Ties to U.S. Multinationals Give Foreign Affiliates a Competitive Edge
Affiliates that leverage their parent companies' resources grow faster and outperform local competitors in countries with scarce capital and skilled labor.
ANN ARBOR, Mich. Affiliates of U.S. multinational enterprises that leverage their parent companies' resources internally are able to grow faster and outperform local competitors in countries where financial capital and qualified workers are scarce, according to a new study at the University of Michigan Business School.
"Just as business group members in some emerging markets benefit from their relationships with other members, affiliates of U.S. multinational companies can benefit from their ties with their American parents," says C. Fritz Foley, assistant professor of corporate strategy and international business. "By tapping into internal markets, foreign affiliates avoid the constraints local firms face. The extent of the benefit depends critically on the conditions of local input markets that a typical local competitor can access."
In his research, Foley examined three types of resources that an affiliate can obtain from foreign sources through internal marketscapital, human capital and intangible assets. He used affiliate-level data on U.S. multinationals from 1982 to 1996 obtained from the annual Survey of U.S. Direct Investment Abroad conducted by the Bureau of Economic Analysis and information on output, employment and investment by industry for 175 countries taken from the Industrial Statistics Database produced by the United Nations Industrial Development Organization.
His findings show that U.S. multinational affiliates that receive new funds for investment from their parents are more successful in pursuing growth opportunities in host countries where financial development is weak and local companies are hampered by limited access to capital.
Foreign affiliates that utilize the skills and knowledge of managers from the United States also grow faster than their local competition in areas where educated, trained workers are scarce, Foley says. Finally, affiliates that use proprietary assets transferred from the parent firm also experience higher rates of growth in market share.
The study results are more pronounced when the constraints facing local firms are more binding and different types of parent provisions affect distinct drivers of affiliate growth in market share. For example, foreign affiliates that receive equity financing or intrafirm loans from their parent companies have a decided advantage in capital-intensive industries or when industry growth in the host country is high and additional investment is needed to fuel expansion.
"Parent financial investments and the use of U.S. citizens in the work force enable affiliates to increase labor productivity faster than their competitors in countries where financial development is weak and human capital is scarce," Foley says. "The use of intangible assets created and maintained by parent firms also fuels productivity growth."
Foley's findings have important implications for host countries. Poorly developed accounting standards and a weak system of education, he says, put local firms at a disadvantage when they face competition from U.S. multinational affiliates with access to financial and human capital provided by their U.S. parents.
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