What Causes Multinational Companies to Increase Resource Commitments During Financial Crises in Emerging Markets.doc

WHAT CAUSE MULTINATIONAL COMPANIES TO INCREASE RESOURCE COMMITMENTS DURING FINANCIAL CRISES IN EMERGING MARKETS?Tao Gao, Northeastern University Talin E. Sarraf, Prudential Douglas Elliman Real EstateAbstractThis paper explores the effects of changes in host government policies, market demand, firm strategy, and infrastructural conditions on multinational companies propensity to increase resource commitments during financial crises in emerging markets. Model was tested using data collected from the 2001-2002 Argentine financial crisis. IntroductionTo many multinational companies (MNCs), the term “emerging markets” means growth opportunities. Yet, the constant changes of events typical to emerging markets represent both exciting opportunities and considerable risks for multinational businesses. Perhaps the most relentless challenge in doing business in emerging markets is the risk of being caught up in a financial crisis. Crisis situations call for crisis management responses and MNCs must expect and deal with a financial crisis as it occurs (Bartels and Freeman 2000; Goodman 2002; Singh and Yip 2000; Thompson and Poon 2000) and changing the amount of resources to be committed in an emerging market under crisis is perhaps the most important strategic decision for a firm. This decision redefines the scale of the foreign operation and largely shapes the MNCs control in the local operations and its level of risk exposure (cf. Anderson and Gatignon 1986).Research ObjectivesIn an effort to address the limits of the prior literature on firm-level studies on responses to financial crises in emerging markets, we conducted a survey of MNCs during the recent Argentine crisis (October-November of 2002) to achieve two research objectives:1. To understand under what antecedent conditions multinational companies would increase their resource commitments during a financial crisis in an emerging market.2. Identify antecedent variables that best predicted multinational companies willingness to increase resource commitments during the Argentine financial crisis.HypothesesBecause the decision on the level of resource commitment in a foreign market has been extensively studied in the foreign market entry mode and FDI literatures, we reviewed numerous studies in these areas of research (e.g., Anderson and Gatignon 1986; Buckley and Casson 1998; Hill, Hwang, and Kim 1990; Kogut and Singh 1988; Stopford and Wells 1972; Davidson 1980; Agarwal and Ramaswami 1992; Bello and Lohtia 1995; Erramilli and Rao 1993; Gatignon and Anderson 1986; Klein, Frazier, and Roth 1990; Koechlin 1996; Gao 2004; Root 1994; Sharma 2002). Based on this extensive literature review and accounting for major specific events that occurred during the Argentine financial crisis (e.g., freezing of bank deposits, social unrest, and major changes in government leadership), we identified a series of 22 host country and firm strategic factors. In making selections of antecedent factors, we used as a criterion their particular relevance to changes of foreign market entry modes in times of a financial crisis in an emerging market. We expected these factors, organized into four groups (market demand, local infrastructural conditions, government policies, and strategic motivations), to be used by MNCs in deciding on changing their resource commitments during financial crises in emerging markets. Hypotheses were development as a result of the literature review. MethodologyThe hypotheses were tested with data collected in a survey of 82 MNCs during the recent Argentine financial crisis (late 2002). We analyzed the dimensions structure of the 22 individual antecedent factors by performing an exploratory factor analysis, and confirmed a four-dimensional structure. In order to identify antecedent variables that would best predict multinational companies willingness to increase resource commitments during the Argentine financial crisis, we tested the hypotheses using both the correlation and regression analyses.ConclusionWhile all four categories of variables were considered by the respondents as generally important reasons for increasing resource commitments during a crisis, only favorable changes in government policies significantly influenced MNCs decision to change the level of resource commitments during the Argentine financial crisis. The research, managerial implications, and policy-making implications are discussed. REFERENCESAgarwal, S. and S. N. 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