Choice of Entry Mode DBA Joint Venture Management Howard Davies

The Joint Venture Is One Form of Entry Mode, to be Compared With: n Wholly-owned subsidiaries –greenfield ventures –acquisitions n Contractual Strategies –licensing –franchising

What Do We Know About the Factors Which Determine Entry Mode Choice? n Many conceptual frameworks Ownership advantages - Hymer (1960, 1976) firms go abroad in order to exploit their advantages - the nature of the advantage may influence the entry mode chosen Internalization and Transactions Costs - Buckley and Casson (1976) Hennart (1991) certain conditions make it more profitable to internalize a transaction Strategic Behaviour - Kogut (1988) entry mode may affect the firm’s position relative to others Bargaining Theory - Fagre and Wells (1982), Kobrin (1987) - firms bargain with governments over the terms on which they can enter Eclectic Theory - Dunning (1981) Hill, Hwang and Kim (1990) - all of the above

But How to Operationalize These Theories? n The theories are formed at such an abstract level that considerable development is needed to apply them. n At least 8 sets of factors have been examined, in the name of the theoretical frameworks outlined above –entrant firm characteristics - the dominant research stream –home industry characteristics –home country characteristics –host industry characteristics –host country characteristics –host/home country differences –venture characteristics –global industry conditions

Entrant Firm Characteristics (36 out of 49 studies) n WHAT IS THE LOGIC AND HOW PRECISELY DOES IT DERIVE FROM THE THEORIES? (Poorly articulated?) –Firms going abroad on the basis of “leakable” advantages seek more control- hence R&D/technology- intensive firms choose higher degrees of control (WOFE>JV>Licensing) - 6 studies YES[Davidson and McFetridge 1985;Fagre and Wells, 1982;Gomes-Casseres 1989;Hennart and Park, 1993;Kobrin 1987;Stopford and Wells, 1972] 3 studies NO [Hennart 1991;Chang 1995; Hisey and Caves;1985]. Advertising intensity has similar results –Larger firms choose higher degrees of control. WHY? They have more resources to protect? -7 studies YES, including Agarwal and Ramaswami 1992;Erramilli, 1991, no support, 1 NO [Chan 1995]. –Firms with more international experience choose higher % ownership [Gatignon and Anderson 1988; Hennart 1991; Kobrin 1987] because they are prepared to take more risk (????) or lower % [Gomes-Casseres 1989; Hennart and Reddy 1997] because they are prepared to take more risk!!!!. Firms JV in more familiar/closer markets –WHAT IF NON-LINEAR RELATIONSHIPS? (High and low experience leads to high control strategies)

Other Relevant Entrant Firm Characteristics? n Different Goals and Motivations lead to Different Strategies –following clients (as opposed to seeking markets) leads to higher control strategies - Erramilli and Rao 1990 –accessing raw materials monopolised by local firms leads to JVs - Gomes-Casseres 1989 –where global strategy is involved, higher control is sought - Kim and Hwang 1992

Home Industry and Country? n Home Industry Characteristics? –Caves and Mehra More competition at home (measured by increases in the number of MNCs in the home market) leads to higher degree of control required in overseas entries(but Fagre and Wells 1982 found no relationship) –In R&D intensive industries where product technology is important firms prefer JVs to having more control (Gomes-Casseres 1989) and licensing preferred to FDI in industries with high % of managewrial workers (Contractor 1984)(Does this contradict the transactions argument?) n Home Country Characteristics? (Erramilli 1996) –Firms from countries whose culture exhibits high POWER DISTANCE and high UNCERTAINTY AVOIDANCE seek higher % ownership

Host Industry: Growth, Concentration and R&D intensity? n One set of studies –JVs preferred over WOFEs when industry growth is very rapid (Hennart 1991;) –JVs preferred over acquisitions when growth is neither fast nor slow (Hennart and Reddy, 1997) –High degrees of ownership preferred when market potential is good (Agarwal and Ramaswami, 1992) n But Kogut and Singh (1988) found no association n Concentration - high concentration means acquisition preferred to greenfield (Caves and Mehra, 1986) - BUT others found no association between concentration and entry mode (Hennart 1991;Hennart and Park, 1993;Kogut and Singh 1988) n R&D intensity - JVs preferred over WOFEs when host industry is technology intensive (Kogut and Singh 1988,;Singh and Kogut 1989)

Host Country Characteristics? n Government Policy as the most obvious influence –restrictive policies lead to choice of JVs (Erramilli, 1996; Kobrin 1987;Gomes-Casseres 1990) –BUT Contractor (1984) found no link n Riskiness? –Some studies found a positive relationship between riskiness of a country and the degree of ownership (Kim and Hwang 1992), some found no relationship (Erramilli and Rao 1993;Kobrin 1987) some found a negative relationship (Aulakh and Kotabe 1997;Gatignon and Anderson 1988) n Country size - –bigger leads to preference for ownership (Erramilli 1996) or licensing (Davidson and McFetridge 1985 n Development/technological capability –positively associated with preference for licensing

Country Differences? n Cultural differences - AT LAST SOME CONSENSUS!! –THE GREATER THE CULTURAL DIFFERENCE, THE LOWER THE % OF OWNERSHIP DESIRED (Agarwal 1994;Erramilli 1991;Erramilli and Rao 1993; Fladmoe-Lundquist and Jacque 1995; Gatignon and Anderson 1988) –BUT Kwon and Konopa (1992) found no link between shared language or geographical distance and entry strategy

Other Factors? n VENTURE CHARACTERISTICS –Level of ownership negatively associated with size of the venture relative to parent size (the scale economies connection?) - Gatignon and Anderson 1988;Singh and Kogut 1989) but Kobrin (1987) found no relationship and Erramilli (1996) found subsidiary size POSITIVELY related to desired level of ownership –More R&D involved leads to desire for 100% ownership(Gatignon and Anderson 1988) n GLOBAL CONDITIONS –Global concentration leads to lower % of ownership sought (Kobrin 1987) –Riskier global environment, firms accept lower ownership and control in order to commit less resources (Brouthers 1995)

What About Entry Mode and Performance? n ROE, ROS or Perceptual Measures - conflicting results n Share price effects from ‘event’ studies - inconclusive n “Stability: i.e. duration - Gomes-Casseres (1987) found WOFEs more stable than JVs, Beamish (1985) found the opposite

SO WHAT DO WE KNOW? n NOT MUCH!!! n WHY?? –Underspecification - a small number of factors examined in each study –No control for contingency factors which will moderate any relationships e.g. the environment will impact on performance –Little examination of implementation issues –Different specification of key variables –Links may be non-linear (e.g. U-shaped) n LINKS TO THEORY POORLY ARTICULATED n POOR INTERPRETATION OF RESULTS?