Choice of Entry Mode

1
Choice of Entry Mode

• DBA
• Joint Venture Management
• Howard Davies

2
The Joint Venture Is One Form of Entry Mode, to
be Compared With

• Wholly-owned subsidiaries
• greenfield ventures
• acquisitions
• Contractual Strategies
• licensing
• franchising

3
What Do We Know About the Factors Which Determine
Entry Mode Choice?

• Many conceptual frameworks
• Ownership advantages - Hymer (1960, 1976) firms
  go abroad in order to exploit their advantages -
  the nature of the advantage may influence the
  entry mode chosen
• Internalization and Transactions Costs - Buckley
  and Casson (1976) Hennart (1991) certain
  conditions make it more profitable to internalize
  a transaction
• Strategic Behaviour - Kogut (1988) entry mode
  may affect the firms position relative to others
• Bargaining Theory - Fagre and Wells (1982),
  Kobrin (1987) - firms bargain with governments
  over the terms on which they can enter
• Eclectic Theory - Dunning (1981) Hill, Hwang and
  Kim (1990) - all of the above

4
But How to Operationalize These Theories?

• The theories are formed at such an abstract level
  that considerable development is needed to apply
  them.
• At least 8 sets of factors have been examined, in
  the name of the theoretical frameworks outlined
  above
• entrant firm characteristics - the dominant
  research stream
• home industry characteristics
• home country characteristics
• host industry characteristics
• host country characteristics
• host/home country differences
• venture characteristics
• global industry conditions

5
Entrant Firm Characteristics(36 out of 49
studies)

• WHAT IS THE LOGIC AND HOW PRECISELY DOES IT
  DERIVE FROM THE THEORIES? (Poorly articulated?)
• Firms going abroad on the basis of leakable
  advantages seek more control- hence
  RD/technology- intensive firms choose higher
  degrees of control (WOFEgtJVgtLicensing) - 6
  studies YESDavidson and McFetridge 1985Fagre
  and Wells, 1982Gomes-Casseres 1989Hennart and
  Park, 1993Kobrin 1987Stopford and Wells, 1972
  3 studies NO Hennart 1991Chang 1995 Hisey and
  Caves1985. Advertising intensity has similar
  results
• Larger firms choose higher degrees of control.
  WHY? They have more resources to protect? -7
  studies YES, including Agarwal and Ramaswami
  1992Erramilli, 1991, 1996. 2 no support, 1 NO
  Chan 1995.
• Firms with more international experience choose
  higher ownership Gatignon and Anderson 1988
  Hennart 1991 Kobrin 1987 because they are
  prepared to take more risk (????) or lower
  Gomes-Casseres 1989 Hennart and Reddy 1997
  because they are prepared to take more risk!!!!.
  Firms JV in more familiar/closer markets
• WHAT IF NON-LINEAR RELATIONSHIPS? (High and low
  experience leads to high control strategies)

6
Other Relevant Entrant Firm Characteristics?

• Different Goals and Motivations lead to Different
  Strategies
• following clients (as opposed to seeking markets)
  leads to higher control strategies - Erramilli
  and Rao 1990
• accessing raw materials monopolised by local
  firms leads to JVs - Gomes-Casseres 1989
• where global strategy is involved, higher control
  is sought - Kim and Hwang 1992

7
Home Industry and Country?

• Home Industry Characteristics?
• Caves and Mehra 1986 - More competition at home
  (measured by increases in the number of MNCs in
  the home market) leads to higher degree of
  control required in overseas entries(but Fagre
  and Wells 1982 found no relationship)
• In RD intensive industries where product
  technology is important firms prefer JVs to
  having more control (Gomes-Casseres 1989) and
  licensing preferred to FDI in industries with
  high of managewrial workers (Contractor
  1984)(Does this contradict the transactions
  argument?)

• Home Country Characteristics?(Erramilli 1996)
• Firms from countries whose culture exhibits high
  POWER DISTANCE and high UNCERTAINTY AVOIDANCE
  seek higher ownership

8
Host IndustryGrowth, Concentration and RD
intensity?

• One set of studies
• JVs preferred over WOFEs when industry growth is
  very rapid (Hennart 1991)
• JVs preferred over acquisitions when growth is
  neither fast nor slow (Hennart and Reddy, 1997)
• High degrees of ownership preferred when market
  potential is good (Agarwal and Ramaswami, 1992)
• But Kogut and Singh (1988) found no association
• Concentration - high concentration means
  acquisition preferred to greenfield (Caves and
  Mehra, 1986) - BUT others found no association
  between concentration and entry mode (Hennart
  1991Hennart and Park, 1993Kogut and Singh 1988)
• RD intensity - JVs preferred over WOFEs when
  host industry is technology intensive (Kogut and
  Singh 1988,Singh and Kogut 1989)

9
Host Country Characteristics?

• Government Policy as the most obvious influence
• restrictive policies lead to choice of JVs
  (Erramilli, 1996 Kobrin 1987Gomes-Casseres
  1990)
• BUT Contractor (1984) found no link
• Riskiness?
• Some studies found a positive relationship
  between riskiness of a country and the degree of
  ownership (Kim and Hwang 1992), some found no
  relationship (Erramilli and Rao 1993Kobrin 1987)
  some found a negative relationship (Aulakh and
  Kotabe 1997Gatignon and Anderson 1988)
• Country size -
• bigger leads to preference for ownership
  (Erramilli 1996) or licensing (Davidson and
  McFetridge 1985
• Development/technological capability
• positively associated with preference for
  licensing

10
Country Differences?

• Cultural differences - AT LAST SOME CONSENSUS!!
• THE GREATER THE CULTURAL DIFFERENCE, THE LOWER
  THE OF OWNERSHIP DESIRED (Agarwal
  1994Erramilli 1991Erramilli and Rao 1993
  Fladmoe-Lundquist and Jacque 1995 Gatignon and
  Anderson 1988)
• BUT Kwon and Konopa (1992) found no link between
  shared language or geographical distance and
  entry strategy

11
Other Factors?

• VENTURE CHARACTERISTICS
• Level of ownership negatively associated with
  size of the venture relative to parent size (the
  scale economies connection?) - Gatignon and
  Anderson 1988Singh and Kogut 1989) but Kobrin
  (1987) found no relationship and Erramilli (1996)
  found subsidiary size POSITIVELY related to
  desired level of ownership
• More RD involved leads to desire for 100
  ownership(Gatignon and Anderson 1988)
• GLOBAL CONDITIONS
• Global concentration leads to lower of
  ownership sought (Kobrin 1987)
• Riskier global environment, firms accept lower
  ownership and control in order to commit less
  resources (Brouthers 1995)

12
What About Entry Mode and Performance?

• ROE, ROS or Perceptual Measures - conflicting
  results
• Share price effects from event studies -
  inconclusive
• Stability i.e. duration - Gomes-Casseres (1987)
  found WOFEs more stable than JVs, Beamish (1985)
  found the opposite

13
SO WHAT DO WE KNOW?

• NOT MUCH!!!
• WHY??
• Underspecification - a small number of factors
  examined in each study
• No control for contingency factors which will
  moderate any relationships e.g. the environment
  will impact on performance
• Little examination of implementation issues
• Different specification of key variables
• Links may be non-linear (e.g. U-shaped)
• LINKS TO THEORY POORLY ARTICULATED
• POOR INTERPRETATION OF RESULTS?