Local embeddedness can be defined as a firm’s (or FS’s) efforts to interact
and to build relationships with local (i.e. host country) actors in order to exchange
resources, knowledge and information (Wright, 2010, p. 127). Embedded
business relationships are characterized by a larger number of functional areas of
a given firm that are involved with business partners, a higher dependence on
business partners, mutual commitment and trust (Andersson et al., 2001; ForsPOSITIONING
OF FOREIGN SUBSIDIARIES IN MULTINATIONAL…
37
gren et al., 2005). Literature suggests that understanding of local environment,
and the amount and features of local embeddedness, result in enhanced firms’
competence development, innovation, and market performance (see e.g. Schmidt
and Hartmann, 2011 for literature review).
Operationalizing local embedness subsidiary
3.1.1. Subsidiary local embeddedness Embeddedness between two parties in a relationship is usually measured as frequency of interaction and/or degree of mutual adaptation of resources/activities (Lane & Lubatkin, 1998). Considering the fact that embeddedness reflects the limited possibilities to change to other relationships, in contrast to a purely arm’s–length relationship, the latter indicator is probably most relevant. Consequently, following Andersson et al. (2002), four questions were used to measure subsidiary local embeddedness. On Likert-type scales ranging from 1Zvery little to 7Zvery much, the respondents were asked to indicate to what extent their subsidiaries’ most important local business relationships had caused adaptations concerning (a) product technology, (b) production technology, (c) standard operating procedures, and (d) business practice. The answers were averaged to form a construct measuring subsidiary local embeddedness (aZ0.76). A varimax factor analysis revealed that the four items loaded on one factor.
Embednesss geenral local linkage
Local embeddedness and local linkages. In terms of location-specific advantages, Dunning’s
(1988a,b) “eclectic” theory explained that for FDI, the advantages originate from exploiting local
resource endowments or factors that a host country provides and that a MNE considers valuable to
combine with its own competitive advantages. MNEs will opt for one motivation or another to invest
more and/or choose higher-equity modes in those countries which provide greater location-specific
advantages.
Location-specific factors represent the special advantages accruing to MNEs investing in a particular
host country. For MNEs, “the locational configuration of a firm’s activities may itself be an
ownership-specific advantage as well as affect the modality by which it augments, or exploits, its
existing ownership advantages” (Dunning 1998: 60). Therefore, location-specific factors are likely to
substantially affect MNE subsidiaries’ firm competitiveness and future development in the host country
(Campa and Guillen 1998; Erramilli, Agarwal, and Kim 1997; Narula and Dunning 2000; Peng
2009; Tatoglu and Glaister 1998). Several scholars suggested that the local business environments
and political systems of emerging markets are relatively less developed (Filatotchev et al. 2007;
Meyer and Nguyen 2005; Pacek and Thorniley 2007). It is important to examine, for each locationspecific
factor, how the degree of local embeddedness influences the performance of MNE subsidiaries
operating in emerging markets.
MNEs should not be presumed just as bounded units and owners of resources, but also as institutions
with permeable and very blurred boundaries (Benito, Lunnan, and Tomassen 2011; Dicken and
Malmberg 2001). MNEs create local linkages to utilize location-specific factors and support their foreign
business activities in the host country (Chen and Chen 1998; Chen, Chen, and Ku 2004; Dicken
2004). The nature of local linkages must be understood from the concept of a business network.
Ghoshal and Bartlett (1990) developed an inter-organizational network theory of the MNEs. In
Ghoshal and Bartlett’s study (1990), a MNE is regarded as an inter-organizational system rather than
as an organization. Hakansson (1992) suggested that a business network is shaped through interactions
which occur in accordance with the perceptions of the network held by individual firms.
To penetrate a foreign market and improve operational efficiency, all MNEs in the host country
need to be embedded in one or more networks via local linkages (UNCTAD 2001). MNEs in the
host country set up local linkages with local partners, suppliers, distributors, customers, government
agencies and so on, to exploit the local resources (Dicken 2004).
In this study, a local network is defined as a web of interdependent relationships upon which business
exchange transactions between organizations are undertaken locally. “Embeddedness” represents
the fact that business development is influenced “by actors’ dyadic relations and by the structure of
overall network of relations” (Grabher 1993: 4). The “local embeddedness” of a MNE subsidiary
means the network of relationships between a MNE subsidiary and its suppliers, competitors, consumers,
and public units where it operates (Granovetter 1985; Harrison 1992; Yeung and Li 2000
There is an older literature that looks at the impact of offshoring in the form of vertical foreign direct investment (FDI) on developing country labor markets. One example of such a paper on vertical FDI is Helpman (1984), in which unskilled wage can go up in developing countries as a result of such FDI. While many empirical and earlier 8For example, Grossman and Rossi-Hansberg (2012) focus on “trade in tasks” between two similar countries, with an economies-of-scale element embedded in the model. 9Wage increases in the developed country during upswings of the business cycle will result in increases in offshoring to the developing country, while during downswings offshoring will go down. Thus offshoring stabilizes the wage in the developed country but increases its volatility in the developing country. 6 theoretical papers on vertical FDI arrive at the conclusion that vertical FDI has positive effects on developing country labor markets (McMillan, 2009), unlike our paper they do not look at the impact of small and gradual reductions in offshoring costs (fall in trade costs, easier overseas supervision and monitoring and greater automation) that bring in more and more complex tasks into the fold of offshoring. We view the earlier theoretical literature, that does not have a task-trade view of offshoring but focuses on vertical FDI, and our work as complementary in the understanding of the impact of offshoring on developing country labor markets.
Three sets of claims have been advanced to support optimistic accounts of foreign
investment in CEE and its regions after 1990. The first set of arguments emanated from
the conventional literature which pointed to foreign investment as “the engine of
growth” in post-communist economies (Lipton & Sachs, 1990). This claim was premised
on the argument that not only would foreign investment bring a vital injection of capital to
economies where domestic individual and institutional savings were low, but also that
there would be an automatic transfer of technical and managerial know-how to firms.
Therefore in CEE, as in other countries, FDI has acquired hegemonic status in many
regional and local development strategies (Hudson, 1995; Phelps, 1997).
The second set of arguments supporting the increased potential of FDI for local development
are related to claims that new corporate dynamics have led to the emergence of
qualitatively new and essentially superior forms of manufacturing investment by TNCs
in less-developed regions (Amin et al., 1994; Fynes & Ennis, 1997; Rugman & D’Cruz,
1997). Such quality investments were seen as the product of a number of organizational
changes. These new directions included increased autonomy for subsidiaries, a shift
from defensive strategies associated with lowering costs to offensive strategies associated
with asset and knowledge seeking and an increasing emphasis on aftercare.
Thirdly, attention has turned to the locality as an important source of competitive advantage
for firms (Cooke &Morgan, 1994; Scott, 1995), where firms could access the external
economies of scale through clustering (Porter, 1994; Krugman, 1995). Strong claims have
been made that geographical proximity allows firms to access tacit knowledge from local
networks that are central to competitive advantage in a global economy, where knowledge
is increasingly ubiquitous and codified (Maskell & Malmberg, 1999a, 1999b).\citep*{Hardy_2011}
By the early twenty-first century, there was a shift of interest to the potentiality of business
service foreign investment; new trends in offshoring and outsourcing were paralleled by a
new orthodoxy and panacea for economic success. Market forces were no longer regarded
as sufficient for assisting the post-communist countries in shifting the trajectories of their
nation states or regions and integration with the global economy (World Bank Report,
2002). It was argued that the economic context of the new millennium has shifted to
demanding “more far-reaching institutional innovations on the part of those who wish
to ‘catch up’” (UNIDO, 2005, p. 8). It follows that in order to “catch up”, countries
need to develop knowledge economies in order to compete successfully. According to
UNIDO, “knowledge” is a critical factor for growth comprising “variables highly correlated
with the creation and diffusion of and use of knowledge such as R&D innovation,
scientific publications, information and communications technology infrastructure,
quality management and education” (UNIDO, 2005, p. xiv). From the European
perspective this emphasis is reinforced by the Sapir Report in 2003, which views the
poor performance of the European Union (EU) in general as a symptom of its failure to
transform into an “innovation based economy”.
\citep*{Hardy_2011}
Drahokoupil and Capik’s contribution (2011) deconstructs
Can not calculate service offshoring correctly
Compared with foreign trade, business service FDI data are not good measures for
captive offshoring and offshore outsourcing. Only a part of FDI in business services is connected
to offshoring and offshore outsourcing. Moreover, FDI data on services are unreliable
and vary greatly depending on the source of the statistics. Companies report different
base capitals for business services projects and interviews revealed that the recorded FDI
does not provide a good basis for international comparisons. In Hungary for example, two
comparably sized greenfield investments undertaking similar activities had very different
capital bases: one of them was approximately 12,000 Euros and the other approximately
2.8 million Euros.\citep*{Sass_2011}
Vertical versus horizontal FDI
The distinction between vertical and horizontal FDIs can be well observed not only in
manufacturing, but also in the service sector (Caves, 2007). Market-seeking investors
establish a subsidiary in the host country to provide services for the local market and
are usually attracted by specific market attributes. For vertical investors, the most important
motive of investing abroad is reducing costs by obtaining cheaper factors of production
(Barba-Navaretti & Venables, 2004). Mainly motivated by the availability of
low cost qualified labour, these companies are offshoring only particular service functions
to the host country—usually administration (back office functions), finance, human
resources, payroll services, logistics (corporate functions), customer care and content
development (knowledge services and R&D). Such investments are commonly referred
to as shared service (or contact) centres and take place within both service and manufacturing
sectors. Shared \citep*{Sass_2011}
Key features of offshored services.
Those services, which are affected by the process, have specific common characteristics.
These are usually:
. labour intensive,
. structured, describable with simple algorithms, and can be standardized,
. connected to information (e.g. information processing),
. use telecommunications
. routine work,
. relatively easily measured and evaluated,
. mobile
. local embeddedness has low priority
. significant differences in wages (labour costs) between the home and host country for
the affected service activity,
. low sunk costs in establishing in new location.
\citep*{Sass_2011}
Service FDI impact on host location
The impact of services FDI on former transition economies is relatively rarely analysed.
Generally, Aykut and Sayek (2007) show that the sector composition of FDI
has an effect on its growth impact. Eschenbach and Hoekman (2005) found that reforms
in services policies result in a higher inflow of FDI into these sectors and thus
positively affect the post-1990 economic performance of transition economies. Riedl
(2010) found similar results, though she assumed that services FDI is almost exclusively
market-seeking. Gorodnichenko et al. (2013) showed that services firms benefit
more from FDI. The impact of business services FDI on the local economy, emphasizing
the vertical nature of it, was presented by Sass (2011), showing that
spillovers are scarce because backward and forward linkages with indigenous firms
remain limited. Hardy et al. (2011) compare the local impact of horizontal and vertical
business services in the Czech Republic, Hungary and Slovakia. They show the differences
in local impact, stating among others that the most salient static impacts of
these investments are on the labour market, where horizontal investments provide
fewer, but more skilled jobs than vertical investments. Gál (2004) analysed financial
services FDI in Hungary from that point of view.
This paper contains the results of an ongoing research, where we tried to assess the impact of three selected services sector FDI on the local economy in the area of employment and exports in this case of the four Visegrad countries. We have selected three service sectors, which represent a relatively high share of the overall FDI stock on one hand and which are different in terms of being predominantly horizontal (financial services), vertical (business services) or confluent (IT-services) nature. Our preliminary findings are more or less in line with what could be expected on the basis of the theories in terms of the impact of these services FDI on exports: FDI in the sector with predominantly vertical projects, business services has a positive impact on exports, the sector with predominantly horizontal projects, financial services had no effect, while contrary to the findings, the confluent sector, IT-services we could not find a positive impact, which indicates that even in that sector, FDI projects are mainly horizontal and are attracted mainly by the domestic market of the analysed countries. In terms of the employment effect, surprisingly, it is only FDI in the sector with mainly vertical projects, business services, which had a positive impact on employment, while in the horizontal sectors no such effect was traced. This is contrary to the findings of other research
(XXV. International RESER Conference:
Host country impact of services FDI: the
case of Visegrad countries
Zoltán Gál, Magdolna Sass)
Manufacturing versus service FDI spillovers servcie FDI
\citep*{Doytch_2008}
A voluminous literature examines the relation between total FDI and aggregate growth.6 Previous
studies on spillover effects of total FDI usually find a positive relation with growth, if specific conditions
such as skilled labor, high wealth and developed financial markets are met (Borensztein et al., 1998;
Blomstrom et al., 1994, Alfaro et al., 2008). However, at the microeconomic level, where all studies
have been conducted within the manufacturing sector, results are less clear-cut. Some case studies
indicate limited positive spillovers of FDI (Haskel et al., 2007; Blalock and Gertler, 2003), and others
find no or negative spillovers (Aitken and Harrison, 1999; Gorg and Strobl, 2001; Lipsey, 2003, 2004).
Based on this inconclusive findings, Lipsey and Sjoholm (2005) suggest a need for further industry level
research by arguing that “..the question shifts from how inward FDI affects every host country and
industry to which types of industries and host countries are affected”. To this day, the only industry
level study we have been able to identify is Aykut and Sayek (2007) who examine the effects of sectoral
FDI on aggregate growth only. Their analysis has the same drawbacks as the other studies in that it is
a static framework and addresses neither the industry-specific growth effects nor disaggregation o
FDI mierzy sié sektorowo , a offshoring po funkacjach . wiec firma produkcjina moze offshorowac zarowno aservice jak i manufacturing ale jej FDI sa zaliczane do manufacturing.