Effects of Location Diversification and Corporate Governance on Multinational Enterprises' Financial Performance and Risk‐taking: Evidence from Taiwanese Enterprises

• DOI: http://doi.org/10.1111/cwe.12128
• Author: Cheng‐Chang Lu,Tsung‐Han Kuan,Chwen‐Chi Liu
• Date: 01 September 2015
• Published date: 01 September 2015

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China & World Economy / 63–84, Vol. 23, No. 5, 2015

©2015 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Effects of Location Diversification and Corporate

Governance on Multinational Enterprises’ Financial

Performance and Risk-taking: Evidence from

Taiwanese Enterprises

Cheng-Chang Lu, Tsung-Han Kuan, Chwen-Chi Liu*

Abstract

This study investigates the location choice performance of foreign direct investment (FDI)

originating from small- and medium-sized multinational enterprises established in newly

industrialized economies. In this study we integrate location diversification, breadth and

corporate governance to examine the performance of Taiwanese enterprises investing in

Chinese mainland. Examining Taiwanese manufacturing enterprises from foundational,

traditional and high-technology aspects, our findings demonstrate the following: (i) diversifying

the location choice negatively affects the return of assets; (ii) investments in regions with an

abundant population positively affect the performance of Taiwanese traditional manufacturing

enterprises; and (iii) a higher percentage of insider holdings in Taiwanese enterprises results

in better FDI performance. We conclude that the performance of FDI originating from Taiwanese

enterprises varies depending on industrial and governance characteristics. We suggest that

the location choice for Taiwan FDI in Chinese mainland should be determined by the

characteristics of the industry. Chinese mainland should attract multinational enterprises

from emerging markets according to the characteristics of regions.

Key words: corporate governance, foreign direct investment, geographic diversification,

performance, risk

JEL codes: E220, F210, F230

I. Introduction

Foreign direct investment (FDI) is a key factor that has affected economic growth in both

*Cheng-Chang Lu (corresponding author), Associate Professor, School of Finance, Hubei University

of Economics, Wuhan, Hubei, China. Email: cclu1031@yahoo.com.tw; Tsung-Han Kuan, Assistant

Professor, Department of Economics, Feng Chia University, Taichung, Taiwan, China. Email:

kuanth@mail.fcu.edu.tw; Chwen-Chi Liu, Professor, Department of Risk Management, Feng Chia

University, Taichung, Taiwan, China. Email: liuc@fcu.edu.tw.

64 Cheng-Chang Lu et al. / 63–84, Vol. 23, No. 5, 2015

©2015 Institute of World Economics and Politics, Chinese Academy of Social Sciences

developed and emerging countries. The impact of FDI on the development of multinational

enterprises (MNEs) and economies has been the focus of an increasing number of studies

in international business. In the empirical FDI literature, attention has predominantly been

paid to the impacts of FDI on the performance of large MNEs (Pantzalis, 2001; Pantzalis

et al., 2008; Kim et al., 2009; Kyaw et al., 2011). However, there is little research regarding

the impact of FDI on small- and medium-sized multinational enterprises (SMEs) based in

emerging countries.

According to a report from UNCTAD (2009), the amount of outward FDI from SMEs

based in emerging markets has increased dramatically in the recent two decades. Specifically,

the location strategies of SMEs in emerging economies differ from those of MNEs in

developed countries (Makino et al., 2002). Therefore, the FDI strategies of SMEs require

more attention. Taiwanese enterprises have actively participated in international

investments to access potential markets (Dai and Liu, 2009). According to data from the

National Bureau of Statistics of China, a substantial number of Taiwanese enterprises

have invested in the Chinese mainland. In addition, SMEs are the largest FDI investors

among Taiwanese enterprises, and Taiwanese enterprises exhibit many of the

characteristics of SMEs in emerging economies throughout the world (Lei and Chen,

2011). Thus, the study of Taiwanese SMEs in Chinese mainland may be helpful in

formulating the FDI strategies of SMEs based in other emerging economies. The present

study attempts to fill this gap in the research by investigating the impacts of SME

investment strategies on firm performance using FDI evidence from Taiwanese SMEs

investing in the Chinese mainland.

Dunning (1998) argues that several factors led MNEs to disperse production across

locations over the 1970s and 1980s, whereas other factors caused MNEs to concentrate

particular types of production in a limited number of locations. Dunning indicates that

MNE production has gradually moved toward specific immobile clusters or regions that

are endowed with complementary value-added activities or assets. In addition, the evidence

from the research of Makino et al. (2002) demonstrates that most SMEs from newly

industrialized economies have relied on production contracts and network linkages with

firms based in developed countries.

Many published studies address the location motives of large MNEs. However, FDI

outflows from SMEs based in emerging economies have attracted increasing attention

(e.g. Dunning, 1998; IMF, 2002; UNCTAD, 2009). The evidence from the published

literature indicates that FDI from SMEs significantly contributes to economic growth

and employment in emerging markets (Acs et al., 1996; Harvie and Lee, 2002; Beck et al.,

2005; Ayyagari et al., 2007). Therefore, the present paper investigates the FDI strategies

of Taiwanese SMEs invested in Chinese mainland to determine whether these investments