A transaction cost perspective on foreign market entry strategies of US and Japanese firms

A large scale survey of top US and Japanese executives is conducted in order to assess the power of transaction cost economics (TCE) in explaining a firm's choice of entry mode (e.g., joint venture vs. full ownership) when it enters a foreign market. Results suggest that several TCE tenets are useful in explaining US firms' choice of entry mode. However, TCE predictions were not supported by the entry mode choices of Japanese firms. Implications of these findings for researchers and managers are discussed. © 1998 John Wiley & Sons, Inc.     

Geographic Distance as a Moderator of Curvilinear Relationship Between Cultural Distance and Shared Ownership

This study tests geographic distance as a moderator of the curvilinear relationship between cultural distance and a firm's preference for shared ownership entry mode. The sample consisted of US foreign direct investments in 60 countries spread over 18 years. Results showed that an inverted U‐shaped relationship between cultural distance and preference for shared ownership is stronger for firms separated by high geographic distance. While full equity ownership is most likely when both cultural and geographic distances are either low or high, shared ownership is most likely when the cultural distance is high (low) but the geographic distance is low (high). Copyright © 2012 ASAC. Published by John Wiley & Sons, Ltd.     

Equity-based entry modes of emerging country multinationals: Lessons from Turkey

Based on a sample of 522 foreign affiliates of Turkish multinational enterprises (MNEs) with varying levels of Turkish equity ownership, this study provides an empirical analysis of the determinants of equity-based entry mode strategies in host country markets. A number of hypotheses are developed to examine the impact of institutional, transaction specific and firm level variables on Turkish MNEs’ choice of equity ownership mode in their foreign affiliates. The results reveal that institutional variables are important in explaining the equity composition of foreign affiliates of Turkish MNEs. Particularly important in determining equity ownership mode were found to be political constraints, linguistic distance, knowledge infrastructure and the extent of parent diversity. Results concerning the influences of the size of the affiliate are contrary to expectations and contradict the findings of previous research. No support was found for the impact of cultural distance on the equity ownership mode of Turkish MNEs in their foreign affiliates. Apart from political constraints, equity ownership choice and its underlying determinants do not vary between emerging and developed host country markets.     

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.     

Investment motive as a moderator of cultural-distance and relative knowledge relationships with foreign subsidiary ownership structure

In this analysis, we seek to contribute to the growing body of literature exploring moderators of cross-national differences and foreign subsidiary ownership structure relationships, by developing the argument that cultural distance and majority-owned foreign subsidiary relationships will be positively moderated if a subsidiary serves a manufacturing motive, as opposed to a market-seeking motive. Additionally, we argue that relationships between increasingly greater levels of host country technical knowledge, relative to a firm's home country, and the use of majority-owned foreign subsidiary structures will be negatively moderated by manufacturing motives. These ideas are tested, and supported, in the empirical context of subsidiaries of Japanese automotive firms from 1993 through 2009.     

The ‘miracle’ of car ownership in Japan's ‘Era of High Growth’, 1955–73

The ‘Era of High Growth’ in Japan is well known for its ‘miracle’ economy, although the reasons why car ownership increased during this period have been largely ignored. Both the ‘miracle’ and the process of motor manufacturing have been viewed from the perspective of supply rather than demand. This article examines the ways in which the formidable barriers to mass car ownership were removed during this period by analysing quantitative data and also reconsidering narratives of Japanese manufacturing predicated on Japanese cultural uniqueness (nihonjinron). It considers the Japanese as consumers as well as workers, and concludes that car ownership is less a ‘miracle’ than a manifestation of Japan's process of modernisation during the twentieth century.     

Foreign ownership strategies of UK and US international franchisors: An exploratory application of Dunning's envelope paradigm

In industries dominated by franchising as the dominant mode of entry there is a tendency that franchisors pursue different ownership strategies. We test ownership strategies of international franchisors using Dunning's ‘envelope’ Ownership, Location and Internalization (OLI) paradigm. The ownership choices of international franchisors’ foreign market entry based on the strategic intent of exploitation and exploration are well explained by Dunning's ‘envelope’ OLI paradigm. Our results show that the dynamic L advantages (perceiving foreign locations as a source of learning), the static O advantages (nationality of the firm) and static L advantages (the role of foreign applicants) have a significant influence on the selection of foreign entry strategy by international franchisors.     

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.     

Expanding near the home base or venture far? The influence of home country state on the economic distance of foreign direct investments

The extent of the economic distance between a firm's home origin and its foreign direct investment (FDI) is an important strategic decision for the investing firm. This study fills an important knowledge gap by investigating the home institutional antecedents of FDI economic distance. Drawing insights from comparative institutionalism, we argue that home-country states vary in both their power to coordinate the economy and the external and internal channels through which they exercise that power. These variations have implications on a firm's motivation and capability to escape external dependencies on the home-country state by investing in economically distant foreign locations. Empirically, using a dataset of 891 new international entrants from 2004 to 2011, we found support for our hypotheses that home-country state power is positively associated with FDI economic distance, and that the influence of the home-country state is contingent on the state's governance quality and its ownership in firms.     

Japanese Foreign Direct Investment in the UK Electronic Industry: The Eclectic Approach

This article analyses the combined effects of Japanese firms' ownership and location advantages on the size of foreign direct investment (FDI). The size of FDI is measured by two proxies, the firm's employment level and its total assets. Econometric models are estimated. The estimated regression models show that the parent company's firm-specific resources and the external economies in the located region determine the flow of FDI at the time of entry of Japanese electronic firms in the UK. This result shows that empirical analysis on FDI flows should combine both the ownership and location advantages, as suggested by Dunning's eclectic paradigm.     

Ownership structures of U.S. joint ventures in the 1980S

A firm's choice between sole and joint ventures in a foreign market is subject to various market-specific and firm-specific influences. This study draws upon the transaction cost and bargaining power theoretical frameworks to identify and measure some of these influences. A logistic regression model was employed to examine the relative influences of the main and interaction effects of the independent factors on ownership structures employed for new foreign subsidiaries by U.S. firms in the 1980s.     

On the choice of in-house production versus outsourcing by multinationals

Abstract

The global economy is becoming more integrated with the increase in international fragmentation. This paper examines two forms of global production networks in a general equilibrium framework by building on the ‘knowledge-capital model.’ The focus is the relationship between country characteristics and the multinational firm's choice either to allocate the labor-intensive processing stage in-house to its foreign affiliates or to outsource the activity to outside contractors at arm's-length. Chinese data on the export processing trade are used to test the theory. The findings show that multinational firms with their headquarters in highly skilled-labor-abundant countries of intermediate size have a preference for outsourcing. By contrast, skilled-labor-abundant countries of small size are homes to multinational firms with subsidiary production in the host country where unskilled labor is cheap.     

Reconceptualizing cultural distance: The role of cultural experience reserve in cross-border acquisitions

Cultural distance is one of the most widely used distance construct in international business. However, scholars have long questioned the notion that cultural distance has a homogenous impact on organizational actions and performance. We redress this by examining how the relationship between cultural differences and deal abandonment in cross-border acquisitions is contingent on firm-level cultural experience reserve and industry affiliation. Drawing on the organizational learning theory and cultural friction perspective, we first propose that the cultural experience reserve of a focal firm mitigates the positive impact of cultural differences on cross-border deal abandonment. We then hypothesize that the firm's industry context affects the uncertainties associated with cultural differences. Our findings based on a sample of 197 Indian services sector firms support our theoretical predictions.     

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.     

Cross-national distance and insidership within networks: Japanese MNCs' ownership strategies in their overseas subsidiaries

This study investigates the controversial question about how cross-national distance influences MNCs' equity ownership in their overseas subsidiaries. Prior studies adopted aggregated constructs and time-invariant measures of cross-national distance, failing to capture the complexity of the phenomenon. Moreover, although ‘insidership’ within business networks may moderate the foreignness that MNCs confront in overseas markets, prior studies have not incorporated it into analysis. The present study confirms the explanatory power of multiple dimensions of cross-national distance and MNCs' insidership within networks. It also shows that cross-national distance and insidership within relevant works strengthen or weaken each other's influences on Japanese ownership strategies.     

The Roles of Cultural Elements in International Retailing of Cultural Products: An Application to the Motion Picture Industry

We investigate factors influencing the international retailing of cultural products by concentrating on two cultural elements: (1) consumer-perceived cultural content embedded in the product and (2) the general cultural environment of the foreign market. To test cross-culture predictability in international retailing, we develop a novel text mining procedure to elicit the specific cultural content of the product using consumers’ online product reviews. In addition, to measure the general cultural environment of the market, we apply Hofstede's cultural distance measure. To explain foreign markets’ acceptance of culturally specific elements, we theorize that the relationship between inter-country cultural distance and product sales is U shaped because of both cultural discount and cultural premium. In our empirical analysis using American movies in international retailing, we find that the two specified types of cultural factors determine a movie's success, along with the movie's characteristics and the market's economic environment. From a managerial perspective, international retailers that understand the delicate implications of the match/mismatch of their general national culture and the imported product's specific cultural content can better predict the international success of imported cultural products.     

International new ventures as “small multinationals”: The importance of marketing capabilities

This paper explores how marketing capabilities contribute to the international expansion of international new ventures, and influence their choice of entry mode. The study examines how marketing capabilities help international new ventures to use entry modes involving higher resource commitment in international markets. The proposed model was tested on country-level data from Spain. The results show that marketing capabilities contribute to a firm's decision to choose entry modes involving higher resource commitment in foreign markets. The paper also includes insights on antecedents of international new ventures’ choice of entry modes in foreign markets.     

Examining Determinants of Foreign Wage Premiums in China

We estimate foreign wage premiums for every 3‐digit manufacturing industry in China and discover a wide range of premiums both for ‘foreign’ ownership and for overseas Chinese ownership. Foreign ownership generates larger and more prevalent wage premiums than overseas Chinese ownership, but both produce premiums that respond similarly in estimates of determinants. Using the number of computers per worker to measure firms' technology levels, we find evidence consistent with the hypothesis that foreign firms pay higher wages to reduce the risk of worker turnover and the accompanying technology leakage in 76 to 78 per cent of industries. However, this determinant explains only 5 to 6 per cent of the foreign wage premium. We find the most intensive support for the ‘fair wage’ hypothesis that foreign firms pay higher wages because they are more profitable than domestic firms and workers in more profitable firms expect to be paid more, otherwise they will shirk. This hypothesis explains an average of 8 to 9 per cent of the foreign wage premiums, with support found in 72 to 75 per cent of the industries. When we consider the best combination of explanatory variables to include in each industry's wage regression, we find evidence consistent with our combined hypotheses in most industries, but we still find large residual foreign wage premiums.     

Boundary-crossing and the localization of capabilities in a Japanese multinational firm

We conducted a case study to explore the challenges encountered by a foreign subsidiary of a Japanese multinational firm when localizing its organizational capabilities in China. Drawing on the concepts of boundaries and boundary-crossing, we identify pragmatic and cultural knowledge boundaries, which denied opportunities for the host-country employees to contribute their local expertise to augment the firm's core capabilities within the domains of research and development and operational protocols. However, within those domains that were regarded as complementary to or peripheral to the firm's core capabilities, host-country employees were granted more scope to cross the associated pragmatic boundaries.     

Do Strategic Motives Affect Ownership Mode of Foreign Direct Investments (FDIs) in Emerging African Markets? Evidence from Ghana

The objective of this study is to examine the influence of ownership, location, and internalization‐specific factors, as well as strategic motives on ownership choice of foreign subsidiaries in Ghana. The authors use a quantitative methodology in order to statistically explore the relationships between dependent and independent variables by using the logistic regression model. The analysis was based on 115 manufacturing investments made by multinational corporations (MNCs) from different countries in 1994–2013. The results indicate that contractual risk leads to the choice of whollymowned subsidiary while cultural distance and country risk lead to the choice of the joint venture. In the case of the motives, efficiency‐seeking and resource‐seeking FDIs lead to the choice of the joint venture. © 2016 Wiley Periodicals, Inc.