Cultural distance,political risk,or governance quality? Towards a more accurate conceptualization and measurement of external uncertainty in foreign entry mode research

It is well accepted that multinational enterprises (MNEs) prefer equity joint ventures (JVs) over wholly owned subsidiaries (WOSs) in foreign countries where the formal and informal external environment is highly uncertain. Many entry mode studies have modeled the external uncertainty faced by MNEs in foreign countries as the cultural distance to these countries (thus focusing on the informal environment), or as their political risk level (thus focusing on the formal environment). We argue that both approaches are suboptimal because (1) cultural distance not only reflects the external uncertainty associated with WOSs but also the internal uncertainty associated with JVs, and (2) political risk covers only one aspect of the formal external environment. We contend that the governance quality of foreign countries is a better proxy for external uncertainty. The lower this quality, we hypothesize, the higher the likelihood that MNEs will choose JVs over WOSs. An analysis of 231 entries by Dutch MNEs into 48 countries offers support for this hypothesis. We also find that cultural distance has no impact on entry mode choice and that political risk has the weakest impact of all aspects of governance quality.     

Multinational Enterprises’ Entry Mode Strategies in Syria and Jordan: The Impact of Ownership Advantages

This study addresses the issue of ownership advantages affecting multinational enterprises’ (MNEs) entry mode strategies in developing countries. Although a few studies have focused on such effects, very little attention has been devoted to the ownership advantages generated from the institutional environment of MNEs’ home countries. To bridge this gap, this study concentrates on three types of ownership advantages: intangible asset advantages (IAA), advantages of common governance (ACG), and home‐country‐specific advantages (HCSA). Using a sample of 303 foreign affiliates, this study empirically examines the choice of MNEs between a wholly owned subsidiary (WOS) and a joint venture (JV). The data were collected from senior executives of MNEs’ subsidiaries operating in Syria and Jordan. The findings of this study reveal that MNEs’ choice of entry mode strategies is significantly influenced by intangible asset advantages, advantages of common governance, and home‐country‐specific advantages. Hence, senior executives perceiving an increased importance of these assets will opt for a WOS rather than a JV when entering a new market in the Middle East. © 2015 Wiley Periodicals, Inc.     

Natural disasters and MNE internalization: Reoptimizing subsidiary governance

Natural disasters pose significant threats to MNEs and their subsidiaries. We evaluate the impact and temporal significance of unsystematic disasters on MNE governance decisions. Focusing on JVs and drawing upon new internalization theory, we assess the significance of parent-subsidiary characteristics and experience after a disaster. Our dataset encompasses 7,938 disaster events across 132 countries affecting 5,375 Japanese MNEs and 20,053 subsidiaries over 26 years. We demonstrate the negative impact of disasters on JV survival and observe acquisition (exit) following a disaster based on higher (lower) levels of asset specificity, relative importance, and country and disaster specific experience.     

What changes the rules of the game in wholly owned subsidiaries? Determinants of knowledge acquisition from parent firms

We examine key factors affecting the extent of knowledge acquisition from multinational enterprises (MNEs) in their wholly owned subsidiaries (WOSs). As the volume of foreign direct investment (FDI) by MNEs is rapidly growing, empirical studies dealing with knowledge acquisition from parent firms in subsidiaries are in the limelight. However, as far as we know, none has attempted to identify primary mechanisms influencing subsidiary learning by dividing WOSs based on ‘investment mode’ and ‘investment direction’. We believe WOSs are characterized by these two issues and thus this research contributes to current literature by providing a detailed picture of learning mechanisms in subsidiaries. We advance a series of propositions to achieve the research objective by using a sample of WOSs established by MNEs in Korea. By doing this, we reveal that subsidiary learning depends significantly on absorptive capacity in learning organizations, relational capital and parent firms’ behavior. Also, we confirm that factors facilitating knowledge acquisition are influenced by investment mode and investment direction. Based on the results, this study provides some useful implications for MNEs and policy makers in local markets.     

我国企业跨国市场进入方式的选择战略

本文首先比较了不同跨国市场进入方式的优缺点,分析了并购与新建、独资与合资的各国选择经验和选择影响因素,最后指出我国对外直接投资的跨国市场进入方式选择:从投资动机看,对发达国家技术和管理经验寻求型直接投资的进入方式应以并购、合资为主,从东道国的外资政策看,我国的产业转移型对外直接投资的主要目标是发展中国家,进入方式应以新建、合资为主,从投资规模角度看,我国自然资源寻求型对外直接投资的进入方式应以合资为主。     

Entering China Today

Summary

The peripherally growing and remarkably dynamic Chinese economy is now encouraging the use of more diverse and creative entry modes for international investors. This article illustrates various entry modes of foreign direct investment available at present to foreign companies entering China. These entry modes include equity joint ventures, wholly foreign owned subsidiaries, contractual joint ventures, umbrella companies, acquisitions, representative offices, branches, build-operate-transfers, licensing and franchising. The merits and limitations of each entry mode are discussed. Some practical advice on entry strategies for international executives active in the Chinese market is also highlighted.     

Transactional and institutional alignment of entry modes in transition economies. A survival analysis of joint ventures and wholly owned subsidiaries in Vietnam

How do partially aligned entry modes predicted through theoretically pluralistic frameworks perform in terms of longevity? We build on transaction costs and neo-institutional economics and use event history method and Vietnamese data on 3835 joint ventures and wholly owned subsidiaries established by foreign firms from 1987 to 2008 to answer this question. We find that survival rates for entry modes that are partially aligned to transactional and institutional factors differ for JV- and WOS-based entries. We provide new evidence for the predictive power of the transactional and institutional approach for entry mode choice, performance, and survival in transition economies.     

Environmental risks,localization and the overseas subsidiary performance of MNEs from an emerging economy

Despite the fact that multinational enterprises (MNEs) from emerging economies invest actively in host countries with substantial risks, we have limited understanding of how they manage environmental risks to achieve desirable performance in their overseas subsidiaries. Drawing on resource dependence theory, we argue that different localization strategies serve as a mediating mechanism linking environmental risks and overseas subsidiary performance. Our findings based on a sample of Chinese MNEs show that industry risks significantly reduce the levels of input localization and marketing localization of Chinese MNEs’ subsidiaries, and thus negatively affect subsidiary performance. Political risks have an insignificant impact on input localization and marketing localization, but a positive direct impact on Chinese MNEs’ overseas subsidiary performance. We also find that state-owned MNEs’ localization strategies are more sensitive to industry risks compared with privately owned MNEs.     

A closer look at the productivity advantage of foreign affiliates

In analyzing firm productivity in Belgium, this article shows empirically that both scale and efficiency contribute positively to the typical productivity advantage of foreign affiliates. Stochastic production frontier estimation using the translog functional form indicates that foreign subsidiaries exploit economies of scale more fully and benefit from better (transferred) technological capabilities than Belgian national firms (i.e., Belgian owned firms without subsidiaries abroad). Belgian multinational enterprises (MNEs), i.e., Belgian owned firms with at least one subsidiary abroad, resemble foreign‐based MNEs in possessing specific technological advantages. While the increasing globalization has facilitated the realization of scale effects across borders, this article shows that the development of technological capabilities/advantages is still a prerequisite for MNEs to compete successfully abroad.     

Strategic group influence on entry mode choices in foreign markets

This study examines imitation behavior in the foreign entry mode of the members of a strategic group within the industry. Following the institutionalist perspective, we argue that legitimating actors (trade associations, training institutions and investors, among others) can exert pressure on strategic group members to conform to institutionalized organizational practices and structures. We hypothesize that a company’s choice of foreign entry mode is determined by the previous choices of other companies within the strategic reference group. Thus, the probability of entry with a wholly owned subsidiary (versus shared-control entry) increases when the number of wholly-owned subsidiaries established by companies within the strategic reference group of the home-country is higher. We analyze 351 foreign direct investments of 30 Spanish banks in 55 countries between 1986 and 2008. Our results reveal imitation behavior between members of the strategic group and highlight the important role of the strategic group in strategic thinking.     

The dynamic role of small- and medium-sized multinationals in global production networks: Norwegian maritime firms in the Greater Shanghai Region in China

This article examines the role of small- and medium-sized multinational enterprises (MNEs) in the dynamic development of global production networks (GPNs) in the maritime industry. It studies the dynamism between subsidiaries of Norwegian maritime firms and regional actors and institutions in the Greater Shanghai Region of China from the perspectives of the subsidiaries. It argues that strategic coupling, recoupling and decoupling are partly the results of regional selection mechanisms. However, in the cases where the subsidiaries are embedded within the host region, the strategies and behaviour of MNEs are of decisive importance for the dynamic development of GPNs.     

Perceived organizational justice, trust, and OCB: A study of Chinese workers in joint ventures and state-owned enterprises

We examine the relationships among perceived organizational justice, trust, and organizational citizenship behavior (OCB) of workers in joint ventures (JVs) and state-owned enterprises (SOEs) in China. We hypothesize different dimensions of organizational justice are related to trust in organization and trust in supervisor, which will in turn affect workers’ OCB. Some of these relationships are hypothesized to be different in SOEs and JVs owing to the differences in management practices and employment relationships between them. Our hypotheses are tested on data collected from 295 supervisor–subordinate dyads in a JV and 253 such dyads in an SOE. The analyses reveal that (1) the positive effect of distributive justice on trust in organization is stronger in JVs than in SOEs, (2) the positive effect of procedure justice on trust on organization is stronger in SOEs than in JVs, (3) the effect of interaction justice on trust in supervisor is similar for both types of organization; (4) trust in organization affects OCB in both SOEs and JVs, and (5) trust in supervisor affects OCB in JVs only.     

A stages approach to the internationalization of higher education? The entry of UK universities into China

This article contributes to understandings of the internationalization of higher education by investigating the extent to which a stages approach is evident in the overseas expansion of universities such that they begin with exports before moving on to contractual arrangements, then joint ventures and finally the establishment of wholly owned subsidiaries. Focusing on the expansion of UK universities into the Chinese market, the findings from 10 case studies reveal that universities do not follow a uniform market entry pattern. Moreover, evidence suggests that access to high-level personal networks in China determines the development of high commitment entry modes.     

The characteristics and stock-market performance of international joint ventures located in three host-country groups: An extension and empirical validation

In a well-known study of joint venture (JV) characteristics, Beamish (1985) compared the attributes and performance of JVs located in developed and developing countries. This study advances Beamish's (1985) work by circumventing some of its key limitations. It compares the structure and stock-market performance of two-party equity JVs across three host-country groups: (i) developed countries, (ii) newly industrialized countries, and (iii) developing countries (including Emerging markets and transition economies). Based on a cross-sectional sample of nearly 1100 JVs involving American firms and non-American partners, this study finds that JV characteristics diverge as well as converge vis-à-vis three host-country groups. Interestingly—unlike Beamish (1985)—differences in JV configurations across these groups do not result in differences in abnormal returns to American parents. However, some JV characteristics consistently influence firms’ shareholder value (albeit sometimes in opposite directions) whereas the valuation impact of other characteristics depends upon a particular host-country group.     

Performance effects of alternative joint venture resource responsibility structures

This study examines the relationship between the acquirers of a joint venture's (JV's) resources and the JV's performance in achieving its partners' goals. Research data were collected through surveys of 83 U.S. firms involved in manufacturing JVs to examine the differential impact of alternative resource responsibility structures on JV performance. The analysis shows that JVs receiving a variety of resources from both partners outperform JVs where JV management is responsible for securing its own resources, and outperform JVs receiving resources primarily from a dominant partner. The implications of the study's results for theory development, future research, and practicing managers are discussed.     

The effect of group composition and autonomy on the performance of joint ventures (JVs): an analysis based on Spanish export JVs

This paper analyses the effects of group composition and autonomy on the performance of export joint ventures (JVs). The basic argument is that group composition has a significant influence on the performance of JVs and, at the same time, this effect is moderated by the degree of autonomy held by the JV general manager. To lend support to this argument, we take insights from two complementary theoretical approaches: the resource-based view of the firm and the transaction cost theory. The hypotheses set forth are tested on the basis of a sample of 83 Spanish export JVs. The paper contributes to the literature providing evidence on the influence that export JV composition has on performance. It also suggests that autonomy does not directly affect export JV success, but it does, however, have an indirect effect by moderating the relationship between group composition and performance.     

Managing relationships within sino-foreign joint ventures

In setting up joint ventures (JVs) in the PRC, foreign staff are compelled to go through a painful management process. This includes encountering a myriad of problems and difficulties, ranging from external environmental problems to internal organizational conflicts of interest. Based on an empirical study of two leading JV pioneers in China, Shanghai Volkswagen Automotive Company Ltd. (SVW) and Beijing Jeep Corp. (BJC), this article suggests that the problems encountered are, in most cases, attributable to managerial relationships and human interaction. It submits that managers working within JVs in China would benefit greatly from understanding the dynamics of the relationships. Looking at this situation from both Western and Chinese perspectives, it sets out to describe the essential themes found in three principle managerial relationships: 1) between two/more parents; 2) between parents and the venture; and 3) between two groups of staff.     

MNE liability of foreignness versus local firm-specific advantages: The case of the Chinese management software industry

The theory of the multinational enterprise (MNE) suggests that the subsidiaries of MNEs possess firm-specific advantages (FSAs) that can overcome their liability of foreignness (LOF). It also suggests that subsidiaries can gradually decrease their LOF over time as they learn more about the host country environment and develop better connections to local business networks. Accordingly, subsidiaries should outperform local firms not only at point of entry but also (and increasingly so) in the long run as LOF decreases. This paper challenges this received wisdom by using case-study methodology to argue that LOF may not decrease over time and, meanwhile, the FSA gap between local firms and subsidiaries may narrow. We focus on two types of FSAs (asset and transaction ownership) and three sources of LOF (complexity, uncertainty, and discrimination) to develop a theoretical framework for analysing the dynamic relationships between LOF and FSAs and show how local firms can outperform foreign subsidiaries over time. We use the case of the Chinese management software industry to illustrate the framework. Our findings have important implications for MNEs competing abroad as well as helping to explain the emergence of strong competition from local firms.     

Cultural distance and the choice between wholly owned subsidiaries and joint ventures

Most empirical research on the choice between joint ventures and wholly owned subsidiaries analyzes the role of cultural distance in an isolated way. This study explores the potential influence of some factors related to the diversity among countries that are traditionally associated with cultural distance but not explicitly included in measurements of cultural distance. Different approaches to and measurements of cultural distance are used in this analysis. This study examines the potential existence of a moderating or intensifying effect of third variables on the role played by cultural distance. The results confirm the contingent role of host country risk on the choice between equity joint ventures and wholly owned subsidiaries.     

Real options and the theory of foreign direct investment

We extend applications of real options theory to foreign direct investment (FDI) research regarding choice of location and choice of market entry mode under uncertainty. Our study is motivated by the regional configuration of multinational enterprises (MNEs), as well as observed deviations from the stages model in internationalization theory. We shed light on these issues using real option modeling and computer simulations. The results suggest that from the standpoint of pursuing business opportunities and generating real options, building a subsidiary in a nonhome region could be more beneficial than in a home region. However, high option exercise cost may reduce the option value of a nonhome-region location. Our models also imply that choice of entry mode depends on the magnitude (high vs. low) and the type (exogenous vs. endogenous) of uncertainty. When uncertainty is high and endogenous, MNEs may prefer high-commitment entry modes because they contribute to the reduction of uncertainty and provide valuable growth options.