Latin American Business Review

ISSN: 1097-8526 (Print) 1528-6932 (Online) Journal homepage: http://www.tandfonline.com/loi/wlab20

Attributes of Foreign Subsidiaries and the Location

Strategy of Multinational Firms in Global Cities in
Latin America

Paulo Kazuhiro Izumi, Pedro Carvalho Burnier, Mário Henrique Ogasavara &
Júlio César Bastos de Figueiredo

To cite this article: Paulo Kazuhiro Izumi, Pedro Carvalho Burnier, Mário Henrique Ogasavara
& Júlio César Bastos de Figueiredo (2017): Attributes of Foreign Subsidiaries and the Location
Strategy of Multinational Firms in Global Cities in Latin America, Latin American Business Review,
DOI: 10.1080/10978526.2017.1354707

To link to this article: http://dx.doi.org/10.1080/10978526.2017.1354707

Published online: 11 Oct 2017.

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 LATIN AMERICAN BUSINESS REVIEW
https://doi.org/10.1080/10978526.2017.1354707

none defined

Attributes of Foreign Subsidiaries and the Location

Strategy of Multinational Firms in Global Cities
in Latin America
Paulo Kazuhiro Izumi, Pedro Carvalho Burnier, Mário Henrique Ogasavara , and
Júlio César Bastos de Figueiredo
Graduate Program in International Management, ESPM, São Paulo, Brazil

ABSTRACT ARTICLE HISTORY

International business research has recently honed in on the Received 25 April 2017
subnational dimension of multinational enterprises (MNEs), Revised 2 July 2017
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particularly the city level. Through a binomial logistic regression Accepted 4 July 2017
of data from 254 foreign subsidiaries of 10 Latin American KEYWORDS
global cities between 2006 and 2012, we found that specific Foreign subsidiaries; global
attributes of the firm related to the industrial sector, subsidiary cities; Latin America;
control, and ownership level have a positive effect on the location strategy; subsidiary-
location choice in cities. In addition, we found that in the specific attributes
previous period and during the international financial crisis,
MNEs exploited their internalization advantages more intensely
by exerting greater control over their subsidiaries in global
cities.
RESUMEN
Las investigaciones sobre los negocios internacionales han
concentrado su atención en la dimensión subnacional de las
Empresas Multinacionales (MNEs, sigla en inglés), especialmente
al nivel de la ciudad. A través de la regresión logística
binomial basada en datos de 254 subsidiarias extranjeras de
diez ciudades globales latinoamericanas entre 2006–2012,
verificamos que ciertos atributos específicos de la empresa
relacionados al sector industrial, control de las subsidiarias y
nivel de propiedad afectan positivamente la selección de su
ubicación en las ciudades. Además, también constatamos que
en el período anterior y durante la crisis financiera internacional,
las MNEs aprovecharon con más firmeza las ventajas obtenidas
con la internacionalización, mediante control más riguroso de
sus subsidiarias situadas en ciudades globales.
RESUMO
As pesquisas em negócios internacionais têm voltado sua
atenção para a dimensão subnacional das MNEs (Empresas
Multinacionais, na sigla em inglês), em especial no nível de
cidade. Por meio de regressão logística binomial com dados
de 254 subsidiárias estrangeiras, em 10 cidades globais
latino-americanas, do período de 2006 a 2012, descobrimos
que atributos específicos de empresas relativos a setor
industrial, controle de subsidiária e nível de propriedade têm
efeito direto na escolha da localização nas cidades. Além

CONTACT Paulo Kazuhiro Izumi paulo.izumi@acad.espm.br ESPM - Programa de Mestrado e Doutorado

em Gestão Internacional, Rua Doutor Álvaro Alvim, 123, Bloco C, Sala 402, Vila Mariana, São Paulo-SP,
CEP 04018-010, Brazil.
© 2017 Taylor & Francis
 2 P. K. IZUMI ET AL.

disso, constatamos que no período anterior e durante a crise

financeira internacional, as MNEs exploraram suas vantagens de
internalização de forma mais intensa pelo exercício de maior
controle de suas subsidiárias em cidades globais.

Introduction
The analysis of the interaction between specific attributes of multinational
enterprises (MNEs) and location decisions has received increasing attention
in international business studies (Alcacer & Chung, 2007; Kravis & Lipsey,
1982). Some research has found that companies have heterogeneous motiva-
tions in assessing location advantages (Belderbos & Carree, 2002; Chung &
Alcácer, 2002; Shaver & Flyer, 2000), aiming to improve or maintain their
competitive position in the industry. Location advantages are not generalizable
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because they do not represent the same value for all MNEs; indeed, they vary
according to different specific attributes of the firm and this interaction conse-
quently influences location choices (Nachum & Wymbs, 2007). The location of
MNEs has become the focus of a growing area of research (Beugelsdijk &
Mudambi, 2013; Chadee, Qiu, & Rose, 2003; Enright, 2009). Nevertheless,
traditional international business literature, unlike economic geography
(Beugelsdijk, McCann, & Mudambi, 2010; McCann & Mudambi, 2005), often
uses a country and its national borders as the unit of analysis to debate MNE
location strategies, without providing a more precise differentiation of existing
nuances in locational characteristics in a smaller geographical scope.
Only in recent years have researchers begun to investigate the regional or
subnational dimensions of location decisions, strategies, and performances
of MNEs (Chadee et al., 2003; Chan, Makino, & Isobe, 2010; Ricart, Enright,
Ghemawat, Hart, & Khanna, 2004; Rugman & Verbeke, 2003). In line with
this perspective, this study analyzes MNE location choices in global cities.
London, New York, Tokyo, Paris, Chicago, Frankfurt, Hong Kong,
Singapore, Mexico City, Buenos Aires, and São Paulo, for instance, are con-
sidered global cities according to the Globalization and World Cities Research
Network (GaWC, 2012). These sites are important centers of decision making,
coordination, and economic concentration; they are constituents of a global
hierarchy of cities that emerged with globalization and the development of
a postindustrial economy. Global cities (GCs) are strategic places for the
formation and reproduction of the international economic system based on
the status of their position within transnational networks (Sassen, 2001;
Sheppard, 2002). Metropolitan areas characterized by high levels of links with
local and global markets, they offer cosmopolitan cultural environments and
an agglomeration of corporate services companies (also known as advanced
producer service firms) in such fields as consulting, advertising, accounting,
law, and finance (Goerzen, Asmussen, & Nielsen, 2013; Sassen, 2001, 2005).
 LATIN AMERICAN BUSINESS REVIEW 3

Recent studies emphasize the advantages of GC locations, relating them to

specific firm attributes (Nachum & Wymbs, 2005), including (a) the ability
to reduce the liability foreignness (Mehlsen & Wernicke, 2016) and (b) the pat-
terns of attraction of MNEs according to their activities—whether demand-
driven (competence-exploiting) or supply-driven (competence-creating)
activities (Goerzen et al., 2013). However, research examining the relationship
between firm-specific attributes and GC locations in emerging markets is scarce.
Emerging markets are important not only for contributing to a significant
outflow volume of foreign direct investment (FDI) but also for FDI inflows.
According to a 2015 United Nations Conference on Trade and Development
(UNCTAD) report, the FDI outward stock of developing countries has grown
faster than that of developed countries since the 1990s. FDI received by
developing countries increased from US $510 billion in 1990 to US $1.67
trillion in 2000 and US $8.3 trillion in 2014. In 2014, FDI from developing
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countries was 32% of global FDI inflows and 19% of outflows (UNCTAD,
2015). Despite the opportunities and challenges posed by the rise of emerging
economies to MNE strategies for researchers (Xu & Meyer, 2013), and
notwithstanding highlights from the initiatives of certain scholars (Hoskisson,
Eden, Lau, & Wright, 2000; Meyer & Peng, 2005; Wright, Filatotchev,
Hoskisson, & Peng, 2005), little attention has been devoted to this field
(Singh, 2012). If FDI location studies focusing on GCs are considered
important, albeit incipient (Izumi, Couto, & Ogasavara, 2017), research on
location decisions in emerging market GCs is simply non-existent.
Prior research investigating the influence of firm-specific attributes on
location choices has highlighted the importance of different types of factors,
including the strength of technological competence (Pelegrin & Bolancé,
2008; Shaver & Flyer, 2000), company size, the intensity of production factors
(Kravis & Lipsey, 1982), technical and technological capabilities (Alcacer &
Chung, 2007; Chang, Hayakawa, & Matsuura, 2014), the geographic
scope of the firm, innovation capabilities, international experience, and
differentiation (Nachum & Wymbs, 2005). However, a question that remains
unanswered by the empirical literature is what the effects are of the firm’s
attributes on location decisions for specific regions of emerging markets,
particularly to GCs located in Latin America (LATAM GCs). This study
aimed to investigate the effects of ownership and internalization factors on
location decisions in LA global cities.
The study contributes to the international business literature in the follow-
ing ways. First, by adding the specific approaches of LATAM GCs to the
growing research on foreign direct investment locations in subnational
regions (Chan et al., 2010; Meyer & Nguyen, 2005). Some LATAM GCs are
striving to gain prominence by fostering the economic conditions to attract
foreign direct investment. Research focusing on location decisions for this
particular region is still rare, however (Korez-Vide, Voller, & Bobek, 2014).
 4 P. K. IZUMI ET AL.

Narrowing the geographical scope in order to allow location analysis at the

micro level is very relevant today, especially because of the important role that
cities play in the world economy (Beaverstock, 2002; Beaverstock, Doel,
Hubbard, & Taylor, 2002; Sassen, 2001). Moreover, MNEs choose a specific
place within a country (i.e., the city level) as the location for their investments
(Goerzen et al., 2013); however, prior empirical analyses have only used the
country level to measure this FDI location. Second, by focusing on business
location decisions in LATAM GCs, this research supports the researchers’
growing interest (Khanna, Palepu, & Sinha, 2005; London & Hart, 2004;
Meyer, 2004; Pillania, 2009) in the role of MNEs in emerging economies.
Third, most studies have focused on location factors, such as market size
or labor costs, either on a country level or on a more fine-grained level.
Specific characteristics at the subsidiary-level, however, have not been subject
to rigorous empirical investigation.
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We conducted a study of 254 subsidiaries established in 10 LATAM GCs

from 2006 to 2012. In order to estimate the main effects of the attributes of
ownership advantages and the attributes of internalization advantages on
location choices, we ran a binomial logistic regression. The findings show that
subsidiary control and ownership level have a positive impact, whereas firm
resource and managerial complexity have negative influence on location
choice in LATAM GCs. The next section presents a literature review
examining the theoretical foundations that led to the proposed hypotheses.
Later, the methodology section describes the criteria for operationalization
of variables, data sources, and the statistical technique used. Data analysis
presents the empirical results. Finally, this article concludes by summarizing
its main contributions to the international business literature, study
limitations, and suggestions for future research.

Literature review and hypotheses

When firms internationalize, there is a need for specific attributes that can
provide competitive advantage to those companies in foreign markets
compared to local competitors and other international competitors. These
attributes, or advantages, allow firms to overcome the operating costs of a
distant environment (Dunning, 1980). Since these attributes vary according
to different assets, skills, and strategic objectives, location advantages also
have different values for them (Nachum & Wymbs, 2005).
The eclectic paradigm of international production sought to explain
reasons for firm internationalization.; also known as the OLI model—for
advantages based on ownership, location, and internalization (Dunning,
1980, 1988)—it postulates that a firm would engage in FDI if pursuing
the three advantages. First, firms must have specific ownership advantages that
are not available to their competitors. These advantages arise from the
 LATIN AMERICAN BUSINESS REVIEW 5

exclusive possession or privileged access to tangible and intangible assets such

as production technologies or processes, better sources of raw material, brand,
expertise, product differentiation, management, and marketing skills that
MNEs may transfer to their operations in foreign markets. The larger the
ownership advantage of a company, the greater its propensity to internalize
it (Dunning, 1980). Research has suggested that ownership advantages can
be considered benefits that firms develop in their home country, revealing
the influence national characteristics have on the creation and maintenance
of MNE-specific advantages (Erramilli, Agarwal, & Kim, 1997; Nachum &
Rolle, 1999; Yip, Johansson, & Roos, 1997).
Ownership advantage is consistent with the resource-based view (Sun,
Peng, Ren, & Yan, 2012) that emphasizes the strategic importance of the
ownership of valuable resources and capabilities. Barney (1991) viewed a
company as consisting of tangible and intangible resources and capabilities.
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These include features and physical capabilities (e.g., technology used, equip-
ment, plant, and geographic location); human resources (e.g., knowledge,
experience, confidence, innovation, talent, and the competence of managers
and employees); and resources and organizational capabilities (e.g., systems,
structures planning, control and coordination, and culture and reputation).
For firms to create a sustainable competitive advantage in implementing their
strategies, resources must meet four conditions: value, rarity, imperfect
imitability, and organization, known as the VRIO model (Barney &
Hesterly, 2008).
Second, there must be some internalization advantages leading the MNEs to
consider that their specific ownership advantages will be better used internally
rather than through market transactions such as sales to foreign companies or
contractual or constitution partnerships through joint ventures (Dunning,
1988). This theoretical thread suggests that in order to exploit competitive
superiority, companies transfer their specific advantages to host markets
through FDI (Erramilli et al., 1997). By transferring within an internalized
governance structure, firms have full ownership control over subsidiaries.
Third, a foreign market should offer location advantages that make it more
profitable to serve a client through local production than export. Location
advantages offer attractive features for the investments of MNEs and consist
of a host country’s specific advantages (Dunning, 1988). They include the
natural resources of the host country, its market size, factors of production,
educational system and governance structures, as well as formal and informal
institutional factors such as culture, political stability, regulation, and tariff
and non-tariff barriers. Trevino, Mixon Jr., and Upadhyaya (2005) observed
that elements of institutional building in Latin America such as political risk,
capital markets liberalization, and privatization had an impact on the increase
in FDI inflows. We used the bases of OLI framework to develop the
conceptual model proposed in Figure 1.
 6 P. K. IZUMI ET AL.

Figure 1. Conceptual model and hypotheses.

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Specific attributes of ownership advantages

Subsidiary control
Qualified professionals must manage subsidiaries, and, therefore, MNEs use
expatriates to coordinate more effectively the activities of knowledge transfer,
control, and coordination (Harzing, 2001; Hocking, Brown, & Harzing, 2004).
The expatriation can be understood as sending headquarters staff to a subsidi-
ary that operates in the host country in order to represent the parent firm
(Collings, Morley, & Gunnigle, 2008). This international assignment ensures
the effectiveness of corporate governance in its foreign subsidiaries (Pirožek &
Komárková, 2015). Findlay, Li, Jowett, and Skeldon (1996) showed that GCs
are attractive MNE locations and, therefore, that they host a large number of
skilled MNE expatriates.
The need for information, knowledge, and capital transfers to operate
through complex relationships at local and global levels makes the presence
of expatriates and the international migration of skilled workers in GCs an
important factor for these cities’ dynamics and processes of economic globa-
lization (Beaverstock, 2002). An advantage in using expatriates is that they are
familiar with the organization and the MNE strategy and are integrated into
the company’s corporate culture (Ando & Paik, 2013). Thus, expatriates may
be able to maintain the objectives of the foreign subsidiary in better alignment
with the parent firm, thereby helping to avert the risk of certain forms of
local-partner opportunistic behavior (Bassino, Dovis, & van der Eng, 2015).
As the number of foreign subsidiaries increases, it becomes more difficult
for MNEs to process information about them and control their operations
throughout the world (Baliga & Jaeger, 1984). The presence of qualified
 LATIN AMERICAN BUSINESS REVIEW 7

expatriate employees, then, allows direct or indirect control over the

management of subsidiaries that are geographically and culturally dispersed
(Edström & Galbraith, 1977; Martinez & Jarillo, 1989). It also serves to replace
or complement the centralization of decision making and direct supervision
of subsidiaries by head office managers (Harzing, 2001). Baliga and Jaeger
(1984) distinguished between two types of MNE control over subsidiaries:
bureaucratic and cultural. Bureaucratic control uses a set of rules, regulations,
and procedures that clearly delimit the role and autonomy of the subsidiaries,
whereas cultural control uses common values and standards when infor-
mation about work processes, behaviors, and environmental contingencies
are quite uncertain (Baliga & Jaeger, 1984).
In subsidiaries located in culturally distant markets, the need for cultural
control is higher due to the greater asymmetry of information between the
headquarters and its subsidiary (Gong, 2003). The use of expatriate staff in
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these locations can improve the performance of the subsidiary due to the
cultural control that allows the transfer of company-specific resources
through these expatriates (Gong, 2003). The number of expatriates present
in a subsidiary reflects the level of control that a MNE wants to engage in
the subsidiary to influence its performance (Konopaske, Werner, & Neupert,
2002). In fact, prior research has found that cultural distance increases the
propensity of subsidiaries to use expatriates (Boyacigiller, 1990; Colakoglu
& Caligiuri, 2008; Gong, 2003; Harzing, 2001).
The different mechanisms of control and coordination of foreign subsidi-
aries an MNC can use is what the agency theory refers to as monitoring or
behavioral control strategies. In this sense, the use of expatriate managers
can be viewed as a headquarters strategy to monitor their subsidiaries
(Björkman, Barner-Rasmussen, & Li, 2004).
The use of expatriates by MNEs in GCs to manage foreign operations
expands the scope of control, coordination, and knowledge transfer beyond
the traditional relationship between the parent firm and subsidiaries.
The migration of foreign skilled workers has become a key mechanism of
increasing the coordination capacity of these cities insofar as it is performed
within a complex relationship between local and global interconnected cities
(Beaverstock, 2002). That such international assignment is possible due to the
network of a qualified workforce has already been observed in studies on
migration processes and the use of elite expatriates in industrial sectors,
financial services, and other activities in GCs (Beaverstock et al., 2002;
Findlay et al., 1996). This new international labor brought about by
economic globalization is only one of the reasons for which companies need
to transfer management skills and techniques around the world, making the
formation of a community of expatriates a prerequisite and a result of the
attractiveness of GCs (Beaverstock et al., 2002; Findlay et al., 1996). MNEs
choose to locate in GCs using expatriates due to the better subsidiary control
 8 P. K. IZUMI ET AL.

that this strategy enables them. Consistent with this explanation, we

proposed that:
H1: Subsidiary control has a positive effect on the propensity of MNEs to locate their
foreign subsidiaries in global cities.

Firm resources
In her GC model, Sassen (2001, 2005) explained that the geographic
dispersion of economic activities and their simultaneous integration that
characterizes globalization contribute to growing importance of a number
of complex and non-standard functions requiring highly specialized skills.
Such skills include specializations in finance, investment, telecommunica-
tions, advertising, and information technology, which tend to cluster in
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GCs. The fact that firms increasingly source such services or components
from other companies rather than produce them at headquarters leads to less
market uncertainty, enabling them to select any location (Sassen, 2005).
Therefore, GCs offer advantages for MNEs in terms of the availability of
specialized advanced producer services connected to local and global net-
works. Such firms serve as critical specialized producers that help optimize
the production networks of enterprises that are geographically dispersed.
Producing these specialized services requires skills and experience; from this
perspective, GCs are nodes in the command and control of the global
economy. Advanced producer services tend to agglomerate in GCs (Taylor,
Derudder, Faulconbridge, Hoyler, & Ni, 2014) creating knowledge clusters
of firms (Porter, 2000) engaged in similar activities that can help MNEs to
reduce their liability of foreignness (Goerzen et al., 2013).
By combining the main features of GCs—international connectivity,
advanced services to producers, and a cosmopolitan atmosphere—with the
components of liability of foreignness, Goerzen and colleagues (2013)
observed that the presence of advanced producer services in GCs benefits
MNEs by reducing costs related to uncertainty, discrimination, and
complexity in three ways. First, they accelerate learning by providing MNEs
consultancy and advice and facilitate access to partners with local and global
knowledge. Second, they legitimize foreign firms with global service providers
that also generate local credibility for the MNE. Finally, they reduce the need
to import basic services, allowing the MNE to work with the same service
providers across borders, thus, reducing coordination costs (Goerzen et al.,
2013).
Nachum and Wymbs (2007) investigated the determinants of GC location
choices; however, they limited their research scope to financial and
professional service industries, including banking, insurance, advertising,
software and information services, accounting, management consulting,
 LATIN AMERICAN BUSINESS REVIEW 9

and engineering consulting. The specific characteristics of these types of firms

imply that their location decisions are affected by different factors than
those affecting manufacturing firms and, therefore, they hypothesized that
the larger the firm (i.e., the greater the firm’s resources), the higher the like-
lihood of it being located away from the center of business activities, i.e., from
GCs. Their findings showed that the effect of size on location choice varies
depending on the level of cluster advantages—“the agglomeration externalities
that may emerge as a result of the geographic proximity of firms engaged in
similar activities” (Nachum & Wymbs, 2007, p. 223).
Bonaccorsi (1992) stated that firm size provides a useful approximation of
firm resources. The concentration of advanced services firms in GCs assumes
the use of a smaller contingent of employees, a measure of firm size.
Manufacturing industry firms use more employees and tend to be located
in nonglobal cities (NGCs). Size differences affect the location choices of
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MNEs via the impact on the needs of firms for complementary resources that
they do not possess. “Large firms tend to internalize certain activities and are
less dependent on external resources than their smaller counterparts”
(Nachum & Wymbs, 2007, p. 229).
Building from our discussion, we propose the following hypothesis:
H2: Firm resources have a negative effect on the propensity of MNEs to locate their
foreign subsidiaries in global cities.

Specific attributes of internalization advantages

The decision on the allocation of the equity ownership level is a key issue for a
MNE when dealing with the creation of a foreign subsidiary (Raff, Ryan, &
Stähler, 2009). Traditionally, research on entry mode selection argues that
the choice of equity ownership level is related to the question of how much
control the MNE wants (Agarwal & Ramaswami, 1992; Anderson & Gatignon,
1986). The stronger the control desired by MNEs for their foreign operations,
the higher the ownership level on the subsidiary. Thus, internalization advan-
tages determine the degree of control over the activities of subsidiaries and
resources used. MNEs choose the entry mode that offers the highest return
for the risk of investment (Hennart, 1989; Luo, 2001; Madhok, 1997). Because
the ownership level represents the degree of control that the MNE head-
quarters exerts on its subsidiary activities, it has strong implications for stra-
tegic behavior and corporate performance (Gedajlovic & Shapiro, 1998, 2002).
From a hierarchical perspective on decisions involving the entry strategy (Pan
& Tse, 2000), after deciding to enter by using its own capital, the MNE will
decide whether it will establish a wholly owned subsidiary (WOS) or share
ownership with partners as a joint venture (JV). This decision involves defin-
ing the percentage of equity ownership in its overseas operations. An intrinsic
 10 P. K. IZUMI ET AL.

relationship exists between the ownership level chosen and the number of
possible foreign partners. Thus, the lower the shareholdings of the parent
company in a subsidiary composition, the greater the participation of one
or more partners.
A parent firm has full and exclusive property rights for managing the
operation in a WOS. Conversely, in a JV, local and foreign partners share
the equity ownership, management, risks, and rewards of the incorporated
organization (Ogasavara & Hoshino, 2007). On the one hand, the greater
the ownership level in a foreign subsidiary, the greater the operational control
by the parent firm—the greater resource commitment, investment, and risk
not withstanding (Agarwal & Ramaswami, 1992; Barkema, Bell, & Pennings,
1996; Luo, 2001; Parola, Satta, Persico, & Bella, 2013). On the other hand, if
a MNE enters a foreign market through partnership, it not only needs to
control its local managers and protect its intellectual property, it must also
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manage potential conflicts of interest between different partners, which

increases managerial complexity.
Previous research suggests that for distant cultures (Hofstede, 1984), a JV
is the ownership structure traditionally used to access the market (Makino &
Beamish, 1998). Strategic alliances between partners of different national-
ities incur a higher level of management complexity than those between
partners of the same nationality. JVs formed between partners who share
a similar national or corporate culture tend to achieve superior financial
performances (Makino & Beamish, 1998). A conventional JV is more sus-
ceptible to cultural distance issues than a WOS, due to the difficulties such
firms have in dealing with the “double-layered acculturation” (Barkema
et al., 1996)—meaning managing cultural differences at both organizational
and national levels.
To investigate the cause of failures in strategic alliances, Park and Ungson
(2001) focused on two primary sources of failed alliances: interfirm rivalry
and management complexity. The study proposed that strategic alliances fail
due to opportunistic hazards as each partner tries to maximize their own indi-
vidual interests instead of shared interests. In addition, failures arise because
of the difficulties (coordination costs) in coordinating two independent firms.
Previous studies have noted that as the number of partners increases, so does
the complexity of contractual governance, due to managerial complexity and
aspects associated to imperfect information, uncertainty about partner beha-
vior, and the incongruity of goals (Gong, Shenkar, Luo, & Nyaw, 2007; Park &
Russo, 1996; Parkhe, 1993). Based on these arguments, we offer the following
two hypotheses:
H3: The ownership level of the parent company has a positive effect on the
propensity of MNEs to locate their subsidiaries in global cities.
H3: H4: Managerial complexity has a negative effect on the propensity of MNEs to
locate their subsidiaries in global cities.
 LATIN AMERICAN BUSINESS REVIEW 11

Methods
Sample
This is a quantitative study using a sample of Japanese MNE subsidiaries
operating in Latin America. Japanese firms were chosen for several reasons.
First, the Japanese economy during the period of analysis was the world’s
second largest. Second, a secondary database at the subsidiary level was
available. Third, the choice of Japanese investment in Latin American was a
way to analyze MNEs operating in emerging markets, as only a few studies
have investigated this particular region (Ogasavara & Hoshino, 2007).
Secondary data from Japanese subsidiaries were obtained from the printed
editions of the 2006–2012 database called Kaigai Shinshutsu Kigyou Souran,
a publication of the Toyo Keizai Company. This data source, published
annually since 1970, provides extensive information on the overseas activities
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of Japanese subsidiaries and has garnered increasing acceptance among

international business researchers (Ando & Paik, 2013; Chan et al., 2010;
Makino & Beamish, 1998; Ogasavara & Hoshino, 2007).
For GCs, this study adopts the list developed by the researchers at
Loughborough University and founders of GaWC (Globalization and World
Cities Research Network). The GC list is based on cities’ ability to supply
global corporate services. The list focuses on the presence in multiple
locations of offices of four types of advanced services companies: accounting,
advertising, financial, and legal (Beaverstock, Smith, & Taylor, 1999). From
the year 2000, GaWC began to adopt connectivity between advanced services
firms present on the GCs list as a measure of global connectivity among
them, recognizing the role of these companies in the formation of global city
networks (GaWC, 2012). The initial sample contains subsidiaries located in
25 LA countries that present data from 2006 to 2012, for a total of 11,655
observations. By eliminating 18 countries that do not have GCs, there remain
7,945 observations (eight countries with GCs over a 7-year period). Also
excluded were missing value cases.
Table 1 summarizes the final sample regarding the observations of
254 Japanese subsidiaries operating in Latin America in each year and

Table 1. Sample: Observations per year.

Latin America
Year Global cities Non-global cities N
2006 68 70 138
2007 48 50 98
2008 49 47 96
2009 61 78 139
2010 78 87 165
2011 82 99 181
2012 86 109 195
 12 P. K. IZUMI ET AL.

differentiates between GCs and NGCs. It should be noted that the number of
observations in the sample is different for each year analyzed since they
correspond to the subsidiaries in operation with available data in that
respective year.

Variables
Dependent variable
Measured by the GC location considering a dummy variable. Subsidiaries
located in a GC equal 1, while subsidiaries located in a NGC equal 0. As
mentioned earlier, the GaWC classification (2012) was used because it is
considered a theoretically transparent and empirically rigorous GCs rating
(Beaverstock et al., 1999). LATAM GCs are Mexico City, São Paulo, Caracas,
Santiago, Buenos Aires, Rio de Janeiro, Bogota, Lima, Montevideo, and
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Brasília. NGCs consist only of other cities appearing in the Toyo Keizai
database from the eight countries that have GCs (Mexico, Brazil, Venezuela,
Chile, Argentina, Colombia, Peru, and Uruguay).

Independent and control variables

Table 2 summarizes the independent and control variables and describes the
operationalization (description) and the expected sign of the hypotheses
(positive or negative). For the control variable, the types of subsidiary industry
were coded numerically, grouping the different sectors into two areas of

Table 2. Variable descriptions.

Expected
Variable Description sign Hypothesis
LOCATION
Global City Dummy: 1 = Global city; 0 = Non-global city
OWNERSHIP
Subsidiary control Number of expatriates in subsidiaries + H1
divided by number of employees
Firm resources Number of employees (dummy). 1 = Large − H2
(non-manufacturing >100; manufacturing >500);
0 = Small and Medium (non-manufacturing < = 100;
manufacturing < = 500)
INTERNALIZATION
Ownership level Percentage of equity ownership by parent firm + H3
Managerial complexity Total number of partners, considering − H4
Japanese partners and local partners
CONTROL VARIABLE*
Industry Dummy: 1 = Manufacturing; 0 = Nonmanufacturing
Source: prepared by authors.
Note: To test the size of subsidiaries we used a dummy variable with the following code: (0) for small and
medium companies and (1) for large companies. In this case, we adopted the classification of the
Brazilian Service of Support for Micro and Small Enterprises (Sebrae, 2014). In the manufacturing sector,
a company is considered small or medium when it has 500 or fewer employees and large otherwise. In
the case of non-manufacturing, a company is considered small or medium when it has 100 or fewer
employees, and large otherwise (Sebrae, 2014).
 LATIN AMERICAN BUSINESS REVIEW 13

activity: manufacturing and nonmanufacturing. We analyzed the sectors to

verify how the foreign subsidiary industry influences the global city location.
For the classification of the sector a dummy variable was created, using (1) for
the manufacturing sector and (0) for the non-manufacturing sector.

Statistical analysis
The quantitative analysis is based on binary logistic regression. This method,
like multiple linear regression, analyzes the relationship between a dependent
variable and one or more independent variables. This regression is the
most recommended analytical tool when the dependent variable is binary
(dummy), independent variables are qualitative or quantitative, and
multivariate normality assumptions are not met (Ball & Tschoegl, 1982;
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Cox, 1972). The regression model including four independent variables and
one control variable is as follows:
Y ¼ bh þ b1ðSubsidiary ControlÞ þ b2ðFirm ResourcesÞ
þ b3ðOwnership LevelÞ þ b4ðManagerial ComplexityÞ þ b5ðIndustryÞ

Discussion and data analysis

Before running the binary regression, we performed a correlation analysis
between pairs of independent variables. The correlation was not significant
in almost all regressions of annual data. These results demonstrate strong
absence of collinearity among the four independent variables of this model.
Moreover, a variance inflation factor (VIF) test for each year of the period
2006–2012 confirms the absence of multicollinearity, since the VIF was less
than 1.2 for all variables (Hair, Black, Babin, Anderson, & Tatham, 2006).
Table 3 shows results for the hypothesis analyzing the binary regression
model. It includes four independent variables and one control variable in
order to observe the impact of the subsidiary location in relation to GC or
NGC. The table shows higher level of significance in 2006 for firm resources
(p < 0.01) and 2010 for subsidiary control (p < 0.05). In 2007, 2009, 2010, and
2011, these variables were marginally significant (p < 0.10) as determinants of
location in global cities.
Regarding the explanatory capacity of the model, the R2 coefficient of
Nagelkerke is satisfactory, with a variation of 0.32 to 0.47.
To estimate the classificatory efficiency of the model, the sample was
divided into two parts: one used to estimate the model and the other to test
the efficiency of the classification—holdout sample (Hair et al., 2006). The
number of cases corresponds to approximately 60% of the total set of
observations, as suggested by Hair and colleagues (2006). Table 4 shows the
 14 P. K. IZUMI ET AL.

Table 3. Binary logistic regression model.

Year 2006 2007 2008 2009 2010 2011 2012
Variables Regression coefficients
Constant −1.031 −0.612 −2.328 −1.185 −0.343 0.615 0.642
Ownership advantages
Subsidiary control 1.540 0.407 0.960 5.164* 4.869** 1.685 2.878*
Firm resources −1.342*** −1.306* −0.877 −0.354 −0.234 −0.733* −0.617*
Internalization advantages
Ownership level 2.354* 1.813 4.150* 2.399* 1.005 0.618 0.435
Managerial complexity −0.040 0.069 −0.220 −0.019 −0.460* −0.328 −0.330*
Industry −2.184*** −2.881*** −2.615*** −1.826*** −2.049*** −2.009*** −1.914***
(control variable)
N – observations 138 98 96 139 165 181 195
R2 Cox & Snell 0.296 0.350 0.350 0.263 0.276 0.243 0.239
R2 Nagelkerke 0.394 0.466 0.466 0.353 0.369 0.325 0.320
***p < 0.01; **p < 0.05; *p < 0.10.
**p < 0.01; **p < 0.05; *p < 0.10.
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classification accuracy table of the validation sample for each year. The results
reveal that overall classification accuracy of the training sample and the
holdout sample are relatively similar, thus attesting to the predictive capacity
of the model.

Table 4. Classification tablea.

Predicted
Selected cases Unselected cases
Global city Global city
Year Observed 0 1 % correct 0 1 % correct
2006 Global city 0 40 6 87.0 19 5 79.2
1 14 27 65.9 9 18 66.7
Overall percentage 77.0 72.5
2007 Global city 0 20 9 69.0 15 6 71.4
1 3 22 88.0 2 21 91.3
Overall percentage 77.8 81.8
2008 Global city 0 20 8 71.4 14 5 73.7
1 4 26 86.7 4 15 78.9
Overall percentage 79.3 76.3
2009 Global city 0 31 10 75.6 27 10 73.0
1 11 27 71.1 8 15 65.2
Overall percentage 73.4 70.0
2010 Global city 0 33 15 68.8 30 9 76.9
1 14 34 70.8 8 22 73.3
Overall percentage 69.8 75.4
2011 Global city 0 44 14 75.9 34 7 82.9
1 17 35 67.3 15 15 50,0
Overall percentage 71.8 69.0
2012 Global city 0 53 22 70.7 23 11 67.6
1 19 37 66.1 8 22 73.3
Overall percentage 68.7 70.3
a
The cut value is 0.500.
This table shows the 60–40 split-sample validation test results for each year of the period 2006–2012.
Subsidiaries were randomly selected, where 60% of the sample are classified in the training sample and
40% are classified in the hold-out sample.
 LATIN AMERICAN BUSINESS REVIEW 15

Regarding Ownership Advantages, the coefficient of Subsidiary Control

showed significant results after the international financial crisis—years 2010
and 2012—demonstrating that in this period, companies used qualified
professionals to manage subsidiaries, and this factor influenced the choice
of GC location. Thus, this result provides partial support for H1. The presence
of expatriate communities is a prerequisite and a result of economic
development of GCs (Beaverstock & Boardwell, 2000; Findlay et al., 1996).
This workforce is necessary to offer companies the ability to coordinate
activities transnationally, and such transactions attract workers with specific
skills to GCs (Findlay et al., 1996). Possibly, given the type of activity in
GCs where the subsidiaries are often responsible for regional or global
operations (Nachum & Wymbs, 2005), the need for coordination intensified
in the post-financial crisis period. This fact could justify the use of expatriates
in GCs as a way of maintaining the global capacity and the Subsidiary Control
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in these locations.
The other ownership advantage, Firm Resources, shows a significant effect
on GC location choice in the years 2006, 2007, 2011, and 2012, which
supports H2. The negative sign indicates that large subsidiaries tend to
be located outside of GCs, while smaller ones are located in GCs, which is
consistent with the theoretical framework cited in this study.
In terms of Internalization Advantages, the results show that the relation-
ship between Ownership Level and GC location decision is marginally
significant in 2006, 2008, and 2009—in the period before and during the
international economic crisis. The results imply that MNEs internalized their
resources, possibly to minimize investment risks. This finding provides partial
support for H3.
For the findings related to Managerial Complexity, the coefficients are
negative and marginally significant only for the years 2010 and 2012. The
complexity of contractual governance is associated to post-economic crisis
period. Thus, the results partially support H4. Regarding the control variable
Industry, found to be significant at p < 0.10, the negative sign indicates that
subsidiaries of the industrial sector (manufacturing) tend to be located outside
GCs, and that non-industrial enterprises (nonmanufacturing) seek to locate in
GCs. Service sectors in GCs are predominantly non-manufacturing.
The findings are consistent with the characterizations of previous research
(Goerzen & Beamish, 2003; Sassen, 2001, 2005; Taylor et al., 2014). Advanced
producer services tend to cluster in GCs, forming knowledge clusters, which
can help MNEs reduce the liability of foreignness (Goerzen & Beamish,
2003). Conversely, manufacturing firms tend to locate outside of GCs in an
attempt to minimize operating costs. Costs of locating in a GC city are often
too high for manufacturing firms, which need much more space than service
firms. Therefore, to reach their customers, they often rely on distributors and
distribution channels located in GCs.
 16 P. K. IZUMI ET AL.

Conclusions
This article addressed a topic of emerging relevance in international business
studies, which is the factors influencing decision making by MNEs to locate
their international subsidiaries in GCs. More specifically, it provided the first
evidence of the effect of specific attributes of subsidiaries on location decisions
in LATAM GCs. Attributes of ownership and internalization advantages
influence the GC location decisions. Subsidiary-level variables can explain
the location decisions of MNEs, a finding counter to that of most studies,
which focus on location factors, such as market size, labor cost, or the tax rate
of a country. Empirical research with a focus on GCs is quite recent, yet still
scarce in international business studies. Analyses at levels of smaller
geographical areas are considered increasingly important, since location
characteristics have relative importance vis-à-vis other firm-specific attributes.
This study contributes to the growing research that focuses on a regional or
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sub-national geographic scope, with a particular focus on choice of location

in the emerging markets of Latin America.
One interesting finding with important implications refers to timeframe.
The subsidiaries were found to have adopted particular strategic behavior
due to the international economic crisis. In the period before and during
the international economic crisis, subsidiaries sought to exploit more inten-
sively their internalization advantages (higher equity ownership levels) by
exerting greater control of subsidiaries in GCs. The fact that emerging
countries were less affected by the recession may be related to the increase
of foreign direct investment in these regions during that period. Post-
international recession, MNEs have used qualified professionals to manage
subsidiaries, and this factor has influenced the choice of GC locations. This
fact could justify the use of expatriate workers as a way of maintaining
the global capacity of these firms and the transfer of knowledge within the
MNE network.
Moreover, our results show that industry sector is an important factor to be
considered in GC locations in emerging markets. Nonmanufacturing firms
have a higher propensity to locate in GCs, indicating a tendency toward
agglomeration in tertiary sector activities in certain geographical areas. Large
subsidiaries, that is, those with greater firm resources, tend to be located
outside of GCs, while smaller subsidiaries locate in GCs.
Despite providing interesting findings, this research has some limitations.
First, our empirical model is limited to a few variables available in the data-
base. Second, we were unable to use more-detailed information about indus-
trial sectors, which could have provided interesting insights. Because we used
a printed version of the database, no industry code was available. Third, there
are many other possible variables for the approach to ownership advantages
and internalization advantages. However, the study included variables widely
 LATIN AMERICAN BUSINESS REVIEW 17

used in empirical research on determinants of location, thus hypotheses

testing was adequate. Fourth, this study analyzed only Japanese subsidiary
cases. It is possible that firms originating from other countries have their
own requirements, which can cause them to react differently to the attractive-
ness of GCs. One of these differences refers to the fact that Japanese multina-
tional companies, when compared with the MNEs of other nationalities, have
a stronger tendency to control the subsidiaries through expatriate parent
country nationals (Gong, 2003; Kopp, 1994; Peterson, Napier, & Shim,
1996). In addition, due to the significant cultural distance between Japan
and Latin American countries, one might expect expatriates to be even more
critical in the management of Japanese foreign subsidiaries.
Finally, we restricted the study to a specific set of attributes of the subsidi-
aries that influenced the choice of location in GCs. Future studies should use a
complementary perspective to consider city characteristics, such as infrastruc-
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ture, government support, and other institutional aspects that could also
contribute to a better discussion of the location decision. Moreover, further
research could examine how location-specific and firm-specific characteristics
interact in the determination of location choice, which could identify and
enlighten as to motivations behind specific location decisions made by MNEs
in GCs. Such recommendations are a promising agenda for further integrated
perspectives of international business and economic geography.

ORCID
Mário Henrique Ogasavara http://orcid.org/0000-0001-8988-5762

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