The database was compiled from a survey of Norwegian FDIs originally published by the magazine
Norges Industri,
and consists of the majority of foreign direct investments in manufacturing undertaken by Norwegian manufacturing companies up to mid-year 1982.Only foreign subsidiaries in operation at the time of publication were included in the survey and therefore in the database. A foreign direct investment is defined as ownership of 10% or more of the equity in a foreign company. However, in a majority of the actual cases the level of ownership is far higher, and 55% of the cases are wholly owned subsidiaries.
In total, the database consists of 201 cases representing investments undertaken by 93 Norwegian companies. The first investment dates back to 1910, but, as shown in Figure 2.1, the majority of investments were undertaken later, and in particular during the 1970s and '80s. The almost negligible number of investments undertaken before 1960, followed by the rapidly increasing number of investments in the 1960s and '70s, reflect the transformation of the Norwegian economy in the last decades. Norway was a poor country at the turn of the century. Economic development, fueled first by hydropower, and later by North Sea oil, has made Norway a prosperous country. Still, the country has few big companies by international standards, and though about 3000 Norwegian firms were engaged in exporting in the late 1980s, only a few of them were truly internationalized in the sense of operating a diverse set of internationaloperations (Joynt, 1989).
Figure 2.1.
Norwegian FDIs in Manufacturing by Year of Investment.
Number ofFDIs
150 ~ 128
i
100
50 _:_
10 10
-1952 1953-62 1963-72 1973-82
According to official statistics from the Bank of Norway, 291 cases of Norwegian foreign direct investment in manufacturing were registered by the end of 1982 (Norges Bank, 1985).
Our database contains 201 cases. However, since our database only covers investments up to the middle of 1982, the figures are not completely compatible. Bearing in mind that the outflow of investments increased steeply during the first part of the eighties, some of the discrepancy could be accounted for by the half-year difference in the termination dates of the
54
two data collections. In sum, the data used in this study appear to give a satisfactory coverage of the actual number of manufacturing operations in foreign locations owned or partly owned by Norwegian manufacturing companies in 1982.
A further check of how representative the database ishas been carried out by comparing the geographical distribution of the FDls in our sample with official data. For this purpose the countries were divided into three groups. The first group encompasses other Nordic countries (Sweden, Denmark, Finland and Iceland). The second group includes other countries in Europe and North America, while the rest of the countries of the world were lumped together in the third group of countries.
Table 2.1. Geographical Distribution of Norwegian FDls in Manufacturing.
Region This Study Official Data")
Region 1 33% 39%
Region2 47% 42%
Region 3 20% 19%
Total 100% 100%
(N=201) (N=365)
..) 1983-data
Table 2.1 shows a comparison of the geographical distribution of FDls in our database with the distribution of FDIs according to official data at the end of 1983. A similar geographical distribution was, unfortunately, not available for 1982. Apart from the remarkable increase in FDls in 1983 (from 291 to 365 according to the official data), the table suggests that the geographical distribution at the end of that year is fairly consistent with the distribution in our sample.
The database lists the location and size of FDls along with their mother companies. Based on the year of establishment of the FDls, the sequence of FDls for a particular company was
determined. Inaddition, various variables relating to mother companies and FOIs have been compiled and included in the database. Inthe data analysis the export share of the mother company, the sales of the mother company, the mode of entry used (greenfield vs.
acquisition), and the ownership percentage of the FDIs are introduced as control variables.
Results
After sorting the data for FOIs according to sequence of investment for individual companies, it turns out that we have ninety-three observations of the first foreign inves~ent made by a company but only thirty-one observations of a second foreign investment. The number of companies having made more investments is rapidly decreasing with higher order investments. The highest number of FOIs made by one company is eighteen, while the second highest is eleven. The mean cultural distance to the foreign market by investment number is reported in Table 2.2.Inthis table, investment numbers 5 and higher have been collapsed into one category.
Table 2.2 shows that there are only minor differences in the cultural distances to the markets entered at different stages. Analysis of variance for the data in this table shows that sequence of investment is not related to the cultural distance from Norway to the markets (F
=
0.54, DF=
4, 196). Thus, across companies there is no general relationship between cultural distance to the market and investment sequence. Furthermore, Scheffe's test of pairwise group means indicate that no significant differences exist between any of the groups in Table 2.2.HIsuggests that the first FOI undertaken is located closer to the home country than later FOIs. The database contains 93 observations of first investments and 108 observations of later investments. To test HI'the null hypothesis is that the mean cultural distance of the first investments is equal to the mean cultural distance of all later investments. The alternative hypothesis is that the mean cultural distance of later investments is larger than for first investments. A one-tailed t-test shows that the observed difference is not statistically significant at the 5% level (t=
1.25;P=
0.11). This means that across all observations in the56
database, there isno firm evidence that first investments are made closer to the home country than later investments.
Table 2.2. Average Distance of FDls by Sequence of Investments.
Investment Mean Cultural Standard Numberof
Number Distance Deviation Cases
1 1.8162 1.4530 93
2 2.1631 1.2698 31
3 2.0711 1.5399 18
4 . 2.2758 1.9052 11
5 and higher 1.9608 1.3877 48
Total 1.9522 1.4392 201
The second hypothesis deals with the expansion pattern of FDls after the first investment. The process approach suggests that a movement away from the home country should be observed as more experience is acquired, that is, an increasing number of investments are made.
Table 2.2 suggests that such a movement is unlikely. However, these data reveal the location of all investments with a given number in the sequence of investments. A test of H2 requires that the location of investment nshould be related to the location of investment n-1for each company. If a movement away from the home country is taking place the cultural distance to investment n should be higher than the cultural distance to investment n-I for a particular company. The cultural expansion may, however, decrease as the number of investments increase. Based upon these considerations the test proposed for H2 involves estimating a simple regression model:
(1)
where
CDn
=
cultural distance to location of investment number n for a given company;CDn_1
=
cultural distance to location of investment number n-l for a given company;In
=
investment number nfor a given company;a,b=coefficients.
The second hypothesis derived from the process model implies that the constant
a
in (1) is positive. A decrease in cultural expansion as the number of investments grows means that the coefficient bin (1) is negative. Intotall08 investments in our database are preceded by another investment made by the same company. The estimation of (l) results in:(2)
CDn - CDn_1
=
0.116 - 0.003In (0.43) (-0.08) F=
0.94, Adj. R2=
0.00While the sign of the constant in (2) is in accordance with H2, the t-values reported in the parentheses show that neither the constant (a) nor the coefficient for the number of investments (b) is significant. Thus, the empirical evidence indicates that the average change in cultural distance between two subsequent investments is not positive and does not vary with the number of investments previously undertaken by the company. This means that H2 is not supported.
The process approach maintains that a gradual penetration of more distant markets serves to reduce the uncertainty felt by managers. According to this approach the experience from nearby markets will reduce uncertainty and make more distant markets more appealing to managers. Our findings suggest that this process does not playa major role in the choice of locations for FDls undertaken by Norwegian manufacturing companies. On the other hand, experience may still affect location choices by lowering the perceived cost of operating in well-known cultures. If this is the case, we would expect to find a strong correlation between the cultural distance to a country where an investment is made, and the cultural distance to the
58
country where the
previous
investment by the same company was undertaken. This turns out to be the case, as the correlation between CDn and CDn_1is highly significant (r =0.40,n =108;p <0.01).
Since the locations of two consecutive investments are highly correlated, the direction and extent of any movement in cultural distance between two subsequent investments should be related to the location of the first of the two investments. Ifthe starting point is a distant location, we may expect the location of the next investment to be closer to home while the opposite would be expected if the starting point is a culturally close location. A linear regression for the 108 observations preceded by another investment reveals the following relationship:
(3)
CDn
=
1.31+0.38 CDn_l(6.26) (4.53) F
=
20.6, Adj. R2=
0.15Equation (3) shows that there is a strong association between the location of an investment and the direction and extent of the next movement in cultural space. If the cultural distance of the previous FDI (CDn_l)exceeds an index value of 2.13, the regression predicts that the next investment will be culturally closer. In the opposite case, the next investment will tend to take place in a more distant location. Separate regressions for investment number two (thirty-one observations) and all later investments (seventy-seven observations) reveal the same basic pattern.
A close inspection of the database does not reveal any industry-specific differences in the location sequences. Since the choice of location for the first FDI seems important, a number of variables have been investigated that might be correlated with the location of the first FD!. The only significant relationship found is that FDIs located in countries that are culturally distant, tend to be greenfield investments to a larger extent than for FDIs undertaken in culturally doser countries. The explanation is probably that culturally distant countries tend to be less
developed countries where fewer opportunities exist to buy established companies. Export share, ownership percentage and size of the parent company are not correlated with the cultural distance to the country where the first investment was undertaken.