FOREIGN DIRECT INVESTMENT AND PERFORMANCE OF JAPANESE SUBSIDIARIES IN MALAYSIA

1. FOREIGN DIRECT INVESTMENT AND PERFORMANCE OF JAPANESE SUBSIDIARIES IN MALAYSIA BY : NorhidayahMohamad Aichi University and Universiti Teknikal Malaysia Melaka And Yasuo Hoshino Aichi University and University of Tsukuba, Japan

2. Introduction • Japan and Malaysia have already cultivated positive and agreeable partnership as well as strong bilateral trade and investment linkages for a long time. The Look East Policy of Malaysia and direct investment of the Japanese firms in Malaysia contribute to the close relationship between the two countries. The accumulated investment and transfer of technology by the Japanese firms is an encouraging basis for further development of both countries in the future. • During the last eight years, the Malaysia-Japan Economic Partnership investment initiative has facilitated active discussion and cooperation on ways to improve the climate for foreign direct investment (FDI) in Malaysia and in the Japan. Therefore, foreign investment in Malaysia has risen steadily in recent years. • Even though the background is as such, we have only a little knowledge and a few relevant empirical researches on foreign companies in Malaysia. When Malaysia makes it much easier for foreign companies to enter into Malaysia, and also when foreign companies respond to it in a very encouraging manner, it is strategically important and useful to know more about them. While it is essential to develop more alternative models, theories and frameworks, it is worth to have more empirical research in order to understand how the systems function in the market.

3. Objectives • Determine main factors that contribute to the Japanese MNCs subsidiaries performance in developing country • Analyze the relationship between special characteristics (entry mode, dimensional aspects, & international experience) and Japanese MNCs subsidiaries performance in Malaysia

4. Literature Review

5. Current Situation • To date, extensive research on the effects of FDI has not provided a clear and conclusive picture on the impact of Japanese firms on local host economies. • Whereas some studies seem to conclude that, the FDI has played an important role in a host country’s development and others do not (Giroud, 2000). • According to Kumarasinghe & Hoshino (2008), there is still insufficient research on Japanese MNCs activities in the Pacific region. • In a case of Malaysia, Japanese MNCs emerged as the leading direct investment in Malaysia with RM 32.1 billion and RM 33.7 billion in year 2003 and 2004 respectively (Department of Statistics, 2008).

6. Entry Mode • Entry mode is one of the most important strategic decisions made by a firm seeking to enter a foreign market. Parallel to its importance, it has been the third most researched field in International management

7. Dimensional aspects & International experience • Past researches have shown that the size of a firm has an important effect on subsidiary’s performance (Mansour & Hoshino, 2001; Isobe, 1998; Freeman, Carroll, & Hannan, 1983). • However, in the study on the factors influencing the performance of Japanese FDI in Thailand found that firm size is negatively associated with profitability (Siripaisalpipat & Hoshino, 1999). • In this research, the dimensional aspects measured by the parent's equity ratio, ROE,average age, net sales/employees, profit/net sales, depreciation expenditure/net sales, R&D/net sales and growth average. • International experience increases the possibility of firms committing a large amount of resources to foreign market (Medcof, 2001). On the other hand, international experience provided firms with important knowledge about customer, markets, cultures and government that encourage future expansion (Hill, Hwang, & Kim, 1990). Thus, in this research we used subsidiary’s age and parent’s overseas sales as the proxy for international experience measurement.

8. Performance • It is crucial to examine the performance of Japan MNCs subsidiaries in host country to remain the investment and at the same time enhancing the regional competitive advantages. • Previous research constructed the performance based on the top Japanese manager's assessment about his subsidiary financial performance. • There are three main arguments that support this type of measure. As quoted by Cespedes & Hoshino (2001): • three conditions enable this measurement. • Where available, financial measures of performance are not directly comparable across industries and countries with different accounting systems and customs (Brown, Soybel, & Stickney, 1994). • Because the survey respondent is the top Japanese Manager in each subsidiary, it expected that each manager report the subsidiary performance from a similar reference point (Makino & Delios, 1996). And • Managers' perceptions of performance have been demonstrated to be correlated with objective financial measures (Geringer & Herbert, 1991) .

9. Independent Variables Dependent Variables FDI Entry mode - Wholly owned subsidiaries - Joint Venture Dimensional Aspect • Parent equity ratio, • Parent ROE, • Parent Average Age • Parent Net Sales/Employees • Parent Profit/Net Sales • Parent Depreciation Expenditure/Net Sales • Parent R&D/Net Sales • Parent Growth Average MNCs Subsidiary Performance International Experience - The age of the subsidiary - Parent overseas sales Research Framework

10. Research Methodology Analysis Unit Japanese MNCs subsidiaries in Malaysia Source of Data Nikkei Zaimu Database (Nikkei Inc., 2005-2009)and eolDB Tower online services (financial report) Data Sample 270 Japanese MNCs subsidiaries (2005-2009) Data Analysis Method Pearson Chi-Square and Levene’s test Binary logistic regression using SPSS 18.0 software

11. Analysis and Findings

12. Hypothesis 1: MNCs subsidiaries entering through wholly owned investments are more likely to perform better than those entering through joint venture Hence, the first hypothesis that stated, “MNCs subsidiaries entering through wholly owned investments are more likely to perform better than those entering through joint venture” is rejected because significant value was > 0.05.

13. In Malaysia case, dimensional aspect in terms of Net Sales/Employees and Profit/ Net Sales have a positive sign and significant for year 2005-2009. However, in terms of parent’s R&D/ Net Sales show a negative sign and significant for year 2005-2009. This provides support for the hypothesis 2 state that the larger MNCs, the better subsidiary performance. • Hypothesis 2: The larger the MNCs, the better subsidiary’s performance. *significant at the 5% level

14. Hypothesis 3: The greater the international experience of MNCs, the better performance of their subsidiary. Thus, we can conclude that, there was positive correlation between age and performance and therefore support the third hypothesis. *significant at the 5% level

15. Multinomial logistic regression Note:** significant at the 5% level. • Multinomial logistic regression capable to provides detail information by observing the influence of each independent variable to subsidiary performance. • Previous analysis using binary logistic shows that “subsidiary age” has positive impact in subsidiary performance. With multinomial logistic regression, it shows that “subsidiary age” has positive influence generating a “gain” instead of a “loss”.

16. Conclusion • In order to sustain competitiveness in the foreign market, it is essential for companies to have enough resources and flexibility while deciding which mode of entry to use for penetrating the foreign market. • This study examines the relation between internalization advantages of Japanese parent companies and the attained performance of their subsidiaries. Based on the information contained in “Toyo Keizai Data Bank 2005-2009" and eol DB Tower services (financial report), we select 270 cases to determine the relationship between entry mode, dimensional aspects and international experience with subsidiary performance. • Dependent variable was measure using three categories (gain, breakeven and loss). While ten different characteristics of parent and subsidiary companies used as proxies for independent variables. A binary logistic regression model applied in this research. We also used correlation analysis to identify if there were any correlations among the independent variables that could threaten the stability of the binary model. • The five significant variables were subsidiary age, parent’s net sales/employee and profit/ net sales with p value less than 0.05 and positively associated with the subsidiary performance. Moreover, parent’s R&D/net sales and overseas sales show the significant value but negatively associated with subsidiary performance.

17. References • Brown, P. R., Soybel, V. E., & Stickney, C. P. (1994). Comparing U.S. and Japanese corporate level operating performance using financial statement data. Strategic Management Journal, 15 (1), 75-83. • Cespedes, C. V., & Hoshino, Y. (2001). Effects of ownership and internalization advantages on performance: The case of Japanese subsidiaries in the United State and Latin America. Review of Pacific Basin Financial Markets and Policies, 4 (1), 69-94. • Department of Statistics. (2008). Publications. Retrieved 3 11, 2010, from Department of Statistics Malaysia: http://www.statistics.gov.my/portal/index.php?option=com_content&view=article&id=503&Itemid=14&lang=en#5 • Freeman, J., Carroll, G., & Hannan, M. (1983). The liability of newness: Age dependency in organizational death rates. American Sociological Review, 48 (5), 692-710. • Geringer, J., & Herbert, L. (1991). Measuring performance of international joint ventures. Journal of International Business Studies, 22 (2), 249-263. • Giroud, A. (2000). Japanese transnational corporations? knowledge transfer to Southeast Asia: the case of the electrical and electronics sector in Malaysia. International Business Review, 5 (9), 571-586. • Hill, C., Hwang, P., & Kim, W. (1990). An eclectic theory of the choice of international entry mode. Strategic Management Journal, 11 (2), 117-128. • Hoshino, Y., & Takabayashi, S. (1999). Zainichigaishikeikigyou no shinsyutukeitai to gyouseki (Entry Modes and Performance of Foreign Subsidiaries in Japan). Sosoki Kagaku (Organizational Science), 32 (3), 65-75, (in Japanese). • Isobe, T. (1998). Nikkei kaigaikogaisha no jigyomokuteki to gyouseki (Business roles and performance of Japanese subsidiaries). Japan Academy of International Business Studies Annual Bulletin, 4, 320-331, (in Japanese). • Kumarasinghe, S., & Hoshino, Y. (2008). Entry Mode Strategies and Performance of Japanese MNCs in Australia and New Zealand: the role of Japanese. Asian Journal of Finance & Accounting, 1 (1), 87-105. • Makino, S., & Delios, A. (1996). Local knowledge transfer and performance: Implication for alliance formation in Asia. Journal International Business Study, 27 (5), 905-27. • Mansour, M., & Hoshino, Y. (2001). Firm-specific factors, shareholding structure and corporate performance of the Japanese manufacturing investment in Europe. Japanese Journal of Administrative Science, 14 (3), 117-127. • Nitsch, D., Beamish, P., & Makino, S. (1996). Entry mode and performance of Japanese FDI in western Europe. Management International Review, 36 (1), 27-43. • Siripaisalpipat, P., & Hoshino, Y. (2000). Firm-specific advantages, entry mode and performance of Japanese FDI in Thailand. Japan and the World Economy, 12, 33-48. • Woodcock, C., Beamish, P., & Makino, S. (1994). Ownership-based entry mode strategies and international performance. Journal of International Business Studies, 25 (2), 253-273. • Yoshihara, H. (1994). GaishikeiKigyou (Foreign Companies). Tokyo: Doubunkan, (in Japanese).

18. List of Companies • List of Companies.docx

19. The End &Thank You