Title: THE PERFORMANCE OF JAPANESE SUBSIDIARIES IN MALAYSIA Authors: NORHIDAYAH BINTI MOHAMAD Aichi University and Universiti Teknikal Malaysia Melaka (UTeM) 2-10-31 Tsutsui, Higashi-Ku, Nagoya 461-8641, Japan norhidayah@utem.edu.my Fax: +81 52 937 8264 Tel: +81-80 4305 1005 & YASUO HOSHINO Professor of Finance and Management, Aichi University and University of Tsukuba 2-10-31 Tsutsui, Higashi-Ku, Nagoya 461-8641, Japan hoshino@aichi-u.ac.jp Fax: +81 52 937 8264 Tel: +81 52 937 8264 1 THE PERFORMANCE OF JAPANESE SUBSIDIARIES IN MALAYSIA Abstract This paper investigates the relationship between Japanese subsidiary’s performance, entry mode, dimensional aspects, and international experience. We used a sample of 270 subsidiaries from Toyo Keizai Inc., Japan Overseas Investments, listed by countries, from 2005 to 2009. The purpose of this paper is to establish a relationship that is statistically significant, between Japanese subsidiary performances. A multiple regression model has been applied in this research. The results reveal that dimensional aspects and international experience had influenced the subsidiary’s performance. Moreover, a parent companies establishment and performance can create profit for their subsidiaries to retain their profitability. Keywords: Entry mode, Foreign Direct Investment (FDI), and subsidiary’s performance 1. Introduction This study focuses on Foreign Direct Investment (FDI) and Multinational Companies (MNCs) with the aim of determining the main factors that contribute to the MNCs subsidiary’s performance within a developing country. Host countries often associate the inflows of FDI with a wide variety of benefits; the most common of which, is the transfer of modern technologies. The extent to which a host country can secure these FDI benefits is likely to depend upon the 2 mode of entry of foreign firms. To maintain or achieve competitiveness and profitability, a manufacturing firm or enterprise must respond to a range of challenges, including rapid improvements in technology, declining employment and output, globalization of markets, and environmental requirements. MNCs play an important role in the process of global economic integration. Andersson & Forsgren (2000) reveals in his research that MNCs can provide intangible assets, such as advanced technology, rather than the MNCs stock of physical capital. The FDI, interconnected with MNCs, has already become an increasingly vital source for many developing countries to obtain international capital and advanced technology. Thus, the Malaysian government provides attractive policies for foreign investors and maintains a free market, in order to retain its existing investors and attract more potential investors. Therefore, various actions have been taken by the government to maintain the competitiveness of the country, including the reduction of corporate tax, down from 27% in 2007 to 26% in 2008; and a further reduction to 25% in 2009. With this, Malaysia is finds itself amongst the most competitive countries in Asia, for corporate tax. With all these facilities and incentives provided by the government, Malaysia remained as a favourable economy to foreign investors, as implied by their FDI position, which grew twofold, since 2001. Continuous reinvestment, as well as new capital injection amongst existing 3 foreign companies, indicates their confidence in the Malaysian investment climate. From 2003 until 2007, manufacturing and financial intermediation were the two main sectors of FDI recipients (Department of Statistics, 2000). 1.1. FDI in Malaysia Japan and Malaysia have for a long time, already cultivated a positive and agreeable partnership, as well as strong bilateral trade and investment linkages. Malaysia’s Look East Policy and the direct investment of Japanese firms in Malaysia, contributes to the close relationship between the two countries. The accumulated investment and transfer of technology by Japanese firms is an encouraging basis for the further development of both countries in the future. Malaysia is one of Japans most important economic partners, and vice versa. The bilateral relationship has been both solid and stable, with close personal ties between both countries at official and private sector levels. Bilateral trade has significantly lengthened during the past decades. Referring to Malaysia Economic figures of 2009, Japan was the third largest export destination of Malaysia (at 71.79 billion Ringgit Malaysia, accounting for 10.8% of total exports) and the largest source of import (at 14.2 billion Ringgit Malaysia, accounting for 12.5% of total imports) for the year 2008. 4 In the year 2002, Malaysia was the 10th largest import and export partner of Japan, with 1.4 trillion Japanese Yen (3.3%) and 1.38 trillion Japanese Yen (2.6%), respectively. In 2008, more than 72% of exports from Malaysia to Japan consisted of industrial goods, while the remaining percentages were agriculture, forestry, and fishery items. Subsequently, almost all exports from Japan to Malaysia were industrial goods (Hayashi, 2010). Furthermore, Table 1 shows the FDI statistics for the three main countries in Malaysia. Japan indicates the highest composition ratio (31.8) amongst the three countries. In Malaysia, the FDI for manufacturing (735 firms) and non-manufacturing (686 firms) had a small gap with 49 different companies in the year 2009 (Report and Statistics, 2010). Insert Table 1 about here Based on the Japan-Malaysia economic partnership group report in 2003, bilateral and regional approaches for Free Trade Agreements (FTA) are currently being pursued to further improve the competitiveness of countries in the region, as seen in the European Union and NAFTA for Europe and North America, respectively. To achieve similar benefits, the Association of Southeast Asian Nations (ASEAN) has proposed various partnership agreements between ASEAN countries and the Asia region, to achieve these similar benefits. Therefore, the ASEAN Free Trade Area (AFTA), the Framework for Comprehensive Economic Partnership between 5 ASEAN and Japan, ASEAN and China, as well as between ASEAN and South Korea, have been signed. In conjunction with these regional approaches, a bilateral approach for economic partnership is becoming important. There is much room for further improvement of the bilateral relationship between Japan and Malaysia. The Japan-Malaysia Economic Partnership Agreement (JMEPA) is a strategic partnership for forging closer economic relations in trade and investment, between the two countries. This agreement flooded Japanese FDI into Malaysia during the second half of 2006 and it showed a positive impact from the agreement. During the last eight years, the Malaysia-Japan Economic Partnership investment initiative facilitated active discussion and cooperation on ways to improve the climate for Foreign Direct Investment (FDI) in Malaysia and Japan. Foreign investment in Malaysia has risen steadily in recent years as mentioned in this previous discussion. Currently, the impact of FDI on the economy and technology of the host country has caught the attention of international researchers. The reason for developing countries, such as Malaysia, attraction to FDI was to bring technology overspill effects through demonstration, imitation, reverse engineering, individual contact, diffusion of management skills, and the exploitation of the international market. This can shrink the gap in higher technology within 6 developed countries, to upgrade industrial technology acceleration, and to raise technology indentations during the course of development (Chen & Chen, 2009). Even though the background is as such, we only have a little knowledge and a few relevant empirical researches on foreign companies in Malaysia. When Malaysia makes it much easier for foreign companies to enter the country, and also when foreign companies respond to that in an encouraging manner, it is strategically important and useful to know more about them. While it is essential to develop more alternative models, theories, and frameworks, it is worth having more empirical research, in order to understand how the system functions in the market. 2. Theoretical Background Various approaches are usually taken when analysing advantages, entry mode, and performance. Cespedes & Hoshino (2001) used two different approaches to examine entry mode. Firstly, a transaction cost model that is used to explain the relationship between entry mode and the performance attained by the subsidiary. Secondly, an eclectic paradigm that clarifies how the advantages of the parent company determine the entry mode selection. Recently, some scholars have also introduced Institutional Theory (IT) to explore the entry mode decision. In past researches, entry mode studies were investigated, mainly base on transaction cost theory (Cespedes & Hoshino, 2001; Chen, Yang, Hsu, & Wang, 2009; Andersson & Gatignon, 1986; Palenzuela & Bobillo, 1999). The transaction cost model offers powerful insights into the 7 evolution of the MNCs. Research by (Nicholas, 1987) found that the transaction cost factors were important determinants of the decision to invest in subsidiary’s, by pre-1939 British manufacturing multinationals. Firms were expected to choose to enter a foreign market, only if it offered a high risk adjusted return on investment. Therefore, transactional cost theory is an appropriate methodology for modelling dynamic growth. The content and predictions of the eclectic (or OLI) paradigm, are firmly embedded in a number of different economic and business theories. The OLI paradigm holds three kinds of advantages that shape the determination of entering a foreign market, for instance ownership (O) advantages, location (L) advantages, and internalization (I) advantages (Dunning, 2000). The first, ownership advantages, refers to the possession of superior intangible and tangible assets (asset power) and skills, such as MNCs experience, firm size, and an ability to develop product differentiation. The second sub-paradigm of the OLI tripod, offers a framework for evaluating alternative ways in which firms may organize the creation and exploitation of their core competencies; given the locational attractions of different countries or regions. Finally, the third is the internationalization advantages, which stand for the benefits of internalizing foreign activities, such as avoiding the dissipation of knowledge, preventing deterioration in the quality of products, and eliminating the costs of writing and enforcing contracts. 8 Previous researchers define institutions, as the ‘rules of the game’, including the laws and regulations of the host country (Daviz, Desai, & Francis, 2000; Oliver, 1997; North, 1990). The institutional theory considers the processes by which structures, including schemas, rules, norms, and routines, become established as authoritative guidelines for social behaviour (Scott, 2004). Entry mode choices that can be explained by an extended transaction costs model, including institutional and cultural variables, lead to better performance after entry; compared to those that cannot be explained by the model (Brouthers, 2002). 3. Hypothesis development According to Mansour & Hoshino (2001), in order to compete with host firms in their own markets, MNCs subsidiaries must possess superior assets and skills, reflected by their size, multinational experience, managerial expediency, etc. On the other hand, investments in R&D are also important to any firm, because they help to develop technological capabilities, and improve the firm’s competitive advantage and performance (Helfat, 2000 and Kotabe et al., 2002). Therefore, all of these factors may facilitate MNCs subsidiaries to enjoy the advantages that help them compete against domestic firms. Previous researches put a lot effort into identifying the variables associated with firm performance (Un & Cuervo-Cazurra, 2008; Kumarasinghe & Hoshino, 2008; Ben Youssef & 9 Hoshino, 2007; Brouthers, 2002; Mansour & Hoshino, 2001; Nitsch, Beamish, & Makino, 1996; Woodcock, Beamish, & Makino, 1994). However, a subsidiary’s performance can be measured in many different ways. Therefore, this research will investigate MNCs subsidiary’s performance in foreign markets, and explain several key factors. 3.1. Entry Mode Entry mode is one of the most crucial parts of the decision making process faced by MNCs, in order to go abroad through FDI. There were various methods of entry mode available i.e., wholly owned or joint venture. All of these methods involve a higher resource commitment and a higher control (Hill, Hwang, & Kim, 1990). Research by Ogasavara & Hoshino (2007) found that Japanese-Japanese joint ventures, with a partner that had previous experience in the local market, performed better than wholly owned subsidiaries and traditional international joint ventures. Furthermore, in Yoshihara (1994) research on foreign firms in Japan, he used five scale (highly successful, successful, doubtful, unsuccessful, highly unsuccessful) self-assessed questionnaires to compare the profitability of sole ownership and joint ventures. The results revealed that joint venture had statistically significant results of higher profitability than sole ownership firms did. Hoshino & Takabayashi (1998) investigated on 182 foreign manufacturing 10 firms in Japan between 1994 and 1995. They also found that joint ventures had significantly higher performance compared to sole ownership firms in all aspects of majority-owned, equallyowned and minority-owned joint ventures. According to Oswald & Jahera (1991), there is a significant relationship between ownership and performance. Their results showed that higher excess returns for a firm, are contributed to by a higher level of inside ownership. Drawing on the findings of these earlier studies, here is the first hypothesis: Hypothesis 1: MNCs subsidiaries, entering through wholly owned investments, are more likely to perform better than those entering through joint venture. 3.2. Dimensional Aspects Previous literature shows that MNCs performance can be determined by many different factors. Besides entry mode, dimensional aspect and international experience were other factors that are considered in this research. Past researches have shown that the size of a firm has an important effect on the subsidiary’s performance (Mansour & Hoshino, 2001; Isobe, 1998; Freeman, Carroll, & Hannan, 1983). These dimensional aspects are measured by the parent equity ratio, Return on Equity (ROE), net sales per employees, profit to net sales, Research and Development (R&D) to net sales, depreciation expenditure to net sales and parent growth 11 average. However, the study on the factors influencing the performance of Japanese FDI in Thailand, found that firm size is negatively associated with profitability (Siripaisalpipat & Hoshino, 2000). Therefore, here is the second hypothesis: Hypothesis 2: The larger the MNCs, the better the subsidiary’s performance. 3.3. International Experience International experience increases the possibility of firms to commit large amounts of resources to foreign a market (Medcof, 2001). On the other hand, international experience provided firms with important knowledge about customers, markets, cultures, and governments, which encourages future expansion (Hill, Hwang, & Kim, 1990). Numerous studies have suggested that a firm’s internationalization experience plays an important role in the decision of entry mode and the firm’s performance (Mathews, 2002; Siripaisalpipat & Hoshino, 2000; Li, 1995; Ramaswamy, 1993). As recommended by Cui et al., (2006) this research will also look into the length of MNCs and subsidiary’s relationship, in order to achieve clarity for this study. Thus, the subsidiary’s age, parent’s overseas sales to net sales and logarithm of parent overseas sales ware used as a proxy for international experience. The following hypothesis is therefore expected: 12 Hypothesis 3: The greater the international experience of MNCs, the better the performance of their subsidiary. Figure 1 illustrates the specific interrelatedness of the four main variables of the firm performance model. These core variables are entry mode, dimensional aspects, international experience, and subsidiary performance. Insert Figure 1 about here The direct investment of MNCs may bring precious resources including capital, technology, management skills, R&D capabilities, and a network of international trade (Chen & Chen, 2009). As MNCs expand into new markets, their success is partially determined by the ability to transfer competitive technologies to local subsidiaries (Chung, 2001; Chen, 1996). As MNCs subsidiaries reside in increasingly diverse environmental contexts, examining the performance of MNCs subsidiary’s performance, compared to their parent company, becomes more and more important. Despite the growing interest amongst scholars and the business community, there is a lack of research on MNCs subsidiary’s performance, using parent financial analysis. To date, extensive research on the effects of FDI has not provided a clear and conclusive picture on the impact of Japanese firms on the local host economies. Whereas, some studies seem to conclude that FDI has played an important role in a host country’s development, and 13 others do not (Giroud, 2000). According to Kumarasinghe & Hoshino (2008), there is still insufficient research on Japanese MNCs activities in the Pacific region. In the case of Malaysia, Japanese MNCs have emerged as leading direct investments in Malaysia, with RM32.1 billion and RM33.7 billion in the years 2003 and 2004, respectively (Department of Statistics, 2008). Numerous studies have reported literally on FDI (Chen & Chen, 2009; Kumarasinghe & Hoshino, 2008; Ben Youssef & Hoshino, 2007; Pak & Park, 2005; Giroud, 2000; Siripaisalpipat & Hoshino, 2000). However, it seems that very few have reported in the context of MNCs subsidiary’s performance, comparing two different data analyses in a developing country. Thus, it is crucial to examine the performance of Japanese MNCs subsidiaries in a host country, in order to retain investment, and at the same time, enhance the regional competitive advantages. Furthermore, this research attempts to determine the critical factors that contribute to MNCs subsidiary’s performance. 4. Methodology This study examines the relationship between entry mode, dimensional aspect, the international experience of Japanese companies, and the attained performance of their subsidiaries. The data analysis used the subsidiary's performance as a dependent variable and other different characteristics of the parent company and subsidiaries, as proxies for the 14 independent variables. A multiple regression model was applied in this research and suggested focus on performance amongst the selected MNCs subsidiaries. 4.1. Data Collection The data for entry mode and the subsidiary’s performance was derived from Tokyo Keizai Inc., Japan Overseas Investments, listed by countries (Toyo Keizai Inc, 2005-2009) with approximately 270 cases. The classification of entry modes is based on the percentage of share ownership of the major shareholders, as reported in this database. Firms with over 95% ownership were considered as wholly ownership subsidiaries and 20% to 94% owned firms were considered as joint subsidiaries. Within joint subsidiaries, 51% to 94% were sub-categorize as majority-owned joint subsidiaries, 50% as equally owned joint subsidiaries, and 20% to 49% as minority-owned joint subsidiaries. Kamei (1996) and Yamazaki and Takeda (1992) indicated that it is appropriate to consider 95% of ownership as wholly-ownership. Therefore, to distinguish wholly ownership and partnership 95% ownership has been used in this research too. Performance data for the parent MNCs was obtained from two Japanese databases, using the year 2005 as the based year. The performance data was derived from the Nikkei Zaimu Database (Nikkei Inc., 2005) and eol DB Tower online services (financial report). 15 4.2. Sample Malaysia, as a single geographical area, was chosen for the purpose of this analysis. This selection was made based on the large number of MNCs subsidiaries available and the diplomatic relationships between Japan and Malaysia that were established in 1957. Table 2 indicates the number of Japanese MNCs subsidiaries in Malaysia from the year 2005 until 2009. However, the amount of available data was less than expected, after eliminating missing data. Insert Table 2 about here 4.3. Dependent variable Firstly, growth sales ratio was used as a proxy for profitability. Since the subsidiaries growth sales ratio represent the profit earned during a certain period, it assumed that it would be a suitable gauge to measure the integrated profitability of that firm. From the published sales data of the sample firms, sales growth was calculated. The subsidiaries growth sales for the sample calculated as follows. Subsidiaries sales growth = (Sales amount of current year – Sales amount of previous year) Sales amount of previous year For the analysis, simultaneous analysis of several groups was used using SPSS for Windows 18.0 software. 16 4.4. Independent variables This research consists of fourteen independent variables, which come from subsidiaries and parent data. The subsidiary’s data includes subsidiary age, financial capital and sales, On the other hand, the parent’s data takes account of the parent’s overseas sales, average age and profitability ratio. Since the distribution of monetary values do not usually follow the normal distribution curve, the use of the ‘natural logarithm’ of the quantity is applied, instead of the monetary value itself, to smooth the values and bring them closer to the normal distribution (Yui, 1989). Thus, in this research parent overseas sales were computed by the logarithm to bring the variables closer to a normal distribution. 5. Data Analysis 5.1. A descriptive comparison of the samples In comparing some of the descriptive statistics of the sample from Malaysia, some facts are worthy of mention. Malaysia, with 735 manufacturing subsidiaries and 686 nonmanufacturing subsidiaries, is well balanced with a nearly equal percentage. The main activities of manufacturing subsidiaries, is machinery and transport equipment at RM38.38 billion, whilst manufacturing goods at RM14.03 billion. According to (Cespedes & Hoshino, 2001), Japanese companies establish subsidiary’s in developing countries, to carry out their production activities, to sell their products, and to offer after sales services. In terms of entry mode for Japan MNCs 17 subsidiary’s into Malaysia, more than 55% were joint-venture ownerships, while the rest were wholly owned. 5.2. Testing for the differences between entry mode and a firm’s performance In this research, classification of performance was measured by calculating the sales growth as the indicator for firm’s performance. The t-tests analysis employed to determine if a statistically significant different existed between ownership and performance. t-test is used to see whether variances vary in different groups. Therefore, if the t- test is significant at p ≤ 0.05, confidence can be gained in the hypothesis that the variances are significantly different and that the assumption of homogeneity of variances has been violated. Table 3 shows the results for the performance and entry mode classification. Based on these findings, the two-tailed value of p is 0.504 and 0.032 for manufacturing and nonmanufacturing companies respectively. The p value, for manufacturing companies is greater than 0.05 and as for non-manufacturing companies is smaller than 0.05. Therefore, this does not indicate a significant value for manufacturing companies and have significant differences for non-manufacturing sectors. Therefore, we must conclude that there was a significant different between the means of ownership and the Japanese subsidiary’s performance for nonmanufacturing companies and the result was contrary for manufacturing companies. In other words, entry mode does not have any impact on MNCs subsidiary performance for 18 manufacturing companies. Hence, the first hypothesis that stated, “MNCs subsidiary’s entering through wholly owned investments are more likely to perform better than those entering through joint venture” is rejected for manufacturing companies and supported for non-manufacturing companies. Insert Table 3 about here This result is similar to (Mansour & Hoshino, 2001) but contradictory to several past researches (Oswald & Jahera, 1991; Woodcock, Beamish, & Makino, 1994; Nitsch, Beamish, & Makino, 1996). It also shows that there was no consistent association between entry mode and financial performance. 5.3. Correlations analysis There are two types of correlations, known as bivariate and partial. A bivariate correlation is used between two variables, whereas a partial correlation looks at the relationship between two variables while ‘controlling’ the effect of one or more additional variables (Field, 2009). In this case, we employed bivariate correlation with Kendall’s tau correlation coefficient, which is suitable for interval data and nonparametric data. Table 4 and Table 5 show the correlation between the independent variables. This table gives details about the correlations between the independent variables, where each of the variables is correlated with one another. The main conclusions are discussed below. 19 The variables “Parent overseas sales” shows a high correlation with ‘Overseas sales ratio’, ‘Subsidiary’s capital’, ‘Local and Japanese workers’, and other parent’s profitability ratio such as ‘ROE’, ‘Equity ratio’, ‘Capital expenditure to Net sales’ and ‘Overseas sales to Net sales ratio’. On the other hands, the ‘Subsidiary local workers’ shows a high correlation with ‘Parent overseas sales ratio’, ‘Subsidiary age’, ‘R&D to net sales’, ‘Subsidiary sales’, ‘Subsidiary capital’, ‘Japanese workers’ and also ‘Parent’s profitability ratio’. As mentioned by Griswold (2009), a successful company operating in a favourable business will tend to expend employment at both domestic and overseas operations. Insert Table 4 and Table 5 about here ‘Subsidiary sales’ shows a correlation with ‘Japanese workers’, ‘Parent overseas sales ratio’, ‘Subsidiary age’, ‘Parent average age’, and parent profitability ratio. According to Ittnera, Larckera, & Randallb (2003), sales growth and return on assets are associated with strategic performance measurement. ‘Subsidiary capital’, ‘Parent overseas sales ratio,’ and ‘Japanese workers’ are correlated. According to (Griswold, 2009), a study from the National Bureau of Economic Research in 2005, found that during the 1980s and the 1990s, there was a strong positive correlation between domestic and foreign growth rates of multinational firms. Desai, Foley, & Hines (2008) analyse of US MNCs subsidiaries and parent companies, found that a 10% increase in capital investment 20 was associated with a 2.2% increase in domestic investment by the same company, including a positive connection between parent and subsidiary sales, assets, and number of employees. ‘Parent average age’, ‘Parent equity ratio’, ‘Parent net profit ratio’ and ‘Japanese workers’ are correlated. According to Woodcock, Beamish & Makino (1994), there was a relationship between age and firm performance, with differences existing between established and new ventures. 5.4. Multiple regression Multiple linear regression models with one dependent Y variables: Y = i +Xb + e Where Y = a vector containing observed scores on the dependent variable; i = a vector 1 X = a matrix of continuously distributed or categorical (dummy-coded) independent variables b = the vector of regression weights e = the vector of residual or error or leftover scoring unexplained by the model Multiple regressions applied for each of the independent variables, in order to determine the significance of their effect on subsidiary performance and to test if the sign of their correlation followed the hypothesis outcome. According to Makino and Delios (1996), a positive sign for a regression coefficient indicates that the variable increases the likelihood of higher performance, while a negative sign indicates an increase in the likelihood of lower performance. 21 The hypothesized signs and the results of the multiple regression are shown in Table 6. The main findings are discussed below. Insert Table 6 about here In the case of Malaysia, the dimensional aspect, in terms of the parent’s growth revenue average (B =2947.04) has a positive sign and is significant for manufacturing companies in years 2005 to 2009. Moreover, subsidiary local workers (B =23409.96) indicate positive value and significant for non-manufacturing companies. This provides support for hypothesis 2, which stated that the larger the MNCs, the better the subsidiary performance. This result is consistent to the findings by (Mansour & Hoshino, 2001; Isobe, 1998; Freeman, Carroll, & Hannan, 1983). It seems that, the large size of the investor is a significant predictor of good performance, when the other variables are taken into account. In addition, the parent’s profit to net sales (B = - 1535.64) and parent’s growth revenue Year on Year (YOY) (B = - 533.338) indicates a negative value and significant result with p at less than .05. The negative value in this finding indicates that an increase in the parent’s profit to net sales and parent’s growth revenue YOY by one standard deviation may reduce the subsidiary performance. Our results shows that the degree of international experience, measured by parent’s overseas sales has a negative value and significant effect on subsidiary performance for years 2005 to 2009 (B = - 25464.706) for non-manufacturing companies and no significant effect for 22 manufacturing companies. According to Ajami et al., (2006), the objectives of the parent company is also affected the subsidiary’s performance. Therefore, when parent company decided to increased their overseas sales, this decision may benefits an MNC in the aggregate but reduce the subsidiary’s performance. Therefore, we can conclude that there was a negative correlation between parent’s overseas sales and subsidiary performance and therefore we have to reject the third hypothesis. 6. Conclusion FDIs require a business relationship between a parent company and its associated foreign subsidiary. In order to sustain competitiveness in the foreign market, it is essential for companies to have enough resources and flexibility, while deciding which mode of entry to use for penetration of the foreign market. This study examines the relationship between internalization advantages of Japanese parent companies and the attained performance of their subsidiaries. Based on the information contained in ‘Toyo Keizai Inc. Data Bank 2005-2009’ and ‘eol DB Tower services (financial report)’, we selected approximately 270 cases to determine the relationship between entry mode, dimensional aspects, and international experience with subsidiary performance. The subsidiary's performance, as dependent variable, was measured using subsidiary’s sales growth. While, fourteen different characteristics of the parent and subsidiary companies 23 were used as proxies for independent variables. A multiple regression model was applied in this research. As a preliminary step to the application, we used correlation analysis to identify any correlations amongst the independent variables that could threaten the stability of the regression model. Six out of fourteen of the independent variables were significant with subsidiary performance in the case of Malaysia. The six significant variables were ‘parent’s overseas sales’, ‘parent’s growth revenue average’, ‘parent’s growth revenue YOY’, ‘parent profit to net sales’, 'parent’s capital expenditure to net sales’ and ‘subsidiary local workers’, with a p value less than 0.05 and associated with subsidiary performance. The relationship between ownership and a firm’s performance was an important issue and has been an on-going discussion in corporate finance literature since the classic work of (Berle & Means, 1932). They suggested an inverse relationship between the divergence of ownership and firm performance. Previous researches, using various methodologies, have focused on the relationship between ownership and firm’s performance with mixed findings. A study conducted by (Oswald & Jahera, 1991; Mehran, 1995; Holthausen & Larcker, 1996) found a positive relationship between ownership and performance. Their findings showed that entry mode has a significant relationship with firm performance (Oswald & Jahera, 1991). In this paper, we used ttest to analyse the relationship between entry mode and firm’s performance. However, none of the results revealed a statistically significant relationship between these two variables. Our 24 insignificant findings have a similar result to (Mansour & Hoshino, 2001; Cespedes & Hoshino, 2001). Therefore, these findings rejected the first hypothesis. Besides, this research shows that dimensional aspects, such as parent’s growth revenue average and subsidiary local workers have a positive effect on performance in line with (Mansour & Hoshino, 2001; Konopaske, Werner, & Neupert, 2002). Moreover, in this paper we also consider the effect of international experience on performance. Parent’s overseas sale was found negatively significant to the subsidiary performance. Thus, these findings support both the second and the reject the third hypotheses in this research. However, the study also has several limitations. One limitation is that only the subsidiaries sales growth from each subsidiary was used as the proxy for the profitability in foreign subsidiaries upon conditions for using these company data. Normally, it is more desirable to include several indicators to measure more accurate profitability of a business. 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Subsidiary Local Workers International Experience - Subsidiary Age - Parent Overseas Sales - Parent Overseas Sales/Net sales 31 Table 1: Foreign Direct Investment Statistics in Malaysia Country Composition ratio 2006 2007 2008 2009 Amount (Million RM) 6523 Amount (Million RM) 5595 Amount (Million RM) 7041 Japan 31.8 Amount (Million RM) 4412 China 24.7 1885 2952 119 5478 United States 10.6 2477 3020 8669 2345 20228 33426 46099 22145 Total(Inc. Others) Source: JETRO (2010) Table 2: No. of Samples from 2005-2009 Year No. of Japanese MNCs Subsidiaries in Malaysia No. of Available Japanese MNCs Subsidiaries 2005 803 60 2006 771 58 2007 779 50 2008 759 59 2009 753 43 Table 3: Performance Breakdown by Entry Mode Performance Ownership Wholly Joint Venture Totals Sig. t df Manufacturing Service N 78 Mean 16667.00 N 36 Mean 36113.15 92 20716.18 55 16366.60 170 91 0.504 -0.670 168 0.032 2.184 89 32 Table 4: Correlation Matrix of Independent Variables for Manufacturing Table 4: Correlation Matrix of Independent Variables for Manufacturing Unit Measurement Variables 1 Subsidiary Japanese Workers Correlation Coefficient 2 Parent Overseas Sales Ratio Sig. (2-tailed) 3 Parent ROE 4 Parent Net Profit Ratio 5 Parent Equity Ratio Parent Average Age Subsidiary Age 8 Parent Profit to Net Sale 10 11 12 Parent Capital Expenditure to Sales Sig. (2-tailed) Parent Growth Revenue Average Correlation Coefficient Parent Growth Revenue YOY Correlation Coefficient Sig. (2-tailed) Parent Fix Assets Turnover 14 15 Parent Depreciation Expenditure to Net Sales Correlation Coefficient Parent Net Sales/ Employees Correlation Coefficient Sig. (2-tailed) Sig. (2-tailed) 16 Parent Recurring profit/ 17 Employees Parent Overseas Sales to Net Sales Ratio 18 Parent No. of Consolidate Sig. (2-tailed) Sig. (2-tailed) Subsidiary Capital Subsidiary Sales 21 Subsidiary Local Workers Parent Overseas Sales Ratio 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Ratio Ratio Ratio * .033 ** Ratio Correlation Coefficient Correlation Coefficient * -.106 -.169 . ** -.356 ** 1.000 .071 .061 .018 -.021 .075 .206 .231 .247 .726 .695 .174 .096 -.021 .103 .703 ** .009 * .021 * .139 .016 ** .000 .001 .199 .000 .070 .063 .099 .215 .275 .053 .098 .101 .084 .081 .017 .186 ** .285 .000 ** ** -.312 .001 .000 .009 -.106 .878 .066 ** .004 .000 ** .000 ** .000 .004 .293 ** ** ** .001 .984 -.089 .058 .080 .256 .042 .024 .411 .644 ** .114 .470 .252 .154 ** ** ** * -.122 * 1.000 ** .207 .121 .913 .000 ** . .006 .026 .041 .245 .446 .000 -.033 .047 . .311 .540 .387 .099 -.079 .018 -.032 .055 .142 .732 .551 .004 -.087 -.024 .111 .635 ** ** .015 ** .001 ** .004 .140 -.171 .202 .007 .111 ** .215 .011 -.210 ** -.221 ** .149 ** ** .179 . ** ** ** .000 -.017 ** -.213 .000 ** .023 .882 .000 .071 .106 .105 1.000 .000 .001 .516 ** .340 ** -.182 .073 .495 1.000 . .062 .236 .747 -.008 ** .001 .154 .000 * -.121 -.193 1.000 .000 .000 .000 .845 * -.020 .709 .000 ** * .129 .122 .000 -.147 -.083 ** .000 .026 .215 .065 -.243 1.000 .677 .000 .002 ** -.211 -.023 .003 -.162 .000 * ** .000 .001 ** .040 .000 .000 .176 .329 . * -.117 * .107 .041 .054 .731 .294 ** .159 1.000 . .044 -.337 .002 .395 .000 .063 .049 .015 .230 .344 .769 ** .245 .000 ** .192 . -.018 ** .213 .168 ** ** -.103 .001 .045 .056 .101 .074 .244 .049 .000 .221 .066 .062 .001 .000 .320 -.011 .023 .046 .039 -.104 .066 .054 .098 -.068 -.003 .020 .864 .715 .458 .543 .106 .304 .387 .117 .288 .966 .000 .108 -.053 -.077 .103 -.016 -.004 .006 .067 .312 .139 .058 .769 .936 .908 .079 .053 .129 .160 .332 .018 -.057 -.036 .101 .315 .522 .072 * ** .171 .005 .225 ** .000 ** ** .001 ** ** 1.000 .042 -.160 ** .179 .242 . .000 .000 .000 ** .969 .871 .000 .409 .000 .453 ** .096 .000 * .047 .068 ** .225 * .108 .000 ** .195 .611 .744 .180 Million RM ** 1.000 .000 .073 .397 Individuals .850 ** .000 .308 Million RM .321 .001 .258 Million RM . .010 .047 -.051 Companies * .000 .178 Ratio 1.000 .000 .114 -.214 ** .010 -.182 Ratio .520 .048 .134 Ratio 1.000 . .103 .073 .019 Correlation Coefficient Sig. (2-tailed) .014 .241 Ratio ** .003 .130 Correlation Coefficient Sig. (2-tailed) 22 Ratio Correlation Coefficient Sig. (2-tailed) 4 . * .157 Correlation Coefficient Sig. (2-tailed) 20 Years Correlation Coefficient Sig. (2-tailed) 19 Years Correlation Coefficient Sig. (2-tailed) .169 .004 -.151 Correlation Coefficient Sig. (2-tailed) 13 Ratio Correlation Coefficient Sig. (2-tailed) ** .119 Parent R&D to Net Sales Ratio Correlation Coefficient Sig. (2-tailed) 9 Ratio Correlation Coefficient Sig. (2-tailed) 1.000 .137 Correlation Coefficient Sig. (2-tailed) 7 Ratio ** .006 .160 Correlation Coefficient Sig. (2-tailed) 6 Ratio Correlation Coefficient Sig. (2-tailed) 3 . .173 Correlation Coefficient Sig. (2-tailed) 2 Individuals Correlation Coefficient Sig. (2-tailed) 1 1.000 .383 .000 ** .165 -.148 .004 ** .002 .028 .610 ** -.123 * .023 .112 .048 * .132 .014 * ** .347 .000 .061 -.119 .278 .024 .014 .033 .808 .540 .084 -.005 .018 -.078 .127 .929 .740 .176 .000 .046 .505 .072 .061 -.058 .020 .232 .304 .329 .732 .142 .013 * .061 .286 -.127 .028 * **. Correlation is significant at the 0.01 level (2-tailed). 33 .310 ** .118 * .037 * ** .183 .001 ** .166 .003 .207 ** .000 .137 .019 * .208 .000 ** .126 .029 -.241 * .147 .011 1.000 . ** -.220 1.000 .000 * . -.020 .692 * -.136 .000 .016 .027 -.042 .070 .664 .497 .264 ** .000 .146 .188 ** .006 -.119 ** ** -.357 . * .003 .961 ** -.160 .000 .004 .050 .046 .384 .421 * 1.000 .012 ** -.165 1.000 -.167 .002 .029 .001 .159 ** -.178 .001 .007 * . ** -.329 .000 .201 * 1.000 .000 ** .254 ** ** .413 . .112 .090 .052 .159 .184 ** .002 ** .209 .760 ** .001 .380 .000 -.020 .018 .789 ** -.009 .895 1.000 . .389 ** 1.000 .000 .345 . ** .000 .146 .013 .461 ** 1.000 ** .122 .000 * .274 .000 . .049 * 1.000 . Table 5: Correlation Matrix of Independent Variables for Services Variables Unit Measurement 1 2 3 4 5 6 7 8 9 1 Parent Recurring Profit/Employees Correlation Coefficient 2 Overseas Sales to Net Sales Ratio Correlation Coefficient .063 Sig. (2-tailed) .475 . Parent No. of Consolidate Correlation Coefficient -.040 .119 .663 .233 . Subsidiary Capital Correlation Coefficient -.308 ** .009 -.067 .000 .923 .488 . -.298 ** .016 .032 .258 ** .001 .873 .751 .002 . -.209 * -.008 .033 .259 ** .286 ** .015 .931 .732 .001 .001 . .054 .350 ** .240 * .093 .159 .202 * .538 .000 .015 .299 .096 .022 . -.364 ** -.073 .024 .322 ** .279 ** .299 ** .005 .000 .462 .813 .000 .002 .000 .960 . 3 4 Sig. (2-tailed) Sig. (2-tailed) Sig. (2-tailed) 5 Subsidiary Sales 6 7 8 9 10 16 17 18 19 20 21 22 16 17 18 19 20 21 22 Ratio Companies Million RM Million RM 1.000 1.000 1.000 1.000 Subsidiary Japenese Workers Correlation Coefficient Parent Overseas Sales Ratio Correlation Coefficient .008 .986 ** .105 -.040 -.049 -.051 .304 ** -.011 Sig. (2-tailed) .926 .000 .289 .657 .613 .571 .000 .910 . Parent ROE Correlation Coefficient .473 ** -.036 -.133 -.200 ** -.077 -.075 .082 -.172 * -.024 .000 .688 .146 .008 .341 .332 .336 .033 .781 ** .074 -.189 * -.149 * .067 .000 .403 .039 .046 .043 .056 .001 .043 .438 .000 . -.042 .156 -.021 -.027 -.096 -.084 -.355 ** -.040 .111 -.192 ** .355 ** .602 .078 .817 .730 .242 .276 .000 .626 .194 .008 .000 . -.128 .184 * .210 * .034 .099 .026 .249 ** .043 .117 -.065 -.189 * -.358 ** .136 .050 .030 .672 .242 .746 .005 .612 .197 .386 .013 .000 . -.089 .037 .107 .007 .402 ** .088 .251 ** .033 .126 .161 * -.111 -.381 ** .342 ** .288 .686 .258 .926 .000 .266 .004 .689 .153 .029 .134 .000 .000 . -.126 .138 .185 .026 -.053 .124 .176 .006 .306 * -.107 .098 .164 -.068 .012 .272 .284 .138 .827 .664 .313 .175 .965 .019 .353 .395 .154 .569 .916 . .333 ** .092 -.162 -.148 -.267 ** -.184 * -.264 ** -.171 .099 .260 ** .968 ** .337 ** -.112 -.163 .117 .000 .301 .076 .088 .003 .032 .003 .060 .265 .001 .000 .000 .194 .051 .308 . -.065 .107 -.073 .019 -.065 .086 .052 -.044 .174 -.110 .174 * .134 .076 -.022 .459 ** .198 * .451 .259 .455 .835 .512 .354 .581 .653 .068 .204 .045 .122 .409 .807 .000 .022 . .271 ** .191 * -.184 * -.026 -.066 .055 -.029 .017 .164 .203 * .235 ** .049 -.125 -.123 .105 .242 ** .128 .001 .032 .045 .767 .470 .529 .745 .854 .067 .013 .004 .546 .147 .145 .360 .003 .143 .153 .051 -.093 .070 -.027 .121 .073 .035 .001 .135 .019 -.093 -.106 .038 .081 .025 -.073 .059 .566 .311 .420 .767 .159 .408 .701 .995 .095 .819 .252 .216 .650 .480 .754 .396 .000 . .145 -.103 .013 -.154 .030 -.083 .076 -.067 -.092 .284 ** -.242 ** -.342 ** -.037 .170 * -.273 * -.269 ** -.580 ** -.040 -.018 .074 .248 .883 .075 .746 .336 .390 .463 .301 .000 .003 .000 .665 .042 .018 .001 .000 .626 .827 . -.230 ** .152 .087 .158 .030 .102 -.027 .168 .166 -.320 ** .203 * .332 ** .055 -.131 .459 ** .228 ** .578 ** .071 -.037 -.717 ** .005 .086 .342 .068 .746 .237 .756 .066 .062 .000 .013 .000 .519 .118 .000 .005 .000 .386 .651 .000 . .465 ** .005 .001 -.157 -.056 -.118 .276 ** -.252 ** -.052 .308 ** -.154 -.379 ** .015 .094 -.397 ** -.158 -.250 ** .025 .099 .381 ** -.515 ** 1.000 .000 .959 .995 .069 .540 .169 .002 .006 .554 .000 .058 .000 .864 .262 .001 .051 .004 .757 .224 .000 .000 . Sig. (2-tailed) Sig. (2-tailed) Individuals Million RM Individuals Ratio Ratio Parent Net Profit Ratio Correlation Coefficient Parent Equity Ratio Parent Average Age Subsidiary Age .322 Ratio Correlation Coefficient Ratio Correlation Coefficient Years Correlation Coefficient Sig. (2-tailed) 15 15 Correlation Coefficient Sig. (2-tailed) 14 14 Parent Overseas Sales Sig. (2-tailed) Sig. (2-tailed) 13 13 Correlation Coefficient Sig. (2-tailed) 12 12 Subsidiary Local Workers Sig. (2-tailed) 11 11 . Ratio Correlation Coefficient Sig. (2-tailed) 10 1.000 R&D to Net Sales Ratio Correlation Coefficient Parent Profit to Net Sales Correlation Coefficient Parent Capital Expenditure to Sales Correlation Coefficient Parent Growth Revenue Average Correlation Coefficient Parent Growth Revenue YOY Correlation Coefficient Parent Fix Assets Turnover Correlation Coefficient Parent Depreciation Expenditure to Net Sales Parent Net Sales/Employees Correlation Coefficient Sig. (2-tailed) Sig. (2-tailed) Sig. (2-tailed) Sig. (2-tailed) Sig. (2-tailed) Sig. (2-tailed) Sig. (2-tailed) Years Ratio Ratio Ratio Ratio Ratio Ratio Ratio Correlation Coefficient Sig. (2-tailed) Ratio * -.153 * -.166 1.000 1.000 -.284 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). 34 ** 1.000 -.166 1.000 1.000 . .386 ** 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 . .292 ** 1.000 1.000 1.000 Table 6: Multiple Regressions Independent Variables Included Manufacturing Service Model 1 Model 2 Model 1 Model 2 39879.26 (0.731) -11986.48 (-1.841) 27.582 (0.114) -1535.64 (-1.742) 77.225 (0.305) 1016.20 (1.916) -7927.84 (-1.831) -9775.44 (-1.621) 1621.93 (1.241) 2718.90** (3.719) -533.338** (-2.088) 1840.31** (2.324) 32622.937 (0.610) -12523.182 (-1.965) -52.488 (-0.219) -1466.125** (-2.050) 381569.113** (2.611) -16243.23 (-1.295) 523.45 (1.637) -3062.75 (-1.124) -361.33 (-1.675) -1341.12 (-1.817) -11268.45 (2.120) 21069.49** (9938.66) -5687.26 (-1.790) 2707.00 (1.575) -1116.87 (-1.582) -800.28 (-0.531) 335201.82** (2.273) -25464.706** (-2.198) 494.919 (1.508) -4106.66 (-1.507) F 3.265 3.377 2.092 1.913 P 0.001 0.001 0.052 0.080 R Square 0.268 0.275 0.426 0.374 Constant 1. Parent Overseas Sales 2. Parent Overseas Sales/Net Sales 3. Parent Profit/Net Sales 4. Parent Recurring Profit/Employees 5. Subsidiary Age 6. Subsidiary Capital 7. Subsidiary Local workers 8. Parent Age 9. Parent Growth Revenue Average 10. Parent Growth Revenue YOY 11. Parent Capital Expenditure / Net sales 12. Fix Asset Turnover 956.311 (1.833) -7848.74 (-1.826) -10620.204 (-1.761) 1757.437 (1.391) 2947.044** (3.864) -546.157** (-2.145) 2221.037** (2.667) 2941.254 (0.996) -1439.228 (-1.903) -6274.67 (-0.745) 23409.961** (2.315) -4352.094 (-1.377) 1715.464 (1.034) -1227.743 (-1.700) -438.094 (-0.286) Model Indices **significant at the 5% level 35