Learning from Siblings within Multinational Firms

Author Name CHEN Cheng (Clemson University) / SUN Chang (University of Hong Kong) / ZHANG Hongyong (Fellow, RIETI)
Creation Date/NO. July 2019 19-E-053
Research Project Studies on the Impact of Uncertainty and Structural Change in Overseas Markets on Japanese Firms
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Using a unique dataset of Japanese multinational corporations (MNCs), we provide evidence that MNCs learn about potential profitability in the destination market by observing the performance of their affiliates (henceforth "siblings") in other nearby markets. Specifically, good historical performance of siblings in nearby markets raises the probability of foreign direct investment (FDI) entries into the destination market. For a market where the MNC has established an affiliate, good sales performance of nearby siblings raises the sales expectations of affiliates established in that market. To explain these facts, we provide a simple model of a multinational firm learning about its profitability in multiple markets. The model further predicts that nearby siblings' historical performance has a larger impact on the established affiliate's expectations when the affiliate is less experienced and/or its own signals are noisier. We confirm both predictions in our data.