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Foreign Subsidiary Performance: Evidence from Ghana a

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Samuel Dadzie , Jorma Larimo & Huu Le Nguyen

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University of Vaasa , Vaasa , Finland Published online: 16 May 2014.

Click for updates To cite this article: Samuel Dadzie , Jorma Larimo & Huu Le Nguyen (2014) Foreign Subsidiary Performance: Evidence from Ghana, Journal of Transnational Management, 19:2, 165-187, DOI: 10.1080/15475778.2014.904662 To link to this article: http://dx.doi.org/10.1080/15475778.2014.904662

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Journal of Transnational Management, 19:165–187, 2014 Copyright # Taylor & Francis Group, LLC ISSN: 1547-5778 print=1547-5786 online DOI: 10.1080/15475778.2014.904662

Foreign Subsidiary Performance: Evidence from Ghana SAMUEL DADZIE, JORMA LARIMO, and HUU LE NGUYEN Downloaded by [Institute of Professional Studies] at 01:59 28 January 2015

University of Vaasa, Vaasa, Finland

The objective of this study is to examine the influence of selected ownership, location, and internalization-specific factors on performance of foreign subsidiaries in Ghana. Our analysis was based on 75 manufacturing investments made by MNEs from different countries in 1994–2008. The results indicated that market size, host country experience, greenfield establishment mode, and joint venture ownership mode had positively impacted performance of foreign subsidiaries independent of the measure of performance. Furthermore, international experience and cultural distance had influenced performance when the total performance measure was used. Finally, the ownership mode significantly influenced performance only in greenfield investments, and not in acquisition mode. KEYWORDS foreign subsidiary, Ghana, performance

INTRODUCTION Ghana has long been regarded as one of sub-Saharan Africa’s ‘‘star performers’’ (Coulombe & Wodon, 2007). It was among the first economic reformers in Africa, with a series of reforms beginning in 1983. These reforms included the abolition of price controls, the opening of capital markets, reductions in import tariffs, and privatization of many state-owned enterprises (Sandefur, 2010). As a result of these reforms Ghana exhibited strong and sustained growth, with a growth rate of 7.7% in 2010, and 13.4% in 2011 (UNCTAD, 2011). In 2010, Ghana was ranked the seventh largest recipient of foreign direct investments (FDIs) and the fourth safest FDI destination country in Africa (UNCTAD, 2011). Received June 2012; revised January 2014; accepted February 2014. Address correspondence to Jorma Larimo, Department of Marketing, University of Vaasa, Wolfintie 34, PL 700, 65101 Vaasa, Finland. E-mail: [email protected] 165


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How well firms have performed in their foreign operations and how to achieve better performance in foreign markets has long been a key question in the field of international business. The eclectic paradigm (OLI) by Dunning (1980; 2000; 2008) has been one of the core frameworks which have been extensively applied in the past to explain and examine the foreign direct investment (FDI) decisions of multinational firms. The theory proposes that the choice of market entry mode is determined by three sets of advantages: ownership advantage, location advantage, and internalization advantage. Large volume of research has focused on performance of foreign companies in their entries, especially in FDIs (e.g., Barkema & Vermeulen, 1998; Brouthers & Brouthers, 2000; Elango & Sambharya, 2004; Harzing, 2002; Hennart & Park, 1993; Mudambi & Mudambi, 2002). However, most of the studies have focused on advanced countries and only a few studies have concentrated on the FDI performance on emerging economies. Research focusing on the performance of foreign subsidiaries in Africa is quite limited. The aim of this study is to examine strategies and performance of foreign MNEs investing in Ghana during the period 1994 to 2008. To this end, the main research question of this study is: What are the implications of ownership-specific and location-specific factors as well as establishment and ownership mode decisions on subsidiary performance? In addition, the study tries to find out: Do the results vary depending on the measure of performance? Previous studies have raised this question and the results are inclusive (e.g., Larimo, 2010). The next sections of the article are as follows: First we outline theory and hypotheses. We then discuss methodology, data collection process, the operationalization of our variables, and data analysis. After that we discuss the results, their implications as well as contributions of this study.

LITERATURE REVIEW In order to review literature and analyze what has been studied, we have based our research on the articles published in journals found in databases available from ABI Inform Global, Emerald, Science Direct, ESBCO, SAGE Journals Online, and JSTOR Arts & Sciences. The keywords for the search were ‘‘entry mode choices,’’ ‘‘motives,’’ ‘‘establishment modes,’’ ‘‘ownership choice,’’ ‘‘FDI performance, ‘‘Africa,, ‘‘Ghana.’’ We identified 16 relevant studies of FDI in Africa (Table 1), of which three are on motives, one on establishment modes, three on performance, and the rest are on market conditions. Related to the analysis of entry mode choice, Bhaumik and Gleb (2005) found that determinants of the choice of entry mode were different between the manufacturing and services sectors. Market regulations and factors that determine the transaction cost of doing business were the key determinants of the choice of the mode of entry. The level of technology in the MNCs’ products

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Ghana

11 SSA countries

South Africa and Egypt

22 countries

Africa

Yasin (2005)

Bhaumik & Gelb (2005)

Asiedu (2006)

Malgwi et Al. (2006)

Explores the link between the two major sources of external capital to fill Africa’s significant gap (FDI and ODA) Examines entry mode between greenfield and acquisition of manufacturing and services firms Examines the impact of natural resources, macroeconomic instability, FDI regulatory framework, corruption, effectiveness of the legal system, and political instability on FDI flows Examines the operating characteristics of MNCs in Africa

Examines strategic motive for international venture formation in Ghana

Ghana and Cote Examines IJV in West Africa D’ Ivoire 26 Africa countries Examines how uncertainty affects FDI flows to Africa

Boateng & Glaister (2003)

Lemi & Asefa (2003)

Bartels et Al. (2002)

Boateng & Glaister (2002)

Determinants of FDI in 20 African countries

Goals of the studies

Investigates which policy factors have played a significant role in the improvement of their investment climate of sub-Saharan Africa. Ghana and Nigeria Examines performance of international joint venture in West Africa

20 African countries 29 African countries

Agodo (1978)

Morisset (2000)

Level of analysis

Authors

TABLE 1 Summary of the Earlier Empirical Studies of FDI in Africa

USA

Foreign firms

N=A

382

Foreign firms

U.S manufacturing and non-manufacturing firms Western Europeans, North America, and Asia Foreign firms

West Europeans, North America, and Asia UK and France

Foreign firms

USA

Origin of the firms

224

N=A

47

N=A

45

57

N=A

33

Size of sample


(Continued )

N=A

1984–2000

1990–2000

1990–2003

1986–1997

1987–1999

N=A

1986–1997

1990–97

1960–1970

Time period

168

20 countries

Wahid et Al. (2009)

Kolstad & Wiig (2011)

Africa

Kyereboah-Colemen Ghana et al. (2008) Chrysostom & Lupton(2011) Africa

10 SSA countries

16 countries

Cleeve (2008)

Bartels et Al. (2009)

Level of analysis

Authors

TABLE 1 (Continued)

Examines factors attracting FDIs: Tax incentives, market size, infrastructure and skill of labor Examines the impact of natural resources, political stability, labor cost and market size on FDI in Africa Examines motivating factors attracting FDIs into sub-Saharan Africa Examines the effect of real exchange rate volatility on foreign direct investment (FDI) Examines characteristics and performance of Japanese FDI in Africa Examine the dominant motives behind China’s increasing FDI in Africa in recent years

Goals of the studies

China

Japan

1062 N=A

Foreign firms

Foreign firms

Foreign firms

Foreign firms

Origin of the firms

N=A

758

N=A

N=A

Size of sample


2003–2006

N=A

1970–2002

N=A

1990–2005

1990–2000

Time period


Foreign Subsidiary Performance: Ghana

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was not correlated with the choice of entry mode. Chrysostome and Lupton (2011) examines the characteristics and performance of 1,062 Japanese FDIs. They found that efficiency and market seeking were the common purposes for Japanese firms in Africa. Their performance is good with a very high exit rate in low income regions, high with a high exit rate in low middle income regions, and moderate with a low exit rate in upper middle income regions. Boateng and Glaister (2002) examine a number of aspects of performance of 57 IJVs in the West Africa context. The findings indicate that partner capabilities, capital adequacy, congruity of motives, and goals are significant determinants of performance. Level of control was found to have a negative impact on performance. Bartels, Johnson, and Ahmed (2002) examines equity IJV in Ghana and Cote D’Ivoire and they found that there is significant consistency in the characteristics of IJVs between firms from DCs and LDC in the following dimensions: motives, asymmetry in equity distribution, frequency of government association, source of CEO, autonomy in management and instability. Malgwi, Owhoso, Gleason, and Mathur (2006) examine the operating characteristics of U.S firms in Africa and found that firms with operations in Africa are larger, more diversified, and more profitable than a matched control sample of multinational firms. Bartels, Alladina, and Lederer (2009) found that FDI location decision in sub-Saharan Africa is influenced strongly by political economy consideration whereas labor and production input variables are not influential. Kolstad and Wiig (2011) also found that Chinese FDI is attracted to countries’ large natural resources, especially when the host country has a weak institution system.

HYPOTHESIS DEVELOPMENT Ownership-Specific Factors Firm size has been considered an important source of strategic advantage since it can allow the firm to realize economies of scale and scope and access to resources denied to smaller firms. Large firms often have intensive investments in advanced technology, product differentiation, and extensive advertising (Siripaisalpipat & Hoshino, 1999). In the case of Ghana, as labor and resources are very cheap compared to those of developed countries, larger size gives firms a much stronger market position to secure their operations. Previous studies (e.g., Brouthers, 2002; Brouthers & Werner, 2003; Pangarkar & Lim, 2003) argued that transaction cost predicts that a relationship exists between the size of parent firm and performance. This is because large investors can commit a significant amount of resources, which might lead to greater synergies (Pangarkar & Lim, 2003). Moreover, Glaister and Buckley (1999) argued that large MNEs with global reach and an integrated

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network may also facilitate a more effective supply chain, thereby enhancing the cost effectiveness of operations. Empirical support to the previous views was given e.g., by the results of Pangarkar and Lim (2003). Based on the above argument we propose that: H1: There is a positive relationship between parent firm size and FDI performance.


International Experience and Target Country Experience A parent firm’s experience in the foreign market is critical for international expansion, and consequently, can have significant effects on the performance of foreign subsidiaries. The accumulation of experience helps the parent firm to increase knowledge of doing business in the foreign market and consequently, can reduce operational uncertainties. Gatignon and Anderson (1988) argue that firms with lack of experience in the international setting are not capable of managing subjectively, monitoring appropriately, and assessing inputs in lieu of outputs. This is usually the case in Africa where physical and political infrastructures are quite different from developed economies. As a firm expands its operation overseas, it learns more about how to cope with different environments. In terms of Ghana, economic, political, and legal systems, as well as the perceived psychological distance are very crucial for Western firms. Barkema and Vermeulen (1998) argue that when firms make international investments, specific knowledge of the host country is gained together with more general knowledge of conducting international operations. Furthermore, Larimo (2003) argued that target country specific experience should reduce uncertainty related to the operation environment and in this way increase the possibilities for better performance. As firms operate in Ghana, good experience and connection with local authorities would allow firms to choose to better location with logistics advantages to build their factory, and better access to natural resources of the country. Hence based on the previous argument we propose that: H2: There is a positive relationship between the international experience and FDI performance. H3: There is a positive relationship between parent firm’s previous target country experience and FDI performance.

Location-Specific Factors Brouthers (2002) found a relationship between market potential and MNE performance. There are fixed costs associated with FDI, which are easier to deal with when spread over a larger volume of output. The larger the



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market, the greater the reduction in the marginal costs of producing abroad and the more likely the firm is to invest in that location rather than resort to exportation. In a small market, firms may find that fewer integrated modes provide better opportunities either because (1) they do not increase the capacity in the market, hence not impacting competitor pricing strategies as severely; (2) can provide a better return on investment by minimizing the resource commitment, based on lower expected returns; or (3) reduce the switching costs of market exit if product= service sales are low (Kim & Hwang, 1992). Ghana is a medium-sized African country and the second largest population in West Africa. Investors looking for better performance will be attracted to the Ghana market based on the regional market and not only the size of the Ghanaian market. Hence, based on the above viewpoint we propose that: H4: There is a positive relationship between perceived market size and FDI performance.

Cultural Distance A growing number of studies consider cultural distance in the MNE portfolio of operations an important predictor of performance (Luo & Peng, 1999; Mulok & Ainuddin, 2010). The greater the cultural distance between home and host countries, the greater the differences in management practice, and the more difficult it becomes to integrate the unit with the parent. Luo and Peng (1999) argue that high cultural differences tend to cause to intra-organizational conflicts and poor execution of organizational actions, resulting in inconsistencies in values and institutions between home and foreign market operations. Furthermore, previous studies (e.g., Schneider & De Meyer, 1991), argue that high cultural distance limits MNE performance due to increased training, monitoring, and control costs, as well as differences in managerial cognition of environmental and organizational issues. According to Hofstede (2001), Ghana is characterized by high uncertainty avoidance and collectivism culture. Thus the country is quite different compared to leading developed countries (e.g., USA, UK, and Germany). Luo and Peng (1999), and several others have found a negative relationship between cultural distance and MNE performance, while some other studies (e.g., Morosini, Shane, & Singh, 1998) have found a positive relationship. Park and Ungson (1997) argue that managing portfolios of foreign operations with higher cultural distance often associates with increased transaction and operating costs, resulting in lower survival rate for MNEs. Thus, based on the previous information, we propose that: H5: There is a negative relationship between perceived cultural distance and FDI performance.

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Host Country Risk Agarwal and Ramaswami (1992) argue that host country risk reflects uncertainty about the continuation of current economic and political conditions and government policies that are deemed to be critical to the survival and profitability of firm operations in that country. Furthermore, Miller (1993) and Ahmed, Mohamad, Tan, & Johnson (2002) emphasized the importance of the political risk and the uncertain dimension of MNEs’ operations and performance. Bijur (1995) argues that levels of risk in the host country place a firm’s assets at a heightened risk; firms cannot afford to lose them or render them unproductive. By and large, a country that is economically and politically unstable has a high level of risk associated with FDIs made. An extremely unpredictable environment will result in firms that want to minimize exposure to risk through entry methods that offer the necessary flexibility in the face of environmental risk (Erramilli & D’Souza, 1995; Kim & Hwang, 1992). In general the perceived country risk in Ghana is assumed to be clearly higher than e.g., OECD countries and in several emerging economies because of the less-developed institutional structures. Based on these viewpoints, we propose that: H6: There is a negative relationship between perceived country risk and FDI performance.

Establishment Mode and Performance The FDI can be made using either greenfield investment or acquisition mode. Several studies (e.g., Nitsch, Beamish, & Makimo, 1996) argue that the performance of greenfield investments is systematically better than that of acquisitions. Furthermore, Larimo (2003) argues that greenfield investments need more time for planning, construction, and market positioning than takeovers, and as a result may lose a lot of time before they can develop their operations. MNEs consider greenfield mode when their firm-specific advantages are well built enough to cover the additional transaction costs arising from operations in the foreign market, and when location advantages are great. Regarding acquisitions-related advantages it may be stated that in cases where the foreign company acquires an existing local firm that is well-established in the market the investing firm may then try to combine the subsidiary’s advantages with its own core abilities, thereby augmenting its overall firm specific asset (Dunning, 2000). The new combined entity may then be able to use these synergies to better overcome the transaction cost barrier and to improve its position on the local market (Dunning, 2000). Wide empirical evidence suggests that although several advantages are associated with acquisitions they also appear to be risky, and a great proportion of acquisitions do not reach the goals set for them. In the case of


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Ghana, as the local practices and taboos are very different from that of the West countries, the integration in post-acquisition stage may lead to serious problems, therefore reducing performance of the units. Several studies (e.g. Benito, 1997; Delios & Makino, 2003) also indicate better performance in greenfield investments than in acquisitions, especially in cases of high cultural distance and highly uncertain markets. Therefore, we propose that:


H7: There is a positive relationship between the greenfield establishment modes and FDI performance.

Ownership Mode and Performance The ownership modes are wholly owned subsidiary (WOS) and joint venture (IJV). Anderson and Gatignon (1986) argue that a correct decision on ownership mode should improve a company’s long-term performance. In the same way, a mode wrongly chosen will lead to high transaction costs and low transaction benefits (Chen & Hu, 2002). It has been argued that performance is relatively independent of ownership mode, since both WOS and IJV choice could equally obtain the same results. Previous empirical studies report mixed results on the relationship between the degree of ownership and performance. Chowdhury (1992) found that WOSs performed better than IJVs. Similarly, Woodcock, Beamish, & Makino (1994) found that WOS generated higher profits than IJVs. Some additional studies have drawn similar conclusions (e.g., Brouthers & Brouthers, 2000; Nitsch et al., 1996). However, some studies indicated that IJVs have performed better than WOSs (e.g., Pan, Li, & Tse, 1999; Reus & Ritchie, 2004). Finally, there are studies such as Pangarkar & Lim (2003) and Luo (2003) where there is no relationship between ownership arrangement and performance was found. In the case of Ghana, partnering with local firms permit foreign firms to have immediate access to local knowledge related to local practices in human resources management, distributing products in local distribution webs, which are difficult for foreign firms to know if they enter the market with WOS. Moreover, because many studies focusing on FDIs in emerging markets (i.e., Pan et al., 1999) seem to indicate better performance in IJV apparently because of the contributions from local partners to deal with local market uncertainty. Therefore we expect: H8: There is a negative relationship between WOS ownership modes and FDI performance.

We have expected that performance is better in greenfield investments than in acquisitions and better in joint ventures than in wholly owned FDIs. However, we expect that there may be some differences in the


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FIGURE 1 Conceptual model.

impacts when the establishment and ownership mode decisions are analyzed jointly. We expect that joint ventures perform better than WOSs if the investment is made in the mode of greenfield investment (e.g., Reus & Ritchie, 2004), whereas if the investment is made using acquisition mode we expect WOSs subsidiaries have performed better than joint ventures (partial acquisitions). Our expectation is that acquisitions can be very problematic, especially in Ghana because of high need for technological and management integration, as well as corporate culture between Western and Ghanaian firms. Thus we expect: H9: There is a positive relationship between joint venture ownership in greenfield mode of investments and FDI performance. H10: There is a positive relationship between WOS ownership and FDI performance in acquisition mode of investments

The framework of the study is summarized in Figure 1.

SAMPLE AND METHODS The population of the study consists of foreign manufacturing units in Ghana made in 1994 to 2008. The data for this study was obtained from the Ghana



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Investment Promotion Council (GIPC). The total number of firms based on the data-base from GIPC was 390. The following criteria were applied to define suitable respondents: (1) the person should be top management personnel and should have been involved in the original entry mode decision and the operation after the entry, and (2) foreign ownership of the company should be more than 10% of the equity capital. Ownership of less than 10% is considered a portfolio investment (Dunning, 1998). After applying the above criteria, the final sample was 230 units. The data consists of FDIs made by MNEs from 19 different countries. The questionnaires were personally delivered to the CEOs or top executives of these firms. At the end of the data collection period, 75 completed questionnaires were received representing a response rate of 32.6%. The questionnaires not returned were due to the following reasons. First, the employees who were qualified to provide the necessary information were no longer employees of the subsidiary, or had gone back to their respective home countries. Second, some of the companies did not answer the questionnaires because company policy prohibited disclosure of information concerning the company. We found no differences in terms of size of MNCs between responding and non-responding groups whereas there were differences depending on the origin of MNCs, indicating a lower rate of participation among Asianbased investors than in the other groups. The final sample size is in line with other foreign entry mode studies using survey data (e.g., Dikova, 2005; Harzing, 2002; Kim & Hwang, 1992). The operationalizations of the variables used in the study is presented in Table 2. Out of the 75 investments, 48 (64%) were FDIs made in the form of greenfield investments, whereas 27 (36%) FDIs were made via acquisitions. With regard to the ownership mode, 30 (40%) were FDIs entered through WOSs and 45 (60%) FDIs entered through IJVs. Foreign firms with a foreign equity stake equal to or exceeding 95% were considered WOS, whereas those with a lower foreign equity stake were labeled IJVs. In terms of the origin of the foreign firms, 19 (25%) of the responses are from firms originating from the UK, whereas 56 (75%) are firms from other countries. Of the sample FDIs, 33 (44%) were made in the period 1994–1999 and 42 (56%) were made between 2000 and 2008.

DATA ANALYSIS In line with previous studies an ordinary least squares (OLS) model was employed to examine the empirical data because the dependent variables were continuous (scale from 1 to 5). Linear regression models are econometrically appropriate when the performance of affiliate is treated as the dependent variable (e.g., Dikova, 2009; Demirbag, Tatoglu, & Glaister, 2007;

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Country risk

Cultural distance

Market size

Target country experience

International experience

Independent variables Firm size

Dependent variable Performance and profitability

Variables

The number of the employees of the parent firm assessed by the questionnaire on a Likert-type scale. 1 ¼ 1–499, 2 ¼ 500– 999, 3 ¼ 1000–4999, 4 ¼ 5000–7999, 5 ¼ 8000 and above The number of foreign manufacturing unit at the time of establishment. 1: no unit, 2: 1 unit, 3: 2 to 4 units, 4: 5 to 9 units, 5: 10 to 19 units, 6: 20 or more units. Form of foreign firms’ previous experience in the country entered. It is measured as follows. 1: no prior activity 2: sales office; 3: licensing agreements; 4: export; 5: joint manufacturing venture; 6: wholly owned manufacturing unit. The perceived market size assessed on a Likert-type scale (1: very small to 5: very large) Computed in the manner suggested by Kogut and Sing (1988) using a composite index based on the difference between Ghana (West Africa) and home countries of the investors along the four cultural dimensions (Power distance; uncertain avoidance; individuality and masculinity) based on Hofstede (1980) The perceived investment risk in Ghana at the time of their investment. It was measured on a Likert-type scale (1: very high risk and 5: very low risk)

Managers were asked to indicate on a 5-point scale ranging from 1 ‘‘very unsatisfied’’ to 5 ‘‘very satisfied’’ how the subsidiary performed based on total performance and profitability of the unit.

Operationalization

TABLE 2 Operationalization of Variables of the Study

þ Li (1995)

Barkema &Vermeulen (1998)

þ

þ

Li (1995)

Demirbag et al. (2008); Agarwal et al. (1992) Vermeulen & Barkema (2001)

þ

Expected sign

Agarwal et al. (1992); Anderson & Gatignon (1986)

Brouther et al. (2003); Fey & Beamish (2001)

Reference studies


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Contractual risk

Proprietary asset

Age of the unit

Country of origin

Competition

Incentives

Control variables Product relatedness

Ownership mode

Establishment mode

A dummy variable that takes a value of 1 if the subsidiary’s main products are the same as the parent’s products and 0 if the subsidiary’s products are different from the parent’s main products. A dummy variable and was assigned value of 1 for incentives, and 0, no incentives Competition is measured in the form of a foreign firm expected competition they will encounter at the time of the decision to invest in Ghana. It was measured on a Likert-type scale (1: very high and 5: very low) A dummy variable for MNEs operating in Ghana with their parent firm originating from UK is coded 1 and 0 if the parent firm originated outside the UK (i.e., other countries) A dummy by assigning the value of 0 for FDI made during 1990s, and 1 for those made in 2000s in Ghana A dummy variable coded as1 for high and 0 for low technology industries. Example of high technology products are electrical, electronic, etc., while example of low technology products are food, rubber, etc. The perceived cost of making and enforcing a contract at the time of investment assessed on a Likert-type scale (1: very small and 5: very high)

A dummy variable that takes the value of 0 when the entry into a foreign market is based on the acquisition of an existing company within that market, and 1 when venture is based on entire new assets (i.e., greenfield start-up) A dummy variable that takes the values of 0 if the affiliate is JV (ownership 10–94% by the foreign investor) and 1 if the affiliate is WOS (ownership 95–100% by the foreign investor) þ

Larimo (2003) Hennart & Larimo (1998)

Agarwal et al. (1992)

Schroath, Hu, & Chen (1993)

Padmanabhan & Cho (1995)

Demirbag et al. (2008)

Slangen (2005)

Padmanabhan & Cho (1995)

Chang & Rosenzweig (2001); Brouthers & Brouthers (2000)

þ

Woodcock et al. (1994); Li (1995)



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Slangen & Hennart, 2008). The regression equation takes the form Y ¼ b1x1 þ b2x2 þ c þe, where Y is the true dependent, the bs are the regression coefficients for the corresponding x (independent) terms, where c is the constant or intercept, and e is the error term reflected in the residuals. The correlations between the independent variables varied from moderate to low. The only worrisome correlation is between that of international experience and target country experience (r ¼ 0.97), which is higher than the correlation cut-off point 0.60, implying potential multicollinearity problems. The variance inflation factors (VIF) analysis indicated values of 27 and 25 for the two above referred variables, which are considerably higher than Hair et al.’s (1998) multicollinearity threshold value of 10. Related to other variables, the respective values were clearly below 10. Thus different runs were decided to be made including and excluding international and target country experience. The results of the ordinary regression analysis are presented in Table 3 . Models 1, 2, 3, 5, and 6 are statistically significant while model 4 is statistically non-significant. In general the models based on total performance evaluations were better than the models based on profitability evaluations.

RESULTS AND DISCUSSION The results indicated that nine variables are statistically significant in model 1 (based on total performance), and eight variables are statistically significant in model 2 (based on profitability). Of the reviewed variables six were significant in both models: the four independent variables market size, country risk, establishment mode, ownership mode, and the two control variables: proprietary assets, and age of the unit. All six variables also have the same sign in both models: a larger perceived market size, greenfield mode of investment, IJV mode of ownership, and more recently made investments had increased probability of better performance, whereas perceived high country risk and making the FDI in high tech fields had increased probability of poorer performance. Thus the presented hypotheses 4, 6, 7 and 8 receive support independent of the measure of performance. Of the above six variables, market size is significant at the 0.05 level in both models, whereas IJV ownership mode is significant at the 0.01 in model 1 and 0.05 level in model 2. Three additional variables were significant in model 1, cultural distance, international experience, and target country experience. The two first variables had a negative sign whereas the third one had a positive sign. Thus the impacts of international and target country specific experience variables were in the opposite direction. The impact of experience variables was at the 0.1 level, whereas cultural distance had more significant impact (at the 0.05 level). Thus based on the total performance, hypotheses 3 and 5 also received support.

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Independent variables PSIZE INTEX TCEXPERIENCE MSIZE CULTDIS CRISK ESTABLISHMENT MODE OWNERSHIP MODE Control variables CONTRISK PROASSEST PRELATEDNESS COMPETITION INCENTIVES AGE: 1990=2000s UK=OTHERS CONSTANT N R2 Adjusted R2 F-statistic

Variables

(.191) (.362) (.355) (.140) (.073) (.092) (.282) (.236) (.091) (.264) (.258) (.082) (.247) (.229) (.260) (.748)

.253 .636 .683 .341 .156 .165 .570 .670

.057 .149 .277 .025 .263 .570 .213 2.565 75 .427 .281 .002

Total Performance

Model 1

Model lb

.011 .410 .359 .005 .228 .578 .315 2.527 75 .391 .249 .003

.345 .155 .193 .634 .657 (.089) (.252) (.260) (.083) (.252) (.234) (.260) (.765)

(.143) (.075) (.092) (.286) (.241)

.182 (.191) .044 (.079) (.077) (.142) (.075) (.092) (.283) (.240)

.015 (.089) .394 (.250) .367 (.257) .005 (.082) .234 (.251) .590 (.233) .317(.257) 2.398 (.755) 75 .397 .256 .003

.074 .346 .151 .193 .641 .671

.183 (.190)

Total performance Total performance without target without international country experience experience

Model la

TABLE 3 OLS Regression results related to total performance and profitability

(.224) (.424) (.416) (.164) (.086) (.107) (.305) (.277) (.106) (.289) (.302) (.096) (.290) (.269) (.305) (.878)

.148 .059 .194 .427 .130 .221 .607 .627 .002 .674 .172 .048 .765 .496 .686 1.730 75 .376 .218 .010

Profitability

Model 2


.015 .671 .195 .043 .755 .498 .715 1.718 75 .374 .228 .006

.428 .130 .229 .625 .634

(.102) (.287) (.296) (.095) (.287) (.267) (.297) (.872)

(.163) (.086) (.105) (.326) (.275)

.168 (.218) .134 (.090)

Profitability without target country experience

Model 2a

(.102) (.286) (.294) (.094) (.287) (.267) (.295) (.864)

(.088) (.163) (.085) (.105) (.324) (.274)

(Continued)

.006 .671 .181 .046 .762 .498 .696 1.714 75 .376 .231 .006

.137 .428 .130 .224 .613 .637

.155 (.217)

Model 2b Profitability without international experience

180 p < 0.01,

(.212) (.478) (.398) (.140) (.300) (.369) (.581) (1.329)

.236 .547 .464 .118 .353 .419 1.199 2.713 27 .794 .554 .022

(.202) (.408) (.364) (.193) (.128) (.141) (.544)

(.277) (.625) (.520) (.183) (.392) (.482) (.751) (1.737)

(.265) (.533) (.476) (.252) (.167) (.185) (.711)

p < 0.05, p < 0.1.

.153 .537 .130 .170 .893 .446 1.601 2.289 27 .706 .362 .109

.125 .565 .463 .261 .056 .422 .526

Profitability with partial vs. full acquisition

Total performance with partial vs. full acquisition

.417 .376 .360 .313 .260 .185 1.225

Model 4

Model 3

Two tailed significant values indicate:

Independent variables PSIZE INTEX TCEXPERLENCE MSIZE CULTDIS CRISK Partial vs. full acquisition Greenfield IJV vs. WOS acquisition Control variables CONTRISK PROASSEST PRELATEDNESS COMPETITION INCENTIVES AGE: 1990=2000S UK=OTHERS CONSTANT N R2 Adjusted R2 F-statistic

Variables

TABLE 3 (Continued)

.360 .393 .090 .219 .406 1.338 .038 1.968 30 .730 .478 .025

.340 .441 .044 .120 1.155 1.185 .220 .533 30 .795 .603 .005

(.156) (.373) (.399) (.133) (.405) (.336)) (.317) (1.114)

(.404) (.695) (.628) (.206) (.112) (.135)

(.174) (.415) (.445) (.148) (.452) (.374) (.758) (1.242)

.175 .779 1.141 .534 .099 .307 1.899 (.384)

(.450) (.775) (.760) (.230) (.124) (.150)

Profitability with greenfield IJV vs. WOS acquisition

Model 6

2.504 (.758)

.037 1.363 1.510 .586 .332 .234

Model 5 Total performance with greenfield IJVvs. WOS acquisition




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In model 2 (based on profitability) variables incentives and country of origin of the investing firm had significantly influenced the performance. Incentives had positively influenced performance and non-UK investors had performed better in their investments than UK-based investors. Based on model 2 no additional hypothesis received support. From the independent variables only one—firm size—and three control variables—contractual risk, product=investment relatedness, and level of competition—did not significantly influence the performance in the two models. Furthermore, also the results in model 5 indicate independent of the measure of performance, greenfield joint ventures significantly increased probability of better performance. Thus hypothesis 9 is supported. Also, the results analyzing the influence of ownership arrangement in FDI acquisitions (model 3) indicated, however, significant but opposite to the prediction of both performance measures. Thus hypothesis 10 did not receive support.

SUMMARY AND IMPLICATIONS OF THE STUDY This study analyzed the determinants of subsidiary performance in FDIs made in Ghana. The empirical part of the study was based on survey results about determinants of performance in 75 subsidiaries established in 1994– 2008 based on management evaluation of total performance and profitability of the units. The results of the study are summarized in Table 4. The results are in line with a previous study by Brouthers (2002) who found that large market size positively affects foreign subsidiary performance. Furthermore, earlier studies by Li (1995), Nitsch et al. (1996), Hennart and Larimo (1998) have found that greenfield investments perform better than acquisitions. In addition, Pan and Chin (1999), and Pan et al. (1999) found that JVs performed better than WOS. Moreover, Li (1995) found that target country experience positively affects performance. Similarly, Chang (1995) and Luo and Peng (1999) have found that higher cultural distance leads to lower performance. Based on total performance, our results were in line with earlier findings by Luo and Peng (1999), and Mulok and Ainuddin (2010). The results revealed that the model based on total performance provided better results than that based on profitability evaluations. Furthermore, the results showed that perceived market size, perceived country risk, proprietary assets, age of the unit, establishment mode, and ownership mode were significant determinants of performance independent of the measure used. Higher perceived market size, lower perceived country risk, and also making the investments in low-tech industries, as well as if the investment was made in the 2000s, if the subsidiary was established using greenfield investment, and if the unit was an IJV led to better performance. International and target country experience of the foreign firm as well as cultural distance had strong influence to total performance of the units.

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TABLE 4 Summary of the Hypothesis and Results


Hypotheses

Variables

Expected sign

Total performance Not supported Not supported (opposite side) Supported Supported Supported Supported Supported Supported Supported Not supported

H1 H2

Firm size International experience

þ þ

H3 H4 H5 H6 H7 H8 H9 H10

Target country experience Market size Cultural distance Country risk Establishment mode (Greenfield) Ownership mode (joint venture) Greenfield joint venture Full acquisition

þ þ þ þ þ þ

Profitability Not supported Not supported Not supported Supported Not supported Supported Supported Supported Supported Not supported

An interesting finding was that the influence of two experience variables was toward opposite direction: while target country experience is positive related to performance, international experience is negative. Furthermore, size of the investing foreign firm did not have any significant influence on the results independent of the measure of performance. In summary, the results of this study indicated that entry mode and location-specific variables had more significantly influenced the performance than the ownershipspecific variables. This study makes the following contribution to the existing literature. First, unlike the majority of studies on MNEs’ performance, which mostly examined either international expansion into developed and Asian countries, we investigated the level of satisfaction of numerous foreign business unit managers with the performance of their subsidiaries in Ghana. Furthermore, to determine drivers of MNEs’ performance in the context of a developing country, earlier work has normally used information from corporate-level financial reports, such as the annual return on sales and return on assets and have examined the performance at the headquarters level. In this study, we used performance at the subsidiary level. The study by Boateng and Glaister (2002) is one of few studies that investigated the performance of FDI in West Africa. These authors, however, focused only on IJVs. This study went beyond that by also examining partial and full acquisition, greenfield IJV and WOS, as well as ownership and location-specific factors of FDI in Ghana. In addition, the significance of combined effects of establishment and ownership mode variable offers new insights for FDI performance in Africa as it has not been analyzed in earlier studies. To offer additional managerial implications, we studied in more detail the ten best and ten poorest performing subsidiaries from our sample. We found that the ten best investments in terms of performance (mean of performance 4.7) were mainly market-seeking investments, were mainly greenfield establishments where IJV was the ownership mode, and perceived cultural



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distance with Ghana was high. On the other hand, the ten worst performing foreign subsidiaries (mean of performance is 1.8) were mainly established via greenfield mode but were motivated by resource-seeking goals, were WOSs, and perceived cultural distance with Ghana was low. The results from our closer look indicate that local market knowledge provided by local partners plays a crucial role in performance of foreign subsidiaries. In addition, MNEs that perceive higher cultural distance with the host country have better performance, as in these cases managers may take more precaution with problems caused by cultural conflicts and seem to be better prepared to deal with the differences. In the opposite, when MNEs perceive or assume that there are no differences in their culture and the culture of the host countries, they may face some unexpected behaviors of local people or local partners that may deem performance. Our suggestion here is that MNEs that operate in Africa, especially in Ghana, should take into account the role of local partners, take precaution with cultural distance though it may seem to be similar, and not put so much emphasis on cheap labor as the motive to enter the market as this low cost of the labor is absorbed by other hidden costs such as recruiting, training, and bureaucracy. Global FDI flows fell by 18% in 2012 but flows to African countries increased by 5% and Ghana has been among Africa’s top five recipients of investments both in 2011 and 2012 (see UNCTAD, 2013). Thus there is interest toward FDIs in Africa. There are several avenues for further research. As discussed earlier, the participation rate of Asian investors was clearly lower than that of Western investors. Thus, in the future the more detailed analysis of Asian investors would be especially welcome. Additional possible research avenues include the longitudinal analysis of the 75 reviewed investments and=or the analysis of the divested FDIs and comparisons between strategic decisions made in survived and divested investments.

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