The Impact of FDI on Business Orientation and Performance Relationship- Abstract, Kao Kveng Hong

7/27/2019 The Impact of FDI on Business Orientation and Performance Relationship- Abstract, Kao Kveng Hong

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The Impact of FDI on Market Orientation and Business

Performance Relationship

Dr. Kao Kveng Hong*

Scholar at Angkor Khemara UniversityDate: 2014

ABSTRACT

FDI forces firms to be competitive and market orientedthe ability to serve

customers current and future needs. Firm can do so by encouraging product

innovation, developing product development capability and reducing organizational

slack. In this study, we label the combination of the three variables as firms

Organizational Absorptive Capacity (OAC). Literature suggests that FDI, and

market orientation have a positive impact on business performance; however, the

mediating role of OAC between FDI and market orientation is unclear. Drawing on

the Source-Position-Performance framework, we propose to testFDIs direct impacton market orientation, and on business performance, and its indirect impact via firms

OAC on market orientation. Implication for managers is that they would be able to

adjust their firms OAC to be market orientedand to improve business performance.

Keywords: Business Performance, Capability, FDI, Innovation, Market

Orientation, Organizational Slack

1. Introduction

The main driver for Chinas economic success lies in Foreign DirectInvestment (FDI) (Lui and Zou, 2008). FDI is found to have a positive impact onGDP growth in host economy (Hanousek et al., 2011), capabilities and productinnovation (Lin and Lin, 2010), better resources allocation, i.e., optimizingorganizational slack (Kotrajaras et al 2011). In the past two decades, since mostemerging markets began participating in the globalization process, and the StructuralAdjustment Program initiated by their governments, FDI became a focal point for

both managers and scholars. Thus, FDI has been studied in various contexts, such asindustrial productivity, its direct and indirect effects (Zhao and Zhang,2010), hostcountrys economic conditions, such as levels of financial market development,institutional development, better governance, and appropriate macroeconomic policies(Kose, 2006; Kotrajaras et al., 2003), manufacturing (Lin and Lin, 2010), innovation

(Getz and Robinson, 2003; Clark and Guy, 1998), and technology transfer (Fan,2002), among others. These studies may suggest that FDI can lead host firms to bemarket orientedfirms ability to meet customers present and future needs by

becoming customer and competitor oriented and by coordinating activities withinorganization (Narver and Slater, 1990) which in turn should have a positive impact on

business performance (Singh 2009; Singh 2003 Greenley, 1995; Narver and Slaterand Slater, 1990). However, the relationship between FDI and market orientation isunclear.

The purpose of the study is to bring clarity between FDI and market orientations forboth managers and scholars. First, we conceptualize a model based on source-

position-performance framework (Day and Wensley, 1988) and propose the directimpact of FDI on market orientation, and on business performance. Second, we


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propose the indirect impact of FDI on market orientation via three pertinent ant inter-related variables frequently cited in literature: Innovation (product), Capability(product development), And Organizational Slack (extra resources). We conceptualizethe three mediating variables as Organizational Absorptive Capacity (OAC) of a firmwhich renders firms a competitive advantage by enabling them to develop market

orientation within their firms. Innovation is defined as a change in a product offering,service, business model or operations, which meaningfully improves the experience ofstakeholders. A firms capability is defined as its ability to develop new product or

services to create and deliver superior customer value (Day, 1994). Organizationalslack refers to more resources than necessary to produce a given level oforganizational output (Bourgeois, 1981).

Integration of OAC with FDI offers a new perspective that international businessmanagers can use in determining which dimension of OAC is most important in theirfirms or industry for a superior business performance. For example, the concept oforganizational slack and its competitive advantage is well documented (Peng and Tan,

2003; Singh, 1986), but its calibration is not. Thus managers can use the study toadjust slack in order to develop market orientation and improve business performance.Calibration of organizational slack is needed to redeploy resources to develop productinnovation, and product development capability. In the following sections, we proposethe conceptual model, advance propositions, and discuss their implications, anddiscuss their implications for managers.

2. The Conceptual ModelFigure 1 shows the conceptual model based on day and Wensleys (1988)

source-position-performance framework in which FDI is the source, OAC is position(positional mediator), and market orientation and business performance are theoutcome(see also Han, Kim and Srivastava, 1998). We hypothesize two pathwaysdirect and indirect. The direct pathway involves the direct impact of FDI on marketorientation, and on business performance, whereas the indirect pathway is posited tooccur indirectly through OAC innovation, capability and organizational slack.

2.1 FDI and InnovationForeign direct investment is defined as a firm from one country making an

investment in another firm in another country. This may be physical, financial and ortechnological. There are two kind of FDI: Inward and Outward. Inward FDI (e.g.,imports) can strengthen competition and accelerate the process of innovation, whereas

outward FDI (exports) can have a complementary impact on research anddevelopment initiatives of manufacturing firms (Lin and Lin, 2010). FDI hasappositive impact on firms innovative activities. Innovation is defined as a change ina product offering, service, business model or operations, which meaningfullyimproves the experience of stakeholders. Taiwanese manufacturing industry hasexperienced a positive impact of FDI on innovation mainly due to the access tomodern foreign technology, which has forced local firms in the same industry to becompetitive and innovative However, impact of FDI is not always positive. Studiesshow that foreign acquisition may not necessarily lead to better technology transfersor higher innovation, because the skills, technology, knowledge and methods may not

be better than existing or research and development; on the other hand, foreign

parents might transfer part of their technology, or not at all (Stiebale and Reize, 2011).Effect of foreign acquisition on a firms innovation is mixed. So, we advance:


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P1: FDI leads to innovation.

Figure 1: Conceptual Model Source-Position-Performance Framework

SOURCE POSITION OUTCOME1OUTCOME2

P1 P6

P2 P7 P9

P3P8

P4P5

2.2 FDI and CapabilityA firms capability is defined as its ability to develop new product or services

to create and deliver superior customer value (Day, 1994). Due to FDI, existence offoreign-owned firms in host economy leads to increased competition in the domesticmarket (Fan, 2002), forcing domestic firm to upgrade their production methods to

become more efficient by learning from foreign firms superior technologies. Theprocess of leaning and becoming efficient enables firm to develop their own productdevelopment capabilities. Building capability is one of the spillover effects of FDI.Further, Further, DFI can contribute to developing skilled and knowledgeableworkforce through training initiatives and other educational programs. Despite theobvious advantages of FDIs ability to improve host-countrys capability, such

improvements are largely dependent on certain characteristics of host countries. Weargue that characteristics-level of infrastructure, governance, trade openness-generatespillover effects such as capability. Hence, we propose:

P2: FDI Leads to Capability.

2.3 FDI and Organizational SlackOrganizational Slack refers to the excess capacity or resources maintained by

an organization-created consciously or unconsciously. There are two kinds oforganizational slacks: tangible and intangible slack. Tangible slack may be excessfinance or employees that are not fully engaged, whereas activities and marketing

expertise (Chang and Rhee, 2011). Firms with lower levels of organizational slackoperate more cautiously than firms with higher levels of slack. A high organizational

CAPABILIT

Y

INNOVATIO

N

FDIMARKET

ORIENTATION

BUSINESSPERFORMAN

CE

ORGANISATIONAL

SLACK


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slack enables to take risk, and to adapt to competitive end uncertain economic climate.As FDI is inherently risky, firms with more slack use investment-based strategy.Organizational slack is positively related to the feasibility of rapid FDI expansion.

Firms create a buffering mechanism to deal with market turbulence or uncertainty by

allocating excess slacks to foreign initiatives, or by developing different products, orby entering different geographic markets. However, in doing so, they reduce the levelsof slack due to FDI similarly, local firms begin to cut their slack in order to be morecompetitive due to arrival of the foreign firms. Thus we propose:

P3: FDI Reduces Organizational Slack.

2.4 FDI and Market OrientationMarket orientation relates to the creation of superior customer value and

continuous superior performance for the business (Narver and slater, 1990). This viewconsists of three behavioral components customer orientation, competitor orientation

and inter-functional coordination within firms. In order for firms to be marketoriented, they need resources (i. e., to meet the current and future needs of customers)such as skilled labor or improved technology. FDI may provide both. Thus, FDI canmake local firms market oriented by adding knowledge and skills to the localworkforce, and by providing training programs, and by assisting transfer oftechnology. Further, FDI can directly influence host countrys productivity byintroducing capital goods (equipment), new processing practices, new products, andnew management skills.

Such knowledge and emergence of ideas provided by FDI stimulate innovation whichfirms use to be market oriented (Zhao and Zhang, 2010). Furthermore, FDIs positiveimpact on the business environment of host economies through introduction of newtechnologies and technological assistance to local supplier and customers mayactually improve market orientation of local firms (Fan, 2002). Thus, FDI may benecessary for firms to be market oriented. So we propose:

P4: FDI lends to Market Orientation

2.5 FDI and Business Performance

FDI has spillovers effects: horizontal and vertical. Horizontal spillovers are

external to local firms and affect at the intra-industrial level. For example entry ofaffirms whose productivity is driven by FDI encourages other firms within the samesector to catch up with the performance and competitiveness. The increase inefficiency occurs by imitating new technologies or by hiring trained workers andmanagers from foreign-owned firms. In contrast, vertical spillovers take place at theinter-industry level through, for example, technology transfer to local suppliers orcustomers in the production chain. Thus, firms operating in other sectors than theforeign enterprise are also affected by the FDI presence, as they come in contact withthe suppliers. Usually, foreign firms require higher standards from their localsuppliers which in fact increase efficiency of the firms (Hanousek et al., 2011).Although FDI may have different effects different countries, it is expected that its

spillover effects through transfer of knowledge and technology should positivelycontribute to increasing business performance. So we propose:


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P5: FDI leads to Superior Business Performance.

2.6 Innovation and Market Orientation

Innovation determines sustainability of an organization, as it stimulates anddevelopment to come up with new or improved products or services (Getz andRobinson, 2003). An increase in evolutionary thinking through research anddevelopment requires a technical change. Advances in technology can result inchange and innovation. Because it is important to meet customers need, firms searchfor advanced technologies to produce innovation products. The ability to produceinnovation products or services or services makes firms market oriented.

However, innovation should not only be confined to improving the quantity andquantity of a product, but also the characteristic of the new product which differ fromother products. Otherwise, innovation may be insufficient to support market

orientation of affirm. In fact, FDI brings pressure and risk to the firms. It may bedifficult for small firms to achieve growth and be market oriented if innovation isinsignificant (Clark and Guy, 1998). Thus, it is expected that FDI market firmsinnovative enough to be market oriented through technology transfer: thus, we

propose:

P6: Innovation Leads to Market Orientation.

2.7 Capability and Market Orientation

A firms capability is defined as its ability to develop new products or services tocreate and deliver superior customer value (Day, 1994). Developing new capabilitiesis particularly important for market-oriented firms because they respond to currentmarket environment, and anticipate future market conditions (Chandy and Tellis,2000; Slater and Narver, 1995; Kohli and Jaworski, to perform tasks on their own bylearning from foreign collaborating-or technology-transferring firms. One of suchtasks is a firms ability to be market oriented; that is, to be able to track customers

preferences and develop products accordingly while being competitive. Hence,survival of firms is determined by firms capabilities to develop market oriented

products and services. Although capabilities can be valuable sources of sustainablecompetitive advantage in some industries at certain periods of time, it may not bevaluable in all industries at all times (Collis, 2006). For example, a firm may decide to

be market oriented though outsourcing rather than developing its own capability underturbulent market conditions. Nonetheless, we expect that the overall capability offirms and their competitiveness influence firms to be market oriented. Thus, we

propose:

P7: capability Leads to Market Orientation.

2.8 Organizational Slack and Market OrientationOrganizational slack refers to more resources than necessary to produce a given levelof Organizational output (Bourgeois, 1981). Organizational slack is excess andavailable resources to technology, equipment, inventory, information, and people.

Because market orientation calls for substantial amount of resources to anticipatefuture needs of customers while meeting current needs, firms can redeploy excess


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slack for developing market orientation and for in-house design and production ofproducts. Firms perform better because they allocate resources better and managethem better. Slack is potentially utilizable resources that can be diverted or redeployedfor achieving organizational goals (George, 2005). We argue that presence of slackshould be strategic.

However, opponents of slack posit that slack can encourage complacency, politics, orself-serving managerial behavior, and thus can hurt performance (Jensen, 1986).Therefore, slack should be eliminated to reduce this possibility (Phan and Hill, 1995).Although organizational slack is an important prerequisite for competitive advantageand for market orientation, it can also be viewed as a disadvantage if it is not optimal.Too much slack reduces return on investment as resources are taken away from the

bottom line, and too little slack lack timely response to market condition and customerpreferences. The challenge lies in managing and optimizing and optimizing slack togain a competitive advantage. The source of sustainable competitive advantage islikely to be found in different places at different points in time in different industries.

Thus, firms need to adjust slack to be market oriented and to improve performance(Love and Nohria, 2005). Thus, we propose:

P8: Organization Slack Leads to Market orientation.

Market Orientation and Business PerformanceIt is well established that market orientation leads to a superior business performance(Jaworski and Kohli, 1993; Narver and Slater, 1990), and that it builds competitiveadvantage for firms (Narver and Slack, 1990). It is mainly due to the fact that firms

products are more successful because market oriented firms would conduct marketresearch to discover customers needs. As a result, customers preferences match

firms products, resulting in less product failures, leading to superior businessperformance as determined by profitability, return on investment, and market share,among others. Often firms develop market oriented strategies to be by profitable andcombat entry of new firms by adjusting their marketing mix (Robinson, 1988).

Although increasing or maintaining a magnitude of market orientation is a complexprocess and requires a considerable expenditure of resources, such as money and time(Slater and Narver, 1995), the benefit of becoming market oriented far exceeds thecosts of being market oriented, as firms are able to capture more market share (Singh,2003), and thus more profitable, leading to a superior business performance. thus, we

propose:

P9: Market Orientation leads to Superior Business Performance.

3. Discussion and implication for ManagersThe purpose of the study was to advance propositions relating to FDI and marketorientation-business performance relationship, and the mediating role of innovation,capability and organizational slack.FDI-inward or outward-influences a firms innovative activities as it introducescompetition in host countries and accelerates local firms innovative processes inorder to stay competitive. Innovation can be viewed as the catalyst for growth within

an organization is a change in a product offering, service, business model oroperations, which meaningfully improve the experience of stakeholders. Implication


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for managers is that innovation should be meaningful in order to have an impact onbusiness performance. It is important to understand what really innovation means(Gertz and Robinson, 2003). We recommend managers to be innovative and takeadvantage of FDI that renders innovative and competitive advantage throughtechnology transfer.

Further, FDI enables firms to deploy resources to build product developmentcapability in order to be market oriented. Developing market orientation requiresmanagers to review their resource allocation mechanism and optimize it to create a

buffer in the marketplace. Given the critical role of resources, the presence. orabsence of it can have impact on market orientation-business performancerelationship. For example, some resources may seem more elusive than others. Someslack resources can be tied in day-to-day operations while others are more tangibleand can be kept aside and easily accounted for. We recommend managers adjustingorganizational slack even if it can be risky(George, 2005).

A countrys economic growth is mainly the result of FDI. It can take the form ofpartnerships, mergers, joint ventures, acquisition of assets and greenfield ventures inwhich a firms builds its own business or manufacturing facilities in a foreign country(Lau and Bruton, 2008). However, manager should be cognizant of the fact FDI canalso have a negative impact in case of foreign acquisitions on the propensity to

perform innovation activities (Stiebale and Reize, 2010).

FDI in China is now more than $80 billion per year compared to $2 billion in India orother competing countries such Japan. The majority of the FDI flow into China is inthe non-financial sector. This means that foreign firms use China to manufacture

products for both exports and for sale in other markets (Lau and Bruton, 2008). It issuggested that East Asian countries need to increase their investment ininfrastructures, human capital development, and facilities for enhancing internationaltrade and the investment climate (Kotrajaras et al., 2011). China has a GDP growth ofapproximately 9 per cent annually, which is an aggregate increase of 700 per centsince its globalization program began in 1978. If this growth continues, China will beworlds largest economy in terms of GDP in 25 years. Clearly, power of FDI cannot

be underestimated whether on firms or nation.

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*Dr. Kao Kveng Hong is Professor of Business & Economics at Angkor KhemaraUniversity, Phnom Penh, Cambodia. He holds a Bachelors Degree in Economic

Science, a MBA and a Ph.D. in Business Administration. Prior to entering academiclife Dr. Hong was active in business; he remains the CEO of Asia Marketing SolutionCompany, a company he founded in 2006. Dr. Hong is also a qualified teacher. He

began his career as an English and Japanese teacher in private schools in Siem Reap.

These days he teaches Marketing, Media, Management and sales subjects toundergraduates and MBA students. He may be reached at [email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]

The Impact of FDI on Business Orientation and Performance Relationship- Abstract, Kao Kveng Hong

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