PROPOSAL: FOREIGN DIRECT INVESTMENT IN MALAYSIA
Program Directors - Associate Professor Amir Mahmood and Professor Stephen Nicholas and University of Malaya
The results of the project will provide the following net benefits to Malaysia by:
1. promoting closer research links with the Faculty of Business and Law, University of Newcastle
2. promote closer commercial and business links between Malaysia and major foreign investors by
a. providing Malaysian and foreign firms in Malaysia with data and analysis to compete internationally
b. providing Malaysian firms (especially suppliers to foreign firms) with a “best practice” guide to operating and cooperating with foreign firms in Malaysia
3. provide the Malaysian Government and investment agencies with data and analysis on foreign investment in Malaysia to develop better public policy
The methodology will be surveys, which yield rich firm-specific data.
Outline of Research Project
The focus is on managerial decision-making, with practical solutions to overcoming investment and operating problems in foreign markets.
Theory: International Business: Overseas Involvement and the Design of Contracts
The investment decision by foreign firms in Malaysia involves the international transfer of firm-specific assets. Two simultaneous and interdependent decisions are made: the choice of location for an overseas investment and the choice of the multinational form.
The Theory of Location Choice: Institutional Proximity and Other Location factors
The choice of location model draws on location, new institutional economic, agglomeration economies and path dependency theory to develop a set of location variables, including production costs, transfer costs (tariffs and non tariff restrictions; transport costs), financial assistance and market characteristics. Our theory captures the cross-country richness of variation in formal institutions and informal norms, or rules structuring co-operation and co-ordination within societies. How different MNEs assess institutional proximity is crucial to their investment and location decision. In particular, our measure identifies the tension between existing Malaysian rule structures and how MNEs design JVs and wholly-owned subsidiaries.
The Theory of Multinational Form Choice
The choice of multinational form draws on transaction cost and agency theory. Firms invest abroad to internalise transactions that occur in imperfect intermediate product markets for the purchase of raw materials and components, and imperfect markets for the sale of firm specific know how. The theory identifies how MNEs select across two governance structures, by comparing the choice of multinational form with intermediate contracts (such as, licenses, franchises, alliances and management contracts). Within the multinational form, the theory allows the choice between joint ventures (JVs) and wholly-owned subsidiaries (WOS) to be analysed.
FDI Decision: Ownership Advantages, Investment Decision and Operations
The project examines the ownership advantages (product and process technology, work and managerial practices, advertising, marketing and distribution skills, brand name and parent reputation advantages) transferred to Malaysia. These firm-specific assets define the knowledge base of Malaysian-based MNEs, where foreign firms trade-off integrated production and national responsiveness. This part of the project will also investigate location factors (market size, income levels, energy and labour costs); follow-the-leader strategies; government policy (trade, competition and industry policy); and performance (profitability and productivity).
Parent-Subsidiary Control and Decision-Making
Malaysian-based MNEs are increasingly supplementing formal or structural modes of parent-subsidiary control (e.g. formal target setting) with informal mechanisms of coordination (e.g. contacts and meetings between managers; managerial transfer and mobility across business units). At the same time there has been an upgrading of the role of subsidiaries as they become “nodes” in a network of subsidiaries.
The project will investigate the composition of the board, and the role of personnel/HRM; the level of head office control over HR practices in subsidiaries, and the character of management and HRM practices adopted by foreign investors (e.g. recruitment, remuneration, unions and bargaining; employee involvement; training; work organisation).
The project will investigate the supplier-MNE relations between Malaysian-based MNEs from different countries, including the source of raw material, components, finished goods and capital equipment; types of inputs; basis of sourcing decisions (quality, price, local content rules); relationship contracting; and supplier performance. These questions allow the globalisation of supplier relations to be measured.
There is an emerging literature on organisational learning by MNEs, both learning within the MNE and learning from the external environment.The project investigates the problems of learning by Malaysian-based MNEs through repetition and experimentation.
The project will assess the outcomes and performance of Malaysian-based MNEs, using subjective and objective measures