gao what causes mncs to increase resource commitments

VOLUME 17 • NUMBER 2

What Causes Multinational Companiesto Increase Resource Commitments During

Financial Crises in Emerging Markets?Tao Gao & Talin E. Sarraf

Abstract: This paper explores the major factors influencing multina-tional companies' (MNCs) propensity to change the level of resource Icommitments during financial crises in emerging markets. Favorablechanges in the host government policies, market demand, firm strat-

' egy, and infrastructural conditions are hypothesized to influence the'[ MNCs' decision to increase resource commitments during a crisis.

The hypotheses are tested with data collected in a survey of 82 MNCs ;during the recent Argentine financial crisis (late 2002). While all the

, above variables are considered by the respondents as generally im-portant reasons for increasing resource commitments during a crisis,

; only favorable changes in government policies significantly influenceMNCs' decisions to change the level of resource commitments duringthe Argentine financial crisis. The research, managerial implications,

: and policy-making implications are discussed.

i Keywords: Financial crisis, emerging markets, Argentine financialcrisis, multinational companies, changes in resource commitments, ;FDI, changes in investments

INTRODUCTION

BackgroundTo many multinational companies (MNCs), the term "emerging markets"means growth opportunities. Growth in these markets can occur on a

Tao (Tony) Gao, is an assistant professor of marketing in the College of Business Administration, Northeastern University,

Boston. He conducts research primarily on the development, governance, and consequences of buyer-seller relationships,

customer value and risk perceptions, international business strategies, and business ethics. He is published in JOUTTUII ofBusi-

nessResearch,JoumalofBusinessEthics,¡oumalofSerüiceResearch,ResearchinMarketing,Intemationa¡ReviewofRetail,Dishibution

and Consumer Research, Journal of Relationship Marketing, Journal of International Business and Economy, Latin American Business

Review, and Multinational Business Review. Contact information: [email protected]; (617) 373-5744 (phone); Marketing Group,

College of Business Administration, Northeastern University, Boston, MA 02115.

Talin E. Sarraf, was a senior project manager in Long Island Products Division of Ipsos at the time of study. She has experi-

ences in international market research, public relations, and real estate management. Her academic research interests are

in emerging markets and strategic responses to financial crises. Her research is published Injoumal of International Business

and Economy and Latin American Business Review.

Tao Gao & Talin E. Sarraf 1 3

THE MULTINATIONAL BUSINESS REVIEW

variety of fronts - development of infrastructure, opportunities for mak-ing foreign investments, and expansion of the consumer market fueled byrising income and emerging of a middle class - to name a few. Featuringlarge physical sizes, large populations, strong rates of growth, significanteconomic reforms, and major political importance within their regions,big emerging markets such as China, India, Brazil, and Argentina areoften considered important drivers for regional or even global economicgrowth (Pillania 2009a 2009b).

Meanwhile, the constant changes of events typical to emerging marketsrepresent both exciting opportunities and considerable risks for mul-tinational businesses. Perhaps the most relentless challenge in doingbusiness in emerging markets is the risk of being caught up in a financialcrisis. Unfortunately, with their regular heavy reliance on external capitalfor economic development, emerging markets are highly susceptible tofinancial crises (Grabel 2000; Singh andYip 2000). Several major financialcrises have occurred in the past two decades from Argentine to Mexico toSoutheast Asia to Turkey to Brazil and to Russia. The most recent case ofsuch a catastrophe in an emerging market took place in Argentina in 2001-2002, when it experienced its worst political and economic crisis since1983 (Cooper and Madigan 2002; Goodman 2002), characterized by drasticpolicy changes, government turmoil, and social unrests.

The complex and volatile changes in the currency value, government poli-cies, consumer demand, and support industries, among others, presentmajor challenges to the operations, sales, and profitability of all multina-tional firms doing business in the market. The changes create threats toMNCs ranging from loss of markets, disruption of supply and distribu-tion chains, collapse of local alliance partners, increased financial risks,increased hostility toward foreign firms, disruption of cost structures, togreater political risks (Singh and Yip 2000). Meanwhile, even the worstfinancial crises in emerging markets could spell opportunities for MNCssuch as short-term bargain hunting of inexpensive assets, ability to expandexports to neighboring markets, and long-term strategic investments.

Crisis situations call for crisis management responses and MNCs mustexpect and deal with a financial crisis as it occurs (Bartels and Freeman2000; Goodman 2002; Singh andYip 2000; Thompson and Poon 2000) andchanging the amount of committed resources in an emerging marketunder crisis is perhaps the most important strategic decision for a firm.The decision redefines the scale of the foreign operation and largelyshapes the MNCs control in the local operations and its level of risk expo-sure (cf. Anderson and Gatignon 1986).

14 What Causes Multinational Companies To Increase Resource Commitments ...


Research GapsAlthough there have been many studies on the general issue of responsesto financial crises in recent years, most emphasize host governments' re-actions to ongoing and past crises (Chotigeat and Lin 2001; Clifford andEngardio 2000; Grabel 2000; Kim and Mahfuzul 2002). On the other hand,fewer attempts have been made to draw specific lessons for foreign firmsoperating in the host country, particularly regarding the strategic respons-es they should adopt in economic crises and the ways they should pre-pare for future crises (Singh and Yip 2000). Available firm-level studiesare typically based on the Asian financial crises of 1997-98, which focuson post-crises strategic lessons for multinational companies' responses inrelation to FDI activities (Bartels and Mirza 1999).

Among the exceptions, one study uses firm-level data collected duringthe Asian financial crisis to study MNCs' expectations of post-crisis re-form and the role of FDI in economic recovery (Thompson and Poon 2000).Another study uses firm-level data to study MNCs' propensity to reevalu-ate their modes of operations during the 2001-2002 Argentinean financialcrisis (Eshaghoff and Gao 2004). Yet another study uses firm-level datato study MNCs' preferences for four responses to the 2001-2002 Argen-tinean financial crisis, namely status maintenance, operational adapta-tion, strategic retrenchment, and strategic expansion (Gao and Eshaghoff2004a). The study further examines important decision factors that MNCsconsider in reevaluating and/or altering their foreign entry modes duringthe 2001-2002 Argentinean financial crisis (Gao and Eshaghoff 2004b).

The above studies notwithstanding, limited empirical studies are basedon firm-level data collected during the crisis, especially reported in a LatinAmerican context, especially the recent Argentinean financial crisis. No stud-ies have systematically invesdgated how the multinational companies makestrategic decisions on increasing resource commitments during a crisis.

Research ObjectivesIn an effort to address the above limitations of the prior literature, weconduct a survey of MNCs during the recent Argentine crisis (October-November of 2002) to achieve two research objectives:

l.To understand under what antecedent conditions multinational compa-nies would increase their resource commitments during a financial crisisin an emerging market.

Tao Gao & Talin E. Sarraf 15


2. Identify antecedent variables that best predict mulfinational compa-nies' willingness to increase resource commitments during the Argentinefinancial crisis.

In the rest of the paper, we review foreign market entry mode and FDIliteratures and enumerate the factors that can cause MNCs to increasetheir resource commitments during financial crises in emerging markets.We then describe the method of data collection, report the findings, andconclude with a discussion of our study's contributions and its research,managerial, and policy-making implications.

Literature Review: Antecedents to MNCs Decisions to IncreaseResource Commitment in Emerging Markets Under Crisis

Because decision making regarding the level of resource commitment ina foreign market has been extensively studied in the foreign market entrymode and FDI literature, we start by reviewing numerous studies in theseareas of research (Anderson and Gatignon 1986; Buckley and Casson 1998;Hill, Hwang, and Kim 1990; Kogut and Singh 1988; Davidson 1980; Agar-wal and Ramaswami 1992; Bello and Lohtia 1995; Erramilli and Rao 1993;Gatignon and Anderson 1988; Klein, Frazier, and Roth 1990; Koechlin 1996;Gao 2004; Pillania, 2008; Root 1994; Sharma 2002).

According to the contingency perspective of foreign market entry modedecisions, multinational companies should maintain a close fit betweentheir entry mode (i.e., the governance form for their foreign operation)and various antecedent factors (Anderson and Gatignon 1986; Gatignonand Anderson 1988). Many studies have added to research on foreignmarket entry mode choices by introducing new variables (Hill, Hwang,and Kim 1990; Davidson 1980; Kogut and Singh 1988), applying new (or ex-panding existing) theoretical perspectives (Anderson and Gatignon 1986;Buckley and Casson 1998; Dunning 1980), or empirically testing the rela-tions between the underlying factors and firms' entry mode preferences(Agarwal and Ramaswami 1992; Bello and Lohtia 1995; Erramilli and Rao1993; Gatignon and Anderson 1988; Klein, Frazier, and Roth 1990; Pillania2009c). As a result of the collecfive efforts, four categories of contingencyvariables have been documented as infiuencing a firm's entry mode selec-tion: relating to the external (host country) environment, internal (firm)environment, entrant strategy, and the relationship or lack of it betweenthe entrant and a potential partner (Gao and Brown 1998; Gao 2004; andSharma 2002).

16 What Causes Multinational Companies To Increase Resource Commitments .


Based on the literature review and accounting for major specific eventsthat occur during the Argentine financial crisis (e.g., freezing of bank de-posits, social unrest, and major changes in government leadership), weidentify a series of 22 host country and firm strategic factors, as listed inthe left column of Table 2. We follow Gao and Eshaghoff (2004b) and usetwo important criteria in identif3dng contingency factors pivotal to chang-es of foreign market entry modes in times of a financial crisis in an emerg-ing market: (1) volatility - the size of a possible change to a factor causedby the crisis and (2) centrality - the factor's relevancy to strategic decision-making during a financial crisis. We expect these factors, organized intofour groups (market demand, local infrastructural conditions, governmentpolicies, and strategic motivations), to be used by MNCs when decidingon changing their resource commitments during financial crises in emerg-ing markets.

Market DemandNaturally, the size of the market is a significant factor drawing direct invest-ments to emerging markets. Regardless of the crises situations, emergingmarkets, such as Argentina, still offer a great consumer base which, takenalongside the literacy and education level, result in highly educated andpremier consumer targets (Saccomano 2002). Local consumers in manyemerging markets also have a positive attitude towards foreign productsand companies, deeming them a higher quality and better value (Sharma2002). Crisis conditions cannot negate decades of economic progress andthe resulting increase in GDP and per capita income, both of which sug-gest a potentially great local consumer base.

We also expect multinational companies to survey neighboring countries'economic conditions while deciding on changing resource commitmentsduring a crisis in an emerging market. Harmonization of trade relations inregional economic groups, such as the ASEAN and MERSOCUR, enablesMNCs to serve a regional market considerably larger than that of any par-ticular country. When one country is struck with financial crisis, MNCsmay be especially interested in using the host country as a productionbase and looking for selling opportunities in neighboring markets.

Infrastructural ConditionsMultinational companies have always treated infrastructure as a key de-terminant in their foreign entry mode decisions for developing countries(Agodo 1978). Physical infrastructure (e.g., roads, harbors, railways, andbuildings and facilities) and technological infrastructure (e.g., telecom-munications, computers, and logistics) are vital for efficient performance



of the market functions of a firm (Dunning 1980). The availability of sup-porting structures and industries (e.g., postal service, power and watersupplies, and banking facilities) is also vital (Porter 1990). The length oftime an MNC has experienced in the particular market enables them toadapt to the existing infrastructure on a technological and physical level(Sharma 2002).

While a financial crisis may disrupt the above infrastructural conditionsand support structures, a country's efforts to enhance the conditions dur-ing the crisis may attract multinational companies to increase their invest-ment even in the event of a financial crisis. Furthermore, the financialcrisis, while adversely affecting the local economy by causing unemploy-ment and currency devaluations, does increase the appeal of the emerg-ing market as a production base by decreasing the costs for raw materials,site development, and a quality labor force. Reduction of cost and theavailability of these production factors could be the key factors that attractcompanies to expand operations in spite of crisis.

Government PoliciesHost government policies toward foreign trade and investment greatlyinfluence the various risks an MNC faces in an emerging market such asownership/control risk, operations risk, transfer risk, trade barriers, andrepatriation risk (Miller 1992). High external environmental volatility inemerging markets requires a great deal of flexibility in order to respondto a country's volatile conditions. This flexibility results in high switchingcosts, which further leads MNCs to favor an entry mode of lower resourcecommitment (Erramilli and Rao 1993).

While causing much uncertainty, economic crises usually result in majoreconomic reforms that make a market more approachable for foreign in-vestors and increase the tendency for MNCs to expand their investmentsto reap additional benefits (Chotigeat and Lin 2001). Favorable corpo-rate tax policies and lesser restrictions on foreign ownership are stronglycorrelated with the choice of high resource commitment mode (Sharma2002). Emerging markets pursuing trade liberalizations have targeted for-eign firms in the restructuring of such policies (Chotigeat and Lin 2001).The relief of barriers such as tariffs, local contents restriction policies, andprivatization of state-owned institutions are invitations to foreign compa-nies to invest in the host country (Zhang 2000). After the initial entry, thecontinual changes in barriers provide a great opportunity to reinvest inthe country.

18 What Causes Multinational Companies To Increase Resource Commitinents .


Another element of government policy is the government's own politicalstability, which involves internal and external security situations, leader-ship control, and policy competency and consistency (Dun & Bradstreet2002). Turmoil within the political system, and in its enforcement andreliability, can cause structural problems and produce ineffective fiscalpolicies. Additionally, the risk of unsupervised and unaccountable highgovernment spending can cause severe economic turmoil as well (Fate-hi-Sedeh and Safizadeh 1989; Root 1994). On the other hand, changes inpolitical structure that enhance long-term political stability can also be apositive reinforcement for the emerging market 0un and Sing 1996).

Using data gathered from Japanese, European, and U.S. firms withinvestments in ASEAN,Thompson and Poon (2000) show that multination-al firms uniformly anticipated Asian crisis-induced reforms that wouldbeneficially affect overall investment environments. Their study alsodemonstrates significant correlations between reform expectations andanticipated improvements in the ASEAN investment environment.

Strategic MotivationsMultinational firms' strategic motivations may also infiuence theirdecisions to increase resource commitments during a crisis (cf. Kim andHwang 1992). A company reinvesting in the host country during the timeof crisis can use the current environmental changes to their strategicadvantage by either shaping the market or adapting to it (Courtney 2001).

The shaping strategic approach can enable an MNC to become an indus-try leader and achieve the first mover advantage through the reinvest-ment. For some companies, volatility in emerging markets is a positiveopportunity. In particular, local companies burdened by the financialcrisis who risk economic failure due to their overvalued debts and un-dervalued goods become bargain assets to multinational companies whoare in a position to leverage their capital by acquiring the existing institu-tions. Although if s somewhat opportunistic for a multinational companyto take advantage of local institutions in times of desperation by cashingin on their misfortune, a foreign investment can also be taken as sign ofgoodwill commitment to the effort of promoting prosperity in times ofcrisis. While implementing a high resource commitment and shaping theindustry in an emerging market can mean significant long-term benefits(Sharma 2002), only large multinational companies with available resourc-es can typically take advantage of these opportunities (Saccomano 2002).



On the other hand, adapting to the environmental changes in an emerg-ing market requires less commitment and is a safer strategic approach.Often times following a market leader and fine-tuning existing strategiesand operations to suit changing environments, the approach allows moreagility and fiexibility to mesh their strategy with the volatile market condi-tions as they are constantly changing. When the key value drivers are outof the MNCs control, sometimes adapting to the market conditions is thebest strategy. In this regard, changes in a competitor's operational modescould instigate a reactive reinvestment on the part of an MNC.

In summary, conditions such as large firm size, availability of bargainassets, and changes in competitors' operational modes can lead MNCs toincrease resource commitments in an emerging market under crisis.

Based on the previous discussions and our research objectives, the follow-ing two sets of hj^otheses are proposed. One set is related to the generalantecedents of the MNCs' decision to increase resource commitmentsduring a financial crisis in an emerging market; the other is related to thespecific antecedents of the MNCs' willingness to increase resource com-mitment during the Argentine financial crisis (2001-2002).

Research Objective 1:

Hla: Increases in local and regional market demand will be positive-ly related to MNCs' willingness to increase resource commitmentsduring a financial crisis in an emerging market.

Hlb: Favorable changes in infrastructural conditions will be posi-tively related to MNCs' willingness to increase resource commit-ments during a financial crisis in an emerging market.

Hlc: Favorable changes in the host governments' policies toward for-eign investment during the crisis will be positively related to MNCs'willingness to increase resource commitments during a financial crisisin an emerging market.

Hid: Conditions favorable for making strategic moves will be posi-tively related to MNCs' willingness to increase resource commit-ments during a financial crisis in an emerging market.



Research Objective 2:

H2a: Increases in local and regional market demand will be positive-ly related to MNCs' willingness to increase resource commitmentsduring the 2001-2002 Argentine financial crisis.

H2b: Favorable changes in infrastructural conditions will be posi-tively related to MNCs' willingness to increase resource commit-ments during the 2001-2002 Argentine financial crisis.

H2c: Favorable changes in the host governments' policies toward for-eign investment during the crisis will be positively related to MNCs'willingness to increase resource commitments during the 2001-2002Argentine financial crisis.

H2d: Conditions favorable for making strategic moves will be posi-tively related to MNCs' willingness to increase resource commit-ments during the 2001-2002 Argentine financial crisis.

THE STUDY

SampleOur sample frame is a list of companies with business operations inArgentina, compiled from the International Directory for Foreign Com-panies and the Hoover's Company List. The directories supply the namesof top executives and general mailbox addresses. By extensively search-ing corporate websites for companies on the list, we compile a list of300 e-mail contacts. While this process yields a list of companies doingbusiness in Argentina (e.g., with foreign subsidiaries or exporting prod-ucts to the country), we take additional steps to qualify the respondents.Qualification is measured in terms of the respondents' affiliation with amultinational firm with operations in Argentina at the time of the crisis,whether the firm is medium- or large-sized as a global company, and theirinvolvement in intemational business decisions (as further representedby their experience in making international strategic decisions and execu-tive rank).

Survey Methodology and ResponsesWe send out e-mail messages asking the executives to participate in ourstudy and offer to a summary of findings as an incentive for their partici-pation. The survey is carried out during October and November of 2002, inthe midst of the crisis, using a web interface (online) methodology provid-ed by a global market research company specializing in online research.



We ask the respondents to visit a website by clicking a link included inthe e-mail invitation. From the 300 e-mail contacts, 228 people clickedon our link, 198 answered question one, while 123 completed the survey.Given the critical and time-sensitive nature of our survey to multinationalcompanies doing business in Argentina, it is not surprising that more than70% of our e-mail recipients clicked on the link and visited the website.Additionally, the CEO of a top 100 firm in the Fortune's largest global com-panies sent a separate e-mail message to us indicating their interest. Ofthe 123 completed surveys, 82 respondents qualified (using qualificationcriteria provided above), yielding a 67% qualification rate and a 27.3% ef-fective response rate.

Possible non-response biases are examined by comparing characteris-tics of early and late respondents (Armstrong and Overton 1977). Earlyresponses are coded as ones coming in the first week and the rest areconsidered late responses. No significant differences are found betweenearly respondents and late respondents along the number of years of inthe position, years with company, rank, firm size, and current modes. SeeTable 1 for a summary of demographic information about the respon-dents and their firms. We supplement the structured survey researchwith several in-depth interviews, both online and in person, with formerArgentine government officials and CEOs of MNCs currently operating inArgentina, who will remain anonymous because we promised completeconfidentiality regarding any company-specific information they chose toshare with us.

22 What Causes Multínatíonal Companies To Increase Resource Commitments .


Table 1 : Information on the Respondents and TheirCategory of InformationIndustry

Banking/Financial ServicesBusiness ServicesHealth/PharmaceuticalsIT/ComputinK/TelecommunicationsLeisure/ManufacturingMediaRetailTravelOther

Size of Local Operations (# of employees)Less than 100101-10001001-5000More than 5001

NationalityUSAOther (Germany, UK, etc.)

RespondentsYears in company

2 or less3-45-8More than 8

Years in position2 or less3-45-8More than 8

Work locationUSAArgentina

PositionCEO/President/OwnerVice PresidentSenior ExecutiveExecutiveOther

MNCs

Percentage

6.0 %11.9 %

6.0 %14.9 %

4.5 %10.4 %

3.0 %10.4 %4.5 %

28.4 %

37.3 %22.5 %13.5 %26.7 %

9 1 %9 %

38.6 %20.9 %4.5 %

35.8 %

43.0 %21.2 %

9.1 %16.7 %

92.5%7.5%

21.4 %8.6 %8.6 %

51.4 %10.0 %

MeasuresTo measure the relevance of decision factors in MNCs' reinvestment deci-sions, we ask the executives to indicate their agreement or disagreementwhether each of the 22 circumstances are best conditions for an MNC to



increase their current investment and expand operations in an emergingmarket under crisis (1 = strong disagree; 5 = strongly agree). We measurethe extent of favorable changes to various decision factors by asking the execu-tives to rate their agreement or disagreement that each of the 22 circum-stances had occurred during the Argentinean financial crisis. We measureMNCs' decision to change their resource commitment in Argentina under thecurrent crisis situations with the difference between their desired levelof resource commitments during the crisis and that of their initial entry.The answers are captured in a scale anchored by 1 (decrease greatly) and5 (increase greatly).

RESULTS AND DISCUSSION

Overall Ranking of Individual Antecedent FactorsTo get information on the specific rankings of individual factors that causeMNCs to increase their resource commitments in an emerging marketduring a financial crisis, we rank all 22 raw indicators along their meanrelevance ratings from largest (most relevant) to smallest (least relevant).As shown in Table 2, the means range from 3.45 to 4.18 and all are sig-nificantly larger (p = 0.01; one-sided t-test) than 3.00, the mid-point of thescale (neither disagree nor agree). The results show that all of the individ-ual factors are relevant reasons why MNCs would increase their resourcecommitments during a financial crisis.

The top ten most prominent factors are increase in market demand,increase in regional demand, positive consumer attitudes, favorableeconomic reforms, growing GDP, improvements in logistics and transpor-tation, falling of trade barriers, improvements in technology infrastruc-ture, positive interactions with IMF/WTO, and favorable FDI reforms andincentives. Relatively speaking, the five least significant factors causingMNCs to increase resource commitments are positive changes in neigh-boring economies, difficult irreversibility of foreign market entry mode,large firm size, decrease in labor cost, and currency devaluation.

Collectively, the findings answer the first research question and showpreliminary support for the first set of hypotheses (Hla-Hld). That is,all of the 22 individual factors represent conditions where MNCs wouldincrease their resource commitments during a financial crisis in an emerg-ing market.

Dimensional Structure of Antecedent FactorsTo further answer the first research question, we analyze the dimensional


VOLUME 17 NUMBER 2

Table 2: Mean Relevance of Individual Decision Factors in Influencing MNCs' Decisionto Increase Resource Commitment

Factors

Increase in market demand

Increase in regional demand

Positive consumer attitudes

Favorable economic reforms

Growing GDP

Improvements in logistics and transportation

Falling of trade barriers

Improvements in technology infrastructure

Positive interactions with IMF/WTO

Favorable FDI reforms and incentives

Improvements in physical infrastructure

Long country experience

Strong trading bloc associations

Changes in competitor modes

Availability of bargain assets

Favorable political reforms

Improvements in support structures

Positive changes in neighboring economies

Difficult irreversibility of FEM

Large firm size

Decrease in labor cost

Currency devaluation

Mean

4.18

4.01

3.92

3.90

3.87

3.86

3.83

3.83

3.83

3.80

3.80

3.79

3.76

3.68

3.67

3.63

3.59

3.59

3.58

3.51

3.48

3.45

MeanDifferencefirom 3

1.18

1.01

0.920.90

0.87

0.86

0.83

0.83

0.83

0.80

0.80

0.79

0.76

0.68

0.67

0.63

0.59

0.59

0.58

0.51

0.48

0.45

t-Value*

12.78

10.43

8.82

9.77

9.30

7.91

7.97

8.13

7.56

8.41

8.41

8.04

7.37

6.64

5.07

5.18

4.94

4.94

5.68

4.88

3.93

4.26

Sig.(2-taiIed)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Note: ': Ail means for these firms are significantly smaller than 3, the mid-point ofthe scale, atp = 0.01 (one-sided t-test).

structure of the 22 individual antecedent factors by performing an explor-atory factor analysis with a varimax rotation procedure. Using the crite-rion of eigenvalues larger than 1.0 and a cutoff factor loading of 0.50 forthe inclusion of factor items, a four-dimensional structure is confirmed(see Table 3).

The first factor. Favorable Changes in Government Policies, includes strongtrading bloc associations, positive interactions with IMF/WTO, favorableeconomic reforms, falling of trade barriers, decrease in labor cost, favor-able FDI reforms and incentives, favorable political reforms, and currencydevaluation. The second factor. Favorable Changes in Infrastructural Con-ditions, includes improvements in physical infrastructure, improvementsin technology infrastructure, improvements in logistics and transporta-



Table 3: Exploratory Factor Analysis of Individual Decision Factors in InfluencingMNCs' Decision to Increase Resource Commitment

Individual Factors

Strong trading bloc associations

Positive interactions with IMFAVTO

Favorable economic reforms

Falling of trade barriers

Decrease in labor cost

Favorable FDI reforms and incentives

Favorable political reforms

Currency devaluation

Improvements in physical infrastructure

Improvements in technology infrastructure

Improvements in logistics and transportation

Improvements in support structures

Growing GDP

Positive consumer attitudes

Increase in market demand

Increase in regional demand

Availability of bargain assets

Large firm size

Changes in competitor modes

Eigenvalues

Cumulative Variances Explained

Coefficient Alpha

Dimensions

Favo

rabl

eC

hang

es in

Gov

ernm

ent

Polic

ies

0.77

0.75

0.72

0.61

0.60

0.58

0.57

0.50

9.41

49.52%

0.90

Favo

rabl

eC

hang

es in

Infr

astr

uctu

ral

Con

ditio

ns0.80

0.78

0.72

0.65

1.40

56.90%

0.88

Incr

ease

s in

Dem

and

0.83

0.70

0.70

0.64

1.36

64.04%

0.85

Favo

rabl

eC

ondi

tions

for

Mak

ing

Stra

tegi

cM

oves

0.73

0.63

0.60

1.08

69.75%

0.67

Note: Extraction Method: Prínápal Component Analysis; Rotation Method: Varimax with Kaiser Normalization.

tion, and improvements in support structures. The third factor. Increase inDemand, includes growing GDP, positive consumer attitudes, increasein market demand, and increase in regional demand. The fourth factor.Favorable Conditions for Making Strategic Moves, includes availability ofbargain assets, large firm size, and changes in competitors' operationalmodes. Three individual antecedent factors, positive changes in neighbor-ing economies, difficulty irreversibility of the foreign market entry mode.

26 What Causes Multinational Companies To Increase Resource Commitments ...


and long country experience, were eliminated from the factor analysis dueto their low loading on the four dimensions. In sum, the above findingsconfirm a four-dimensional structure of the remaining 19 raw factors. Asevidence of the reliability of the four antecedent variables, the coefficientalphas for them are 0.90 (Favorable Changes in Government Policies),0.88 (Favorable Changes in Infrastructural Conditions), 0.85 (Increase inDemand), and 0.67 (Favorable Conditions for Making Strategic Moves),respectively; all of which are higher than 0.60, the cut off value recom-mended for early stage studies (Bagozzi and Yip 1988). Please see Table 4for the final list of items and their factors.

Table 4: Final List of Individual Decision Factors and Their Dimensions

Dimensions ofAntecedent Factors

Favorable Changes inGovernment Policies

Favorable Changes inInfrastructural Conditions

Increases in Demand

Favorable Conditions forMaking Strategic Moves

Individual Antecedent Factors

Strong trading bloc associationsPositive interactions with IMF/WTOFavorable economic reformsFalling of trade barriersDecrease in labor costFavorable FDI reforms and incentivesFavorable political reformsCurrency devaluation

Improvements in physical infrastructureImprovements in technology infrastructureImprovements in logistics andtransportationImprovements in support structures

Growing GDPPositive consumer attitudesIncrease in market demandIncrease in regional demand

Availability of bargain assetsLarge firm sizeChanges in competitor modes



Testing of Hypotheses Hla-HldThe four groups of antecedent variables have similar means (3.69 for gov-ernment policies; 3.83 for infrastructural conditions; 3.98 for demand; and3.53 for strategic motivations), and all of them are significantly larger than3.00 (neither strongly disagree nor strongly agree), the mid-point of thescale (p = 0.05; one-sided t-test). These results further show the relevanceof all four variables, or groups of factors, in positively infiuencing MNCs'decision to increase resource commitments during a crisis, providingadditional answers to the first research question and support for hypoth-eses Hla, Hlb, Hlc, and Hid.

Testing of Hypotheses H2a-H2dTo answer the second research question and identify antecedent variablesthat would best predict multinational companies' willingness to increaseresource commitments during the Argentine financial crisis, we test thesecond set of hypotheses (H2a-H2d) using both the correlation and re-gression analyses. The independent variables are the perceived changesin four groups of antecedent factors, namely Increase in Demand (forH2a), Favorable Changes in Infrastructural Conditions (for H2b), Favor-able Changes in Government Policies (for H2c), and Favorable Condi-tions for Making Strategic Moves (for H2d); and the dependent variableis Decision to Increase Resource Commitment. The correlations amongthe four independent variables and the dependent variable, as reportedin Table 5, are all significant at p = 0.05, providing initial support for H2a,H2b, H2c, and H2d.

Table 5: Correlations Among Study Variables

Favorable Changes inGovernment Policies

Favorable Changes inInfrastructural Conditions

Increases in Demand

Favorable Conditions forMaking Strategic Moves

Increase in Resource Commitment

Mea

n

3,70

3,83

3,98

3,53

3,21

Stan

dard

Dev

iati

on

0,72

0,78

0,68

0,73

0,76

1

1,00

0,65»

0,65*

0,75*

0,45*

2

1,00

0,66*

0,59*

0,29*

3

1,00

0,61*

0,37*

4

1,00

0,32*

5

1,00

Note *; Significant atp = 0.05.

28 What Causes Multinational Companies To Increase Resource Commitments ,


We estimate the multiple regression model by simultaneously including allfour independent variables and the dependent variable. All independentvariables are mean-centered to minimize the impact of multicollinearity.The largest condition index is 3.47, much smaller than the cutoff valueof 30.00 for serious multicollinearity (Hair et al. 2006). Likewise, the VIFs(Variance Inflation Factors) range from 2.11 to 2.82 for the independentvariables, all smaller than the cutoff value of 10.00 for serious multicol-linearity. Therefore, multicollinearity is not a concern, albeit the relativelyhigh correlations between some independent variables.

According to the regression results shown in Table 6, only FavorableChanges in Government Policies is found to significantly influence MNCs'decision to increase resource commitment during the Argentine financialcrisis. This is indicated by the large and significant i-value (2.32; p < 0.05)associated with the test for this effect. Therefore, H2c receives supportfrom our data while hypotheses H2a, H2b, and H2d are not supported.While the parameter estimates for two independent variables. FavorableChanges in Infrastructural Conditions and Favorable Changes for MakingStrategic Moves, are negative, their significance values, at 0.68 and 0.70,respectively, are well above the acceptable level of 0.05. Therefore, theyshould be considered as being caused by chance rather than indicatinga certain significant relation between these variables and the dependentvariable.

Table 6: Testing of Hypotheses Using Regression Anaiysis

Independent Variables

Favorable Changes in Government Policies (H2c)

Favorable Changes in Infrastructural Conditions (H2b)

Increases in Demand (H2a)

Favorable Conditions for Making Strategic Moves(H2d)

Dependent Variable

Increase inResource

Commitment

0.42=*

-0.07

0.18

-0.07

0.22

Notes:a: All parameters are standardized path coefficients.*: Significant atp = 0.05.



CONCLUSION

Discussion of FindingsIn this study, we explore the major factors influencing multinational com-panies' (MNCs) decisions to change the level of resource commitmentsduring financial crises in emerging markets. A host of 22 factors pertain-ing to favorable changes in host government policies, market demand,firm strategy, and infrastructural conditions are found to be importantantecedents to MNCs' decisions to change resource commitments duringcrises. These findings show the importance of attending to these factorsin the host government's effort to improve the investment environment toretain and attract foreign investors in crisis situations.

While our respondents consider all four variables (favorable changesin demand, infrastructural conditions, government policies, and strate-gic motivations, respectively) as general reasons for increasing resourcecommitments during a crisis, only the favorable changes in governmentpolicies significantly influences their decision to change the resourcecommitments during the 2001-2002 Argentine financial crisis. This findinghighlights the importance of using policy change as a way to improve theinvestment environment to gain the confidence from foreign investors.

The economic reform undertaken by the Argentine government duringthe 2001-2002 financial crisis, although painful and destructive in the be-ginning, paved a hopeful road to recovery (Duhalde 2002). Reform camein the form of freeing the peso from the dollar, placing restrictions ongovernment spending, and enhancing scrutiny to limit excessive foreignborrowing and monetary management. To restore investor confidenceand stabilize the economy, the Argentine government (the DuhaldeAdministration), like any government dealing with crisis situations woulddo, pledged reforms to its trade and investment policies, largely promotedby the crisis and pressures from the IMF, the World Bank, the WTO, etc.All of these interactions with key external stakeholders seemed to havebeen well received by MNCs doing business in Argentine.

Two other variables, namely favorable changes in demand and infrastruc-tural conditions, do not have significant effects on MNCs' decisions to in-crease resource commitment during the Argentine crisis. This could havebeen caused by the relative lack of significant changes in both areas dur-ing this crisis, when compared to the more transparent changes in the hostgovernment policies. In regards to the lack of significance from strategicmotivations, the likely explanation is that our respondents represent a mixof firm sizes and there is a combination of firms interested in pursuingeither shaping or adapting strategy (Courtney 2001).



ImplicationsIn the present study, we seek to systematically investigate motivationsbehind multinational companies' willingness to increase their resourcecommitments during a financial crisis in an emerging market. While ex-ploratory in nature, our study extends the research by being the first sys-tematic, empirical study on this important topic to choose a Latin Americancontext and survey the multinational firms during the crisis.

The current study has several important implications for future researchon MNCs' crisis responses in emerging markets. First, longitudinal andcomparative studies can relate our findings to firm responses in futurecrises in emerging markets, if their occurrences are sadly inevitable.Second, future research can go beyond our study scope to examine otherimportant issues such as the timing of reaction (i.e., what make firms reactimmediately) and the extent of changes perceived by MNCs in regardsto various antecedent factors during the crisis. We only highlight the im-pact of the factors that can increase resource commitments in a relativelysimplistic way. Third, future research can address the limitations in oursamples and obtain larger and more diverse samples.

As Elegant (1998) points our, few companies escaped Southeast Asia'seconomic hammering unscathed and fewer still took advantage of it. Ourfindings show that as many as 32% of surveyed multinational firms didconsider increasing their resource commitment during the Argentinefinancial crisis and their motivations were related to favorable changesin government policies. Other MNCs should perhaps be prepared to dothe same in future crisis situations in emerging markets. As discussedbefore, the most lamentable of financial woes for a host country can meanrare opportunities for multinational firms (cf. Beck 2000; Smart andVertin-sky 1984). And to the satisfaction of all parties involved, the host countrygovernment and people generally welcome the MNCs' decisions to stayand increase investments in the country. Furthermore, a more proactiveattitude and a trial-and-error experimentation approach will help the firmseize the opportunity and accumulate precious crisis-handling experienc-es for the future (Beck 2000).

Finally, directly based on a survey of multinational firms during a finan-cial crisis, our research findings corroborate with previous studies theimportance of government policy changes for enhancing the confidenceof foreign investors (e.g., Thompson and Poon 2000; Fan and Dickie 2000;Thompson 2001). Governments can strengthen their trading bloc as-sociations, interactions with IMF/WTO, economic reforms, removal oftrade barriers, FDI reforms and incentives, political reforms, and contain



currency stability. Initiatives aimed at enhancing market demand andinfrastructural conditions for multinational firms can also prove usefulin keeping and inducing them to increase their resource commitmentsunder crisis situations.

LimitationsTwo limitations of the study should be highlighted. First, the inferencedrawn on the results of Table 1 regarding the importance of infrastructuralconditions suffers from a selection bias because a large percentage (14.9%)of the firms fall under the IT/Computing/Telecommunication industry.Second, the study provides relatively weak support for the argument aboutthe factors that drive resource commitment of the multinational compa-nies during financial crisis in emerging markets. This is because the studydoes not distinguish between the factors driving resource commitment ofthe multinational companies in the absence of financial crisis in emergingmarkets. Given these limitations and the small sample size, we recom-mend caution in drawing conclusions from our study results.

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