Divestment and international business strategy (original) (raw)

Why are Foreign Subsidiaries Divested? A Conceptual Framework

1997

Foreign direct investment (FDI) is usually defined as a cross-border invesünent made by a company for the purpose of acquiring a lasting eqa1, uity interest in a foreign enterprise, and thereby exert a considerable degree of influence on the operations of that enterprise. A FDI represents in other words a long-term commitment to a foreign operation. Exitsor divestmentsseem nevertheless to be far from uncommon. Boddewyn (1979) one of the first international business scholars who paid attention to foreign divestmentmentions that while the l g0 largest u.S. based multinationals added some 41200 subsidiaries to their nerworks between the years 1967 to 1975, more than 2,400 affiliãtes were divested during the same period. some more ¡ecent studies suggest that the number of divestments is indeed quite significant: for example, padmanabhan (1993) identified 421 divestments of European subsidiaries by U.K. companies in the [1983][1984][1985][1986][1987][1988][1989][1990][1991][1992] period; Häkkinen (tgg4) reporrs that Finnish companies had divested almosr 900 foreign subsidiaries in the period 1978 in a study of the longevity of FDIs made by large Dutch multinationals found that of 225 FDIs made in the period 1966-19gg, iust over half of them were still in existence in 1988.

Managerial and financial-accounting elements of international divestment: A literature review

2007

Since the early of 1980s a substantial wave of international divestments has occurred although this phenomenon has not been sufficiently investigated up to now, inter alia due to its multiple nature. The primary purpose of this paper is to review the existing international business literature concerning managerial and financial-accounting aspects of this issue. The main results of our analysis are the following: First, there are several modes of international divestment with different identities and characteristics. The most important of them are found to be liquidation, plant closure & relocation and divestiture. Second, none of the existing theories can satisfactorily provide a global explanation of international divestment phenomenon in terms of nature, determinants, exit mode, or decision-making; thus, major theoretical gaps still remain. Third, empirical studies use a number of firmspecific factors as independent variables (such as entry modes, equity ownership structure, extent of diversification, experience, cultural distance, and financial performance) in order to explain the decision to divest. Most of them also utilize industry-specific factors using them as control variables. Nevertheless, further empirical research is also needed to shed light on the multidimensional character of the divestment phenomenon.

Closure and divestiture by foreign entrants: the impact of entry and post-entry strategies

Strategic Management Journal, 2000

We analyze the longevity of foreign entrants explicitly considering two possible ways of exit: firm closure and capital divestiture. We find that entry and post-entry strategies affect the longevity of firms and of foreign equity holdings, but in different manners. While the ownership arrangements and organizational structure affect the likelihood of divestment, they exert no significant effect upon closure. The entry mode exerts opposite effects on the two modes of exit, greenfield entrants being more likely to shutdown, but less likely to be divested. Only human capital affects closure and divestment in the same manner. Firms with large endowments of human capital are less likely to exit, irrespective of the exit mode considered.

Domestic or international: Divestitures in Australian multinational corporations

Global Finance Journal, 2006

Here we consider recent divestments made by Australian firms with subsidiaries in both domestic and overseas markets. When these companies divest, they are faced with the choice of selling a unit either in Australia or internationally. In this paper we analyze that decision and our results show that firms that elect to divest overseas are highly geographically diversified, large and with low dividend yield when compared to firms that choose to divest within Australia. We also find some evidence that these firms are using divestitures to exit from non-core business areas and streamline their operations.

Multinational Firms and Plant Divestiture

Review of International Economics, 2015

Multinational …rms not only make acquisitions, but also frequently divest a¢liates. A¢liate divestiture is the result of many factors, some internal and some external to the …rm. Using detailed con…dential survey data of Swedish multinationals, we are able to examine divestiture decisions within the context of the worldwide a¢liate network of the …rm. In contrast, most existing studies of multinational exit focus on one country only. A model of mergers and acquisitions with …nancing constraints generates predictions regarding the correlation between a¢liate size and the decision to sell. Consistent with this theory, we …nd that larger a¢liates are more likely to be divested, but an increase in relative size of an a¢liate reduces the probability of divestiture. Additional network characteristics, the presence of other a¢liates nearby and sales of a¢liates elsewhere, are also positively correlated with divestiture. We …nd no support for the notion of footloose multinationals.

MNE divestments of foreign affiliates: Does the strategic role of the affiliate have an impact?

Journal of Business Research, 2021

Divestments by multinational enterprises (MNEs) of their foreign affiliates are an increasingly important phenomenon in the contemporary global economy. We investigate what determines the likelihood that a foreign affiliate will be divested emphasising, in particular, the strategic roles played by the affiliates within their parent MNEs' global value chains, and hence the degree of relatedness between the affiliate and the parent firm. We find that poor parent performance and poor affiliate performance are key determinants of affiliate divestment, but that the magnitude of these effects varies significantly depending upon whether the affiliates are in related or unrelated sectors, are horizontal or vertical affiliates, and are located upstream or downstream in the global value chain of their parent MNE.

Subsidiaries in motion: Assessing the impact of sunk versus flexible assets

Advances in International Management, 2009

This paper addresses an unresolved theoretical issue in international business: the impact of existing, committed assets on parent and subsidiary decisions on future configurations of value-adding activities in host locations. We develop a measure of investment committedness, or the degree of flexibility versus specificity of existing assets in a location, to explore this issue. The measure assesses the extent to which assets, such as brands, human capital, process technologies and supplier relations, retain only scrap value outside their current application, or whether they can be re-deployed to alternative value-adding activities in the host location, or shifted offshore, either within the multinational enterprise (MNE) or to another user. The measure is a key step in developing a model of strategic choice for the future configuration of value-adding activities by MNEs in host locations. Drawing on firm-specific data from 237 MNE subsidiaries operating in Australia, we first present a traditional integration-responsiveness classification of subsidiary activities. This static snapshot of the subsidiaries' current profiles is then compared and contrasted with the measure's preliminary findings on the levels of investment committedness and strategic flexibility available to the sample MNEs and how this may shape strategic allocation decisions, including divestment and withdrawal.

Three decades of subsidiary exits: Parent firm financial performance and moderators

Journal of Business Research, 2020

This study aimed to find important constructs and relationships among models of subsidiary divestment during the period from 1989 to 2018 using correlation matrices of 80 studies, the selection of which was based on six criteria. It revealed eight important constructs, namely firm innovativeness, environmental factors in the target country, type of experience, organizational characteristics, investment strategy, parent firm financial performance, subsidiary divestment, and the moderating effects of advertising intensity and product diversification. Furthermore, it shed light on seven relationships that should be considered in future attempts to measure or assess parent performance related to its antecedents and subsidiary divestment. Moreover, advertising intensity and product diversification were respectively weakening and strengthening moderators on firm financial performance, and advertising intensity was a weakening moderator between organizational characteristics and subsidiary divestment. The implementation of a product diversification policy did not assist in preventing subsidiary divestment. Conclusions, implications, limitations, and future research were discussed.

Subsidiaries in Motion: Assessing the impact of sunk vs. flexible assets

This chapter addresses an unresolved theoretical issue in international business: the impact of existing, committed assets in a host location on parent and subsidiary decisions regarding the configuration of future value-adding activities for the location. We develop a measure of investment committedness, or the degree of flexibility versus specificity of existing assets in a host location, to explore this issue. The measure assesses whether assets, such as brands, human capital, process technologies, and supplier relations, retain only scrap value outside their current application or they can be redeployed to alternative value-adding activities in the host location or shifted offshore, either within the multinational enterprise (MNE) or to another user. The measure is a key step in developing a model of strategic choice for the future configuration of value-adding activities by MNEs in host locations. Drawing on firm- specific data from 237 MNE subsidiaries operating in Australia, we first present a traditional integration-responsiveness classification of subsidiary activities. This static snapshot of the subsidiaries’ current profiles is then compared with the measure’s preliminary findings on the levels of investment committedness and strategic flexibility available to the sample MNEs and how this may shape strategic allocation decisions, including divestment and withdrawal.