Bringing back the O in Dunning’s OLI framework: An assessment of the ownership

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Bringing back the O in Dunning’s OLI framework: An assessment of the ownership advantages of emerging multinationals that influence outward foreign direct

investments in service industries

By

Joris Stam S3024806

j.s.stam.1@student.rug.nl

University of Groningen Faculty of Economics and Business MSc International Business and Management

MSc thesis

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Abstract

The outward foreign direct investments from emerging markets increased exponentially in the previous decennium, with most investments made by emerging market multinationals active in service industries. Due to the differences between multinationals from developed and emerging markets, it is not clear whether the current internationalization theories can be used to explain the surge in outward foreign direct investments. Furthermore, these theories have been based on manufacturing industries. Therefore, there is a debate among scholars on whether the Internationalization theories can be applied to explain the foreign expansion of service multinationals. One of the current internationalization theories is John Dunning's eclectic paradigm. Dunning proposes that firms need ownership advantages to

internationalize, to create a competitive advantage, while other scholars disagreed. This study sets out to test Dunning's claim. Two possible ownership advantages for service firms from emerging markets were identified by or through anecdotal evidence. These ownership advantages are international management capabilities and the ability to offer services at low costs. The results were drawn out of a sample of 191 acquisition deals, involving Indian firms active in computer-related services. These results did not show a significant link between the identified ownership advantages versus the number of acquisitions. As a result, this study does not strengthen the assumption that service firms from emerging markets possess ownership advantages. Instead, this study contributes to the discussion on the ownership advantages of service multinationals from emerging markets.

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Introduction

In the last two decades, Outward Foreign Direct Investment (OFDI) has grown. The majority of OFDI has increased through cross-border mergers and acquisitions (M&As) (Deng & Yang, 2015). The rise in OFDI can be partially explained by the investments made by emerging markets: Between 2004 and 2008 their investments in cross-border M&As grew with almost 400% (Nichelson & Salaber, 2013), with most investments made by the service industry (Rasiah & Gammeltoft, 2010). Despite this growth, it is not clear whether the internationalization theories can be applied to firms from these countries, due to the differences between firms from developed and emerging markets (Nicholson & Salaber, 2013). One of these theories is the eclectic paradigm. The eclectic paradigm was created by John Dunning and consists out of Ownership, Location and Internationalization advantages (therefore also known as the OLI-framework) (Beugelsdijk, Brakman, Garretsen, & van Marrewijk., 2013).

Dunning developed his model based on the premise that developing countries are the same as developed ones, with the difference being that the developing countries are in an earlier stage of economic development (Dunning, 1980). However, there are scholars who do not agree with this assumption (Mathews, 2006). These scholars have argued that the eclectic paradigm cannot be used to explain OFDI behavior by emerging market multinationals (EMNEs), especially because EMNEs seem to lack ownership advantages (Mathews, 2006). Dunning argued that EMNEs have to possesses these advantages to internationalize, but expects that the ownership advantages of EMNEs are likely to be different (Dunning, 2006). Dunning defined ownership advantages as the assets a firm possesses or can acquire, which are not in the possession of a firm’s current and/or possible competitors (Dunning, 1980) and divided these into three categories: Asset-based advantages, transactional advantages and institutional advantages (Eden & Dai, 2010). Although scholars have tried to identify the ownership advantages through anecdotal evidence (e.g. Kumar, 2008; Guillén & Garcia-Canal, 2009; Contractor, 2013; He & Fallon, 2013), it is still not clear what these advantages are

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Which ownership advantages affect Outward FDI by Emerging Multinational Enterprises operating in service industries?

This study will focus on the O-dimension of Dunning’s eclectic paradigm, because most criticism on Dunning’s model has focused on the application of this dimension. Scholars seem to agree that both the I and L dimensions of the eclectic paradigm can be applied to EMNEs. Still, concerns have been raised on whether EMNEs possess ownership advantages (Mathews, 2006; Rugman, 2010). Additionally, there is a discussion on whether the eclectic paradigm could be applied to explain the internationalization of multinationals active in service

industries (Boddewyn, Halbrich, & Perry, 1986; Vandermerwe & Chadwick, 1989; Javalgi & Martin, 2007).Identifying the ownership advantages possessed by EMNEs will provide insight in the OFDI behavior of service EMNEs. Moreover, it will provide information as to how service EMNEs are able to compete with MNEs from developed nations in the global marketplace.

This study is theoretically built on the premise that John Dunning’s eclectic paradigm can explain the internationalization of service EMNEs. Consequently, EMNEs need to be in possession of ownership advantages in order to compete abroad and successfully

internationalize (Dunning, 1998; Ramamurti, 2012). Although Developed Multinational Enterprises (DMNEs) do possess superior resources, EMNEs have grown in the past decades and acquired ownership advantages as well. These ownership advantages can take different forms, but the expectation is that these are different from the ownership advantages DMNEs used to grow globally (Dunning, 2006). While DMNEs mainly use technology and brands to facilitate their growth, EMNEs do not possess these strengths (Madhok & Keyhani, 2012) and use different ownership advantages to compete globally (Ramamurti, 2012). Anecdotal

evidence identified two of these ownership advantages as the international management capabilities of service EMNEs and low costs of their services.

In order to study the ownership advantages of EMNEs, Indian firms active in computer-related services were selected as a sample. India is considered to be an appropriate setting to study the ownership advantages of EMNEs, due to the growing number of Indian firms expanding abroad, in order to improve certain ownership advantages (Kumar, 2008).

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period that investments in cross-border M&As grew exponentially. Testing the results in the manually collected sample of 191 deals, did not provide significant results. This study does contribute to the debate on the presence of ownership advantages in service EMNEs and what these might be

Theoretical background

Service EMNEs and Internationalization

Scholars identified three waves of OFDI from emerging markets. During the first wave, occurring from the 1960s to midway the 1980s, the dominant multinationals to invest abroad were active in manufacturing industries, mostly investing in other developing countries, where there was less competition from DMNEs. The second wave of OFDI occurred from the late 1980s until around 1995, in which EMNEs from service industries, such as finance, infrastructure and IT, engaged in OFDI. Furthermore, EMNEs started to expand to more distant locations, including developed countries. The surge in OFDI between 2004 and 2008 occurred during the third wave. During this wave, which started in the 1990s, EMNEs active in service industries became the leaders in OFDI from emerging markets (Gammeltoft, 2008).

The service industry has been of growing importance in the global economy (Javalgi & Martin, 2007). According to the World Bank database, services are responsible for 69% of the total world output in 2017, a growth of almost 20% since 1995. According to Javalgi & Martin (2007), this growth can be explained by three factors. First, the development of information and telecommunications technologies, resulting in easier and faster ways for service firms to operate internationally. Additionally, manufacturing firms are focusing more on service differentiation, due to increasing competition. Finally, more international

opportunities have been created through the establishment of international trading blocks. The last factor created more opportunities for both service and manufacturing firms.

Although services have increased in importance globally, scholars struggle to explain the internationalization of service firms. While several scholars argued that manufacturing-based theories can be used to explain the OFDI behavior of service firms (Boddewyn et al., 1986), other scholars disagree (Vandermerwe & Chadwick, 1989; Javalgi & Martin, 2007).

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distances. For example, Vandermerwe & Chadwick (1989) argued that it is more difficult for certain service firms to expand to a foreign country, as most services requires a local presence and a higher degree of personal contact. As a result, these firms have more distress to

overcome cultural differences.

The second stream of literature is focused on the different characteristics between services and other industries (Meyer et al., 2015). Before 1980, scholars identified four characteristics distinguishing services from other industries. These characteristics are are intangibility, heterogeneity, production and consumption being inseparable and perishable (Fisk, Brown, & Bitner, 1993). Some scholars argued that these characteristics are too generic and created their own characteristics (Lovelock & Yip, 1996), while others expanded on the classic

characteristics (Campbell & Verbeke, 1994). According to Campbell & Verbeke (1994), the characteristics service intangibility, inseparability and heterogeneity affect the globalization of service MNEs. Dunning (1989) argued that there are only two fundamental characteristics between goods and services. First, the actions of production, exchange and consumption are separate in the case of goods, while this is not the case with services. Second, when goods are sold, it implies a change of ownership of goods, while consumers only pay a part of the price of ownership. Dunning mentioned the example of movie theaters. Consumers do not only pay to watch the movie, but also for the usage of seats and theater facilities (Dunning, 1989).

The literature did not only focus on how services differ from other industries, but also the differences between services. The literature on the service industry has identified two types of services: Hard and soft services. Soft services are services where the supplier is an integral part of the service, such as hotels and management consultancies (Blomstermo, Deo Sharma, & Sallis, 2006; Javalgi & Martin, 2007). Hard or pure (Dunning, 1989) services do not require the supplier to be present during the consumption of the service, such as architectural firms (Blomstermo et al., 2006). Lovelock & Yip (1996) argued that information-based services should be its own category, as these services depend on data to add value.

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ownership advantages are used to develop competitive advantages in the domestic market, instead of foreign markets. Nevertheless, this strategy is constructed on the premise that service EMNEs do not possess ownership advantages, an assumption criticized by several scholars (Dunning, 2006; Narula, 2006; Eden & Dai, 2010).

It is not clear whether a theory such as Dunning’s eclectic paradigm can be applied to service EMNEs. The eclectic paradigm was created to explain the difference in productivity between American and English manufacturing firms in the United Kingdom. Dunning found that the American firms were two to five times more productive than the English firms. He explained that ownership, locational and internalization advantages could explain this phenomena (Beugelsdijk et al., 2013; Sharmiladevi, 2017). As was the case with other internationalization theories, such as Vernon’s Product Life Cycle Theory (1966), Dunning based his research on the manufacturing industry. Nevertheless, Dunning argued that his theory could also be applied to MNEs active in service industries. According to Dunning, products and services are not that different, as “goods embody some non-factor intermediate services, and most

services embody some intermediate goods” (Dunning, 1989).

Summarizing, there are several differences that distinguish service industries from manufacturing industries. Hence, it is not clear whether the current internationalization theories can be used to explain the internationalization of services. Scholars have also raised questions on whether the eclectic paradigm can be applied to developing countries (Mathews, 2006). Still, Dunning has argued that his model is applicable to both service industries and emerging markets (Dunning, 1989; 2006). In order to proof Dunning’s claim, this study will research the application of Dunning’s eclectic paradigm to service EMNEs, by analyzing the three separate dimensions: Ownership, Location and Internationalization.

Internalization advantages

The Internationalization advantages (the I in OLI) explains how firms engage in OFDI. This dimension has been applied to firms from emerging markets in recent years (e.g. Buckley, Forsans, & Munjal, 2012), proving they can be applied to EMNEs. However, the literature has shown some concerns regarding applying the model to multinationals active in service

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Boddewyn et al. (1986) identified two issues when applying internalization advantages to service MNEs. First, most service MNEs are not R&D intensive and therefore cannot rely on their technology as a firm-specific advantage. Second, service MNEs use non-equity modes of entry, such as licensing. The use of non-equity modes may be a problem in applying the I-dimension to service MNEs, as Dunning’s model is based on entry modes with high control, such as Greenfield investments (Dunning, 1980; Eden & Dai, 2010). Nonetheless, Boddewyn et al. (1986) concludes that these issues do not cause problems in applying the dimension to service MNEs.

Also, the issue of using non-equity modes of entry is only an issue for hard services. Suppliers of soft services require higher control over their services. As a result, these suppliers choose for entry modes with high control, such as Greenfield investments and cross-border

acquisitions (Krishna Erramilli, 1990; Blomstermo et al., 2006). Additionally, EMNEs seem to have a preference for entry modes with high control (Gammeltoft, 2008).

Although there are some issues, the I-dimension of the eclectic paradigm can be applied to service EMNEs. Service EMNEs have decided to engage in OFDI, because they require a high control over their operations (Gammeltoft, 2008). Hence, Greenfield investments have been the choice of entry for service EMNEs. Still, acquisitions have become increasingly popular as an entry mode in recent years. From 2004 to 2006, the number of cross-border acquisitions by Indian firms doubled from 64 to 133 (Kumar, 2008), in order to obtain

technologies and brands (Sakakibara, 2008). The expectation is that cross-border acquisitions will become the prevalent entry mode.

Localization advantages

The Localization advantages (the L in OLI) explain where firms engage in OFDI. As is the case with the Internationalization advantages, this dimension has been applied to firms from emerging markets in recent years, proving the L-dimension can be applied to EMNEs.

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The locational advantages include the benefits of the foreign markets (Buckley et al., 2012), available natural resources, lower cost locations for production (Buckley, Clegg, Cross, Liu, Voss, & Zheng, 2007) and less strict regulations imposed by the government of the host country (Gammeltoft, 2008). Finally, the presence of strategic assets is considered a locational advantage, which EMNEs obtain by acquiring other companies (Dunning, 1991; Meyer, 2015).

EMNEs mostly expanded abroad for the advantages that foreign markets had to offer and the presence of natural resources during the first and second wave of OFDI. During the third wave, more EMNEs expanded abroad to find strategic assets in order to improve their ownership advantages (Gammeltoft, 2008; Kumar, 2008). Service EMNEs also internationalize to serve their clients abroad (Kolstad & Villanger, 2007).

Summarizing, both the I and L dimension of the eclectic paradigm are applicable to service EMNEs. Although there are some issues with applying the I-dimension, service EMNEs seem to expand for the same locational advantages as other firms. One of these advantages

(strategic assets) is linked to the ownership advantages, the final dimension of Dunning’s model. The O-dimension will be discussed in the next section.

Ownership advantages

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EMNEs have resulted in several disadvantages as well. These disadvantages include faulty contract enforcement, weak protection of property rights, non-transparent regulations and government decision-making. These aforementioned disadvantages have led to severe information problems (Luo, 2006; Khanna & Palepu, 2009). Moreover, the weak institutions have made it difficult for EMNEs to acquire assets such as finance and technology (Khanna & Palepu, 2009). Hence, this study will not include institutional advantages as an ownership advantage for service EMNEs. As for the other two categories, service MNEs are likely to obtain their ownership advantages from intangible assets such as knowledge, information, organizational and marketing technology (Dunning & Norman, 1983; Boddewyn et al., 1986; Dunning, 1989). However, it is not clear whether these advantages can also be applied to service firms from emerging markets.

The application of the O-dimension has led to discussion among scholars. Some scholars have argued that EMNEs do not possess ownership advantages. According to Mathews (2006), firms from emerging markets that expand abroad, lack these resources. Instead, they expand to find these strategic assets, gaining them through leverages, linkages and learning from other firms. These resources are gained through acquisitions and strategic alliances. His assumption was criticized by several scholars (Narula, 2006) and by Dunning himself. Dunning argued that competitive advantages of EMNEs (which could be country or firm specific) are likely to be different from the advantages of developed MNEs. Instead, the EMNEs “had to possess some unique and sustainable resources” (Dunning, 2006).

A possible source of ownership advantages for EMNEs which was mentioned in the literature, is natural resources. The internationalization of EMNEs is seen as a result of exploiting

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pool of inexpensive personnel (Kapur & Ramamurti, 2001). As a result, lower costs can give these firms a competitive advantage when expanding abroad.

Another source of ownership advantages seems to be related to the management of EMNEs (Kumar, 2008; Guillén & Garcia-Canal, 2009). Scholars have identified that the managers of EMNEs have a greater propensity to learn as opposed to the managers of DMNEs, while they are more focused on building networks and are globally orientated (Contractor, 2013). The latter has resulted in their increased involvement in cross-border acquisitions, which increased their international expertise (Kumar, 2008). Therefore, international management capabilities are identified as a second potential ownership advantage.

This study has shown that Dunning was correct, the eclectic paradigm can be applied to service EMNEs, including the ownership advantages. Moreover, various scholars have identified potential ownership advantages of service EMNEs. Both ownership advantages (international management capabilities and low-cost services) will be further discussed in the next section.

Theory & Hypotheses

International management capabilities

International management capabilities are the ability to manage business functions (i.e. accounting and marketing) in foreign countries (Thakur, Burton, & Srivastava, 1997), as well as dealing with economic, political and legal systems and cultural distances (Siripaisalpipata & Hoshinob, 1999). While expanding to other developing countries is easier for EMNEs, as these markets are similar to their own, expanding to developed countries may have more benefits. Expanding to developed countries enhances the international management capabilities of EMNEs (Morschett, Schramm-Klein, & Zentes, 2015).

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The literature offers several explanations for this phenomena. First, while there is no

comprehensive evidence to prove that EMNEs have a larger tendency to form alliances than DMNEs (Contractor, 2013), EMNEs do value sharing experience more than DMNEs, when selecting a strategic partner (Hitt et al., 2000). EMNEs value sharing experience more, as they have a greater propensity to learn than their counterparts from developed nations (Contractor, 2013). According to Contractor, this is due to the mentality of the managers of EMNEs, as a result of rich interactions and networks in their home country. Managers of EMNEs are more focused on gathering knowledge and may even travel abroad only to gain expertise (Peng, 2012). This knowledge includes information about foreign markets, cultural differences and foreign regulations, which can facilitate managing the international activities of EMNEs (Contractor, 2013).

Second, the managers of EMNEs are more globally oriented, due to their global mindset (Contractor, 2013). The global mindset can be described as an openness to differences in culture and strategy, both on a local and global level and the ability to handle these differences (Levy, Beechler, Taylor, & Boyacigiller, 2007). As a result, they are more equipped to recognize the best foreign practices and implement these in their own

organization, due to their awareness of cultural and national diversity. Managers gained these skills by studying and working abroad (Contractor, 2013), while Indian managers developed this mindset by working in their own country. Due to the cultural diversity between areas in India, managers learn to handle several cultural, linguistic and ethical issues. Hence, they are able to adapt to and manage operations in various locations (Kumar, 2008). A global mindset or at least a positive attitude towards internationalization, has proven to have a positive effect on the internationalization of service MNEs (Javalgi, Griffith, & Steven White, 2003).

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that several EMNEs grew through new strategies implemented by their CEO, often gaining international experience by studying abroad (e.g. Contractor, 2013; Venkataraman,

Allayannis, & Yemen, 2017).

As a firm expands to foreign markets, it will learn how to handle different environments and distances. The skills acquired from these earlier expansions can be used for new foreign acquisitions (Siripaisalpipata & Hoshinob, 1999). Prior experience in a country can help MNEs to overcome the liability of foreignness (Peng, 2001) and therefore, MNEs may be encouraged to expand to a host country they already invested in, instead of investing in a new country (Lu, Liu, Wright, & Filatotchev, 2014). EMNEs use cross-border mergers and

acquisitions to obtain international managerial skills. This can be especially valuable in mature and skilled or knowledge-based markets, such as computer-related industries (Kumar, 2008).

Hypothesis 1: The internationalization of service EMNEs is positively associated with the international management capabilities of service EMNEs.

Low costs of services

The ability to offer services at low costs does not only allow EMNEs to compete

domestically, but also globally (He & Fallon, 2013). EMNEs have been able to develop their products and services in a cost efficient way, as most customers are ‘at the bottom of the pyramid’ (Kumar, 2008). The ability to offer services at a low price, can have a positive effect on the OFDI of a firm (Glass & Saggi, 2002).

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The frugal mentality can be observed in three areas of EMNEs. The first area can be detected in the processes of EMNEs. In the process of internationalization, EMNEs started to build their own global value chains, even though they lacked the managerial knowledge and experience to manage these processes. Still, these firms did manage to structure their value chains in a way, that they contributed to the competitive advantages of the EMNEs. For example, anecdotal evidence shows that Brazilian firms created several distribution

subsidiaries overseas, as distribution in some countries was not handled efficiently by local firms (Williamson, 2015). Nevertheless, most studies about the global value chain have focused on the manufacturing industries, due to a lack of data and information from service industries (Sturgeon & Gereffi, 2009).

The second area mentioned by Contractor (2013) is design innovation. Design innovation is the ability to respond to customer needs, by creating products and services that are

inexpensive and functional, while also having the ability to find a new usage of existing technologies. This concept is known as grafting innovation or reverse innovation (He & Fallon, 2013). While this concept is traditionally explained as an innovation created for the developed markets, which can also be sold in a developing markets, EMNEs have since adopted this concept. EMNEs develop solutions for a particular problem in their domestic market, which is later sold in other emerging markets (Govindarajan & Euchner, 2012). Reverse innovation does not appear to be common in services. Most studies on reverse

innovation focus on the manufacturing industries (Zeschky et al., 2014). Furthermore, it is not a part of the literature on innovation in services (Iyer, LaPlaca, & Sharma, 2006).

The third and last area mentioned is frugal overheads or cost innovation. Cost innovation can lead to a competitive advantage in both service and manufacturing industries (Contractor, 2013). These innovations are incremental, extensions of or modifications in existing services (Iyer et al., 2006). Anecdotal evidence revealed some examples, such as cutting down on travel expenses (Contractor, 2013) and transferring funds through short service messages (Zeschky et al., 2014). This method was also observed in Chinese EMNEs, which disturbed global competition through this method (Zeng & Williamson, 2007).

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(Ramamurti, 2009). For services such as IT and BPO, the lower costs of skilled labor have allowed firms to compete globally (Kapur & Ramamurti, 2001).

Hypothesis 2: The internationalization by service EMNEs are positively associated with the ability to offer services at low costs of service EMNEs.

Empirical context

Indian service sector

The services sector in India is one of the fastest growing sectors worldwide (Bhargava, 2016), with computer-related services being one of the fastest growing service industries in India (Satija, 2016). These computer-related services can be divided into two components: Information Technology (IT) services and Business Process Outsourcing (BPO) (Nirmal, 2017). These sectors primarily rely on revenues earned abroad in developed markets (Times of India, 2017).

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Methodology

Data collection and sample

India is selected as the setting for this study, due to India's involvement in Foreign Direct Investment. While India is the most popular destination for Inward FDI (Fingar, 2015), the level of OFDI has rapidly increased in the last decade. A growing number of Indian MNEs are expanding abroad, in order to improve their ownership advantages through technologies, brands and marketing expertise (Kumar, 2008). Furthermore, Indian OFDI is still under researched, despite the growth in Indian MNEs expanding abroad (Buckley et al., 2012).

The sample of this study is based on cross-border acquisitions by listed Indian computer-related service firms, occurring between 2000 and 2010. This time period is selected, because of the exponential growth in cross-border acquisitions in emerging markets during these years. The primary databases for data collection are the Zephyr, Orbis and Compustat Global databases. The Zephyr database provides information on cross-border acquisitions and the values of the deals involved in this study. Orbis provides company information, including financial and subsidiary data. Compustat Global provides financial data as well. Table 1 provides an overview of the origin of the data used in this study.

Proxy Primary database

Dependent variable Number of acquisitions - Zephyr Independent variables International management capabilities International experience Local experience Zephyr Orbis Low costs of services

Efficiency ratio Compustat Global

Control variables Year - Zephyr

Firm size Employees Compustat Global

Firm size Sales Compustat Global

Firm age - Orbis

Firm performance Return on Assets Compustat Global

Multinationalism - Orbis

Host market GDP of the host

country

World Bank

Corporate tax rate - KPMG

Unemployment rate - OECD

Non-trade linkages Commonwealth G15

G20

Thecommonwealth.org G15.org

G20.org

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18 Variable measurement

The number of acquisitions by listed Indian computer-related service firms occurring between 2000 and 2010 is the dependent variable in this study. The acquisitions per firm are grouped not only per year, but also per country, due to influence of locational advantages (Dunning, 1980).

Cross-border acquisitions have been chosen to measure the internationalization of service EMNEs. Although greenfield investments are still the dominant entry mode for EMNEs, acquisitions have become more frequent (Rasiah & Gammeltoft, 2010) and have been

growing rapidly (Kumar, 2008). This study wants to prove a positive association between the dependent variable and the independent variables. Whenever the value of one of the

independent variables increases, the number of cross-border acquisitions should increase as well (Buckley et al., 2012). For an overview of how the variables relate to each other, see the conceptual model in figure 1.

H1 +

H2 +

Figure 1 Conceptual model

Following recent publications on applying the eclectic paradigm to EMNEs, the model will be tested by using a multiple linear regression analysis (Buckley et al., 2012; Anwar & Mughal, 2017).

Number of acquisitions per year per country International management capabilities Low costs of services Controls: 1. Firm size 2. Firm size 2 3. Firm age 4. Return on Assets 5. Multinationalism 6. GDP of the host country 7. Corporate tax rate 8. Unemployment rate 9. Commonwealth member 10. G15 member

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Independent variables

The measurement of international management capabilities is based on a study by Siripaisalpipat & Hoshino (2000). They measured international management capabilities through international experience in general, experience in operating in a specific country and experience from operating a foreign subsidiary. Due to an overlap between data from

experience in a specific country and foreign subsidiary experience (as was pointed out by Siripaisalpipat & Hoshino, most firms obtain their experience in a foreign country through a subsidiary), these two measurements will be combined into local experience (LOCAL). International experience (INTER) will be measured through the total number of acquisitions completed by a firm.

The service industry is mainly labor-intensive and therefore labor costs are important

(Ramasamy & Yeung, 2010). Several studies focused on labor costs as a determinant for FDI (e.g. Deprins, Sumar, & Tulkens, 2006). Three types of measures were used, with unit labor costs as an independent variable showing significant and positive results (Bellak, Leibrecht, & Riedel, 2008). However, the data necessary to calculate the unit labor costs (total number of hours worked) have not been released by EMNEs. Although there is a proxy available, which calculates the unit labor costs by using the average costs and employment in a country (Bellak et al., 2008), this proxy can only be used on a country level. Because this study is conducted on a firm level, a different measurement has to be selected for this study. Other measures used by scholars are gross wages and total labor costs, but both measurements have proven to be unsuccessful (Bellak et al., 2008). Therefore, this study will measure the second hypothesis by using the efficiency ratio. The efficiency ratio can be calculated by dividing the costs of labor through the revenues of the firm.

Control variables

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resources to engage in FDI (Dowell & Killally, 2009; Lu et al., 2014). Experience in different countries or multinationalism is another control variable selected for this study, as the

experience with OFDI can speed up and better support the internationalization process (Wang. Hong, Kafouros, & Wright, 2012; Clegg, Lin, Voss, Yen, & Shih, 2016).

Several control variables at the country level have also been selected. The main motivation for service firms to internationalize, is to gain access to foreign markets (Chakrabarti, 2001; Kolstad & Villanger, 2007). Hence, the size of the host economy is included, measured by its GDP (Duanmu, 2014). Other variables included are the corporate tax rate and the

unemployment rate. Corporate tax affects FDI negatively, as it can prevent firms from investing in a country (Dunning, 2006; Duanmu, 2014), while a country with a higher unemployment rate will welcome FDI into their country (Duanmu, 2014).

Moreover, a country that has a lot of relationships (or linkages), can influence firms learning and joining in networks. The success of EMNEs in foreign countries can be influenced by social capital and relationship intensity. A richness in relationships and alliances of the home country, may lead to firms wanting to increase their knowledge through foreign alliances (Contractor, 2013). These relationships will be measured through non-trade linkages in which India participates, which are the Commonwealth, G-20 and G-15 (Buckley et al., 2012).

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Results and analysis

The descriptive statistics of this study are shown in table 2. The table shows that the

maximum number of firms acquired from a country in the same year is three. The firms are active in five different countries on average (including India), while there are firms that have no experience in cross-border acquisitions before the year 2000. Furthermore, there are firms that have no prior experience in the host country, before acquiring a firm from that country.

More than 80% of the deals involved two members of the G20, while only 1,6% of the countries involved are a member of the G15. The table also shows huge differences in

statistics between firms such as size, age and performance, while huge differences can also be identified between the countries involved. For example, the highest corporate tax rate

identified is 55%, while one of the countries included has a tax rate of 0%. This country is Bahrein. According to PriceWaterhouseCoopers, the government of Bahrein only collects taxes from firms involved within the oil and gas sector. Although these statistics are interesting, they also show the presence of outliers. In order to deal with these outliers and reduce their effect, they are identified and transformed by winsorizing the data, with a probability of 2.5% at both sides. The correlations can be found in Appendix B (Table 3).

N Mean Standard

deviation

Min Max

Number of acquisitions per year per country

191 1.168 0.414 1 3 International experience 191 2.288 2.572 0 13 Local experience 191 4.901 6.026 0 26 Efficiency ratio 191 39.39 24.63 0.01 139.62 Number of employees 191 11,976 22,746 47 113,800 Sales 191 22,800,000 44,500,000 8,991 230,000,000 Firm age 191 19.262 13.570 2 62 Return on Assets 191 6.418 24.30 -122.39 37.27 Multinationalism 191 5.424 5.202 1 23 GDP 191 8,213,747,000,000 6,119,106,000,000 6 14,964,400,000 Unemployment rate 191 6.11 2.41 1 23.7 Corporate tax rate 191 34.46 7.24 0 55 Commonwealth membership 191 0.215 0.412 0 1 G15 membership 191 0.016 0.125 0 1 G20 membership 191 0.827 0.379 0 1

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Before the multiple linear regression model can be applied, certain assumptions need to be met (Keller, 2012). This assumption check can be found in appendix A. The results of the assumption check show that three of the four assumptions have not been met: the residuals are not distributed normally, two control variables (Number of employees and Sales) are highly correlated and the independent variables are heteroscedastic. To solve these problems, the variables have been transformed into logarithms, the control variable Sales has been removed from the study and standard robust errors have been added to the multiple linear regression model.

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Variable 1 2 3 4 5 6 Independent variables International experience -0.0365 (0.0325) -0.0360 (0.0345) -0.0508 (0.0325) Local experience 0.0060 (0.0264) 0.0031 (0.0293) 0.0105 (0.0328) Efficiency ratio -0.0270 (0.0182) -0.0326 (0.0186) Control variables Number of employees 0.0137 (0.0210) 0.0149 (0.0218) 0.0132 (0.0207) 0.0147 (0.0217) 0.0137 (0.0211) 0.0147 (0.0219) Firm age -0.0212 (0.0710) -0.0256 (0.0714) -0.0223 (0.0700) -0.0261 (0.0705) -0.0470 (0.0592) -0.0604 (0.0568) Return on Assets -0.0121 (0.0351) -0.0161 (0.0362) -0.0130 (0.0362) -0.0165 (0.0367) -0.0110 (0.0347) -0.0178 (0.0361) Multinationality 0.0222 (0.0291) 0.0408 (0.0428) 0.0193 (0.0363) 0.0390 (0.0529) 0.0352 (0.0247) 0.0586 (0.0479) GDP of host country 0.0685 (0.0363)* 0.0719 (0.0365)* 0.0651 (0.0453) 0.0701 (0.0471) 0.0709 (0.0319)** 0.0702 (0.0425) Unemployment rate 0.0113 (0.0966) 0.0280 (0.1043) 0.0103 (0.1003) 0.0272 (0.1094) -0.0031 (0.0915) 0.0154 (0.1039) Corporate taxrate 0.1850 (0.1527) 0.1828 (0.1541) 0.1786 (0.1415) 0.1796 (0.1417) 0.1742 (0.1545) 0.1576 (0.1433) Commonwealth member 0.0390 (0.0892) 0.0496 (0.0873) 0.0341 (0.1004) 0.0469 (0.1005) 0.0463 (0.0785) 0.0542 (0.0889) G15 member -0.2382 (0.1373) -0.2539 (0.1480) -0.2366 (0.1359) -0.2529 (0.1484) -0.2127 (0.1446) -0.2265 (0.1553) G20 member -0.2133 (0.0742)** -0.2249 (0.0756)** -0.2064 (0.0870)** 0.2212 (0.0910)** -0.2139 (0.0617)** -0.2181 (0.0789)**

Year-fixed effects included

Constant 0.0369 (0.3944) 0.0073 (0.4040) 0.0913 (0.4370) 0.0357 (0.4563) 0.2138 (0.4542) 0.3046 (0.5312)

F 0.0979 0.0865 0.1227 0.1083 0.0671 0.0670

Adjusted R-square 0.0410 0.0398 0.0425 0.0405 0.0415 0.0413

Valid N 191 191 191 191 191 191

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The first hypothesis suggested a positive relationship between international management capabilities and the dependent variable. The international management capabilities were measured by analyzing the number of cross-border acquisitions undertaken by the firm (international experience) and the number of years of experience through subsidiaries in a certain country (local experience). While the effect of local experience was positive as expected, international experience appears to have a negative effect on the dependent variable. Moreover, both the effect of international and local experience are insignificant.

Hypothesis 2 suggested a positive effect between Indian service firms ability to keep their costs low and the dependent variable. This hypothesis was measured by using the efficiency ratio. However, it appears that a better efficiency does not have a positive, but a negative effect on the number of acquisitions per year per country. Again, the effect appears to be insignificant.

The effect of most control variables appears to be insignificant as well, with the exception of membership of the G20 in all models and the GDP of the host country in models 1,2 and 5. While GDP of the host country does have the expected positive effect on the number of acquisitions, a host country being a member of the G20 has a negative effect.

Conclusion

Discussion and implications

This study set out to identify the ownership advantages of service EMNEs. Two possible sources were identified in the literature, which are international management capabilities and the ability to offer services at low costs. The expectation was that these ownership advantages would have a positive effect on the internationalization of Indian IT and BPO services.

Instead, only previous subsidiary experience in the host country influenced the number of acquisitions positively, previous acquisition experience and labor cost efficiency had a negative relationship with the dependent variable. Since these results are insignificant, a conclusion cannot be drawn based on these relationships.

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2000), their global mindset (Levy et al., 2007; Contractor, 2013) or even a different source that has not been identified yet.

Still, it is quite unusual that international and local experience (through which the

international management capabilities have been measured) did not have a significant effect on the number of acquisitions. Especially considering the internationalization theory is based on the fact that experience further facilitates internationalization (Johanson & Vahlne, 1977). A possible explanation could be that the EMNEs have too much experience and therefore no longer benefit from it (Barkema & Drogendijk, 2007). This seems unlikely, as the firms included in this study, have been involved in approximately two acquisitions on average. Instead, it appears that these firms do not possess enough experience. Another possible explanation is that these firms either choose not to learn from prior acquisition experience or are unable to (Trichterborn, Knyphausen‐Aufseß, & Schweizer, 2015). The latter would be a direct contradiction to the theory that EMNEs have a greater propensity to learn. However, the firms included in this study may have been unable to learn, due to differences between the acquisitions (i.e. the size of the acquisition). Some firms decide not to use their earlier

experience in acquisitions, in order to avoid generalization and discrimination of their acquisition methods (Trichterborn et al., 2015).

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Also, the presence of host country institutions reduces the importance of host country

experience as well, because well developed host country institutions support risks and reduces information asymmetry (Lu et al., 2014). This study did not control for the different

institutional environments, which could have influenced the results of this study.

The efficiency ratio did not have a significant influence on the number of acquisitions as well. This seems to be in line with most other studies involving labor costs and FDI. The only studies that found a significant link between labor costs and FDI, were the studies which used unit labor costs as an independent variable, while other proxies appeared to be unsuccessful. The literature has provided several explanations, including the inability to transfer the same labor productivity to the host country, a difference in the quality of infrastructure and the presence of weak institutions in the host country (Bellak et al., 2008). Especially the latter may be of importance. According to Miller & Eden (2006), unfamiliarity and discrimination can lead to higher costs while operating abroad in countries with a weak institutional

environment. As a result, the ownership advantage of being able to offer services at low costs, may not be of significance in such countries.

Alternatively, Ramamurti (2012) presented different explanations, which could explain the results of this study. According to Ramamurti, EMNEs do possess ownership advantages, but these are not of the same quality as the ownership advantages of DMNEs. EMNEs still need to develop these ownership advantages further to compete globally, due to the fact that emerging markets are in a different stage of economic development (Ramamurti, 2009). Another explanation is that EMNEs go abroad to obtain ownership advantages, but use these primarily in their home market (Ramamurti, 2012).

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Finally, this study only focused on computer-related services in India. It could be that due to several characteristics of this industry, the results turned out differently. Moreover, the included ownership advantages were obtained through anecdotal evidence from mostly manufacturing industries. It is possible that these ownership advantages are not applicable to services after all, due to the differences between manufacturing and service industries.

Whatever the case may be, the theoretical background has shown that the eclectic paradigm can be applied to service EMNEs. Unfortunately, this study has not been able to strengthen this theory. Instead, the results of this study contributed to the debate on the presence of ownership advantages in service EMNEs and what these might be. The fact that international management capabilities and the low costs of services may not be the ownership advantages of Indian computer-related services, does not mean the theory was wrong. Due to the

differences between industries and type of services, it could be that these ownership advantages do explain the OFDI behavior of other EMNEs.

This study has several managerial and theoretical implications. For managers of Indian IT and BPO services, the results means that they cannot rely on their international capabilities and the low costs of their services in facilitating the internationalization of their firms.

Theoretically, the study failed in explaining the surge of OFDI from emerging markets such as India between 2004 and 2008. Furthermore, this study could not give an answer as to what ownership advantages influence OFDI by EMNEs. Since the data was only tested for one type of industry, no conclusions can be made for all EMNEs. Therefore, it can only be concluded that these ownership advantages do not affect OFDI by Indian computer-related services.

Limitations and future research

As is the case with most studies based on empirical research, this research has several

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Measurement of the hypotheses is also limited. While the literature showed three explanations for the presence of international management capabilities in EMNEs (global orientation, larger propensity to learn and international experience), only one of these has been measured and included in this study. Due to constraints in time and resources, data on the global orientation and propensity to learn of managers of EMNEs, could not be collected. For the second hypothesis the optimal measurement was also not used, due to again limitations in data collection. The usage of different measures, may lead to different and significant results.

Finally, testing the identified ownership advantages in different empirical contexts, may lead to different and significant results as well. A different statistical method may also yield a different outcome. Due to the high correlation between the control variables Number of employees and Sales, the variable Sales was removed from this study. Testing the data using partial least squares regression was another possible solution, while the discussion showed that the institutional environment of the host country should be included as a control variable in future studies (Lu et al., 2014). While international management capabilities and low costs are the most important sources of ownership advantages, anecdotal evidence revealed several possible other sources. For example, several scholars have named being state-owned as a possible ownership advantage (Ramamurti, 2012), as state-owned enterprises (SOE) have access to cheap capital, which can be used to finance their internationalization (Buckley et al., 2007). Innovation is another ownership advantage, that might have a significant effect on manufacturing firms (Guillén & Garcia-Canal, 2009; He & Fallon, 2013; Williamson, 2015). Researching these different ownership advantages and applying them to different empirical contexts, is an interesting area for future research.

Acknowledgements

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Appendix A: Assumption check

Before the multiple linear regression model can be applied, certain assumptions need to be met (Keller, 2012). These assumptions are: (1) there is a linear relationship between the dependent and independent variables, (2) the residuals are distributed normally, (3) the independent variables are not highly correlated and (4) the variance of error terms is required to be constant. Which means that the independent variables have to be homoscedastic.

The linear relationship is proven by using scatterplots, which shows a linear relationship. Which means that the first assumption has been met. The distribution was tested by creating a kernel density plot, which revealed that the distribution is skewed to the right (Figure 2). This problem is solved by creating logarithms of the independent variables. However, creating the logarithms caused a different problem. There are firms included in the dataset which have no international or local experience, resulting in a value of 0. Since logarithms need to have a value above 0, these observations are excluded from the analysis, resulting in a shrunk dataset. In order to solve this problem, a new variable was created. This variable is equal to the natural logarithm of the variables. When the value of the variable is 0, the natural logarithm will be used instead.

Figure 2 Kernal density plot

0 .5 1 1 .5 2 2 .5 D e n s it y -.5 0 .5 1 Residuals

Kernel density estimate Normal density

kernel = epanechnikov, bandwidth = 0.0470

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The assumption of multicollinearity was checked by using the Variance Inflation Factor (VIF) and by creating a correlation matrix, which is included in appendix B. To proof there is no multicollinearity in the data, the VIF score has to be below 10, while the correlations between the independent variables cannot be above 0.8. While the VIF showed that the independent variables of this study scored 3.09, thereby ruling out multicollinearity, the correlation matrix showed different results. The control variables Number of employees and Sales correlated above 0.8 and therefore, the control variable Sales has been removed from this study.

The final assumption is that there needs to be a similarity of variance of error terms across the independent variables. This assumption was checked by using the Breusch-Pagan test.

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Appendix B Correlation matrix

Variable 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1 International experience 1 2 Local experience 0.1738** 1 3 Efficiency ratio 0.0031 0.1512** 1 4 Number of employees 0.4711*** 0.2620*** -0.1058 1 5 Sales 0.4154*** 0.1938*** -0.1359* 0.9051*** 1 6 Firm Age 0.3284*** 0.4105*** -0.2167*** 0.7094*** 0.7487*** 1 7 Return on Assets 0.0644 0.2848*** -0.0386 0.3962*** 0.3388*** 0.3638*** 1 8 Multinationality 0.5075*** 0.3966*** -0.0231 0.7366*** 0.6879*** 0.6700*** 0.4349*** 1

9 GDP of the host country -0.1235* 0.3482*** -0.0014 -0.2137*** -0.2533*** -0.1168 -0.0520 -0.2194*** 1

10 Unemployment ratio 0.1154 0.0568 0.0248 0.0280 0.0454 0.0976 0.0643 0.0426 -0.0993 1

11 Corporate Tax rate -0.0931 0.2769*** -0.0699 -0.2176*** -0.2759*** -0.1736** -0.0498 -0.2779*** 0.7514*** 0.0821 1

12 Commonwealth member 0.1392* -0.0734 0.1333* 0.0872 0.0889 -0.0266 0.0543 0.0556 -0.5882***

-0.0573 -0.4653*** 1

13 G15 member 0.0610 -0.0393 0.0764 0.2802*** 0.3240*** 0.1275* 0.0487 0.2053*** -0.1484** 0.1002 -0.1625** 0.0365 1

14 G20 member -0.1135 0.2664*** 0.0031 -0.2441*** -0.2405*** -0.1505** 0.0432 -0.1803** 0.5918*** 0.0394 0.5776*** -0.0984 -0.1650** 1

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