Investment Timing and Performance: Further Evidence

Research Purposes

FDI theories answer Why, What, Where andHow but not When questions. The purposes

of this research are to examine• The determinants of Taiwanese

investment in Mainland China at different timing;

• Whether the early investors perform better than do the later investors;

• Additional objective: Does industry matter?

Literature Review (1)

• Dunning’s three pillars has been used extensively: ownership, location and internalization advantages;

• + network theory, strategic intents;• Time element has not yet been seriously

considered.

Literature Review (2)• Conceptually, in real world, a CEO has to

decide when to invest, now or later and whether the decision is good or bad will then be evaluated by future performances.

• Empirically, researchers ask similar questions.

• A gap between conceptual and empirical perspectives: prior vs. posterior.

Literature Review (3)

• Prior perspective:– The CEO collects information: internal and

external, SWOT, ----– Uncertain, risk: unknown, unpredictable and

uncontrollable elements;– Animal spirit - CEO’s or Top management’s gut

Literature Review (4)• Posterior perspective

– Like evaluating a leader’s decision: Jorge Washington, Lincoln, Clinton, Mao Zedong, Chiang Kai She, Jack Welch, ----

– Evaluating Bush’s decision in evading Iraq:• What determine Bush’s decision?• Was the decision good or bad?

– Issues: What criteria? Evaluating periods covered.

Literature Review (6)

• Research questions:– The determinants of investment in 1990 and

2000?– Performances of early and later investors

Literature Review (7)• Ownership Advantages indicate a firm’s

organizational capability that encourages a firm to invest earlier than do the other firms that do not own the advantages. These advantages include – the size of ssets (Tan,Vertinsky, 1996; Blandon, 1999;

Gaba,Pan,Ungson, 2002; Leung et al, 2003； Raff & Ryan, 2006),

– advertising (Tan & Vertinsky, 1996), – R&D expenditure (Tan & Vertinsky, 1996; Raff &Ryan, 2006), – Export ratio (Tan & Vertinsky, 1996; Raff,Ryan, 2006),– International experience (Gaba et al, 2002; Leung et al, 2003;

Blandon, 1999),– Profitability (Tan & Vertinsky, 1996),– Asset mobility (Tan & Vertinsky, 1996; Leung et al, 2003),– Ability of vertical integration (Tan & Vertinsky, 1996),– Degree of diversification (Raff & Ryan, 2006) and – Economy of scope (Gaba et al, 2002).

Literature Review (8)

• Internalization Advantages, which indicate how a firm enters foreign market, include – Entry mode (Gaba et al, 2002; Pennings &

Slenuwaegen, 2004),– Network relation (Tan & Vertinsky, 1996; Raff

& Ryan, 2006).

Literature Review (9)• Location advantages, which indicate the

attractiveness or risks of a host country a firm plans to enter, include – Market centrality (Tan & Vertinsky, 1996),– Market niche of host country (Tan & Vertinsky, 1996;

Mitra & Golder, 2002, Raff & Ryan, 2006), – Risk of host country (Gaba et al, 1996; Leung et al,

2003),– Growth of Product (Gaba et al, 1996; Raff & Ryan,

2006),– Trade volume (Leung et al, 2003), – The number of firms enters earlier (Tan & Vertinsky,

1996; Baba et al, 2003).

Literature Review (10)

Performance indicators: • Profits, either ROI or ROA (Luo, 1998; Pan

et al, 1999; Pan & Chi, 1999);• Market share (Pan et al, 1999; Delios &

Makino, 2003);• Survival rate (Delios & Makino, 2003);• Waiting time for making profits (Leung et

al, 2003).

Literature Review (11)Other Determinants of performance:

– Entry mode (Luo, 1998; Pan et al, 1999; Pan & Chi, 1999; Delios & Makino, 2003),

– Asset (Pan et al, 1999; Leung et al, 2003; Delios & Makino, 2003),

– Utilization rate of asset (Pan et al, 1999; Pan & Chi, 1999),– Total investment (Pan & Chi, 1999),– Characteristics of Asset (Delios & Makino, 2003),– Diversification degree (Luo, 1998; Delios & Makino, 2003),– Export ratio (Pan & Chi, 1999; Luo, 1998)– International experience (Delios & Makino, 2003)– Industry concentration (Pan et al, 1999),– Investment location (Luo, 1998; Pan et al, 1999; Pan & Chi,

1999),– Market penetration (Leung et al, 2003),– Total investment from home country (2003),– Total export from home country (Drake & Caves, 1974? ).

Model Specification (1)

For investment timing: two ordered probit models

• For traditional industry:– Dependent variable: three investment periods: early,

second early and later periods • For electronics industry:

– Dependent variable: two periods: early and later periods;

• Independent variables: firm characteristics, location factors (Taiwan and China), Internalization factors

Model Specification (2)

For timing and performance: OLS• Dependent variable: value added per

employee and rate of return of total assets• Independent variables: location factors, firm

characteristics

Results (1)

• Traditional and electronics industries are different in investment timing;

• The factors that postponed investment in China: – Technology purchase– Profitability

Results (2)• Investment timing is a negative factor to the

rate of return, but it is negative but not significant to the value added per employee.

• The aggregate environment risk is important in explaining the time effect on corporate performance with control of other firm factors.

• The differences between traditional and electronics are different, revealing in various factors.

Conclusion• China is an important in global and Taiwan

economies, and the globalization of Taiwanese firms.

• This research is an additional contribution to the increasing but still limited researches in China.

• Time factor is closely related to the risk of location environment.

• Industry matters in investment timing.

Limitations & Suggestions

• Limitations: the usefulness of posterior research is limited.

• Suggestions:– Case studies– Longer period (example: Giant in the U.S.) – Multiple criteria incorporating with strategic

objectives– More details in environmental factors for both

home and host countries