18.01.2017

Learning from Others: When to Imitate – and When to Disregard

LI, J. T. | QIAN, Cuili | YAO, Fiona K.

Company X from the United States is considering investing in China, and managers’ first move is to observe the choices made by other overseas firms already in the country. After studying patterns of behavior, they can then set out to learn the technologies, organizational forms and managerial practices that have worked for the incumbents.

In this scenario, a potential investor can decide whether to follow others into the same location or to invest elsewhere in the country and explore a new potential market. Prior entrants’ experience can be an important information source for firms evaluating whether a given location is worth pursuing, a factor particularly relevant when entering an emerging economy where uncertainty is likely to be high. Previous studies indicate that organizations imitate the practices adopted by others and they will pick a location that has seen frequent successful entries.

Beyond simply imitating the actions most frequently used, firms may look further into differences among the companies in their reference group – are they first-time foreign investors, or are they highly experienced, i.e. do they have a number of sequential investments? If the latter, this will likely increase the confidence of the would-be investor. But if the location is crowded with veteran incumbents, the learning firm may consider the competition to be too strong.

The research team of Jiatao Li, Cuili Qian, and Fiona K. Yao wanted to discover the extent to which the proportion of the previous entries made by experienced investors affects the level of confidence of later entrants in imitating them. They hypothesized that the percentage of sequential investments by other firms had an “inverted U-shaped” relationship with the probability that a firm investing subsequently will choose that location.

Their second question was related to the nature of the learning organization. Companies vary in their capacity to learn from others, so how does learning from target firms vary with the learning firm’s experience in the host country? The hypothesis was that greater experience in the host country will weaken the relationship between the percentage of sequential investments by other firms in a location and the probability that a subsequent entrant will choose that location.

The researchers studied the location choices of 7,478 manufacturing ventures in China by American firms. The results tended to confirm that a firm’s location decisions are indeed influenced by learning from a reference group. However, the firm does not necessarily copy the most frequently used practices, but learns from decisions made by the more experienced investors. Learning from experienced firms seems particularly influential in building confidence in imitation.

These results contribute to understanding of interorganizational learning by highlighting the importance of how learning from experienced targets affects confidence in imitating. The findings go beyond previous studies by bringing competition into consideration. When a firm sees a high proportion of sequential entries made by experienced firms, its confidence in imitating them and choosing that location decreases rather than increases. It is more inclined to choose another location, presumably to avoid competition. And when considered in tandem with a firm’s own experience, the curvilinear impact of learning from others’ experiences becomes weaker for firms with experience in the host country. Compared with experience in other host country locations, knowledge in the specific location is apparently more salient and transferable, and this has a stronger weakening effect on learning from others.

The results suggest some interesting implications for future research. Previous studies have mainly focused on firm-level factors influencing search behavior, and interlocking networks. Foreign direct investment location choice is a new setting for the study of this phenomenon at the interorganizational level, and it would be enlightening if these results could be generalized to other empirical settings.

LI, J. T.

Lee Quo Wei Professor of Business, Chair Professor, Director of Center for Business Strategy and Innovation
Management