Divesture of Foreign Manufacturing Affiliates: Country Platforms, Multinational Plant Networks, and Foreign Investor Agglomeration
We develop hypotheses concerning the impact of multinational firms' international plant configuration and host country foreign investor agglomeration on the divesture of manufacturing affiliates, drawing on real option theory and location and agglomeration theory. We test our hypotheses on a comprehensive sample of 1080 Asian manufacturing affiliates of Japanese multinational firms in the electronics industry during the turbulent years preceding and into the Asian financial crisis (1995-1999). We find evidence that multinational firms both create flexibility options through maintaining a multinational plant network of platform affiliates in multiple Asian countries, and exercise this flexibility option through divestments and relocation of manufacturing activities within the network. Firms most responsive to Japanese investor agglomeration or inter-firm buyer-supplier agglomeration within vertical business groups have a higher probability of divesture, suggesting that agglomeration leads to 'adverse selection' of firms and affiliates with weaker competitiveness.
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