Establishment mode means that the MNE starts its operations from scratch in the foreign country usually through a wholly owned subsidiary where as in entry mode; this can be accomplished by a subsidiary or through partnership with a local party which involves shared ownership. In this study the authors examine the effect of same variables on both these choices available to a company.
They do it through a series of hypotheses. The first hypothesis measures the positive effect of greater institutional advancement on the choice that the company makes. Institutional advancement is defined in the study as pertaining to changes in formal institutions over a period of time. It is argued that regulatory forces are likely to be a big influence on a decision that an MNE makes with regard to its establishment or entry choice. Regulatory forces or rather Regulative forces as described in the study are not limited to laws and regulations only but also include political and other social factors.
The authors conclude that institutional advancement has a positive effect on the choice to establish a subsidiary with shared ownership. The second hypothesis postulated by the authors’ measures the moderating effect of institutional advancement on the tendency of a technologically intense firm to either go for establishment mode or entry mode. It is argued that firms which are technology intense should go for establishment mode because their competitive advantages are embedded in their labor force skills and organizational practices so it is more efficient for them to start from scratch. They should hire and train the local labor force. Furthermore in case of a joint venture or share ownership of the subsidiary, protecting the intellectual rights can be an issue.
Protection of such rights is dependent on the judicial system. In transition economics where the judiciary is corrupt and intellectual property rights are not respected, an MNE would be reluctant to transfer its technology. Therefore authors conclude that firm with advanced proprietary technology are likely to prefer establishment mode but level of institutional advancement has a positive moderating effect on such a firm going for entry mode.
The third hypothesis measures the moderating effect of institutional advancement on a multidomestic MNE to either go for establishment of entry mode. Multidomestic firms are defined as those which pursue multidomestic strategy and want to establish a sustainable local market presence. For such MNEs acquiring a local company is a more attractive option because such acquisition can provide them with local brands, market knowledge, distribution channels and network relationships with the host country’s other businesses and government. How the restructuring and realignment of the acquired entity can be very challenging.
The firms in the host country are likely to be following a different paradigm. But on the other hand if an MNE goes for shared ownership or entry mode, it can accomplish more without facing these difficulties. It is argues that a multidomestic MNE requires lesser control on the subsidiary. If this is so then subsidiaries in the host country can have considerable freedom and operate on their own fully leveraging their local expertise.Hence it is concluded institutional advancement has a positive moderating effect on a multidomestic MNE to go for entry mode.
Finally the authors have used an international survey to gather the data to support their findings. The survey consists of a questionnaire with 33 open and close ended questions. Furthermore the MNE’s latest establishment mode choice or entry mode choice has been taken as the dependent variable.
This study is no doubt a valuable asset for managers and students alike in studying the behavior of MNEs in making their choices when it comes to Foreign Direct Investment but nevertheless it has a few shortcomings and weaknesses. But the biggest shortcoming of this study is the scope. The authors have primarily taken a sample of European MNEs. And the so called economies in transition are basically east European countries which were once under the iron curtain.
Firstly we need to consider the fact that Europeans MNEs may be very different from Japanese or American MNEs and so forth. The establishment or entry mode choice for Japanese firms may be dependent on or moderated by variables other than the ones discussed here. Similarly an MNE whether European or Japanese may decide to invest in some country in Central Asia or North Africa or even South Asia. The market conditions in these countries are very different from those of the transition economies discussed by the authors.
This means that the findings in this study are not universally applicable. Nevertheless it is a valuable addition to our knowledge regarding MNE behavior in making Foreign Direct Investment decisions. But for any researcher trying to consult this study, it is very important to keep the above mentioned limitations in mind.
Courtney from Study Moose
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