Institutional and transaction cost influences on MNEs’ ownership strategies of their affiliates: Evidence from an emerging market

This paper examines the impact of institutional, and transaction cost specific variables on MNEs’ choice of equity ownership in their foreign affiliates. We consider the determinants of the choice of foreign investors between full ownership (setting up a wholly owned greenfield subsidiary or engaging in a full acquisition) and sharing ownership with a local firm (establishing a greenfield joint venture or making a partial acquisition). Drawing on both transaction cost and institutional theories, a number of hypotheses are developed. Based on a dataset of 6838 foreign affiliates in Turkey, the empirical analysis reveals that institutional variables are important in explaining the equity composition of foreign affiliates. Particularly important in determining equity ownership were found to be political risk, cultural distance, linguistic distance, agglomeration, location and the size of the affiliate. A distinguishing feature of the paper is that we examine the marginal effects of the independent variables in explaining ownership patterns of MNEs.     

Board composition,family ownership,institutional distance and the foreign equity ownership strategies of Turkish MNEs

In much of the developing world, families represent the dominant form of firm ownership. This study investigates how this influences equity ownership strategies when firms venture abroad. Drawing on agency theory and institutional theory, we investigate the direct effect of board composition and family ownership on the equity-based ownership strategies of multinational enterprises (MNEs) in their affiliates, and how institutional distance may moderate this. Examining foreign affiliates of listed Turkish MNEs, we find that a high ratio of independent directors is negatively linked to levels of equity ownership of MNE affiliates. We also find that a high ratio of inside directors on the board is positively associated with the equity stake of MNEs in their affiliates. The significant interaction effect between board composition, family ownership and institutional distance helps explain the unexpectedly weak effects of institutional distance.     

Factors influencing perceptions of performance: The case of western FDI in an emerging market

This paper adopts an integrative approach to incorporate institutional, host country and firm variables as determinants of the factors influencing perceptions of foreign affiliate performance. Based on primary data from 145 affiliates of Western MNEs in Turkey, the findings show that the factors of input quality, comparative cost advantages and government regulations demonstrate a statistically significant impact on the perception of performance of affiliates. In contrast, political risk, financial incentives and cultural distance do not have any significant impact on the perception of performance of affiliates. The findings indicate that firm specific factors are less important than either institutional or perceived environment-specific factors within the host country in influencing perceptions of foreign affiliate performance.     

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.     

Ownership structures of norwegian foreign subsidiaries in manufacturing

This article explores how Norwegian multinational companies select ownership structures for their foreign manufacturing subsidiaries. Hypotheses are drawn from various theoretical perspectives on the choice of wholly owned versus partly owned affiliates. The hypotheses are tested on a sample of 174 foreign direct investments made by Norwegian companies. One main finding is that political risk of the host country strongly increases the probability that ownership of a foreign subsidiary is shared. The results also suggest that cultural distance between the home and the host countries leads to a higher propensity to joint venture. Other results were less conclusive and little support was found for a transaction coast approach to choice of ownership structures.     

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.     

A double-edged sword? The moderating effects of control on firm capabilities and institutional distance in explaining foreign affiliate performance

By drawing from the internalisation and institutional theories, as well as the organisational capability perspective, the paper analyses the moderating effects of parent control over foreign affiliates in relation to firm capabilities and institutional distance and their performance effects. These relationships are explored in the context of new MNEs from Poland as a mid-range emerging economy, for which ownership choices constitute critical decisions given their early stage of internationalisation. Our findings show that while firm capabilities drive foreign affiliate performance, the increase of parent control limits this beneficial effect, suggesting the potential occurrence of organisational inertia and reduction of learning in foreign markets. On the contrary, we also find partial evidence that the increase of parent control reduces the negative effect of institutional distance computed based on the Mahalanobis formula. Accordingly, the study suggests a certain ambiguity of parent control in affecting affiliate performance.     

Firm heterogeneity and location choice of Chinese Multinational Enterprises (MNEs)

Using data on 194 location choices in 32 countries for a decade, we investigated locational determinants of Chinese Multinational Enterprises (MNEs). We found that State-Owned MNEs, compared to their peers without controlling state equity, are less concerned about political risk of the host country, but more responsive to favorable exchange rate between Chinese RMB and the host currency. Strategic intent of Chinese MNEs affects their location choice in a way that manufacturing oriented investment, compared to trading subsidiaries, is more attracted to countries with large market size and more deterred by high cost structure of the host country.     

Determinants of Sales Destinations of U.S. Multinational Firms' Affiliates in Developing Countries

This study examines the determinants of the sales of .U.S. multinational firms' affiliates to alternative destinations, including sales to other affiliate firms in a host country and a source country markets as well as sales to other non-affiliate persons in each market. Sample host countries are drawn from developing economies where U.S. multinational firms had affiliate firms during the period 1983–1998. The results of the study reveal that affiliates of multinational firms manipulate sales to minimize international taxation. This is supported by the finding that foreign corporate income taxes: affect sales between affiliate firms favorably, unlike its impacts on sales of affiliates to non-affiliate persons in both a host country and source country markets. Considering all markets together, economic volatility and political instability have minimal impacts on sales of affiliates to other affiliate firms compared to their impacts on sales to non-affiliate persons. The results also confirm that host countries' economic policy reforms and membership in multinational investment guarantee agencies facilitate sales of affiliates to other affiliate firms.     

Distance and divestment of Korean MNC affiliates: the moderating role of entry mode and experience

In this study, we examine the impact of cross-national distance on the divestment of foreign affiliates. On the basis of the nine dimensions of cross-national distance (Berry et al. 2010. “An Institutional Approach to Cross-National Distance.” Journal of International Business Studies 41 (9): 1460-1480), we empirically examine the impact of each measure of distance on the divestment of affiliates. Using a data set of 1697 multinational corporations (MNCs) headquartered in Korea and their 2435 affiliates in 67 host countries from 2000 to 2010, we find that distance created by economic, financial, political, administrative, cultural, demographic, knowledge and global connectedness leads to the divestment of foreign affiliates. We also find that the positive relationship between cross-national distance and affiliate divestment is likely to become stronger when an MNC enters the host country through a joint venture and weaker for affiliates with greater experience in the host country.     

The Characteristics and Performance of Affiliates of Small and Medium-Size Multinational Enterprises in an Emerging Market

Little has been reported on the characteristics and performance of affiliates of small and medium-sized multinational enterprises (MNEs) operating in emerging markets. The paper has two research objectives: to assess characteristics of Korean affiliates of small and medium-sized MNEs, and identify the determinants of performance. Seven hypotheses were formulated and tested on a sample of Korean subsidiaries of small and medium-sized MNEs by using a bootstrap method of regression analysis. We found that: affiliates of small and medium-sized MNEs in Korea favored joint ventures with local firms rather than wholly-owned subsidiaries; ownership rate was directly related to the degree of control from the parent firm; and performance was determined significantly by the degree of control exercised by parent firms and their exporting levels. Age, size, and R&D expenditures had no relationship with the performance of affiliates of small and medium-size MNEs in Korea.     

Cross-border acquisition in services: Comparing ownership choice of developed and emerging economy MNEs in India

Despite rapid increase in cross-border acquisitions (CBAs), prior research has not examined ownership choice of foreign MNEs investing in the services sector in emerging economies. Drawing on multiple strands of literature, we posit acquirer's ownership choice (partial versus full acquisition) to be influenced by type of service offering (soft versus hard), institutional distance between acquirer and target nation, and acquirer's country-of-origin (emerging versus developed economy). Empirical analysis of 385 CBAs undertaken in India over an 11-year period provides evidence that services, in particular soft services, and high institutional distance increases the likelihood of full acquisition by emerging economy acquirers. However, acquirers from developed economies show preference for partial acquisition under similar circumstances.     

The moderating effect of bilateral investment treaty stringency on the relationship between political instability and subsidiary ownership choice

We investigate whether the degree to which a bilateral investment treaty (BIT) protects against expropriation (i.e., its “stringency”) influences the international strategy of multinational enterprises (MNEs) as they invest in countries with varying levels of political instability. We draw on institutional logic and insights from political economics to hypothesize that BIT stringency will moderate the established positive relationship between host country political instability and minority ownership. Analysis of a sample of 289 foreign investments made by AEX-listed Dutch MNEs in 34 countries between 2004 and 2013 provides support: a more stringent BIT will encourage the MNE to choose a majority stake as political instability rises. Robustness tests provide further support for our argument. The results have both managerial and policy implications relating to the role that BIT stringency plays in determining MNE strategy.     

Acquisitions Entry Strategies in Africa: The Role of Institutions,Target‐Specific Experience,and Host‐Country Capabilities—The Case Acquisitions of Finnish Multinationals in Africa

Acquisition is an important entry strategy for multinational enterprises (MNEs) seeking to gain faster entry into new and emerging markets and remain competitive in the global marketplace. MNEs utilize partial‐, staged‐, and full‐acquisition strategies when entering into foreign markets. This research analyzes how and why firms opt for these acquisition strategies in the context of Africa. The study applies institutional theory and explores constructs derived from the Uppsala internationalization process model. Using a case study of five Finnish acquisitions in Africa (Egypt, Morocco, Kenya, and South Africa), it was found that Finnish MNEs opt for partial acquisition rather than staged and full acquisition in the context of acquisitions made prior to late 1990s without earnout arrangements. Finnish MNEs opt for the choice of staged acquisition rather than partial and full acquisition in the contexts of mild regulatory framework in host countries and when the acquired firm business requires extensive improvements and the target host market structure is fragmented. Finnish MNEs opt for the choice of full acquisition rather than partial and staged acquisition in three contexts specifically: (1) when the acquiring Finnish MNE possesses host‐country capability, target‐specific experience, and ensures the retention of top management personnel of the acquired target; (2) when the size of the acquired target is relatively very small compared to the acquiring MNE; and (3) when the nature of the acquired firm business is well developed and the target host‐market structure is consolidating. © 2016 Wiley Periodicals, Inc.     

Ownership control of foreign affiliates: A property rights theory perspective

This paper applies property rights theory to explain changes in foreign affiliates’ ownership. Post-entry ownership change is driven by both firm-level characteristics and by the differences in the institutional environments in host countries. We distinguish between financial market development and the level of corruption as two different institutional dimensions, such that changes along these dimensions impact upon ownership change in different ways. Furthermore, we argue that changes in ownership are affected by the foreign affiliate’s relatedness with its parent’s sector, as well as by the affiliate’s maturity. We use firm level data across 125 host countries to test our hypotheses.     

Institutional determinants of ownership stake in cross-border acquisitions in Africa: The moderating role of geographic distance

We look at how emerging markets' institutional features affect ownership stake in cross-border acquisitions (CBAs) within Africa. Particularly, we show that the presence of shared colonial history between the home and host country and the extent of fractionalization distance and formal institutional distance influence the acquiring firm's decision regarding its ownership stake in the target. Moreover, we show that geographic distance between the home and host country, by augmenting uncertainty faced by acquiring firms, moderates the relationship between these institutional features and ownership stake. We test our hypotheses in a sample of 341 intra-Africa CBAs from 2001 to 2016. Generally, we find that greater ex ante uncertainty and ex post costs increase ownership stake. Specifically, greater geographic distance strengthens the positive relationship between shared colonial history and ownership stake and reverses the negative relationship between formal institutional distance and ownership stake. As for fractionalization distance, the relationship is more nuanced and needs to be further studied. We contribute to advance research on south–south CBAs in general, particularly within Africa, as well as to extend hostage theory in foreign market entry strategies in and from emerging markets.     

Gaining legitimacy through hiring local workforce at a premium: The case of MNEs in the United Arab Emirates

This study examines the process and outcomes of cultivating external legitimacy through the employment of host country nationals by multinational enterprises’ (MNEs) affiliates in the United Arab Emirates. It builds on the literatures of both institutional theory and legitimacy. Analysis of data obtained from 48 managers of MNE's affiliates located in the UAE shows that in sectors where the employment of host country nationals is almost taken for granted such as in banking, MNEs are driven by a sense of appropriateness and social legitimacy. In contrast, in sectors where the employment level of UAE nationals is almost nonexistent, those MNEs engaging in localization are driven by the logic of economic efficiency and tend to employ nationals in order to extract rent from the government. The authors discuss the results and their managerial and policy implications.     

Networks of foreign affiliates: Evidence from Japanese micro-data

The paper provides evidence of the investment patterns of Japanese multinational enterprises (MNEs) across countries and industries and analyses the main drivers of their location strategies, using detailed micro-data on Japanese parents and their affiliates including the final destination of affiliate sales. The breakdown of affiliate sales by destination market reveals that Japanese MNEs establish services affiliates primarily to maximise proximity to local customers, while foreign affiliates in manufacturing sectors tend to engage more widely with third countries. Yet, some economies emerge as strategic gateways to other destinations in their region. The empirical analysis delves into the drivers of host country attractiveness for FDI seeking new markets, production efficiency and to act as regional or global platforms. Important factors shaping Japanese FDI decisions include trade and investment policies in goods and services, deep FTAs, as well as streamlined customs procedures. Furthermore, well-calibrated rules for digital commerce and investments in digital infrastructure and innovation contribute to attracting MNEs. Overall, the paper stresses the factors behind better integration into global production networks and the policy priorities to attract various types of FDI inflows.     

Network complementaries in the international expansion of emerging market firms

Can domestic political capital be transferable to more or less similar institutional contexts abroad? Motivated by contradictory results in two streams of research, this study seeks to combine the insights from two theoretical arguments and conceptualize the role of domestic political ties in international expansion as a dual problem of securing key resources from home governments and looking for opportunities in foreign markets and matching resources to capture them. We adopt the notion of network complementarity to examine the complementarity effect of domestic political ties and foreign ties on international expansion. The implication is that EMNE research that concentrates on either looking for foreign opportunities or securing domestic resources, but not both, is likely to be incomplete when international expansion is being studied. Using a longitudinal panel dataset of Chinese international new ventures expanding to 105 foreign markets, we find a positive interactive effect of domestic political ties and foreign ties on Chinese MNEs’ internationalization. This positive interactive effect on internationalization is found to be stronger for expanding to developing host markets than to developed host markets. We discuss the implications of these findings for research on domestic political ties, the international expansion literature, the network complementarity literature, and the international entrepreneurship literature.     

The effects of business- and non-business-targeting terrorism on FDI to the MENA region: The moderating role of political regime

This study investigates the effects of terrorist attacks on foreign investment by stressing the importance of both business- and non-business-targeting terrorism in the host country. Building on North’s strand of institutional theory, we argue that both forms of terrorism represent exogenous risks likely to generate high levels of non-ergodic uncertainty for MNEs and subsequently deter foreign investors. Further, we hypothesize that these effects may be moderated by host-country political regime type, which serves as a gauge for a favorable investment environment for MNEs operating in institutionally fragile markets. Using panel data on fifteen MENA countries over the period 2001–2018, we find empirical support for our hypotheses whereby hybrid political regimes, namely anocracies, strengthen the negative effects of both business- and non-business-targeting terrorism on FDI. Our work contributes to the research on FDI and exogenous risks by offering a more fine-grained conceptualization of terrorism, as well as by highlighting the moderating role of host-country hybrid regimes.