competitive drivers and international plant configuration strategies

Strategic Management JournalStrat. Mgmt. J., 26: 577–593 (2005)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.466

COMPETITIVE DRIVERS AND INTERNATIONALPLANT CONFIGURATION STRATEGIES: APRODUCT-LEVEL TEST

RENE BELDERBOS1* and LEO SLEUWAEGEN2

1 Katholieke Universiteit, Leuven, Belgium; and Technische Universiteit Eindhoven,Eindhoven, The Netherlands2 Vlerick Leuven Gent Management School, Leuven, Belgium; Katholieke Universiteit,Leuven, Belgium; and Erasmus Universiteit, Rotterdam, The Netherlands

We analyze the determinants of the decision to invest abroad and the choice of spatial config-urations of overseas plants for 120 Japanese firms active in 36 well-defined electronic productmarkets. We find that key competitive drivers at the firm and industry levels have a criticalimpact on the choice between alternative international plant configurations. Regional config-urations focused on Asia are chosen by firms with weaker competitiveness for products withestablished manufacturing technologies. Plant configurations focused on the United States andthe European Union are chosen by technology-intensive firms facing competitive threats in for-eign markets. Global configurations are chosen by firms with a strong competitive position in theJapanese and world market for their core product businesses and are more common in the caseof strong oligopolistic rivalry between Japanese firms. Copyright 2005 John Wiley & Sons,Ltd.

INTRODUCTION

Since the mid 1980s it has been argued that theincreasingly global character of competition inindustries is pushing multinational firms to con-figure and coordinate manufacturing activities ona global basis. Leading scholars such as Porter(1986), Ohmae (1985), and Bartlett and Ghoshal(1987) saw an emerging trend toward networksof decentralized but interdependent plants. Decen-tralization was seen as a necessity because ofstrong swings in exchange rates, rising protec-tionism, and a growing need to respond quicklyto changing and differentiated consumer demands.Real option theory has been shown to be able toput a value on the operational flexibility gainedthrough operating a global manufacturing network

Keywords: foreign direct investment; plant location; mul-tinational firms∗ Correspondence to: Rene Belderbos, Faculty of Economics andApplied Economics, Katholieke Universiteit Leuven, Naamses-traat 69, B-3000 Leuven, Belgium.E-mail: [email protected]

with establishments in different currency areas(Kogut and Kulatilaka, 1994). Global coordina-tion, moreover, was to allow firms to benefitfrom major scale and scope economies associ-ated with shortened product cycles and increas-ing development costs. A presence in major mar-kets reduces the lag between the introduction ofnew and improved products between the homeand foreign markets, necessary to increase rev-enues within a shorter time frame. Kalish, Maha-jan, and Muller (1995) derive that the simulta-neous introduction of new products in domesticand foreign markets is more likely to be preferredin the case of short product cycles in combina-tion with large and growing foreign markets andstrong foreign competition. Moreover, increasingglobal competition as well as the desire of firmsto acquire foreign technology are considered asmajor motives why firms are spreading their man-ufacturing operations across countries (Bartlett andGoshal, 2000).

Although the literature has suggested a trendtoward global presence and global manufacturing

Copyright 2005 John Wiley & Sons, Ltd. Received 22 January 2001Final revision received 28 December 2004

578 R. Belderbos and L. Sleuwaegen

strategies, there has been very little empiricaltesting of the actual importance and the condi-tions under which global manufacturing occurs. Inthis paper, we posit that the choice for specificinternational plant configurations is determined bycompetitive drivers at the firm and industry levels,in interaction with locational pull factors. Moreprecisely, we develop and test hypotheses con-cerning the impact of the domestic and globalcompetitive environment and the technological anddomestic market position of the firm, as these areconsidered key drivers behind internationalizationstrategies (Yip, 1995; Bartlett and Ghoshal, 2000).We consider the internationalization decision andthe international plant configuration decisions in anintegrated empirical model, distinguishing betweenfactors driving—or pushing—the firm to investabroad, competitive drivers pushing for specificplant configurations, and locational factors pullingthe firm to invest in a particular region or setof regions. Simultaneously analyzing the interna-tionalization strategy and location strategy reflectsthe important strategic role overseas subsidiariescan play (Ferdows, 1997; Bartmess, 1994) and thenotion that global location decisions are an essen-tial part of the wider strategy of the firm (e.g.,McCormack, Newman, and Rosenfield, 1997).

Our analysis broadens the scope of previousempirical work that has limited analysis to loca-tion decisions for plants in a specific country orregion taking the foreign direct investment deci-sion as given (Mayer and Mucchielli, 2002; Head,Ries, and Swenson, 1995; Devereux and Grif-fith, 1998; Belderbos and Carree, 2002) and stud-ies that have analyzed the foreign direct invest-ment decision for a specific host country only(e.g., Hennart and Park, 1994; Kogut and Chang,1996; Chang, 1995; Chung and Alcacer, 2002).Empirically, we analyze the decisions to investabroad and the choice for global or regionallyfocused international plant configurations by 120Japanese firms active in 36 well-defined prod-uct markets. This finer level of analysis ensuresthat we model investment and plant configura-tion decisions where they are taken: at the busi-ness unit level. It enables us to test for the effectof firm and industry competitive drivers whilecontrolling for regional characteristics that differover product markets, such as market size andtrade protection. The focus on Japanese industryis of interest since Japanese firms’ ‘focus’ strate-gies geared towards serving various developed

markets with relatively undifferentiated productsand protectionist responses in the European Unionand the United States made them early adoptersof global manufacturing strategies (Ohmae, 1985;Bartlett and Ghoshal, 2000). The electronics indus-try is a suitable setting since it includes technology-intensive product markets and competition in thisindustry plays out on a global scale.

The next section derives the hypotheses concern-ing the relationship between competitive driversand the choice for international plant configura-tions. We then describe the empirical methodologyand the dataset and present the empirical results.We conclude with a discussion of the results andsuggestions for further research.

INTERNATIONAL PLANT CONFIGU-RATION CHOICE: THEORY ANDHYPOTHESES

The various theories of foreign direct investment,e.g., internalization theory (e.g., Caves, 1996; Dun-ning, 1993), resource-based theory (Chang, 1995;Delios and Beamish, 1999; Song, 2002), interna-tional product cycle theory (Vernon, 1979; Kalishet al., 1995), the theory of oligopolistic interaction(Knickerbocker, 1973; Yu and Ito, 1988), and thestage theory of internationalization (Johanson andVahlne, 1977), are well established in the litera-ture. They can be considered partly overlappingbut having complementary relevance in explain-ing foreign investment patterns. They have beentested in various empirical settings, but in deter-mining foreign investment decisions in specificcountries rather than in a global plant configura-tion setting.1 We draw on these theories to derivehypotheses concerning competitive drivers relatedto domestic and foreign competition, domesticmarket position, and technology intensity expectedto have a discriminating impact on plant configu-ration choices.2

We examine the conditions under which a spe-cific global or regional manufacturing strategyis preferred from the viewpoint of (potential)Japanese multinational firms. Before proceeding

1 See, for example, Hennart and Park (1994), Belderbos andSleuwaegen (1996), Tan and Vertinsky (1996), Kogut and Chang(1991, 1996), Chang (1995), and Song (2002)2 In this, we further elaborate the conceptual frameworks of Root(1987), Yip (1995), and Bartlett and Ghoshal (2000).

Copyright 2005 John Wiley & Sons, Ltd. Strat. Mgmt. J., 26: 577–593 (2005)

International Plant Configuration 579

with hypotheses development it is useful to elab-orate first on the type of plant configurations thatare to be considered. We distinguish three majorforeign plant configurations: (1) Asia-bound con-figurations (foreign manufacturing investment inAsia only); (2) West-bound configurations (for-eign manufacturing investment in the United Statesand/or the European Union but not in Asia);(3) global configurations (foreign manufacturinginvestment in all regions). Hence, we distinguishbetween investments in the two main developedmarkets (the United States and the EuropeanUnion), investments in developing and newlyindustrialized countries attracting a major share ofJapanese investments (Asia), and investments inboth areas. Previous research has shown major dif-ferences in the relationship between technologicaland marketing capabilities of firms and investmentdecisions between Asia on the one hand, and West-ern markets on the other (Belderbos and Sleuwae-gen, 1996; Fukao et al., 1994; Kojima, 1985). Nosubstantial differences have been observed, on theother hand, in investment behavior by Japanesefirms in these latter two developed regions (Belder-bos, 1997; Barrel and Pain, 1999). Hence, in orderto focus on the main differences between configu-rations we treat the European Union and the UnitedStates as one developed region.3

Hypotheses

The theory of the multinational firm suggeststhat only firms with a competitive advantagebased on proprietary assets such as technologicalstrength, brand names, or manufacturing exper-tise will be able to invest abroad and competesuccessfully (e.g., Caves, 1996; Dunning, 1993).In order to reduce market transaction costs, thecoordination of activities related to the genera-tion and exploitation of the proprietary assets isinternalized within the firm through foreign direct

3 We explored the determinants of more narrowly defined con-figuration choices by taking the European Union and the UnitedStates as separate configurations, but found that the determinantsof these configuration choices did not differ. Fully separatingthe European Union and the United States out of the global andWest-bound configurations would introduce six additional con-figurations and increase the number of coefficients by 102. Wenote that aggregating E.U. and U.S. investment does not implythat we do not incorporate the different locational characteristicsof the United States and the European Union, but rather that weaggregate over such locational factors, assuming that the formof the investment relationship is the same for the two regions.

investments (Hennart, 1982). Mitchell, Shaver,and Yeung (1992) and Rangan and Drummond(2004) found domestic market shares to be closelyrelated to foreign market success and Caves (1996:58) suggested that the propensity to invest abroadrises monotonously with domestic market share.With higher market shares, further domestic salesincreases are more likely to force a competi-tive response by rival firms, reducing the per-ceived price elasticity in the domestic market. Thisreduces the marginal return on domestic expan-sion relative to the marginal return on expan-sion to serve overseas markets and encouragesforeign investment. Similarly, Chang (1995) findsthat Japanese firms are more likely to engage inforeign investment for product lines in which theypossess the strongest competitive advantage andface the lowest risk of overseas business failure.

On the other hand, previous studies on for-eign investment and export decisions have sug-gested that domestic market leaders are less likelyto expand abroad compared with ‘follower’ firmswith intermediate market shares (e.g., Mascaren-has, 1986; Ito and Pucik, 1993; Hennart and Park,1994). Given a dominant presence of the mar-ket leader(s), follower firms face the strongestconstraints on domestic expansion and can onlyreach a larger scale of operations in case theylook for expansion abroad in markets with simi-lar demand characteristics. Empirical evidence hassuggested that intermediate positions in the domes-tic market are associated most strongly with for-eign investment in other developed markets (Itoand Pucik, 1993; Hennart and Park, 1994). Inthe context of plant configuration decisions, itfollows that this pattern of non-dominant firmexpansion abroad is most likely to hold in thecase of expansion in regions with developed mar-kets such as the United States and the Euro-pean Union. Given the more limited resourcesand scale of non-dominant firms, such firms arelikely to choose a focused geographic expansionstrategy. Investments in developed markets withsimilar demand characteristics provide the largestmarginal benefit and may in addition allow acqui-sition and development of additional resources(e.g., through takeovers). Dominant firms, on theother hand, have the resources and competitive-ness to expand in all regions and to benefit fromthe scale economies of a global plant configura-tion. The least competitive firms with the smallestmarket shares in the domestic market are likely



to lack the resources to invest in developed mar-kets but such resources are less of a prerequisiteto compete in newly industrializing or developingcountries in Asia (Fukao et al., 1994; Belderbosand Sleuwaegen, 1996). Hence, given the decisionto internationalize production, firms with weakerpositions in the Japanese market are most likelyto opt for a purely cost-based internationaliza-tion strategy focused on an Asia-bound configu-ration.

Hypothesis 1: The stronger the domestic marketposition of the firm, the more likely it is thatthe firm chooses a global plant configuration.A West-bound configuration is most likely if thefirm is strongly positioned but non-dominant inthe Japanese market. Asia-bound configurationsare predominantly chosen by firms without astrong market position.

In addition to the firm’s position in the homemarket, the position of the home industry on worldmarkets is an important driver of global plantconfiguration decisions. Internalization theory ofthe multinational firm suggests that foreign directinvestment is more prevalent in industries possess-ing more valuable intangible assets and greaterglobal competitiveness (e.g., Hennart, 1982; Dun-ning, 1993). The greater the industry’s world mar-ket share, the greater its overseas market pene-tration and the more likely that scale economieswarrant overseas production. Such competitivenessand scale at the industry level leading to greatermarket penetration at the world level is most likelyto enable investments in global plant configura-tions. On the other hand, dominance of the worldindustry is not necessarily the strongest driver ofa West-bound configuration. Caves (1996), Kalishet al. (1995), and Motta (1992) have shown thatit is the credible threat by foreign firms to cap-ture market share in overseas markets that mayprompt firms to engage in defensive investmentsabroad. Foreign investment may serve as a strate-gic commitment to increase market presence anddislodge efforts by foreign competitors to pene-trate the market. It may also facilitate adaptationof products to local consumer demand, increasedbrand recognition, and goodwill among foreignconsumers, and enable quicker responses to actionsof local competitors. These considerations play thelargest role in the United States and the Euro-pean Union, where rival firms pose the strongest

threats and where the largest markets are at stake.Hence, the need for defensive investments mayfavor Japanese investments in the European Unionand United States in industries where Japanesefirms hold intermediate positions rather than adominant world market share.

Hypothesis 2: The stronger the position of Japa-nese industry in the world market, the morelikely it is that a global plant configurationis chosen. A West-bound plant configuration ismost likely in the case of competitive threatsfrom local firms and hence an intermediate posi-tion of Japanese industry in the world market.Asia-bound configurations are mostly associatedwith a weak international position of Japaneseindustry.

The relationship between foreign investment anddomestic industry-wide competition has been thesubject of research since the seminal work ofKnickerbocker (1973). Knickerbocker tested thehypothesis that in loose-knit oligopolies firms rec-ognize interdependencies with their oligopolisticrivals and follow these firms as soon as theyexpand abroad in order to avoid a potential weak-ening competitive position in foreign as well asdomestic markets. In contrast, in tight oligopoliescharacterized by the highest concentration rates,firms are more likely to invest abroad in a coor-dinated way that helps to sustain the collusiveequilibrium from which they benefit. The hypoth-esis that in loose oligopolies rivalry between firmsincreases the occurrence and speed of foreignexpansion has been supported by various empiricalstudies of foreign investments in individual coun-try settings (Knickerbocker, 1973; Flowers, 1976;Caves, Porter, and Spence, 1980; Yu and Ito, 1988;Chang, 1995; Kinoshita and Mody, 1997). Thiskind of competitive interaction implies a strategicrole of foreign affiliates, fighting competitive bat-tles with rivals to the benefit of the corporationbut often sacrificing affiliate profits. It thereforerequires that firms exert control over their over-seas subsidiaries to coordinate global competitiveinteraction and to align incentive systems (Root,1987; Kim and Hwang, 1992). A presence in allpotentially attractive regions increases the num-ber of strategic options for a firm to increase itscompetitiveness vis-a-vis rivals. Once a firm hasestablished an affiliate in a new location, other



firms are likely to follow to sustain the exist-ing competitive equilibrium. Competitive inter-action in loose oligopolies hence involves imi-tative investment behavior in multiple locations,pushing towards global manufacturing configura-tions.

Hypothesis 3: A choice for a global manufac-turing configuration is more likely in the casewhere the product market in Japan is looselyoligopolistic and characterized by strong com-petitive interaction.

Besides a firm’s competitiveness and market posi-tion in different product lines, the overall posses-sion of intangible technological assets is expectedto allow for successful overseas manufacturing(e.g., Caves, 1996; Hennart, 1982). Competitive-ness expressed as high domestic market sharesmay be based on the repeated introduction ofinnovative products, but also on brand image inthe domestic market and investments in domesticdistribution networks. Since technological advan-tages generally are more susceptible to transferabroad than marketing advantages (e.g., Hennartand Park, 1994; Kimura, 1989), innovative firmsare expected to have a higher propensity to investabroad. This factor is most crucial if firms com-pete in developed markets and require state ofthe art technology to fend off local competitors.At the same time, firms also locate productionin advanced countries to benefit from technolog-ical spillovers (Kogut and Chang, 1991) and tosource local technology rather than transfer tech-nologies from Japan. The spillover argument ismore important for firms with a strong absorp-tive capacity, which is reflected in their tech-nological intensity (Veugelers, 1997; Cohen andLevinthal, 1990). Scope for such spillovers is byfar the largest in the developed markets of theUnited States and the European Union. In addi-tion, considering that technology-intensive firmsuse relatively more highly skilled labor and R&Dpersonnel, they will have a greater preference formanufacturing in locations with a skilled work-force and a developed technological infrastruc-ture.

Hypothesis 4: Technology-intensive firms aremore likely to choose a West-bound configura-tion, ceteris paribus.

EMPIRICAL METHODOLOGYAND DATA

In past research the decision to invest in a particularregion has often been narrowed down to a com-parison of conditions in the home country vs.those prevailing in that particular country or regionwithout considering alternative configurations. Inrefining the analysis to foreign investments at theproduct level considering global or regional plantconfiguration strategies, we adopt a more com-prehensive empirical model. We model the prob-ability that a certain plant configuration is cho-sen as the product of (1) the probability to investabroad and (2) the probability that the plant con-figuration is chosen conditional on a positive inter-nationalization decision. This allows us to dif-ferentiate between key drivers pushing firms toinvest abroad, and the key competitive driversdetermining the plant configuration decision. Thecorresponding empirical model is the nested logitmodel, which can be derived from spatial config-uration choice models in which firms compare therelative profitability of alternative locations (simi-lar to standard capital budgeting techniques).4 Theforeign investment equation includes, in additionto the firm and industry drivers, a variable rep-resenting the potential profitability of internationalplant configurations, reflecting the composite effectof pull factors such as labor cost advantages andmarket opportunities.

The dataset

We constructed a product-level database of Japa-nese firms’ plant establishments in the UnitedStates, the European Union, and Asia for 36 prod-ucts in the electronics and precision machineryindustries.5 The 36 electronics products are allfinal goods in order to focus on products with

4 Statistically, the nested logit model relaxes the independence ofirrelevant alternatives constraint implicit in a multinomial logitmodel. For details on this, we refer to Belderbos and Sleuwaegen(2003). A similar approach has been used in plant locationmodels distinguishing between countries and regions (Mayer andMucchielli, 1998), where firms consider the decision to investin a country and the attractiveness of the various regions in thecountry where the investment can be located if they select thecountry for investment.5 Included are investments in the ASEAN nations (Indonesia,Malaysia, Thailand, Brunei, Singapore, and Philippines), China,Hong Kong, Taiwan, and South Korea. Other countries in Asia(e.g., India, Vietnam) were also included but recorded few or noinvestments in the 36 industries.



comparable characteristics in terms of marketingchannels and manufacturing organization. Theproducts are defined at the four- or five-digit level,reflecting differences in manufacturing experienceand market share between market segments (e.g.,laptop vs. desktop computers, and LCD televi-sions vs. conventional televisions). For each prod-uct, Japanese manufacturers were identified basedon Japanese electronics industry data (DenshiKeizai Kenkyuujo, 1993; Yano Keizu Kenkyuujo,1989–95). After excluding foreign-owned firmsthis resulted in a comprehensive list of Japaneseproducers for each product. In total, the datasetincludes 120 individual firms, of which 28 areprivately held. The 120 firms on average manufac-tured between four and five products, resulting in atotal number of firm–product combinations of 533.Fifteen observations had to be omitted because nodata were available for the explanatory variables;this reduced the dataset to 518 observations. Thedependent variable was created by determiningwhether the firms had set up manufacturing plantsfor each product (counting plants in operation in1992) in the European Union or United States,and in Asia, using a variety of firm-level datasources. In 266 out of 519 cases foreign invest-ment occurred. In the plant configuration choiceanalysis this gave us 266 decisions each on a set ofthree choice possibilities, and hence 798 observa-tions in the plant configuration stage of the nestedlogit model. Among the different plant configura-tions, the global and Asia-bound configurations aremost common (96 and 93 cases respectively), butthe West-bound configuration is also well repre-sented (84 cases). There are systematic differencesacross products (e.g., with a global configurationdominant in the VTR, CTV, and fax industries) butat the same time instances of substantial variationacross firms within an industry.

Operational measures

We first describe the operational measure of thehypotheses on firm and industry competitivedrivers, after which we discuss the broad setof control variables. The Appendix provides adescription of the variables in addition to themeans and standard deviations.

Market share data (Hypothesis 1) were col-lected for the years 1990–91 primarily from YanoKeizai Kenkyujo (1990–92). We classified firmsinto four groups: those with market shares smaller

than 5 percent, with market shares between 5 and10 percent, with market shares between 10 and20 percent, and with market shares greater than20 percent, respectively. The latter group we con-sider dominant firms; firms with market shareswithin the 10–20 percent range are consideredcompetitive but non-dominant firms. We mea-sure the global competitiveness of Japanese indus-try (Hypothesis 2) by the world market share ofJapanese firms. We collected data on Japaneseindustry’s share of the world market in 1990–92from various sources. Based on the informationavailable, Japanese industry’s world market sharecould be classified as low (<25 percent), interme-diate (25–75 percent), or dominant (>75 percent).6

Based on the market share data of individual firmswe calculated the Herfindahl index in Japan foreach product. We followed Shepherd (1997) indefining a loose oligopoly as an industry with aHerfindahl index greater than 1000 and smallerthan 1800. Loose oligopoly is a dummy variablethat takes the value 1 for such industries and testsHypothesis 3. Technology intensity (Hypothesis 4)is measured as the number of patents in the 5-year period 1989–93 granted to the firm or itssubsidiaries by the U.S. patent office, per 1 billionyen of turnover.7

Control variables: Plant configuration decision

In the plant configuration decision equation, weinclude a number of industry and firm control vari-ables as well as variables indicating the attractive-ness of the different locations/configurations. Weinclude a dummy variable taking 1 if the productunder consideration belongs to a core business ofthe firm. We defined a core product as a productthat is part of a firm’s line of business that rep-resents at least 10 percent of total turnover, basedon information in the firm’s financial reports. Incore businesses, key resources are more likely tounderlie the capabilities of the firm and poten-tial scale economies are more likely to allow a

6 The main method to calculate world market share was to adddata on overseas production by Japanese firms to figures ondomestic production in Japan and to divide this sum by thefigure for world market volume. The calculated world marketshares show low competitiveness in most white goods sectorsand computers but a dominant position in world markets forseveral consumer electronics products (e.g., CD players, VCRs,facsimile machines, cameras).7 See Belderbos (2001) for details on Japanese electronics firms’patenting intensity and a description of the data.



configuration with multiple foreign plants. We alsoinclude a control variable manufacturing experi-ence, the logarithm of the number of years sincethe recorded start of production in Japan for eachproduct. Following Vernon’s (1966, 1979) prod-uct cycle theory, production technologies are moreeasily transferred abroad and adapted to local con-ditions, and foreign locations are more likely tohave cost advantages, if technologies and productsare mature and relatively standardized. This degreeof standardization and maturity of manufacturingtechnology will depend on the degree of manu-facturing experience the firms have obtained inpilot plants and core factories in Japan focused onimproving their technology.8 Firm size may reflectthe ability of a firm to overcome financial barri-ers to invest in multiple foreign countries and toovercome institutional and other barriers to enterforeign markets (Caves, 1996: 59; Belderbos andSleuwaegen, 1996). Firm size is measured as thenatural logarithm of the firm’s turnover.

The plant configuration model also includes aset of location- or configuration-specific charac-teristics, pull factors influencing the profitabilityof particular configurations, and hence the likeli-hood that they are chosen. Import tariffs raise thecost of serving the host country market throughexports from the home country or from export plat-form countries (Smith, 1987), and hence increasethe relative profitability of local manufacturing.Tariffs have been found to significantly affectinward investments in various previous studies(e.g., Belderbos, 1997; Campa, Donnenfeld, andWeber, 1998). We calculated the tariffs that canbe avoided by choosing a specific plant config-uration as weighted averages of the tariff levelsfor each country or region. As weights we usedthe relative size of the countries’ markets for eachproduct. U.S. and E.U. tariffs vary between 2and 10 percent, while average tariffs in East Asiaoften reach higher than 30 percent for productssuch as color televisions, VCRs, and white goods.

8 This may not be a perfect measure of the degree of thetechnological maturity of manufacturing, in particular in the casewhere products were first manufactured outside Japan. We testedwhether manufacturing experience had a systematically strongerimpact for products that were first commercialized in Japan,but found no significantly different impact. In addition, overtime new versions of products may be created that require newmanufacturing technologies (e.g., Baden Fuller and Stopford,1996): this consideration may be less crucial in our analysissince we defined products in the narrowest terms (e.g., threetypes of television are distinguished).

To control for this high variability in tariff ratesand because we expect a larger marginal impactof tariff increases at moderate tariff levels, weinclude the natural logarithm of the average tarifffor the configurations. Besides conventional importduties, Japanese exports to the European Unionand the United States have been affected by vol-untary export restraints and antidumping actions.Both voluntary export restraints and antidumpingactions have previously been found to impact onJapanese investments in the United States and theEuropean Union (e.g., Belderbos, 1997; Kogut andChang, 1991, 1996; Drake and Caves, 1992). Ourantidumping and VERs measure of trade protec-tion takes the value 1 if antidumping or othertrade restrictions have targeted Japanese exports ofthe product to the United States or the EuropeanUnion, and the value 2 if both the United Statesand European Union imposed such measures. Thisreflects that the incentives for trade barrier jumpinginvestment are stronger if both these major marketsare difficult to access through exports from Japan.Market size is an important locational pull fac-tor attracting foreign investment (e.g., Head et al.,1995; Wheeler and Mody, 1992; Mayer and Muc-chielli, 2002). The larger the market, the greater thebenefits of adaptation of products to local marketconditions, which is facilitated by local produc-tion, and the more likely it is that sales levelswarrant the fixed costs of setting up local produc-tion facilities (Buckley and Casson, 1981; Smith,1987; Motta, 1992). Market size is measured as thesize of a region’s product market as a percentageof the ‘Triad’ markets (Western Europe, the UnitedStates, and Japan/East Asia). It measures the rel-ative importance of the foreign markets includedin the plant configuration. Cost reduction is one ofthe possible motivations for foreign direct invest-ment and labor cost has been found to significantlyaffect locational choices of foreign direct invest-ment (e.g., Belderbos and Carree, 2002; Mayerand Mucchielli, 2002; Wheeler and Mody, 1992).We measure labor cost as the unweighted aver-age wage costs per employee paid by Japanesemanufacturing affiliates established in the coun-tries included in the specific configuration, usingdata drawn from a survey among Japanese for-eign affiliates.9 Firms may have obtained diverging

9 This survey was conducted by MITI (1997) in 1995. Althoughthe timing of the measurement of labor cost follows the timingof investment in our analysis, this is not likely to bias our



degrees of experience operating in the differentregions. The more experience a firm has accumu-lated in a region, the lower the perceived risks andinformational costs of entering the region throughdirect investment in manufacturing. Differences inregional experience can orient the firm towardsa configuration building on the strongest regionalexperience and induce firms to expand investmentsin the region (Johanson and Vahlne, 1977). To cap-ture regional experience effects, we include a vari-able internationalization experience, measuring thelogarithm of the number of months since a firm’sfirst establishment of a distribution subsidiary inthe region of the plant configuration. Investmentsin overseas distribution, after-sales service, andmarketing increase sales growth potential, providefeedback on local market and investment condi-tions, and generally serve as a platform for learningabout foreign markets, facilitating expansion intomanufacturing.

Control variables: Foreign investment decision

Conceived theories of foreign direct investment aswell as an abundance of earlier empirical stud-ies have confirmed the impact on the propen-sity to invest abroad of the firm and industrydrivers identified above: the firm’s market sharein Japan, Japanese industry’s world market share,whether the product is considered a core prod-uct for the firm, the technology intensity of thefirm, manufacturing experience, the presence ofoligopolistic rivalry, the international experienceof the firm,10 and firm size. In addition to these, anumber of other factors are included. The growthof the domestic market, the recent growth rate inthe Japanese market (1990–92) for the product,captures that a lack of domestic growth opportu-nities may compel firms to expand abroad (e.g.,Vernon, 1966; Caves, 1996). Finally, we controlfor possible effects of membership of Japanesehorizontal and vertical business groups (keiretsu)

results since firms will to an extent take expected labor costdevelopments into account, and because the differences in laborcosts across industries are likely to be relatively stable.10 International experience here is defined as the logarithm ofthe number of months since the establishment by the firm of itsfirst sales subsidiary in the United States, European Union, orAsia. Empirical studies on foreign investment have confirmedthe positive impact of previous experience in foreign marketson the decision to invest in manufacturing (Davidson, 1980;Hennart and Park, 1994; Belderbos, 1997; Chang, 1995; Kogutand Chang, 1996; Martin and Salomon, 2003).

on investment decisions. Member firms of horizon-tal keiretsu may benefit from information exchangewithin the group on foreign investment risks andlocal conditions (for instance, through informa-tion gathered by the general trading firm) and maybe more able to finance risky foreign investmentprojects (Belderbos and Sleuwaegen, 1996; Chang,1995). In vertical business groups, the presenceof manufacturing networks abroad established by‘core’ firms has been found to positively affectforeign investment decisions by related supplierswithin the group. The latter can benefit from assis-tance, experience, and an exclusive overseas mar-ket provided by the ‘core’ firm (Belderbos andSleuwaegen, 1996; Chang, 1995). Vertical keiretsuis a dummy variable taking the value one if thefirm is listed as a member of one of the largervertical manufacturing groups in Japan. Horizon-tal keiretsu is a similar dummy variable measuringhorizontal keiretsu membership.11

RESULTS

The estimation results are presented in Table 1for the decision to invest abroad and in Table 2for the plant configuration decision conditional ona positive foreign investment decision. We firstdiscuss the results concerning the decision to investabroad.

The estimated coefficients presented in Table 1represent the marginal impact on the odds ratioof the probability of producing abroad relativeto the probability of domestic production only.The model generally performs well, with a pseudoR2 of 0.27 and a correct prediction of foreigninvestment or domestic production in 74 percentof the cases. Most firm and industry drivershave a significant impact on the internationaliza-tion decision, with signs in accordance with con-ceived theory and earlier empirical results. Higherdomestic market shares significantly increase the

11 The pattern of group firms following ‘core’ firms in theirexpansion abroad has been found to induce clusters of keiretsumanufacturing plants abroad (Head Ries and Swenson, 1995;Belderbos and Carree, 2002). However, we do not expect thesesupplier–assembler relationships to play a particularly importantrole in our analysis. Since we focus attention on consumer (final)goods industries, our sample mainly includes assembling firmsand not the typical related suppliers within keiretsu groups thatproduce components for supply to the ‘core’ firm and other groupfirms.



Table 1. Logit model of the internationalization decision

Coefficient t-ratio (asymptotic)

Firm’s domestic market share 5–10% 1.17 3.17∗∗∗

Firm’s domestic market share 10–20% 1.73 4.42∗∗∗

Firm’s domestic market share >20% 2.79 4.80∗∗∗

Japan industry’s world market share >25%, <75% 1.02 2.72∗∗∗

Japan industry’s world market share >75% 0.78 1.91∗

Growth Japanese market −1.44 −2.59∗∗

Manufacturing experience 0.58 2.77∗∗∗

Core product 0.84 3.16∗∗∗

Internationalization experience 0.30 2.90∗∗∗

Loose oligopoly 0.58 2.36∗∗

Technology intensity −0.07 −0.73Firm size −0.08 −0.87Vertical keiretsu 0.20 0.71Horizontal keiretsu −0.31 −1.29Potential profitability of plant configurations 0.32 2.28∗∗

Intercept −5.52 −4.10∗∗∗

Number of observations 519Pseudo R2 0.27Log-likelihood −261.8∗∗∗

% correctly predicted 74

∗ Significantly different from zero at the 10% level; ∗∗ 5% level; ∗∗∗ 1% level. A choice is correctly predictedif the predicted probability is greater than the sample frequency.

probability to invest abroad and foreign invest-ments are also more prevalent in industries inwhich Japanese industry has an intermediate ordominant world market position. Foreign invest-ment is more likely if the Japanese market is nolonger growing or even shrinking, and if firmshave more experience manufacturing the productin Japan. Foreign investment is also more likelyfor core products and by firms with previous inter-national experience in the form of investments innon-manufacturing affiliates abroad. Finally, firmsin loosely knit oligopolistic industries show a sig-nificantly higher probability of investing abroad.The potential profitability of international plantconfigurations, reflecting the composite effect ofpull factors, is also significant and positive.12 Otherfactors, among which are technology intensity,firm size, and keiretsu membership, have no addi-tional significant impact on the internationalizationdecision.

Table 2 contains the results for the plant con-figuration decision, conditional on a decision toinvest abroad. Estimates of the first two sets of

12 This result, and the fact that the coefficient is also significantlysmaller than one at the 1 percent significance level, confirms theappropriateness of the nested logit model, separating the foreigninvestment from the plant configuration decisions. See Belderbosand Sleuwaegen (2003) for further details.

coefficients in Table 2 are the marginal impacton the odds ratio of a Japanese firm choosing aglobal plant configuration as opposed to a West-bound configuration or an Asia-bound configura-tion, respectively. The third set of coefficients rep-resents the marginal impact on the odds ratio ofchoosing a West-bound configuration and not anAsia-bound configuration. The latter coefficientsare equal to the difference between the first andsecond sets of coefficients and are included in thetable to enable direct inspection of the significantdifferences between West- and Asia-bound config-urations. For all location (configuration)-specificvariables one generic coefficient is estimated, butfor each configuration a separate constant term isincluded, capturing fixed effects associated withthat configuration such as geographic distance, thedegree of cultural and economic integration withJapan, and macro-economic factors such as interestrates.13

The empirical model rightly predicts the cho-sen plant configuration in 77 percent of cases andthe pseudo R2 reaches 0.327, which is relatively

13 Given the dummy structure of the model, the estimated con-stant term represents the fixed effect for firms manufacturing anon-core product with a market share smaller than 5 percent inindustries with low Japanese world market shares not character-ized by a loosely oligopolistic structure.



Table 2. Conditional logit model of the choice between international plant configurations

GlobalAsia-bound

GlobalWest-bound

West-boundAsia-bound

Reference state Coeff. t-ratio Coeff. t-ratio Coeff. t-ratio

Intercept −10.10 −3.29∗∗∗ −7.30 −2.85∗∗∗ −2.80 −0.94Competitive driversFirm’s domestic market share 5–10% (H1) 0.76 1.30 0.46 0.80 0.30 0.47Firm’s domestic market share 10–20% (H1) 2.08 3.70∗∗∗ 0.91 1.88∗ 1.17 1.92∗

Firm’s domestic market share >20% (H1) 2.10 3.48∗∗∗ 2.47 3.96∗∗∗ −0.37 −0.52Japan industry’s world market share >25%, <75% (H2) 1.60 2.46∗∗ 0.57 0.73 1.03 1.40Japan industry’s world market share >75% (H2) 2.02 2.62∗∗∗ 2.22 2.56∗∗ −0.21 −0.25Loose oligopoly (H3) 1.26 2.66∗∗∗ 0.79 1.84∗ 0.47 0.99Technology intensity (H4) −0.34 −1.64 −0.43 −2.10∗∗ 0.09 0.46Firm and industry ControlsCore product 1.80 2.85∗∗∗ 1.39 2.09∗∗ 0.41 0.73Manufacturing experience −0.64 −1.53 0.97 2.69∗∗∗ −1.61 −3.58∗∗∗

Firm size 0.34 2.03∗∗ 0.05 0.28 0.29 1.61Vertical keiretsu 0.13 0.25 0.13 0.33 −0.15 −0.27Horizontal keiretsu 0.35 0.83 0.28 0.55 0.22 0.45Location-specific pull variablesTariffs 0.65 1.22 0.65 1.22 0.65 1.22Antidumping and VERs 1.53 5.05∗∗∗ 1.53 5.05∗∗∗ 1.53 5.05∗∗∗

Market size 3.97 3.04∗∗∗ 3.97 3.04∗∗∗ 3.97 3.04∗∗∗

Labor cost −0.24 −2.31∗∗ −0.24 −2.31∗∗ −0.24 −2.31∗∗

Regional experience 0.002 1.40 0.002 1.40 0.002 1.40Number of choosers (choices) 266 (3)Pseudo R2 0.327Log-likelihood −196.8∗∗∗

% correctly predicted 77

t-value is asymptotic normally distributed: ∗ significantly different from zero at the 10% level, ∗∗ 5% level, ∗∗∗ 1% level. Forconfiguration-specific variables, one generic coefficient is estimated. A choice is correctly predicted if the predicted probabilityis greater than the sample frequency.

high for conditional logit models. The resultsprovide qualified support for Hypothesis 1. Marketshares in the 5–10 percent range have no sig-nificantly different impact from the lowest mar-ket shares below 5 percent (the omitted dummyvariable). Dominant market shares (greater than20 percent) unambiguously lead to global config-urations, as predicted. Among the different mar-ket positions, a strong but non-dominant positionin the Japanese market (a market share in the10–20 percent range) overall is mostly likely tolead to a West-bound configuration: there is asignificantly positive impact compared with Asia-bound configurations, while the negative impactcompared with global configurations is consid-erably smaller than for dominant market shares.On the other hand, the results do not suggestthe stronger notion that non-dominant firms preferWest-bound over global configurations. The choicefor an Asia-bound configuration overall is mostlikely for firms with the smallest market shares

as predicted. Hypothesis 2 also finds qualifiedsupport in the results. The higher the Japaneseindustry’s competitiveness expressed by its worldmarket share, the more likely it is that firms in theindustry choose a global plant configuration. Ashypothesized, this does not hold for non-dominantbut competitive Japanese industries (market sharesin the 25–75 percent range), where there is no sta-tistically significant difference between global andWest-bound configurations. A non-dominant posi-tion overall is most likely to lead to a West-boundconfiguration choice, while the weakest position(<25 percent share) is most likely to lead to Asia-bound configurations. The results provide strongsupport for Hypothesis 3: the loose oligopoly vari-able has a significant impact on the probabilityof choosing a global configuration compared toboth Asia-bound and West-bound configurations.Technology intensity has the hypothesized posi-tive effect on the probability that a West-boundconfiguration is chosen. The estimated effect is



significant in comparison with the choice for aglobal configuration, partially confirming Hypoth-esis 4.

Among the firm and industry control variables,firm size has a positive and significant effect onthe probability of choosing a global plant config-uration as opposed to an Asia-bound configura-tion, which is in line with earlier empirical studies(e.g., Belderbos and Sleuwaegen, 1996). The esti-mated coefficients for core product suggest thatfirms are more likely to choose a global plantconfiguration if the product belongs to a firm’score business. This is consistent with the resource-based view of multinational firm expansion and thenotion (Chang, 1995) that firms use investmentsabroad in core business as platform investmentscreating options for further investments in otherbusiness lines. Manufacturing experience leads toconfigurations that include plants in Asia, withAsia-bound configurations most strongly affected.This is consistent with the view that standardizedand mature technologies facilitate cost-effectivetransfers in particular to countries with a lessdeveloped technological infrastructure and a lessskilled workforce (Vernon, 1979; Dicken, 1998).Membership of horizontal or vertical keiretsu hasno significant effect on the plant configurationdecision, a finding that contrasts with Chang(1995) but is in line with Belderbos and Sleuwae-gen (1996) and Hundley and Jacobson (1998), who

found mixed effects of horizontal keiretsu mem-bership. All location-specific regional pull vari-ables have the expected sign, and three of themare statistically significant. The existence of VERsand the imposition of antidumping measures hasa strongly significant effect on the plant con-figuration choice. Market size has the expectedpositive impact and labor cost the predicted neg-ative impact. The average level of import tar-iffs and local international experience at the firmlevel fail to reach conventional significance lev-els.

Overall, the firm and industry factors have amarked and significant impact on the plant con-figuration decision in addition to locational fac-tors. A log-likelihood ratio test comparing themodel in Table 2 with a model with the firmand industry drivers left out clearly rejects omit-ting these variables (the calculated chi-square teststatistic of 82.9 with 18 degrees of freedom ishighly significant). The discriminatory impact ofthe firm and industry drivers can be examinedmore clearly by calculating the predicted proba-bilities for a number of stylized cases. Table 3shows the predicted probabilities for the threestylized cases in which specific configurationsare most likely to be chosen. Whereas the pre-dicted probability of choosing a global configura-tion on average (all variable in the sample mean) is22 percent, this increases to a dominant 97 percent

Table 3. Effects of firm and industry strategic drivers on predicted probabilities

Predicted probabilities

Global West-bound Asia-bound

Typical global 97 1 2Firm has dominant position on domestic marketJapanese industry has dominant position in the world marketStrategic interaction in loosely oligopolistic industryProduct is core product for the firmTypical West-bound 20 76 4Firm with non-dominant position on the domestic marketIntermediate position of Japanese industry in the world marketNon-core productLimited manufacturing experienceHigh technology-intensive firmTypical Asia-bound 1 1 98Firm has weak competitive position on domestic marketJapanese industry has weak international positionExtensive manufacturing experience

All variables in sample mean 22 25 52

Predicted probabilities calculated with all other variables taken in the sample mean. Non-dummy variables in the table are taken asmean plus (high) or minus (low) one standard deviation.



if the key conditions for global configurationsare substituted (dominant market position, dom-inant industry position, core products, and looseoligopoly). Similarly, the probability of choos-ing a West-bound configuration increases from25 to 76 percent in the stylized case of non-dominant market position, intermediate industrycompetitiveness, non-core product, limited manu-facturing experience, and high-technology inten-sity. The probability of an Asia-bound configura-tion increases from 52 to 98 percent if firms havea weak market position, if the industry is weaklycompetitive, and if Japanese firms have extensivemanufacturing experience.

CONCLUSION AND DISCUSSION

Our results provide strong evidence that the choicefor a specific spatial configuration of plants is notonly determined by locational characteristics, butis also crucially affected by firm and industry com-petitive drivers. We could define a set of condi-tions under which a global plant configuration ismost likely to be chosen: when the firm has strongcompetitive advantages in a product market withrelatively weak foreign competition, when strate-gic interaction between Japanese firms takes placein a loosely oligopolistic home market, and whenthe product is a ‘core’ product for the firm andof strategic importance. Asia-bound configurationsare chosen by firms with weaker competitivenesswhen Japanese firms have standardized manufac-turing technologies through extensive manufactur-ing experience at home. West-bound configurationsare chosen by firms with intermediate levels ofcompetitiveness for non-core products but overallhigh technology intensity. The latter investmentsare likely to be made in order to gain access toforeign technology and in order to learn from over-seas markets and may also include acquisitions offoreign firms. This finding is consistent with theimportant role of technology sourcing and acqui-sitions in the expansion of Japanese firms’ opera-tions in the United States and the European Union(e.g., Kogut and Chang, 1991; Belderbos, 2003).

The differential impacts of competitive driverson the configuration choice demonstrates the rel-evance of distinguishing between the possiblestrategic roles that plants occupy within the inter-national production systems developed by firms(e.g., Ferdows, 1997; Bartlett and Ghoshal, 2000;

Bartmess, 1994; Vereecke and Van Dierdonck,2002). The implication is that the location of for-eign direct investments is of major importancenot only from an efficiency perspective but alsoas an integral part of the competitive strategy ofmultinational firms, with important repercussionsfor performance (e.g., Porter, 1986; Morrison andRoth, 1992; Yip, 1995). Though proposed in a dif-ferent context, our results corroborate the findingsof Kim and Hwang (1992) that global strategicvariables play a decisive role in market entry deci-sions. More generally, our findings suggest thatthe decision to enter a particular foreign market orregion cannot be seen in isolation from the designof a successful competitive strategy. This calls forexplicitly incorporating strategic competitive con-siderations in foreign entry decision models, suchas the decision framework originally proposed byRoot (1987).

The novel approach in our empirical analysiswas to examine global plant configuration deci-sions rather than individual foreign investmentdecisions. The marked differences found betweenWest-bound configurations and global configura-tions suggests that previous research limiting anal-ysis to the determinants of (Japanese) investmentsin developed markets has obscured a number ofimportant aspects of internationalization strategies.The fact that a firm invests in the United States orthe European Union in itself does not reveal infor-mation on the firm’s internationalization strategyand plant configuration choice, which in turn isassociated with a substantial variability in firm-level competitiveness and technological intensityas well as different conditions in the Japanese andglobal industry.

The empirical results reconfirmed support forthe complementary explanatory power of variousforeign direct investment theories distinguishedin the literature: internalization theory, resource-based theory of the multinational firm, the stage(process) theory of the internationalization, andthe theory of strategic interaction. Two exceptionsmerit further discussion. First, technology inten-sity of the firm had a counter-intuitive negativebut insignificant coefficient in the internationaliza-tion decision. This appears at odds with a largebody of existing literature on foreign investment,which has found significantly positive effects ofthe possession of intangible assets (e.g., Caves,1996). One explanation is that the inclusion in theempirical model of market share data at the product



level, in addition to a measure of Japanese industryworld competitiveness, sufficiently expresses theimpact of the relevant intangible assets in termsof product-level competitiveness. In addition, witha given level of competitiveness as measured bymarket share, higher overall R&D intensity ofthe firm may indicate a stronger emphasis onimproving margins through increased quality andperformance of existing product lines. This mayrequire continuous interaction between R&D cen-ters and manufacturing operations favoring thelocation of production in Japan (cf. Dubois, Toyne,and Oliff, 1993; Belderbos, 2001). Second, whileinternational experience had a significantly posi-tive impact on the internationalization decision inaccordance with the stage theory of foreign directinvestment, regional experience had an insignifi-cant impact on the choice of plant configuration.While the first steps in the internationalization pro-cess in terms of gathering information on foreignmarkets and operating marketing and distributionaffiliates are important for the foreign investmentdecision, the choice of plant configuration is lessexperience dependent. Established multinationalfirms apparently take a strategic approach ratherthan an incremental approach to plant configura-tion decisions and these choices are largely deter-mined by competitive forces and the attractive-ness of the different regions for investment. Thisfinding appears inconsistent with the stage theoryof internationalization, but we note two possiblecaveats. Experience effects are most pronouncedat the country level such that our more aggre-gated regional-level analysis may not adequatelymeasure these effects. In addition, a proper test ofstage theories has to adopt a longitudinal empiricalapproach, which goes beyond the cross-sectionalnature of our data.

The results highlighted the intricate way inwhich domestic market position correlates withforeign market entry. The results confirmed find-ings in earlier work that strong domestic marketperformance is a good predictor of foreign invest-ment and foreign market success (Caves, 1996: 59;Hennart and Park, 1994). However, only qualifiedsupport was found for the notion that competitivebut non-dominant firms in the home market facestronger growth constraints, which pushes them toemploy focused internationalization strategies indeveloped markets. A conceivable explanation isthat a follower position in the domestic marketaffects the timing of foreign entry (Mascarenhas,

1986) but does not have a long-term impact differ-entiating internationalization strategies from lead-ing firms. A better identification of follower andleader positions may also require a more elabo-rate analysis at the product market level of marketshare differences and developments rather than aclassification across product markets based on mar-ket share classes. In this, an approach taking themarket positions of foreign rival firms explicitlyinto account (Rangan and Drummond, 2004) mayfurther refine the analysis. Clearly, the relationshipbetween domestic market success and internation-alization strategies merits further conceptual andempirical work.

For the strategy practitioner our model andresults may help to underscore the importance ofgiving plant configuration decisions a central rolein strategic planning and implementation for opti-mizing performance. Through empirically identi-fying the impact of major strategic drivers andlocational factors on the implied profitability ofspecific configurations, our results may help prac-titioners not to overlook viable alternatives. At theoperational level this would imply that in a broadscanning process appropriate weights are givento a list of useful regional location variables inline with the competitive profile of the firm. Forinstance, non-dominant high-tech firms will givea higher priority to local agglomeration forces inregions that show a strong technological potentialfor the product or product cluster concerned. Fol-lowing the outcomes of such a scanning process,the potential large set of alternative configurationsmay be narrowed down to a limited number ofrelevant alternatives, for which in-depth feasibilitystudies may be undertaken (cf. McCormack et al.,1997).

Limitations and further research

In concluding we point out some important lim-itations of our study and suggest avenues forfuture research. We consider the cross-sectionalnature of the micro-level data the main limita-tion of our research. The data are not well suitedto uncover paths of dynamic internationalizationprocesses, which are subject to two contrast-ing hypotheses. McDougall, Shane, and McOvi-att (1994) and Bell (1995) argue that many inter-national new ventures at the product level areradically and quickly implemented in all devel-oped markets. For such ventures international



competencies are of great importance and thereis only limited dependence on domestic compe-tencies and growth. This globalization model, inwhich firms exploit the domestic and major for-eign markets in a simultaneous fashion, contrastswith an incremental approach to international-ization described in the process view of inter-national investment (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977). Testingthese alternative hypotheses would necessitate theuse of longitudinal data, for instance by extendingor repeating the dataset at 5-year intervals. Giventhe formidable task of gathering the micro-leveldata, we consider this a major challenge for futureresearch.

A second limitation is that we did not examinethe relationship between different plant configura-tions and actual performance. Findings in Deliosand Beamish (1999) suggest that the geographicscope of operations has a separate positive feed-back on the performance of Japanese firms, whichthey attribute to increased scale economies andcost reduction as well as potential benefits of tech-nology spillovers and global learning. Geringer,Tallman, and Olsen (2000) found more mixedeffects of international diversification on Japanesefirm performance. Recent work by Vermeulenand Barkema (2002) showed that the performanceeffects of international expansion is moderatedby the process of foreign direct investment, withspeed, irregular expansion, and increased scopereducing the positive impact on profitability. Ourmodel suggests that the appropriateness and prof-itability of different levels of geographic scopein international production depend on the pushand pull factors affecting the firm in the specificproduct market. Depending on firm resources anddomestic and foreign competition, a more lim-ited geographic scope of overseas production mayresult in a better performance than a wider scope.The mixed findings on the relationship betweenperformance and geographic scope in the existingliterature may not only stem from lack of atten-tion to the process of foreign direct investment butalso from aggregation bias when summing overthe different product markets in which the firm isactive. Our more detailed predictions concerningthe international operations of firms at the productlevel suggest that future research on (geographic)diversification and performance should attempt toanalyze this relationship at the business unit levelrather than at the firm level.

A final and obvious limitation is the restrictionof our data to the (broadly defined) electronicssector and to Japanese firms. We tested our hypo-theses on a sample of product-level industrieswith varying characteristics and levels of interna-tionalization. This variety in plant configurations,which is related to diversity in foreign investmentmotives and the ‘footloose’ nature of assemblyplants, may be quite particular to the electronicsindustry. Application of the model in other set-tings implies different weights of the respectivestrategic drivers and locational pull factors. Theresults for Japanese firms may be less easily gen-eralized to the extent that the home country of thefirm and its regional context of operations matterfor foreign expansion choices. On the other hand,in industries characterized by international com-petition, industry conditions may effectively implysimilar roles of strategic drivers and locational fac-tors on plant configuration choice by U.S. andE.U. firms. Application of the model in a differ-ent regional context would necessitate modificationof the plant configuration alternatives. While forJapanese firms South East Asia appears as a geo-graphically close low-cost region, for U.S. firms,Mexico and other Latin American countries mayprovide a similar regional context, while the com-parative region for E.U. firms would be EasternEurope. Future comparative research using data onother industries and U.S. or European firms couldbring out such major similarities and dissimilari-ties.

ACKNOWLEDGEMENTS

Rene Belderbos’ research was funded by a fel-lowship from the Royal Netherlands Academyof Arts and Sciences. Leo Sleuwaegen grate-fully acknowledges financial support of the Bel-gian DWTC (project SE/01/003) and KU Leuven(project OT/96/03). The paper benefited from help-ful comments by two anonymous referees, KristienCoucke, Thierry Mayer, Francesca Sanna Ran-daccio, Reinhilde Veugelers, Shigeru Yasuba, andparticipants at seminars at the Universite Paris I(Sorbonne), University of Oxford, Maastricht Uni-versity, Gakushuin University, Yokohama NationalUniversity, the EARIE conference (2002), and the2002 CEPR conference on foreign direct invest-ment.



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Appendix: Explanatory variables: means and standard deviations

Variable Mean Standarddeviation

Competitive driversFirm’s domestic market share 5–10% (dummy) 0.108 0.311Firm’s domestic market share 10–20% (dummy) 0.162 0.369Firm’s domestic market share 20–60% (dummy) 0.087 0.282Japan industry’s world market share >25%, <75% (dummy) 0.615 0.487Japan industry’s world market share >75% (dummy) 0.254 0.454Loose oligopoly (dummy) 0.545 0.498Technology intensity (U.S. patents per 1 billion yen sales) 1.027 1.275Firm and industry controlsCore product (dummy) 0.775 0.418Manufacturing experience (ln years) 2.567 0.636Internationalization Experience (ln months) 5.401 1.462Growth Japanese market (%) 0.112 0.280Firm size (ln sales) 12.931 1.726Vertical keiretsu (dummy) 0.592 0.492Horizontal keiretsu (dummy) 0.326 0.469Locational pull variablesTariffs (ln %) 2.430 0.651Antidumping and VERs (dummy) 0.476 0.675Market size (% of world market) 0.555 0.311Labor cost (wage cost per employee in million yen) 2.548 1.850Local experience (ln months) 5.425 1.111

Means and standard deviations for 518 choosers (observations) for firm and industry characteristicsand control variables, and for 266 choosers ×3 choices (798 observations) for configuration-specificvariables.


competitive drivers and international plant configuration strategies

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