Academy of International Business

InsightsVol. 19, No. 3, 2019

Special Issue on the 2019 Peter J. Buckley and Mark Casson AIB Dissertation Award

Essays on Organization, Creativity, and Globalization Sungyong Chang p3 Foreign Direct Investment in Global Cities and Co-Ethnic Clusters: Characteristics, Profitability, and Survival Dwarka Chakravarty p7 Contemporary Perspectives on Internationalization: Subnational, Regional, Digital Maximilian Stallkamp p12 Bloody Business: Multinational Investment in an Increasingly Conflict-Afflicted World Caroline Theresia Witte p16

An official publication of the Academy of International Business LEtter from the editors

This issue ofAIB Insights is our seventh annual focused issue highlighting research from fi- nalists of the Peter J. Buckley and Mark Casson AIB Dissertation Award. Since 2013, these issues have served as an invaluable conduit for the timely dissemination of the latest, state-of- the-art dissertation research in international business, and we proudly continue this tradition. As in the six previous years, this special issue publishes extended dissertation abstracts of this year’s award-winning and award-nominated dissertations. Our contributing authors summa- rize their dissertation research to capture their extensive and exceptional scholarly endeavors in a “nutshell.”

John Mezias, Editor 2019 Buckley and Casson AIB Dissertation Award winner:

“Essays on Organization, Creativity, and Globalization” by Sungyong Chang, London Busi- ness School (Ph.D. awarded by Columbia University)

BIG Question: How does the globalization of digital innovations facilitate the discovery of talent and how can firms benefit from the globalization of digital innovations?

Award-nominated dissertations (in alphabetical order):

“Foreign Direct Investment in Global Cities and Co-ethnic Clusters: Characteristics, Perfor- William Newburry, mance, and Survival” by Dwarka Chakravarty, San Diego State University (Ph.D. awarded by Associate Editor Ivey Business School, Western University)

BIG Question: How does subsidiary location within global cities and co-ethnic clusters impact the characteristics, profitability, and survival of foreign direct investment?

“Subnational, Regional, Digital: Contemporary Perspectives on the Internationalization of Firms” by Maximilian Stallkamp, Virginia Tech (Ph.D. awarded by Ivey Business School, Western University)

BIG Question: How is the internationalization of contemporary firms shaped by (1) subnational/regional factors and (2) by digital business models?

“Bloody Business: Multinational Investment in an Increasing Conflict-Afflicted World” by Caroline Witte, Copenha- gen Business School (Ph.D. awarded by Erasmus University Rotterdam)

BIG Question: What determines multinational enterprises engagement in conflict countries?

On behalf of the AIB community, we would like to thank this year’s Buckley and Casson AIB Dissertation Award Se- lection Committee for their invaluable and dedicated efforts, work, and commitment: Shige Makino (Chair), David Reeb, Marcus Møller Larsen, and Tatiana Kostova.

On pages 20-21 in this issue, we provide an overview of previous winners of this prestigious award, starting with the award’s founding year of 1968.

Congratulations to the 2019 AIB dissertation awardee and finalists for their significant accomplishments!

2 AIB insights Special Issue on the 2019 Peter J. Buckley and Mark Casson AIB Dissertation Award Essays on Organization, Creativity, and Globalization Sungyong Chang Ph.D. awarded by Columbia University, USA (May 2018)

and media companies, which is the main focus of the Uppsala BIG Question: model. My dissertation investigates when global platforms are How does the globalization of digital innovations facil- conducive to the discovery of new talent, and how global me- itate the discovery of talent and how can firms benefit dia companies may overcome the liability of foreignness and from the globalization of digital innovations? how they can overcome this liability. Thus, my dissertation at- tempts to contribute to a burgeoning literature in international business, specifically, the globalization of digital platforms and Introduction media companies (e.g., Johanson & Vahlne, 2009; Alcácer, Cantwell, & Piscitello, 2016; Chen, Shaheer, Yi, & Li, 2019) Do technological advancements such as digital innovation or and produce useful managerial insights. artificial intelligence facilitate human creativity and innova- tion? Global media and Internet conglomerates such as Apple To explore the relationship between technological innovation and Google have been introducing new digital innovations all and human creativity, we need a better understanding of the over the world and have been dominating the global market. topic of discovery of new talent. I want to emphasize that the As this trend has intensified, there has been a growing concern discovery of new talent is an essential yet underexplored type of around the relationship between technological innovations and innovation. This goes back to the classic classification of inno- creativity. This concern has called for more systematic research vation types proposed by Schumpeter (1934). He distinguishes on whether these new digital technologies will have a comple- among the following five types of innovation: new products, mentary relationship with human creativity, especially in firms’ new processes, new organizations, new markets, and new re- discovery of creative talent. My dissertation aspires to produce sources. Most prior work focuses on the first four types of in- useful insights on how managers can leverage opportunities novation. This study focuses on the last type of innovation, the from the globalization of new digital innovation. To attain this discovery of new resources, in creative industries where artist goal, my dissertation first explores opportunities and threats talent – a type of resource – is the most important source of from the globalization of digital innovations and then exam- creativity and profit (Caves, 2000; Tervio, 2009). ines how managers can leverage such opportunities and avoid threats in talent discovery and competitive dynamics. This article summarizes my dissertation which examined the following three-related questions. The first essay explores how The emergence of platforms and media companies in the mod- managers in music companies benefit from the globalization of ern digital economy challenges the existing internationalization the digital market for unbundled products by unleashing hu- theory and practice. Due to their multisided market nature man creativity and innovation in local users and complemen- of many digital innovations, the internationalization process tors. I utilize the staggered entry of iTunes into 29 countries of platforms and media companies depends critically on lo- to identify a causal impact of the introduction of the digital cal complementors (i.e., content providers) in the host coun- market for unbundled products. try market, as well as the commitments of global platforms

Vol. 19, no. 3, 2019 3 The second essay examines how entrepreneurs benefit from the from a one-shot unbundled experimentation is less accurate globalization of the digital self-release market. The second essay than that from albums, single-producing firms make 29.75% focuses on the competitive dynamics between incumbents and more omission errors. Overall, the results suggest that the pos- entrepreneurial firms in the host country to identify opportu- itive effect from the decreased cost of experimentation out- nities and threats from the globalization of the digital self-re- weighs the negative effect from the loss of information quality lease market. I exploit the staggered entry of YouTube into 29 on talent; Single-producing firms discover artists with greater countries to identify a causal impact of the introduction of the talent and produce more popular songs; that is, the most pop- digital market for self-releases. ular artist and song in single-producing firms are more popular than those in album-only-producing. Finally, single-producing In the third essay, I explore how the subsidiaries of global me- firms are more likely to discover artists who created at least one dia companies can overcome the liability of foreignness in dis- new genre, suggesting that unbundling facilitates the creation covering local talent in the host countries. I analyze all global of new markets. media conglomerates’ acquisitions of foreign country music labels during 1988-2015. The first essay exploits a unique empirical setting to make a credible causal inference about the impact of unbundling on To answer these questions, I build a dataset collected and experimentation and creativity. However, the idiosyncrasies of matched from multiple large-scale datasets, including the Spotify the music industry should not cloud the general applicability APIs, MusicBrainz, Discogs, and Quantone databases. The sam- of the conceptual approach to a broad range of firms and in- ple covers 165,464 artists, 2,349,776 songs, and 22,157 music dustries. The first essay highlights how the introduction of the companies in 29 countries for the period from 1950 to 2015. digital market for unbundled products changes the business environment for managers who are in charge of discovering new talent. On the one hand, the low cost of experimentation from unbundling helps small and young firms that are under How Can Managers Benefit from financial constraints. The findings suggest that managers in the Digital Market for Unbundled small companies should leverage the low cost of experimen- tation and capture opportunities arisen from the market for Products? unbundled products by experimenting with newer and more radical business ideas or projects. On the other hand, managers The first essay explores the impact of the introduction of a in large firms should cope with such threats of small and young market for unbundled products by a global platform company firms by lowering the chance of missing out on talented em- on experimentation and the discovery of new talent of local ployees or early-stage business projects in which they invested. music companies. Digitalization has spurred a fundamental unbundling of creative industries. In the music industry, for instance, digitalization has enabled music to be purchased as both individual songs (i.e., a single) and a bundle of songs (i.e., an album). Due to the piracy problem, there is a concern that How Can Managers in Entrepreneur- digitalization makes it more difficult for record labels to fund ial Firms Benefit from the Digital the release of new music. I argue that music labels, especially small local labels, can mitigate the negative impact from such Market for Self-Release? a challenge by producing singles because the major bottleneck for the discovery of new music and talent is the high cost of The second essay investigates whether the digital market for traditional album production. self-release facilitates the discovery of talent by entrepreneurial firms in the host country. An unknown artist has trouble get- I test this idea by utilizing the staggered market entry of the ting a contract with music labels that will fund money to create iTunes Music Store into 29 countries as an exogenous shock. new music. Thanks to digitalization, artists can self-release and The introduction of iTunes has significantly increased the promote with low cost thought digital platforms. For example, commercial importance of singles because music is sold in the artists can develop their track record and profit from views on form of individual songs that were previously only or primarily YouTube. sold as parts of albums. I find that the benefit from producing singles (increased experimentation) outweighs other potential Whereas a self-release market has a clear benefit for unknown adverse effects. First, single-producing firms experiment with artists, the self-release market may have a negative influence on more new artists than album-only-producing firms. Specifical- the entrepreneurial firms’ discovery of new talent. The com- ly, the proportion of new artists to all artists is 27.25% (a 4.62% parable set of entrepreneurial firms in the music industry will point) higher in single-producing firms than in album-on- be independent labels. Some independent labels were reason- ly-producing firms. In contrast, as information on artist talent ably successful in discovering new talent, and these indepen-

4 AIB insights dent labels made a profit by producing more releases with new music labels to strengthen their synergy between media tech- popular artists or being acquired by the major labels. Because nology and the popularity of K-pop. Will Chinese ownership the self-release market provides would-be artists with informa- affect the acquired Korean music labels’ search for Korean tion regarding their talent, talented artists have good bargain- talent (local market) negatively or positively? One argument ing power when they sign a contract with a music label. For suggests that global media conglomerates may undermine the example, Elvis Presley is one of the most significant cultural discovery of new talent from the host country because these icons of the 20th century and is referred to as “the King of Rock conglomerates often lack a good understanding of the host and Roll.” Because Elvis himself did not know his talent, he country culture. For instance, the New York Times highlight- signed with Sun Records, a small entrepreneurial music label, ed their concern regarding Sony’s liability of foreignness when in the hope of being discovered. Thus, the self-release market Sony acquired CBS records (a US music label) in the 1980s. may make it more difficult for entrepreneurial firms to sign a One columnist wrote of the Japanese, “They make good cars, contract with the next Elvis Presley because incumbent labels TV sets, tractors. However, will they, or the executives they have better resources to attract those talented artists, such as hire, know another Duke Ellington when they hear one?” (so-called) YouTube stars. Although there is the liability of foreignness from foreign own- In testing this theory, I exploited YouTube’s staggered market ership, global media conglomerates have offsetting advantages entry into 29 countries (the introduction of the localized ver- (e.g., additional cash flow and know-how from the synergy be- sion with the local language), and this study produces results tween content and other media and technologies) that can be from a difference-in-difference-in-differences (DDD) specifi- transferred to a foreign subsidiary. I argue that, mainly, man- cation. The results suggest that the introduction of a self-re- agers in the acquired host country subsidiaries can leverage the lease market decreases the discovery of new artists by local increased capital flow media from global media conglomerates entrepreneurial firms. In contrast, in response to losing new to solve the critical bottleneck in the talent discovery process: talent, entrepreneurial firms increase their reliance on medio- the high cost of experimenting with new artists. cre incumbent artists, resulting in lower average performance. The average popularity of new artists in entrepreneurial labels I analyze global media conglomerates’ acquisitions of foreign decreased by at least 26%, and it reached a level similar to the country music labels during 1988-2015. The estimates from average popularity of new artists in incumbent labels. Consid- a difference-in-differences (DD) specification suggest that, ering that entrepreneurial firms have relied on the discovery of during the study period, global media conglomerates did not new talent regarding the proportion of new artists (their pro- undermine the host country’s discovery of talent that was deeply portion of new artists is approximately 20% higher than that of rooted in its local culture. The results suggest that global media incumbent labels), the discovery performance of entrepreneur- conglomerates do not undermine the host country’s discovery ial labels became lower than that of incumbent labels. of local talent. In particular, except for Matsushita’s acquisition of RCA in 1990, the long-term effect of the acquisitions on the There are several important takeaways from these findings. discovery of local talent is either positive or null. For example, First, these findings emphasize that the digital self-release mar- in the above case of Sony’s acquisition of CBS Records in 1988, ket for unknown artists inadvertently may increase competi- which is the first merger by a Japanese firm with a firm of a tion in the resource market, resulting in entrepreneurial firms distant culture. Sony did not undermine CBS Records’ discov- experiencing a disadvantage in discovering talented employees. ery of domestic new talent but increased the popularity of new Second, in the presence of a thriving self-release market like host country artists in CBS Records by 44.48%. In contrast, YouTube, managers in entrepreneurial firms need to put more Sony’s acquisition decreased CBS Records’ reliance on incum- effort and invest more money in discovering new talent and by bent artists and foreign (outside the US) artists. reducing their investment in mediocre incumbent employees. The third essay attempts to provide evidence on the benefits of synergy between content and technology can be leveraged through globalization, even in sensitive industries such as cul- tural industries. The first key takeaway is that although there is Can Global Media Conglomerates a growing anti-globalization sentiment throughout the world, Create a Synergy with Acquired Host the managers in global media conglomerates can serve the local market’s tastes and desires successfully. Second, managers in Country Subsidiaries? global media conglomerates can create synergy between their advantages in financial resources with host country subsidiar- This essay examines how global media conglomerates’ acqui- ies’ local knowledge. Third, the qualitative evidence shows that sition can create synergies with acquired foreign music labels host country subsidiaries’ autonomy in the talent discovery in the discovery of new talent. A growing number of Chinese process plays a pivotal role in creating synergies between the media and Internet conglomerates have been buying Korean global media conglomerates and host country subsidiaries.

Vol. 19, no. 3, 2019 5 Conclusions and Implications References of Dissertation Abstract

Since the works of Hymer (1960), Vernon (1992), and Caves Alcácer, J., Cantwell, J., & Piscitello, L., 2016. Internationalization in (1971, 1996, 2000), the nature of the relationship between the information age: A new era for places, firms, and internation- multinational enterprises and innovation has always been at al business networks?. Journal of International Business Studies, the heart of the theory of the multinational enterprise. I mainly 47(5): 499-512. explore how digital technologies have transformed and revolu- Caves, R. E. 1971. International corporations: The industrial economics tionized the current business environment around the multina- of foreign investment. Economica, 38(149): 1-27. tional enterprise. With the digital transformation, new forms Caves, R. E. 1996. Multinational Enterprise and Economic Analysis. of multinational enterprises have been emerging, which are un- Cambridge: Cambridge University Press. accounted for by received wisdom in the international business Caves, R. E. 2000. Creative Industries: Contracts between Art and Com- literature. The global expansion of digital platforms and media merce. Boston: Harvard University Press. companies is one of the such accounted forms. Digital plat- Chen, L., Shaheer, N., Yi, J., & Li, S., 2019. The international penetra- forms such as iTunes and YouTube provide an Internet-based tion of ibusiness firms: Network effects, liabilities of outsidership platform to lower the cost of experimenting with new talent. and country clout. Journal of International Business Studies, 50(2): The lowered cost of experimentation may or may not facilitate 172-192. the discovery of new talent depending on the nature of the ser- Ghemawat, P. 2016. People are angry about globalization. Here’s what vice and competitive dynamics between established firms and to do about it. Harvard Business Review. entrepreneurial firms. Hymer, S. H. 1960. The international operations of national firms, a study of direct foreign investment. Ph. D. thesis, Massachusetts The first two essays offer managerial implications for managers. Institute of Technology. These two essays demonstrate that not all digital technologies Johanson, J., & Vahlne, J.E. 2009. The Uppsala internationalization are conducive to talent discovery in small and entrepreneurial process model revisited: From liability of foreignness to liability firms. The key takeaway of the first essay is that although there of outsidership. Journal of International Business Studies, 40(9): are benefits of unbundling, unbundling may also have a neg- 1411-1431. ative impact on the discovery of new talent because it will be Schumpeter, J. A. 1934. The Theory of Economic Development. New challenging for these firms to infer an artist’s true talent from a York: Routledge. one-shot unbundled experimentation result of success or fail- Tervio, M. 2009. Superstars and mediocrities: Market failure in the dis- ure. Thus, managers should set an effective discovery strategy covery of talent. The Review of Economic Studies, 76(2): 829-850. to solve this potential trade-off. Vernon, R. 1992. International Investment and International Trade in the Product Cycle. The Quarterly Journal of Economics, 80(2): The key takeaway from the second essay is that the introduc- 190-207. tion of the digital market for self-releases mainly poses a threat to entrepreneurial firms’ talent discovery process as undiscov- ered artists can experiment with their talent without the help of entrepreneurial firms. Thus, managers in entrepreneurial firms Sungyong Chang ([email protected]) is an assistant professor should invest more money in the talent discovery process and of Strategy and Entrepreneurship at London Business School. He find out another source of talent discovery than the dominant received his PhD degree in Management from Columbia Univer- self-release platform like YouTube. sity. He is interested in innovation, globalization, and computa- tional social science. His particular focus is on the impact of the Finally, the third essay offers insights on how global media companies create synergies with their foreign subsidiaries. As globalization of digital innovations on the discovery of talent and Ghemawat (2016) notes, even though global digital platforms invention of new products in high-tech and cultural industries. offer global connectivity among users and complementors, user interactions on digital platforms are mostly domestic, and that national borders still matter in cyberspace. The third essay demonstrates how global digital platforms and media com- panies can overcome this paradoxical situation. The findings suggest that even though digital platforms have entered many countries and have become the dominant platform in many countries, managers in these companies should let their foreign subsidiaries put forth a substantial amount of localization ef- fort to solve such paradoxical situations.

6 AIB insights Special Issue on the 2019 Peter J. Buckley and Mark Casson AIB Dissertation Award Foreign Direct Investment in Global Cities and Co-Ethnic Clusters: Characteristics, Profitability, and Survival Dwarka Chakravarty Ph.D. awarded by Ivey Business School, Canada (August 2018)

the rise of certain cities as command and control points for BIG Question: MNEs. Cities such as London, New York, Tokyo, and Hong How does subsidiary location within global cities and Kong which provided an advanced level of professional services co-ethnic clusters impact the characteristics, profitability, and connectivity for managing these global production net- and survival of foreign direct investment? works became highly influential in the world economy. Sassen (1991) defined such cities as global cities. Based on her work, a widely used list of world cities was developed (Beaverstock, Smith, & Taylor, 1999) which includes 23 in North America Introduction (see Table 1). GCs provide MNEs with a range of economic, institutional, and ecosystem advantages including connections The traditional approach of using entire countries as location to local and global markets, cosmopolitan environments, and units of analysis in IB research obscures micro-level drivers advanced services (Goerzen, Asmussen, & Nielsen, 2013). Of- which better explain FDI choices and consequences (Beugels- fering much more than new markets to MNEs, they serve as dijk & Mudambi, 2013). Recognizing this, of late there has strategic points for access to and exchange of knowledge, tech- been greater focus on using finer-grained, sub-national units nology, capital, and skilled human resources (Wagner, 2008). such as states, metropolitan statistical areas (MSAs), cities, and clusters. The second motivating phenomenon is the tendency of MNEs to agglomerate in close proximity to their home country and This article is motivated by two important, yet understudied industry peers in clusters, that are not limited by administra- phenomena regarding sub-national FDI. The first is the attrac- tive boundaries of cities and metro areas. Japanese firms often tion of FDI towards “global cities” (GCs) such as New York, seek out US locations where other Japanese firms are located; Los Angeles, and Toronto. Commencing in the 1980s, the in- as do English, German, and Korean firms (Crozet, Mayer, & ternationalization of production and services and consequent Mucchielli, 2004). Within such co-ethnic concentrations, we increase in economic and geographic complexity accelerated often find clusters of subsidiaries belonging to the same in-

Vol. 19, no. 3, 2019 7 dustry sector. I denote these as “co-ethnic and co-industry” This article will help MNE managers better understand the (CECI) clusters. Subsidiary location in co-ethnic (CE) and risks vs. rewards of specific location choices in North America co-ethnic and co-industry (CECI) clusters can be advanta- and actions they can take to improve their odds of success. geous for several reasons. Co-ethnicity provides a basis for trust through a common cultural, linguistic, and social ground, en- abling economic interaction and information sharing. This is particularly valuable when tacit and sensitive knowledge is in- volved (Chang & Park, 2005). CECI clusters can promote pos- itive knowledge spillovers because firms from the same home country and industry are more likely to have similar technolo- gy and management practices. CECI clusters can also provide resource, efficiency, and scale benefits via access to specialized labor and suppliers, reduced transportation costs, and sharing of equipment and infrastructure (Kim, Delios, & Xu, 2010; Marshall, 1920).

Figure 1. Japanese FDI in North America (1990-2013). Research Rationale Source: Toyo Keizai, 2014.

Substantial FDI is directed towards GCs, their metropolitan Research Design areas (metros), and co-ethnic clusters. For instance, from 1990- 2014, nearly 50% of Japanese subsidiaries in North America A sample of Japanese subsidiaries in North America over the were established in 23 GCs and their metros out of a possible time period 1990-2013 from the Toyo Keizai 2014 database 415 such North American MSAs (See Figure 1). Across all lo- was used. The sample comprises 25,347 subsidiary-years cations (GCs, metros, others), close to 65% of all subsidiaries (2,863 unique subsidiaries of 1,605 MNEs). 23 North Ameri- were established in co-ethnic clusters and over 40% were estab- can GCs were identified from Beaverstock et al.’s (1999) widely lished in co-ethnic and co-industry (CECI) clusters. Despite used list, which is consistent with Sassen’s (1991) GC concept, its pervasiveness, research regarding FDI in GCs, metros, and and whose listing year is close to the middle of the data range. co-ethnic clusters remains underexplored and lacks compre- hensive and precise examination using large longitudinal sam- To obtain a precise measure for subsidiary location (i.e., GC/ ples, multi-level methods, and geo-spatial analysis that bridges metro/other), subsidiary street addresses were converted to IB and economic geography. Hence, we know very little about the corresponding latitude and longitude using Google Maps. how these sub-national locations affect investment character- Then ArcGIS 10.5 software was used to plot each subsidiary istics, and if they provide performance benefits that overcome co-ordinate (latitude, longitude) as a point on a geospatial potentially adverse effects of cost, competition, and negative map of North America. US and Canada census map layers knowledge spillovers. were added to delineate GC limits, GC metro areas, and oth- er locations (outside of GCs and metros) To illustrate, Figure This article focuses on the above gaps by addressing the fol- 2a (on the left) depicts subsidiaries (black dots) in the GC of lowing research questions. First, how do subsidiary and MNE Chicago (cross hatched), and its surrounding metro area (black characteristics differ between GCs, metros, and other loca- outlined). tions? Second, how does subsidiary performance (profitabili- ty and survival) differ between these locations? Third, how do Clusters were determined (at a 95% confidence level) based co-ethnic and CECI clusters impact subsidiary performance? on geo-spatial location, proximity, and density analysis using

Table 1: Global Cities in North America Canada USA Calgary Atlanta Columbus Los Angeles Richmond Montreal Boston Dallas Miami San Francisco Toronto Baltimore Detroit Minneapolis Seattle Vancouver Chicago Houston New York Washington DC Cleveland Kansas City Philadelphia

8 AIB insights Findings

Characteristics FDI in GCs substantially differs from metros and other locations across sub- sidiary and MNE characteristics. A GC subsidiary is likely to be a smaller size, wholly owned services unit, with a rela- tively high percentage of expatriate em- ployees; a metro subsidiary is likely to be an intermediate size wholesale op- eration, with a lower percentage of ex- patriate employees; while a subsidiary Figures 2a and 2b. Japanese Subsidiaries and Co-Ethnic Clusters in operating outside of these areas is likely Chicago and Its Metro Area a large manufacturing unit with the lowest percentage of expatriates. See the Optimized HotSpot tool in ArcGIS 10.5. This tool identi- Table 2. MNEs operating across all three areas have the high- fies statistically significant spatial clusters based on the number est levels of tangible assets and advertising intensities, however of neighbors for each subsidiary within a given geographical MNEs operating in metros and other locations have interme- boundary. Consistent with prior research (e.g., Stallkamp, diate levels of tangible assets but the highest R&D intensities, Pinkham, Schotter, & Buchel, 2018), a 15-kilometre bound- and MNEs operating outside of GCs and metros have the low- ary radius was used. To identify co-ethnic clusters, the analysis est levels of tangible and intangible assets. See Tables 2 and 3. was conducted for subsidiaries across all industry sectors. To identify co-ethnic and co-industry (CECI) clusters the analysis was done for groups of subsidiaries within each of the following industry sectors - automotive, electronics, machinery, financial Profitability services, real estate, and transportation. Figure 3a (on the left) Subsidiaries in GCs and metros are twice as likely to be profit- shows a cluster of Japanese automotive subsidiaries in the De- able relative to their counterparts in other locations. These out- troit-Windsor area and Figure 3b (on the right) shows a cluster comes are strengthened for services subsidiaries in GCs which of Japanese chemicals subsidiaries in the Los Angeles area. are 2.5 times more likely to be profitable than peers in other lo- cations; and manufacturing subsidiaries in metros which have For regressions, a multi-level longitudinal model was applied 2.5 times and 1.7 times greater profitability odds than peers wherein subsidiaries are nested within firms and repeated mea- in other locations and GCs respectively. Both co-ethnic (CE) sures over time are nested within subsidiaries. Ordinal logistic and co-ethnic and co-industry (CECI) clusters further boost regression and a parametric hazard model were used for prof- subsidiary profitability. CE cluster membership improves GC itability and survival analysis respectively, with both models subsidiary profitability odds by 1.7 times, and GC and metro accounting for non-proportional odds. subsidiaries in CECI clusters are 2.5 to 3 times more likely to be profitable.

Survival Subsidiaries in GCs and metros are less likely to survive (face about 1.4 times higher exit risk) relative to their peers in other locations. Services subsidiaries in GCs and manufacturing subsidiaries in metros face 2 times and 1.4 times higher exit risk relative to their industry peers in other locations. While exit risk does not significantly differ for subsidiaries in Figures 3a and 3b. Co-Ethnic and Co-Industry Clusters – Detroit (Automotive) CE clusters, CECI clusters reduce exit and LA (Chemicals) risk by 5 times in locations outside of GCs and metros.

Vol. 19, no. 3, 2019 9 Table 4 provides a comparison of subsidiary profitability and tions. the survival prospects are worse. In GCs and metros, survival findings. These suggest that while average subsidiary the challenges of higher costs and competition may give rise profitability in GCs and metros is better than in other loca- to a number of moderate and poor performing subsidiaries. Such subsidiaries may face survival challenges, due to the weight of corporate expectations and added Table 2: (Selected) Subsidiary Characteristics scrutiny regarding financial performance in such Subsidiary Characteristic GCs Metros Other high-profile locations. In contrast, literature sug- gests that a corporate-level understanding of the Average Employees 117 145 253 challenges that subsidiaries face in less munificent Average Expatriates 11.6 8.5 6.3 locations (e.g., outside of GCs and metros), enables Expatriates % (of Employees) 14.3 8.7 4.7 them to survive even when they perform poorly. MNE corporate managers may persevere with such Wholly Owned % 81.2 78.4 64.0 subsidiaries based on a longer-term outlook of de- Services % 47.7 34.9 17.4 veloping experience, and gradually improving le- Manufacturing % 11.1 28.8 60.1 gitimacy, market share, and performance (Chacar Wholesale % 26.2 59.2 14.6 & Vissa, 2005).

Table 3: (Selected) MNE Characteristics MNE Characteristic MNEs with sub- MNEs with sub- MNEs with (Averages) sidiaries in GCs sidiaries only in subsidiaries & metros & metros & other only in other other locations locations locations Employees 22,775 8,732 2,535 Revenue (‘000 USD) 1,506,983 287,843 69,956 Assets (‘000 USD) 1,345,532 286,862 64,404 International Experience (years) 687 262 95 R&D Intensity % 2.3 3.2 1.7 Advertising Intensity % 1.6 1.4 1.1

Table 4: Comparison of Profitability and Survival Findings by Location and Cluster Location Profitability Survival Global City 2 times greater odds of profitability vs. 1.5 times exit risk vs. other locations; other locations; and 2.5 times for Services and 2 times for Services subsidiaries; subsidiaries; differences with metro peers differences with metro peers not not significant. significant. Metro 2 times greater odds of profitability vs. other 1.3 times greater exit risk vs. other Locations; Mfg. subsidiaries 2.5 and 1.7 locations; 1.4 times for Mfg. times more likely to be profitable relative to subsidiaries; differences with GC peers in other locations and GCs. peers not significant. Other As above As above

Co-Ethnic 1.7 times greater odds of profitability No significant differences in exit risk Cluster relative to un-clustered peers in metros; relative to un-clustered peers. insignificant in GCs and other locations. Co-Ethnic, 3 times and 2.5 times more likely to be Exit risk 5 times lower than un- Co-Industry profitable relative to un-clustered peers in clustered peers in other locations; Cluster GCs and metros respectively; insignificant in insignificant in GCs and metros. other locations.

10 AIB insights Managerial Implications References

MNEs seeking access to markets and/or knowledge should Beaverstock, J. V., Smith, R. G., & Taylor, P. J. 1999. A roster of world establish services subsidiaries in GCs and manufacturing cities. Cities, 16(6): 445-458. subsidiaries in metros Beugelsdijk, S., & Mudambi, R. 2013. MNEs as border-crossing Subsidiaries established for business development and knowl- multi-location enterprises: The role of discontinuities in geographic edge seeking reasons will benefit from customer proximity and space. Journal of International Business Studies, 44(5): 413-426. innovation ecosystems. The downtown Houston branch of Ja- Chacar, A., & Vissa, B. 2005. Are emerging economies less efficient? pan’s largest bank— Mitsubishi UFJ, is located near the offices Performance persistence and the impact of business group affilia- of its main customers—Japanese and US energy companies. tion. Strategic Management Journal, 26(10): 933-946. The Dutch MNE Philips’ North America health technology Chang, S.J., & Park, S. 2005. Types of firms generating network exter- research center is located in metro Boston. To improve the nalities and MNCs’ co‐location decisions. Strategic Management likelihood of profitability for market/knowledge seeking sub- Journal, 26(7): 595-615. sidiaries, I recommend locating services subsidiaries in GCs Crozet, M., Mayer, T., & Mucchielli, J.L. 2004. How do firms agglom- and manufacturing in metros. Knowledge seeking subsidiaries erate? A study of FDI in France. Regional Science and Urban may further benefit from metro locations within diverse CE Economics, 34(1): 27-54. clusters. Goerzen, A., Asmussen, C. G., & Nielsen, B. B. 2013. Global cities and multinational enterprise location strategy. Journal of International In GCs and metros, average profitability is better, but greater Business Studies, 44(5): 427-450. corporate scrutiny and higher expectations may lower survival Kim, T.Y., Delios, A. & Xu, D. 2010. Organizational geography, expe- rates for the weaker to moderate performers. Hence, subsid- riential learning and subsidiary exit: Japanese foreign expansions iary managers must make the case for greater corporate-level in China, 1979–2001. Journal of Economic Geography, 10(4): tolerance while the subsidiary establishes itself and overcomes 579-597. challenges of higher costs and competition. Marshall, A. 1920. Principles of economics. London: Macmillan. Sassen, S. 1991. The global city: New York, London, Tokyo. Princeton, MNEs seeking efficiency and/or resources should establish NJ: Princeton University Press. subsidiaries outside GCs/metros Stallkamp, M., Pinkham, B. C., Schotter, A. P., & Buchel, O. 2018. Core Long-term survival may be a more relevant performance mea- or periphery? The effects of country-of-origin agglomerations on sure for efficiency/resource seeking subsidiaries. Such oper- the within-country expansion of MNEs. Journal of International ations are generally capital intensive, requiring stability and Business Studies, 49(8): 942-966. sustained cost advantages to generate returns. Large-scale Wagner, D. 2008. Learning from Global Cities, MIT Sloan Management manufacturing and distribution activities will benefit from Review, 49(4): 10-11. availability of lower cost factors of production. Toyota’s largest automobile plant is built on 1,300 acres in Georgetown, Ken- tucky. The Belgian steel-maker Arcelor-Mittal’s rural Indiana Dwarka Chakravarty ([email protected]) is an Assistant Pro- plant is located near the Morse reservoir, since steel production fessor of Strategic Management at the Fowler College of Business, requires copious amounts of water. CECI clusters may further San Diego State University. His research interests include global improve survival prospects in such locations. cities, regional strategy, and emerging market multinationals. Prior to his Ph.D., he received an MBA from the Indian Institute of Across GCs, metros, and other locations, MNEs should seek to establish subsidiaries within co-ethnic (CE) and co-eth- Management, Bangalore; and worked with KPMG Consulting in the nic and co-industry (CECI) clusters UK; and with Microsoft in India and the Philippines. CE and CECI clusters improve subsidiary profitability in GCs and metros, and CECI clusters enhance survival odds in other locations. Our analysis suggests that a conservative heuristic for (CE or CECI) cluster membership is 10 neighbors within 10 miles.

Vol. 19, no. 3, 2019 11 Special Issue on the 2019 Peter J. Buckley and Mark Casson AIB Dissertation Award Contemporary Perspectives on Internationalization: Subnational, Regional, Digital

Maximilian Stallkamp Ph.D. awarded by Ivey Business School, Canada (October 2018)

even culture. This means that managers have to decide not just BIG Question: which country to invest in, but also where within that country How is the internationalization of contemporary firms they should invest. Understanding subnational differences and shaped by (1) subnational/regional factors and (2) by dig- choosing the right subnational location is especially important ital business models? for firms operating in large, emerging markets, such as China, India, and Brazil, where differences between more developed and less developed areas are particularly stark. My research ex- An important challenge for managers is how to expand a firm’s amines the subnational location choices of Japanese firms in reach into new markets. Recognizing this major challenge for China and shows that choosing certain types of subnational practitioners, academic researchers have studied the phenom- locations for their first investment in China can help firms ex- enon of firm internationalization for more than half a cen- pand more quickly afterwards. tury. My dissertation makes the case that academic research on internationalization must evolve if it is to remain relevant Second, firms must increasingly consider supranational region- and useful to practitioners. The internationalization patterns al factors in addition to country-level and subnational factors. of firms have changed profoundly over the past half century Regional economic integration (e.g., the European Union, and continue to evolve in response to technological progress ASEAN, NAFTA/USMCA) encourages firms to serve multiple (e.g., digitalization) as well as political and economic chang- countries in a region by adopting regional strategies. For many es (e.g., regional economic integration, the resurgence of pro- firms, this raises the question whether they should establish tectionism, the rise of emerging markets). To provide effective regional management centers in key regions to more effectively guidance to practitioners, research must address the realities of manage regional operations. This is the focus of the second part internationalization today. To this end, my dissertation aims of my dissertation, which examines under which conditions to provide contemporary perspectives on internationalization, firms introduce regional headquarters and so-called regional examining three different issues faced by today’s international- management mandates. izing firms. Third, many of today’s fastest-growing and most innovative First, my dissertation addresses the subnational dimension of firms are so-calleddigital firms, whose products and services internationalization. Firms’ international business strategies are purely digital. As digital products can be delivered virtu- are often discussed at the country level, such as which country ally over the internet (for instance through websites and app to invest in, or how to do business in country X. However, stores), they can—in principle—be made available globally at provinces, states, and cities within a single country can differ very low cost. For this reason, it is often claimed that interna- vastly in terms of economic development, infrastructure, and tionalization is comparatively easy for digital firms and can be

12 AIB insights achieved through purely virtual channels. However, my disser- ic variables, but also the presence of home-country firms that tation shows that this view is overly simplistic and may mislead might provide a useful social support network. practitioners. I found that digital firms continue to face signif- icant barriers to internationalization and make use of a variety of different operating modes and internationalization strategies to serve foreign markets effectively. Part 2: When Do Firms Establish Re- gional Headquarters or Other Re- gional Management Centers? Part 1: Investing in China, but Where in China? The Importance of Sub- Many multinational enterprises (MNEs) pursue regional strat- national Location Choice in Foreign egies to capitalize on similarities between multiple countries Markets in a region. For instance, many US-based multinationals have distinct regional strategies for Europe, Latin America, South- When a firm invests in a foreign country, does it matter where east Asia, and other regions. Such regional strategies have be- in the host country investment is located? Many countries are come increasingly attractive with the formation of regional internally diverse, with substantial variation across cities and trade agreements and regional economic blocs (e.g., European regions in terms of economic development, infrastructure, and Union, ASEAN, NAFTA/USMCA), which promote econom- market-supporting institutions. This challenge has been in- ic integration within regions. Regional strategies are some- creasingly noted by practitioners (e.g., McKinsey, 2012). It is times—but not always—supported by regional management especially acute for firms operating in (or planning to enter) structures, such as regional headquarters. The second part of large emerging markets, where some areas have benefited from my dissertation examines under which conditions firms intro- sustained economic development while others have been left duce such regional management structures. behind. I developed and tested a theoretical model based on the follow- Foreign firms investing in emerging markets tend to invest in ing logic. As a firm expands its operations in a host region by relatively more developed subnational locations, especially for establishing multiple foreign subsidiaries, the growing regional their first investment in a particular country. I examined over subsidiary network creates increasing demands for coordina- 10,000 foreign direct investments made by Japanese firms in tion and information processing on the parent firm. This can China between 1993 and 2014, and I found that the vast ma- overwhelm the information processing capacity of the corpo- jority was concentrated in major urban areas in a few coastal rate headquarters, which is also geographically remote from provinces. This intense clustering was remarkably stable over the operations in the host region. To relieve the burden on time, despite various government policies aimed at promoting corporate headquarters, MNEs establish regional management investment in the country’s interior, and despite rising costs in structures to create additional information processing capacity coastal provinces. Crucially, many Japanese firms invested in at the regional level. However, this does not necessarily mean close proximity to other Japanese firms, leading to agglomera- that firms with many subsidiaries must establish a traditional tions of Japanese foreign subsidiaries. regional headquarters (RHQ), i.e., a stand-alone organization- al unit dedicated entirely to regional management functions. I tested empirically whether there was any measurable bene- As RHQs are perceived as expensive and inflexible, many firms fit for Japanese firms entering China to locate their first in- instead rely on regional management mandates (RMMs) as- vestment in such a Japanese agglomeration. I found that these signed to an existing operating subsidiary in a region (Alfoldi, subnational locations with dense populations of other Japa- Clegg & McGaughey, 2012). nese firms appear to aid new Japanese entrants in expanding more rapidly. Specifically, firms that entered in a subnational I found that MNEs use RHQs and RMMs in different ways. agglomeration were significantly faster to establish additional Firms that have large numbers of subsidiaries in a region tend subsidiaries in other parts of China. This supports the view to choose RHQs, whereas a greater dispersion of subsidiaries that the presence of “co-ethnic” Japanese networks within these across many countries in a region is associated with the alloca- agglomerations can provide new entrants with crucial resourc- tion of RMMs to select operating subsidiaries. While I was not es and information that support further expansion in the host able to compare the relative effectiveness of RHQs and RMMs, market. More generally, my findings suggest that managers my research does suggest that practicing managers differentiate should carefully consider where in a host country they invest, between the two and that a distinct ‘use case’ exists for both as the initial subnational location choice can have important RHQs and RMMs. long-term consequences. In doing so, they should consider not just “hard” factors such as physical infrastructure and econom-

Vol. 19, no. 3, 2019 13 Part 3: How Can Digital Firms Serve globally and gained international users from the outset. How- Foreign Markets Effectively? ever, most pursued more deliberate market entry strategies, releasing their products or services in select markets only. In- terestingly, firms’ early international expansion efforts often Digitalization—the increasingly pervasive use of advanced dig- targeted proximate countries in their home region, mirroring ital technologies in business and society—has the potential to well-established internationalization patterns observed among transform how firms internationalize. This is particularly the conventional firms, albeit at an accelerated pace. I identified case for so-called digital firms, which produce purely digital several constraints that limit the ability of many digital firms products and services. Examples include business services (e.g., to serve global markets from the start. Among them are the Shopify, Twilio), social media (e.g., Facebook, Snap), games need for local adaptation (e.g., to meet local tastes, preferenc- and entertainment (e.g., Epic Games, Netflix), or market- es, or regulatory requirements) and the need for local-language place-like platforms that facilitate trade in physical goods and sales and customer support services. Many digital firms also offline services (e.g., Uber, Airbnb, Etsy). operate platform business models that require a critical mass of local complementors (e.g., restaurants, drivers, developers) Since digital products and services can be delivered virtually in each foreign market (Stallkamp & Schotter, 2019). These over the internet to users almost anywhere in the world, it is constraints force many digital firms to adopt a more deliberate, often assumed that internationalization is comparatively easy country-by-country internationalization strategy. for digital firms. Digital firms, according to this line of think- ing, can simply make their digital products available globally The high-level conclusion is that digitalization does not elimi- over the internet, without having to establish factories, sup- nate the challenges of internationalization, even for firms with ply chains, or other physical facilities abroad (e.g., UNCTAD, purely digital products. Although digital technologies create 2017). By extension, digital firms are often assumed to be new ways of engaging with foreign markets, many digital firms ‘born global’, meaning that they serve worldwide markets from still require ‘boots on the ground’ and face limitations in how inception (e.g., McKinsey Global Institute, 2016). quickly they can scale internationally. A better understanding of how digital firms internationalize is crucial for entrepre- The third part of my dissertation questions this common nar- neurs, executives, and investors in digital firms, as well as for rative of inherently global digital firms that easily serve world- the academics studying them. wide audiences through online channels. I studied 17 different digital firms from 3 continents (North America, Europe, and Asia), operating in different industries. Based on interviews with key decisionmakers (founders, CEOs, senior managers) Implications and Conclusion and additional secondary materials, I analyzed (1) the foreign operation modes of digital firms, and (2) the temporal and geo- Beyond the implications for academic research discussed in graphic patterns of their internationalization. the dissertation, there are several implications for practitioners (managers, entrepreneurs, investors, government officials). In I found that, rather than relying entirely on virtual inter- terms of location choice, my findings indicate that a firm’s net-based exports, digital firms use a variety of different modes initial subnational location choice in a host country can have to serve foreign markets. From a technical perspective, digital important long-term consequences for the firm’s subsequent products and services can easily be exported through purely expansion in the country. This suggests that executives need to virtual channels, such as app stores and websites. However, analyze foreign investment location choices at a fine-grained most firms in my sample found that they still required some subnational level and take into account potential benefits from sort of physical presence in foreign markets. This is often nec- locating close to foreign direct investments made by firms from essary to provide sales, marketing and customer service func- the same home country. Policy makers and government offi- tions, to build relationships with stakeholders, and to resolve cials seeking to attract foreign investment may want to leverage unexpected problems on the ground. Moreover, having ‘boots existing foreign investment from a particular country to attract on the ground’ (as one executive put it) was in many cases seen further investment from that country. My findings on regional as critical for understanding foreign markets and adapting management structures suggest that firms with a growing for- products to local needs. Not all digital firms need to establish eign subsidiary footprint in a specific region should consider conventional foreign subsidiaries in each foreign market. In- different forms of regional management centers. While RHQs stead, the firms I studied used a mixture of foreign subsidiaries, and RMMs are to some extent substitutable, RMMs appear to regional offices, and flexible arrangements based on temporary be more suitable for some conditions and RHQs for others. executive postings and external partners. Finally, my research on digital firms shows that the interna- tionalization of these firms is more complex than commonly Similarly, digital firms are not necessarily ‘born global’. Some acknowledged. Rather than assuming that any digital firm can of the sample firms did in fact make their product available scale globally using only virtual channels, a more realistic un-

14 AIB insights derstanding of each individual digital firm’s business model is needed. In many cases, some form of physical presence is still Maximilian Stallkamp ([email protected]) is an Assistant required and selective, country-by-country internationaliza- Professor at Virginia Tech. His research and teaching interests are tion strategies are necessary. in international strategy, with a special focus on firms with digital and platform-based business models. Max’s research has been This dissertation provides new insights on how firms interna- published in the Journal of International Business Studies, the tionalize in the 21st century. Contemporary internationaliza- Journal of Management Studies, and the Global Strategy Journal. tion is about more than just country-level market entry deci- sions, the establishment of overseas manufacturing plants, and cross-border flows of physical goods. Firms operate in a com- plex, multi-layered environment that presents challenges and opportunities at the subnational, country, and regional level, and increasingly also in the digital sphere. The international- ization of firms remains an important and challenging issue for researchers and practitioners alike.1

References

Alfoldi, E. A., Clegg, L. J., & McGaughey, S. L. 2012. Coordination at the edge of the empire: The delegation of headquarters functions through regional management mandates. Journal of International Management, 18(3): 276–292. McKinsey Global Institute. 2016. Digital globalization: The new era of global flows. http://www.mckinsey.com/business-functions/ digital-mckinsey/our-insights/digital-globalization-the-new-era-of- global-flows. McKinsey & Co. 2012. Winning the $30 trillion decathlon. Going for gold in emerging markets. https://www.mckinsey.com/busi- ness-functions/strategy-and-corporate-finance/our-insights/win- ning-the-30-trillion-decathlon-going-for-gold-in-emerging-markets Schotter, A., Stallkamp, M., & Pinkham, B. 2017. MNE headquarters disaggregation: The formation antecedents of regional manage- ment centers. Journal of Management Studies, 54(8): 1144–1169. Stallkamp, M., & Schotter, A. P. 2019. Platforms without borders? The international strategies of digital platform firms.Global Strategy Journal. Advance online publication. https://doi.org/10.1002/ gsj.1336 Stallkamp, M., Pinkham, B., Schotter, A. & Buchel, O. 2018. Core or periphery? The effects of country-of-origin agglomerations on the within-country expansion of MNEs. Journal of International Busi- ness Studies, 49(8): 942–966. UNCTAD. 2017. World investment report 2017: Investment and the digital economy. http://unctad.org/en/pages/PublicationWebflyer. aspx?publicationid=1782

Endnotes

1 Note: Versions of Essay 1 and Essay 2 have been published as co-authored articles (Stallkamp, Pinkham, Schotter & Buchel, 2018; Schotter, Stallkamp & Pinkham, 2017).

Vol. 19, no. 3, 2019 15 Special Issue on the 2019 Peter J. Buckley and Mark Casson AIB Dissertation Award Bloody Business: Multinational Investment in an Increasingly Conflict-Afflicted World Caroline Theresia Witte Ph.D. awarded by Erasmus University Rotterdam, The Netherlands (January 2018)

opportunities in conflict areas for the private sector and mul- BIG Question: tinationals in particular. However, global competition pushes What determines multinational enterprises engagement firms to consider location options with relatively high political in conflict countries? risk profiles, including those troubled by conflict and war. Ac- cordingly, a better understanding of how conflict risk affects the operations of MNEs is much needed. Introduction My thesis emphasizes that the assumption that political vi- When I started working on my Ph.D. dissertation in the sum- olence necessarily puts off investors is too simplistic. A con- mer of 2013, the Arab Spring, characterized by popular calls siderable number of MNEs are attracted to conflict regions, for democracy in several countries in the Arab world, had showing that there are opportunities for firms to create and turned into an Arab Winter, characterized by horrific political appropriate value whilst facing significant conflict-related risk. conflicts. In the years that I developed the papers in my dis- I even find that political conflict positively affects greenfield sertation, the conflicts in Syria, Yemen and Libya only intensi- foreign direct investment (FDI) by the most diversified firms, fied. Globally, we have seen a large increase in political conflict suggesting that entry into conflict countries might allow firms from 35 conflicts in 2005 to 50 in 2015.1 This increase can of to obtain a first-mover advantage if MNEs are able to absorb course be partially explained by the turmoil resulting from the discontinuous risk. I also demonstrate that the continuity of Arab Spring, but conflict also increased in other parts of the the risk is an important factor influencing MNEs’ entry strate- word, such as Iraq, Nigeria or Ukraine. Interestingly enough, gies, so that exceptionally discontinuous risks, such as the risk multinational enterprises (MNEs) do not seem so deterred by of a terrorist attack, are so unpredictable that they do not af- conflict and actively invest in conflict countries. Of all subsid- fect FDI decisions. Finally, the findings of my thesis imply that iaries that MNEs opened in low, middle-income economies, wars can reduce the importance of home-host ties for current 13% were actually in conflict countries, and 5% were even in investment decisions. war countries, defined as conflict countries1 with at least 1,000 battle-related deaths. Main Themes: FDI, Political Conflict The research objective of my dissertation is to shed light on the and Prosperity opportunities for MNEs in conflict regions and to enhance our understanding of the MNE and conflict risk. Although the IB Ultimately, my dissertation concerns the relationships between literature has paid considerable attention to MNEs investing in political conflict, FDI and prosperity. In the triangle in Figure emerging markets and the risks associated with this, there has 1, the relationships studied are depicted as two solid arrows. been somewhat limited attention to the relationship between The largest part of my thesis is devoted to studying the relation- conflict and MNEs. It has been mainly left to economists and ship between FDI and violent political conflict. However, to political scientists, with the general idea that there lie very few study the factors which determine MNE’s reaction to political

16 AIB insights conflict, it is necessary to understand how variation in conflict growth and poverty measures, do not necessarily translate to an emerges in the first place. Therefore, the first paper of my -dis increase in life satisfaction. For example, in the period preced- sertation focuses on explaining conflicts. To test both the effect ing the Arab Spring, many Arab countries, especially the ones of prosperity on conflict and the effect of conflict on FDI, I em- where the uprisings were most intense, experienced a phenom- ploy a variety of regression techniques on large panel datasets. enon called ‘unhappy development’, where rising income levels were accompanied by decreasing subjective wellbeing (Aram- Political Conflict patzi et al., 2018). Political conflict (Figure 1, top box) has two components. Whereas violent conflict, most notably civil war and to a lesser Main Findings and Results extent international conflicts, might be the most salient types of political conflict, in my dissertation, I also pay attention to Unhappy Rebels: The Role of Subjective Wellbeing in Civil civil resistance, the non-violent counterpart of armed conflict. Uprising Recently, we have seen that this type of conflict often leads to This paper examines the antecedents of political conflict and violent conflict (e.g., the Arab Spring in Syria) and can have is directly born out of my frustration with existing models of large consequences for multinational enterprises (e.g., the an- political conflict. These existing models tend to focus on objec- ti-government protests in Hong Kong). tive factors such as GDP growth and ethnolinguistic fractual- ization, whilst these factors are unable to predict or explain the Arab Spring or some Political Conflict of the other recent conflicts. In the ‘unhap- py rebels’ chapter, I ask whether wellbeing Violent conflict Non-violent conflict data can explain variation in non-violent (e.g., civil war & in- (e.g., civil resistance) conflict events. Particularly, I look at the ternational conflicts) number of anti-government protests and strikes around the globe. This type of con- 2 3 1 flict is prevalent around the world. Take for example, the protests at the beginning of the Arab Spring or those that preceded Foreign Direct Investment (FDI) Prosperity the violent conflict in Ukraine. The focus • Sector heterogeneity • Economic development on subjective indicators is warranted by an • Firm level heterogeneity • Subjective wellbeing increased discrepancy between develop- • Home country heterogeneity ments in objective and subjective indica- tors. For example, whilst in most of parts of the Arab world income was growing, Figure 1. Illustration of the hypothesized political conflict, FDI and prosperity subjective wellbeing measures indicated a triangle decrease in satisfaction with living stan- Note: The solid lines represent the relations studied in this dissertation, while the dashed lines correspond to relations established in the literature. The numbers indicate the papers of dards. the dissertation in which the relationship is discussed. My findings demonstrate that a decrease in Foreign Direct Investment subjective wellbeing can motivate citizens to engage in acts of In terms of FDI (Figure 1, bottom left), I move beyond wheth- civil resistance. This effect is largely the result of changes in sat- er FDI flows are overall affected by political conflict and- fo isfaction with living standards and the perceived capability to cus on different sources of heterogeneity that affect how FDI have a purposeful and meaningful life. These findings support flows react to political conflict. These sources of heterogeneity the view that economic grievances can lead to peaceful upris- include sector, firm and home country characteristics. Accord- ings. However, I find no effect of subjective wellbeing on vio- ingly, I improve the understanding of the mechanisms that lent political conflicts, which suggests that other factors such as affect MNEs’ investment opportunities in conflict-afflicted the resources of rebels or the military power of the government countries. play a more important role here.

Prosperity Dodging Bullets: The Heterogeneous Effect of Political -Vi The final concept in the triangle is prosperity (Figure 1, bottom olence on Greenfield FDI right), which focuses on healthy societies and thriving citizens. In this chapter, I study the variation in how MNEs adjust their Whereas prosperity is often seen as a synonym for economic FDI in response to political violence. I argue that you would development, I am particularly concerned with the relation- expect a negative effect for political conflict rather than for ship with subjective wellbeing. This is particularly relevant in other types of political violence such as assassinations, political contexts where objective measures of development, like GDP terror or terrorism. Political conflict has a higher impact on the

Vol. 19, no. 3, 2019 17 operations of firms than political terror or assassinations (see level heterogeneity in the relationship between political con- Figure 2). In addition, it poses a more continuous risk than ter- flict and FDI, in the third paper I turn to heterogeneity at the rorism, meaning that it is relatively foreseeable and hence more level of the MNE’s home country. Whereas the effect of inter- likely to affect strategic decision-making. Hence, I argue that national wars on home-host ties is relatively well understood, the average multinational will shy away from areas troubled by this paper demonstrates how internal conflict – currently the violent political conflict. However, a considerable number of dominant form of armed conflict– affects these relationships. MNEs invest in conflict countries anyways. Particularly, I look at the importance of previous colonial ties. It is well known that these ties can benefit firms from previ- To study why firms invest in these conflict countries, I analyze ous colonizer countries in a previous colony. In this paper, I the relationship between greenfield FDI flows and conflict for ask: how is the value of home-host ties contingent on political 90 developing countries over the period 2003 to 2012. I find conflict and instability? On the one hand, firms from previous that nationwide political conflict is negatively associated with colonizers might be better able to profit from the uncertain- total greenfield FDI, but this relationship is completely driven ty and transparency than firms from countries without these ties. On the other hand, wars also pose a threat to their advantage, because the value of their relational resources could diminish Type of impact Level of impact quickly when conflict leads to institutional Type of risk Low High changes. I hypothesize that by increasing the Continuity Discontinuous/ Assassinations Terrorism risk within the institutional structure, small political conflict positively moderates the re- Intermittent lationship between home-host ties and loca- Continuous Political Terror Political conflict (e.g., civil tion attractiveness, whereas full-fledged wars conflict or interstate war) and regime transitions, in which risk to the institutional structure dominates, erode the Figure 2. Different types of political violence, organized by level of impact value of ties. and continuity Examining location choice decisions in Sub-Saharan Africa, I find evidence that wars by decreased FDI flows into non-resource industries. In other and institutional transitions indeed devaluate home-host ties, words, whereas multinationals in the service and manufacturing whereas small political conflict does not affect the value of ties. industry decrease their investments in the case of conflict, I do These results do not support the idea that connected firms can not find any evidence that resource-related greenfield FDI -de benefit more from the confusion caused by political conflict. In creases. Studying the mechanisms that could explain the insen- contrast, they seem to have more to lose and accordingly face sitivity of resource FDI to political conflict, I find that this effect considerable incentives to avoid the outbreak of wars. can largely be explained by the high profitability of natural re- source extraction and geographic constraints on location choice.

In the non-resource sector, the least geographically diversi- fied firms are most sensitive to conflict. Large MNEs active in Contributions and Implications for many different countries are on the other hand not sensitive Practitioners to political conflict. I find evidence that MNEs that are suffi- ciently internationalized are even attracted to conflict regions. This suggests that firms that enter into conflict countries might Political conflict has become more prevalent in the last decades even increase earnings if MNEs are able to absorb discontin- and with the consequences of global warming becoming more uous risk. As such, MNEs might want to consider entry into pronounced, the prospects of world peace are merely declin- conflict countries – taking into account sector and firm attri- ing. My dissertation contributes to the existing literature on butes, despite the large level of risk posed, with the intention MNEs in developing countries by increasing our understand- of obtaining a competitive advantage. Finally, other types of ing of conflict risk for the MNE. A better understanding of the political violence, including intermittent violence in the form consequences of conflict helps firms prepare for conflict-related of terrorist acts and assassinations, or persistent but low-impact risks, possibly reducing the overall economic impact of con- events, such as political terror, have no effect on the location flict. My thesis’ main contribution relates to the unpacking of choice decisions of multinational enterprises. conflict-related risks, and accordingly, this dissertation facili- tates a better understanding of the interaction between risk and When Political Instability Destroys Historical Ties firm characteristics. I demonstrate that the continuity of the While in the second paper, I look at the role of firm and sector risk is an important factor influencing MNEs’ entry strategies,

18 AIB insights so that exceptionally discontinuous risks, such as the risk of by providing intelligence and financial resources, which can a terrorist attack, are so unpredictable that they do not affect be employed to enhance military capacity. In addition, con- FDI decisions. Yet, MNEs tend to avoid countries that are af- nected MNEs can lobby their home country governments into flicted by armed conflict, a type of political violence that poses providing military support to the host country’s government, a relatively continuous type of risk and can have a large nega- which could deter insurgents. In contrast, unconnected MNEs tive impact on a firm’s profits. might in the long run benefit from war and instability, because this could reduce the advantage of firms originating from a I empirically show that whilst on average political violence that country with a tie to the host. By entering a country that is poses a discontinuous risk (e.g., terrorism) or has a low impact likely to go through an institutional transition in the near fu- on the multinationals’ operations (political terror) does not af- ture and partnering up with the opposition party, MNEs can fect greenfield investments, political conflict is detrimental to create a considerable political first-mover advantage. MNEs. This is not surprising, because conflicts decrease the profitability of subsidiaries due to supply chain disruption and Regarding economic and business policy, more attention should the risk of capital destruction. The average MNE might accord- be given to the role of economic grievances that are subjective ingly consider implementing strategies to minimize the proba- in nature. Here the case of ‘unhappy development’ merits spe- bility of conflict. Although MNEs are unlikely to have a major cial attention. Countries experiencing ‘unhappy development’ influence on the outbreak of conflicts, they can nevertheless prosper in terms of objective indicators of development, but engage in voluntary actions that might decrease human suffer- suffer in terms of subjective wellbeing. The Arab Spring was ing and could accordingly decrease conflict. Examples of such preceded by a period of such unhappy development. Hence, actions are providing adequate schooling and supporting small economic policies, such as trade agreements and corporate tax business development through skill trainings and microfinance. incentives, should not only be evaluated in terms of objective economic outcomes, but also in terms of their effect on sub- Yet, the relationship between political conflict and FDI is het- jective wellbeing. This also implies that there are opportuni- erogeneous. Several factors determine the sensitivity of FDI to ties for international business policy research to uncover how political conflict, most notably: MNEs actually affect subjective wellbeing, including individu- als’ perceptions that they have the freedom to make something 1. The international profile of the MNE of their lives. 2. Sector level economic rents and constraints on location choice 3. The MNE’s geographic exposure to violence References 4. The existence of home-host ties Arampatzi, E., Burger, M. J., Ianchovichina, E., Röhricht, T., & Veen- hoven, R. 2018. Unhappy development: Dissatisfaction with Life on Accordingly, my results emphasize that the assumption that the Eve of the Arab Spring. Review of Income and Wealth, 64(S1): political conflict necessarily depresses earnings and puts off -in 80-113. vestors is too simplistic. A considerable number of MNEs are Pettersson, T., & Wallensteen, P. 2015. Armed conflicts, 1946–2014. attracted to conflict regions, showing that there are opportuni- Journal of Peace Research, 52(4): 536-550. ties for firms to create and appropriate value whilst facing sig- nificant conflict-related risk. The finding that political conflict Endnotes positively affects greenfield FDI by the most diversified firms, 1 Political conflict is defined as a contested incompatibility that concerns suggests that entry into conflict countries might even create government and/or territory where the use of armed force between two strategic opportunities if MNEs are able to absorb discontin- parties, of which at least one is the government of a state, results in at least uous risk. 25 battle-related deaths in one calendar year (Pettersson & Wallensteen, 2015). The findings in my thesis also imply that wars can reduce the importance of home-host ties for current investment decisions. These ties remain conducive to business dealings, but wars and Caroline Witte ([email protected]) is an assistant professor of institutional transitions can reduce the advantage that MNEs strategy and international management at the Department of from countries with these ties have. This creates two separate Strategy and Innovation, Copenhagen Business School. She is sets of incentives for connected and unconnected MNEs. Con- mainly interested in strategic management in fragile economies. nected MNEs are likely to benefit from the strengthening of Caroline has a PhD from the Erasmus University Rotterdam and a a host government’s state capacity and particularly from an MSc. in Economics and Business from the same institute. Caroline increase in military power. A strong state could deter rebel- has also worked as an external consultant for the World Bank’s lion, whilst also decreasing the probability that insurgents win a conflict. MNEs could enhance host countries’ state capacity Chief Economist Office for the Middle East & North Africa.

Vol. 19, no. 3, 2019 19 Previous AIB Dissertation Award Winners

Luis Ballesteros (Ph.D. awarded by The Heather Berry (Ph.D. awarded by University 2018: Wharton School, University of Pennsylvania) 2001: of California, Los Angeles) Neli Kouneva Loewenthal (Ph.D. awarded Joan P. Mileski (Ph.D. awarded by University 2017: by George Washington University) 2000: of Texas at Dallas) Anne Jacqueminet (Ph.D. awarded by HEC Witold Henisz (Ph.D. awarded by University 2016: Paris) 1999: of California, Berkeley) Michael A. Sartor (Ph.D. awarded by West- Lena Zander (Ph.D. awarded by Uppsala 2015: ern University) 1998: University) Marcus M. Larsen (Ph.D. awarded by Co- Tatiana Kostova (Ph.D. awarded by Univer- 2014: penhagen Business School) 1997: sity of Minnesota) Lite J. Nartey (Ph.D. awarded by The Whar- Xavier Martin (Ph.D. awarded by University 2013: ton School, University of Pennsylvania) 1996: of Michigan) Marc van Essen (Ph.D. awarded by Erasmus Subramanian Rangan (Ph.D. awarded by 2012: University) 1995: Harvard University) Prithwiraj Choudhury (Ph.D. awarded by Patricia Robinson (Ph.D. awarded by Massa- 2011: Harvard Business School) 1994: chusetts Institute of Technology) Jesper Edman (Ph.D. awarded by Stockholm Scott Xianfang Liu (Ph.D. awarded by Penn- 2010: School of Economics) 1993: sylvania State University) Daniel Rottig (Ph.D. awarded by Florida Srilata Zaheer (Ph.D. awarded by Massachu- 2009: Atlantic University) 1992: setts Institute of Technology) Ajai Gaur (Ph.D. awarded by National Uni- Eugene Salorio (Ph.D. awarded by Harvard 2008: versity of Singapore) 1991: University) Rekha Krishnan (Ph.D. awarded by Tilburg Arvind Parkhe (Ph.D. awarded by Temple 2007: University) 1990: University) Jon Erland Lervik (Ph.D. awarded by Nor- Paz Estrella e Tolentino (Ph.D. awarded by 2006: wegian School of Management) 1989: University of Reading) Renata Kosova (Ph.D. awarded by University Ching-Sung Wu (Ph.D. awarded by Univer- 2005: of Michigan) 1988: sity of California, Los Angeles) Cyril Bouquet (Ph.D. awarded by University Fritz Rieger (Ph.D. awarded by McGill Uni- 2004: of Western Ontario) 1987: versity) Camilla A. Noonan (Ph.D. awarded by Uni- Kwang Chul Lee (Ph.D. awarded by Univer- 2003: versity of Reading) 1986: sity of South Carolina) Jeffrey E. Johnson (Ph.D. awarded by Uni- L. Jeremy Clegg (Ph.D. awarded by Univer- 2002: versity of Strathclyde) 1985*: sity of Reading)

20 AIB insights Leo Sleuwaegen (Ph.D. awarded by Catholic Jeffrey S. Arpan (Ph.D. awarded by Indiana 1985*: University of Leuven) 1971: University) John J. Dugan, Jr. (Ph.D. awarded by Tem- José R. de la Torre (Ph.D. awarded by Har- 1984: ple University) 1970: vard University) Kate Gillespie (Ph.D. awarded by University John D. Daniels (Ph.D. awarded by Univer- 1983: of London) 1969: sity of Michigan) Erdogan Bilik (Ph.D. awarded by Ohio State James W.C. Tomlinson (Ph.D. awarded by 1982*: University) 1968: Massachusetts Institute of Technology) Douglas W. Nigh (Ph.D. awarded by Uni- * In the years of 1973, 1978, 1982 and 1985, ties resulted in 1982*: versity of California, Los Angeles) several award winners. Viem Kwok (Ph.D. awarded by University of 1981: California, Berkeley) William H. Davidson (Ph.D. awarded by 1980: Harvard University)

Sarkis J. Khoury (Ph.D. awarded by Univer- 1979: sity of Pennsylvania) Michael A. Amsalem (Ph.D. awarded by 1978*: Harvard University) Ruediger Neumann-Etienne (Ph.D. awarded 1978*: by University of Michigan) Robert D. Tamilia (Ph.D. awarded by Ohio 1977: State University) Gerard B. J. Bomers (Ph.D. awarded by 1976: University of Washington) Ah B. Sim (Ph.D. awarded by University of 1975: California, Los Angeles) Edward B. Flowers (Ph.D. awarded by Geor- 1974: gia State University)

Lee H. Radebaugh (Ph.D. awarded by Indi- 1973*: ana University) Claude L. Simpson (Ph.D. awarded by 1973*: Georgia State University) Arnold K. Weinstein (Ph.D. awarded by 1973*: Columbia University)

James J. Ward (Ph.D. awarded by George 1972: Washington University)

Vol. 19, no. 3, 2019 21 Call for Papers: AIB Insights Special Issue “Responsibilities of Educators in International Business”

Guest Editors: Allan Bird and Daria Panina

AIB Insights Associate Editor: William Newburry

Introduction At a time when international business scholars have called on executives and managers to place greater attention on corporate social responsibility in order to address issues of inequality, diversity, inclusion, and sustainability, in line with Rasche and Gilbert’s (2015) broader call, it is appropriate for the academic community to turn its attention inward and address the issue of responsibility in international business education. Given the expansion of IB educational activities through increasing coverage of relevant topics in functional courses, what is the role of IB education in shaping the mindsets and values of the business leaders of tomorrow? What is the unique contribution of IB courses to transforming business students into citizens of the world? In short, what responsibility do international business educators have and what do they aspire to achieve as educators? Several aspects of IB education raise distinctive issues when addressing matters related to educator responsibility. It is not uncommon, for instance, for educators to seek not just education, but transformation. This has given rise to increasing use of experiential learning approaches (Taras & Gonzales-Perez, 2015), particularly in cross-cultural management courses. In 2014, AIB Insights (Maznevski, 2014; Peterson, 2014) dedicated an issue to one instance of an experiential activity that went terribly wrong, thereby plunging students, the instructor, and the institution into turmoil. What responsibility do instructors and institutions have in the selection and implementation of different pedagogies? To what extent do IB educators consider the impact their instructional decisions may have on their students, institutions of higher education, and the world? In a similar vein, in a time of instability in sociopolitical and economic structures on the global level (Meyer, 2017) – amid calls for de-globalization and appeals to reconsider capitalism – what role does IB education play in promoting and maintaining civility and rationality in the broader public square? In this AIB Insights Special Issue, we seek to further flesh out the contours of responsible IB education and promote a dialogue about enhancing the quality of IB education through an acceptance of greater accountability.

Example Topics While we are broadly interested in any topic related to the Special Issue theme that encourages a discussion of the responsibilities of IB educators, some potential topics for the special issue are listed below. • What is different about teaching IB from teaching in other disciplines (e.g., management, finance)? • What ethical considerations and concerns underlie the teaching of IB? • What are the responsibilities of educators in the IB field to stakeholders (i.e., students, sponsoring institutions, employers, societies)? • How do these responsibilities vary based on: o Location (e.g., within country or outside)? o Timeframe (e.g., before, during or after international experience)? o Student demographics (e.g., age, gender, domestic versus international)? • How do we ensure that IB education provides the transformational process that we aim for, and what responsibilities do educators have in designing and overseeing this process? • What are the ethical issues associated with IB education? • How does viewing IB education as a calling impact perceptions of responsibility? • What is the role of IB education in a time of calls for de-globalization? • What responsibility do educators have when selecting and implementing different pedagogy?

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Submission Process and Timeline AIB Insights is the Academy of International Business official publication that provides an outlet for short (around 2500 words), interesting, topical, current and thought-provoking articles. Colleagues interested in submitting their work to this Special Issue should consult the AIB Insights Editorial Policy and use the Online Manuscript Submission System, both of which can be accessed via the AIB Insights website at https://aib.msu.edu/publications/insights. Please select “Special Issue: IB Education” under ‘Track’ when submitting your manuscript.

Timeline: Please submit your work on or before October 31, 2019. Expected publication of this Special Issue is in the first half of 2020.

References Maznevski, M. (2014). Managing Deep Intercultural Training Exercises. AIB Insights, 14(2), 7. Meyer, K. E. (2017). International business in an era of anti-globalization. Multinational Business Review, 25(2), 78-90. Peterson, M. F. (2014). Stepping on cultural and religious assumptions. AIB Insights, 14(2), 4. Rasche, A., & Gilbert, D. U. (2015). Decoupling responsible management education: Why business schools may not walk their talk. Journal of Management Inquiry, 24(3), 239-252. Taras, V., & Gonzalez-Perez, M. A. (Eds.). (2015). The Palgrave handbook of experiential learning in international business. Palgrave Macmillan.

For Submissions, Ideas And Questions, Please Contact: [email protected] AIB Insights (ISSN: print: 1938-9590; online: 1938-9604) provides an outlet for short, topical, stimulating, and provocative articles. Past copies of AIB Insights can be accessed through the AIB website at http://aib.msu.edu/publications/insights

AIB Insights Editorial Team John Mezias, Editor William Newburry, Associate Editor Anne Hoekman, Managing Editor Chei Hwee Chua, Communications Officer

Vol. 19, no. 3, 2019 23 Editorial Policy

AIB Insights is the Academy of International Business official the Journal of International Business Studies. The publication publication that provides an outlet for short (around 2,500 is intended to inform, educate, and enlighten readers with words), interesting, topical, current and thought-provoking state of the art information on a topic with a broad appeal to articles. the profession. Acceptable articles may fall into one of several categories: Articles can discuss theoretical, empirical, practical, or peda- gogical issues affecting the international business community. 1. Research insights from authors’ stream of research The publication seeks articles that have an international busi- 2. Current issues affecting international business as ness and cross-disciplinary orientation with IB researchers and a discipline faculty as the intended primary audience. 3. The use of technology in international business 4. The evolving nature and evolution of the International Authors should highlight the insight of their article in the Business department/function/discipline first paragraph. They should prompt the reader to think about 5. Internationalization of the curriculum international business and international business teaching/ 6. Innovative approaches to teaching international learning in new ways. Articles sought should be grounded in business research, but presented in a readable and accessible format. 7. Teaching pedagogy and content articles 8. Other topics of interest Articles written for AIB Insights should be free of professional jargon and technical terms, light on references, but heavy on Please include a cover page with all the authors’ contact insight from the authors’ experiences and research. Termi- details (email, university affiliation, full address, telephone, nology should be defined if it is not in the common domain fax if used). The second page should include 50-75 word of the IB literature. Authors should remember the intended biographies of participating authors. Articles submitted audience of the publication and write accordingly. A regres- should follow JIBS referencing style for consistency. AIB sion equation, a correlation matrix, a table or a graph needed Insights is published four times a year and available in print to support a point may be included. and digital format. Please submit your manuscript via our online manuscript submission system at aib.msu.edu/ AIB Insights does not seek the kind of articles that are intend- publications/insights. For any questions, please contact the ed for traditional journals in international business, such as AIB Insights editorial team via email at [email protected]. Submit your manuscript at aib.msu.edu/publications/insights

AIB Insights (ISSN: print 1938-9590; online: 1938-9604) is an official AIB Insights Editorial Team AIB publication and provides an outlet for short, topical, stimulating, John Mezias, Ph.D., Editor and provocative articles. Past issues of AIB Insights can be accessed at University of Miami, USA aib.msu.edu/publications/insights. William Newburry, Ph.D., Associate Editor AIB Insights is jointly published with the AIB Newsletter by the Florida International University, USA Academy of International Business Secretariat. For more information, Chei Hwee Chua, Communications Director contact the AIB Media and Communications Coordinator at: University of Miami, USA Anne Hoekman, Managing Editor Academy of International Business Michigan State University, USA Michigan State University Past Editors: Eppley Center Daniel Rottig, Editor (2016-18) & 645 N Shaw Ln, Rm 7 Associate Editor (2013-15) East Lansing, MI 48824 USA Romie Littrell, Editor (2013-15) Tel: +1-517-432-1452 Ilan Alon, Editor (2009-12) Fax: +1-517-432-1009 Tamir Agmon, Editor (2004-08) Copyright © 2019 Academy Email: [email protected] Betty Jane Punnett, Founding Editor (2001-03) of International Business

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