Linking constructs to sntry mods - simplifying the entry mods sslsetion

The primary thesis presented in this work is that a company's, and specifically a bank's, choice of mode of entry into a foreign market where that entry requires the commitment of considerable financial and/or managerial resources, is determined by two multi-factor constructs:

i) the desired level of control over the new venture and,

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ii) the need for access to resources not currently available to the firm.

It is hypothesised that, while the number of variables affecting an entry mode selection are large, decision makers have difficulty dealing with such complexity and will thus try to simplify the task by modelling the decision. The most parsimonious model, suggested here, is that the organization asks itself two questions:

"What level of control do we wish to have over the new enterprise (or conversely, what level of control are we prepared to give up)?" and

"What resources do we need in the foreign market which we cannot transfer?"

It is thus suggested that, although there are a number of factors involved in the selection of entry modes (e.g.

country risk, intensity of competition, diversification strategy), these factors are reflected in these two constructs. For example, the standard view of a diversification strategy assumes that the entrant lacks technical and commercial skills which equates to perception of a resource deficit. These relationships will be further expanded in the following discussion. So let us look at these two constructs in more detail.

Desire for Control

Desire for control is defined as "management's motive for authority over the operational and strategic

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making" (Hill et al. 1990).

Prior discussion on control (see section 3.3.1.1) has identified three control-related dimensions: the MNE's concern to resolve conflicts, to protect its intangible resources and to carry strategies efficiently. These control dimensions are influenced by firm, market and country-related factors, as the discussion on factors in the next section will indicate. For example, a firm exploiting competitive advantage will seek control of its venture because control can facilitate efficient execution of the firm's strategies.

Studies on selection of entry modes have consistently argued that ownership is the mechanism whereby MNEs can resolve the above concerns (Anderson and Gatignon 1986;

Hill et al. 1990; Kim and Hwang 1992; Woodcock et al.

1994). Control mechanisms which are not based on ownership are considered slower and less efficient compared to ownership mechanisms because partners have greater scope to act opportunistically (Killing 1983; Woodcock et al. 1994).

As a result, joint ventures have been associated with a medium level of control because ownership is shared with partners (Anderson and Gatignon 1986; Hill et al. 1990; Kim and Hwang 1992; Erramilli and Rao 1993; Woodcock et al.

1994). It is anticipated therefore that:

Hla: the greater the MNB's desire for control the more likely is the selection of greenfield investments or acquisitions over joint ventures.

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The measure of desire for control will contain variables reflecting the dimensions identified above: to carry strategies efficiently, to protect intangible resources and to resolve conflicts. Each of these dimensions is discussed below.

Attainment of a firm's objectives over the long-term is contingent on its ability to implement a strategy which exploits its competence on several dimensions of corporate activity (Porter 1986; Prahalad and Hamel 1990) . Insufficient control can limit the MNB's ability to coordinate activities or effectively utilise resources (Stopford and Wells 1972; Anderson and Gatignon 1986).

Furthermore, exercising control over the critical functions of the foreign venture protects the firm from exposing its proprietary resources. This aspect is particulary important in banking due to the information intensive nature of the industry and the absence of copyrights and patents (Casson 1989; Enderwick 1989). Protecting the MNB's proprietary resources can prevent opportunistic behaviour which often leads to conflicts with partners (Williamson 1975; Anderson and Gatignon 1986). Casson (1987), summarizing the above argument, has stated that control of a foreign venture can be achieved through managerial responsibility on the sources of firm proprietary advantage.

Besides the sources of conflicts discussed above, Robinson (1978) has argued that conflicts between partners can also arise from disagreement on important decisions often taken at senior level. Robinson has identified

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Table 4.1. Indicators of desire for control

Desired control of Authority over 1. Marketing

Products, pricing, sales and communication strategy 2. Accounts relationship

Managing clients

3. Information technology Systems' development 4. Operations

Delivery of customer service 5. Management selection

Recruitment and promotion of senior managers 6. Capital expenditure

Investments in projects 7. Dividend policy

Returns to shareholders

8. Re-investment of earnings Managing shareholder's value

9. Overall desired control on the venture The required authority over the foreign operation

several areas such as, dividend policy, reinvestment and management selection. According to Robinson, partners have strong interests in such issues and unless one partner has control over these decisions, it is very likely that conflict will arise.

The proprietary functions identified in banking are, marketing and accounts management, technology, operations and risk management (Tschoegl 1987; Shannon 1988; Hoschka 1993). Hoschka (1993) has argued that commercial knowledge and skills reside in the above functions, and that

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therefore they are sources of competitive advantage. For example, client information gathered through accounts management in one operation can be utilised for assessing risks associated with client business in other locations

(Yiannopulos 1983).

The preceding discussion has argued that in order to effectively operationalize desire for control, one must measure control across the critical activities of the venture. The measure adopted in this study will cover the important functional activities in banking and the areas of possible conflict as identified by Robinson (1978). The variable employed along with their definitions are shown in Table 4.1.

Need for complementary resources

Need for complementary resources is defined as "the resources required to effectively compete with incumbent firms which cannot be developed instantly" (Chatterjee 1990).

Greenfield investment cannot provide the entrant with complementary resources. A firm pursuing a greenfield entry must mobilize or develop all resources required to establish a competitive position in the market. However, given that certain resources cannot be re-deployed or developed efficiently, greenfield investments are considered slow entry modes (Biggadike 1979; Wilson 1980;

Hennart and Park 1993) . On the other hand, the firm can

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purchase the complementary resources required through an acquisition, or access them through a joint venture.

Greenfield investments thus clearly differ from acquisitions and joint ventures. For example, a firm requiring a broad distribution channel to compete effectively with incumbents may need many years to develop from nothing (Buckley et al. 1992). Therefore, the entrant may choose to access the required distribution instantaneously in order to penetrate the market quickly.

The distribution can be bought through an acquisition or made available to the firm through a joint venture (Hamill 1989; Buckley et al. 1992).

Drawing on the above discussion, it is expected that,

Hlb: the higher the need for complimentary resources the more likely is the selection of acquisition or joint venture over greenfield investment.

The resources needed to overcome barriers to entry are not fixed. Discussion of factors, which follows in the next section, will argue that the resources required depend on firm and market-related factors. Overall, the resources required depend on (Stopford and Wells 1972; Yip 1982;

Caves and Mehra 1986; Hennart and Park 1993):

i) the type of resources possessed by the entrant, which are related to the firm's size and experience;

ii) the speed of entry required, which is associated with market attractiveness;

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iii) the resources required to compete effectively with incumbent firms, which are related to competition and the firm's diversification and market responsiveness strategies.

Consequently, managers evaluate the impact of lack of certain resources on entering the market effectively (Yip 1982; Chatterjee 1990). Literature on entry barriers has identified a number of firm-resource deficiencies which act as barriers to entry (for a detailed discussion see section 2.3.2.2). These are business skills, customer base, image, distribution and mass. The banking literature has confirmed the effect of lack of these resources on foreign entry.

Buckley et al. (1992), studying U.K financial services' strategies in Europe, have identified a list of resources which they characterised as "barriers to quick entry".

According to Buckley et al. (1992), readily accessing resources such as distribution, local image and clientele was considered critical by managers, given the "over­

banked" character of Europe. Studying bank entries from a global prospective, Walter and Smith (1993) have identified mass, distribution, skills and image as necessary resources to compete with international competitors. This is also supported by anecdotal evidence. The recent German acquisitions of U.K investment banks for example (Deutsche Bank acquired Morgan Grenfell and Dresdner acquired Kleinwort Benson) , has been attributed to the need of German banks to access more skills in asset management, and strengthen their global distribution of such services

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(The Banker, October 1995, pg.46).

Driven by the foregoing discussion, the operationalization of need for complementary resources will cover the sources found to pose difficulty in accessing market share. Market share has been chosen as the indicator of effective entry because research has found that managers are concerned with market share when entering new markets

(Biggadike 1979; Porter 1980; Yip 1982; Burke 1984).

The variables measuring need for complementary resources and explanations of each variable are shown in Table 4.2.

Table 4.2. Indicators of need for complementary resources

Degree of difficulty in rapidly accessing market share caused by the lack of the following:

The barriers to enter a market efficiently caused by deficiency of 1. New business skills

Commercial know-how

2. An established customer base

Clientele on which can base initial efforts 3. A strong image

Reputation in market

4. An established distribution network

An existing system of delivering customer services 5. Critical mass

Business which can assure economies of scale

In summary, discussion of the two constructs has argued that MNBs are concerned with strategic efficiency, sharing of resources and accessing the resources required to effectively enter the foreign market. The first two

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concerns determine the M N B 's desire for control of the strategic activities of the foreign venture. To effectively achieve this, the MNB should seek ownership. The last concern raises the need for complementary resources. If the MNB requires resources which take time to develop, then it should avoid greenfield investments. The balance of the effects of the two motives on entry modes should determine the final outcome.

In the following sections the factors will be discussed. To avoid discontinuity, similar factors will be grouped together into sections. An introduction and a summary will accompany each section in order to link sections together. Discussion will start with macro-level factors and progress in a descending fashion.