Target-Specific Experience, Host Country Capability,

This section argues that MNEs do not remain passive when confronted with both formal and informal institutional pressures at the time of market entry. They re-spond to these institutional pressures by developing certain capabilities through knowledge acquired during their ongoing business relationship with a target firm and host country experience. By combining arguments from two theoretical lenses, internationalization process theory (Johanson & Vahlne 2009), neo-organizational institutionalism-institutional theory (Oliver 1997; Kostova & Za-heer 1999) and general literature on MNE response to failed institutions (Frynas

& Mellahi 2003), it is shown that target-specific experience provides the MNE a response to informal institutional constraints. It is also shown that host country experience through ongoing business in a particular host country develops a firm’s host country capability and provides the firms with adequate knowledge in dealing with host country formal and informal institutional constraints.

Target-specific experience refers to experiences that accumulate into knowledge about a specific business partner. Johanson and Vahlne (2009: 1416) refer to this knowledge as relationship-specific knowledge. According to them, firms that have valuable network partners or existing relationship in a host country market or with a target firm in host country market has privileged access to information about the market, their relationship partners and their business network. The busi-ness relationships constitute knowledge development within an MNE because it provides privileged access to information about the market (Andersson et al.

1997; Johanson & Vahlne 1977; Johanson & Vahlne 2009). A firm's business networks makes up the firm network positions and provides the firm with alliance learning, closeness centrality and structural hole position (Lin et al. 2009). Con-sequently, the firm enjoys insidership within its network (Johanson & Vahlne 2009). The insidership position has been said to drive a firm’s number of acquisi-tions in foreign markets (Lin et al. 2009). Market knowledge is attained from ex-isting relationship or target-specific experience. It is expected that firms that have existing relationship with a specific target (Target-specific experience) in the form of customer, supplier, distributor relationship or collaborative relationship will most likely opt for staged and full acquisition. This is because, during such

collaborative relationship, they have gained knowledge about each other business, the nature of targets assets and network value. Lin et al. (2009) argues that such learning from previous relationships affects firms’ decisions towards future ac-quisitions.

While target-specific experience can drive acquisition commitment decisions, commitment decisions also depend on the outcomes of learning (Johanson &

Vahlne 2009) and the nature of the institutional environment (Lin et al. 2009). An increasing and positive outcome of learning is one in which the MNE has ac-quired market knowledge and attain a positive business relationship with the tar-get firm. Johanson and Vahlne (2009) suggest that increasing market knowledge and knowledge about a partner firm business is likely to result in increasing commitment decisions. From the perspective of acquisitions, it is expected that MNEs that have existing business relationship with a specific target will most likely in the event of positive learning outcomes gain increased market knowledge about the host country market. Full acquisition is most likely an out-come of the business relationship.

It has been argued that ambiguity about the knowledge of the target business asset and network value increases the higher the informal institutional difference be-tween the parent MNE and the target firm (Folta 1998; Chari & Chang 2009; Xu et al. 2010; Quimet 2013). Though, a relationship with the target firm might exist, contractual difficulties could still arise due to the informal institutional distance between the parent MNE and host country of the target firm. Also, the outcomes of knowledge of the partner business and host market knowledge may suggest a cautious investment approach. Consequently, it is expected that MNEs will opt for staged acquisition. The choice of staged acquisition serves as contractual bridges to negotiation failures through earnout arrangements linking the acquisi-tion purchase price to future performance of the target firm. Furthermore, staged acquisition can also be in response to gaining sufficient time in developing knowledge of managing the operations of the business in foreign markets. It can also be in response to allow sufficient time to gain effective host country capabil-ity in dealing with formal institutional constraints of target host country such as non-transparent regulatory institutions and failure in formal institutions.

MNE’s can develop effective mechanisms and strategies to deal with non-transparent regulatory institutions and failure in formal institutions (e.g., political risks). Oliver (1991) suggests that firms can pacify, balance and bargain with the sources of institutional pressures that affect their business operations. Frynas and Mellahi (2003) suggest that firms can be active actors capable of acquiring and upgrading firm-specific resources and capabilities for coping with or even

bene-fiting from institutional pressures such as political risk. Similar studies show that some multinationals increase investments in corrupt emerging countries because such corrupt government provides them incentive and opportunity to overcome liability of foreignness and to influence government decisions to their sole ad-vantage (La Porta, Lopez-de-Silanes, Shleifer & Vishny 1999; Anand, Ashforth

& Joshi 2005; Rodriguez et al. 2005).

Experience and institutional knowledge in dealing with inefficient regulatory in-stitutions and political risks are pivotal in enabling firms to develop the needed capabilities to deal with these types of institutional pressures. They are also need-ed in developing an effective compromise, bargaining and manipulating strategy in dealing with host country institutional pressures. The role of MNE’s experience or experiential knowledge in entry mode studies has been investigated from sev-eral theoretical lenses. Nevertheless the findings are inconclusive as some studies found positive (Anderson & Svensson 1994; Barkema & Vermeulen 1998; Har-zing 2002), negative (Barkema & Vermeulen 1998; Padmanabhan & Cho 1999;

Brouthers & Brouthers 2000) and no relationship (Cho & Padmanabhan 1995;

Meyer & Estrin 1997; Larimo 2003) between experiential knowledge and the choice of acquisition and greenfield investment. The reasons for this contradiction is because these studies explored different theoretical lenses, explored various categories of experiences (e.g. international experience, host country experience, acquisition experience and greenfield experience)(Slangen & Hennart, 2007).

While the experience gained from several years of international business opera-tions (international experience) might be relevant for developing effective capa-bilities to respond to institutional pressures. It is argued that on one hand, some experiential knowledge is not transferable and on the other hand, host country capability is the context specific experience that provides firms with adequate knowledge in dealing with host country institutional pressures.

Host country capability is defined as capabilities derived from knowledge MNEs acquire by doing business in a particular country through the ongoing business operations in a particular host country (modified from Chetty et al. 2006; Slangen

& Hennart 2008a). This involves having a subsidiary in the host country or an established joint venture or partial acquisition in the host country. Some authors such as Chetty et al. (2006), Slangen and Hennart (2008a) and Chen (2008) define such capability as host country experience based on the number of years of doing business in the host country (e.g. subsidiary). In this dissertation, it is argued that host country experience enables the parent MNE to develop its operational capa-bilities in the host country through learning and innovation. Unlike the assump-tion of Chetty et al. (2006), instituassump-tional knowledge is rarely transferable especial-ly in emerging economies. As a result, institutional knowledge should also be

country specific. Learning in such host country could include host country institu-tional knowledge (Eriksson et al. 1997; Puck et al. 2009) and knowledge of an ongoing business in the host country (Chetty et al. 2006; Puck et al. 2009). They are country specific (Mu, Gnyawali & Hatfield 2007; Mudambi, Mudambi & Na-varra 2007; Michailova & Zhan 2014) and contributes to the overall operational capabilities of the firm (Vahlne & Johanson 2013). Such capabilities cannot be acquired via exporting operations (Marinova, Marinov & Yaprak 2004), conse-quently, it is necessary that such host country knowledge be referred to as host country capabilities rather than experiences that might be duration specific (e.g.

business partner relationships, etc.).

The acquisition of host country capability requires an ongoing operation in a spe-cific host country in order to gain greater familiarity of the local competitor, inti-mate knowledge of the market (Marinova et al. 2004). The acquisition of host country capability ensures legitimacy aimed at averting consumer discrimination in favor of local providers (ibid). Host country capability develops a firm’s insti-tutional knowledge. Instiinsti-tutional knowledge is the perceived knowledge of busi-ness, currency laws, financial practices, and business culture (Chetty et al. 2006).

It is used to understand both the formal and informal institutional differences be-tween countries (ibid). It consists of knowledge about the laws, norms and gov-ernance standards and structures in specific countries (Eriksson et al. 1997).

What differentiate host country capability and other forms of experiences in pre-vious literature (e.g., acquisition experience, international experience, host coun-try experience) is that it is not limited to host councoun-try experience. It includes ca-pabilities derived from an ongoing business in the form of signing a contract with a new distributor or agent in the host country (Chetty et al. 2006: 700). It includes capability needed to expand the business considerably with an existing customer in the host country; doing business with one or more new customers within the existing market and entering new country markets with existing customers (ibid).

These experiences results into knowledge opportunities (Johanson & Vahlne 2009). Other experiences referred in the IB literature are born in disaggregate measures. They are expressed in the form of internationalization experience, and general business experience conveyed in the number of years of doing business in a particular country. These are no host country capability as defined in this disser-tation. For example, having a non-operational subsidiary in a host country or tax heaven subsidiary does not constitute host country capability.

It is believed that MNEs that do possess host country capability will opt for full acquisition while MNEs that do not possess host country capability will opt for partial and staged acquisition at the time of market entry. Firms that possess host

country capability are acquainted with the cultural knowledge of the host country and how to do business in the host country. They also possess the institutional knowledge and have developed operational capabilities on how to effectively manage and create new business opportunities in the host country. Conversely, in the absence of host country capability, firms would opt for partial and staged ac-quisition as both strategies provides them foothold strategy to learn and develop necessary competencies needed to operate and successfully do business in the host country.

Conclusively, this section shows that firms do not remain passive to formal and informal institutional constraints during the time of entry. Firms respond to these institutions with host country capability and experiences gained from ongoing business with a particular business target (target-specific experience).