Does location matter in determining firms’ performance? A comparative analysis of domestic and multinational companies
| Pages | 253-272 |
| DOI | https://doi.org/10.1108/JABS-04-2016-0056 |
| Published date | 06 August 2018 |
| Date | 06 August 2018 |
| Author | Said Shah,Jamil Anwar,SAF Hasnu |
| Subject Matter | Strategy,International business |
Does location matter in determining firms’
performance? A comparative analysis of
domestic and multinational companies
Said Shah, Jamil Anwar and SAF Hasnu
Abstract
Purpose –The purpose of this paper is to investigatethe impact of internationalization of investmenton
corporate policies through multinational firms (MNFs) and thereby variation in financial performances
when compared to domesticfirms (DFs) using 10 years’ (2004-2013) secondary data of 153 firmslisted
on PakistanStock Exchange.
Design/methodology/approach –This study applies regression and ratio analyses for testing of
hypothesesand other statistics.
Findings –The resultsindicate that the performance of MNFs is betterthan that of DFs primarily because
of internationalization of investments and inventory utilization. The rest of the factors included in the
model, namely,cash conversion cycle and corporate governance(CG) indices, have less prominent role
in determiningfirms’ performance.
Research limitations/implications –Sample size was restricted to 153 firms, as complete data for
the period selected to carry out the study were available only for these firms. For determining the
quality of CG, only sample average has been used as bench mark due to non-availability of industrial
average.
Practical implications –The recommendationsof the research can be used by economic planners and
corporate experts as policy guidelines and bench mark for improving the corporate and economic
performance of the country. Besides, these recommendations are beneficial for emerging economies
particularlyand developed economies generallyacross the globe.
Social implications –Economicand financial regulators can get guidance from the findingsof the study
to adjust national-levelcorporate planning. For example, State Bank of Pakistan(the central bank of the
country) can amend its prudential regulations with regard to maintaining liquidity by corporate units
according to the resultsof the study. Corporate units can directly get guidance and adoptthe findings of
the study in their corporateplanning to improve their performance.The findings and methodology of the
researchcan also be used by research students on furtherexploring the field.
Originality/value –Splitting the sample into domestic and multinationals firms, separately and jointly
analyzing these firms and then comparing corporate strategies of these firms based on location are
unique.
Keywords Multinational corporations
Paper type Research paper
1. Introduction
Cross-border investments are supposed to bring diversified (and expectedly high) profits
for firms. It is commonly believed that certain types of capital inflows are more useful for
host as well as foreign countries. Particularly, foreign direct investment (FDI) is generally
regarded as more beneficial due to its havingquality of promoting growth and development
in host countries by encouraging transfer of new technology, providing employment
opportunities and bringing skills. FDI and to some extent loans are substantially more
sensitive to information frictions than investment in portfolio equity and debt securities
Said Shah is Assistant
Professor at University of
Swabi, Swabi, Pakistan.
Jamil Anwar is Assistant
Professor at COMSATS
University Islamabad,
Abbottabad Campus,
Abbottabad, Pakistan.
SAF Hasnu is Professor at
Department of
Management Sciences,
COMSATS University
Islamabad, Abbottabad
Campus, Abbottabad,
Pakistan.
Received 15 April 2016
Revised 5 August 2016
25 October 2016
Accepted 21 December 2016
DOI 10.1108/JABS-04-2016-0056 VOL. 12 NO. 3 2018, pp. 253-272, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 253
(Daude and Fratzscher, 2006). A multinational firm (MNF) having presencein more than one
country and strong financial standing brings many benefits to itself and its stakeholders in
the form of:
nreduction in labor and transportation costs;
nbenefit of tax variations;
nincrease in the consumer base by transferring them the benefit of reducing prices due
to low production costs and low taxes;
nproviding benefits of increase in tax revenues and employment for the country of origin;
and
nmost importantly maximization of profit and earnings per share.
The term location is used in the study as euphemism for origin, viz. multinational and
domestic firms (DFs). For the purpose of this study, a DF is one which is owned, controlled
and operated by Pakistani citizen (s). An MNF is an enterprise that owns and controls
income generating assets in more than one country (Hood and Young, 1979;Dunning,
1998). The three essential conditions recommended by Dunning (1998) for a firm to opt for
cross-border investment are ownership, location, and internalization. According to Frank
(1980), in order for firms to be classified as multinationals, different countries require
different foreign stakes. For example, the USA, Germany and Sweden require 10 per cent,
France 20 per cent and Australia 25 per cent. As per the definition provided by United
Nations, any enterprise is considered as multinational which controls assets in two or more
countries, having 10 per cent control of voting stock or 25 per cent of sales or assets in
a foreign subsidiary. Markusen (1995) defined multinationals as firms that engage in direct
foreign investment, acquire controlling shares in a foreign firm or set up a subsidiary in a
foreign country. Location may affect the corporate policies of firms such as working capital
(WC) management practices, preference for debt or equity as a source of long-term
financing, corporate governance (CG) practices and others leading to variation in their
financial performances.
Going beyond the borders of a state for investing may be in the form of establishing an
individual company or other economic units and creating an association among
investments of different countries. The main purpose of cross-border investments is to
provide a base for economic links between capitalist countries leading to an expansion of
the global labor division and internationalization of production. Internationalization of
investments empower firms already in monopolistic position in their host countries to hold
control of outside market, resulting in concentrating a substantial part of the world
production in their hands. For example as reported in The Great Soviet Encyclopedia
(1979), the largest American oil companies were holding about half of their assets outside
the borders of the USA in late 1960s. Similarly, Imperial Chemical Industries –a British
chemical concern –concentrated32 per cent of its production outside the UK. This process
increases the efficiency of firms operating in developing countries particularly and those
working in developed countries generally. A key role of cross-border investments is to
interlink financially strong firms of developed countries, as well as to provide a sustainable
growth to the economies of developing countries. MNFs bring benefits to their respective
countries of origin too besides maximizing their organizational profitability. For example, in
the mid-1960s, US companiesowned 33 per cent of the share capital of Philips –an electro-
technical concern (which is controlled by Dutch capital) –French companies owned 10
per cent, Swiss companies owned 9 per cent and West German companies owned 2
per cent (The Great Soviet Encyclopedia,1979).
MNFs are beneficial in many ways both for host and home countries. The benefits of MNFs
for the host countries include:
PAGE 254 jJOURNAL OF ASIA BUSINESS STUDIES jVOL. 12 NO. 3 2018
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