Local Embeddedness, Market Focus, and Productivity: Evidence of Taiwanese Manufacturing MNE Subsidiaries in China

There has been considerable literature discussing the characteristics and importance of location-specific factors in the context of Foreign Direct Investment (FDI), but very little literature linking location-specific factors to productivity. This study explores, for each location-specific factor, the relationship between the degree of local embeddedness and the labor productivity. We contribute to the body of literature on location-specific factors by arguing that market focuses play a pivotal role in determining the impact of local embeddedness on productivity. Based on their strategic choices, we categorize Taiwanese manufacturing multinational enterprise (MNE) subsidiaries in China into two groups: the local-market-focus group and the export-market-focus group. The paper fits the Ordinary Least Squares (OLS) regression models to the export-market-focus group and the local-market-focus group separately. For these two groups, each local-embeddedness variable exerts different effect on labor productivity. Results also suggest that local-market-focus FDI is more affected by the host country's local business environment than is export-market-focus FDI. Although this study cannot represent all foreign companies in China, its dynamism offers a rich context in which to explore a deeper understanding of foreign companies' business activities in China.