T HE CONCEPTUALISATION OF THE THEORETICAL MODEL FOR ENTRY MODE

In pondering the entry mode decision, managers make a trade-off between the expected benefits, expected costs and risks of the investment and try to maximize the success of the investment. They calculate benefits, costs and risk for different scenarios of entry modes. We examine four modes of entry that are a combination of joint ventures and wholly owned subsidiaries on the one hand, and of acquisition versus green-field investment on the other.

The earlier literature tried to reconcile different entry mode explanations within one single transaction cost theoretical framework (e.g. Gatignon, Anderson (1988) for the ownership decision between licensing, joint venture and wholly owned subsidiary). The explanation for the ownership decision is mostly underpinned by transaction cost theory. The establishment mode decision is mostly based on transaction cost theory, organisational learning or oligopolistic rivalry.

Later contributions combine different frameworks to explain the entry mode decision. Chi, McGuire (1996) integrates transaction cost and strategic option perspectives to explain ownership decisions. Transactional variables and real uncertainty explain joint ventures (Rivoli, Salorio (1996), Kulatilaka, Perotti (1992)). Hill, Hwang, Kim (1990) show that the ownership decision is not made in isolation but also depends upon the strategic relationship the MNC envisages between operations in

different countries. In the analysis by Dixit, Pindyck (1994)61, the entry order of the real investment decision is determined by 1) irreversibility, two types of uncertainty, namely 2) firm-level uncertainty and by features of the decision environment, i.e. 3) the non-firm level uncertainty and 4) firm’s proprietary assets (Pindyck (1988)). Since firm’s proprietary assets are a major determinant of governance structures in transaction cost economics, the model could to a maximal extent possible be similar to the model explaining way of entry.

We briefly review the determinants of entry mode of each theoretical perspective62. Next, we try to integrate them into a joint eclectic theory of ownership and establishment mode choice.

In transaction cost theory (II.2), the value of firm specific assets and transactional uncertainty determine both ownership and way of growth choices mainly through the dissemination risk it entails. Beside, organisational learning theory (II.4) shows that the absorptive capacity shaped by multinational diversity and operational experience determines the way of growth decision. Therefore, to explain both, both views are necessary. Next, different types of uncertainty have an impact on the pay-off of the investment mode chosen: external (Williamson’s primary ‘state contingent’) uncertainty, operational uncertainty, contractual uncertainty and competitive (Williamson’s secondary strategic) uncertainty. The real options theory applied to entry mode explains that real uncertainty combined with irreversible investment leads to an investment mode that implies lower resource commitment. Finally, the contribution by Kim, Hwang (1992) pointed out that the entry mode decision is not taken in isolation. The MNC’s global strategy is a major determinant of the ownership choice with the use of constructs such as global concentration, global synergies and global strategic motivations (Kim, Hwang, 1992).

Given these different theoretical streams, we fixed criteria to choose determinants for a joint framework on entry mode ownership and establishment mode decisions. First, overlap in determinants from diverging theoretical perspectives is to be avoided. Therefore, we left out operational uncertainty since it is just the opposite of operational experience. Second, determinants need to be observable. In case they are not, because of measurement problems, they are dropped. Finally, all variables are tested both on their impact on ownership choice and establishment mode choice.

Some limitations we note in beforehand. The entry mode will in this dissertation be explained historically by factors already present before entry takes place. This approach has serious methodological disadvantages, the most important weakness being that it is not capable of taking into account dynamic effects, i.e. the changes of the determinants during the investment process. It is, however, a possible way to model entry order decisions ((Mascarenhas, 1992b), (Mitchell, Shaver, Yeung (1994)).

Second, every entry mode decision is controlled for order of entry. The concept ‘order of entry’ is used rather than the absolute timing. A ‘first mover’ is defined within one and the same industry, including its incumbents and newcomers. For estimations on performance estimates63, this makes a difference (Mitchell, 1991), since the market share of newcomers and incumbents is different, depending on whether the order is compared to all entrants or to incumbents only. To test the theory and develop the empirical model, an industry sample is adequate. Instead of looking into entry order relative to the players within a particular industry, one could also look more generally into the determinants of entry order, for instance into a new geographical market, in a cross-industry sample, controlling for industry effects. It is then possible to investigate the factors that influence the entry- 61 _{For simplicity we only compare the first mover literature with the real options approach in this chapter on model}

development, and not with the adjustment cost view. The causality has already been explained in Table 3 in Chapter 2.

62_{The overview is a summary of the much more elaborate overview of factors that influence entry mode that can be found}

in Chapter II.

63_{Whether earlier or later entry pays is reflected in performance, either market share or mortality or survival rate (Golder,}

strategy decision (order and mode) whereby the clock for entry is the timing relative to the first mover in the new geographical market. The theory is the same, but the way of validating it requires using another sample.

To sum up, the joint framework for the mode of entry is motivated by balancing the strategic incentive to invest early to gain a perceived64 competitive advantage against the incentive to remain flexible in the face of (avoiding) uncertainty (Kulatilaka, Perotti (1992), Rivoli, Salorio (1996)).

The decision about ownership is a trade-off decision between a lower control entry mode (joint venture) and a higher control entry mode (wholly owned subsidiary). Transaction-specific variables, the firm’s global strategic posture, irreversibility and the value of the option explain whether a low or high control entry mode is needed (Figure 12).

Figure 12: The determinants of a low control (joint venture) and high control (wholly owned subsidiary) entry mode

transaction- specific variables: value of transaction- specific asset dissemination risk global strategic variables: global concentration, global synergy, global strategic motivation

irreversibility option value

joint venture low high low low high

wholly owned subsidiary high low high high low

The organisational learning construct international experience and operational experience explains the establishment mode. Since the choice between new ventures either through starting-up or via internal venturing is to a large extent determined by accumulated learning, it is a factor that is peculiar to this aspect of the entry mode decision.

Taken all the factors together without overlap, the interrelated entry mode decision is, therefore, determined by the collective, simultaneous consideration of 1) transaction-specific assets 2) experience or accumulated learning, 3) uncertainty, irreversibility and the option value and 4) the firm’s global strategic posture. How transaction variables, experience, uncertainty and strategic variables influence the choice of entry mode is now explained in section IV.2.