By applying two organizational theories to understand FDIs established by Korean textile firms between 1986 and 1995, a period during which the IB literature provides insufficient statistical empirical evidence about the post-entry organizational chan ...
By applying two organizational theories to understand FDIs established by Korean textile firms between 1986 and 1995, a period during which the IB literature provides insufficient statistical empirical evidence about the post-entry organizational change-performance relationship, this study examined how post-entry ongoing organizational changes in the core areas of foreign subsidiaries of Korean textile firms are related to their mortality rates (i.e., exit rates) in host countries. Paying attention to the relationship between post-entry organizational changes and subsequent mortality rates may contribute to our understanding of the primary question: What are the consequences of organizational change? (Barnett & Carroll, 1995). The findings show that changes in the core dimensions of foreign subsidiaries definitely contribute to reducing their mortality rates in host countries. However, this study carefully confirms that not all organizational changes have an identical effect on mortality rates.
Given that organizational changes occur in diverse core areas, this study specified and qualified the different effect of organizational changes in the three core areas of investment amount, ownership, and products of a foreign subsidiary on its mortality rate. We found that although post-entry ongoing changes in investment amount and product areas significantly contribute to reducing a subsidiary’s mortality rate, changes in ownership do not influence the mortality rate. This finding may result from a subsidiary’s ability to quickly respond to a changing local environment through post-entry modifications in investment amount and product areas. That is, parent companies can rapidly change the level of resource commitment to their subsidiaries or product areas in response to a host country’s transforming environment. In contrast, changing the ownership structure is more complex given the management and control problems between partners. Moreover, additional expenses arising from coordination problems are unavoidable. Changes in organizational structure are indirectly related to the basic work activities of an organization and more directly related to its management (Tsoukas, 1996). Therefore, organizational change in ownership might be indirectly rather than directly related to the subsequent mortality rate; future research may be enriched by demonstrating the indirect relationship.
This study explores the relationship between post-entry on-going organizational changes in core areas of foreign subsidiaries, such as investment amount, ownership, and product, and the subsequent survival of such subsidiaries in a host country. This study further investigates the relative importance of subsidiary’s organizational change in core areas. For these research questions, this study employs a sample of 2,582 foreign direct investment cases by Korean textile firms. The findings show that a foreign subsidiary’s post-entry ongoing organizational changes in the core areas are negatively associated with its mortality rate. However, we carefully qualify this result: ongoing changes in investment amount and product areas help reduce the mortality rate, whereas changes in ownership do not.
This study also has several practical implications. First, given that organizational changes do not uniformly influence the mortality rate, firms should pay more attention to the dominantly influencing factors to reduce the mortality rate of their subsidiaries in host countries. Second, this study demonstrated that foreign subsidiaries of Korean textile firms face the liability of adolescence (see Figure 1), not the liability of newness. During this period, firms may attempt to make organizational changes to overcome this liability or may consider an exit strategy depending on their strategic priority.
This research was to Journal of Applied Business Research (SCOPUS), as planned at the initial stage, and then it was accepted for publication.