Internationalization and Performance in Emerging Countries:

Assessing the Merit of Home-Country Support for Outward Foreign Direct Investment in Neighboring Countries

PavidaPananond, Ph.D., Assoc.Prof.

Alvaro Cuervo-Cazurra, Ph.D., Prof.

Unlike inward foreign direct investment (IFDI), which is generally welcome in most countries, thanks to the inflows of foreign capital, expertise and domestic employment opportunities, outward foreign direct investment (OFDI) is often questioned on its benefits and impacts on the home country’s economy. The usual view is one of a zero-sum gain in which OFDI is perceived as investment that is not done in the home country, which leads to additional costs borne on the overall economy.  For developing countries that have long thrived on labor-intensive industries, OFDI is perceived to pose threats to domestic employment should local companies relocate their operations to countries with lower costs, as it enables them to negotiate for concessions from employees in the home country. Additionally, OFDI is perceived as a reduction of the productive base of the country and the associated taxes for the government, as multinationals are able to shift profits to low-tax locations. Nevertheless, despite these arguments, Herzer (2011)points out that the existing literature is still lacking on the impact of OFDI to home countries.

Thus, the question on whether and, if so, how OFDI should be supported, therefore, carries even more acute implications for policy makers. Whereas most government officials are eager to promote IFDI with special agencies dedicated to facilitating the process of investment and with tax concessions and special regulations for foreign investors, few support OFDI.

However, a few countries have started helping their local firms invest abroad. These include the Chinese government mandate of going out, the Brazilian financial support for the acquisition of foreign firms, or the Singaporean ‘Regionalization 2000’ policy since 1993 that encourages its domestic firms to invest in the rest of Asia. These actions are justified on the basis that with increasing deregulation and liberalization, local companies cannot maintain their levels of international competitiveness and thrive in a global marketplace unless they expand abroad. Additionally, OFDI helps local companies learn new skills and abilities that can improve their competitiveness at home and ensure their future success.  Unfortunately, some of the support seems to be based on little more than on government officials’ desire to have some local firms become global champions and appear in the leagues of the largest firms, without a clear understanding of whether internationalization and OFDI is actually helping companies improve.

Thailand is no exceptionto the debate on the merits of government support for OFDI. Given a variety of policy initiatives undertaken by different government authorities, the Thai government has yet to come up with a comprehensive policy framework toward the development of Thai companies’ ‘global competitiveness’ in line with the broad support provided by other governments like the Chinese and the Singaporean ones. Recent policy initiatives are based on two criteria—selecting target industries and target destinations. Target industries are divided into those that seek raw materials that Thailand lacks and those that can maintain and expand markets for Thai products and services. For destinations, Asia particularly the Association of Southeast Asian Nations (Asean) members, receive the most emphasis, followed by the Middle East, South Asia and Africa. While picking winners and preferred destinations may provide a short-term answer to the majority of Thai companies looking for clear directions from the government, this type of policy may risk overlooking other varieties of OFDI from Thailand that may not fit into the government’s priority list but could be equally significant for the global competitiveness of Thai companies.

In addition, making recommendations for OFDI opportunities alone may not be sufficient to convince Thai firms to invest abroad. In a study of OFDI activities of Thai listed companies, Nitichai(2011) pointed out that one of the main reasons Thai firms lag behind their Asean neighbors in investing abroad is the lack of convincing evidence that international expansion leads to better firm performance. It is therefore necessary for home-country government to get a better understanding of whether internationalization is good for firms before embarking on a grand OFDI support scheme. After all, operating in a foreign country is more difficult than operating at home, as foreign firms face a series of challenges from being a new entrant, to lacking reputation and established relationships to outright discrimination by consumers and some governments.

Hence, before providing support for the internationalization of firms, government officials need to understand whether such investments are likely to pay off. Any company can become a multinational if it has enough financial funds, or if the government is willing to subsidize its internationalization. However, not all companies become successful in their internationalization, and thus some of the government support for internationalization may have been a bad idea from the start. OFDI impacts on home countries are traditionally measured by macro-economic factors, especially employment statistics. Few research looks at the impact on firm, despite the fact that government support policy bears direct implication on the firm’s strategy and performance.

Therefore, we propose to analyze the impact of different internationalization strategies on firm performance to gain a better understanding of what types of internationalization are associated with superior competitiveness and associated performance.

Objectives

The study has two main objectives

  1. To study the relationship between different internationalization strategies and firm performance of listed Thai firms
  2. To derive appropriate suggestions on OFDI policy that is based on the analysis of firm-level factors

Reference

  • Herzer, Dierk. (2011). The Long-run Relationship between Outward Foreign Direct Investment and Total Factor Productivity: Evidence for Developing Countries. Journal of Development Studies, 47(5), 767-785.
  • Nitichai, Patamaporn. (2011). Thai list companies' direct investment abroad: Current situation and policy implications: The Stock Exchange of Thailand.