To measure multinational (MNE) activity at the macro level, many scholars use FDI data. As FDI data are based on capital flows between home and host countries, a mismatch may exist between financial and operational MNE activity. Comparing operational sales data and FDI data of US MNEs, we find that the FDI data bias is a) country-specific, and b) related to the type, quality and structure of the host country's financial market. The implication of this finding is that sample, research question and the FDI measure are interrelated, potentially leading to over- or under- estimations of the statistical results of FDI data-based studies. We illustrate the importance of our findings by a review of FDI data based articles published in the Journal of International Business Studies the last two decades.

 

Co-authors: Arjen Slangen, Roger Smeets, Jean Francois Hennart

 

Status: in progress

 

 

 

Prior studies have argued and found that cultural distance reduces trade flows between countries. However, these studies have analyzed total merchandise trade, and have overlooked that the main component of such trade, arm's length trade, has a substitute, viz. arm's length local affiliate sales. This paper shows that it is vital to take into account these affiliate sales, since they are hampered more by cultural differences than arm's length trade. Drawing on the liability of foreignness and entry mode literatures, we argue that as the cultural distance to a country increases, firms will find it increasingly attractive to serve that country through arm's length exports rather than through local affiliates. We therefore hypothesize that the ratio of arm's length local affiliate sales to arm's length exports decreases with cultural distance, and that arm's length exports may hence increase rather than decrease with this distance. Analyzing the effects of various cultural distance measures on arm's length US foreign affiliate sales and arm's length US exports in the 1983-2003 period, we find that cultural distance has a negative impact on the ratio of arm's length local sales to exports, and a positive impact on arm's length exports.

 

Co-authors: Arjen Slangen, Jean Francois Hennart

 

Status: under review