Assessment of Overseas Subsidiary Survival in Chinese Provinces: A Longitudinal Study of Indian Multinationals

• Published date: 01 June 2021
• Author: Khanindra Ch. Das,Mantu Kumar Mahalik
• Date: 01 June 2021
• DOI: http://doi.org/10.1111/1467-8462.12404

The Australian Economic Review, vol. 54, no. 2, pp. 190–207 DOI: 10.1111/1467-8462.12404

Assessment of Overseas Subsidiary Survival in Chinese

Provinces: A Longitudinal Study of Indian Multinationals

Khanindra Ch. Das and Mantu Kumar Mahalik*

Abstract

This study provides a longitudinal survival

assessment of Indian subsidiaries in Chinese

provinces. We construct a panel dataset of

Indian subsidiaries operating in Chinese

provinces during 2004–2017 and examine

survival using a panel probit model and Cox

regression. The results support the real

options perspective, the economic geography

approach and the institution‐based view.

Subsidiary exits were associated with smaller

size, albeit higher in the manufacturing

sector. There is a positive impact of sub‐

national economic geography factors on

subsidiary survival. The finding contributes

to the South–South investment literature as it

highlights the role of sub‐national factors in

shaping subsidiary survival.

JEL CLASSIFICATION

F21; F23; R32

1. Introduction

Indian investment in China increased after the

global financial crisis of 2007–2008 had

subsided. The annual flow of investment was

US$30.58 million in 2009–2010, peaking at

US$89 million in 2014–2015. There has been

a mild slowdown in investment flow from

India in the subsequent years (US$39 million

in 2016–2017). Nevertheless, a decade of

investment by Indian firms in China has seen

diversity across many sub‐regions charac-

terised by individual local advantages.

Similarly, Chinese firms’investment in India

was negligible in 2008–2009 but increased at

a much faster pace to US$495 million in

2014–2015. There has been a slowdown in

equity inflow from China to India since

2015–2016 (see Figure 1) but it has remained

seven times higher than Indian investment in

China (US$277 million in 2016–2017). There

are challenges and opportunities on both sides

of the border although their nature and

magnitude vary. In particular, Indian firms in

China are constrained by both market and

non‐market factors (Das 2020). Market factors

include a tough operating environment for

foreign players, competition from large and

local firms and lack of economies of scale and

scope. Non‐market constraints include lack of

experience in the Chinese market, legal and

regulatory barriers, access to business net-

works and cultural and language barriers,

among others.

Investment location choice in the host

country is important for both practitioners

and policymakers. This is because the choice

of foreign location has the potential to either

* Das: Birla Institute of Management Technology, Plot

No. 5, Knowledge Park II, Greater Noida, UP‐201306,

India; Mahalik: Department of Humanities and Social

Sciences, Indian Institute of Technology, Kharagpur,

West Bengal, India. Corresponding author: Das, email

<kchdas@gmail.com>. An earlier version of the article

was presented at the 11th All India Conference of China

Studies at Christ University, Bengaluru, India. We thank

G. Venkat Raman, Ravi Bhoothalingam, Madhavi

Thampi, Swati Dutta and Jabin T. Jacob for their helpful

discussion and valuable comments on an earlier version

of this article. Further, we thank three anonymous

referees and editors of the journal for insightful

comments.

© 2020 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd

enhance or diminish the performance of firms

(Jain, Kothari and Kumar 2016), and it has a

bearing on economic development. There are

several determinants of firm location that

include macroeconomic, political, legal, endow-

ment of resources, regulation and institutions

(Wakasugi 2005; Cheng and Stough 2006;

Cole, Ellioti and Zeang 2009; Ma, Tong and

Fitza 2013a; Das and Banik 2015; Kang 2018).

1

Further, the performance of a subsidiary can be

partly driven by the same set of factors that

determine location choice. While the factors

driving the location of multinational subsidiaries

in Chinese sub‐regions are dealt with elsewhere

2

(Chen 1997; Cheng and Stough 2006; Amity and

Javorcik 2008; Ma, Delios and Lau 2013b;

Das 2020), in this study we examine a different

issue, namely the role of sub‐national factors

along with the impact of subsidiary and parent

firm‐specific characteristics in shaping the sur-

vival of emerging multinationals’subsidiaries in

another emerging country, that is Indian sub-

sidiaries established in Chinese provinces.

We are interested in China because, first, it

has been India's largest trade partner since

2013–2014. At the same time, India has

incurred the highest trade deficit against

China (that is US$51 billion in 2016–2017

as per India's Ministry of Commerce

databank). One of the ways to reduce this

trade asymmetry is to increase exports to

China. In this context, foreign investment and

subsidiary presence in China could be one of

the ways to establish export markets. If

subsidiaries of Indian multinationals can per-

form and survive in Chinese sub‐regions, the

asymmetry in the trade relation may be

reduced by channelling some of the Indian

products to China. The survival of Indian

subsidiaries in China therefore assumes im-

portance, which could be shaped by various

challenges present in the host region. As this

aspect of bilateral economic relations has not

been examined systematically, we aim at

filling this gap by analysing the survival and

performance of Indian subsidiaries operating

in Chinese provinces using a sample of both

manufacturing and services sector firms.

Second, not all new ventures created

through overseas investment survive or per-

form well, which may be dependent on the

business environment and local challenges in

the host country. In the case of emerging

multinationals’investment in other emerging

markets (South–South investment), there

could be additional challenges to subsidiary

survival. While the subsidiaries of developed

country multinationals in emerging countries

Figure 1 Bilateral FDI Flows ($US millions)

52.5

30.58 40.42 52.45 66.68 71.73 88.94

65.56

38.83

0.80 6.44

41.36

1.56

72.68

151.86

124.00

494.75

461.40

277.24

0

100

200

300

400

500

600

2007_08 2008_09 2009_10 2010_11 2011_12 2012_13 2013_14 2014_15 2015_1 2016_17

Indian firms in China Chinese firms in India

Source: Authors’compilation from Reserve Bank of India (RBI) and Department of Industrial Policy and Promotion

(DIPP), India.

191Das and Mahalik: Study of Indian Multinationals in Chinese Provinces

© 2020 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics