Divestment of Foreign Manufacturing Affiliates: Country Platforms, Multinational Plant Networks, and Foreign Investor Agglomeration

Abstract

We develop hypotheses concerning the impact of multinational firms' international plant networks and host country foreign investor agglomeration on the divestment of manufacturing affiliates, drawing on real option theory and location and agglomeration theory. We test our hypotheses on a comprehensive sample of 1078 Asian manufacturing affiliates of Japanese multinational firms in the electronics industry during the turbulent years preceding and into the Asian financial crisis (1995-1998). We find evidence that multinational firms both maintain flexibility options by operating a network of platform affiliates in multiple Asian countries, and exercise these flexibility options through divestments of affiliates that do not add flexibility value. Affiliates of which the location decision at entry was dominated by the local presence of Japanese investor agglomeration or buyer-supplier agglomeration within vertical business groups have higher divestment rates, suggesting that agglomeration leads to 'adverse selection' of affiliates with weaker competitiveness.

Keywords: Business, Business groups, Country, Decision, Electronics industry, Firms, Flexibility, Hypotheses, Impact, Industries, Industry, International, Manufacturing, Multinational firms, Networks, Options, Selection, Theory, Value