Impact of ownership and location factors on

service multinationals’ internalisation

Group: 11
Index:
1. Introduction
2. Theory and hypotheses
3. Limitation and future studies
4. Conclusion
Introduction:
This research examines the
impact of ownership and location
factors on the extent of
internalisation for service
multinationals seeking to enter
into the Czech Republic, Hungary,
and Poland
Theory and hypotheses:
Theory:

- Internalisation theory demonstrates that the multinational enterprise is an

organisation that uses its internal market to produce and distribute products
and services in an efficient manner in situations where a regular external
market fails (Rugman, 1982).

- Occurs when the expected net present value of an investment project is

positive and greater than those of alternative modes.
Theory and hypotheses:
- It is more efficient for a firm to create and use an internal market, rather than
incur the prohibitive transaction costs of an outside market (Coase,1937)

- Ownership and location factors make foreign activities profitable, and the
internalisation advantages make an investment the best way to exploit these
activities => create an FDI opportunity
Theory and hypotheses:
Theory:

The eclectic paradigm (Dunning, 1976): one of the major schools of FDI theory,
as background to hypotheses development.

OLI framework (Dunning) provides a way of encapsulating and harmonising

most schools of FDI theory.

Dunning’s paradigm treats FDI decisions as a product of three types of factors:

ownership, location, and internalisation (OLI)
Theory and hypotheses:
Hypothesis 1 (Ownership advantages-Firm size)

There is a positive relationship between the firm size and the degree of
internalisation, ceteris paribus(All else unchanged)

Reasons:
1. Large firms are more capable of absorbing cost and risk involved
2. Collect market intelligence more easily than small firms => Quicker to
determine profitable opportunities
3. Firm size represent financial and managerial resources => Service firm with
larger resources base will opt for higher degree of internalisation by going for
more equity-based investment
Theory and hypotheses:
Hypothesis 2 (Ownership advantages-Level of international business activity)

The level of international business activity of the home country will be

positively associated with the degree of internalisation

It’s an a priori hypothesis (Based on theoretical deduction rather than empirical

observation)
Theory and hypotheses:
Reasons:

1. A majority of multinational cooperation have origin in developed countries that possess

high FDI to gross fixed capital formation ratio

2. Outward FDI represents the commitment of resources into a relatively risky and unfamiliar
environment => only countries with necessary resources and liberal economic policies are
willing to be more risk-taking when internationalising => The key is the extent of openness of
the economies

Historically, it has been observed that countries like so will encourage local firms to engage in
international business activities

Thus, an a priori
Theory and hypotheses:
Hypotheses 3:

Higher location advantages will have a positive impact on the degree of

internalisation.

Its reasons are based on:

● Market size

● Market potential

● Foreign business penetration in the local economy

● Host nation industrial productivity

Theory and hypotheses:
Market size:

Service multinationals are most likely to be involved in countries with large

markets size as measured by population and GDP => Opportunity in emerging
markets and already existing large markets

Market potential:

Studies have hypothesised a positive relationship between the growth prospects in

foreign environment and firm’s willingness to commit Its financial resources
(Agarwal & Ramaswami, 1992; Buckley & Casson, 1998). Past research indicates
that equity modes of entry are preferred in high growth markets (Kwon & Konopa,
1993; Nakos & Brouthers, 2002; Pan & Tse, 2000) => Based on these studies,
service multinationals perceiving high growth potential in a market will tend to
prefer higher degree of equity investment
Theory and hypotheses:
Foreign business penetration in the local economy:

Economies that are more open to international investment and trade should be a greater
incidence of international business activities( Dunning & McQueen 1981). Firms would choose
higher control and equity modes in nations characterised by higher penetration of FDI. The
penetration of FDI into a host nation is operationalised by the ratio of FDI to GDP => We
suggest that the rising levels of equity and control is positively associated with the level of
penetration of FDI into a country

Industrial activity:

Several studies reveal that lately multinational corporations have gone abroad for ‘resource-
seeking’ reasons (Dunning, 1993). This resource-seeking FDI is usually undertaken by
manufacturing and service multinational enterprises from countries with high real labor costs
to supply labor intensive intermediate or final products for both domestic and export
markets. Most of this type of FDI has taken place in developing countries => Hence, industrial
productivity will have a moderate positive impact on the service multinationals propensity to
internalize their foreign operations
Limitation and future studies:
Limitation:

Many types of service firms were included => Heterogeneity

The result can’t be generalised yet and can’t introduce a specific idiosyncrasies in
the model specification

The ease of services to be licensed or franchised - options not consider in this

study - may have contributed toward the small explanatory power of the empirical
model
Limitation and future studies:
This study examined only the entry of a firm, not its success or failure

Many small and privately held firms were excluded

Only a few of Dunning’s OLI ownership and location-based advantages were used

Managerial willingness and perception to invest abroad were not examined in this
study

Future studies:

All the mentioned above are sources for further studies

Conclusion:
The knowledge gained by this research can be applied on a smaller scale again on:
● Politically closed countries such as North Korea and Cuba
● Countries that are closed to FDI due to war (parts of Yugoslavia, Iraq)
● Countries that are not technically closed to FDI but are very unattractive to
investment(African drought countries, extremely poor sub-Saharan Africa)

Managers of multinational enterprise can use their knowledge garnered from their
experiences and this research in central and eastern Europe to other parts of the
world

This study attempt to investigate some of the possible explanatory variables for
service FDI into a relatively untouched region of the world. These data presented
by Central and Eastern Europe provided us the opportunity to test theories in an
environment mostly uninfluenced by past business practices and business history.
References
Sumit K. Kundu, Vikas Kumar & Susan D. Peters (2008): Impact of ownership
and location factors on service multinationals' internalisation, The Service
Industries Journal, 28:5, 567-580

http://dx.doi.org/10.1080/02642060801988068
Thanks for your attention