Resource Accumulation and Overseas Expansion by Japanese Multinationals
Heather Berry*
2022 Steinberg Hall-Dietrich Hall
University of Pennsylvania
Philadelphia, PA 19104-6370.
and
Mariko Sakakibara
Anderson Graduate School of Management
University of California, Los Angeles
110 Westwood Plaza, Suite B508
Los Angeles, CA 90095-1481
In this paper, we analyze the process of resource accumulation and overseas expansion by
multinational enterprises (MNEs). We examine both the motivation and outcome of a firm’s multinational
expansion strategy by analyzing two issues: first, whether the accumulation of a firm’s intangible assets
actually precedes its investment abroad, and second, the evolution of the value of multinationality to
shareholders as a firm’s level of international activity and foreign experience changes. We analyze these
issues using a panel of 141 Japanese manufacturing firms (1974–1997). Overall, our results suggest that
while it is typical for Japanese firms to accumulate intangible assets prior to investing in foreign markets,
these firms need experience in foreign markets before a return on this investment will be realized.
Keywords: Foreign Direct Investment, Firm Performance, Intangible Assets
JEL Classification: F23; L25
*Corresponding Author. Tel: (215) 898-0990; Fax: (215) 898-0401; e-mail: berryh@wharton.upenn.edu.
We would like to thank Richard Caves, Michael Darby, Robert Dekle, Vit Henisz, Takeo Hoshi, Naomi
Lamoreaux, Marvin Lieberman, Hideki Yamawaki, participants in the 1999 NBER Japan Project Meeting,
and workshops at UCLA and UC Santa Cruz for helpful comments. We would also like to thank Emi
Morita, Hidefumi Takeuchi and Tatsuo Ushijima for research assistance. Financial support from the
Center for International Business Education and Research at the UCLA Anderson Graduate School of
Management (4-400980-IN-23496-RGMS97) is gratefully acknowledged.
1
Resource Accumulation and Overseas Expansion by Japanese Multinationals
An extensive literature in both strategy and international management examines how a firm
develops, exploits and sustains its competitive advantage. An important focus in both the resource-based
view (in the strategy literature) and the internalization theory (in the international management literature) is
on the resources and capabilities of firms that are hard to imitate, strategic in nature and likely to afford a
firm unique opportunities.
Such assets tend to be intangible assets, particularly various kinds of
knowledge and know-how for new products and processes, for developing and carrying out marketing
programs and for managing these economic activities.
While both the strategy and the international management literatures recognize the importance of
intangible assets, each is limited in how it analyzes these assets. The international management literature
is limited because the vast majority of studies focus on transaction costs and alternate governance
structures that result from the existence of a firm’s intangible assets rather than on the management and
development of these assets. The resource-based view is limited because it does not typically analyze
how strategic resources can be used and created in foreign markets. Further, extant literature on the
resource-based view has not yet considered the impact of a distinctly international firm resource on firm
performance – the managerial capabilities developed from a firm’s experiences managing operations in
foreign markets.
In this paper, we contribute to both the international management and strategy literatures by
analyzing the process of resource accumulation and overseas expansion by multinational enterprises
(MNEs). We focus on the exploitation and development of a firm’s intangible assets in both home and
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foreign markets to more fully examine how firms build and sustain competitive advantage over time. More
specifically, we examine both the motivation for foreign direct investment and the outcome from this
investment in terms of firm performance. Regarding the motivation for foreign direct investment (FDI), we
test whether the accumulation of a firm’s intangible assets actually precedes its investment abroad (as
implied by the internalization theory). Importantly, we also move beyond the internalization theory and
consider whether MNEs may be more than just exploiters of home country knowledge – and whether
foreign markets afford firms access to resources, knowledge and competencies outside their home market
that can be used throughout their global network of subsidiaries. This allows us to more fully examine how
firms build and sustain competitive advantage over time.
Regarding the outcome from this investment, we examine the performance effects from a firm’s
foreign operations as a firm’s level of international activity changes. Unlike existing research, we analyze
how performance effects from a firm’s multinationality may change as firms increase their activities abroad
and gain experience managing subsidiaries in foreign markets. We extend both the resource-based view
and the international management literature by incorporating insight into how firms can benefit from the
international firm-specific resource of foreign experience.
We make these extensions to more fully examine how firms exploit and develop their intangible
assets in both home and foreign markets. By analyzing the process of resource accumulation and foreign
expansion, we provide a dynamic test of both the exploitation motives the internalization theory suggests
and more recent international management arguments about asset-development motives. By focusing on
the managerial capabilities a firm develops from its foreign expansion activities, we identify an additional
intangible asset that should be considered among a firm’s resources and capabilities. As we show in this
paper, there may be different outcomes from a firm’s overseas activities depending on whether a firm has
this resource. By not considering this resource, prior studies on the performance effects from a firm’s
3
multinationality may be overstating the influence of the other intangible assets included in the analysis.
THEORY AND HYPOTHESES
Both the resource-based view (as developed by Barney, 1991, Conner, 1991, Peteraf, 1993,
Rumelt, 1987 and Wernerfelt, 1984 among others) and the internalization theory (as developed by
Buckley and Casson (1976), Caves (1971) and Dunning (1980), among others) are concerned with a firm’s
ability to obtain rents and sustain its competitive advantage. As noted above, the firm-specific strategic
advantages that are the focus of the internalization theory are the same types of assets as those identified
in the resource-based view – the intangible assets of firms that are strategic in nature and likely to afford a
firm unique opportunities. By effectively developing and exploiting these assets, firms can sustain and
build their competitive advantage. As Rumelt (1987) states, “a firm’s competitive position is defined by a
bundle of unique resources and relationships and the task of general management is to adjust and renew
these resources and relationships as time, competition and change erode their value.”
In this paper, we view firms as being bundles of resources and routines that are utilized in specific
product and geographic markets. Importantly, the strategic assets we are considering are not likely to be
distributed uniformly across firms within an industry. Firms acquire and accumulate strategic assets over
time and the configuration of asset bundles may differ considerably across firms within an industry,
depending on their initial and subsequent strategic choices. Firms with strong strategic advantages may
undertake FDI whereas those firms lacking these advantages may remain home-bound or service foreign
markets by other modes. In this paper, we extend the literature that examines a firm’s intangible assets in
two ways. First, we consider whether the accumulation of a firm’s technological know-how and marketing
ability actually precedes its investment abroad. And second, we examine how the performance effects
from multinationality change as a firm gains the firm-specific resource of foreign experience. Each of these
issues is developed more below.
4
Internalization Theory
Traditional arguments in the international management literature about the motivation for FDI by
multinational enterprises emphasize the possession and exploitation of firm-specific advantages. Similar to
Coase (1937), Hymer (1976) explained how the logic of multinational organization is governed by the
internalization of international markets. Drawing on Bain (1956) Hymer explained how the profitability and
growth of MNEs reflect their possession of monopolistic competitive advantages such as proprietary
technology, brand names and other firm-specific assets.
Over the past three decades, the idea that foreign direct investment is an economic solution to
market imperfections has been extended by many others (see Buckley and Casson (1976), Caves (1971)
or Dunning (1980), for example) into what is generally referred to as the internalization theory. This theory
is primarily concerned with identifying the situations in which firms own and control value-adding activities
outside their national boundaries. Like earlier attempts to explain the growth of domestic firms, it seeks to
explain the international integration of value-added activities in terms of the costs and benefits of this form
of organization relative to market transactions. According to the internalization theory, a firm that invests in
wholly-owned subsidiaries abroad must possess some kind of strategic assets that more than offsets the
costs of operating in countries alien to the firm and from a distance. As noted above, such assets tend to
be intangible assets, particularly various kinds of knowledge and know-how for new products and
processes, for developing and carrying out marketing programs and for managing these economic
activities.
The majority of empirical studies that test the predictions of the internalization theory have
analyzed a cross-section of firm data during a single period in time (see, for example, Caves, 1974;
Buckley and Casson, 1976; Dunning, 1980; Morck and Yeung, 1991; Kogut and Chang, 1991; Pugel et al.,
5
1996).
While previous empirical studies have reported a significant relationship between a firm’s
technological know-how and marketing ability and its foreign investment, these studies have been limited
in their analysis to cross-sectional data. The problem with this static approach is that the internalization
theory is not really tested – to adequately test the internalization theory, one needs to consider the process
of intangible assets accumulation and the foreign expansion strategy of firms. The theory does not simply
predict an association between a firm’s intangible assets of technological know-how and marketing ability
and its foreign direct investment — rather, it predicts a very clear direction for this association: the
existence of these assets should precede a firm’s international investment abroad. By looking at only one
year in time, previous studies have been unable to conclude whether a firm’s accumulation of technological
know-how and marketing ability actually precedes its international expansion.
In the present analysis, the relationship between a firm’s lagged intangible assets of technological
know-how and marketing ability and its foreign investment is explored to test the internalization theory
predictions regarding the exploitation abroad of assets created in a firm’s home market. Granger’s concept
of causality (Granger, 1969) is used to investigate the issue of precedence between a firm’s home market
asset accumulation and its investment abroad. If the internalization theory holds, the intangible assets of
technological know-how and marketing ability should Granger cause investment abroad.
Hypothesis 1: The accumulation of technological know-how and marketing ability precedes a
firm’s foreign direct investment.
Though the internalization theory is only concerned with how a firm exploits the intangible assets
created in its home market, some studies in the international management literature (including Madhok
(1997), Bartlett and Ghoshal (1989), Dunning (1993), Dunning and Nurula (1995), Kuemmerle (1997) and
Kogut and Zander (1993) for example) have moved beyond the internalization theory and recognized that
MNEs may be more than just exploiters of home country knowledge or advantages – that foreign markets
6
may allow firms to acquire competencies throughout their network. Bartlett and Ghoshal (1989) have
asserted that MNEs operating in a variety of environments are exposed to multiple stimuli that enable them
to develop competencies and learning opportunities. Kuemmerle (1997) and Wesson (1993) have argued
that feedback may exist from a firm’s subsidiaries to its technical activities in its home market. Foreign
subsidiaries may gain access to local technological knowledge or may create knowledge themselves that
can be transferred back to the parent company (Kogut and Chang, 1991). To test whether firms may be
more than just exploiters of home country knowledge – and whether a firm’s multinational network of
operations allows a firm to access knowledge and competencies in foreign markets to be used in the home
market, both directions between FDI and the intangible assets of technological know-how and marketing
ability are explored in tests of Granger causality. If there is feedback and if firms are tapping into foreign
markets to develop their firm-specific resources and competitive advantages, then the results should reveal
that a firm’s FDI Granger causes its intangible assets of technological know-how and marketing ability in its
home market.
Hypothesis 2: Feedback will exist from a firm’s foreign subsidiaries to its technological know-how
and marketing ability.
Performance Effects from Multinationality
The second issue that is analyzed in this paper is how the performance effects from a firm’s
foreign operations change as a firm’s level of international activity changes. In the previous section, we
analyzed the relationship between a firm’s intangible assets of technological know-how and marketing
ability and its intangible asset of multinationality.1 In this section, we examine the performance effects from
a firm’s intangible asset of multinationality – or its foreign operations, and whether the intangible assets of
technological know-how and marketing ability moderate this relationship.
Building on the view that firms are bundles of resources and routines that are utilized in specific
7
product and geographic markets, shareholder valuation of firms will depend on the value of a firm’s
resources and routines in the markets in which they are employed. One asset that has not been
considered in either the international management literature or the resource-based view to examine the
performance implications of a firm’s multinationality is the firm-specific resource of foreign experience.2
When considering the performance effects from a firm’s international operations, we believe it is necessary
to consider this distinctly international resource because of the benefits that can accrue to firms possessing
this type of firm-specific asset.
In this study, we use a firm’s Tobin’s q ratio to examine the performance effects from a firm’s
intangible resources.3 We predict that the performance effects from a firm’s multinationality will change
over time. We distinguish between an initial and more advanced period of international expansion by
firms4 to focus on a uniquely international resource that may provide benefits to firms – the firm-specific
resource of foreign experience. We build on Morck and Yeung (1991), who suggest that in an initial period
of a firm’s international expansion, a firm’s multinationality will increase firm value because it enhances a
firm’s intangible assets of marketing ability and technical know-how, but not by itself. During a more
advanced stage of multinationality, however, we argue that a firm’s foreign operations will be valued
beyond simply enhancing the firm’s intangible assets of technological know-how and marketing ability from
its home market. The reasoning for these predictions is based on both the experience a firm gains from
establishing and operating foreign subsidiaries, and the type of information that is available to shareholders
at each of these stages. Both the initial and advanced stages we are referring to are discussed in more
detail below.
In what we are calling an initial expansion period, firms have no experience establishing and
operating subsidiaries in any market outside of their home market. As Hymer (1976) notes, a firm that
decides to enter a foreign market is at a disadvantage compared to local firms in that market. As Zaheer
8
(1995) has shown, foreign firms face a substantial “liability of foreignness.” Managers from a foreign firm
do not know the local environment, they may not be sensitive to cultural differences, and they may not
have access to or realize what type of information is needed to succeed in other countries. Further, a
firm’s managers may not be able or capable of managing operations in foreign countries. As Hymer (1976)
and other have noted, all of these disadvantages in foreign markets make a firm’s strong intangible assets
of technological know-how and marketing ability from its home market crucial to determining the success of
initial entries into foreign markets.
Equally important for performance effects, when a firm is initially expanding abroad, shareholders
have little to no information about how successful a firm will be outside its home market. While investors
have knowledge about a firm’s strong intangible assets of technological know-how and marketing ability
from its home market, they do not know how well the managers will be able to transfer these assets from
their home market to foreign markets. Mitchell, Shaver and Yeung (1997) have shown that successful
international expansion requires preparedness, focused management and learning from international
experience. Through their analysis of firms in the American medical diagnostic imaging equipment
industry, they show that firms encountering difficulties during their initial attempts to expand internationally
may not survive, or less dire, may suffer market share losses. Further, Li (1995) has shown that first time
entrants are more likely to fail than repeat entrants. These studies confirm that international operations are
risky, and that not all firms attempting to become international will be successful. In this study, we argue
that the first few foreign entries by a firm will provide a good test of the skills of the firm’s managers to
succeed outside their home market for shareholders. Until a firm has shown investors that it can succeed
in foreign markets, a firm’s shareholders may discount its initial FDI.
After this initial period of foreign expansion, however, the performance effects from a firm’s
multinationality may change. As firms gain more experience operating in foreign markets, they provide
9
information to shareholders that the firm is capable of operating outside the home market. In addition,
those firms that encounter severe difficulties in their initial foreign expansion may not be able to expand
abroad further. Those firms that continue to expand into a more advanced stage are providing information
to shareholders that they can successfully enter and operate in foreign markets. These firms are showing
investors that they have the preparedness and focused management that Mitchell, Shaver and Yeung
(1997) have shown that successful international expansion requires. No longer being a first-time entrant in
international expansion, these firms no longer fall into Li’s (1995) first-time foreign entrant category (which
he found were more likely to fail than repeat entrants).
By focusing on a firm’s foreign experience, we are focusing on the capabilities that firms gain that
transcend specific foreign markets. Like others, we argue that some of the knowledge and learning about
the foreign expansion process that managers gain through their initial entries in foreign markets will be
useful to their expansion in other countries. For example, Barkema, Bell and Pennings (1996) analyzed
the survival rates of 13 Dutch firms’ foreign subsidiaries and found that firms benefit from previous
experience in the same country as well as previous experience in countries with a similar culture. Terpstra
and Yu (1988) and Yu (1990) have shown that a firm’s prior international experience matters because firms
gain knowledge from investments that can be used in other markets, while Blandon (2001) has shown that
prior foreign involvement significantly explains entry into the Spanish banking sector by foreign banks. In
addition, managers may build organizational routines that allow firms to efficiently expand abroad in many
markets (Westney, 1988; Madhok, 1997, Johanson and Mattsson, 1988). Further, Delios and Henisz
(2000) have shown that firms build hazard-mitigating capabilities that provide benefits for future market
entries. While it is obvious that managers need to learn about country-specific issues (including the
specific cultural and institutional differences) with each entry into a foreign country, they can also build on
the parent level firm-specific information and learning from their initial entries (Chang, 1995, Barkema et
10
al., 1996, Pennings, et. al., 1997, Madhok, 1997). The parent level firm resources that may be developed
through previous international experience include but are not limited to parent level managerial capabilities
to coordinate activities across borders, to successfully identify foreign markets in which opportunities exist
for the firm, to manage foreign employees, to deal successfully with foreign governments and to deal with
cultures and institutions that are different from the home market. As firms gain experience with each of
these activities they will also be developing managerial capabilities that will be useful for future foreign
expansions.
In terms of the performance effects from a firm’s more advanced levels of multinationality, the
internalization theory argument that firms can exploit the intangible assets of technological know-how and
marketing ability from their home market in foreign markets provides one reason for investors to value a
firm’s international investments. The reasoning from this theory is likely to influence the valuation of both
initial and advanced levels of foreign expansion. More specifically, if a firm exploits its intangible assets of
technological know-how and marketing ability from its home market, then the interaction terms between
these intangible assets and multinationality would be positive and significant in both an initial and
advanced level of international expansion. However, there are other reasons a firm’s international
operations in an advanced stage may be valued beyond providing the firm with additional markets in which
to exploit their home-based technological and marketing knowledge. Shareholders may value a firm’s
access to profitable markets (this may be even more valued during economic downturns in the home
market); or shareholders may value a firm’s access to new types of technological know-how or marketing
knowledge in foreign markets that can be transferred elsewhere. Further, as Kogut (1983) argues, one
advantage of a multinational firm lies in the global network that is available to the firm. Shareholders may
value the arbitrage and leverage opportunities Kogut describes as being available to firms with a more
advanced level of multinationality. More specifically, shareholders may value an MNEs ability to arbitrage
11
institutional restrictions, informational externalities and the cost savings gained by joint production in
marketing and manufacturing.
After a firm has established subsidiaries abroad and has invested in more advanced levels of
international expansion, we predict that FDI will increase firm value beyond simply enhancing the parent
firm’s intangible assets of technological know-how and marketing ability. Firms with more advanced levels
of investment abroad have shown shareholders that they can succeed in foreign markets. These firms are
providing a signal to investors that they are able to successfully expand in foreign markets. Further, we
argue that firms acquire competencies as they are expanding abroad – especially managerial and
operational competencies that can be applied to other markets as a firm continues to expand abroad.
Finally, these firms have more network options, including the ability to tap into foreign know-how, or more
profitable markets (Kogut, 1985, Kogut and Chang, 1991, Wesson, 1993, Kuemmerle, 1997). These
reasons lead us to predict that as a firm gains higher levels of activity abroad (and after a firm has
experience with foreign subsidiaries), a firm’s FDI may be valued by investors beyond simply enhancing
the parent firm’s intangible assets of technological know-how and marketing ability.
Hypothesis 3: Relative to an initial stage of international expansion, during a more advanced
stage of international expansion a firm’s FDI will be valued positively and significantly by investors
One study that found the opposite of what we are suggesting is Doukas and Travlos (1988), who
analyzed the impact of US firms’ foreign acquisitions on the market value of the firm. They found
differences between shareholder valuation of MNEs that already operate in a foreign country and MNEs
that do not already operate in the foreign country — first time foreign acquisitions into a country are
positively valued by investors, while acquisitions by firms already operating in the target market are
insignificantly valued by investors. One reason their results are different from our hypothesis may be
because they limited their sample to include only acquisitions. We suspect that at an initial stage, this
12
entry mode may be valued differently. By acquiring a firm in a local market, an MNE is buying an already
established firm in a foreign market. This provides the firm with an operation that has already proven itself
in this market, and already has access to local distribution, marketing, and general information. The firm is
reducing the amount of risk they will be subject to in this new market. Further, managers from the parent
firm may be able to learn less about the local market on their own because they are buying an operation
that is already up and running. At an advanced stage, however, we are not sure why Doukas and Travlos
find insignificant results as our reasoning about the benefits from foreign experience should apply to all
entry modes. In the present study, we consider all foreign direct investment, the majority of which is via
greenfield investment for Japanese MNEs to test our hypotheses. 5
Hypotheses 1 and 2 complement Hypothesis 3. In Hypothesis 1 and 2, we focus on firm motives
and causality in strategic actions as we examine the causal relationship between the accumulation of
intangible assets and FDI to test the predictions of the internalization theory. In addition, we examine
whether Japanese FDI has been asset-exploiting (hypothesis 1), asset-seeking (hypothesis 2), or both. In
Hypothesis 3, we test the outcomes from this investment and the perceptions of valuation by shareholders.
We test whether FDI (at both initial and advanced foreign investment levels) creates excess value because
firms are exploiting their intangible assets and/or because of other reasons. Through these three
hypotheses, we analyze the process of resource accumulation and overseas expansion by MNEs and
examine how this overseas expansion is a source of value to firms.
In all three of our hypotheses, we have focused on a firm’s foreign direct investment in our
discussion of a firm’s multinationality. However, we believe that it is important to consider exports in
addition to a firm’s FDI to more fully analyze a firm’s multinationality. Trade models have shown that
exports and FDI can have either a substitution or complementary relationship (or both), depending on
whether a firm is exporting intermediate or final goods (Bloomstrom et al., 1988; Lipsey and Weiss, 1981;
13
Markusen, 1995; and Swedenborg, 1979). In addition, from a more practical point of view, Japanese
manufacturing firms had very high levels of exporting prior to the mid-1980s. With the appreciation of the
yen and a series of trade disputes, there was a decline in Japanese export growth and an increase in
Japanese foreign direct investment starting in the late 1980s. As the literature is not clear on the
relationship between FDI and exports (and because exports could occur either because a firm (or country)
has a comparative advantage in cheap inputs or because a firm possesses superior technological or
marketing capabilities), and because we do not have intra-firm trade information for our firms, we do not
pursue specific hypotheses on the performance effects from a firm’s exports. 6 However, to more fully
analyze the performance effects from a firm’s multinationality, we include both FDI and exports in our
analysis. We include a firm’s exports as an intangible asset of the firm in our models below because
similar to FDI, we believe that a firm’s exports provides benefits beyond the capital investment made by the
firm. 7 Further, regarding hypotheses one and two above, as the internalization theory does not offer
specific predictions about exports we do not posit specific hypotheses here regarding the relationship
between a firm’s intangible assets and its exports, or a firm’s FDI and its exports. However, we test the
relationship between these variables to more fully analyze the data and the causal links between a firm’s
multinationality and its intangible assets of technological know-how and marketing ability.
METHODS
Data
Our sample consists of all publicly traded manufacturing firms that are listed in the Japanese
Development Bank (JDB) Database from 1974-1997 and that provide information on their advertising and
R&D expenditures throughout this time period. Similar to US firms, Japanese firms do not consistently
report their R&D and advertising expenditures over time. Because of the missing R&D and advertising
data, our sample includes 3,384 observations for 141 firms over this twenty-four year period. 8 After
14
factoring in lags, we end up with a sample of 2961 observations for our panel of firms. Because we have
limited our sample to include only those firms reporting their R&D and advertising expenditures, we
compared our sample of firms and the entire population of publicly traded manufacturing firms and found
that our sample is representative of the population.9 All firm-level financial information is based on data
reported in either the JDB Database or the Japan Company Handbook. All financial figures are real annual
figures deflated to the base year 1970 using Japanese GDP deflators published in the Bank of Japan’s
Economic Statistics Annual. Table 1 gives summary statistics of the main variables, while Table 2 reports
the product moment correlations between these variables. Table 3 describes the operationalization of
each of the variables (including the control variables to test for the robustness of the results), while the
main variables of firm performance, marketing ability, technical know-how, exports and FDI are discussed
in more detail below.
Firm Performance. We use a firm’s Tobin’s q value to measure firm performance. Tobin’s q is defined as
the ratio of the market value of the firm to the replacement cost of its tangible assets. The attractiveness of
Tobin’s q is that, first, it provides an estimate of the firm’s intangible assets and second, no risk adjustment
or normalization is required to compare q across firms (Lang and Stulz, 1994). In this paper, JDB financial
data have been used to create Tobin’s q values and Hoshi and Kashyap’s (1990) methodology for
calculating Tobin’s q values for Japanese firms has been followed. In this methodology, a number of
corrections have been made to the data that are reported by Japanese firms to correct for the fact that
Japanese firms’ book values tend to be much lower than replacement values — with land values being the
most prominent problem. (For more discussion of this methodology, see the Appendix.) Chart 1 shows
the average Tobin’s q values for the firms in the sample.
Marketing Ability (ADStock). A firm’s annual expenditure on advertising has been used as a proxy for
marketing ability in many studies (Morck and Yeung, 1991; Morck and Yeung, 1992; Pugel et al., 1996;
15
Kogut and Chang, 1991; Belderbos and Sleuwaegen, 1996). However, a better proxy for marketing ability
should capture a firm’s accumulation of “marketing capital” as studies on advertising expenditures have
found a long-term effect on sales that carry over to multiple years (Peles, 1971; Hirshey and Weygandt,
1985; Broadbent, 1993). To more accurately reflect the marketing ability a firm gains from its advertising
expenditures, an advertising stock measure (that includes both accumulated and current period
expenditures) is used to proxy for a firm’s marketing ability. While there is no consensus in the literature
on the rate of depreciation, we follow Hirschey and Weygandt (1985) and use a depreciation rate of 50%
for previous years’ expenditures going back two years.
Technical-Know How (R&DStock). Following other studies, a firm’s R&D expenditures are used as a proxy
for technical know-how. Similar to the arguments for the long-term effects of advertising expenditures,
Grilleches and Mairesse (1984) have argued that a firm’s R&D expenditures have long term effects that
influence a firm’s market values over time.
Thus, an R&D stock measure (which includes both
accumulated and current period expenditures) is used to proxy for a firm’s technical know-how. In this
study, Grilliches and Mairesse (1984) are followed, and a depreciation rate of 15% is applied to the firm’s
previous year expenditures going back four years.
FDI Variables. Following other studies that have analyzed performance effects, 10 the measure for FDI
used in this study is a count for each firm of the number of foreign subsidiaries; the higher the number of
subsidiaries, the higher the degree of FDI for that firm. For each of the 141 firms in the sample, a native
Japanese speaker determined the number of subsidiaries for each year from the Japanese language
directory of firms with foreign subsidiaries, the Toyo Keizai Shinposha Directory. As the directory for each
year was examined, our data reflect entry and exit, and the global reconfiguration of activities by the 141
firms in our sample. Domestic firms, that are not multinationals and thus have no subsidiaries abroad, are
included in the sample; a portion of these firms became multinational during the time period of this study.
16
Exports. The share of exports in total sales was determined for each firm for each year from the Japan
Company Handbook. This share was multiplied by the total sales of the firm to obtain a yen value amount
for total exports from the parent firm. There are 15 firms that never report any values (zero or otherwise)
for exports throughout the twenty-four year period.
Controls: To ensure that our results are not driven by other firm characteristics that have been identified in
other studies as influencing a firm’s q ratio, we include a number of controls in our analysis (see Lang and
Stulz (1994) for a discussion of this literature). In firm-level analyses of the type we are considering, it is
common to include some measure of the firm’s historical performance to capture the growth prospects of
the firm.11 As a control, we include the growth rate of the firm’s labor force to address this issue.12 It is
also common to include debt, to proxy for any variation in firm values because of differences in capital
structure or differences in a firm’s ability to access financial markets. 13 We also include a control for real
exchange rate effects. There have been mixed theoretical arguments and empirical results on the
question of whether there is a link between exchange rate movements and FDI. 14 To ensure that we are
not simply capturing exchange rate effects, the Yen real exchange rate is used to control for real exchange
rate effects. (Real exchange rate interaction terms with FDI and exports are used to capture firm-level
effects of exchange rate movements.) In addition, we include the keiretsu membership dummy variable. It
has been argued that Japanese bank-centered business groups, know as keiretsu, have better access to
capital than independent firms and are less liquidity constrained. This structure might provide an important
source of competitive advantage (Gerlach, 1992) and allow those firms to invest more (Hoshi, Kashyap
and Sharfstein, 1990, 1991). By using a keiretsu dummy variable, we are controlling for these potential
effects. Table 2 describes these control variables in more detail and also provides information on industry
variables, which were included to test for the robustness of the results.
17
Specifications
In hypotheses 1 and 2, we are interested in testing whether knowledge is being transferred from a
firm’s home market to its foreign subsidiaries (Hypothesis 1) and whether knowledge is being transferred
back to a firm’s home market from its foreign subsidiaries (Hypothesis 2). Granger’s test of causality
(Granger, 1969) provides a means to test whether statistically one can detect the direction of causality
when there is a lead-lag relationship between two variables. Granger causality tests are performed by joint
F-tests of the hypothesis that the collective coefficients of the lagged causal variables in the model are
significantly different from zero. Considering a hypothetical case of two variables, a and b, Granger’s test
of causality can result in four cases: unidirectional causality from variable a to variable b; unidirectional
causality from variable b to variable a; feedback (or bilateral causality); and independence of the two
variables. In our estimation, feedback is captured by testing for increases in expenditures in the parent
firm’s home market. (For a parent firm to use knowledge it has gained from its subsidiaries abroad,
additional expenditures to absorb and fully exploit this knowledge in the home market would most likely be
needed.)
We applied Granger’s test of causality to consider the issue of precedence between the variables
RDStock and ADStock and a firm’s FDI, between a firm’s exports and its FDI, and between a firm’s exports
and its RDStock and ADStock. We use first differences of these variables to capture the changes to them.
Using R&DStock and FDI as an example, the two equations for these variables are estimated by:
n
n
j 1
k 1
FDI it   j FDI i (t  j )    k RDStock i (t k )   it
n
n
j 1
k 1
RDStock it    j FDI i (t  j )    k RDStock i (t k )   it
18
(1)
(2)
where variables are for firm i in year t, and n is the lag period. Granger causality tests are performed by
joint F-tests of the hypothesis that the collective coefficients of the lagged causal variables in the model are
significantly different from zero. With several lags of the same variable, each estimated coefficient may not
be statistically significant, possibly due to multicollinearity. Therefore, we report the sum of the coefficients
in Table 3. Because the results of the Granger causality test can be sensitive to the specification of the lag
structure, we ran our tests separately using 3, 4, 5 and 6 lags in our equations. The equations are similar
for the other sets of variables we test.
One potential problem with our specification is that it may inappropriately aggregate firms in
industries with different export and intangible asset accumulation experiences. Further, our results in this
section could also be affected by the voluntary export restraints (VERs) that were imposed on the electric
equipment, machinery and transportation industries in Japan. To test the robustness of the results, we
eliminated firms in these three industries from our sample and re-ran the Granger causality tests.
The methodology for testing hypotheses 3 builds on the approach from earlier studies of market
valuation. The financial market-based approach has strong theoretical and empirical foundations in the
efficient-markets literature (Ross, 1983; Fama, 1970). In a well-functioning capital market, the financial
market value of a firm provides the best available unbiased estimate of the value of a company’s assets
(including both tangible and intangible assets). A basic assumption in this paper is that there is financial
market efficiency and that the market value of a firm (V) is the sum of the value of its net tangible assets
(T) and its net intangible assets (I). Thus,
V=T+I
(3)
For publicly traded firms, V is defined as the market value of its outstanding common shares plus
estimates of the market value of its debt. The tangible assets variable is an estimate of the replacement
value of the firm’s tangible assets. The intangible assets that are included in our model are technical
19
know-how, marketing ability, exports and FDI. As indicated above, a leverage variable (debt) is also
included to proxy for any variation in firm values owing to differences in capital structure. To control for firm
size, all variables are scaled by the replacement cost of tangible assets.15
V T I
 
T T T
(4)
This causes the left hand side of the equation to become Tobin’s Q.
Because we are interested in how a firm’s multinationality is valued, we test two equations. First,
we test only the main effects of our variables:
Qit  i  1
R& DStock it
ADStock it
Debt it
Exportsit
FDI it
 2
 3
 4
 5
 it (5)
Assetsit
Assetsit
Assetsit
Assetsit
Assetsit
where Q is a firm’s Tobin’s Q ratio; R&DStockit is a firm’s stock of technical know-how; ADStockit is a firm’s
stock of marketing ability; Debtit is a firm’s debt; Exportsit is a firm’s exports; FDIit is the number of a firm’s
foreign subsidiaries; and Assetsit is a firm’s total tangible assets. i represents intangibles related to other
factors, in Japanese firms, this term could represent such intangible assets as efficient use of human
resources, management style or expertise, just-in-time delivery of components, or strict quality control.
Finally, it is an error term. Equation (5) indicates that a firm’s value to shareholders (as measured by its
Tobin’s Q) is a function of its technical know-how, marketing ability, leverage (debt), exports and FDI.
Interaction terms between the FDI variables and both of the intangible assets are then added to
test the interaction effects (between a firm’s multinationality and its intangible assets of technological knowhow and marketing ability) in the following equation:
Qit   i  1
R& DStock it
ADStock it
Debt it
Exportsit
FDI it
 2
 3
 4
 5
Assetsit
Assetsit
Assetsit
Assetsit
Assetsit
 FDI it
 FDI it
R& DStock it 
ADStock it 
  7 
 
 6 
*
*
Assetsit 
Assetsit  it
 Assetsit
 Assetsit
20
(6)
Equation (6) allows for consideration of whether a firm’s multinationality increases its value because it
enhances a firm’s intangible assets of marketing ability and technical know-how, or if it increases a firm’s
value independently.16
To test for the effects of a firm’s foreign experience – and differences between a firm’s initial and
advanced levels of international investment – we included a dummy variable for firms at an advanced
stage on international expansion. We include this advanced FDI dummy variable as a main effect in
equation (5), and interact it with all of our FDI terms in equation (6). Because there is certainly some
subjectivity in deciding when a firm has reached an advanced stage of investing internationally, we tested
two separate dummy variables for the advanced stage. The first dummy variable we tested takes a value
of 1 after the firm’s first three years of investing abroad and 0 otherwise. The second advanced dummy
variable we tested takes a value of 1 after the firm’s first five years of investing abroad and 0 otherwise.
We only report the first dummy variable results below (using the dummy variable for an advanced stage
after three years of investing abroad), but note that the results are the same for each of these dummy
variables.17. In addition, we test both equation (5) and (6) including the controls for exchange rate and firm
growth discussed above.18 Finally, we also tested our model including an FDI squared term, to ensure that
we were not overlooking a non-linear relationship. (As the FDI squared term was positive but not
significant, we do not report these results below.) In addition, we ran our models with an additional
advanced dummy variable to capture differences at high levels of geographic expansion (for firms with 10
or more foreign subsidiaries and separately for a firm with 25 or more foreign subsidiaries). In both of
these cases, the advanced dummy was positive and significant.
Hsiao (1986) and Baltagi (1995) have noted that pooling data across time can result in serially
correlated error terms. In fact, the combination of time-series and cross-section variables adds a
21
dimension of difficulty to the problem of model specification because the error term may be correlated over
time and over cross-sectional units. This serial correlation problem can introduce substantial bias into the
efficiency of the estimators. To control for serial correlation problems, we use the first differences of all
variables and include a first-order autoregressive term.19 By using first differences, we are capturing new
investment by a firm for each variable in our models. We use generalized least squares (GLS) to test
Hypothesis 3. To ensure that the results are not influenced multicollinearity between the main and
interaction terms, we centered the variables involved with the interaction terms (Aiken and West, 1991).
There are differences across industries in terms of the accumulation of intangible assets, level of
exports and FDI. Thus, as with our Granger test of causality, one potential problem with our specifications
for Hypothesis 3 is that they may inappropriately aggregate firms in industries with different export and
intangible asset accumulation experiences. As a test for the robustness of the results, we performed four
additional tests.
First, we eliminated the observations in the three industries (electric equipment,
machinery and transportation) that were affected by VERs and antidumping measures in the late 1980s. 20
Second, we ran our equations with industry dummy variables (for all industries). Further, we included a
keiretsu dummy variable in our models. Further, as noted above, there are 15 firms that do not report
export data. To ensure that these missing data points which were assumed to be zero are not driving the
results, we also ran our models with a reduced sample of 126 firms. As the results are not affected by
these firms, we report the results using the full sample. Finally, we ran our models using year dummies
and excluding the bubble economy years (1986-1990) to test for the robustness of our results.
RESULTS
Asset Accumulation and Investment Abroad
In Hypothesis 1, it was predicted that the accumulation of a Japanese firm’s intangible assets
would precede its direct investment abroad. Table 3 reports the Granger causality results for firms in all
22
manufacturing industries.
This table provides the F-statistic for Granger causality, the number of
observations, the sum of the lagged explanatory coefficients and the adjusted R-squared statistic for the
pairs of bivariate relations. Table 3 reveals that for all manufacturing firms, RDStock and ADStock Granger
cause FDI – providing support for the predicted relationship from the internalization theory between a firm’s
intangible assets of technological know-how and marketing ability and its investment abroad.21
To test the robustness of the results, Table 3 also reports the Granger causality results excluding
firms in the electric equipment, machinery and transportation industries, and for industrialized (INDFDI) and
lesser developed country location FDI (LDCFDI) considered separately.
With the reduced sample
(excluding industries that have been affected by government regulations restricting exports), the only
statistically significant relationship is that RDStock Granger causes FDI (the same results occur whether
three, four, five or six lags are used). The ADStock variable does not Granger cause FDI in this reduced
sample. In the sample where advanced and developing country locations are considered separately, each
of the intangible assets of RDStock and ADStock Granger cause FDI in both of these locations.
Our results do not support Hypothesis 2, that there is feedback from FDI to either RDStock or
ADStock. As can be seen in Table 3, we do not find feedback in the full sample, in the reduced sample
excluding industries affected by export restrictions, or in our sample where industrialized (INDFDI) and
Less Developed Country FDI (LDCFDI) is considered separately. To further test for feedback from FDI to
the parent firm’s intangible assets of technological know-how and marketing ability, we broke our sample
into three additional subsamples: we limited our FDI variable to include only those observations from a
firm’s advanced level of FDI, we broke our sample into decades (the 1980s and the 1990s), and we
excluded subsidiaries in China. We were unable to find feedback in any of these subsamples.
23
Shareholder Valuation of Multinationality
Hypothesis 3 predicts that in a more advanced stage of a firm’s international investment (and after
a firm has foreign experience), FDI will be valued directly by investors. Table 4 reports the standardized
parameter estimates of the main and interaction effects models (with t-statistics in parentheses), and
provides support for this hypothesis. As revealed in Table 4, the interaction between a firm’s FDI and the
AdvanceDummy is positive and significant. Further, Table 4 reveals that in both models (the main effects
and interaction effects models) a firm’s initial FDI is negatively and significantly valued by shareholders.
Regarding the economic significance of the intangible assets included in our models, a firm’s
technological know-how is the highest valued variable. Our multinationality variables of FDI and exports
are valued the second highest in our models – with each yielding similar increases to firm performance.
We included many controls in our models, and overall, we find our results to be robust. The
coefficient for debt was not significant in either model. Though not reported in the tables, the statistical
significance of any parameter does not change with the inclusion of industry or year dummies, or keiretsu
membership. While some industry dummies are significant, the keiretsu variable is not significant in any
model. In addition, the results do not change when the 15 problem export firms are dropped from the
sample. To further test for the robustness of the results, we also ran our models excluding firms in the
electric equipment, machinery and transportation industries. We have not reported the results in the Table
4 because with the reduced sample, the only difference is that the main effect of the ADStock variable is
not significant. Finally, we attempted to include data on the type and location of each firm’s foreign
subsidiaries. However, when we broke down our initial and advanced FDI variables into industrialized and
LDC country location components, the highly correlated nature of the main effects FDI variables 22 affected
the reliability of the results.
24
DISCUSSION AND IMPLICATIONS
In this paper, we have examined both the motivation for a firm’s foreign direct investment, and the
outcome from this investment to more fully examine how firms build and sustain their competitive
advantage. By analyzing the relationship between a firm’s lagged technological know-how and marketing
ability and its foreign direct investment, we have contributed to the international management literature by
providing a dynamic test in support of the internalization theory. In addition, we have moved beyond this
theory to examine whether MNEs both exploit and develop capabilities through their foreign direct
investments. In our analysis of the performance effects from multinationality, we have revealed an
important resource that is needed before performance benefits will accrue to firms from their multinational
operations. By focusing on the managerial capabilities a firm can develop from its foreign expansion, we
have identified an additional intangible asset that should be considered among a firm’s resources and
capabilities. Neither the resource-based view nor the international management literatures have examined
how this distinctly international resource may moderate the performance benefits from a firm’s
multinationality. Further, by not considering how foreign experience may influence performance effects
from multinationality, previous studies may be overstating the influence of other intangible assets
commonly included in the analysis.
The results from our analysis of the motivation for foreign direct investment provide very robust
empirical support for the internalization theory. Our analysis of Granger causality reveals that Japanese
FDI has been asset-exploiting and provides support for the internalization theory’s prediction that the
accumulation of a firm’s intangible assets precedes its investment abroad. Because our results do not
support the existence of feedback from FDI to intangible assets, it may be the case that Japanese
shareholders value FDI mainly as a revenue generator for Japanese firms in the later period. It might take
years for FDI to work as a vehicle to transfer overseas knowledge back to parent companies; even in this
25
twenty-four year study, however, this relationship was not captured. Interestingly, Mitchell et al. (1998)
found support for feedback from FDI to intangible assets with their US sample. US firms may have already
reached the point where a firm’s FDI serves as a vehicle to transfer knowledge back to the parent
company. Alternatively, there may be differences between how US and Japanese firms establish and use
their FDI which is causing different results between US and Japanese firms. For example, Japanese firms
consistently had lower return on assets than their US counterparts during the period of this analysis and,
ironically, US subsidiaries in Japan are more profitable than Japanese firms (Porter et al., 2000). An
additional explanation is that our findings could suggest that Japanese FDI is primarily oriented toward
market expansion. It is important to note that in the present study our lack of support for an asset-seeking
motive does not mean that asset-seeking does not occur. Rather, our results suggest that the meantendency explanation for Japanese foreign direct investment is asset-exploitation. Clearly, additional study
is needed to determine whether we do not find feedback because of our specifications or because the
average Japanese firm is not pursuing FDI for asset-seeking reasons.
Regarding performance effects, as predicted, we found that a firm’s more advanced level of
international investment in FDI is valued positively and significantly by shareholders. While the results
from our test of the internalization theory emphasize the importance of intangible assets, our performance
effects results reveal that intangible assets are a necessary but not sufficient condition for performance
benefits from multinationality. Not all firms that spend a few years operating abroad will experience
performance benefits from increased multinationality. It is only after a firm has accumulated foreign
experience and signaled to shareholders that it has managerial capabilities to manage operations in
foreign markets that performance benefits will accrue to a firm. Our results suggest that while it is typical
for Japanese firms to accumulate intangible assets in their home market prior to investing in foreign
markets, firms need experience in foreign markets before a return on this investment will be realized.
26
The implications of our findings are different for firms versus shareholders. First, confirming the
internalization theory, our results reveal that for all manufacturing industries, firms typically invest first in
intangible assets and then in foreign expansion. (This finding holds even after export-oriented industries
are taken into account.) Equally important, our results reveal that FDI itself is valued by shareholders after
a firm has experience in foreign markets. This suggests that initially flat performance effects as a result of
increased multinationality need not be viewed with nervousness. Rather, managers should concentrate on
ensuring that their initial ventures abroad are successful to provide evidence to shareholders that the firm
is able to compete in foreign markets. Managers should allow for foreign experience to be gained prior to
evaluating whether FDI is contributing to or detracting from overall firm value.
For shareholders, our results suggest that it is important to wait and see which firms will be
successful in foreign markets before rewarding this type of expansion. It is only after a firm’s initial
expansion abroad that foreign experience has been gained and that shareholders have information about
whether a firm has the necessary international managerial capabilities to succeed in international
endeavors. In addition, our findings suggest that shareholders do indeed view firms as the resource-based
view suggests – as bundles of resources and routines. Increased multinationality can add value to a firm if
it offers the potential for the creation of additional rents from the firm’s resources. One way shareholders
can determine that a firm will be able to create additional rents in foreign markets is if the firm has signaled
that it has acquired international managerial capabilities that it can use in its foreign expansion.
An important distinction between our work and much of the work that has analyzed the
performance effects of multinationality is the setting of our sample. Most of the existing studies have used
US samples where a firm’s initial overseas investments are not observed for a majority of the firms in the
sample (due to the lack of good historical data sources on the initial international expansion of large US
publicly traded firms). With cross-sectional work in particular, findings of performance increases when US
27
MNEs have intangibles assets could in fact be due to both the firm’s intangible assets and its foreign
experience. Without good historical data on the initial overseas investments of firms, we are unable to
conclude how a firm’s foreign experience may be influencing the results. The Japanese sample used in
this study provides an ideal setting to explore the foreign experience variable because of the superior
historical record for the initial international expansion of these firms.
Finally, there are limitations to this study. While the positive aspects of using a Japanese sample
have been explained above, the fact that only Japanese firms have been included in the sample limits the
generalizability of the results. Similar analyses need to be performed on other samples (that have good
data on the initial international expansion period of the firms that are included in the sample) to ensure that
these results are not unique to Japanese MNEs. An additional limitation of this study is that the degree of
multinationality variable is measured simply as a count of the number of foreign subsidiaries. A better
measure would take into consideration additional issues to provide more information on the type of foreign
experience a firm is gaining – such as the size of the foreign subsidiaries, the number of employees, or the
market value of the subsidiaries. We were unable to include these issues in the present analysis, as the
data were not consistently available over the twenty-four year period of the study. The present study
provides a useful starting point for further analysis of these issues.
28
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35
APPENDIX
Calculating Tobin’s Q for Japanese Firms
To calculate Q for Japanese firms, Hoshi and Kashyap’s (1991) method was followed. The
financial data comes from the Japanese Development Bank (JDB) database for publicly traded Japanese
firms. Other sources are noted in the summary of the calculations below. Q is defined as the ratio of the
value of a collection of assets to their replacement cost, using the following formula:
Q = Pg,tVt / Pk,tXKt
where Pg,tVt is the market value of the firm (and includes the value of debt), P k is the price of capital and
XKt is the market value of the firm’s assets.
Equity is calculated as the number of shares outstanding (at the end of the accounting period)
times the price of a share. The price of a share is the average of the high and low values during the
accounting period. This value was used because the end of period share price was only available for
approximately 70% of the sample. Tobin’s Q was calculated for the firms for which the end of period share
price was available for the years 1984, 1989 and 1994 and was found to result in Q’s that had a .95
correlation with the Tobin’s Q values which were calculated with the average share price.
Debt: Short term and long term liabilities are arranged into two categories: interest-bearing and
non-interest-bearing liabilities. Liabilities (like loans, for example) require interest payments and are
grouped into the interest-bearing liability category. In this category, all distinctions between debt and
borrowing are dropped. The remaining liabilities are categorized as non-interest-bearing liabilities
(including things like accounts payable to affiliated companies and accrued expenses to affiliated
companies). For these, the market value is assumed to be the book value. The market value of interestbearing liabilities is calculated by dividing the interest payment of a firm by a properly averaged interest
rate. This rate is given in Hoshi and Kashyap as: rat = (rstBSt + rltBLt) / (BSt+BLt), where rst and rlt are the
short-term and long-term interest rates and BSt and BLt are the short-term and long-term interest bearing
liabilities in book values. Essentially, rat is a weighted average of short-term and long-term interest rates –
determined by the proportions of long-term and short-term interest-bearing liabilities of each firm.
Prevailing interest rates were taken from the 1997 Economic Statistics Annual. The average rate for loans
and discounts made by all types of bands was used for the short-term interest rate; the longest remaining
life bonds for listed bonds was used for the long-term interest rate.
Inventories: Firms can value their inventory in several ways. In Japan, these methods include:
first-in first-out (FIFO); last-in first-out (LIFO); average method; individual method; latest cost method; and
sales price method. For firms that use a last-in first-out method of inventory valuation, the book value can
be significantly different form the market value. Following Hoshi, we assume that for all method except
LIFO, the book value should be close to the market value. The JDB database indicates the inventory
valuation method for three categories of investment, including: a) inventories of finished goods; b)
inventories of work in progress; and c) inventories of raw materials. In this sample, approximately 4% of
the firms use the LIFO method. For these firms, we adjusted the book value in the following way. It is
assumed that in 1970 (the first year for which the method of valuation is reported), the book and market
values of inventories are equal. If a firm increases its inventories, any additions are assumed to be
recorded on the books at the prevailing market value. The sum of the current year’s additions and the
36
inflation-adjusted market value of the inventories that were carried forward from the previous period give
this period’s market value for inventories. If a firm decreases its inventories, it is assumed that the cleared
inventories are 1 year old and the appropriate correction for inflation is made. The following formulas were
followed:
INVt = INVt-1*(PrINVt/PrINVt-1) + DELINVt
= INVt-1*(PrINVt/PrINVt-1) + DELINVt (PrINVt/PrINVt-1)
if DELINVt >0 or DELINVt=0
if DELINVt < 0
where DELINVt = INVt-INVt-1. Wholesale price indices were used to adjust the market value of inventories
which are carried forward.
Land: For most companies, the value of land is recorded using the price when it was purchased.
To adjust these market values, a LIFO-type adjust is made. The first year for which land price valuation
information is available is 1970. Thus, a base year of 1970 is used (where it is assumed that market value
equals book value). To correctly adjust for inflation, the holding period for which land is sold is needed.
Like Hoshi and Kashyap, it is assumed that land which is sold was bought at the most recent price the firm
paid for any land acquisitions. The recursion for the market value of land after 1970 is given as:
If a firm acquires land in a period:
MARVALLANDt = MARVALLANDt-1(Prlandt /Prlandt-1) + ACLandValt
If a firm sells land in a period:
MARVALLANDt = MARVALLANDt-1(Prlandt / Prlandt-1) +SoldLanValt (Prlandt / Prlandlastboughtt-…)
The land price index in the 1997 Economic Statistics Annual was used in the recursion. For firms that
have their main offices in one of the six prefectures that have the six largest cities, the land price index for
commercial areas in the six largest cities was used. The large city category includes the six largest cities
in Japan: Tokyo, Yokohama, Osaka, Nagoya, Sapporo and Kyoto. The Japan Company Handbook was
used to determine where the principal office of each firm was located. For all other firms, the urban land
index was used.
Depreciable Assets: Since the capital stock is recorded using the purchase price, it is necessary
to adjust the book value for depreciable assets as well. The reevaluation method is essentially a LIFO type
recursion which is augmented to take depreciation into account. It is assumed that the same proportion of
the capital stock depreciates every year. To calculate this firm-specific rate, it is necessary to distinguish
between firms which use exponential depreciation and those which use straight line depreciation. The JDB
gives the method of depreciation back to 1970, so this is the base year for each type of depreciation. For
firms which use exponential depreciation (85% of our sample), the economic depreciation rate is given as:
97
Decon = (1/28) 
(Deprect/Kt+Intant+FinanInvest+Dept)
t=70
where the denominator is the stock of the depreciable assets, the intangible assets, the financial
investment and the depreciation. The depreciation which is reported by Japanese firms includes each of
these types of assets. For firms which use straight line depreciation, it is first necessary to estimate the
average life of capital:
97
L = (1/28) 
(Kt+Intant+FinanInvest+Dept/Dept)
37
t=70
Following Hoshi and Kashyap, if alpha is the ratio of the scrap value of the capital to its initial value, then
the economic depreciation is calculated as the value of the exponential depreciation rate (Decon) that
would leave exactly alpha of an investment after L years. Decon is: Decon = 1 - []1/L
The ratio of scrap value to initial value for fixed tangible assets is mandated by Japanese law to be .10,
and this value is used here. Using these estimates for Decon, the market value of depreciable assets XK t
can be calculated through the following recursion (where it is assumed that depreciation occurs at the end
of the period):
XKt = [XKt-1(Pk,t/Pk,t-1) + It]*( 1-Decon)
where It is the investment in depreciable assets, and is imputed from changes in the book value of capital
with a correction for depreciation. I t= Kt - Kt-1 + yDept
where y is defined as the fraction of depreciation that occurs for depreciable assets – it can be estimated
as:
97
y = (1/28)  (Kt /Kt+Intant+FinanInvest)
t=70
As Hoshi and Kashyap note, this method imposes consistency between the capital and investment
measures. The wholesale price index for investment goods is used for the price of new capital.
38
Chart 1: Average Tobin's Q (1974-1997)
3.5
3
Q Ratio
2.5
2
Average Tobin's Q
1.5
1
0.5
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
0
Year
TABLE 1
Descriptive Statistics and Product Moment Correlations
1. ADStock 2.RDStock 3.Debt
4.FDI
4a INDFDI
4b LDCFDI
Number of Obs:
Mean
St. Dev.
Minimum
Maximum
1. ADStock
2. RDStock
3. Debt
4. FDI
4a INDFDI
4b LDCFDI
5. Exports
3384
3848
7517
1.36
65840
3384
15560
53984
1.19
6914557
1
.31
-.12
.14
.20
.03
.08
1
.36
-.28
.29
.16
.05
3384
120109
271335
1720
3431605
1
.15
.06
.18
.07
39
3384
21
13.2
0
89
1
.79
.77
.03
3384
14.8
7.8
0
57
1
.72
.02
3384
15.9
8.5
0
55
1
.05
5.Exports
3384
27728
83658
0
1256143
1
Q
TABLE 2
Operationalization of Variables
Firm performance is measured by Tobin’s q ratios – the ratio of a firm’s market value to the
replacement cost of its tangible assets, following Hoshi and Kashyap (1990). All variables
are inflation adjusted using Bank of Japan GDP deflators.
ADStock*
ADStock (a firm’s marketing ability) is the total value of 100% of a firm’s current year
expenditures on advertising, plus spending from the previous two years depreciated at a
50% rate. Yearly firm level data come from JDB and are inflation adjusted. (mil of yen)
RDStock*
RDStock (a firm’s technological know-how) is the total value of 100% of a firm’s current year
expenditures on R&D, plus R&D spending from the four previous years depreciated at a
15% rate. Yearly firm level data come from the JDB and are inflation adjusted. (mil of yen)
FDI*
INDFDI
LDCFDI
A firm’s number of foreign subsidiaries according to the Toyo Keizai Shinposha Directory.
Using World Bank definitions, the number of foreign subsidiaries in Industrialized countries.
Using World Bank definitions, the number of subsidiaries in Less Developed Countries.
Exports*
A firm’s inflation adjusted level of exports. (mil of yen)
Debt*
The market value of a firm’s short and long term debt, as described in the Appendix One.
All values are inflation adjusted using GDP deflators. (mil of yen)
Yen
Yen real exchange rate as published by the IMF. Interaction terms (Yen*FDI and
Yen*Exports) are used to capture the firm-level effects.
FirmGrowth* The three-year change in the number of employees for each firm.
AdvanceDummy** Takes a value of 1 after the firm’s first three years of investing abroad and 0 otherwise.
Keiretsu
Dummy variable horizontal Keiretsu membership which equals one if the firm is affiliated with
one of the six main banks in Japan, including Mitsui, Mitsubishi, Sumitomo, DKB, Fuyo and
Sanwa.23 This affiliation comes from Weinstein and Yafeh’s (1995).
Industry
2-digit SIC industry dummies using the JDB codes, including (number of firms): foods (10);
textiles (8); chemicals (38); machinery (22); electrical equipment (24); transportation (6);
precision instruments (5); plastics (7); and a miscellaneous category for firms which mostly
use raw materials (including paper and pulp (1); rubber products (4); stone, clay and glass
(2); iron and steel (2); fabricated metal products (4); nonferrous metals (4) and misc. (4).
*These variables are scaled by the replacement cost of tangible assets (see Appendix One for calculation)
to control for firm size.
** We also tested an AdvanceDummy variable that takes a value of 1 after a firm’s first five years of
investing abroad and 0 otherwise. As the results were the same, we only report the AdvanceDummy
variable using the three-year cut-off in Table 4.
40
TABLE 3 Granger Causality Test Results
OLS Estimation in first differences (with four lags)
I.
Results for Firms in All Manufacturing Industries:
126 Firms
F
N
I Bivariate Relationship between RDStock and FDI and ADStock and FDI:
RDStock
 FDI
11.28***
2394
ADStock
 FDI
6.12***
2394
FDI
 RDStock
1.29
2394
FDI
 ADStock
.56
2394
II. Bivariate Relationship Between Exports and FDI:
Exports
 FDI
5.45***
2394
FDI
 Exports
1.15
2394
III. Bivariate Relationship between RDStock and Exports and ADStock and Exports:
 RDStock
 Exports
.22
2394
 ADStock
 Exports
.19
2394
Exports
 RDStock
.37
2394
Exports
 ADStock
.18
2394
II.
Adj R2
.06
.04
.01
.01
.15
.13
.07
.03
.029
.024
.13
.04
-.005
-.002
-.004
-.002
.04
.02
.05
.01
Results Excluding Firms in Transportation, Machinery, and Electric Equipment Industries
70 Firms
F
N
I Bivariate Relationship between RDStocck and FDI and ADStock and FDI:
RDStock
 FDI
12.63***
1558
ADStock
 FDI
3.9
1558
FDI
 RDStock
1.02
1558
FDI
 ADStock
.55
1558
II. Bivariate Relationship Between Exports and FDI:
Exports
 FDI
1.10
1558
FDI
 Exports
1.04
1558
III. Bivariate Relationship between RDStock and Exports and ADStock and Exports:
RDStock
 Exports
.29
1558
ADStock
 Exports
.15
1558
Exports
  RDStock
.17
1558
Exports
  ADStock
.11
1558
III.
 (Coeff.)
 (Coeff.)
Adj R2
.06
.02
.026
.009
.13
.05
.05
.03
.005
-.021
.09
.05
-.004
-.001
.002
.001
.05
.01
.08
.02
Results For Industrialized FDI (INDFDI) and Less Developed Country FDI (LDCFDI):
126 Firms
F
I Bivariate Relationship between RDStock and ADStock and AdvancedFDI:
RDStock
 INDFDI
15.52***
ADStock
 INDFDI
7.44***
INDFDI
 RDStock
1.11
INDFDI
 ADStock
.84
I Bivariate Relationship between RDStocck and ADStock and DevelopingFDI:
RDStock
 LDCFDI
14.72***
ADStock
 LDCFDI
8.45***
LDCFDI
 RDStock
.74
LDCFDI
 ADStock
.42
* p< .10 ** p< .05 *** p<.01
41
N
 (Coeff.)
Adj R2
2394
2394
2394
2394
.07
.05
.02
.01
.12
.11
.04
.02
2394
2394
2394
2394
.07
.04
.01
.005
.13
.07
.03
.02
TABLE 4
Shareholder Valuation of Intangible Assets, FDI and Exports
Dependent Variable: Q
Model 1(1)
Model 2(1)
Variables:
Main Effects
Interaction Effects
ADStock
.04***
.04***
Assets
(2.71)
(2.66)
RDstock
.11***
.12***
Assets
(3.95)
(3.91)
Exports
.06***
.07***
Assets
(3.58)
(3.84)
FDI
-.03
-.03
Assets
(-2.19)
(-2.08)
AdvanceDummy
.01
.01
(1.02)
(1.09)
 FDI *AdvanceDummy
.07**
Assets
(2.21)
FDI *ADStock
-.03
Asset Assets
(.28)
FDI *ADStock*AdvanceDummy
-.02
Assets Assets
(-.21)
FDI *RDStock
.02
Assets Assets
(.19)
FDI *RDStock*AdvanceDummy
.02
Assets Assets
(.12)
Debt
.03
.03
Assets
(1.24)
(1.26)
Yen*FDI
-.02**
-.02**
Assets
(-2.32)
(-2.54)
Yen*Exports
-.03**
-.04**
Assets
(-1.90)
(-1.83)
FirmGrowth
.04***
.04***
Assets
(3.41)
(3.30)
AR(1)
.05***
.06**
(2.33)
(2.26)
F
8.83***
9.02***
2
Adj R
.059
.062
n=
2961
2961
(T statistics) Variables are explained in text. All beta coefficients have been standardized.
* p< .10, ** p< .05, *** p< .01
These models were also run with Keiretsu, industry and year dummies. Though some industry dummies
were significant, these dummy variables are not reported here because their inclusion did not affect the
significance of the other variables. The keiretsu dummy variable was not significant in either model.
42
These are the most commonly included intangible assets in empirical tests of both the internalization
theory and the resource-based view because of the relative ease of operationalization.
2
While firm experience has not been a focus of the international or strategic management literatures to
explain the performance implications of a firm’s multinationality, we note that a firm’s experience has been
extensively analyzed in the international management literature in the context of a firm’s entry mode
decision (see Stopford and Wells (1972) Johanson and Vahlne (1977) or Chang and Rosenzweig (2001)).
3 This approach has also been used by Tobin and Brainard (1977) Errunza and Senbet (1981), Kin and
Lyn (1986) and Morck and Yeung (1991), among others.
4
We note that the distinction between a firm’s initial expansion and its more advanced levels of expansion
is an empirical question, which we discuss more below.
5 In fact, in our sample, only 5% of the subsidiaries were acquired. Interestingly, beyond the acquisition
entry mode, Delios and Beamish (2001) have analyzed whether there are differences across other types of
entry modes and found differences in subsidiary survival for joint venture and wholly-owned subsidiary
modes. We do not separate our hypotheses or analysis into entry mode types because our analysis is at
the level of the parent firm. While a small proportion of the Japanese firms in our sample pursue
acquisitions, most pursue both joint venture and wholly-owned subsidiary entry modes, making it difficult to
categorize the parent firm based on this issue.
6 We do note, however, that if FDI and exports are complements, when FDI is valued by shareholders, it is
likely that exports will be valued by shareholders as well. If, on the other hand, FDI and exports are
substitutes, when FDI is valued by investors, exports may or may not be valued by investors.
7 Recent literature suggests that firms may learn from exporting experiences about competing products
and customer preferences from export intermediaries, customer feedback, and other foreign agents (see
Grossman and Helpmann (1993) and Clerides et al., (1998) for example).
8 Somewhat surprisingly, in their analysis of US multinationals, Morck and Yeung (1991) assumed that if a
firm did not report its advertising or R&D expenditures then it did not engage in these activities (this
allowed them to maintain a sample size of 1600 firms). This seems problematic, as many firms do not
want their competitors to know the amount that is spent on these activities. Therefore, in the present study
no assumptions of zero values are used. Also, because we create stock variables, missing values for R&D
and advertising expenditures limit our ability to accurately reflect the stock value for these variables.
9 Comparisons between our sample and the population of firms that report R&D and Advertising in 1985
reveal no statistically significant differences between the mean R&D/Sales and Advertising/Sales of our
sample and the entire population (997 firms) of publicly traded manufacturing firms (comparing both by
industry and overall). In addition, there is no statistically significant difference between the mean from our
sample and the mean from the population for our number of foreign subsidiaries variable.
10 See, for example, Morck and Yeung (1991), Mitchell et al., (1998) and Dowell et al. (2000).
11
See, for example, Errunza and Senbet (1981), Lee and Kwok (1988), Morck and Yeung (1991),
Christophe (1997), Dowell et al (2000)
12 We also tested growth of the firm by using the sales of each firm which yielded similar results.
13
See for example, Shapiro (1975), Shaked (1986), Lee and Kwok (1988), Doukas and Travlos (1988)
Morck and Yeung (1991), and Dowell et al (2000).
14
On the one side is the view that when a domestic currency appreciates, domestic firms are able to
purchase foreign assets more “cheaply.” On the other side is the argument that the price of foreign assets
should not matter, rather, it is only the rate of return that is important. Empirically, Froot and Stein (1991)
and Caves (1989) have found correlations between dollar depreciations and FDI in the US. Ray (1989),
1
43
Stevens (1992) and Healy and Palepu (1993), however, have found little support for a relationship
between exchange rate movements and FDI.
15
Hoshi and Kashyap’s method for measuring the replacement cost of a firm’s tangible assets was used.
See the Appendix for a discussion of this calculation.
16 All scaled variables have been transformed by adding a constant and taking the natural log of this sum.
Using the log transformation does not change the statistical significance of any of the variables of interest,
it does, however, result in a better fit of the model (higher r-squares and F statistics).
17
We also ran our models testing a dummy variable that took a value of 0 for a firm’s first investment into
each foreign country and 1 for all subsequent investments in that country (in countries in which a firm is
already active). However, as this produced insignificant results, we do not display these results below.
18 One might argue that there is a simultaneity bias in this equation because Tobin’s Q may influence FDI.
We performed a Granger causality test between Q and FDI and found that Q does not Granger cause FDI,
suggesting the validity of our specifications in equations (5) and (6). We thank Takeo Hoshi for bringing
this issue to our attention.
19
By using an AR(1) model, our Durbin Watson statistic is within the acceptable range (2.12 and 2.05 for
Models 1 and 2 reported below, respectively).
20
This also provides a test for the robustness of the results because by dropping the firms in those
industries affected by trade disputes, we are dropping firms which have the highest number of subsidiaries.
21
We also performed our tests using the level of each variable; this yielded qualitatively similar results.
22 The correlation between the number of subsidiaries in Industrialized and LDC countries is .72.
23
A firm is classified as group affiliated with one of the six groups if at least one of the following holds: 1.)
a group’s main bank is the firm’s biggest lender for three consecutive years, and total shareholding by
members exceeds 20%; 2.) main bank loans account for at least 40% of the firm’s loans for at least three
years; and 3.) the firm is historically affiliated with a group.
44