Localisation factors

In addition to the asset specificity, experience, uncertainty and irreversibility and strategic factor we include localisation effects as control variables77. The entry mode choice is influenced by factors differentiating between different locations within Eastern Europe. Industrial specialisation, national labour markets and privatisation have a strong impact on localisation, but we do not have a strong prediction concerning their effects on entry mode78.

As the general-equilibrium theory of international trade suggests that there is a distribution of trade across countries, it also makes some very similar predictions about the allocation of foreign investments (Horstmann, Markusen (1992)). This theory states that the factors underlying the allocation of FDI depend on the comparative advantage of the factor endowments for foreign investments available in the host country. The distribution of MNE’s subsidiaries depends on the factors or resources available in the country. Some local resources might confer an industry specialisation and be very valuable to a firm. The transaction costs of acquiring these resources in unbundled form through the market may be higher than the costs of an internal transfer via green-field investment (Estrin, Meyer (1999)). Strategic local resources can be qualified human capital or a research base. The cost of adapting and integrating resources via an acquisition will be lower than by trying to get access to strategic resources via the market by green-field investment. Firms rather enter via acquisitions in countries where the industry has a relatively larger research base. The agglomeration effect of locally available skilled labour or scientific knowledge and direct links with other firms can make the location cumulatively more effective (Barrell, Pain, 1999) and attract further acquisitions. We will include the relative size of the research base.

Relatively lower labour costs in Eastern Europe attract investments. It is not clear whether they have an effect on entry mode as well.

Finally, a typical effect of the transition context that is a determinant in the location decision of the investor is the advancement in privatisation of the industry in the host country. We include the privatised share of industry as a control variable. When the privatised share of industry is higher, more acquisition candidates become available. Therefore, firms will enter via acquisitions in countries where the advancement in privatisation is higher. Privatisation may have an agglomeration effect on further FDI. If there are already many companies privatised in a country/ region, this may be an incentive for further investment.

Transition elements as the advancement in privatisation affect both the pace at which and the way in which investment occurred in Eastern Europe in its first ten years since transition started in 1989. One wonders whether typical transition elements make the pattern of FDI in Eastern Europe differ from the pattern observed elsewhere, in other circumstances and/or other periods of time. It needs to be studied whether transition factors interfere not only in the explanation of the order, but also of the type of investment entry79.

77

Localisation advantages of FDI are related to factor endowments, such as low labour costs or a research base (Dunning).

78_{Localisation factors are, therefore, control variables in the entry mode and entry order estimations of the model.} 79_{Estrin, Meyer (2002)}

Figure 13: Hypotheses on entry mode and entry order – overview

construct variable hypothesis

H1a: Firms with a high internal technical competence will enter new markets through wholly owned subsidiaries rather than through joint ventures.

H1b: Firms with a high internal technical competence will enter new markets through green-field investments rather than through acquisitions.

H2a: Firms with a high sales-promotion competence will rather enter new markets by wholly owned subsidiaries than by joint ventures.

H2b: Firms with a high sales-promotion competence will rather enter new markets by acquisition investment than by green-field investment.

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

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

H4: Firms with more operational experience are more likely to enter new markets by acquisition rather than by green-field investment.

H4*: Firms with more operational experience are more likely to enter new markets by green-field rather than by acquisition investment.

external market uncertainty

H5: External market uncertainty increases the likelihood that a firm will enter new markets by acquisition rather than by green-field investment

H6a: Higher contractual uncertainty increases the likelihood that a firm will enter new markets by a wholly owned subsidiary rather than by a joint venture.

H6b: Higher contractual uncertainty increases the likelihood that a firm will enter new markets by green-field investment rather than by acquisition.

irreversibility and option value

H7: Firms with higher endogenous irreversible costs (sunk tangible assets, sales-promotion competence and/or technology competence) will prefer joint venture over wholly owned subsidiary especially in the presence of high uncertainty.

H8a: The greater the market power of the firm, the higher the likelihood that it will enter new markets by wholly owned subsidiary rather than by joint venture.

H8b: The higher the market power of he firm, the higher the likelihood that it will enter new markets by green-field investment rather than by acquisitions.

global strategic motivation

H9: Firms that pursue a ‘local for global’ strategy of global integration (resource-seeking) will enter new markets through green-field investment rather than acquisition. asset specificity technical competence sales-promotion competence strategic posture contractual uncertainty operational experience international experience experience uncertainty global concentration

IV.3. O