Experience Effects and International Expansion: Strategies of Service MNCs in the Asia-Pacific Region

Key Results The Asia and Pacific region has assumed increasing importance in the global strategies of MNCs in a broad range of service industries. Introduction The Asia-Pacific region has become the largest recipient of foreign direct investment (FDI) among developing countries, accounting for about half of all flows to the Third World. During the 1970s and 1980s, the level and composition of FDI in the developing countries of the Asia-Pacific region changed considerably. The growing interest in the Asia-Pacific region as a host to FDI during the 1980s reveals the importance of certain factors that make it attractive to foreign investors: economic growth, the size of domestic markets, the availability of natural resources, the growth of trade, the existence of adequate infrastructure, and the quality of human capital. The rapid economic growth of most countries in Asia and the Pacific in relation to other developing countries has been perhaps the most important factor in attracting foreign investors to the region (UNCTC 1992). While export-oriented investments remain popular, the growth of consumer purchasing power in the region in recent years has led to an increasing number of investments to service domestic markets. The recent increase in the volume of FDI in Asia and the Pacific reflects not only these locational advantages, but also the strategies of MNCs from developed countries, especially from Japan. Such companies have been working to establish a network of foreign affiliates in the region from which to supply both domestic and foreign markets. The need to support MNC activities in manufacturing through the provision of related service activities in trade, transportation and communication led, initially, to foreign investment in the service sectors. Downstream integration into distribution and marketing activities became a widely practiced strategy. FDI in services has become the most dynamic component of FDI in general, with finance- and trade-related services representing the most active areas in service MNC expansion. More importantly, service MNCs as a group are considerably less internationalized than industrial MNCs, which implies that there is a considerable potential for further growth of FDI in services (OECD 1989). Little is known about the pattern and determinants of international expansion strategies in service industries. As Davidson (1980) has shown, knowledge of an experience in the target market are critical to the international expansion, with firms more likely to invest where they or their competitors in the same industry have invested before. The importance of learning and experience in international expansion and operation has been explored in a number of previous studies, but these studies have focused primarily on the experience effect in international expansion strategies of manufacturing industries. The purpose of this study is to examine key factors affecting international expansion strategies of service multinational firms. The paper will examine the effects of international and regional experience on investment decisions of firms in the Asia-Pacific region. Culture difference and firm size, two factors that may limit or enhance expansion, are also examined. Two strategies for expansion, \u0027following the client\u0027 and \u0027follow the leader\u0027 or oligopolistic reaction, will also be examined. The paper is organized as follows. In the first section, we review literature on international expansion of service MNCs. In the next section, we develop hypotheses relating experience effects and other key factors such a cultural differences, firm size, client following strategy, and \"follow the leader\" patterns, to the international expansion strategies of service MNCs in the Asia-Pacific region. The next sections discuss the data and research design. The results and conclusions are included in following sections. Background International expansion strategies of service MNCs may differ from those of manufacturing MNCs due to the unique characteristics of service industries. …