Abstract
We identify inward investment as an important impetus to outward investment, supplemental to the impetuses depicted in conventional internationalization frameworks. By incorporating both the spillover and competition effects of foreign entrants, we develop an integrated framework of the inward–outward investment relationship for different investment modes and different home-country and host-country pairs. Our analysis of venture capital (VC) investments worldwide from 1985 to 2007 shows a positive spillover effect on outward investment for inward co-investments and a negative competition effect on outward investment for inward standalone investments. We find the strongest effects when the host country is a laggard in the VC industry and the home country is a leader.
Similar content being viewed by others
Notes
It is worth noting that the VentureXpert Database does not provide the specific amount invested by each VC firm in each round, but rather the total investment amount in each round. After identifying all of the foreign PCs that the host-country VCs invested in, we aggregated the amount of VC investment in each of these foreign PCs, and then summarized the total amount invested in all foreign PCs that the host-country VCs were involved in. Because of a large number of missing data, and thus a significant reduction in observations, we used this measure only for a robustness check. We replaced all the missing values with zeros in order to run the models.
There are missing data for particular countries in certain years. We employed a regression imputation procedure (Little & Rubin, 1983) to impute the missing data for the institutional indicators. As this procedure generated negative values for the count of scientific articles and US patents, we estimated these two variables using data from the most recent available year for each host country.
References
Agarwal, S., & Ramaswami, S. N. 1992. Choice of foreign market entry mode: Impact of ownership, location and internalization factors. Journal of International Business Studies, 23 (1): 1–28.
Aitken, B. J., & Harrison, A. E. 1999. Do domestic firms benefit from direct foreign investment? Evidence from Venezuela. American Economic Review, 89 (3): 605–618.
Aitken, B. J., Hanson, G. H., & Harrison, A. E. 1997. Spillovers, foreign investment, and export behavior. Journal of International Economics, 43 (1–2): 103–132.
Anand, J., & Kogut, B. 1997. Technological capabilities of countries, firm rivalry and foreign direct investment. Journal of International Business Studies, 28 (3): 445–465.
Argote, L., & Ingram, P. 2000. Knowledge transfer: A basis for competitive advantage in firms. Organizational Behavior and Human Decision Processes, 82 (1): 150–169.
Bain, J. S. 1956. Advantages of the large firm: Production, distribution, and sales promotion. Journal of Marketing, 20 (4): 336–346.
Barney, J. B., & Hoskisson, R. E. 1990. Strategic groups: Untested assertions and research proposals. Managerial and Decision Economics, 11 (3): 187–198.
Borensztein, E., De Gregorio, J., & Lee, J. W. 1998. How does foreign direct investment affect economic growth? Journal of International Economics, 45 (1): 115–135.
Bowman, D., & Gatignon, H. 1995. Determinants of competitor response time to a new product introduction. Journal of Marketing Research, 32 (1): 42–53.
Buckley, P. J., Clegg, J., & Wang, C. Q. 2002. The impact of inward FDI on the performance of Chinese manufacturing firms. Journal of International Business Studies, 33 (4): 637–655.
Buckley, P. J., Clegg, J., & Wang, C. Q. 2007. Is the relationship between inward FDI and spillover effect linear? An empirical examination of the case of China. Journal of International Business Studies, 38 (3): 447–459.
Bygrave, W. B., & Timmons, J. A. 1992. Venture capital at the crossroads. Boston, MA: Harvard Business School Press.
Caves, R. E. 1974. Multinational firms, competition, and productivity in host-country markets. Economica, 41 (162): 176–193.
Chan, C. M., & Makino, S. 2007. Legitimacy and multi-level institutional environments: Implications for foreign subsidiary ownership structure. Journal of International Business Studies, 38 (4): 621–638.
Chang, S. J., & Xu, D. 2008. Spillovers and competition among foreign and local firms in China. Strategic Management Journal, 29 (5): 495–518.
Chen, M., & MacMillan, I. C. 1992. Nonresponse and delayed response to competitive moves: The roles of competitor dependence and action irreversibility. Academy of Management Journal, 35 (3): 539–570.
Clougherty, J. A., & Grajek, M. 2008. The impact of ISO 9000 diffusion on trade and FDI: A new institutional analysis. Journal of International Business Studies, 39 (4): 613–633.
Da Rocha, A., & Dib, L. A. 2002. The entry of Wal-Mart in Brazil and the competitive responses of multinational and domestic firms. International Journal of Retail and Distribution Management, 30 (1): 61–73.
Davidson, W. H. 1980. The location of foreign direct investment activity: Country characteristics and experience effects. Journal of International Business Studies, 11 (2): 9–22.
De Backer, K., & Sleuwaegen, L. 2003. Does foreign direct investment crowd out domestic entrepreneurship? Review of Industrial Organization, 22 (1): 67–84.
Delios, A., & Beamish, P. W. 1999. Geographic scope, product diversification, and the corporate performance of Japanese firms. Strategic Management Journal, 20 (8): 711–727.
Delios, A., & Henisz, W. J. 2000. Japanese firms’ investment strategies in emerging economies. Academy of Management Journal, 43 (3): 305–323.
Dikova, D., & van Witteloostuijn, A. 2007. Foreign direct investment mode choice: Entry and establishment modes in transition economies. Journal of International Business Studies, 38 (6): 1013–1033.
Dikova, D., Sahib, P. R., & van Witteloostuijn, A. 2010. Cross-border acquisition abandonment and completion: The effect of institutional differences and organizational learning in the international business service industry, 1981–2001. Journal of International Business Studies, 41 (2): 223–245.
Driffield, N., & Love, J. H. 2007. Linking FDI motivation and host country productivity effects: Conceptual and empirical analysis. Journal of International Business Studies, 38 (3): 460–473.
Dunning, J. H. 1993. Multinational enterprises and the global economy. Wokingham: Addison-Wesley.
Feenstra, R. C., & Hanson, G. H. 1997. Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras. Journal of International Economics, 42 (3–4): 371–393.
Gaur, A. S., & Lu, J. W. 2007. Ownership strategies and survival of foreign subsidiaries: Impacts of institutional distance and experience. Journal of Management, 33 (1): 84–110.
Gimeno, J. 2005. Explaining the clustering of international expansion moves: A critical test in the US telecommunications industry. Academy of Management Journal, 48 (2): 297–319.
Gompers, P., & Lerner, J. 2000. The venture capital cycle. Cambridge, MA: MIT Press.
Gorman, M., & Sahlman, W. 1989. What do venture capitalists do? Journal of Business Venturing, 4 (4): 231–248.
Greene, W. H. 2003. Econometric analysis. Upper Saddle River, NJ: Prentice Hall.
Grosse, R., & Trevino, L. J. 1996. Foreign direct investment in the United States: An analysis by country of origin. Journal of International Business Studies, 27 (1): 139–155.
Gulati, R., & Higgins, M. C. 2003. Which ties matter when? The contingent effects of interorganizational partnerships on IPO success. Strategic Management Journal, 24 (2): 127–144.
Guler, I., & Guillén, M. F. 2010. Institutions and the internationalization of US venture capital firms. Journal of International Business Studies, 41 (2): 185–205.
Haddad, M., & Harrison, A. 1993. Are there positive spillovers from direct foreign investment? Evidence from panel data for Morocco. Journal of Development Economics, 42 (1): 51–74.
Hausman, J. A. 1978. Specification tests in econometrics. Econometrica, 46 (6): 1251–1271.
Heckman, J. J. 1979. Sample selection bias as a specification error. Econometrica, 47 (1): 153–162.
Hejazi, W., & Safarian, A. 1999. Trade, foreign direct investment, and R&D spillovers. Journal of International Business Studies, 30 (3): 491–511.
Hitt, M. A., Hoskisson, R. E., & Kim, H. 1997. International diversification: Effects on innovation and firm performance in product-diversified firms. Academy of Management Journal, 40 (4): 767–798.
Javorcik, B. S. 2004. Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. American Economic Review, 94 (3): 605–627.
Javorcik, B. S., & Spatareanu, M. 2008. To share or not to share: Does local participation matter for spillovers from foreign direct investment? Journal of Development Economics, 85 (1–2): 194–217.
Johanson, J., & Vahlne, J. E. 1977. The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8 (1): 23–32.
Kaufmann, D., Kraay, A., & Mastruzzi, M. 2005. Governance matters IV: Governance indicators for 1996–2004, World Bank Policy Research Paper No. 3630, The World Bank, Washington, DC.
Kim, T.-Y., Delios, A., & Xu, D. 2010. Organizational geography, experiential learning, and subsidiary exit: Japanese foreign expansions in China, 1979–2001. Journal of Economic Geography, 10 (4): 579–597.
Kneller, R., & Pisu, M. 2007. Industrial linkages and export spillovers from FDI. World Economy, 30 (1): 105–134.
Kogut, B., & Chang, S. J. 1991. Technological capabilities and Japanese foreign direct investment in the United States. Review of Economics and Statistics, 73 (3): 401–414.
Kogut, B., & Zander, U. 1992. Knowledge of the firm, combinative capabilities, and the replication of technology. Organization Science, 3 (3): 383–397.
Kokko, A. 1996. Productivity spillovers from competition between local firms and foreign affiliates. Journal of International Development, 8 (4): 517–530.
Konings, J. 2001. The effects of foreign direct investment on domestic firms: Evidence from firm-level panel data in emerging economies. Economics of Transition, 9 (3): 619–633.
Kuemmerle, W. 1999. The drivers of foreign direct investment into research and development: An empirical investigation. Journal of International Business Studies, 30 (1): 1–24.
Lane, P. J., & Lubatkin, M. 1998. Relative absorptive capacity and interorganizational learning. Strategic Management Journal, 19 (5): 461–478.
Lecraw, D. J. 1993. Outward direct investment by Indonesian firms: Motivation and effects. Journal of International Business Studies, 24 (3): 589–600.
Little, R. J. A., & Rubin, D. B. 1983. On jointly estimating parameters and missing data by maximizing the complete-data likelihood. American Statistician, 37 (3): 218–221.
Liu, X., Siler, P., Wang, C., & Wei, Y. 2000. Productivity spillovers from foreign direct investment: Evidence from UK industry level panel data. Journal of International Business Studies, 31 (3): 407–425.
Lu, J. W., & Ma, X. 2008. The contingent value of local partners’ business group affiliations. Academy of Management Journal, 51 (2): 295–314.
Luo, Y. 1999. Dimensions of knowledge: Comparing Asian and Western MNEs in China. Asia Pacific Journal of Management, 16 (1): 75–93.
Luo, Y., & Tung, R. 2007. International expansion of emerging market enterprises: A springboard perspective. Journal of International Business Studies, 38 (4): 481–498.
Meyer, K. E. 2004. Perspectives on multinational enterprises in emerging economies. Journal of International Business Studies, 35 (4): 259–276.
Meyer, K. E., & Sinani, E. 2009. When and where does foreign direct investment generate positive spillovers? A meta-analysis. Journal of International Business Studies, 40 (7): 1075–1094.
Mody, A. 2004. Is FDI integrating the world economy? World Economy, 27 (8): 1195–1222.
North, D. 1990. Institutions, institutional change and economic performance. Cambridge: Cambridge University Press.
Ooghe, H., Manigart, S., & Fassin, Y. 1991. Growth patterns of the European venture capital industry. Journal of Business Venturing, 6 (6): 381–404.
Porter, M. E. 1980. Competitive strategy. New York: Free Press.
PriceWaterhouseCoopers. 2005. Global private equity 2005. London: PriceWaterhouseCoopers.
Ruane, F., & Sutherland, J. 2005. Export performance and destination characteristics of Irish manufacturing industry. Review of World Economics, 141 (3): 442–459.
Rugman, A. M., & Verbeke, A. 1992. A note on the transnational solution and the transaction cost theory of multinational strategic management. Journal of International Business Studies, 23 (4): 761–771.
Scott-Kennel, J. 2007. Foreign direct investment and local linkages: An empirical investigation. Management International Review, 47 (1): 51–77.
Smith, K. G., Grimm, C. M., Gannon, M. J., & Chen, M.-J. 1991. Organizational information processing, competitive responses, and performance in the US domestic airline industry. Academy of Management Journal, 34 (1): 60–85.
Sorenson, O., & Stuart, T. E. 2001. Syndication networks and the spatial distribution of venture capital investments. American Journal of Sociology, 106 (6): 1546–1588.
Steensma, H. K., Tihanyi, L., Lyles, M. A., & Dhanaraj, C. 2005. The evolving value of foreign partnerships in transitioning economics. Academy of Management Journal, 48 (2): 213–235.
Stuart, T. E., Hoang, H., & Hybels, R. 1999. Interorganizational endorsements and the performance of entrepreneurial ventures. Administrative Science Quarterly, 44 (2): 315–349.
Sun, S. Z. 2009. How does FDI affect domestic firms’ exports? Industrial evidence. World Economy, 32 (8): 1203–1222.
Tong, T. W., Alessandri, T. M., Reuer, J. J., & Chintakananda, A. 2008. How much does country matter? An analysis of firms’ growth options. Journal of International Business Studies, 39 (3): 387–405.
Tsang, E. W., & Yip, P. S. 2007. Economic distance and the survival of foreign direct investments. Academy of Management Journal, 50 (5): 1156–1168.
Wang, C., & Li, Y. 2007. Do spillover benefits grow with rising foreign direct investment? An empirical examination of the case of China. Applied Economics, 39 (3): 397–405.
Wijbenga, F. H., Postma, T. M., van Witteloostuijn, A., & Zwart, P. S. 2003. Strategy and performance of new ventures: A contingency model of the role and influence of the venture capitalist. Venture Capital, 5 (3): 231–250.
Willmore, L. 1992. Transnationals and foreign trade: Evidence from Brazil. Journal of Development Studies, 28 (2): 314–336.
Wright, M., Pruthi, S., & Lockett, A. 2005. International venture capital research: From cross-country comparisons to crossing borders. International Journal of Management Reviews, 7 (3): 135–165.
Yudaeva, K., Kozlov, K., Melentieva, N., & Ponomareva, N. 2003. Does foreign ownership matter? The Russian experience. Economics of Transition, 11 (3): 383–409.
Zaheer, A., & Bell, G. G. 2005. Benefiting from network position: Firm capabilities, structural holes, and performance. Strategic Management Journal, 26 (9): 809–825.
Acknowledgements
The authors are listed alphabetically; each contributed equally to this manuscript. This research was supported by a research grant from the National University of Singapore (R-314-000-059-112). We thank Andrew Delios and Fu Qiang for helpful comments on earlier versions of this paper. This manuscript benefited greatly from comments received from Arjen van Witteloostuijn and two anonymous reviewers.
Author information
Authors and Affiliations
Corresponding author
Additional information
Accepted by Arjen van Witteloostuijn, Area Editor, 14 July 2010. This paper has been with the authors for one revision.
Rights and permissions
About this article
Cite this article
Gu, Q., Lu, J. Effects of inward investment on outward investment: The venture capital industry worldwide 1985–2007. J Int Bus Stud 42, 263–284 (2011). https://doi.org/10.1057/jibs.2010.51
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1057/jibs.2010.51