property rights and international investment in information technology services

Strategic Management JournalStrat. Mgmt. J., 34: 877–889 (2013)

Published online EarlyView 29 November 2012 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2032

Received 27 April 2010 ; Final revision received 7 November 2012

RESEARCH NOTES AND COMMENTARIES

PROPERTY RIGHTS AND INTERNATIONALINVESTMENT IN INFORMATION TECHNOLOGYSERVICES

SRIVIDYA JANDHYALA*George Washington University, Washington, D.C., U.S.A.

Many modern information technology services are increasingly being produced in a host countryto serve clients in an offshore location. As a result, the internationalization of service functionsis beginning to resemble that of their more traditional manufacturing counterparts. This paperexamines the role of formal and de facto property rights protection in the offshore location choiceof information technology services. I also explore the role of a firm’s global subsidiary networkand its experience with similar property rights regimes. Using investment data based on 152firms and their international information service investments between 2002–2006, the empiricalresults highlight the role of de facto property rights protection and related experience in locationchoice. Copyright 2012 John Wiley & Sons, Ltd.

INTRODUCTION

Worldwide trade in services has witnessed a nine-fold increase in the last 30 years, growing fromunder $400 billion in 1980 to over $3.4 trillion in2009 (UNCTAD, 2010). In spite of this sector’sgrowing importance, ‘[l]ittle is known about thepattern and determinants of international expan-sion strategies in service industries’ (Li, 1994:218), and more research on multinational enter-prises (MNEs) engaged in the delivery of servicesis needed (Li and Guisinger, 1992; Capar andKotabe, 2003; Hitt et al ., 2006). Although recentwork has begun to consider the internationaliza-tion of service firms by examining their internalresources (Hitt et al ., 2006), external economicand competitive considerations (Li and Guisinger,1992; Lewin, Massini, and Peeters, 2009), and

Keywords: foreign direct investment; property rightsprotection; information technology services; offshoring;related experience*Correspondence to: Srividya Jandhyala, George WashingtonUniversity, 2201 G Street NW, Funger Hall 401, Washington,DC 20052, U.S.A. E-mail: [email protected]

Copyright 2012 John Wiley & Sons, Ltd.

cultural factors (Doh, Bunyaratavej, and Hahn,2009), few studies have considered the role ofhost country property rights protection or otherinstitutional factors. This stems from the implicitassumption that the unique characteristics ofservices—such as their intangible nature, simul-taneous production and consumption, and absenceof inventories (e.g., Li, 1994; Capar and Kotabe,2003)—make this sector less sensitive to issues ofproperty rights protection.

Recent work, however, has indicated thatmodern services that are information and com-munication technology (ICT) intensive canbe unbundled and splintered in a value chain(UNCTAD, 2004; Blinder, 2006). An increasingnumber of service functions can be stored andtransported across countries such that productionand consumption are in different locations. As aresult, many services functions now resemble theirmanufacturing counterparts and some authorsargue that the internationalization behavior ofservice MNEs is similar to that of manufacturingfirms (Goerzen and Makino, 2007). In this con-text, the internationalization of service functions

878 S Jandhyala

is better explained by considering institutionalfactors, including property rights protection, inaddition to economic and cultural factors (Floresand Aguilera, 2007). However, the impact ofwell-functioning property rights protection onthe internationalization of service MNEs remainsunderstudied.

This study makes two contributions to the exist-ing literature. First, it informs the current debateon the extent to which MNEs engaged in the deliv-ery of services are different from those involvedin manufacturing. While some scholars haveargued that unique characteristics of services trans-late into different international expansion strate-gies (Li, 1994; Capar and Kotabe, 2003), othershave suggested that behavior of service MNEs isclosely related to that of their manufacturing peers(Goerzen and Makino, 2007). By examining inter-national expansion of ICT services, I show that,like their manufacturing counterparts, internationalinvestment in the service sector is also sensitiveto traditional property rights risks. In other words,modern services are more similar to manufacturingthan previously discussed in the literature.

Second, I distinguish between formally adoptedregulations and de facto property rights protectionand empirically capture their effects. Prior liter-ature on institutional characteristics of the hostcountry has primarily focused on the de jure laws,regulations, administrative procedures, and poli-cies to explain a host country’s relative attractive-ness for MNEs (Delios and Henisz, 2003; Chungand Beamish, 2005). However, many countriesimperfectly enforce formal laws, fail to implementpolicies altogether, delay or partially implementadopted policies, or support de facto departuresfrom formal rules (Weber, Davis, and Lounsbury,2009; Zelner, Henisz, and Holburn, 2009). Thus,MNEs may face institutional risks even in coun-tries where formal regulations protect their invest-ments. By focusing on de facto practices, thispaper makes a fresh attempt at measuring insti-tutional quality of a host country.

THEORY AND HYPOTHESES

Investment in services

International commerce in services has tradition-ally been constrained by the fact that buyers andsellers had to be co-located to consume intangibleassets. Most services could only be provided

to foreign customers by employees or affiliateslocated in foreign countries, where they wereconsumed immediately. Thus, most foreign directinvestment (FDI) in services was market-seeking(Nachum and Zaheer, 2005; Brouthers, Gao, andMcNicol, 2008). In industries such as bankingand finance (Miller and Parkhe, 1998; Zaheerand Mosakowski, 1997), advertising (Terpstra andYu, 1988), and law (Hitt et al ., 2006), servicefirms expanded abroad to serve their multinationalclients in foreign locations or in search of new for-eign markets. As a result, service MNEs had fewopportunities to exploit location differences.

Recent advances in ICT have solved the tradi-tional problems of non-transportability and non-storability of many service functions (UNCTAD,2004). Firms can now produce services in onecountry to serve clients in another, offshore loca-tion. In addition, individual components of ser-vices can be stored by the producer to be usedat a later point in time by a proximate or distantconsumer. These changes have resulted in mod-ern service sectors—such as information basedservices—acquiring some characteristics of manu-factured goods. Like manufacturing, service func-tions need to be stored securely and transportedefficiently for further use. Further, like their man-ufacturing counterparts, service MNEs can takeadvantage of the differences in country attributes toincrease efficiency. This type of efficiency-seekingFDI (Nachum and Zaheer, 2005) or offshoring hasgrown rapidly in recent years.

Initial academic research on offshoring focusedon location factors such as labor costs (Doh,2005), presence of a skilled workforce (Lewinet al ., 2009), or the familiarity with home countrylanguage and culture (Doh et al ., 2009). However,as Flores and Aguilera (2007) show, MNE loca-tion choices are better explained by consideringinstitutional factors in addition to economic andcultural ones.

Specifically, traditional property rights issueshave become important in offshored informationservices. The absence of property rights pro-tection increases the likelihood of data thefts,breaches, and cyber-crime—a serious concernamong senior executives (PricewaterhouseCoop-ers, 2005). If customer records or other sensitiveinformation were compromised, a firm’s reputa-tion and its customers’ loyalty may be severelydamaged, while posing significant financial costs.These costs cannot simply be passed on to

Copyright 2012 John Wiley & Sons, Ltd. Strat. Mgmt. J., 34: 877–889 (2013)DOI: 10.1002/smj

Research Notes and Commentaries 879

customers because (1) final sales typically occuroutside the country, and (2) competitors investingin countries with better property rights will havelower costs (Brouthers et al ., 2008). As a result,host country property rights institutions will be acrucial determinant of location choice for MNEs.

Clearly specified and well-functioning propertyrights allow firms to use, transform, and sell theiroffshored services, and utilize them in economicactivity and trade (Besley, 1995). They lowerappropriability hazards by allowing for the betterspecification and monitoring of contracts amongpartners (Oxley, 1999), and providing disputeresolution mechanisms. Thus, firms are more likelyto locate their offshored services in countries thatprovide better property rights protection.

However, it is important to distinguish betweenformal property rights regulations and de factoprotection. Notwithstanding the formal adoptionof property rights regulations, governments fre-quently fail to implement these policies altogether,delay or partially implement adopted policies, orsupport de facto departures from formal rules. Thisdivergence may occur due to conflicting demandsof external, global constituencies on the one hand,and internal, domestic goals on the other (Meyeret al ., 1997). Domestic interests that are at oddswith the globally diffusing policy may prevent itscomplete implementation (Weber et al ., 2009; Zel-ner et al ., 2009). Further, delayed or incompleteimplementation may occur if only weak globalpressures exist initially. Finally, de facto prac-tices may also lag behind formal policies due tobureaucratic and administrative costs involved inimplementation (Weiss and Jacobson, 1998).

Thus, formal regulations are imperfectly corre-lated with their effectiveness. For MNEs assessingthe hazards or risks surrounding the security oftheir assets in a host country, de facto propertyrights protection will play a crucial role. As aresult, I hypothesize that:

Hypothesis 1: A firm’s likelihood of locating itsoffshored information services in a host countryincreases with the extent of the host country’s defacto property rights protection , ceteris paribus.

Role of related experience

Experience theorists argue that an organization’sinstitutional environment influences the practicesand capabilities it builds as its overall level of

experience increases. Since these practices are con-strained by the institutional environment in whichthey develop, they may not ‘fit’ in another countrywith dissimilar institutional environments (Kos-tova, 1999) although firms will attempt to retrieveand replicate them in different circumstances.

A firm operating in countries with weak defacto property rights protection will develop orga-nizational routines and practices to overcome theexternal institutional void and safeguard its assets.Practices could include employee training, estab-lishment of private security systems, spot-checkroutines, and others. Many firms in the infor-mation services offshoring industry develop addi-tional practices such as obtaining the InternationalOrganization for Standardization (ISO) certifica-tion for data management, encrypting data, or pre-venting the use of removable and portable media tolimit their liability. As firms retrieve, replicate, andexploit their accumulated practices in their foreignexpansion, their practices will ‘fit’ their environ-ments in other countries with weak property rightsprotection (Kostova, 1999). In countries with goodproperty rights protection, however, the same prac-tices may simply pose additional costs to the firm,reducing the ‘fit’ between practices and environ-ment. Hence, a firm’s international location choiceis likely to depend on its prior experiences.

The literature examining a firm’s experiencehas primarily focused on the similarities anddifferences between the MNE’s home and hostinstitutions (Tallman, 1988; Kostova and Roth,2002) or some aggregate difference based on theMNE’s international experience (Li, 1994; Deliosand Henisz, 2003). Yet, this masks the diverseexperience profiles of MNEs, given their globalsubsidiary networks (Perkins, 2008). As MNEsexpand their subsidiary network, their organiza-tional practices are influenced by the propertyrights protection of each of those countries. Tothe extent that they face similar challenges in newlocations, they can utilize their established prac-tices. The fit between the MNE’s practices and thehost country de facto property rights protection islikely to be largest when experience is gained in asetting similar to the host country under consider-ation for investment. Thus, I hypothesize that:

Hypothesis 2: A firm’s likelihood of locating itsoffshored information services in a host countryincreases with the extent of similarity between itsoverall international property rights experience


880 S Jandhyala

and the host country’s de facto property rightsprotection , ceteris paribus.

Moderating role of related experience

The value of a firm’s related experience dependson the extent of host country protection (Deliosand Henisz, 2000). While the ‘fit’ between orga-nizational practices and the environment willincrease the likelihood of entry in all countries,I propose that it will have a larger impact in coun-tries with weak property rights protection.

In countries with weak de facto property rightsprotection, the lack of related experience willbe associated with greater property hazards andresulting costs. For offshored services, integrityof data, information security, and cyber crimeall become issues of importance. However, incountries with strong de facto protection, the lackof related experience is likely to be associatedwith higher implementation costs. The routinesand practices of alternate, private mechanismsof property rights protection impose additionaloperating costs that may not be necessary in theseenvironments. The additional costs in the first case,that is, in countries with weak property rightsprotection, are likely to be higher than the second.As a result, the value of related experience indetermining location choice is higher for countrieswith weak rather than strong de facto propertyrights protection.

Further, in countries with weak de facto pro-tection, rules are more likely to be discriminatoryand opaque as compared to those with strongprotection (Eden and Miller, 2004) and greaterfamiliarity and experience may be required tonavigate the institutional landscape. Thus, incountries with weak protection, related experiencewould have added value as compared withcountries with strong protection. Taken together,I hypothesize that:

Hypothesis 3: The positive effect of relatedexperience on a firm’s likelihood of locating itsoffshored information services in a host countryis smaller in countries with strong rather thanweak de facto property rights protection .

EMPIRICAL ANALYSIS

To test the above arguments, I observe investmentsin greenfield information services projects over the

time period 2002–2006. This includes investmentsin call/contact centers (such as helpdesks, technicalsupport, after sales, employee enquiries, andanswering services), and in shared service centers(such as claims processing, account processing,transaction processing, human resource and dataprocessing).

From the Locomonitor database (UNCTAD,2005) I draw firms that have made at least oneinvestment in the information services sector overthis time period. I observe a sample of 152 firmsfrom 17 countries. A little over half of the samplefirms (55%) originate from the United States(Table 1).

Although every country in the world could be apotential host country for investment, a minimumthreshold of infrastructure, human capital, andgovernment initiatives must be crossed for firmsto consider investment. Based on these criteria, Iconsidered any country that appeared on the A.T.Kearney’s Offshore Location Attractiveness Index(AT Kearney, 2004) from 2003 (the first year forwhich the report is available) to 2006 to be apotential host country, generating a list of 50 hosts.Missing data reduced this to a sample of 48 hostcountries.1 Host countries are listed in Table 2.

Dependent variable

The main dependent variable is foreign investmentby a firm in a greenfield project in the informationservices sector. The dependent variable is a binarymeasure that takes the value of ‘1’ if a firm made

Table 1. Home countries in sample

Homecountry

Number offirms Home country

Number offirms

Australia 2 Netherlands 2Bermuda 2 Norway 1Canada 2 South Korea 2Denmark 1 Spain 1Finland 2 Sweden 9France 8 Switzerland 2Germany 10 United Kingdom 8India 3 United States 84Japan 13

1 The two countries not included are United Arab Emirates andVietnam.



Table 2. Host countries with total investments by firmsin estimating sample (2002–2005)

Hostcountry

Number ofinvestments

Hostcountry

Number ofinvestments

Argentina 4 Mauritius 0Australia 8 Mexico 3Brazil 2 Morocco 2Bulgaria 1 New Zealand 0Canada 15 Pakistan 1Chile 4 Panama 1China 17 Philippines 3Costa Rica 2 Poland 7Czech Republic 6 Portugal 3Egypt 2 Romania 1Estonia 1 Russia 1France 4 Senegal 0Germany 3 Singapore 3Ghana 0 Slovakia 7Hungary 6 South Africa 1India 35 Spain 7Indonesia 0 Sri Lanka 0Ireland 12 Thailand 3Israel 1 Tunisia 1Jamaica 0 Turkey 0Jordan 0 Ukraine 0Latvia 0 United Kingdom 16Lithuania 1 United States 4Malaysia 8 Uruguay 1

an investment in a new greenfield project in a hostcountry in a given year, and ‘0’ otherwise.

Independent variables

Host country de facto property rights protection:I use four different measures to observe this con-struct. The first is the host country Rule of Lawindex of the World Bank’s Worldwide Gover-nance Indicators (Kaufmann, Kraay and Mastruzzi,2010) to measure the quality of contact enforce-ment, property rights, police and courts, as wellas the likelihood of crime and violence. Thecomposite measure ranges from approximately−2.5 to 2.5, with higher values corresponding tostronger protection. The second measure is theInternational Country Risk Guide’s (ICRG)2 lawand order index, which measures both the strengthand impartiality of the legal system as well asan assessment of the observance of the law. This

2 The ICRG is updated monthly online by The PRS Group: EastSyracuse, NY.

indicator ranges from zero to six, with higher val-ues corresponding to stronger protection. Third,I use the count of property thefts obtained fromthe United Nations Office of Drugs and Crime(UNODC).3 Although these data are available foronly about half of the sample, with potential dif-ferences in reporting across countries, I include itas the most direct measure of de facto propertyrights protection. Finally, I include the averagesoftware piracy rate from the Business SoftwareAlliance (BSA, 2006). The piracy rate is based onthe difference between demand (estimated usinghardware purchases) and licensed sales of soft-ware. Although this measure does not directly cor-respond to data integrity and information security,it is an objective, internationally comparable, timevarying measure that is highly visible to investors.

Firm’s related experience: For each firm i ,I capture home country and its network ofglobal subsidiaries,4 drawn from the Directory ofCorporate Affiliations (2002–2005) database fromLexis Nexis. I construct a similarity weightedexperience measure in the home and host countriescompared to the target host country as follows:

Related Experienceij ,t−1

= 1

k

∑

q=1....k<>j

Niq ,t−1

1 + (pq ,t−1 − pj ,t−1

)2

Where,Related Experienceij,t-1 = the similarity

weighted experience measure of firm i inrelation to host country j

Niq = number of local subsidiaries of firm i incountry q

pq = de facto property rights measure in countryq

pj = de facto property rights measure in hostcountry j

k = total number of countries over which themeasure is averaged

The numerator captures the extent of operationsin a country, while the denominator captures the

3 Theft is defined as depriving a person or organization ofproperty without force and with the intent to keep it, whileexcluding events such as burglary, robbery, housebreaking, andthefts of motor vehicles. https://www.unodc.org/unodc/en/data-and-analysis/statistics/data.html (24 November 2010).4 On average, a firm has subsidiaries in 7.7 other countries inthe sample with a standard deviation of 9.3.


882 S Jandhyala

similarity of the country with the target hostcountry. Thus, extensive operations in a similarcountry lead to higher values of this measure. Thefinal measure is the average value of experienceacross all other countries.

To illustrate this concept, consider two U.S.firms from the data in the year 2004—PerotSystems and Veritas Software. The first is aninformation technology services provider with asubsidiary in India and the second a softwarecompany with a subsidiary in Israel. Considertheir likelihood of investment in Thailand. In2004, the rule of law index for Thailand, India,Israel, and the United States were 0.07, 0.10,0.82, and 1.41 respectively. For Perot Systems,the rule of law they face in Thailand is verysimilar to what their subsidiary (in India) faces,while Veritas Software’s subsidiary (in Israel)faces very different conditions. Correspondingly,the similarity weighted experience measure forPerot Systems with respect to Thailand is 0.035while it is 0.02 for Veritas Software. Thus, basedon Hypothesis 2, I expect this variable to have apositive and significant coefficient.

Control variables

At the firm level, I first control for firm size(log[assets]) as larger firms may be more likelyto invest in any host country. Next, firms in theservice sector may be advantaged in their abilityto learn or in their ability to manage projects acrosscountries. Thus, I include a dummy that is equalto ‘1’ if a firm belongs to the ICT or businessand financial service industries. Finally, firmswith high knowledge intensity may face additionalrisks (Berry, 2006) and I include the ratio ofresearch and development (R&D) expenditure tototal sales.

At the host country level, I control for differ-ences in formal regulations (de jure) governingproperty rights protection in two ways. First, Iaccount for differences in formal regulations indata integrity, information security, and cyber-crime among host countries. I code a dummyfor country’s adoption of a copyright law to pro-tect software drawn from the World IntellectualProperty Organization (WIPO)5, law directories,consulting firm reports and country Web sites.

5 The WIPO Lex database allows access to intellectualproperty laws and treaties of the members of WIPO,

Next, I code a dummy to indicate if a coun-try has laws on electronic commerce as identi-fied by the United Nations Commission on Inter-national Trade Law (UNCITRAL). I also codedummy variables to indicate if a state is a sig-natory to an international agreement (Berne Con-vention, WIPO’s Copyright Treaty) that providesprotection for information assets. Finally, I con-sider signatures to the Council of Europe’s Con-vention on Cybercrime (COE). By aggregating, theformal regulations index ranges from 1 (Algeria,Morocco, Tunisia) to 5 (Canada, France, USA).Alternately, I also control for regime type usingthe democracy index (Jaggers and Gurr, 1995) asdemocratic governments have been shown to pro-vide stronger regulations for property assets ascompared with their nondemocratic peers (Li andResnick, 2003).

Low costs can also be assumed to driveoffshoring projects and I proxy for this constructusing the log of per capita gross domestic product(GDP). Since market affluence and growth havealso been shown to influence location choices(Flores and Aguilera, 2007), I include the log ofGDP and GDP growth rate. In addition, countrieswith good telecommunication infrastructure mayalso be more attractive to investors (Doh et al .,2009). Hence, I include the log of the total numberof Internet users from the world developmentindicators (WDI).6 Finally, I control for the extentof FDI in the host country (FDI as a percentage ofGDP from WDI).

I also include controls at the home-host dyadiclevels. I include a dummy that takes the valueof ‘1’ if the home and host countries share acommon language and a measure of the absolutetime difference between the capital cities of thehome and host countries,7 both obtained from theCentral Intelligence Agency’s World Factbook .8 Inorder to avoid contemporaneous correlation, I lagthe independent and control variables by one year.

the United Nations, and the World Trade Organization.http://www.wipo.int/wipolex/en/about.html (13 October 2012).6 Although this variable is expected to be positively correlatedwith infrastructure, it could also be associated with greater levelsof potential threats in ICT services. Hence, the expected sign ofthis variable is not obvious.7 The directionality of the time difference is not obvious, havinglarge time differences may allow for continuous delivery ofservices but may also introduce other types of costs.8 https://www.cia.gov/library/publications/the-world-factbook/(13 October 2012).



Estimation technique

The dependent variable Yij,t is a dichotomous entrydecision. I first use the standard logit model asthe primary specification. I include year dummiesand cluster standard errors on the firm to allowfor unobserved firm heterogeneity that impacts afirm’s choices across host countries.

I also report results using a conditional fixedeffects logit model. Since my primary specificationincludes firm-country-years in which no invest-ment occurred, it is possible that the propensityto enter any host country is confounded with thedeterminants of entry into a specific country. Theconditional logit specification (McFadden, 1974)addresses this concern and I report results usingthis alternate model as well. However, variablesthat vary only by firm (as opposed to across coun-tries) are not estimated in this specification; thusI do not obtain coefficient estimates of firm-levelcontrol variables.

RESULTS

Table 3 presents the summary and correlationstatistics for the variables used in the estimationand the main results are reported in Table 4.Models 1–4 are logistic regression models andModels 5–8 conditional logit models.

Hypothesis 1 predicted that a firm’s likelihoodof locating its offshored information services ina host country increases with the extent of thehost country’s property rights protection. In Model1, the coefficient of the rule of law index ispositive and highly significant, suggesting that asthe rule of law index increases (or with stronger defacto property rights protection), the likelihood ofinvestment by a firm in the host country increases.In a simple model without interaction effects,setting all variables at their mean levels (anddummies equal to ‘0’), a unit standard deviationincrease in the de facto property rights measurefrom its mean value increases the likelihood ofentry by 26–117 percent. Thus, I find support forHypothesis 1.

Next, I focus on the related experience measuresto test Hypotheses 2. For each measure of defacto property rights protection, I introduce thecorresponding related experience measure. Weexpect relevant experience to be positively relatedto the likelihood of entry. As expected, this

coefficient is significant in all models exceptModels 3 and 8. In a simple model withoutinteraction effects, setting all variables at theirmean levels (and dummies equal to ‘0’), aunit standard deviation increase of the relatedexperience measure from its mean value increasesthe likelihood of entry by a firm in a given hostcountry between 17 and 28 percent. This resultthus provides support for Hypothesis 2.

Next, I consider the interaction between de factoproperty rights protection and the correspondingrelated experience measures. The coefficient of thisvariable is significant across all the models, pro-viding support for the argument (except Models3 and 7). In an average host country (with meanrule of law), a firm that is high in RelatedExperi-ence (one standard deviation above the mean) hasa 62 percent higher likelihood of investment thanan average firm but only an 18 percent higher like-lihood in a country with strong property rights. Tointerpret the interaction terms, I also use the simu-lation based approach implemented in Stata usingthe intgph routine (Zelner, 2009). Figure 1 depictsthe estimated relationship between de facto prop-erty rights protection proxied by the rule of lawindex (X axis) and the likelihood of investment (Yaxis) for firms with Mean levels of RelatedExperi-ence and Mean + SD levels of RelatedExperience,along with their confidence intervals. The rela-tive increase in probability of investment for firmshigh in RelatedExperience decreases as rule of lawincreases. Taken together, I interpret these resultsto provide support for Hypothesis 3.

I run a series of robustness tests to confirmthe validity of the results and report the resultsusing the rule of law index as the proxy for defacto property rights protection (results availablefrom author). I consider if the results are alteredby excluding all potential and actual investmentsin India—which has attracted a large shareof offshored service investments in this timeperiod—and find them to be similar to thosereported in the main specifications. Next, I restrictthe analysis to only U.S. firms, since they dominatethe sample. The results in this subsample are alsoconsistent with those in the full sample.

I consider alternate measures of RelatedExperi-ence to account for experience diversity—the sumand the maximum value of the RelatedExperienceto account for the firm’s total and the most rel-evant experience in relation to the host country.


884 S Jandhyala

Table 3. Summary statistics and correlations

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Mean 0.01 2.97 0.41 3.98 4.95 0.59 0.58 0.51 0.12 1.05 8.74 0.44 0.07 6.66Std dev 0.09 1.06 0.78 1.22 11.94 0.19 0.91 0.84 0.30 1.49 2.08 0.50 0.08 5.01

1 Firm investment 1.002 Formal regulations 0.03 1.003 Host rule of law

index0.03 0.50 1.00

4 Host law and orderIndex

0.02 0.26 0.69 1.00

5 Host count of thefts(in 100,000 s)

0.03 0.29 0.28 0.26 1.00

6 Host piracy rate −0.04 −0.49 −0.89 −0.66 −0.43 1.007 Related experience

(rule of law)0.04 0.12 0.23 0.16 0.05 −0.20 1.00

8 Related experience(law and order)

0.03 0.00 0.10 0.16 0.03 −0.09 0.91 1.00

9 Related experience(count of thefts)

0.02 0.06 0.04 0.01 0.16 −0.06 0.49 0.46 1.00

10 Related experience(piracy rate)

0.05 0.01 0.04 0.02 −0.01 −0.04 0.93 0.92 0.49 1.00

11 ln(assets) 0.05 −0.01 −0.01 −0.01 −0.01 0.01 0.49 0.50 0.27 0.54 1.0012 Service sector 0.01 0.00 0.00 0.00 0.00 0.00 −0.27 −0.27 −0.13 −0.29 −0.31 1.0013 R&D/sales 0.00 0.00 0.01 0.01 0.01 −0.01 −0.18 −0.19 −0.04 −0.20 −0.31 0.32 1.0014 Host regime type 0.03 0.53 0.31 0.02 0.18 −0.32 0.08 −0.04 0.00 0.01 0.00 0.00 0.00 1.0015 ln(GDP/C) 0.02 0.51 0.88 0.64 0.45 −0.87 0.20 0.08 0.04 0.03 −0.01 0.00 0.01 0.3916 ln(GDP) 0.05 0.21 0.37 0.43 0.71 −0.48 0.07 0.04 0.04 0.00 −0.01 0.00 0.00 0.1617 GDP growth rate −0.01 −0.16 −0.50 −0.43 −0.23 0.57 −0.12 −0.07 0.00 −0.02 0.02 −0.01 −0.02 −0.0718 ln(Internet users) 0.05 0.16 0.22 0.36 0.68 −0.33 0.03 0.03 0.04 −0.01 0.00 0.00 0.00 0.1219 ln(FDI/GDP) −0.02 0.08 0.03 −0.01 −0.30 0.11 0.02 0.02 −0.03 0.00 0.02 0.00 −0.02 −0.0420 Home-host time

difference0.00 −0.13 0.00 −0.03 −0.10 −0.02 −0.11 −0.12 −0.16 −0.12 −0.12 0.03 0.05 −0.08

21 Home-host commonlanguage

0.03 −0.01 0.22 0.08 0.14 −0.19 −0.03 −0.10 0.00 −0.08 −0.14 0.09 0.07 −0.01

15 16 17 18 19 20 21

Mean 8.27 25.23 4.61 15.01 0.84 5.76 0.36Std dev 1.19 1.77 3.05 1.62 0.93 4.09 0.48

15 ln(GDP/C) 1.0016 ln(GDP) 0.54 1.0017 GDP growth rate −0.48 −0.47 1.0018 ln(Internet users) 0.34 0.94 −0.36 1.0019 ln(FDI/GDP) −0.02 −0.46 0.18 −0.46 1.0020 Home-host time difference −0.04 −0.01 0.02 0.03 −0.02 1.0021 Home-host common language 0.24 0.22 −0.11 0.12 −0.12 0.09 1.00

Using either of these alternate measures, I observea similar pattern of results.

Finally, I use an alternate dependent variable—acount of the number of investments by a firm in ahost country—and estimate this regression using azero inflated negative binomial model. This modelallows overdispersion through the splitting processthat models the outcome as zero or non-zero.9

9 I use the host country’s population and geographic distancefrom the home country as well as the firm’s net sales in thebinary probability regression to separate the zeros from theremaining counts.

Thus, it allows us to take into account that notall host countries are equally attractive to all firms.The results are also consistent with those observedabove.

DISCUSSION

With advances in ICT, the assumptions of co-location and the simultaneous production andconsumption of services are being challenged. As aresult, many modern service sectors are acquiring



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ence

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(0.1

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(0.1

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ual

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ln(F

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)(0

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)(0

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)


886 S Jandhyala

Tabl

e4.

(Con

tinue

d)

12

34

56

78

Yea

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mm

ies

Yes

Yes

Yes

Yes

No

No

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ions

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1,87

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ed

some characteristics of manufactured goods andMNEs are able to invest in efficiency-seekingFDI (Nachum and Zaheer, 2005) to exploit thedifferences in country attributes to increase theirworldwide efficiency.

Initial academic research on this phenomenonfocused on the low cost aspects of the host country(Doh, 2005), while more recent work has begunto examine other location advantages such as thepresence of a skilled workforce (Lewin et al .,2009), familiarity with language and culture (Dohet al ., 2009), the existence of clusters (Zaheer,Lamin, and Subramani, 2009). However, as Floresand Aguilera (2007) show, MNE location choicesare better explained by considering institutionalfactors in addition to economic and culturalfactors. Specifically, when a firm’s proprietaryassets are involved, property rights issues remaina big concern.

The results in this paper show that firms areless likely to locate their offshored investmentsin information services in countries with poor defacto property rights protection as they are unableto secure proprietary data including customerinformation and databases. However, experienceand familiarity with property rights institutionssimilar to that of the host country moderates thiseffect. Unlike prior research that has narrowlyfocused on a firm’s experience at home or itsaggregate regional or worldwide internationalexperience (Tallman, 1988; Li, 1994; Delios andHenisz, 2003), I consider how each subsidiaryof the MNE’s global network provides experi-ence across a greater variety of property rightsinstitutions.

However, this analysis is limited in its empiri-cal examination of the particular mechanisms thatallow a multinational firm to overcome the hostcountry institutional deficits. In addition to learn-ing and transferring organization practices, MNEscould also form better and more accurate expecta-tions about de facto protection in any given hostcountry, and avoid countries with weak protectionor use alternate contractual systems. To empiricallyestablish the relative magnitude of these effects issubject to future research.

A second limitation is that I can only identifythe number of subsidiaries a firm has in a givencountry, but not the age of those subsidiaries. Inaddition, the data on FDI and subsidiaries comefrom different data sources and measure differenttypes of activities. The FDI that I measure is purely



0.0

1.0

2.0

3

Pr(

inve

stm

ent=

1)

-2 -1 0 1 2

Rule of law [mean centered]

Predicted Probability at Mean Related ExperiencePredicted Probability at Mean+SD Related Experience

Mean - SD Mean + SD

Figure 1. Predicted probability of investment of related experience and de facto property rights protection

in offshored information services. The subsidiariesdatabase (Directory of Corporate Affiliations) doesnot distinguish between information services andmanufacturing or other types of activities that afirm could be pursuing. Hence, if the knowledgegained by a firm by operating a manufacturingplant in a foreign country does not transfer tooperating a service facility, I would inappropriatelyassign experience to a firm that did not have any.

Finally, I observe only greenfield investmentsin call and contact centers. For many firms, how-ever, the choice to contract their information ser-vices outsourcing to an independent vendor is anattractive alternative that data limitations preventme from examining. A further limitation is that Ican only observe entries, but not the performanceof these entries. As some recent literature hasbegun to show, there may a link between institu-tional development, internationalization sequenceand firm performance (Chan, Isobe, and Makino,2008; Goerzen and Makino, 2007). To explore thislink between related knowledge and internationalexpansion is a subject for future work.

ACKNOWLEDGEMENTS

I thank the editor, JT Li, as well as two anony-mous reviewers for their helpful and insightful

comments. I am also grateful to Heather Berry, JoeClougherty, Witold Henisz, Steve Kobrin, EdwardMansfield, Evan Rawley, Harbir Singh, JenniferSpencer, as well as seminar participants at TheWharton School, University of Southern Califor-nia, George Washington University, Emory Uni-versity, London Business School, Indian Schoolof Business, Offshoring Research Network Forum,International Society for New Institutional Eco-nomics, Strategy and Business Environment Con-ference, Academy of International Business andthe Academy of Management for comments onearlier drafts of the paper. Funding from theMack Center for Technological Innovation of TheWharton School, the University of PennsylvaniaLauder– CIBER and the Ackoff Fund of the Whar-ton Risk Management and Decision ProcessesCenter is gratefully acknowledged.

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