Working Paper: CEPR ID: DP8536
Authors: Peter Egger; Matthias Fahn; Valeria Merlo; Georg Wamser
Abstract: Multinational enterprises (MNEs) develop their networks of foreign affiliates gradually over time. Instead of exploring all profitable opportunities immediately, they first establish themselves in their home countries and then enter new markets stepwise. We argue that this behavior is driven by uncertainty concerning a firm?s success in new markets. After entry, the firm collects information which is used to update its beliefs about its performance at a market. As conditions in different markets are correlated, the information gathered in one of them can also be used to update beliefs elsewhere ? with the degree of correlation depending on issues such as the geographical or cultural distance between markets. This correlated learning may render it optimal to enter markets sequentially ? an investment in market A is only followed by entry in market B if the firm was sufficiently successful in A. The prediction that firms start their expansion in markets that are closer to their home base and then proceed step by step is supported by our empirical analysis, which features the universe of foreign affiliates held by German multinationals. Based on a rich set of benchmark estimates and sensitivity checks, we identify correlated learning across markets beyond alternative explanations as a key driver of gradualism in the genesis of multinational foreign affiliate networks.
Keywords: firm-level data; foreign affiliates; learning; location decisions; multinational firms
JEL Codes: D83; D92; F23; L23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial market entry success (D40) | subsequent market entry decisions (L11) |
| success in market A (L19) | entry in market B (D40) |
| correlated learning (C45) | higher likelihood of entry in proximate markets (D40) |
| first foreign entry (Y20) | more likely in countries closer to MNE's home base (F23) |
| subsequent entries (Y50) | occur in markets that are closer to previously entered ones (D40) |