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Journal of International Business Studies (2011) 42, 545–557

& 2011 Academy of International Business All rights reserved 0047-2506 www.jibs.net


Historical ties and foreign direct investment: An exploratory study Shige Makino1 and Eric WK Tsang2 1

Department of Management, The Chinese University of Hong Kong, Shatin, Hong Kong; 2 School of Management, University of Texas at Dallas, Richardson, USA Correspondence: Shige Makino, Department of Management, The Chinese University of Hong Kong, Shatin, NT, Hong Kong. Tel: þ 852 2609 7636; Fax: þ 852 2603 5104; E-mail: [email protected]

Abstract Recent research suggests that the distance between countries in terms of culture, institutions, geographic proximity, and economic development matters in the foreign direct investment (FDI) decisions made by firms. This study focuses on the historical ties between countries as an additional factor affecting such decisions. In particular, it examines three major historical factors that affect cross-country ties with Vietnam, namely, Chinese occupation and conflict, French colonization, and socialist ideology, and examines the ways in which these historical ties have influenced FDI. The database consists of 631 wholly owned subsidiaries and 1215 joint ventures formed in Vietnam by multinational enterprises from 35 countries and regions between 1989 and 1999. The results indicate that firms from Hong Kong, Taiwan, France, and former and current socialist countries tended to be early movers in Vietnam, whereas firms from Mainland China tended to be late movers. Using the example of Vietnam, this study clearly shows that historical ties can provide additional explanatory power regarding FDI decisions beyond the conventional distance variables. Journal of International Business Studies (2011) 42, 545–557. doi:10.1057/jibs.2010.53 Keywords: foreign direct investment; history of FDI and the MNE; markets and institutions; Southeast Asia; relational embeddedness

Received: 9 December 2008 Revised: 5 August 2010 Accepted: 26 August 2010 Online publication date: 2 December 2010

INTRODUCTION Research into foreign direct investment (FDI) has focused on the country-specific factors of independent countries, and examined how these factors influence the flow of FDI across the world. Recent studies have investigated the distance between countries in terms of such attributes as culture, administrative practices, geographic proximity, and economic development (Ghemawat, 2001), and how distance issues affect the flow of economic activity across borders (Kogut & Singh, 1988; Slangen, Fortanier, & van Tulder, 2007; Tsang & Yip, 2007). The basic premise of this research is that the various kinds of distance between countries make international exchanges and interactions difficult and costly. For example, geographic distance creates transportation costs that affect patterns in international trade and industrial concentration (Krugman, 1991). Cultural distance is a major source of contextual and behavioral uncertainty in host countries, and gives rise to transaction costs that may affect a foreign investor’s commitment to invest, market entry strategies (e.g., entry mode choice and timing of entry), and performance (see Shenkar, 2001, for review).

Historical ties and foreign direct investment

Shige Makino and Eric WK Tsang


Institutional distance is a major cause of foreign investors’ liability of foreignness, and makes their legitimacy-building in a host country difficult (Eden & Miller, 2004; Kostova & Zaheer, 1999; Xu & Shenkar, 2002). This stream of research assumes that the key factors affecting FDI flows are immobile across countries and focuses on the static comparison of location-specific attributes that reside independently in countries. As a result, it overlooks the effects of relational factors that have been historically developed between countries. The present study focuses on historically developed relations between countries, which we refer to as historical ties, as an additional factor affecting the investment decisions of firms. We define historical ties as historical relations between specific pairs of countries that have been developed intentionally (formal ties), or have evolved naturally over time (informal ties). Our primary purpose is to make a preliminary attempt to “bring history back into international business” (Jones & Khanna, 2006) by examining how historical ties influence the flow of FDI between home and host countries.1 We argue that historical ties can provide additional explanatory power concerning firms’ FDI activities beyond what has been captured by the effect of conventional distance variables. To demonstrate our argument, we use data on inward FDI in Vietnam. Vietnam is an excellent research setting for our analysis, as it has diverse historical links with a number of other countries as a consequence of occupation, colonization, and war. In addition, FDI has contributed significantly to the economic growth of Vietnam (Anwar & Nguyen, 2010). For instance, the stock of FDI as a ratio of GDP rose from zero in the mid1980s to over 75% in 2001 (Jenkins, 2006). The results of our analysis show that strong historical ties with Vietnam, as measured by country dummy variables, tended to have a significant impact on the timing of FDI, even after controlling for intercountry distance attributes (i.e., geographical, cultural, institutional, and economic distance), and thus provide strong support for our proposition that historical ties matter in FDI decisions.

HISTORICAL TIES AND FDI: CONCEPTUAL ISSUES Nature of Ties Historical ties represent certain types of relations, formal or informal, that develop between countries.

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Formal ties are created intentionally and take the form of agreements, treaties, and alliances aimed at promoting mutual national interests in a given domain. Examples include agreements between countries, such as free trade agreements (FTAs), economic partnerships and security alliances, and the creation of inter-governmental organizations (IGOs), such as the World Trade Organization and the Organization for Economic Co-operation and Development. Informal ties evolve naturally as a result of geographic proximity, immigration, colonization, or missionary activities, and take the form of cultural, ethnic, and social relations between individuals and nations. These ties develop in a path-dependent manner, and in some cases are based on a common cultural heritage in the form of a shared language, religion, or social norms, practices, and conventions. Ethnic ties are usually the consequence of geographic proximity and immigration. For example, ethnic Chinese live in countries throughout Southeast Asia, including Malaysia, the Philippines, Singapore, Thailand, and Vietnam. Colonization has created ties between countries or regions with dissimilar cultural contexts, examples of which include France and Vietnam, the United Kingdom and Hong Kong, and Portugal and Macau. Historical ties create an institutional framework within which interactions and exchanges between partner countries take place. Institutions are defined as a rule of the game (both formal and informal) that structure economic exchanges and interactions (North, 1990). Formal ties specify rules and procedures that are developed and enforced through official channels between countries. They are relatively durable expressions of mutually aligned intentions in regard to future and ongoing interactions in a given domain among countries (Rangan & Sengul, 2009). Agreements and treaties, for instance, specify the terms by which partner countries are to abide. IGOs specify common goals and procedures for achieving mutual benefits among member countries. Informal ties entail rules and procedures, usually unwritten, that are developed and enforced outside formal channels. These ties shape shared values, norms, and cultural beliefs, and narrow the gap in expectations and understanding among individuals in the respective partner countries. Immigration links, for instance, create social relations based on shared ethnic and cultural origins, and colony – colonizer relations promote interactions among parties between

Historical ties and foreign direct investment

Shige Makino and Eric WK Tsang


countries, and help to spread common languages, religions, social norms, and practices. Similar to institutions, historical ties provide incentive structures for economic exchanges in two ways. First, historical ties reduce the uncertainty in ongoing and future economic exchanges. From the perspective of the local stakeholders, including government bodies and business partners, reduced uncertainty about the home country of an investing firm increases their receptivity to investment, which, in turn, makes it easier for the firm to gain legitimacy in the host country. From the perspective of investing firms, reduced uncertainty about the local environment lowers the perceived transaction costs and psychological barriers associated with investing in the host country. Rangan (2000), for example, argues that a key function of the historical ties between countries is to make foreign firms’ search for and assessment of potential exchange partners easier and less costly, thereby facilitating information flow and making ongoing operations more efficient. Jones (1996) suggests that colony – colonizer relationships work not only to reduce the investing firm’s risk but also to enhance the legitimacy of the investment. He notes, “Colonial governments established similar legal and administrative structures to those in the home country, thereby greatly reducing the risks of FDI. Colonial administrators often favored firms of their own nationality, granting them contracts and concessions, and supporting them against foreign firms and sometimes even indigenous firms” (p 39). Second, historical ties enhance the social relations between parties (individuals, organizations, and even government bodies) across countries, and hence facilitate economic exchanges. The notion that economic exchanges are embedded in social relations has been well discussed in the literature (Granovetter, 1985; Uzzi, 1996). Drawing on the embeddedness perspective, Ingram, Robinson, and Busch (2005) examined the influence of connections through IGOs on bilateral trade, and found that trade between two countries increased by an average of 58% with every doubling of the strength of IGO connections. Similarly, prior studies indicate that informal ties such as ethnic Chinese ties and networks (Rauch & Trindade, 2002; Tong, 2005), immigration links (Rangan & Sengul, 2009), and prior colony – colonizer relations (Ghemawat, 2001) strengthen the social relations between countries, and play a significant role in facilitating bilateral trade and investment.

Because formal ties are usually established for the pursuit of specific goals, they may be dissolved when the goals are achieved or abandoned (e.g., the Coordinating Committee for Multilateral Export Controls and the Warsaw Pact). Informal ties, in contrast, tend to have persistent effects on economic exchanges. For instance, Russian investment in member countries of the Commonwealth of Independent States (CIS) is due in part to the existence of ties between Russia and these former Soviet republics. As Crane, Peterson, and Oliker (2005: 435) argue, “Local knowledge of Russian, as well as family, academic, and professional ties dating from the Soviet period, provide advantages for Russian entrepreneurs (vis-a`-vis their Western counterparts) operating in the CIS.” Similarly, Lundan and Jones (2001) attribute the high levels of trade and investment within the Commonwealth of Nations to the widespread use of the English language and the similar institutional structures, legal systems, and business practices of the member countries. Research generally suggests that prior colony – colonizer relationships have long-lasting, positive effects on trade. Frankel and Rose (2002) found that the positive effects of prior colony – colonizer relationships on trade were even stronger than the positive effects due to FTAs, IGOs, or geographic proximity. While historical ties clearly influence the economic relations between countries, the effects are not always positive. Relations can be disrupted or become hostile because of war, territorial disputes, or other forms of interstate conflict, which incur enormous and long-lasting human, social, and economic costs, and hinder economic progress. Naturally, economic exchange is restricted between countries that are at war or have recently experienced conflict. Research shows that interstate conflicts have a significant, negative effect on FDI inflows (Li & Vashchilko, 2010; Nigh, 1985). For example, in their study of the economic effects of the war in Sri Lanka between 1984 and 1996, Arunatilake, Jayasuriya, and Kelegama (2001) found that the costs arising from reduced inward FDI accounted for 60–85% of the total economic loss. Research also suggests that the negative effects tend to persist after the conflict has been resolved (Alfaro, Kalemli-Ozcan, & Volovych, 2008; Jensen & Young, 2008). For example, the US trade embargo against Vietnam following the Vietnam War (1959–1975) was not lifted until 1994. More recently, Li and Vashchilko (2010) found that, while interstate military conflicts impede economic

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Historical ties and foreign direct investment

Shige Makino and Eric WK Tsang


relations, security alliances promote bilateral investment between high- and low-income countries. In sum, hostile relations resulting from military conflict have a negative effect on FDI flows.

Historical Ties and Distance Historical ties and distance may have similar effects on FDI flows. For example, the effects of historical ties that have naturally arisen from colonization or immigration and the influence of cultural and administrative distance may overlap for two reasons. First, the countries that have such ties usually share the same or similar cultural or ethnic origins (in the case of immigration) or adopt similar administrative systems (in the case of colonization). Second, interactions often result in positive feedback loops, where the similarities in cultural norms or administrative practices serve to reinforce the historical ties, which, in turn, narrows the respective distance between the countries. Nonetheless, historical ties have a distinct influence on the flow of FDI, partly because the distance measures do not fully reflect the relations between the specific attributes of countries, and partly because these measures are flawed. It is not difficult to find real-life examples where the distance measure fails to capture the effect of relationspecific attributes on FDI. Despite the great cultural and administrative distance between Vietnam and France, for instance, French firms continue to invest heavily in Vietnam, as a result of the ongoing ties between the two countries. As another example, consider geographic distance, which is usually used as a proxy for transportation costs in the literature. Geographic proximity should facilitate economic exchange, but that is not necessarily the case between countries with weak or belligerent diplomatic relations. In essence, distance measures fail to capture the historical contexts in which countries develop, maintain, or destroy their unique cultural, institutional, and diplomatic relations. After all, how different or similar one country’s attributes are from another country’s has little meaning until these differences or similarities actually influence their ongoing relations (Shenkar, 2001; Shenkar, Luo, & Yeheskel, 2008). On the methodology side, Shenkar (2001) identified a number of defects inherent in the measure of cultural distance based on Kogut and Singh’s (1988) index, and argued that the effects of cultural distance on economic transactions between countries are not always symmetric, linear, or discordant.

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In brief, historical ties can have positive or negative effects on the bilateral flow of FDI and provide further explanation for the location choice of FDI beyond distance effects. In light of the foregoing discussion, we make the following general propositions. Proposition 1: Historical ties based on colonization, ethnicity, IGOs, or formal agreements facilitate FDI between the countries concerned. Proposition 2: Historical ties strained by conflict hinder FDI between the countries concerned.

HISTORICAL TIES AND FDI: THE CASE OF VIETNAM Vietnam has a history of colonization, occupation, and dominance by foreign powers. The Appendix lists some important events in Vietnam’s modern history that are related to the country’s occupation by and resistance to foreign powers. For most of the period from 111 B.C. to the early tenth century, Vietnam was under the direct rule of successive Chinese dynasties. In the seventeenth century, French missionaries arrived in Vietnam. Over the years, hostility towards the missionaries grew, as some of their teachings went against local customs. In 1847 French troops were sent to Vietnam to protect the local Catholic community, and in 1868 the Vietnamese Emperor signed a peace treaty with France. This eventually led to conflict between China and France, as China was concerned about the presence of French troops on its border. After China was defeated in the Franco-Chinese War (1884–1885), France assumed control over the entire territory of Vietnam. During World War II, Imperial Japan dislodged the French and occupied Vietnam, but allowed a collaborationist colonial French administration to continue to run the country during the occupation. The Geneva Conference of 1954 ended the French colonial presence in Vietnam, and temporarily partitioned the country into two states, pending elections that were never held. In 1976, supported by the Soviet Union, the two states were officially unified as the Socialist Republic of Vietnam. Vietnam became a member of the Council for Mutual Economic Assistance (Comecon) in 1978, which strengthened its political and economic ties with other socialist countries. In contrast, the disruption of the relations between Vietnam and the United States caused by the

Historical ties and foreign direct investment

Shige Makino and Eric WK Tsang


Vietnam War (1959–1975) led to a US trade embargo against Vietnam that was only lifted in 1994. The relationship between China and Vietnam also turned sour, culminating in the SinoVietnamese War of 1979, and diplomatic relations between the two countries were suspended for the following decade. This brief history illustrates how Vietnam has been dominated or politically influenced by China, France, the United States, and other socialist countries over the course of much of its history. The long period of Chinese domination and influence has resulted in many Chinese characteristics being embedded within Vietnamese culture, thereby making the country a part of the Chinese cultural sphere. Nevertheless, whereas Taiwan and Hong Kong maintained strong economic relations with Vietnam, following the Sino-Vietnamese War, China did not resume diplomatic relations until 1991. It is also impossible to dismiss the (ongoing) French influence. In the late nineteenth century and early twentieth century, firms from France invested heavily in French Indochina, which included Vietnam, Cambodia, and Laos (Nørlund, 1991). Much of the coal, tin, and zinc mined in Vietnam was shipped to France, and Vietnam was a good market for French manufactured goods. Many of the Vietnamese who grew up during the period of French colonial rule are able to speak French, and many intellectuals and professionals were educated in France (Hiebert, Thayer, & Chanda, 1993). Although the Soviet Union did not rule Vietnam, it provided the modern-day ideological and political foundations of the country. For instance, Vietnam’s third constitution, which was written in 1980, was based on that of the Soviet Union. The Friendship Pact signed between Vietnam and the Soviet Union was essentially a military alliance, and throughout the 1980s Vietnam conducted most of its trade with the Soviet Union and other Comecon countries. The United States, which supported the regime of South Vietnam, suspended its diplomatic and economic relations with socialist Vietnam after the Vietnam War. In summary, China and regions populated by Chinese (including Taiwan and Hong Kong), France, the former Soviet bloc countries, and the United States have significantly influenced the development of the various social, economic, and political institutions in Vietnam. Hence Vietnam has strong historical ties, some positive and some negative, with these countries and regions. Because

of such ties, firms from the foregoing countries and regions generally have better knowledge of Vietnam, and thus have lower levels of perceived uncertainty in and higher levels of receptiveness to investing there. Except for those from Mainland China (because of the Sino-Vietnamese War) or the United States (because of the Vietnam War), firms from these countries are more likely to have been early investors in Vietnam after foreign investors were allowed to access the domestic market. In line with Proposition 1, we therefore propose the following three hypotheses. Hypothesis 1: Firms from Taiwan and Hong Kong (non-Mainland Chinese ties) are more likely to have entered Vietnam earlier than firms from other countries. Hypothesis 2: Firms from France (French ties) are more likely to have entered Vietnam earlier than firms from other countries. Hypothesis 3: Firms from former or current socialist countries (socialist ties) are more likely to have entered Vietnam earlier than firms from other countries. As Proposition 2 predicts, it is likely that ties between Mainland China and Vietnam have been less conducive to FDI from Chinese firms in Vietnam. Owing to the suspension of diplomatic and economic relations between the two countries throughout the 1980s, firms from Mainland China tended to be late investors compared with firms from other countries. The tension between China and Vietnam has been particularly damaging, because state-owned enterprises in China have been the driving force behind outward FDI (Morck, Yeung, & Zhao, 2008). As state-owned entities, these enterprises are obliged to strictly adhere to Chinese foreign policy. The argument leads to the following hypothesis. Hypothesis 4: Firms from Mainland China (Mainland Chinese ties) are less likely to have entered Vietnam earlier than firms from other countries. Although the United States also has historical ties with Vietnam, US firms were forbidden to invest in Vietnam until the US embargo was lifted in 1994, well after the beginning of the observation period of 1989–1999 in our sample. Therefore we did not

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Historical ties and foreign direct investment

Shige Makino and Eric WK Tsang


analyze the impact of US ties on the FDI decisions of US firms in Vietnam.

METHODOLOGY Data We used a database compiled from issues of The List of Licensed Projects published by the Ministry of Planning and Investment of Vietnam between 1988 and mid-2000. This official database provides information on all investment projects registered by foreign investors with the Vietnamese government in the 12 years after the country opened its doors to foreign investment in 1988. The sample included 631 wholly owned subsidiaries and 1215 joint ventures formed in Vietnam by MNEs from 35 countries and regions. Construction and manufacturing were the major industrial sectors for inward FDI in Vietnam, which together accounted for 60.4% of the total number of investments. The number of inward FDI peaked in the mid 1990s but then declined. Countries with historical ties with Vietnam tended to be major investors. For example, FDI inflow, in terms of the number of individual investments, from Hong Kong and Taiwan accounted for over 30% of the total FDI inflow into Vietnam. FDI from France alone accounted for 5.6%, and Russia/USSR 2.3% of the total. Variables Timing of entry. We measured the timing of entry by period of registration, which is the number of days between the date a project was registered and the end of our observation period on 30 December 1999. A long period of registration means that the project was registered early, and a short period of registration means that it was registered late. This variable was used as a dependent variable in the regression analysis to test the hypotheses. Historical ties. Historical ties were represented by five dummy variables. Mainland Chinese ties was coded as 1 if the home country was Mainland China, and 0 otherwise. Non-Mainland Chinese ties was coded as 1 if the home region was Taiwan or Hong Kong, and 0 otherwise. French ties were measured in two ways. The first measure was based on French investment alone (French ties), and the other was based on investment from a member of la Francophonie, which includes France and the

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French-speaking countries, such as Belgium, Canada, Luxembourg, and Switzerland in our sample (French [broad] ties). These variables were coded as 1 if the home country was one of these countries, and 0 otherwise. Socialist ties was coded as 1 if the home country was a former member of Comecon or one of the other socialist countries, and 0 otherwise.

Cultural distance. We measured cultural distance by the difference between Vietnam and the home country in terms of Hofstede’s (1980) cultural dimensions, and based on Kogut and Singh’s (1988) formula. Administrative distance. To measure administrative distance, we used the 12 items reported in the International Country Risk Guide, including government stability, socioeconomic conditions, investment profile, internal conflict, external conflict, corruption, military involvement in politics, religious tensions, law and order, ethnic tensions, democratic accountability, and bureaucracy quality, each of which represents a certain aspect of the economic, social, and political institutions of the home country. We used the scores reported as of 2007. Following Slangen et al. (2007), we also measured the administrative distance between Vietnam and the home country based on Kogut and Singh’s (1988) formula, ADj ¼

12 h X

i ðIij  Iip Þ2 =Vi =12



where ADj refers to the administrative distance of country j from Vietnam, Iij stands for item i in country j, and p denotes Vietnam. Vi is the variance of item i.

Geographic distance. We measured geographic distance based on the great circle formula, which uses the latitude and longitude of the most important city (in terms of population) or the official capital. We used data from the Centre d’Etudes Prospectives et d’Informations Internationales (http://www.cepii.fr/; accessed August 2007). Economic distance. We measured economic distance by the absolute value of the difference in per capita GDP between Vietnam and the home country in the year of entry. Per capita GDP is commonly used as an indicator of a country’s level of economic development, and is used by Tsang and Yip (2007)

Historical ties and foreign direct investment

Shige Makino and Eric WK Tsang

0.07* 0.09* 0.09* 0.50* 0.04 0.06 0.06* 0.23* 0.02 0.78* 0.04 0.08* 0.19* 0.01 0.17* 0.22* 0.13* 0.12* 0.14* 0.02 0.11* 0.04 0.05 0.03 0.10* 0.24* 0.06* 0.12* 0.52* 0.18* 0.23* 0.13* 0.06* 0.48* 0.00 0.65* 0.07* 0.51* 0.38* 0.53* 0.16* 0.08* 0.41* 0.01 0.47* 0.50* 0.31* 0.07* 0.18* 0.29* 0.21* 0.02 0.29* 0.07* 0.54* 0.69* 0.57* 0.03 0.47* 0.11* 0.30* 0.02 0.05 0.23* 0.03 N¼1846; *po0.01.

1 STD Mean Correlation matrix

RESULTS Before discussing the results of hypothesis testing, we present some simple frequency analyses. Figure 1 shows the trends in FDI in Vietnam with respect to

Table 1

Statistical Analysis In our regression analysis, period of registration was the dependent variable, and the different kinds of distance and historical ties were the independent variables. To avoid the multicollinearity problem, all four distance variables and two control variables, capital and GDP growth, were centered at the mean. The correlation matrix is presented in Table 1. To test the hypotheses, we first entered the distance variables in the regression, followed by the historical tie variables, and then examined whether the latter variables significantly improved the explanatory power, as indicated by the change in the R2 values.


Industry. We included industry dummies based on the one-digit SIC codes to control for industry effects.

0.09* 0.18* 0.02 0.04 0.03 0.08* 0.01 0.02 0.13* 0.31* 0.02 0.03



Capital. We included the amount of investment committed by the foreign firm (in the case of a wholly owned subsidiary) or by all of the partner firms (in the case of a joint venture) to control for the possible effect of resource commitment on the timing of entry (see Isobe et al., 2000).

901 0.47 6711 3481 1.31 0.15 0.47 0.23 0.28 0.18 0.47 3.94 9694




GDP growth. Foreign firms, especially those with market-seeking motivations, may have a strong incentive to explore foreign markets when their home markets mature and become more competitive. Hence we used GDP growth rate (lagged by one year) to control for the possible effect of competitive conditions in home country markets on the timing of entry in Vietnam.

1829 0.00 0.00 0.00 0.00 0.02 0.33 0.06 0.09 0.03 0.34 0.00 0.00





Entry mode. Isobe, Makino, and Montgomery (2000) find that the choice of a joint venture over a wholly owned subsidiary is positively associated with early entry into foreign markets. Entry mode was therefore used as a control variable to control for the possible effect of entry mode on the timing of entry. In this study, entry mode was represented by a dummy variable that was coded as 1 if a subsidiary was wholly owned by a foreign firm, and 0 otherwise.

1. Period of registration 2. Administrative distance 3. Economic distance 4. Geographic distance 5. Cultural distance 6. Mainland Chinese ties 7. Non-Mainland Chinese ties 8. French ties 9. French (broad) ties 10. Socialist ties 11. Wholly owned subsidiary 12. GDP growth (centered) 13. Capital (US$1000, centered)


in their study of the impact of economic distance on FDI survival.



Journal of International Business Studies

Historical ties and foreign direct investment

Shige Makino and Eric WK Tsang


100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% France Taiwan/Hong Kong Socialist countries China

30.0% 20.0% 10.0% 0.0%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Figure 1 Trends in FDI in Vietnam: Cumulative FDI in Vietnam by country (100% in 1999).

the countries and regions under study. It shows the cumulative percentage of FDI flows of each country or region in each year up to 1999. It shows that, during the initial years, the lines representing socialist countries (socialist ties), Taiwan and Hong Kong (non-Mainland Chinese ties), and France (French ties) are above the one representing China (Mainland Chinese ties), which indicates that firms from the former countries and regions tended to enter Vietnam earlier than those from China. The correlation matrix in Table 1 reveals some interesting relationships between the distance and tie variables. For example, all four distance variables had positive correlations with French ties, but negative correlations with Mainland Chinese and non-Mainland Chinese ties. All the distance variables, except economic distance, had positive correlations with socialist ties. These findings indicate that Vietnam tended to have greater distance from France and the socialist countries compared with other countries, and less distance from Mainland China, Taiwan, and Hong Kong. The findings represent an interesting contrast with our predicted relationships. We hypothesize that French and socialist ties would have a positive relationship with early entry into Vietnam; and that non-Mainland Chinese ties (i.e., Taiwanese and Hong Kong ties) would have a positive relationship but Mainland Chinese ties a negative relationship with early entry into Vietnam. This observation alone shows that the tie variables apparently captured something that had been left out by the distance variables. Table 2 presents the results of regression analysis using the standardized coefficients. As mentioned,

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a long period of registration represents early entry and a short period represents late entry. In other words, a positive regression coefficient represents early entry (i.e., the period of registration is longer), whereas a negative result represents late entry into Vietnam. We used the variance inflation factor (VIF) to assess multicollinearity, and found that the VIF scores were between 2.6 (administrative distance) and 4.6 (cultural distance) for all nine models. Multicollinearity was therefore not a problem. As the correlation matrix shows a high degree of inter-correlation among the four distance variables, we examined the effect of the distance variables separately, as shown in Models 1–4. All of the distance variables, except geographic distance, had a negative and significant impact on the propensity of firms to be early movers. However, when these variables were all included in Model 5, their coefficients, except that of economic distance, became either positive or non-significant. Models 6 and 7 examine the effects of Mainland Chinese ties, non-Mainland Chinese ties, French ties, and socialist ties, with other countries serving as the base variable for historical ties. Model 6 includes only the tie variables, and Model 7 is the full model including all of the variables. It is interesting to note that in Model 7, as compared with Model 5, the sign or significance of administrative distance and cultural distance changed abruptly when the tie variables were added, whereas there was no such change for the tie variables in Model 7, as compared with Model 6. This finding suggests that historical ties are a more stable explanatory factor than distance. Models 6 and 7 show that non-Mainland Chinese and socialist ties had a positive and significant impact, whereas Mainland Chinese ties had a negative and significant impact on the propensity of firms to be early movers, supporting Hypotheses 1, 3, and 4. The results also indicate that the effect of French ties was not significant, although the sign of the coefficient was positive. Nevertheless, when French ties were defined, based on a broad category of French-speaking countries, the effect of French ties (French [broad] ties) became positive and significant (Model 6b), even after including the distance variables (Model 7b). In sum, the results of our analysis suggest that historical ties matter for FDI entry decisions, even after controlling for the effect of distance variables. The additional explanatory power of historical ties is indicated by the significant increase in the

Historical ties and foreign direct investment

Table 2

Results of regression analysisa

Model 1 Distance Administrative distance Economic distance Geographic distance Cultural distance

Model 2

Model 3

Model 4

0.07*** 0.17**** 0.02 0.04*

Model 5

0.09**** 0.09**** 0.02

0.30**** 0.02 0.05* Included 0.17**** 13 — 1846

0.30**** 0.02 0.06** Included 0.14**** 13 — 1846

0.30**** 0.01 0.06* Included 0.15**** 13 — 1846

0.29**** 0.01 0.05** Included 0.17**** 16 — 1846

0.09**** 0.10****


0.05** 0.17****

0.31**** 0.12**** 0.06*** Included 0.18**** 16 — 1846

0.31**** 0.13**** 0.06*** Included 0.18**** 16 — 1846

Model 7a

Model 7b

0.05 0.31**** 0.12**** 0.14****

0.05 0.31**** 0.08** 0.16****

0.14**** 0.21**** 0.01

0.14**** 0.22****


0.32**** 0.11**** 0.05** Included 0.22**** 20 0.05**** 1846

0.06** 0.08****

Shige Makino and Eric WK Tsang

0.31**** 0.01 0.05** Included 0.16**** 13 — 1846

Model 6b

0.03 0.19**** 0.07** 0.03

Historical ties Mainland Chinese ties (¼1) Non-Mainland Chinese ties (¼1) French ties (¼1) French (broad) ties (¼1) Socialist ties (¼1) Control variables Wholly owned subsidiary (¼1) GDP growth (centered) Capital (US$1000, centered) Industry dummy Adjusted R2 d.f. Changes in R2 (vs Model 5) N

Model 6a

0.31**** 0.12**** 0.05** Included 0.22**** 20 0.05**** 1846


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a Figures represent standardized beta coefficients. Dependent variable¼period of registration (in days). *po0.10; **po0.05; ***po0.01; ****po0.001.

Historical ties and foreign direct investment

Shige Makino and Eric WK Tsang


adjusted R2 from 0.17 in Model 5 to 0.22 in Models 7a and 7b. Furthermore, Models 6a and 6b, which include all of the tie variables but no distance variables, show that the adjusted R2 is 0.18, virtually the same as that of Model 5 (R2¼0.17), which includes all of the distance variables but no tie variables. This finding indicates that the tie variables alone have similar or even greater explanatory power than the distance variables.

DISCUSSION Our study supports the argument of Jones and Khanna (2006: 453) that “the field of international business should evolve its rhetoric from the relatively uncontroversial idea that ‘history matters’ to exploring how it matters.” Understanding the historical background of cross-country relations is of particular importance in the study of international business in Asian and other less developed countries, because many of these nations have complex histories of foreign dominance involving colonization, invasion, occupation, and alliance. The historical legacy of these countries has significantly influenced their institutional and cultural development. However, in the existing literature on international trade and investment, including the research on distance, the history of cross-country relations is “treated in a stylized fashion with little concern for the complexities of particular historical situations” ( Jones & Khanna, 2006: 460). Adopting a historical perspective brings into focus the role that historical ties play in the foreign investment decisions of today, and provides additional insights into existing theories of FDI. Our study shows that reference to historical ties must not be left out of any comprehensive analysis of FDI decisions. In brief, our findings indicate that historical ties provide a further level of explanatory power regarding FDI decisions beyond the influence of distance attributes. For example, firms from Mainland China have tended to be late investors compared with those from Taiwan or Hong Kong. This finding is particularly interesting, because all three regions share the same cultural traits and are geographically close together. The behavior of Mainland Chinese firms has to be explained by the strained relations between Vietnam and Mainland China following the Sino-Vietnamese War. Another notable finding is that, although many of the socialist countries in our sample (i.e., former members of Comecon: Czechoslovakia/Czech Republic/Slovakia, USSR/Russia, Hungary, and Poland)

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and Vietnam have very different cultural and institutional traits, and are geographically distant from one another, firms from these countries tended to be early movers in Vietnam. This result is consistent with the evidence that Russian firms tend to invest in former Soviet republics (Crane et al., 2005). Similarly, and consistent with our hypothesis, French ties, when defined as a broader group of la Francophonie, had a significant and positive effect on early entry of FDI. This finding partly supports Twomey’s (2000: 14) claim that “[a]ny study of foreign investment in the Third World during the twentieth century must address the issue of colonialism.” However, when the scope of French ties was limited to France only, the effects became non-significant, although the sign of the coefficients remained positive. This finding is surprising, given that France was the largest European investor in Vietnam. One possible reason is that historical ties might not motivate firms equally to be early movers. Drawing on real options theory, for example, Rivoli and Salorio (1996) argued that a firm with unique ownership advantages has greater leeway to delay its FDI decisions, as these advantages preserve – at least temporarily – its gateway to entry, making the option to wait relatively more valuable than the option to invest. With a similar logic, it could be argued that firms from counties with strong historical ties with a focal host country may see greater leeway to delay their entry in that country, because the disadvantages of being late movers may be offset by the benefits of having such ties with the host country. A future study might extend this line of research from the perspective of real options theory and examine when historical ties have a greater impact on the timing of FDI inflows. In short, researchers need to identify the historical factors that are specific to the relations between countries and employ them as additional explanatory variables when examining the FDI flows between those countries. In the present study, we address several gaps in the literature on FDI. First, we investigate a relatively unexplored area of research – the relational view of country-specific factors. While scholars have begun exploring this line of enquiry (e.g., Li & Vashchilko, 2010; Nigh, 1985; Rangan, 2000; Rangan & Drummond, 2004; Rangan & Sengul, 2009), more research is needed to develop a comprehensive theoretical foundation for explaining how historical ties influence FDI flows

Historical ties and foreign direct investment

Shige Makino and Eric WK Tsang


and other cross-border economic exchanges and interactions. One possible avenue is to expand the institutional framework, shifting the scope of analysis from a single country to the relation between pairs of countries. A key premise of the framework is that bilateral economic activities are embedded in unique institutional contexts where ties among countries are developed. To develop such a framework, researchers should investigate a number of new questions. Why are some historical ties more important than others for inducing FDI, and some less important? How long do the effects of ties (including disrupted ties) last? How do the effects of multiple historical ties on FDI interact? How are formal and informal ties linked together and how do they jointly or independently influence FDI flows? How can historical ties at the country level influence, or be influenced by, inter-organizational ties at the firm level? How does FDI shape the subsequent development of historical ties? How do the permeation of the “world culture” (Meyer, Boli, Thomas, & Ramirez, 1997) and the interdependence of the world economy influence the role of historical ties? FDI research has robustly shown that countryspecific factors, such as factor endowments, a country’s capability to innovate, and institutions, play a major role in explaining FDI flows. However, it assumes that such factors are less mobile, if not immobile, across countries, and thus provide few insights regarding how countries can develop particular relation-specific attributes that play a pivotal role in enhancing cross-border economic exchanges, beyond the effects of the comparative advantages of countries. Our study suggests, although preliminarily, that FDI flows can be enhanced by developing close ties between home and host countries, and by avoiding conflicts. Our study has several limitations. The measurement we used for historical ties needs to be refined. We used a dummy variable to describe whether Vietnam has a historical relationship with the foreign investor’s home country in terms of colonization, dominance, or ideology. However, our measurement does not capture the strength of these ties. Ties may have varying degrees of impact on the economic exchanges between countries.

For instance, formally established political and economic alliances often have a more direct and immediate impact than ties that evolve naturally as a result of geographic proximity or immigration. Informal ties may have varying levels of persistence. Inglehart and Baker’s (2000) study, for example, found that traditional values, such as those derived from religion, tended to be more persistent than secular and rational values, despite the modernization brought about by economic development. In addition, the influence of the historical ties that are related to colonization or shared ethnic origin and the measurement of distance in terms of culture and institutions cannot be clearly distinguished, as the two factors often overlap. Such ties could be the cause of the observed distance, which may, in turn, reinforce the strength of historical relations between countries. Future research should develop ways to disentangle the effects of historical ties from those derived from distance. For example, a colonizer’s influence on the various institutions of a colonized country may not be uniform. Accordingly, administrative practices, such as those relating to the law, that are significantly influenced by colonization and are components of the measure of administrative distance can be singled out and controlled for. By so doing, the “isolated” effect of colonial ties can then be studied.

ACKNOWLEDGEMENTS We thank Sea Jin Chang, Lorraine Eden, Don Lessard, Arjen Slangen, Fabienne Fortanier, Rob van Tulder, Takehiko Isobe, and Christine Chan for their comments. An earlier version of this article was presented at the 2009 Academy of International Business Conference, San Diego, USA. This paper was supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region (Project No. CUHK 451010H). NOTE We acknowledge several important historical analyses of multinational enterprises (MNEs) and FDI. Jones (1996), Wilkins (1998), and Rugman (2009), for example, provide comprehensive reviews of the literature on the history of MNEs. 1

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Historical ties and foreign direct investment

Shige Makino and Eric WK Tsang


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Historical ties and foreign direct investment

Shige Makino and Eric WK Tsang



1847 1868 1887 1940 1941 1945 1947 1954 1960 1965 1975 1976 1978 1979 1989 1991 1995

Important events in the modern history of Vietnam: 1847–1995

French troops are sent to Vietnam. The Vietnamese Emperor surrenders, and signs a peace treaty with France. French Indochina, which includes the territory of Vietnam, is formed. Japan invades and occupies Vietnam, but allows the French colonial administration to continue to run the country. Ho Chi Minh forms the Viet Minh Front to fight for Vietnam’s independence. Ho Chi Minh declares Vietnam’s independence after the Japanese surrender to the Allies. British troops enter the country and stay briefly. War breaks out between Vietnam and France as the latter tries to regain power by force. The Geneva Conference ends France’s colonial presence, and partitions the country into two states, North and South Vietnam. The former is supported by China and the Soviet Union, whereas the latter is supported by the United States. Communist sympathizers in South Vietnam establish the National Liberation Front, also known as the Viet Cong, and conduct guerilla warfare against the South Vietnamese government. President Johnson sends US troops to South Vietnam to bolster the state’s defense against the Viet Cong. The North Vietnamese army captures Saigon, and US troops leave the country. The Socialist Republic of Vietnam is established, unifying the two states. Vietnam is admitted to the Comecon because of its economic and diplomatic relations with the Soviet Union. Vietnam invades Cambodia and overthrows the Khmer Rouge regime. China initiates a brief war against Vietnam, partly in response to Vietnam’s invasion of Cambodia. Vietnam withdraws its troops from Cambodia. Vietnam and China resume diplomatic relations. Vietnam and the United States resume diplomatic relations.

ABOUT THE AUTHORS Shige Makino is a Professor and Chairman of the Department of Management at the Chinese University of Hong Kong. He received his PhD from Ivey School of Business, the University of Western Ontario. His research interests include strategies for foreign market entry and survival, performance variations of MNEs, and multilevel issues in international business. He was born in Japan and is a Japanese citizen. E-mail: [email protected]

Eric WK Tsang is an Associate Professor of Management at the University of Texas at Dallas. He received his PhD from the University of Cambridge. His research interests include foreign direct investment, organizational learning, strategic alliances, and philosophical analysis of methodological issues. E-mail: [email protected]

Accepted by Sea-Jin Chang, Area Editor, 26 August 2010. This paper has been with the authors for four revisions.

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