Pace of Expansion and FDI Performance: The Case of Auto FDIs in China

Abstract

How fast do firms expand in a foreign market after their initial entry? Is faster better? Under what conditions is it beneficial or detrimental for a firm to move fast in a foreign market? This paper attempted to answer these questions by investigating the relationship between a firm’s pace of post-entry foreign expansion and its market share performance in a foreign market. The study is an attempt at filling a gap in the existing international business literature. Numerous researches have studied various point-of-entry decisions such as why (motivations), how (entry modes), where (location choices), and when (entry timing) firms make foreign entries. Studies have also investigated the consequences of internationalization, i.e., the relationship between degree of internationalization and firm performance. However, little is known about what happens after initial entry into a foreign market and before firms reach a certain degree of international diversity. As a step towards understanding the internationalization process, this study explores one important characteristic of post-entry foreign expansion—pace of expansion and its performance implications. Opposing hypotheses are developed from the perspectives of industrial organizational economics, and that of organizational learning, the resource-based view of the firm, and internationalization theory. The post-entry experiences of 214 foreign firms in China’s automobile market were examined in our sample. Results from multivariate regression show that greater firm performance is associated with greater expansion frequency and expansion magnitude. Furthermore, we found the inverted U shape relationship between expansion frequency and firm performance. J-shaped relationship between expansion magnitude and firm performance was also identified. We conclude this paper with implications for theory, research and management practice.