divestment and international business strategy.pdf

Journal of Economic Geography 5 (2005) pp. 235251 Advance Access originally published online on 14 February 2005doi:10.1093/jnlecg/lbh041 Divestment and international business strategy Gabriel R.G. Benito* Abstract Thispaperdealswithdivestment,i.e.,theclosureorsell-offofunitsinforeign locations, or conversely units owned by foreign fi rms. Such actions are discussed from the perspective of the fi rms making such decisions, and divestment assessments are looked at through the lens of international business strategy. Based on the integration-responsiveness framework of internationalbusinessstrategy,itisarguedthatthedivestmentpropensities of foreign subsidiaries depend on the type of strategy pursued by the corporation. Subsidiaries of transnational corporations are in general likely to display the highest divestment rates. Whereas subsidiaries forming part of international and multi-domestic strategies may have the lowest divestment likelihood initially, subsidiaries established as part of a global strategy are expected to be the least probable to be divested in the longer run. Keywords: Divestment, multinational company, international strategy JEL classification: F21, F23, M21, L10 Date submitted: 5 December 2003Date accepted: 27 May 2004 1. Introduction An impressive number of studies have been conducted since the 1960s regarding the internationalization of fi rms, especially with a focus on multinational corporations (MNCs), i.e., fi rms that own and operate units in foreign locations (Dunning, 2001). The interest in MNCs is understandable given the economic clout of such corporations, which,asputbyPeterDicken(2003,p.198)hascometoberegardedastheprimaryshaper of the contemporary global economy. The term globalization is often used to describe a process of increasing integration of national and regional economies (Whitley, 2001), whichworkstowardsaworldwideconvergenceofinstitutions,norms,andbehaviors.The actions of multinational corporations promote increased economic interdependence among nations and regions thereby making them key actors in the globalization process (Rugman and Verbeke, 2004, p.3), although the idea that their increased signifi cance necessarily leads to convergence between nations, consumer preferences, or even business behaviors is contested (see e.g., Gertler, 2001; Morgan et al., 2001). It has been noted that MNCs vary considerably, partly refl ecting the institutional and contextualparticularitiesoftheirrespectivehomebases,butpartlyalsoasaresultoftheir differentinternationalizationstrategies(Morganetal.,2001).Suchvariation *Department of International Economics and Management, Copenhagen Business School, Howitz vej 60, DK-2000 Frederiksberg, Denmark; and Norwegian School of Management BI, N-1300 Sandvika, Norway. email #The Author (2005). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissionsoupjournals.org notwithstanding, Dicken (2003, p.198) accurately summarizes the general characteristics of MNCs as companies (i) that coordinate and control various stages of value-added activities within and between countries, (ii) are able to take advantage of national differences in resources and policies, and (iii) have considerable potential for location fl exibility, i.e., the ability to switch and re-switch their resources and operations between locations at an international, or even global, scale. It is nonetheless clear that the two fi rst characteristics have received most of the attention so far, with few studies actually looking at the relocation and divestment aspects of MNC activity. In spite of data indicating that divestments are quite common,1as pointed out by Benito and Welch (1997, p.8): . most of the literature on the international operations of fi rms has focused on the growthor positive developmentof international business operations. It is suggestive that terms such as divestment, divestiture, closure, and exit do not even appear as entries in the otherwise comprehensive index included in Rugman and Brewers authoritative anthology on the state-of-the-art ininternational businessresearch (Rugman andBrewer, 2001). Likewise, arecentreviewofresearchonglobalstrategydoesnotexplicitlytouchonthesubjectatall (ChngandPangarkar,2000).Studiesondivestment(e.g.,Shapiro,1983;Li,1995;Benito, 1997a) closure of foreign units (e.g., Mata and Portugal, 2000), relocation (Pennings and Sleuwaegen, 2000), and market exit (Welch and Wiedersheim-Paul, 1980; Matthyssens and Pauwels, 2000; Wrigley and Currah, 2003) are still relatively scarce, despite the apparent signifi cance that continuing MNC operations have for a wide array of actorsranging from national governments to individual workersand the repeated calls for more knowledge about the magnitude of foreign divestment, the drivers of divestment, and the ensuing effects (Boddewyn, 1979; Caves, 1995; Benito, 1997b; Burt et al., 2003). Thisarticlelooksatdivestmentthroughthelensofinternationalbusinessstrategy:that is, it deals with the closure or sell-off of units in foreign locations, or conversely units owned by foreign fi rms, and will examine such actions from the perspective of the fi rms making such decisions. Specifi cally, it draws on contemporary analysis of international businessstrategytoprobeintowhyandwhenforeigndivestmentislikelytobeacourseof action taken by MNCs. The remainder ofthepaperproceeds asfollows.The nextsectiongives abriefoverview of the divestment literature based on economics and business perspectives. The basics of internationalbusinessstrategyarethensketchedout,withanemphasisonthecorefactors in the so-called integration-responsiveness model, which has became a standard framework for analysis of fi rms international strategies both in economic geography (Dicken, 1994, 2003) and in the business fi eld (Bartlett and Ghoshal, 1989).2The central part of the paper presents an analysis of how the core factors in the integration- responsiveness framework may lead to relocation, divestment, and market exits as the effects of corporate re-structuring and adjustment processes, and not just as failures in foreign markets. Some fi nal remarks conclude the paper. 1Barkemaetal.(1996)reportthatof225FDIsmadebylargeDutchMNCsintheperiod1966to1988onlyhalf werestillinexistencein1988.Benitos(1997a)studyofNorwegianMNCsshowsthatmorethanhalfoftheir FDIsin1982weredivestedwithinaperiodoftenyears.MataandPortugal(2000)reportyearlyexitratesof more than 10% for a sample of foreign subsidiaries in Portugal. 2Important contributions include Doz (1986), Porter (1986), Bartlett and Ghoshal (1989, 1993), Yip (1992), Prahalad and Doz (1997), and Harzing (2000). 236?Benito 2. Perspectives on divestment Divestment has been studied from a variety of perspectives. The wide ranging and multi- layered characters of the phenomenon imply that appropriate levels of analysis range from nations and regions, via industries, to specifi c fi rms, and even individuals. Also, it is one of those phenomena whose signifi cance and complexity both attract and request a diversityofapproaches:oneshouldnotpresumethattheinsightsprovidedbygeography, economics, and business research can make greater claims of fruitfulness and understandingthanthoseprovidedbysociologicalandpoliticalapproaches. Nevertheless, since my point of view is that of fi rms behavior, it is the former literatures that are of particular relevance. In an overview of the literature on divestment, Chow and Hamilton (1993) identify three main streamsindustrial organization (IO), fi nance, and corporate strategythat are also covered in Clark and Wrigleys (1997) seminal treatment of the corporate geography of divestment. Since the majority of empirical studies in the area are confi ned to domestic settings, it is pertinent also to look specifi cally to those that have studied foreign divestments. 2.1. The industrial organization approach Theindustrialorganizationliteraturehasbeenconcernedwithincentivestoexitaswellas impedimentstoexit(SiegfriedandEvans,1994).Themostapparentincentivetoexitislow profi ts, or outright losses, which in turn are due to high costs, permanent decreases in demand, or the entry into an industry by aggressive, more effi cient new competitors (Siegfried and Evans, 1994). Conversely, the existence of specifi c assets, i.e., assets which do not have valuable alternative uses (Williamson, 1985), constitutes an essential impediment to exit (Caves and Porter, 1976; Clark and Wrigley, 1997).3 Inter-relatedness between units can also act as a barrier to exit. For example, joint production and distribution facilities may prevent an, in a strict sense, unprofi table unit from being divested because it may contribute positively to the companys overall activities. The IO literature also proposes that divestment depends on diversifi cation (Haynes, et al., 2003). Caves and Porter (1976) argue that owners of independent plants have a lower opportunity cost and are therefore willing to accept a lower rate of return than operations belonging to a multi-plant/multi-industry company would be expected to achieve. Markides (1995) argues that over-diversifi ed companies typically divest non- core units in order to recuperate performance. Moreover, divestment is facilitated in diversifi ed companies since decisions are likely to be made by top-managers which are geographically and/or emotionally remote from the units under consideration for divestiture (Wright and Thompson, 1987). 2.2. Financial studies Financial studies of divestment have been paying special attention to the impact of divestment on company performance. While a few studies have looked at profi tability 3 Specifi c assets can be either tangible or intangible. In general, the empirical evidence suggests that durable tangible specifi c assets such as high sunk cost in machinery, and/or property (Guy, 1999), discourage exit (Siegfried and Evans, 1994). Similarly, intangible assets such as goodwill, advertising and R Harrigan, 1980). Divestment was advocated as an appropriate route in end game situations characterized by high volatility and uncertainty regarding future returns. Divestment has also been viewed from a corporate portfolio perspective: a company can be regarded as a portfolio of assets, products, and activities, which should be continuously under review from both fi nancial and strategic points of view (Chow and Hamilton, 1993). The contentionthatpoorlyperformingunitsarelikelycandidatesfordivestment,issupported in a number of studies (Duhaime and Grant, 1984; Hamilton and Chow, 1993). Studies alsoindicatethatcorporatefi nancialperformance infl uencesdivestment.Forexample,in their study of 208 divestments made by large New Zealand companies during 198590, Hamilton and Chow (1993) report that the necessity of meeting corporate liquidity requirements was among the most important objectives motivating divestment. In addition to the narrow fi nancial considerations, which are undoubtedly important, strategic considerations also play an important role in the decision to divest. Following Rumelts(1974)studyontherelationshipbetweenstrategyandperformance,anumberof empirical studies have found that corporate expansion into related industries leads to better performance and superior survival rates than expansion into unrelated industries (Bane and Neubauer, 1981; Lecraw, 1984; Morck et al., 1990; Pennings et al., 1994). Similarly, interview based studies report that low interdependency between units (Duhaime and Grant, 1984), and the need to focus on core activities (Hamilton and Chow, 1993), strongly motivate the decision to divest. Despite the occasional case of a successful conglomerate, as a whole studies suggest that fi rms are inclined to, and probably better off by, staying close to their specifi c competencies. 2.4. Empirical studies of foreign divestment Thenumberofstudiesdealingspecifi callywithforeigndivestmentremainslimited.Inthe 1970s, a high number of nationalization actions in developing countries led to several 238?Benito studies on forced divestment (see for example Kobrin, 1980), but voluntary divestment was largely overlooked. In the 1980s, although concerns were raised about the instability of the then increasingly popular cooperative ventures (Kogut, 1988; Blodgett, 1992), and about the integration problems posed by international acquisitions (Nahavandi and Malekzadeh, 1988; Olie, 1990), hardly any studies of foreign divestments were actually undertaken at the time. It is only quite recently that research on foreign divestment has begun to appear. Some studies have looked at the issue from the viewpoint of relocation of manufacturing capacity inter alia as a response to the increasing cost disadvantages of advanced economies like Belgium (Pennings and Sleuwaegen, 2000) and Japan (Yamamura et al., 2003), and a few have studied the effects of political and institutional transformation in transition economies such as Poland (e.g., Roberts and Thompson, 2003). The divestment of retailing operations has also attracted attention in recent times (Alexander and Quinn, 2002; Burt et al., 2003; Wrigley and Currah, 2003), especially as a result of the much-publicized international failures of companies like Marks and Spencer (Burt et al., 2002; Mellahi et al., 2002) and Royal Ahold (Wrigley and Currah, 2003). A number of studies of international divestment have taken a fi rm-level perspective, focusing on the relationship between cultural and experiential aspects of foreign expansion and divestitures (Li, 1995; Barkema et al., 1996; Shaver et al., 1997; Hennart et al., 1998). A basic contention in these studies is that while inter- nationalization exposes companies to an array of diffi culties regardless of the actual mode of entry used or the location of the foreign unit, problems are likely to increase when foreign entries are made in culturally distant locations, when there are few other foreignfi rms operatinginthesame country,4and/ortheyaremadebyacquisition orjoint venture. Acquisitions and joint ventures involve double layered acculturation in which both another corporate culture and a foreign national culture have to be dealt with. Such processes are diffi cult, which in turn may lead to inferior performance, and the studies by Li (1995) and Barkema et al. (1996) report that the probability of divestment is higher for jointventuresandacquisitions.However,whileBenito(1997a)alsofi ndsthatacquisitions did indeed increase exit rates, joint ventures did not. Mata and Portugal (2000) take this line of investigation a step further by pointing out that divestments can be made through closure as well as through sell-offs.5Finally, in line with several studies of domestic exits, the results from Lis and Benitos studies also indicate that international diversifi cation entails ahigher risk ofsubsequentexit thanforeignventureswithin theparent companys main line of