FOREIGN DIRECT INVESTMENT AND PERFORMANCE OF JAPANESE

SUBSIDIARIES IN MALAYSIABY :

Norhidayah MohamadAichi University and Universiti Teknikal Malaysia

MelakaAnd

Yasuo Hoshino Aichi University and University of Tsukuba, Japan

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Introduction Japan and Malaysia have already cultivated positive and agreeable

partnership as well as strong bilateral trade and investment linkages for a long time. The Look East Policy of Malaysia and direct investment of the Japanese firms in Malaysia contribute to the close relationship between the two countries. The accumulated investment and transfer of technology by the Japanese firms is an encouraging basis for further development of both countries in the future.

During the last eight years, the Malaysia-Japan Economic Partnership investment initiative has facilitated active discussion and cooperation on ways to improve the climate for foreign direct investment (FDI) in Malaysia and in the Japan. Therefore, foreign investment in Malaysia has risen steadily in recent years.

Even though the background is as such, we have only a little knowledge and a few relevant empirical researches on foreign companies in Malaysia. When Malaysia makes it much easier for foreign companies to enter into Malaysia, and also when foreign companies respond to it in a very encouraging manner, it is strategically important and useful to know more about them. While it is essential to develop more alternative models, theories and frameworks, it is worth to have more empirical research in order to understand how the systems function in the market.

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ObjectivesDetermine main factors that contribute to the

Japanese MNCs subsidiaries performance in developing country

Analyze the relationship between special characteristics (entry mode, dimensional aspects, & international experience) and Japanese MNCs subsidiaries performance in Malaysia

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Literature Review

Current situation Entry Mode

Dimensional aspects

& International experience

Performance

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Current SituationTo date, extensive research on the effects of FDI has not

provided a clear and conclusive picture on the impact of Japanese firms on local host economies.

Whereas some studies seem to conclude that, the FDI has played an important role in a host country’s development and others do not (Giroud, 2000).

According to Kumarasinghe & Hoshino (2008), there is still insufficient research on Japanese MNCs activities in the Pacific region.

In a case of Malaysia, Japanese MNCs emerged as the leading direct investment in Malaysia with RM 32.1 billion and RM 33.7 billion in year 2003 and 2004 respectively (Department of Statistics, 2008).

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Entry ModeEntry mode is one of the most important strategic decisions

made by a firm seeking to enter a foreign market. Parallel to its importance, it has been the third most researched field in International management

Author Finding

 Woodcock et al. (1994)  sole ownership have significantly better performed than joint ventures

Nitsch et al. (1996)

 sole owned subsidiaries performed better than joint ventures

 Siripaisalpipat and Hoshino (2000)

sole ownership contribute to the high profitability

 Yoshihara’s (1994)  joint venture had statistically significant results of higher profitability than sole ownership firms

Hoshino and Takabayashi (1998)  

 joint ventures had significantly higher performance compared to sole ownership firms

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Dimensional aspects & International experiencePast researches have shown that the size of a firm has an

important effect on subsidiary’s performance (Mansour & Hoshino, 2001; Isobe, 1998; Freeman, Carroll, & Hannan, 1983).

However, in the study on the factors influencing the performance of Japanese FDI in Thailand found that firm size is negatively associated with profitability (Siripaisalpipat & Hoshino, 1999).

In this research, the dimensional aspects measured by the parent's equity ratio, ROE, average age, net sales/employees, profit/net sales, depreciation expenditure/net sales, R&D/net sales and growth average.

International experience increases the possibility of firms committing a large amount of resources to foreign market (Medcof, 2001). On the other hand, international experience provided firms with important knowledge about customer, markets, cultures and government that encourage future expansion (Hill, Hwang, & Kim, 1990). Thus, in this research we used subsidiary’s age and parent’s overseas sales as the proxy for international experience measurement.

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PerformanceIt is crucial to examine the performance of Japan MNCs

subsidiaries in host country to remain the investment and at the same time enhancing the regional competitive advantages.

Previous research constructed the performance based on the top Japanese manager's assessment about his subsidiary financial performance.

There are three main arguments that support this type of measure. As quoted by Cespedes & Hoshino (2001): three conditions enable this measurement.

1. Where available, financial measures of performance are not directly comparable across industries and countries with different accounting systems and customs (Brown, Soybel, & Stickney, 1994).

2. Because the survey respondent is the top Japanese Manager in each subsidiary, it expected that each manager report the subsidiary performance from a similar reference point (Makino & Delios, 1996). And

3. Managers' perceptions of performance have been demonstrated to be correlated with objective financial measures (Geringer & Herbert, 1991) .

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Research Framework

MNCs Subsidiary

Performance

Independent Variables

Dependent Variables

FDI Entry mode- Wholly owned subsidiaries- Joint Venture

Dimensional Aspect

Parent equity ratio, Parent ROE,Parent Average Age Parent Net Sales/EmployeesParent Profit/Net SalesParent Depreciation Expenditure/Net SalesParent R&D/Net SalesParent Growth Average

International Experience- The age of the subsidiary- Parent overseas sales

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Research Methodology Analysis Unit

Japanese MNCs subsidiaries in Malaysia

Source of Data• Nikkei Zaimu Database (Nikkei Inc., 2005-2009) and • eol DB Tower online services (financial report)

Data Sample270 Japanese MNCs subsidiaries (2005-2009)

Data Analysis Method• Pearson Chi-Square and Levene’s test• Binary logistic regression using SPSS 18.0 software

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Analysis and

Findings

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Hypothesis 1: MNCs subsidiaries entering through wholly owned investments are more likely to perform better than those entering through joint venture

Hence, the first hypothesis that stated, “MNCs subsidiaries entering through wholly owned investments are more likely to perform better than those entering through joint venture” is rejected because significant value was > 0.05.

OwnershipPerformance

Performance Mean No. of cases1

Loss2

Breakeven3

GainWholly 4.2% 7.7% 31.8% 2.63 114Joint Venture 2.7% 12.2% 41.4% 2.69 147Totals 6.9% 19.9% 73.2% 261

Test SignificantPearson Chi-Square 0.246

Levene’s Test 0.073

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Hypothesis 2: The larger the MNCs, the better subsidiary’s performance.

*significant at the 5% level

In Malaysia case, dimensional aspect in terms of Net Sales/Employees and Profit/ Net Sales have a positive sign and significant for year 2005-2009.

However, in terms of parent’s R&D/ Net Sales show a negative sign and significant for year 2005-2009.

This provides support for the hypothesis 2 state that the larger MNCs, the better subsidiary performance.

Independent Variables Manufacturing ServiceIncluded Model 1 Model 2 Model 1 Model 2

Constant 13.595(12.495)

14.791(12.896)

-1.251(1.840)

-0.750(1.856)

Parent Overseas Sales -3.950**(1.735)

-4.038**(1.749)

Parent Net Sales/Employee 0.022**(0.010)

0.023**(0.010)

Parent Profit/Net Sales 0.961**(0.371)

0.980**(0.384)

Parent ROE -0.116(0.066)

-0.119(0.069)

0.059(0.060)

0.053(0.112)

Parent Depreciation Expenditure/ Net Sales

1.206(0.723)

1.214(0.702)

Parent R&D/Net Sales -1.734**(0.599)

-1.751**(0.587)

Subsidiary Age 0.566**(0.194)

0.587**(0.203)

0.272**(0.135)

0.201(0.145)

Parent Equity Ratio 0.080(0.057)

0.074(0.056)

Parent Age -0.319(0.325)

-0.339(0.335)

Parent Growth Revenue Average

0.009(0.140)

0.013(0.142)

Entry Mode (Wholly owned) - -0.473

(1.282)17.702

(5949.585)Model Indices

Number of cases 124 124 71 71Log likelihood 25.969 25.832 18.495 16.670Classification result 97.6% 98.4% 97.2% 97.2%Chi-square 43.766** 41.546** 9.058 7.906

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Hypothesis 3: The greater the international experience of MNCs, the better performance of their subsidiary.

Thus, we can conclude that, there was positive correlation between age and performance and therefore support the third hypothesis.

Independent Variables Manufacturing ServiceIncluded Model 1 Model 2 Model 1 Model 2

Constant 13.595(12.495)

14.791(12.896)

-1.251(1.840)

-0.750(1.856)

Parent Overseas Sales -3.950**(1.735)

-4.038**(1.749)

Parent Net Sales/Employee 0.022**(0.010)

0.023**(0.010)

Profit/Net Sales 0.961**(0.371)

0.980**(0.384)

Parent ROE -0.116(0.066)

-0.119(0.069)

0.059(0.060)

0.053(0.112)

Parent Depreciation Expenditure/ Net Sales

1.206(0.723)

1.214(0.702)

Parent R&D/Net Sales -1.734**(0.599)

-1.751**(0.587)

Subsidiary Age 0.566**(0.194)

0.587**(0.203)

0.272**(0.135)

0.201(0.145)

Parent Equity Ratio 0.080(0.057)

0.074(0.056)

Parent Age -0.319(0.325)

-0.339(0.335)

Parent Growth Revenue Average

0.009(0.140)

0.013(0.142)

Entry Mode (Wholly owned) - -0.473

(1.282)17.702

(5949.585)Model Indices

Number of cases 124 124 71 71Log likelihood 25.969 25.832 18.495 16.670Classification result 97.6% 98.4% 97.2% 97.2%Chi-square 43.766** 41.546** 9.058 7.906

*significant at the 5% level

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Multinomial logistic regression

Intercept

Parent overseas

Sales

Parent Net

sales/ Emplo

yees

Parent Profit to

Net Sales

Parent ROE

Parent Depreciation Expenditure/

Net Sales

R&D/Net

SalesSub Age

Equity Ratio

Parent Age

Growth Revenue Average

Entry Mode

WhollyJoint venture

Model 1

Gain/Loss

Breakeven/Loss

6.689(9.004)0.521

(9.743)

-1.656(0.879)

-2.214**(0.923)

0.008(0.005)0.008

(0.005)

0.420**(0.157)-0.015(0.212)

-0.043(0.037)0.092

(0.075)

0.389(0.409)0.747

(0.422)

-0.659**(0.296)0.477

(0.305)

0.304**(0.094)0.268**(0.099)

0.024(0.034)0.023

(0.034)

-0.155(0.219)0.012

(0.236)

0.114(0.100)-0.019(0.106)

- -

Model 2

Gain/Loss

Breakeven/Loss

4.595(9.101)-1.867(9.978)

-2.389(1.297)

-3.041**(1.342)

0.008(0.005)0.007

(0.005)

0.426**(0.169)0.026

(0.224)

-0.048(0.040)0.078

(0.079)

0.552(0.462)0.874

(0.476)

-0.781**(0.355)-0.671(0.375)

0.351**(0.130)0.268

(0.138)

0.028(0.034)0.028

(0.034)

-0.064(0.248)0.162

(0.269)

0.083(0.102)-0.043(0.112)

1.118(1.106)0.111

(1.212)

00

Note:** significant at the 5% level.

• Multinomial logistic regression capable to provides detail information by observing the influence of each independent variable to subsidiary performance.

• Previous analysis using binary logistic shows that “subsidiary age” has positive impact in subsidiary performance. With multinomial logistic regression, it shows that “subsidiary age” has positive influence generating a “gain” instead of a “loss”.

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Conclusion In order to sustain competitiveness in the foreign market, it is essential

for companies to have enough resources and flexibility while deciding which mode of entry to use for penetrating the foreign market.

This study examines the relation between internalization advantages of Japanese parent companies and the attained performance of their subsidiaries. Based on the information contained in “Toyo Keizai Data Bank 2005-2009" and eol DB Tower services (financial report), we select 270 cases to determine the relationship between entry mode, dimensional aspects and international experience with subsidiary performance.

Dependent variable was measure using three categories (gain, breakeven and loss). While ten different characteristics of parent and subsidiary companies used as proxies for independent variables. A binary logistic regression model applied in this research. We also used correlation analysis to identify if there were any correlations among the independent variables that could threaten the stability of the binary model.

The five significant variables were subsidiary age, parent’s net sales/employee and profit/ net sales with p value less than 0.05 and positively associated with the subsidiary performance. Moreover, parent’s R&D/net sales and overseas sales show the significant value but negatively associated with subsidiary performance.

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References Brown, P. R., Soybel, V. E., & Stickney, C. P. (1994). Comparing U.S. and Japanese corporate level operating

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Freeman, J., Carroll, G., & Hannan, M. (1983). The liability of newness: Age dependency in organizational death rates. American Sociological Review , 48 (5), 692-710.

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Mansour, M., & Hoshino, Y. (2001). Firm-specific factors, shareholding structure and corporate performance of the Japanese manufacturing investment in Europe. Japanese Journal of Administrative Science , 14 (3), 117-127.

Nitsch, D., Beamish, P., & Makino, S. (1996). Entry mode and performance of Japanese FDI in western Europe. Management International Review , 36 (1), 27-43.

Siripaisalpipat, P., & Hoshino, Y. (2000). Firm-specific advantages, entry mode and performance of Japanese FDI in Thailand. Japan and the World Economy , 12, 33-48.

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List of Companies

List of Companies.docx

The End &

Thank You