International Strategy and Organization Part IIb: Market Entry Decision: An Integrative Model Josef Windsperger Professor of Organization and Management Center of Business Studies

Internalization Theory Organizational Capabilities Cultural Aspects Eclectic Approach Introduction

Internalization Theory = the transaction cost economics theory of the MNE all firms  TC-Theory MNE  Internalization Theory

Internalization Theory Basic question: Whether doing an activity within the firm by internalizing it  wholly owned subsidiary or to by involving in some form of collaboration  Joint venture  licencing Best entry mode: TC min!

Internalization Theory Factors of the internalization Theory Tacitness Performance ambiguity Interdependence Asset specificity x environmental volatility

Internalization Theory Factors of the internalization Theory Tacit Know-How  the firm is unable to articulate the know-how  pricing and contracting problems  high TC  wholly owned subsidiaries Tacitness Performance ambiguity Interdependence Asset specificity x environmental volatility

Internalization Theory Factors of the internalization Theory Difficulties in specifying and measuring the performance of assets  increased possibility of opportunistic behavior  high TC  wholly owned subsidiaries Tacitness Performance ambiguity Interdependence Asset specificity x environmental volatility

Internalization Theory high interdependence of operations in geographically wide spread units  need for central coordination to reduce TC  wholly owned subsidiaries Tacitness Performance ambiguity Interdependence Asset specificity x environmental volatility

Internalization Theory Factors of the internalization Theory specific assets or investments  increased possibility of opportunistic behavior  risk can be reduced by comprehensive contracting  impossible in dynamic environement  wholly owned subsidiaries Tacitness Performance ambiguity Interdependence Asset specificity x environmental volatility

Organizational Capabilities Factors of the organizational capabilities perspective International capability Transfer experience Activity experience x environmental volatility

Organizational Capabilities Factors of the organizational capabilities perspective little international experience  firm prefers entry modes where it is less involved (licencing) much international experience  firm prefers entry modes where it is more involved (wos) International capability Transfer experience Activity experience x environmental volatility

Organizational Capabilities Prior patterns of transfering know-how develop capabilities in these entry modes and influence later transfers licencing  licencing Joint venture  Joint venture w. o. subsidiary  w. o. subsidiary International capability Transfer experience Activity experience x environmental volatility

Organizational Capabilities Factors of the organizational capabilities perspective Missing activity experience can easily be built up in an stable environment  a dynamic environment causes high costs and much time to acquire new experience  collaboration (JV, licensing) International capability Transfer experience Activity experience x environmental volatility

Internalization Theory vs. Organizational Capabilities Empirical study of Madhok: Internalization theory aspects  not significant Organizational capabilities aspects  significant Acquisition and development of new capabilities is more important than just the deployment of existing ones at minimal costs

Cultural Aspects Culture can influence ownership strategiesin two ways: 1.National Character: (set of national characteristics of the home base country) ◙ Power Distance ◙ Uncertainty Avoidance ◙ Individualism ◙ Masculinity

2. The cultural distance: Distance between national characteristics of the home base country and that of the target market

National Character Theory u States: the strategies of the home base country will be influenced by the national culture of the countries in which they are based. u Focuses: two dimensions: power distance and uncertainty avoidance. –Power distance: the extent to which individuals are comfortable with inequality in relationships –Uncertainty avoidance: the tolerance for ambiguity

National Character Hypothesis “The lower the power distance and the uncertainty avoidance indices of the home base of the investing firm, the greater the likelihood that it will enter the United States with shared-equity ventures.”

Cultural distance theory Cultural distance is defined as the difference between national characteristics of the base and the target countries considered u States: Company’s success in the target country requires: know-how, reputation, some types of distribution services, etc (to the differences of cultural factors) → high transaction costs → interest to share equity with its affiliates

Cultural Distance Hypothesis “The greater the cultural distance between the home base of the investors and the target country, the more likely that they will enter target country through shared-equity ventures.”

Results Research based on results from pooling of 2 databases in the target country United States Japanese manufacturing affiliates : 226 entries, 42% partially owned Finish manufacturing affiliates : 135 entries, 30% partially owned. u The research gave support for the Cultural Distance Hypothesis: Japanese investors, (a country that is culturally further to the US than Finland) tend to have higher propensity to enter the US through joint ventures

Results u The research disproved the National Character Hypothesis: Japan having higher values for power distance and uncertainty avoidance than Finland, should have higher preferences for wholly owned subsidiaries. Instead we find the reverse. u Two main explanations for the result of the logistic model: 1. psychological characteristics tend to affect the strategies of the companies domiciled there. 2. patterns of entry are affected by cultural distance