How to Benefit from Foreign Investments: They Do Not Guarantee Success in Themselves
Research fellows from HSE-Perm’s International Laboratory of Intangible-driven Economy (ID Lab) Anna Bykova and Carlos Jardon found out that in order to get maximum use from foreign partners, Russian companies need to invest in intellectual resources.
Most part of theoretical works in international trade underline the importance of direct foreign investments. They are not only an additional source of funding, but also an important element of transformation and improving the quality of human capital, a mechanism of knowledge exchange between companies and adopting new technologies. All that should lead to increasing of competitiveness at the end of the day. However, empirical evidences are quite heterogeneous and contradictory, especially for businesses located in developing economies. Recent studies show that advantages which direct foreign investments can give to a company, do not appear automatically, but they are connected with opportunities of their use to a great extent.
HSE researchers Anna Bykova, Carlos Jardon and Felix Iturriaga have already analyzed the data of Russian public companies and the effects of foreign investments in two previous works. “We found out that generally foreign ownership does not influence the companies’ performance. It has the positive effect only during an economic recession or enhances it for export-oriented companies,” says Anna Bykova. “We considered it rather strange, especially taking into account the percent of companies with foreign ownership during the analysis. An idea appeared: probably, foreign investments are “useful” not for every business, but only for those companies which possess certain resources. In other words, there must be some kind of “mediators” between foreign investments and companies’ performance, in order to reach positive effect. We decided to test this hypothesis using the concept of dynamic capabilities developed by D.J. Teece in 1997. We suggest that these are dynamic capabilities which play mediative role.”
Dynamic capabilities are abilities of a company to create, to expand and to modify resources depending on external environment and business strategy.
The sample for analysis covered the data on 1096 Russian public companies for the period 2004-2014, collected by ID Lab from open sources. The researchers used Partial Least Square-Structural Equation Modelling and SmartPLS 3.0 software. This method allows to assess functional relations between unobservables – dynamic capabilities, and observables – foreign investments and company’s performance. Unobservables are presented in form of observable indicators. Due to the advantages of this method (softer requirements to normality of data distribution and to using secondary information), PLS-SEM is increasingly used in works on strategic management.
Compared to previous works using PLS-SEM, we used not survey data but open data in our model in order to measure dynamic capabilities.
The findings showed that dynamic capabilities play not partial, as the authors suggested, but full mediative role. Firstly, this confirmed the findings of the previous works which demonstrated the absence of statistically significant effect of direct foreign investments. Secondly, it was noted that transformation of foreign investments into economic value added happens through transformation of company’s internal resources or via a mechanism of using dynamic capabilities.
The researchers point out three types of dynamic capabilities which are the most relevant for the analysis of interaction between recipient companies from developing economies and investors from developed countries.
The first type is absorption capability or the ability to learn and to introduce knowledge and technologies received from foreign partners. The second type is adaptive capability or the ability to transform available internal resources in accordance with higher requirements of foreign investors which is especially important for companies operating in developing markets. The third type is communicative capability or effective discovery and introduction of knowledge on higher market standards and technologies of work with customers and suppliers which increase clients’ loyalty.
Analyzing the impact of different types of dynamic capabilities, the authors found out that communicative capability is the most important for creating value added: 52.2% of the common effect accrues to this type, while adaptive capability has the biggest effect – 50% – for operating performance measured by profitability of total assets. These findings allow to create different strategies of companies’ development in short- and long-term period.
Carlos Maria Fernandez-Jardon Fernandez