Abstract
This work investigates whether host countries institutional factors and firm characteristics can help the understanding of Brazilian multinationals' choices of ownership mode for their foreign direct investments (FDI). Brazil is a privileged locus for research on emerging market multinationals (EMNEs), given its growing stock of outward FDI. The paper contributes to a better understanding of the international strategic choices of EMNEs. First, the phenomenon under study is examined using the theoretical lenses of institutionalism. Second, the study looks at the relationship between state support and choice of ownership mode, a new issue in the area of international business. Third, differences between the decisions taken by manufacturing and service EMNEs are also examined. Fourth, the study focuses on an emerging country, Brazil. The quality of the regulatory environment of the host country, and differences in beliefs, cultural identity and management practices between the host country and the country of origin are factors of the institutional environment significantly related to the choice of ownership mode by Brazilian EMNEs. As to firm characteristics, our results show that state support favors the choice of joint ventures, and that service EMNEs also significantly prefer joint ventures, when compared to manufacturing firms. The findings also support the view that EMNEs are less sensitive to institutional weaknesses in host countries.
institutionalism; ownership mode; institutional distance; regulatory environment
Introduction
The appearance of emerging multinational enterprises (EMNEs) has aroused great interest
among academics, leading to the development of theoretical work and empirical studies
aimed at verifying whether there are differences in motivations, pathways, processes and
performance of these companies, compared to traditional multinationals from developed
countries (Ramamurti, 2012Ramamurti, R. (2012). What is really different about emerging market
multinationals? Global Strategy Journal, 2(1) 41-47. doi:
10.1002/gsj.1025
https://doi.org/10.1002/gsj.1025...
; Sauvant, 2008Sauvant, K. P. (2008). The rise of TNCs from emerging markets: the
issues. In K. P. Sauvant (Ed.), The rise of transnational corporations from emerging
markets: threat or opportunity? (pp. 158-180). Cheltenham, UK: Edward Elgar
Publishing.). In spite of this, there are still important
questions concerning whether differences are theoretically relevant, and, if so, whether
they are adequately captured by the frameworks developed for multinationals from
developed countries (Hennart, 2012Hennart, J.-F. (2012). Emerging market multinationals and the theory of
the multinational enterprise. Global Strategy Journal, 2(3), 168-187. doi:
10.1111/j.2042-5805.2012.01038.x
https://doi.org/10.1111/j.2042-5805.2012...
). Therefore,
new studies may help to revise or extend theories and models, by incorporating specific
aspects of EMNEs (Cuervo-Cazurra, 2012Cuervo-Cazurra, A. (2012). Extending theory by analyzing developing
country multinational companies: solving the goldilocks debate. Global Strategy
Journal, 2(3), 153-167. doi: 10.1111/j.2042-5805.2012.01039.x
https://doi.org/10.1111/j.2042-5805.2012...
).
This study adopts the institutional approach to analyze the choice of ownership mode by
EMNEs. Dunning and Lundan (2008)Dunning, J. H., & Lundan, S. M. (2008). Institutions and the OLI
paradigm of the multinational enterprise. Asia Pacific Journal of Management, 25(4),
573-593. doi: 10.1007/s10490-007-9074-z
https://doi.org/10.1007/s10490-007-9074-...
suggested that
the institutional approach offers a promising path to move forward our understanding of
the different forms of contemporary multinational firms. Most theories that seek to
explain the determinants of FDI emphasize economic variables. The research on entry
modes is often based on transaction cost theory (Brouthers, 2013Brouthers, K. D. (2013). A retrospective on: institutional, cultural and
transaction cost influences on entry mode choice and performance. Journal of
International Business Studies, 44(1), 14-22. doi:
10.1057/jibs.2012.23
https://doi.org/10.1057/jibs.2012.23...
; Hennart, 1982Hennart, J.-F. (1982). A theory of multinational enterprise. Ann Arbor:
University of Michigan Press.; Rugman, 1981Rugman, A. M. (1981). Inside the multinationals: the economics and
internal markets. New York: Columbia University Press.), which focuses primarily on the
firm-specific and industry factors; institutional aspects are often treated as control
or moderating variables (Agarwal, 1994Agarwal, S. (1994). Socio-cultural distance and the choice of joint
ventures: a contingency perspective. Journal of International Marketing, 2(2),
63-80.; Barkema & Vermeulen, 1998Barkema, H. G., & Vermeulen, F. (1998). International expansion
through start-up or acquisition: a learning perspective. Academy of Management
Journal, 41(1), 7-26.; Dikova & Witteloostuijn, 2007Dikova, D., & Witteloostujin, A. van (2007). Foreign direct
investment mode choice: entry and establishment modes in transition economies.
Journal of International Business Studies, 38(6), 1013-1033. doi:
10.1057/palgrave.jibs.8400297
https://doi.org/10.1057/palgrave.jibs.84...
). Nevertheless, since the
beginning of the past decade, empirical studies have been conducted to assess the impact
of host country institutional factors on FDI decisions.
This work investigates whether host countries' institutional factors and firm characteristics can help the understanding of Brazilian EMNEs' choices of ownership mode for their foreign direct investments (FDI). The following research question thus inspired the study: Is the choice of ownership mode by EMNEs related to certain host-country institutional factors and firm characteristics?
The paper contributes to the understanding of the phenomenon in several ways. First, the
choice of ownership modes by EMNEs is examined using the theoretical lenses of
institutionalism. Second, the study looks at the relationship between state support and
choice of ownership mode, a new issue in the area of international business. Third,
differences between the ownership-mode decisions taken by manufacturing and service
EMNEs are also examined. Fourth, the study focuses on an emerging country. Brazil is a
privileged locus for research on EMNEs, given its growing stock of FDI (although the
annual flow of investments is still quite erratic). According to United Nations
Conference on Trade and Development (UNCTAD,
2014United Nations Conference on Trade and Development. (2014). World
investment report 2014: Investing in the SDGs: an action plan. Retrieved from
http://unctad.org/en/PublicationsLibrary/wir2014_en.pdf
unctad.org/en/PublicationsLibrary/wir201...
), the country's stock of FDI abroad reached the figure of US$293.3 billion
at the end of 2013.
Hypotheses Development
Institutional distance
The term institution includes a heterogeneous set of factors, such as customs and beliefs, religion, judicial system, governance structures, and market mechanisms. Scott (2001)Scott, W. R. (2001). Institutions and organizations: ideas and interests (2nd ed.). Thousand Oaks: Sage. identifies three pillars in the institutional environment - regulative, normative and cognitive - which affect firm activities. Peng (2009)Peng, M. W. (2009). Global business. Cincinnati, OH: South-Western Cengage Learning. associated the regulatory pillar with the coercive power of government, expressed by formal institutions such as laws, regulations and rules; and the cognitive and normative pillars with informal institutions, such as culture and ethics.
The understanding that not only physical distance, but especially the perception of
differences between countries of origin and destination influence
internationalization decisions has already been discussed for several decades in
international business literature. The construct of cultural distance, based on Hofstede's (1980)Hofstede, G. (1980). Culture's consequences: international differences
in work-related values. Beverly Hills, CA: Sage Publications. studies and operationalized by
Kogut and Singh (1988)Kogut, B., & Singh, H. (1988). The effect of national culture on the
choice of entry mode. Journal of International Business Studies, 19(3), 411-432. doi:
10.1057/palgrave.jibs.8490394
https://doi.org/10.1057/palgrave.jibs.84...
, has been
recurrently used to understand several aspects of firm internationalization, such as
location (e.g.
Grosse & Trevino, 2005Grosse, R., & Trevino, L. J. (2005). New institutional economics and
FDI location in Central and Eastern Europe. Management International Review, 45(2),
123-145.) and entry mode
(e.g.
Chen & Hu, 2002Chen, H., & Hu, M. Y. (2002). An analysis of entry mode and its
impact on performance. International Business Review, 11(2), 193-210. doi:
10.1016/S0969-5931(01)00055-5
https://doi.org/10.1016/S0969-5931(01)00...
; Hennart & Larimo, 1998Hennart, J.-F., & Larimo, J. (1998). The impact of culture on the
strategy of multinational enterprises: does national origin affect ownership
decisions? Journal of International Business Studies, 29(3), 515-538. doi:
10.1057/palgrave.jibs.8490005
https://doi.org/10.1057/palgrave.jibs.84...
). In addition, the concept of psychic
distance, applied by researchers at Uppsala School to the firm internationalization
process (Johanson & Vahlne, 1977Johanson, J., & Vahlne, J.-E. (1977). The internationalization
process of the firm: a model of knowledge development and increasing foreign market
commitments. Journal of International Business Studies, 8(1), 23-32. doi:
10.1057/palgrave.jibs.8490676
https://doi.org/10.1057/palgrave.jibs.84...
), has
also been extensively used in IB research. However, these constructs and their
operationalizations have been criticized in relation to their conceptual weaknesses
and measurement flaws (e.g.
Shenkar, 2001Shenkar, O. (2001). Cultural distance revisited: towards a more rigorous
conceptualization and measurement of cultural differences. Journal of International
Business Studies; 32(3), 519-535. doi: 10.1057/palgrave.jibs.8490982
https://doi.org/10.1057/palgrave.jibs.84...
).
The construct of institutional distance, developed and refined by Kostova and
associates (Kostova, 1999Kostova, T. (1999). Transnational transfer of strategic organizational
practices: a contextual perspective. The Academy of Management Review, 24(2),
308-324. doi: 10.5465/AMR.1999.1893938
https://doi.org/10.5465/AMR.1999.1893938...
; Kostova & Roth, 2002Kostova, T., & Roth, K. (2002). Adoption of an organizational
practice by the subsidiaries of the MNC: institutional and relational effects.
Academy of Management Journal, 45(1), 215-233. doi: 10.2307/3069293
https://doi.org/10.2307/3069293...
; Kostova & Zaheer, 1999Kostova, T., & Zaheer, S. (1999). Organizational legitimacy under
conditions of complexity: the case of the multinational corporation. Academy of
Management Review, 24(1), 64-81. doi: 10.5465/AMR.1999.1580441
https://doi.org/10.5465/AMR.1999.1580441...
), is believed to have greater
explanatory power than the constructs of psychic distance or cultural distance,
comprising not only sociocultural variables, but also institutional variables that
may significantly influence business decisions (López-Duarte & Vidal-Suárez, 2013López-Duarte, C., & Vidal-Suaréz, M. M. (2013). Cultural distance
and the choice between wholly owned subsidiaries and joint ventures. Journal of
Business Research, 66(11), 2252-2261. doi:
10.1016/j.jbusres.2012.02.017
https://doi.org/10.1016/j.jbusres.2012.0...
; Tung & Verbeke, 2010Tung, R. L., & Verbeke, A. (2010). Beyond Hofstede and GLOBE:
improving the quality of cross-cultural research. Journal of International Business
Studies, 41(8), 1259-1274. doi: 10.1057/jibs.2010.41
https://doi.org/10.1057/jibs.2010.41...
). Because the construct incorporates aspects of
regulative, normative and cognitive distance, it is considered more suitable to
explain the strategies adopted by multinationals. When multinationals face
institutional environments very different from their country of origin, it is more
difficult to establish and maintain their legitimacy (Kostova & Zaheer, 1999Kostova, T., & Zaheer, S. (1999). Organizational legitimacy under
conditions of complexity: the case of the multinational corporation. Academy of
Management Review, 24(1), 64-81. doi: 10.5465/AMR.1999.1580441
https://doi.org/10.5465/AMR.1999.1580441...
), as well as to transfer headquarters'
practices to the subsidiary (Kostova 1999Kostova, T. (1999). Transnational transfer of strategic organizational
practices: a contextual perspective. The Academy of Management Review, 24(2),
308-324. doi: 10.5465/AMR.1999.1893938
https://doi.org/10.5465/AMR.1999.1893938...
;
Kostova & Roth, 2002Kostova, T., & Roth, K. (2002). Adoption of an organizational
practice by the subsidiaries of the MNC: institutional and relational effects.
Academy of Management Journal, 45(1), 215-233. doi: 10.2307/3069293
https://doi.org/10.2307/3069293...
). Host country
institutional environment can impact multinational firms' decisions in two ways. In
absolute terms, the level of institutional quality reflects the effectiveness,
transparency and stability of institutions in the country, resulting in greater or
lesser uncertainty; in relative terms, the differences between the levels of
institutional quality of the country of origin and country of destination mean
potential difficulties to gaining legitimacy in the new environment (Chan, Isobe, & Makino, 2008Chan, C. M., Isobe, T., & Makino, S. (2008). Which country matters?
Institutional development and foreign affiliate performance. Strategic Management
Journal, 29(11), 1179-1205. doi: 10.1002/smj.705
https://doi.org/10.1002/smj.705...
; Phillips, Tracey, & Karra, 2009Phillips, N., Tracey, P., & Karra, N. (2009). Rethinking
institutional distance: strengthening the tie between new institutional theory and
international management. Strategic Organization, 7(3), 339-348. doi:
10.1177/1476127009337439).
Several authors have identified the influence institutional factors have on the
choice of ownership mode, though not using the institutional perspective. For
example, Goodnow and Hansz (1972)Goodnow, J. D., & Hansz, J. E. (1972) Environmental determinants of
overseas market entry strategies. Journal of International Business Studies, 3(1),
33-50. doi: 10.1057/palgrave.jibs.8490740
https://doi.org/10.1057/palgrave.jibs.84...
found
empirical evidence that firms tend to adopt higher-control ownership modes in
countries with favorable environments. In turn, studies based on transaction cost
theory provide varying interpretations of the impact of cultural distance on the
degree of control of the subsidiary (e.g.
Anderson & Gatignon, 1986Anderson, E., & Gatignon, H. (1986). Modes of foreign entry: a
transaction cost analysis and propositions. Journal of International Business
Studies, 17(2), 1-26. doi: 10.1057/palgrave.jibs.8490432
https://doi.org/10.1057/palgrave.jibs.84...
). Even so,
transaction cost theorists often see institutional factors as associated with the
choice of ownership mode.
Although empirical studies have consistently shown that the higher the uncertainty
associated with the institutional environment, the greater the preference for joint
ventures, there is some discussion as to how the three pillars of institutional
distance - regulative, normative and cognitive - may impact FDI decisions. For
example, when studying subsidiaries of Japanese multinationals, Xu, Pan and Beamish (2004)Xu, D., Pan, Y., & Beamish, P. W. (2004). The effect of regulative
and normative distances on MNE ownership and expatriate strategies. Management
International Review, 44(3), 285-307. found a negative association of
regulative and normative distances with levels of participation in subsidiary
capital. The authors did not test cognitive distance because they consider it a
separate construct, which impacts multinationals' strategies through different
mechanisms. This position is shared by Estrin,
Baghdasaryan, and Meyer (2009)Estrin, S., Baghdasaryan, D., & Meyer, K. E. (2009). The impact of
institutional and human resource distance on international entry strategies. Journal
of Management Studies, 46(7), 1171-1196. doi:
10.1111/j.1467-6486.2009.00838.x
https://doi.org/10.1111/j.1467-6486.2009...
.
Eden and Miller (2004)Eden, L., & Miller, S. R. (2004). Distance matters: liability of
foreignness, institutional distance and ownership strategy. In M. Hitt & J. Cheng
(Eds.), Theories of the multinational enterprise: diversity, complexity and relevance
(Vol. 16, pp. 187-221). New York, NY: Emerald. show that the
establishment of joint ventures is advisable in host countries with large normative
distance from the country of origin. However, the impact of cognitive distance on the
choice of ownership mode is more complex, since different aspects of local firms' and
consumers' behaviors can interfere in the decision. Trevino, Thomas and Cullen (2008)Trevino, L. J., Thomas, D. E., & Cullen, J. (2008). The three
pillars of institutional theory and FDI in Latin America: an institutionalization
process. International Business Review, 17(1), 118-133. doi:
10.1016/j.ibusrev.2007.10.002
https://doi.org/10.1016/j.ibusrev.2007.1...
contend that the non-inclusion of
normative and cognitive factors leaves the understanding of the impact institutions
have on FDI decisions incomplete. There are also empirical studies in the literature
whose results support the hypothesis of a negative association between the
uncertainty of the institutional environment and the choice of joint ventures
(e.g.
Arslan & Larimo, 2010Arslan, A., & Larimo, J. (2010). Ownership strategy of multinational
enterprises and the impacts of regulative and normative institutional distance:
evidence from Finnish foreign direct investments in Central and Eastern Europe.
Journal of East West Business, 16(3), 179-200. doi:
10.1080/10669868.2010.523370
https://doi.org/10.1080/10669868.2010.52...
).
Thus, in general the literature assumes that the greater the differences between the regulatory environments of the country of origin and of the host country, the greater the uncertainty and, therefore, the greater the probability of choosing a joint venture. However, this hypothesis carries a bias, probably due to the fact that most studies examined multinationals from developed countries, which enjoy high quality domestic regulatory environments and, as a result, are expected to find it more difficult to operate in low-quality regulatory environments. However, when considering the case of EMNEs typically coming from countries with poor regulatory environments, one should not assume that these companies prefer low-quality regulatory environments in the host countries simply because they are used to them in their countries of origin. In fact, what matters is the uncertainty generated by a regulatory environment of poor quality, regardless of the country of origin of the firm. Although it is possible that a company from a poor regulatory environment is better able to deal with the uncertainty arising from a similar environment in another country, it does not mean that the company prefers, or that it is easy for the company to operate in such environment. Thus, in the case of EMNEs, the impact of the regulatory environment in the ownership mode decision should not be evaluated by the difference (or distance) between the country of origin and country of destination, but by the quality (absolute) of the regulatory environment. Therefore, we advance the following hypothesis:
H1: The higher the quality of the regulatory environment of the host country, the less likely the firm will be to choose a joint venture, preferring to establish a wholly-owned subsidiary.
As to normative and cognitive distance, differences indeed matter, since they generate uncertainty. Therefore, we advance the following hypotheses:
H2: The greater the normative distance between the country of origin and the host country, the more likely the firm will be to choose a joint venture, rather than a wholly-owned subsidiary.
H3: The greater the cognitive distance between the country of origin and the host country, the more likely the firm will be to choose a joint venture, rather than a wholly-owned subsidiary.
Firm characteristics
International Experience- The IB literature consistently considers past experience as
relevant for internationalization decisions. The importance of experience in firm
internationalization is supported by behavioral theorists. A firm that already
accumulated knowledge about foreign markets would need less support from local
partners, and, therefore, would be less stimulated to create a joint venture (Johanson & Vahlne, 1977Johanson, J., & Vahlne, J.-E. (1977). The internationalization
process of the firm: a model of knowledge development and increasing foreign market
commitments. Journal of International Business Studies, 8(1), 23-32. doi:
10.1057/palgrave.jibs.8490676
https://doi.org/10.1057/palgrave.jibs.84...
). Several studies
found that firms are more likely to establish wholly-owned subsidiaries when they
have previous international experience (e.g.Agarwal & Ramaswami, 1992Agarwal, S., & Ramaswami, S. N. (1992). Choice of foreign market
entry mode: impact of ownership, location and internalization factors. Journal of
International Business Studies, 23(1), 1-28. doi:
10.1057/palgrave.jibs.8490257
https://doi.org/10.1057/palgrave.jibs.84...
; Anderson & Gatignon, 1986Anderson, E., & Gatignon, H. (1986). Modes of foreign entry: a
transaction cost analysis and propositions. Journal of International Business
Studies, 17(2), 1-26. doi: 10.1057/palgrave.jibs.8490432
https://doi.org/10.1057/palgrave.jibs.84...
); or that the
greater the international experience, the greater the level of participation of the
foreign firm in the capital of the subsidiary (Delios
& Beamish, 1999Delios, A., & Beamish, P. W. (1999). Ownership strategy of Japanese
firms: transactional, institutional and experience influences. Strategic Management
Journal, 20(10), 915-933. doi:
10.1002/(SICI)1097-0266(199910)20:10<915::AID-SMJ51>3.0.CO;2-0
https://doi.org/10.1002/(SICI)1097-0266(...
). On the other hand, less experienced companies tend to
opt for joint ventures in order to share risks, to create learning mechanisms with
local firms, and to facilitate access to host governments. Other studies show that
the impact of the firm's experience is not limited only to the experience gained in
the specific country, but includes experiences in other countries and industries
(Delios & Henisz, 2003Delios, A., & Henisz, W. J. (2003). Political hazards, experience,
and sequential entry strategies: the international expansion of Japanese firms,
1980-1998. Strategic Management Journal, 24(11), 1153-1164. doi:
10.1002/smj.355
https://doi.org/10.1002/smj.355...
). Nevertheless,
some studies did not get support for the impact of international experience on the
choice of ownership mode (e.g.Arslan & Larimo, 2010Arslan, A., & Larimo, J. (2010). Ownership strategy of multinational
enterprises and the impacts of regulative and normative institutional distance:
evidence from Finnish foreign direct investments in Central and Eastern Europe.
Journal of East West Business, 16(3), 179-200. doi:
10.1080/10669868.2010.523370
https://doi.org/10.1080/10669868.2010.52...
; Kogut & Singh, 1988Kogut, B., & Singh, H. (1988). The effect of national culture on the
choice of entry mode. Journal of International Business Studies, 19(3), 411-432. doi:
10.1057/palgrave.jibs.8490394
https://doi.org/10.1057/palgrave.jibs.84...
). And Li and Meyer (2009)Li, P.-Y., & Meyer, K. E. (2009). Contextualizing experience effects
in international business: a study of ownership strategies. Journal of World
Business, 44(4), 370-382. doi: 10.1016/j.jwb.2008.11.007
https://doi.org/10.1016/j.jwb.2008.11.00...
found that the effect of the
firm's experience in the selection of entry mode varies according to the context of
the host country. We hypothesize that,
H4: The greater the international experience of the firm with foreign direct investments, the less likely the firm will be to choose a joint venture, preferring to establish a wholly-owned subsidiary.
State Support- Several emerging countries show a high level of government
interference on investment flows. For example, Chinese FDI is still predominantly
made by state-owned enterprises (Buckley et
al., 2007Buckley, P. J., Clegg, L. J., Cross, A. R., Liu, X., Voss, H., &
Zheng, P. (2007). The determinants of Chinese outward foreign direct investment.
Journal of International Business Studies, 38(4), 499-518. doi:
10.1057/jibs.2008.102
https://doi.org/10.1057/jibs.2008.102...
). As a result, the investment decisions of Chinese
multinationals may reflect not only economic, but also political objectives. In
Russia, state-owned enterprises account for about a quarter of the country's direct
investment abroad (Sauvant, McAllister, &
Maschek, 2010Sauvant, K. P., McAllister, G., & Maschek, W. A. (2010). Foreign
direct investments from emerging markets: the challenges ahead. New York: Palgrave
Macmillan.). According to UNCTAD
(2011)United Nations Conference on Trade and Development. (2011). World
investment report 2011: Non-equity modes of international production and development.
Retrieved from http://unctad.org/en/docs/wir2011_embargoed_en.pdf
unctad.org/en/docs/wir2011_embargoed_en....
, there were more than 650 multinational companies in the world with
significant government participation in 2010. State-owned multinationals tend to be
less reluctant than other firms to invest in environments with high institutional
uncertainty (Knutsen, Rygh, & Hveem,
2011Knutsen, C. H., Rygh, A., & Hveem, H. (2011). Does state ownership
matter? Institutions' effect on foreign direct investment revisited. Business and
Politics, 13(1), 1-31. doi: 10.2202/1469-3569.1314
https://doi.org/10.2202/1469-3569.1314...
). In such situations, the state-owned firm would expect adequate
compensation by the local government in the event of expropriation or other measures
that affect the firm's results negatively. A state-owned enterprise tends to be seen
not only as a business organization, but also as a political actor. Thus, the firm
may be subject to stricter criteria and controls, encouraging the formation of joint
ventures with local partners, in order to legitimize its local operations (Cui & Jiang, 2012Cui, L., & Jiang, F. (2012). State ownership effect on firms' FDI
ownership decisions under institutional pressure: a study of Chinese
outward-investing firms. Journal of International Business Studies, 43(4), 264-284.
doi: 10.1057/jibs.2012.1
https://doi.org/10.1057/jibs.2012.1...
). Thus,
H5: The larger the support of the government (of the firm's country of origin), the more likely the firm will be to choose a joint venture, rather than a wholly-owned subsidiary.
Size- Firm size, a proxy for its financial resources, can be considered
one of the most important ownership advantages of the firm (Dunning, 1980Dunning, J. H. (1980). Toward an eclectic theory of international
production: some empirical tests. Journal of International Business Studies, 11(1),
9-31.). Thus, in studies on entry modes, firm size has
been frequently used, either as an independent variable, or as a control variable
(e.g.Agarwal, 1994Agarwal, S. (1994). Socio-cultural distance and the choice of joint
ventures: a contingency perspective. Journal of International Marketing, 2(2),
63-80.; Barkema & Vermeulen, 1998Barkema, H. G., & Vermeulen, F. (1998). International expansion
through start-up or acquisition: a learning perspective. Academy of Management
Journal, 41(1), 7-26.; Hennart
& Larimo, 1998Hennart, J.-F., & Larimo, J. (1998). The impact of culture on the
strategy of multinational enterprises: does national origin affect ownership
decisions? Journal of International Business Studies, 29(3), 515-538. doi:
10.1057/palgrave.jibs.8490005
https://doi.org/10.1057/palgrave.jibs.84...
; Kogut & Singh,
1988Kogut, B., & Singh, H. (1988). The effect of national culture on the
choice of entry mode. Journal of International Business Studies, 19(3), 411-432. doi:
10.1057/palgrave.jibs.8490394
https://doi.org/10.1057/palgrave.jibs.84...
; Xu, Pan, & Beamish, 2004Xu, D., Pan, Y., & Beamish, P. W. (2004). The effect of regulative
and normative distances on MNE ownership and expatriate strategies. Management
International Review, 44(3), 285-307.).
In general, it is assumed that large corporations, with more resources, are more
willing to choose entry strategies requiring greater volume of capital, while smaller
firms prefer entry modes compatible with less capital (Agarwal & Ramaswami, 1992Agarwal, S., & Ramaswami, S. N. (1992). Choice of foreign market
entry mode: impact of ownership, location and internalization factors. Journal of
International Business Studies, 23(1), 1-28. doi:
10.1057/palgrave.jibs.8490257
https://doi.org/10.1057/palgrave.jibs.84...
; Brouthers & Nakos, 2004Brouthers, K. D., & Nakos, G. (2004). SME Entry mode choice and
performance: a transaction cost perspective. Entrepreneurship: Theory and Practice,
28(3), 229-247. doi: 10.1111/j.1540-6520.2004.00041.x
https://doi.org/10.1111/j.1540-6520.2004...
). When establishing a wholly-owned subsidiary
in a foreign country, a large firm could achieve economies of scale and scope,
reducing its marginal cost (Meyer, 2001Meyer, K. E. (2001). Institutions, transaction costs, and entry mode
choice in Eastern Europe. Journal of International Business Studies, 32(2), 357-367.
doi: 10.1057/palgrave.jibs.8490957
https://doi.org/10.1057/palgrave.jibs.84...
).
Smaller firms, lacking resources, would give preference to shared-control entry modes
(Contractor & Kundu, 1998Contractor, F. J., & Kundu, S. K. (1998). Modal choice in a world of
alliances: analyzing organizational forms in the international hotel sector. Journal
of International Business Studies, 29(2), 325-358. doi:
10.1057/palgrave.jibs.8490039; Erramilli & Rao, 1993Erramilli, M. K., & Rao, C. P. (1993). Service firms' entry-mode
choice: a modified transaction cost analysis approach. Journal of Marketing, 57(3),
19-38.). Thus,
H6: The larger the size of the firm, the less likely the firm will be to choose a joint venture, preferring to establish a wholly-owned subsidiary.
Economic Sector- The most common criterion used in the literature to differentiate
industry is the dichotomy between industrial firms and service providers, since there
are important distinctions between them that impact entry strategies in foreign
markets (Demirbag, McGuinness, & Altay,
2010Demirbag, M., McGuinness, M., & Altay, H. (2010). Perceptions of
institutional environment and entry mode: FDI from an emerging country. Management
International Review, 50(2), 207-240. doi: 10.1007/s11575-010-0028-1
https://doi.org/10.1007/s11575-010-0028-...
; Dikova & Witteloostuijn,
2007Dikova, D., & Witteloostujin, A. van (2007). Foreign direct
investment mode choice: entry and establishment modes in transition economies.
Journal of International Business Studies, 38(6), 1013-1033. doi:
10.1057/palgrave.jibs.8400297
https://doi.org/10.1057/palgrave.jibs.84...
; Kogut & Singh, 1988Kogut, B., & Singh, H. (1988). The effect of national culture on the
choice of entry mode. Journal of International Business Studies, 19(3), 411-432. doi:
10.1057/palgrave.jibs.8490394
https://doi.org/10.1057/palgrave.jibs.84...
).
Several factors can cause industrial companies and service providers to make
different choices in their entry mode. For example, industrial firms are more subject
to the uncertainties of the physical environment, while firms in the service sector
are more susceptible to behavioral (cultural) issues. Therefore, firms engaging in
manufacturing prefer joint ventures in environments with high levels of uncertainty,
but when faced with behavioral problems they tend to choose wholly-owned
subsidiaries. In contrast, in the face of uncertainties arising from behavioral
issues, service firms would opt for joint ventures, whereas in environments with high
levels of uncertainty, they tend to choose wholly-owned subsidiaries (Brouthers & Brouthers, 2003Brouthers, K. D., & Brouthers, L. E. (2003). Why service and
manufacturing entry mode choices differ: the influence of transaction cost factors,
risk and trust. Journal of Management Studies, 40(5), 1179-1204. doi:
10.1111/1467-6486.00376
https://doi.org/10.1111/1467-6486.00376...
). Thus,
H7: Firms in the service sector are more likely to choose a joint venture than a wholly-owned subsidiary.
Therefore, the conceptual model of the study proposes that the ownership mode adopted by a multinational firm in a host country is influenced by the host-country institutional environment and firm characteristics (Figure 1). The dependent variable, ownership mode, was measured using a dichotomic variable (wholly-owned subsidiary versus joint venture).
Operationalization
Table 1 presents the operational variables used for the constructs Regulatory Quality, Normative Distance, and Cognitive Distance.
The firm's international experience was measured by the number of countries in which
the firm had operations before establishing the specific subsidiary
(cf.
Barkema & Vermeulen, 1998Barkema, H. G., & Vermeulen, F. (1998). International expansion
through start-up or acquisition: a learning perspective. Academy of Management
Journal, 41(1), 7-26.; Dikova & Witteloostuijn, 2007Dikova, D., & Witteloostujin, A. van (2007). Foreign direct
investment mode choice: entry and establishment modes in transition economies.
Journal of International Business Studies, 38(6), 1013-1033. doi:
10.1057/palgrave.jibs.8400297
https://doi.org/10.1057/palgrave.jibs.84...
; Dow & Larimo, 2011Dow, D., & Larimo, J. (2011). Disentangling the roles of
international experience and distance in establishment mode choice. Management
International Review, 51(3), 321-355. doi: 10.1007/s11575-011-0080-5
https://doi.org/10.1007/s11575-011-0080-...
; Kogut & Singh, 1988Kogut, B., & Singh, H. (1988). The effect of national culture on the
choice of entry mode. Journal of International Business Studies, 19(3), 411-432. doi:
10.1057/palgrave.jibs.8490394
https://doi.org/10.1057/palgrave.jibs.84...
). State support was operationalized as a
dummy variable; a company received state support if it was state-owned, the
government was a minority shareholder, or the firm had long-term subsidized
government financing. Size was measured by company gross sales, similarly to Demirbag, McGuinness and Altay's (2010)Demirbag, M., McGuinness, M., & Altay, H. (2010). Perceptions of
institutional environment and entry mode: FDI from an emerging country. Management
International Review, 50(2), 207-240. doi: 10.1007/s11575-010-0028-1
https://doi.org/10.1007/s11575-010-0028-...
study. We
used the four categories of size defined by The National Bank for Economic and Social
Development (BNDES) based on the firm's gross operational revenue in 2012: small
(less than R$16 million); medium (between R$16 and 90 million); medium-large (between
R$90 and 300 million); and large (more than R$300 million). Economic sector was
operationalized as a dummy variable (manufacturing or services).
Methodology
The study is cross-sectional and ex post facto. The research method adopted was a survey of Brazilian multinationals, and the unit of analysis was the foreign subsidiary of a Brazilian multinational. There is no official and exhaustive list of Brazilian companies with foreign operations and their subsidiaries. The list used in the study was obtained from BNDES. The list includes all types of multinationals independent of size and of connections with the bank, and is considered the most complete and reliable list of Brazilian multinationals available in the country.
Only subsidiaries with value-added activities were considered part of the target population; subsidiaries in tax-haven countries were excluded. A total of 198 companies fulfilled the selection criteria, with 587 subsidiaries spread across 84 countries. A maximum number of four subsidiaries by company was set in order to avoid excessive weight of a small number of large companies with many subsidiaries. Thus, the target population was reduced to 432 subsidiaries of 198 companies. The respondent was, preferably, a Brazilian executive, CEO of the foreign subsidiary, who had participated in the decision to establish the subsidiary, or as close as possible to this profile.
The sample was non probabilistic, due to the lack of a comprehensive list of the population, the occurrence of non-response, and the fact that companies with more than four subsidiaries self-selected which of their subsidiaries were to be included in the sample. We proposed the following criteria for selecting the subsidiaries: (a) the subsidiaries should have strategic relevance for the company; (b) the choice of the host country should have been based on previous studies before the decision was taken. A total of 192 questionnaires were received from 106 companies, representing a response rate of 44% of the subsidiaries concerned and 54% of the multinationals in the research population. Nevertheless, the final sample used consisted of 165 questionnaires, or 40% of the target population of subsidiaries, due to questionnaires with inconsistencies or that were completed with data from subsidiaries whose functions were not included in the study. To identify a potential non-response bias, non-parametric tests were conducted to verify whether non-respondents differed significantly from respondents in terms of the geographic location of their headquarters in Brazil and level of economic development of the subsidiary's host country; differences between the two groups were non-significant for both variables, suggesting the absence of non-response bias. The data collection instrument was a self-administered questionnaire with closed-ended questions and 5-point Likert-type scales. Questionnaires were submitted to the scrutiny of five specialists (university professors in the area of International Business and executives from BNDES) and pre-tested with five executives from Brazilian MNEs. The questionnaire was posted on the internet, as well as sent by e-mail to the respondents that indicated a preference for this means of data collection. Returned questionnaires were examined to detect potential errors, and several respondents were contacted to clarify issues as well as to fill in missing data. Finally, an analysis of outliers and missing data was conducted.
Results
Exploratory factor analysis results
Exploratory factor analysis was used to investigate the perceived dimensions of the host country institutional environment and therefore reduce the data to a manageable number of factors (Table 2). Data was examined to ascertain that it filled the requirements of factor analysis; correlation matrices showed a reasonable number of significant correlations, the results of the Bartlett's tests were significant and the values of MSA in the KMO tests were considered adequate. The analysis used principal component analysis and orthogonal varimax rotation; the factors extracted had eigenvalues greater than 1. Reliability was checked using Cronbach's alpha; all coefficients were greater than 0.60.
The two factors of the construct Quality of the Regulatory Environment - Quality of Government Institutions and Prevalence of Market-based Arrangements - together explained 68% of the variance. The first factor, Quality of Government Institutions, included six variables commonly used in international business literature to measure government effectiveness and rule of law. The second factor, Prevalence of Market-based Arrangements, combines three variables related to government controls that affect doing business. The three factors of the construct Normative Distance together explained 59.2% of the variance. The first factor, Values, includes three variables: importance assigned to leisure and entertainment, valuing security, and focus on professional success. The second factor, Beliefs, includes the conviction that one should not question management's authority, that it is important to stay in the same company to go ahead, and that it is important to work in a prestigious company. Finally, the two factors of the construct Cognitive Distance together explained 62.4% of the variance. The first factor, Cultural Identity, includes three variables (language, colonial history, and level of education). The second factor, Management Practices, includes three variables: the prevalence of a short- versus a long-term view, emphasis on innovation, and administrative centralization.
Summated scales (Spector, 1992Spector, P. E. (1992). Summated rating scale construction: an introduction (Quantitative applications in the social sciences). Thousand Oaks: Sage Publications.) were used to form the independent variables to be used in logistic regression. No relevant multicollinearity was found, with low VIF (Variance Inflation Factor) values.
Hypotheses testing
Three models were tested using binary logistic regression: Model 1, only with firm characteristics; Model 2, only with factors of the host country institutional environment; and Model 3, with all factors. Casewise diagnostics led to the exclusion of nine cases, further reducing the sample to 157 cases. Table 3 presents the model summary using the enter method.
All the tests for Model 3 showed the best results. The chi-square was significant and the Hosmer & Lemeshow test was non-significant, suggesting good fit of the data. The hit ratio was 79%. Because of the different size of the two groups, the cutvalue was 0.185. The percentage of cases correctly classified was 78.9% for wholly-owned subsidiaries and 79.3% for joint ventures (Table 4).
Hypotheses H1 and H2 received only partial empirical support. In the case of
Hypothesis 1, concerning the Regulatory Quality, the factor that showed significant
results was Quality of Government Institutions, suggesting that in countries whose
regulatory environment shows a high quality of public administration companies are
more likely to choose wholly-owned subsidiaries. With respect to Hypothesis 2
(Normative Distance), the factor that showed a statistically significant result was
Beliefs. Note, however, that the results indicate that larger differences in beliefs
would increase the probability of creating wholly-owned subsidiaries, contradicting
our original hypothesis, but supporting the results previously reported by Arslan and Larimo (2010)Arslan, A., & Larimo, J. (2010). Ownership strategy of multinational
enterprises and the impacts of regulative and normative institutional distance:
evidence from Finnish foreign direct investments in Central and Eastern Europe.
Journal of East West Business, 16(3), 179-200. doi:
10.1080/10669868.2010.523370
https://doi.org/10.1080/10669868.2010.52...
. One possible
explanation for this result is that very different beliefs can make it difficult to
identify a suitable partner. Values and Relationships did not show significant
results.
Regarding Hypothesis 3 (Cognitive Distance), both factors were significant. The results for the factor Management Practices indicate that the greater the perceived differences between the management practices of the host country and those of Brazil, the more likely it is that the firm uses a joint venture. These results are particularly relevant when considering the small number of joint ventures in the sample, given the preference of Brazilian multinationals for wholly-owned subsidiaries. Thus, they also offer empirical support to the dominant hypothesis in the literature on ownership mode for EMNEs. Strong differences in business practices make an association with local partners interesting in order to take advantage of their local market knowledge, instead of the firm itself seeking to acquire this knowledge (which would require more time and money, and could increase risks). The Cultural Identity factor was also significant, giving support to the importance of indicators of cultural distance and psychic distance used in the literature on ownership modes.
Hypothesis 4 and 6 were not supported empirically. Hypotheses 5 and 7 showed empirical support in the hypothesized direction. The Exp (B) of the variable State Support was 12.488 (p<0.001), showing a strong and significant relationship between state support and choice of joint ventures. With respect to Hypothesis 7 (Exp (B) = 14.396, p<0.001), the results indicate that Brazilian multinationals in the service sector strongly favor joint ventures.
Discussion
In general, Brazilian multinationals show a strong preference for wholly-owned
subsidiaries (75% of the sample), compared to joint ventures (25%). These findings
suggest relevant differences in relation to multinationals from other countries, and
confirm the results obtained by Dias (2012)Dias, A. C. A. M. (2012). A escolha do modo de entrada no mercado
externo e sua relação com o desempenho da subsidiária: evidências das empresas
multinacionais brasileiras (Tese de doutorado). Departamento de Administração,
Pontifícia Universidade Católica do Rio de Janeiro, Rio de Janeiro, RJ, Brasil.
Recuperado de
http://www2.dbd.puc-rio.br/pergamum/biblioteca/php/mostrateses.php?open=1&
arqtese=0612035_2012_Indice.html
www2.dbd.puc-rio.br/pergamum/biblioteca/...
.
Rocha (2003)Rocha, A. (2003). Por que as empresas brasileiras não se
internacionalizam? In A. Rocha (Ed.), As novas fronteiras: a multinacionalização das
empresas brasileiras (pp. 13-28). Rio de Janeiro: Mauad. and Silva, Rocha and Carneiro (2009)Silva, J. F., Rocha, A., & Carneiro, J. (2009). The international
expansion of firms from emerging markets: toward a typology of Brazilian MNEs. Latin
American Business Review, 10(2/3), 95-115. doi:
10.1080/10978520903303638
https://doi.org/10.1080/1097852090330363...
contend that Brazilian firms prefer
to take full control of their businesses, a cultural preference that also appears in the
high percentage of preferred shares (without voting rights, but with preference in
receiving dividends) of Brazilian companies that go public. These authors suggest that
such behavior would be more common when firms internationalize their businesses to
neighboring countries. Considering that most Brazilian multinationals are still regional
(53% of the subsidiaries in the sample are in Latin America and 21% in North America),
their proposition could help explain these findings. However, a question open for
discussion is whether such behavior can also be found in the initial steps of
internationalization of traditional multinationals. Unfortunately that are no studies
based on large samples that can help understand whether these preferences were also
present in their initial choices.
Two of the three hypotheses concerning the institutional environment of the host country have received only partial empirical support, suggesting that some institutional factors studied were not statistically significant in explaining the ownership mode of Brazilian multinationals. There are several possible explanations for these results.
In the case of the construct Regulatory Quality, two factors were identified but only
one (Quality of Government Institutions) was significantly associated with the selection
of wholly-owned subsidiaries, as generally predicted in the literature
(e.g.
Morschett, Schramm-Klein, & Swoboda, 2010Morschett, D., Schramm-Klein, H., & Swoboda, B. (2010). Decades of
research on market entry modes: what do we really know about external antecedents of
entry mode choice? Journal of International Management, 16(1), 60-77. doi:
10.1016/j.intman.2009.09.002
https://doi.org/10.1016/j.intman.2009.09...
;
Slangen & Tulder, 2009Slangen, A. H. L., & Tulder, R. van (2009). Cultural distance,
political risk, or governance quality? Towards a more accurate conceptualization and
measurement of external uncertainty in foreign entry mode research. International
Business Review, 18(3), 276-291. doi: 10.1016/j.ibusrev.2009.02.014
https://doi.org/10.1016/j.ibusrev.2009.0...
; Xu et al., 2004Xu, D., Pan, Y., & Beamish, P. W. (2004). The effect of regulative
and normative distances on MNE ownership and expatriate strategies. Management
International Review, 44(3), 285-307.). This result also
supports our contention that, in the case of EMNEs, researchers should not consider the
regulative distance, but rather the absolute quality of the regulatory environment of
the host country. Brazilian multinationals do take into account the stability and
transparency of government policies, the protection of property rights, and the
efficiency and independence of the judiciary system, and such aspects influence their
decision of ownership mode, in the same way they influence their counterparts from other
countries. The fact that the factor Prevalence of Market-Based Arrangements (which
includes aspects related to the complexity of labor laws, government control of
production factors and the presence of state enterprises distorting competition) did not
show significant results does not imply, however, that Brazilian multinationals prefer
institutional environments with low quality regarding these aspects. The non-significant
results can be explained by the Brazilian institutional environment in which these
aspects are also present. Being used to dealing with them, decision makers at Brazilian
multinationals do not consider such factors important when deciding ownership mode.
We contend, therefore, that because EMNEs originate from countries with poor institutional environments, researchers should be careful when evaluating the influence of regulative distance in their internationalization decision processes. In this study, although decision makers did perceive institutional weaknesses and risks in the countries where they chose to establish their subsidiaries, part of these aspects do not seem to impact the ownership mode decision, probably because they are used to operating in an environment with similar characteristics. Again, they do not show preference, but rather less concern, for this type of environment when choosing the ownership mode. Thus, our proposal of using the absolute quality of the regulatory environment in the case of EMNEs, rather than the regulative distance, is consistent with this study's result.
As to the construct normative distance, the factor Values was also non-significant, which is consistent with the fact that the two main host countries of Brazilian FDI are Argentina (25%) and the United States (19%), which belong to different cultural clusters. The factor Beliefs, however, was significant, although in a direction contrary to hypothesized. In our study, the larger the perceived differences in beliefs, the more the firm would tend to choose a wholly-owned subsidiary. An explanation for why beliefs would significantly impact the ownership-mode decision, and values would not, may rest in the nature of these constructs. Beliefs are not as deeply rooted and stable in time as values; they relate more to "practices", which belong to more superficial "layers of culture" (cf. Hofstede, 1991, pp. 9-10). Therefore, differences in beliefs may actually impact foreign operations more than differences in values. The fact that the direction of the relationship was contrary to hypothesized is not totally surprising; in fact the literature shows ambivalent results in the relationship between ownership mode and cultural distance, a construct similar to normative distance, also including values and beliefs. Of the 13 studies on the relationship between ownership mode and cultural distance reviewed by Harzing (2004)Harzing, A.-W. (2004). The role of culture in entry-mode studies: from neglect to myopia? In J. L. C. Cheng & M. A. Hitt (Eds.), Managing multinationals in a knowledge economy: economics, culture and human resources (Vol. 15, pp. 75-127). Bingley, UK: Emerald Group Publishing Limited., six found a negative relationship, four a positive relationship, and the other three did not show significant results.
As to Cognitive Distance, the factors Cultural Identity and Management Practices were significantly related to ownership-mode decision as hypothesized. Cultural Identity refers to some of the most basic differences between the domestic and the host country, those related to language, cultural roots, and education. In addition, management practices are extremely relevant to foreign operations; large differences in management practices increase the need to adapt the firm's internal routines, and make communication between subsidiaries and the parent company more difficult. When management practices differ substantially between managers in a joint venture, the risk of conflict is increased.
Firm characteristics showed interesting results; state support and belonging to the
service sector positively and significantly impacted the choice of joint ventures, while
size and international experience did not significantly relate to ownership mode. Some
authors suggest that the type of experience (general or host country specific) and the
context in which experience is accumulated (institutionally-similar countries or not)
can generate different results (Dow & Larimo,
2011Dow, D., & Larimo, J. (2011). Disentangling the roles of
international experience and distance in establishment mode choice. Management
International Review, 51(3), 321-355. doi: 10.1007/s11575-011-0080-5
https://doi.org/10.1007/s11575-011-0080-...
; Henisz & Delios, 2002Henisz, W. J., & Delios, A. (2002). What determines success and
failure in international competition? Learning about the institutional environment.
In P. Ingram & B. S. Silverman (Eds.), The new institutionalism in strategic
management (Vol. 19, pp. 339-372). Oxford: Elsevier.; Li & Meyer, 2009Li, P.-Y., & Meyer, K. E. (2009). Contextualizing experience effects
in international business: a study of ownership strategies. Journal of World
Business, 44(4), 370-382. doi: 10.1016/j.jwb.2008.11.007
https://doi.org/10.1016/j.jwb.2008.11.00...
). Therefore, the very way to
operationalize the construct International Experience may produce different results.
The strong role played by state support in the choice of joint ventures is also an
important finding. State support tends to be available more often to larger firms or
firms that advanced further in their internationalization process. Firms with a global
scope of operations tend to be operating in countries with greater institutional
distance, or in countries with greater institutional constraints to the installation of
wholly-owned subsidiaries, thus potentially preferring or being forced to use joint
ventures. Therefore, these firms are more prone to get state support than smaller firms
with a limited scope of internationalization. In addition, state support might have
encouraged Brazilian multinationals to engage in joint ventures that they would not
enter without such support, such as countries with high political risk, fragile
institutions, or large cultural distance (e.g.
Holburn & Zelner, 2010Holburn, G. L. F., & Zelner, B. A. (2010). Political capabilities,
policy risk, and international investment strategy: evidence from the global electric
power generation industry. Strategic Management Journal, 31(2), 1290-1315. doi:
10.1002/smj.860
https://doi.org/10.1002/smj.860...
; Quer, Claver, & Rienda, 2012Quer, D., Claver, E., & Rienda, L. (2012). Political risk, cultural
distance, and outward foreign direct investment: empirical evidence from large
Chinese firms. Asia Pacific Journal of Management, 29(4), 1089-1104. doi:
10.1007/s10490-011-9247-7
https://doi.org/10.1007/s10490-011-9247-...
). In these situations, having the
state as a shareholder or a major source of financing might act as a protection against
those risks for the EMNE (Knutsen et
al., 2011Knutsen, C. H., Rygh, A., & Hveem, H. (2011). Does state ownership
matter? Institutions' effect on foreign direct investment revisited. Business and
Politics, 13(1), 1-31. doi: 10.2202/1469-3569.1314
https://doi.org/10.2202/1469-3569.1314...
).
Finally, in spite of the small number of Brazilian multinationals in the service sector,
a reasonable number of them are in high-tech industries, which could explain the
preference for joint ventures of service firms as a way to attain legitimacy in foreign
markets, since Brazil has no reputation for producing technology. Moreover, due to the
intangibility of services and the need for tacit knowledge to serve new markets, service
multinationals may be seeking access to market knowledge and know-how held by local
partners. These results are consistent with theoretical propositions and empirical
findings in the literature (e.g.
Brouthers & Brouthers, 2003Brouthers, K. D., & Brouthers, L. E. (2003). Why service and
manufacturing entry mode choices differ: the influence of transaction cost factors,
risk and trust. Journal of Management Studies, 40(5), 1179-1204. doi:
10.1111/1467-6486.00376
https://doi.org/10.1111/1467-6486.00376...
; Morschett et al., 2010Morschett, D., Schramm-Klein, H., & Swoboda, B. (2010). Decades of
research on market entry modes: what do we really know about external antecedents of
entry mode choice? Journal of International Management, 16(1), 60-77. doi:
10.1016/j.intman.2009.09.002
https://doi.org/10.1016/j.intman.2009.09...
).
Conclusions
This study aimed to contribute to the understanding of the choice of ownership mode by EMNEs. Its theoretical contribution relies in examining the phenomenon under the perspective of institutionalism in an emerging country, Brazil. The institutional quality of a country's environment is a complex and still poorly explored research area, particularly regarding the use of perceptual measures, since most studies have employed existing indicators from secondary sources. The selection of variables to measure each institutional pillar, after a broad review of the extant literature on entry modes, may contribute to future studies, particularly to those focused on other emerging countries.
The findings suggest that Brazilian MNE choice of ownership mode agrees in general with the theoretical arguments and previous studies in the extant literature. There are, however, specific aspects that can be of interest to researchers that look specifically at EMNEs. First, the assumption that regulative distance, and not the regulatory environment in absolute terms, affects the choice of ownership mode seems not to stand for EMNEs that come from less stable institutional environments. Second, state support showed a strong relationship with the choice of ownership mode in this study. State support has not been previously researched since traditional MNEs from developed countries do not show this characteristic, which is more typical of EMNEs. Therefore, we suggest that future studies on EMNEs should take this variable into consideration.
The disposition of Brazilian multinationals to establish subsidiaries in countries with
fragile institutional environments suggests that their experience in the home country
makes it easier for them to operate in similar environments. These findings also support
the view that emerging multinationals are less sensitive to institutional weaknesses in
the host countries (Gammeltoft, Filatotchev, &
Hobdari, 2012Gammeltoft, P., Filatotchev, I., & Hobdari, B. (2012). Emerging
multinational companies and strategic fit: a contingency framework and future
research agenda. European Management Journal, 30(3), 175-188. doi:
10.1016/j.emj.2012.03.007
https://doi.org/10.1016/j.emj.2012.03.00...
).
The limitations of this research are related to its scope, the methodology used and the data available. The use of perceptual measures collected directly from respondents has its advantages and disadvantages. On the positive side, the relevant variables to measure are the decision makers' perceptions of the institutional environment, and not objective measures of the institutional quality of the environment, since the former, not the latter, guide firms' investment decisions. Moreover, the perceptions of decision makers from EMNEs may be substantially different from those of executives from developed countries. On the negative side, this type of research suffers of an ex post facto bias. Finally, sample size did not permit the use of a holdout sample; therefore our results may suffer from an upward bias in terms of the percentage of cases correctly classified.
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Publication Dates
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Publication in this collection
Apr-Jun 2015
History
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Received
06 May 2015 -
Reviewed
14 May 2015 -
Accepted
14 May 2015