Testing of the Positive-Multinational Network Hypothesis: Wealth Effects of International Joint Ventures in Emerging Markets

Impacts of International Greenfield Investment on Firm Valuation

“…Therefore, it is interesting to check the BRIC countries' effect on the FDI performances of MNCs. This was later developed into the positive-multinational-network hypothesis by Doukas and Travlos (1988); their empirical findings and later the findings by Prather and Min (1998) both support Kogut's theory. Kogut (1989) pointed out that the late 1980s had witnessed a significant evolution of academic interest in the multinational corporation.…”

“…Kogut (1989) pointed out that the late 1980s had witnessed a significant evolution of academic interest in the multinational corporation. This was later developed into the positive-multinational-network hypothesis by Doukas and Travlos (1988); their empirical findings and later the findings by Prather and Min (1998) both support Kogut's theory. Chen, Hu, and Shieh (1991) and Chang and Huang (2002) examined the wealth effect of multinational expansion and found abnormal return through joint ventures cases.…”

“…For example, studying international M&As 2 , Doukas and Travlos (1988) found a significantly positive mean abnormal return of 0.31% on the announcement day when US firms first enter a new country. Prather and Min (1998) documented a significant mean abnormal return of 0.48% for international joint ventures of US firms. In our study, the significant abnormal return of 0.28% on the announcement day of greenfield investment is consistent with those documented in prior studies that test the positive-multinational-network hypothesis.…”

“…In support of this argument, Doukas and Travlos (1988) found that positive abnormal returns are associated with US firms diversifying into a new country for the first time, while shareholders of MNCs already operating in the target country experience negative abnormal returns. In addition, Prather and Min (1998) indicated that the initial exposure to an international joint venture in a specific country is more highly prized than subsequent exposures. Thus, we considered an MNC investing in a host country as an efficient activity, which leads to our second hypothesis:…”

“…The Level of Economic Development in the Host Country Kogut (1983) and Doukas and Travlos (1988) suggested that as a firm expands its boundaries into new industries and geographic regions, it can benefit from the increased options available to it. Prather and Min (1998) concluded that lessdeveloped countries present more opportunities and less competition for further expansion than developed ones. Therefore, it is reasonable to assume that the announcement effect will be more positive for international greenfield projects in developing countries, rather than those in developed ones.…”