Drawing on recent theoretical explanations, we develop hypotheses on the relationship between business group affiliation and FDI by developing country firms. We hypothesize a positive relationship between business group affiliation and FDI overall, as well as between business group affiliation and FDI into advanced countries and into developing countries. In addition, we argue that the impact of business group affiliation on FDI varies in strength among business groups based on their size and diversification. We also empirically test the hypotheses in a sample of firms from one large and important developing country, India.
Rapid growth in foreign direct investments (FDI) by developing country firms is among the most significant development in international business in recent decades (Luo and Tung, 2007, Mathews, 2006 and UNCTAD, 2004). FDI by developing country firms pose a theoretical puzzle because these firms are thought to lack sophisticated firm specific capabilities, especially in R&D and marketing, considered critical in extant theory to overcome liabilities of foreignness and invest overseas (Luo and Tung, 2007, Mathews, 2006, Ramamurti, 2009 and Wells, 2009). Research has advanced new theoretical explanations for developing country firm FDI to address this puzzle (Luo and Tung, 2007, Mathews, 2006 and Ramamurti, 2009). Because their organizational mechanisms and competencies are well suited for the underdeveloped and late industrializing contexts of developing countries, business groups occupy dominant positions in a number of developing countries (Amsden and Hikino, 1994, Hikino and Amsden, 1994 and Khanna and Palepu, 2000). Although there is a large body of literature on business groups in developing countries, the role of business groups in promoting FDI has not received much research attention.1 Could business groups facilitate FDI of firms from developing countries?
Since large numbers of firms in many developing countries are affiliated to business groups, if business groups facilitate FDI of their affiliates, this would contribute to our understanding of the drivers of developing country firm FDI. The finding can also help managers of advanced country multinational corporations (MNCs) assess the competitive threat from developing country firms. Understanding whether business groups facilitate FDI of their affiliates is therefore theoretically and practically important.
This study draws on three recent theoretical explanations for FDI by developing country firms and the literature on business groups to develop hypotheses relating business group affiliation and FDI by developing country firms. The core argument advanced in this study is that business groups exemplify the motivation and means put forth in the new theoretical explanations for developing country firm FDI, and are therefore well placed to facilitate FDI of their affiliates. We, therefore, hypothesize a positive relationship between business group affiliation and FDI of developing country firms. We also argue that advantages of business groups apply in both advanced countries and in other developing countries. Hence we hypothesize a positive relationship between business group affiliation and FDI into both advanced countries and developing countries. Finally, we argue that differences among business groups, in terms of their size and diversification, affect the relationship between business group affiliation and FDI. Specifically, we hypothesize that affiliates of larger business groups have greater FDI than affiliates of smaller business groups, and that affiliates of more diversified business groups have lower FDI than affiliates of less diversified business groups.
The study also tests the hypotheses on a large sample of firms from one large and important developing country, India. While India provides an ideal context to test the hypotheses because of the availability of detailed firm level data covering a large proportion of firms in the economy, India is not a unique context. As in India, utilizing similar organizational mechanisms and competencies, business groups are dominant in a number of other developing countries that are historically, culturally, and geographically distinct including Argentina, South Korea, South Africa, Taiwan, Turkey, Malaysia, Mexico, Brazil, and Chile (Amsden and Hikino, 1994, Guillen, 2000, Khanna and Palepu, 2000, Leff, 1976 and Toulan and Guillen, 1997). India is a reasonably representative country to test our hypotheses on the role of business groups in FDI by developing country firms.
