The impact of experience on entry mode 1 International experience

There are mixed results on the relationship between international experience and the establishment mode. Strategy research demonstrates that the firm’s ability to learn influences its choice of entry mode (Cohen, Levinthal, 1990). They are a result of the firm’s experience in learning or absorbing knowledge in different environments. More international experience reduces uncertainty in a new geographical market (Tallman, Li (1996)). Caves, Mehra (1986) and Andersson, Svensson

67_{Hennart, Park (1993) compares green-field investments (wholly-owned and joint ventures merged) and acquisitions and}

find a preference for acquisitions in the case of very slowly and very rapidly growing target industries.

68_{Hennart, Reddy (1997) compare only the two categories joint venture-green-field and wholly-owned acquisitions and}

(1994) argue that a firm with international experience may have routinized the process of expanding through searching out and making acquisitions. Andersson, Svensson (1994) argue that MNEs holding far-flung networks of subsidiaries are prone to enter by acquisition because their coordination skills have been honed to the point where they can easily ingest the newcomer management team of an acquired subsidiary. Alternatively, firms with a lot of international experience are latecomers catching up with rivals and therefore they need speedy entry that is more guaranteed by an acquisition mode. Therefore, the hypothesis is:

H3: Firms with more international experience are more likely to enter new markets by acquisitions rather than by green-field investments.

On the other hand, it is argued that firms with international experience know how to operate in various contexts and do not need a partner firm or the acquisition of an existing firm to acquire foreign experience (Agrarwal, Ramaswami, 1992). Multinational diversity, which is a proxy for international experience, will therefore stimulate green-field entry rather than acquisition entry (Barkema, Vermeulen (1998)). Through their involvement in international markets, firms are confronted with a broader array of demand and competition characteristics (Abrahamson, Fombrun (1994), Miller, Chen (1996), Barkema, Vermeulen (1998)). These firms developed organisational skills. Some proprietary assets are embedded in a repertory of routines and organisational skills that are the base of a domestic or international strategic advantage the firm developed for foreign direct investment. Therefore, they do not need to acquire a local company to operate in foreign countries, since their knowledge structure about these aspects is more extended. Therefore, the alternative hypothesis is:

H3*: Firms with more international experience are more likely to enter new markets by green- field investments rather than by acquisitions.

IV.2.2.2. Operational experience

Operational experience carries an impact on the establishment mode decision, but the extant literature provides again mixed evidence. We combine the factors host country experience and cultural distance69as a determinant of operational experience (IV.3.2.5.3.). We assume that cultural distance is positively related to operational uncertainty and negatively to host country experience. To put it differently, less cultural affinity can be compensated by more host country experience and vice versa.

Firms gain experiential market specific knowledge by operating in a market (Johanson, Vahlne, 1977). They learn to deal with the local population, the local authorities and know the cultural peculiarities of the local market. Andersson, Svensson (1994), Barkema, Vermeulen (1998), Brouthers, Brouthers (2000) argue that firms with experiential market-specific local experience are, therefore, better able to spot and evaluate local acquisition candidates. They aim for complementarity of their activities with previous activity in the host country and avoid raising competitive pressure (Andersson, Svensson, 1994). The problems of making acquisitions of local domestic companies are therefore reduced by local experience in a given host country. This would lead to the following hypothesis:

H4: Higher operational experience increases the likelihood that a firm will enter new markets by acquisition rather than by green-field investment.

By contrast, others argue that firms with more operational experience in the host country have accumulated knowledge about local business practices because they collaborated with local partners (Erramilli, Rao, 1990, Luo, 2001) and do not need to acquire local companies anymore, since they have the knowledge already in-house. Local experience has in some research no significant effect on establishment mode (Hennart, Park (1993), Hennart, Reddy (1997)) and partially in Kogut, Singh (1988)). This could be due to the fact that the need to acquire local companies is lower because through local experience the investors do not need to gain knowledge about local business practices anymore.

Although entry in emerging markets does not allow us to measure host country experience in the same way (IV.3.2.5.3.), because entry was virtually impossible before 1989, we develop a similar argument.

The ability to gain experiential market knowledge decreases with the degree of foreignness, commonly referred to as the psychic or cultural distance (Vahlne, Wiedersheim-Paul, 1977) Related research showed that acquisitions by firms from more culturally remote countries are more difficult in the sense that failure rate of acquisitions increases more than the failure rate of green-field investments with cultural distance (Barkema, Bell, Pennings (1996)). Firms from culturally more remote countries are more likely to set up green-field investments (Kogut, Singh (1988), Barkema, Vermeulen (1998), Vermeulen, Barkema (2001)). While we consider operational experience as positively related to years of local host country experience and negatively to cultural distance, then one can hypothesize:

H4*: Higher operational experience increases the likelihood that a firm will enter new markets by green-field rather than by acquisition investment.