Estimation results of the multinomial logit specification for entry mode and marginal effects Table 20 gives the estimation results for the multinomial logit model (models 1, 2) with

wholly-owned green-field, wholly owned acquisition, joint venture-acquisition and joint venture – green-field as four separate discrete choices in a non-hierarchical structure. Since our aim is also to find out the relative importance of the irreversibility and uncertainty vis-à-vis the model without these

other level. Since the choices at the second level (ownership or establishment mode) are the same in both subgroups, this condition for structuring the decision as a nested logit is not met.

variables in discriminating among the four entry modes, we show two specifications. In model 1 we estimated the multinomial logit model of entry mode with the direct effects of all theoretical variables. Model 2 augments this model with the hypothesis derived from option theory. For each determinant we discuss its impact on the ownership choice and on the establishment mode choice.

The impact of asset specificity on entry mode – simultaneous model

Mixed results are obtained for the influence of transaction-specific assets (technical and sales- promotion competence) on the ownership choice. The coefficients of the variables that capture the different aspects of asset specificity are positive, but significance levels are different. Hypothesis H1a stating that technical competence encourages wholly owned subsidiary rather than joint venture formation is thereby weakly confirmed. A slightly significant positive effect (p<0.1) is found in the comparison between wholly owned green-field and joint venture green-field, but no support is found among acquisitions. On the contrary, support is found for hypothesis H2a suggesting that sales- promotion competence encourages wholly owned subsidiaries rather than joint venture entry (p<0.01).

The effect of R&D assets on the establishment mode choice is only slightly significant, but in the expected direction in the comparison between joint venture acquisition and joint venture green- field investment (coefficient –0.625;p<0.1). Hence hypothesis 1b stating that R&D assets increase the probability of a green-field investment is weakly supported. For advertising intensity, the effect is stronger (coefficient 0.746; p<0.05), strongly supporting Hypothesis 2b that advertising intensive firms tend to establish acquisitions.

The impact of experience on entry mode – simultaneous model

Both international experience83 (multinational diversity) and operational experience (the opposite of operational uncertainty) tend to increase the likelihood of full ownership (with p<0.01 for both). The effect is only found among green-field investments (columns 1 to 2). This finding is in line with Hennart (1988), i.e. firms that do not need access to local knowledge held by a partner will not joint venture but prefer full ownership.

Hypothesis 3 is rejected in favour of hypothesis 3*, stating that firms with more international experience are more likely to enter new markets by green-field investment, is supported, (p<0.01). Hypothesis 4 stating that higher operational experience increases the likelihood that a firm will enter new markets by acquisition is rejected (p<0.01) in favour of hypothesis 4*, indicating that higher operational experience increases the likelihood that investors choose green-field investment (p<0.01).

The impact of uncertainty84on entry mode - simultaneous model

External uncertainty tends to increase the likelihood of joint venture formation, especially among green-field investments. This effect is, however, not grounded in theory.

Hypothesis 5(b), stating that external market uncertainty increases the likelihood that a firm will enter new markets by acquisition rather than by green-field investment, finds support (coefficients 1.340 and -1.300 respectively and p<0.01 and p<0.05 in columns 3 and 6).

Hypothesis 6a, which states that higher contractual uncertainty increases the likelihood that a

83

International experience is measured through multinational diversity as explained in section IV.3.2.4. and operational experience is measured as the opposite of operational uncertainty, explained in part IV.3.2.5.3..

84_{Operational experience is defined as the opposite of operational uncertainty. Therefore, it has already been mentioned}

firm will enter new markets by a wholly owned subsidiary rather than by a joint venture, is strongly supported (p<0.01). Hypothesis 6b stating that higher contractual uncertainty increases the likelihood that a firm enters new markets by green-field investment rather than acquisition is supported. For corruption, as an alternative measurement of the construct contractual uncertainty, hypothesis 6b is rejected.

Economics of uncertainty and entry mode - simultaneous model

Firms with higher endogenous sunk costs prefer joint venture entry especially in the presence of higher uncertainty, strongly confirming hypothesis H7a (p<0.01) with its roots in economics of uncertainty. This is only tested in model 2. No effect is observed on the establishment mode choice. The results only support this effect on the ownership choice when the ratio of sunk tangible assets over total tangible assets is taken as a measurement of sunk cost. When using technological and sales- promotion costs as sunk costs as a measurement, as has been proposed in Chapter IV in line with some existing literature, this effect is not supported.

The impact of global strategic variables on entry mode - simultaneous model

As far as the global strategic disposition is concerned, global concentration tends to increase the likelihood of full ownership (coefficients positive in columns 1 and 5 and p<0.01), supporting hypothesis H8a. Hypothesis 8b, suggesting that the higher the market power of the firm, the higher the likelihood that it will enter new markets by green-field investment, is rejected and the effect is not significant.

Global strategic motivation85 has no significant influence on the establishment mode choice (columns 3 and 6), rejecting H9. The strategy of global integration seems to influence ownership in the direction of more wholly owned subsidiaries. There is no significant effect of the order of entry on the entry mode chosen.

Finally, results are obtained for the localisation construct. International green-field investments are more likely in the case of a host country with relatively lower labour costs. Industry or host country dummies show no effect, neither on the ownership choice nor on the establishment mode choice.

Since Green (2000) warns against the interpretation of coefficients of the multinomial logit model, we also calculated the elasticities or marginal effects86 of the probability of each entry mode with respect to each variable (Long, Freese, 2003). The results are presented in Table 22. Each cell shows the change in the probability of choosing an entry mode in response to a standard deviation87 increase in each variable (holding other variables at their means). The numbers are sample average percentage changes. The numbers in bold are the largest and smallest changes in probability of entry mode for each independent variable.

A goal was to understand how each factor has an impact on the distribution of entry mode and which factors can discriminate between the entry modes.

A standard deviation increase in R&D intensity increases the probability of wholly owned

85_{What is meant is the ‘local for global’ motivation that does not completely coincide with the resource or low-labour cost}

seeking (as opposed to market seeking) motivation for FDI. Further comments on this can be found in V.3.2.1.3. for ownership decisions and V.3.2.2.4. for establishment mode decisions.

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We used the ‘margeff’ module made available by Tamas Bartus athttp://fmwww.bc.edu/RePEc/bocode/m/margeff. This is not available yet in Stata 8, but released in February 2006.

green-field investment most and decreases the probability of joint venture acquisition most. Hence, higher R&D intensity mostly encourages wholly owned green-field investment and mostly discourages joint venture acquisition entry. The elasticity of the probability of entering by a wholly owned acquisition with respect to an increase in advertising intensity with one standard deviation is 0.62, whereas the corresponding elasticity for a joint venture green-field entry is –0.53. In sum, higher advertising intensity mostly encourages wholly owned acquisition investment and mostly discourages joint venture green-field investment.

As far as international experience is concerned, a standard deviation increase in international experience increases the likelihood of wholly owned green-field investment by 0.97 and decreases the probability of joint venture acquisition entry by 0.55. In line with international experience, firms with more operational experience are most likely to enter by wholly owned green-field investment and least likely to enter by joint venture acquisition, the marginal effects being, respectively, 0.85 and –0.63. In general, experience encourages wholly owned green-field entry.

As far as uncertainty is concerned, an increase in external (demand) uncertainty with one standard deviation increases the probability of joint venture acquisition by 0.79 and decreases the probability of wholly owned green-field investment by 0.78. The elasticity calculated for contractual uncertainty indicates that an increase of contractual uncertainty by one standard deviation leads to a 0.75 increase in the probability of wholly owned green-field investment and a 0.60 decrease in the probability of joint venture acquisition investment.

The probability of joint venture acquisition seems much larger for investors with high sunk tangible assets or R&D tangible assets under high uncertainty, but not for advertising tangible costs. A wholly owned green-field entry is the least probable in case of high irreversibility and high uncertainty.

High market share increases the likelihood of entry through wholly owned green-field investment most and lowers the probability of joint venture green-field investment. A local for global low cost resource seeking motivation mostly leads to wholly owned acquisition and is least likely to stimulate joint venture green-field investment. A lower unit labour cost ratio host country attracts mostly joint venture green-field investment.

In sum, based on the marginal effects, one can conclude the following to discriminate between entry modes. Wholly owned green-field investment is mostly encouraged by the company characteristics R&D specific assets, by international and operational experience and high market share and the presence of contractual uncertainty. Wholly owned acquisition entry is chosen by companies with high advertising intensity and a high market share and a local for global strategic posture. Joint venture acquisition is mostly encouraged by external (market) uncertainty, and the company characteristic of highly sunk tangible assets combined with high uncertainty. Finally, joint venture green-field investments are encouraged by the presence of highly irreversible assets and high uncertainty.

V.2.2. Additional analysis - Estimation results of the sequential logit specification for entry mode