The Sequential-Investment Strategy vs. The Single-Investment Strategy: Lessons from Korean Firms' FDIs to China

Abstract

. The paper focuses on an eye-catching FDI pattern prevailing among Korean firms, so-called sequential FDIs. Between a single-investment strategy and a sequential-investment strategy, we scrutinise the reasons why the sequential-investment strategy is pursued by Korean parents taking time value into consideration. Fundamentally, Korean parents are inclined to establish Chinese subsidiaries sequentially because they can enjoy more flexible production effects, which enable them to lead markets in quantity competition. Three important theoretic predictions are drawn from a quantity competition model. First, the net discount payoff under the sequential-investment strategy is payoff dominant to the single-investment strategy’s as long as the market bargaining power of Korean parents can be enhanced. Second, those parents withholding higher discount factors are more likely to pursue the sequential-investment strategy. Third, the longer the Korean parents can stay in China, the more likely that they are to invest sequentially. Pooling LSDV (least squares dummy variable) regressions support these theoretic predictions. It is evident that sequential investments significantly increase the Korean parents’ production capabilities because the production portfolios constructed by the sequential investment strategy can organise internal production networks. As more subsidiaries are networked, the longer the new subsidiaries established by follow-up investments can be sustained owing to tie-in effects. The duration since after the first subsidiary foundation is positively associated with the frequency of sequential investments. It is evident that Korean firms’ sequential investment strategy, combined with their geographical proximity to China, contributes to overcoming market uncertainty and foreignness in China.