequent entries, interorganizational factors affect entries into Chinese provinces at the industry level positively, but at the product level the impact is negative. And we find that the geographical distance between first entries’ location and subsequent entries’ location in China have a negative impact on subsequent location choice. Thus, for subsequent entries, firms seem to choose the location near to the first entry’s location.

We further separate subsequent entries into two subsamples and examine the impact of interorganizational effects on plant location choices separately. We find that subsequent entries into the same province as first entries are influenced by other firms’ entries in the same industry positively. On the other hand, we find that subsequent entries into the different province as first entries are negatively influenced by entries of other firms which product the same products. Therefore, the more the number of other firms within the same product segment in the province, the more Japanese auto parts suppliers tend to locate the plant on the other province.

This analysis has implications for firms contemplating FDI. First, it 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. Second, it suggests that firms make the differentiation strategy in terms of location choice by using the local knowledge accumulated through experience in host country.