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On the genesis of multinational foreign affiliate networks

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  • Egger, Peter
  • Fahn, Matthias
  • Merlo, Valeria
  • Wamser, Georg

Abstract

Multinational enterprises (MNEs) develop their networks of foreign affiliates gradually over time. Instead of exploring all profitable opportunities immediately, they first establish themselves in their home countries and then enter new markets stepwise. We argue that this behavior is driven by uncertainty concerning a firm’s success in new markets. After entry, the firm collects information which is used to update its beliefs about its performance in a market. As conditions in different markets are correlated, the information gathered in one of them can also be used to update beliefs elsewhere - with the degree of correlation depending on issues such as the geographical or cultural distance between markets. This correlated learning may render it optimal to enter markets sequentially - investment in market A is only followed by entry in market B if the firm was sufficiently successful in A. The prediction that firms start their expansion in markets that are closer to their home base and then proceed step by step is supported by our empirical analysis, which features the universe of foreign affiliates held by German multinationals. Based on a rich set of benchmark estimates and sensitivity checks, we identify correlated learning across markets beyond alternative explanations as a key driver of gradualism in the genesis of MNEs’ foreign affiliate networks.

Suggested Citation

  • Egger, Peter & Fahn, Matthias & Merlo, Valeria & Wamser, Georg, 2014. "On the genesis of multinational foreign affiliate networks," Munich Reprints in Economics 20554, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenar:20554
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    Cited by:

    1. Crescenzi, Riccardo & Gagliardi, Luisa & Iammarino, Simona, 2015. "Foreign multinationals and domestic innovation: Intra-industry effects and firm heterogeneity," Research Policy, Elsevier, vol. 44(3), pages 596-609.
    2. Albornoz, Facundo & Calvo Pardo, Héctor F. & Corcos, Gregory & Ornelas, Emanuel, 2012. "Sequential exporting," Journal of International Economics, Elsevier, vol. 88(1), pages 17-31.
    3. Badinger, Harald & Egger, Peter, 2013. "Spacey Parents and Spacey Hosts in FDI," Department of Economics Working Paper Series 3924, WU Vienna University of Economics and Business.
    4. Becker, Sascha O. & Egger, Peter H. & Merlo, Valeria, 2012. "How low business tax rates attract MNE activity: Municipality-level evidence from Germany," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 698-711.
    5. Yuko Hashimoto & K. M. Wacker, 2016. "The role of information for international capital flows: new evidence from the SDDS," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 152(3), pages 529-557, August.
    6. Defever, Fabrice & Toubal, Farid, 2013. "Productivity, relationship-specific inputs and the sourcing modes of multinationals," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 345-357.
    7. Merz, Julia & Overesch, Michael & Wamser, Georg, 2017. "The location of financial sector FDI: Tax and regulation policy," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 14-26.
    8. Alexandre Gazaniol, 2012. "The location choices of multinational firms : the role of internationalization experience and group affiliation," Working Papers DT/2012/02, DIAL (Développement, Institutions et Mondialisation).
    9. repec:dau:papers:123456789/9018 is not listed on IDEAS

    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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