Foreign expansion: what is the equity entry mode that generates
maximum firm performance?
Kevin van Dorp 10070222 22 June 2017
MSc Business Studies: International Management University of Amsterdam
Final Version Master Thesis First reader: Dr. Niccolò Pisani Second reader: Dr. Carsten Gelhard
Statement of Originality
This document is written by Student Kevin van Dorp who declares to take full
responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no
sources other than those mentioned in the text and its references have been used in
creating it. The Faculty of Economics and Business is responsible solely for the
supervision of completion of the work, not for the contents.
Abstract
This thesis aims to answer which equity entry mode (full versus partial) an MNE should select for its foreign expansion to achieve maximum firm performance. The first hypothesis of this thesis is that a foreign expansion based on wholly-owned (versus partially-owned) subsidiaries is positively related to firm performance (hypothesis 1). The MNE would therefore be best off selecting the full equity entry mode. This hypothesis is built on the theoretical grounding that (networks of) wholly-owned subsidiaries (WOS) deliver financial, operational, and strategic sources of efficiency to the parent firm. The second hypothesis is that these sources of efficiency reserved to networks of WOS are amplified when the MNE has a global focus. A global focus would therefore positively moderate the positive relationship between the use of WOS and firm performance. The third and last
hypothesis of the thesis is that financial leverage limits the full exploitation of these sources of efficiency. Leverage would therefore negatively moderate the relationship hypothesized in H1. The hypotheses were tested using the Global Fortune 500 (year 2016) as sample. The results found no statistical support for all three hypotheses.
Table of content
1. Introduction ... 6
2. Literature review ... 8
2.1 Entry modes alternatives ... 8
2.1.1 Theories developed to model the choice of the different entry modes ... 11
2.2 Entry modes and performance ... 14
2.2.1 Partially-owned subsidiaries ... 14
2.2.2 WOS ... 15
3. Hypotheses development ... 17
3.1 WOS versus partially-owned subsidiaries ... 17
3.2 The moderating effect of global focus ... 21
3.3 The moderating effect of financial leverage ... 23
4. Methods ... 25
4.1 Sample and data collection ... 25
4.2 Variables ... 26
4.2.1 Independent variable... 26
4.2.2 Dependent variable ... 27
4.2.3 Moderating variables ... 27
4.2.4 Control variables ... 27
5. Statistical analysis and results ... 28
6. Discussion ... 33
6.1 Interpretation of the results ... 35
6.2Academic relevance ... 35
6.3 Managerial implications ... 35
7. Conclusion ... 37 8. References ... 39
1. Introduction
Multinational enterprises (MNEs) have several entry modes to choose from when they wish to access a foreign market. The first choice an MNE has to make is whether or not it expands abroad by investing equity (Pan and Tse, 2000). In the case of equity investments, also referred to as foreign direct investment (FDI), it can choose to have full ownership of its foreign subsidiary or only a partial one. When the MNE has full ownership of its wholly-owned subsidiary (WOS), the subsidiary will be either a greenfield or an acquisition. In the case of a partial ownership the subsidiary will be either an international joint venture (IJV) or a partial acquisition. Both equity entry modes have their advantages and disadvantages (Lasserre, 2012). But which one should an MNE select for its foreign subsidiaries to achieve maximum firm performance?
Studies on which of these two equity entry modes (full versus partial ownership) generates the highest returns are limited in number (Chang, Chung, & Moon, 2013; Brouthers, 2007; Jung, Beamish, & Goerzen, 2008; Delios & Beamish, 2004). Moreover, they all share the same
limitations. Early studies primarily compared the performance of IJVs, greenfields and acquisitions belonging solely to Japanese MNEs (Jung, Beamish, & Goerzen, 2008). Furthermore, these studies all made consistent use of the same questionable proxies to approximate subsidiary performance (Chang et al., 2013). Results were mixed. A more recent study by Chang et al. (2013) made use of financial data to measure performance, and found WOS outperform IJVs. However, this study focused exclusively on the performance of foreign subsidiaries located in China. As a result of these limitations, there is still no consensus on the answer to the question. Complementing current
literature is important, because the choice of entry mode is decisive for an MNE’s financial
performance (Brouthers & Hennart, 2007). Moreover, many of the world’s largest firms are MNEs (Rugman & Verbeke, 2004). Hence, the research question of this thesis is as follows:
Research question: What equity entry mode (full versus partial) should an MNE select for
This thesis will first critically review literature on the two different equity entry modes (chapter 2). In the subsequent chapter, a theoretical framework and a selection of three hypotheses are elaborated (chapter 3). The first hypothesis is that a foreign expansion based on wholly-owned (versus partially-owned) subsidiaries is positively related to firm performance. The second
hypothesis is that the aforementioned relationship is positively moderated when the MNE has a global scope. The third and final hypothesis of this thesis is that financial leverage negatively moderates the relationship hypothesized in hypothesis 1. In the methods section (chapter 4), the selection of sample and the method of data gathering are elaborated. This thesis uses the Global Fortune 500 listed in the year 2016 as its sample. These are the world’s largest firms ranked according to their total revenues in the year 2015. The MNEs’ financial data and the information regarding the ownership modes of their subsidiaries are extracted from annual reports and the database Orbis. This chapter also explains the independent, dependent, moderating, and control variables this study uses to test the hypotheses. The three hypotheses are tested in the following chapter ‘statistical analysis and results’ (chapter 5). A hierarchical multiple regression was
performed. Results showed there is no statistical support for any of the three hypotheses. All three hypotheses are therefore are not supported. There are three possible interpretations why this is the case. The first one is that advantages reserved to the use of WOS are offset by areas in which the full equity entry mode is costlier than the partial one. The second one is that an MNE that relies on the use of partially-owned subsidiaries enjoys the same network-bound sources of efficiency that are thought to be reserved to networks of WOS. A final explanation for the results not to support the hypotheses is that expanding abroad with a network of partially-owned (versus wholly-owned) subsidiaries brings forth different sources of efficiency that improve performance. Ultimately, there is no support one of the two equity entry modes generates a superior firm performance.
2. Literature review
2.1 Entry modes alternatives
When MNEs decide to expand their operations abroad they have various so-called entry modes to choose from. An entry into another country can be either one with or without equity invested (Pan and Tse, 2000). Examples of non-equity modes are exports and contractual agreements (e.g.
franchising/licensing, turnkey operations, R&D contracts, and co-marketing). If an MNE chooses to expand through the use of equity, it must choose both an establishment mode and an ownership mode (Brouthers & Hennart, 2007). One establishment mode is the so-called greenfield, and implies the MNE will start its activities abroad from scratch. The other establishment mode is the
brownfield, which consists of acquiring an already existing local firm. The ownership mode, in turn, can be either full or partial. If an MNE chooses to do things by itself, it will have a full ownership over its new wholly-owned subsidiary (WOS). Conversely, if it collaborates with a local partner it will only have partial ownership in the international joint venture (IJV) . Both ownership modes have their advantages and disadvantages.
In the case of a partial ownership, the MNE will have a partner whom it can exchange (market) knowledge with, and share costs and risks (Lasserre, 2012). Furthermore, MNEs can opt to choose this ownership mode when they wish to achieve synergy or when they aim to enter a foreign market that is otherwise inaccessible due to regulations (Lasserre, 2012). However, there are also downsides to the partial ownership mode. The most critical disadvantage of the Joint ventures (JVs) is that that firms need to cooperate. This means that the MNE has less control over its activities than in the case of a WOS. Different strategic visions or objectives between parent firms can lead to lagging decision-making and even conflicts (Cui, Calantone, & Griffith, 2011). Moreover, conflicts can occur when a partnering firm appropriates the other one’s valuable intangible assets for its own gain. These hazards of a JV are amplified in the case of an IJV (Ren, Gray, & Kim, 2009). Cultural differences may complicate the division of roles and the forming of strategy (Chang, Chung, &
Moon, 2013) or cause misunderstandings in communication (Makino, Chan, Isobe, & Beamish (2007). Furthermore, the often-observed lack of trust increases as cultural distance gets larger (Dikova, Sahib, & van Witteloostuijn, 2010) and the general propensity to trust gets smaller in a partner’s home country (Ertug, Cuypers, Noorderhaven, & Bensaou, 2013). Consequently, the IJV is increasingly an unpopular mode to enter transition countries in countries where regulations loosen (Xia, Tan, & Tan, 2008).
Conversely, the full ownership mode has a few significant financial, operational, and strategic advantages for the subsidiary. The financial advantage is that the MNE does not have to share any of the subsidiary’s profits. Moreover, the MNE is free to reallocate the earnings of its other divisions to this subsidiary if it believes it will generate higher rate of returns. The operational advantage stems from the fact that the parent firm does not have to take into account the possibility of a partnering firm appropriating any intangible assets. Consequently, it can transfer and integrate its most valuable intangible assets, thereby increasing the subsidiary’s operational efficiency (Hollensen, 2007) and its performance (Chang et al., 2013). The strategic advantage is that no consensus among several managements is needed to introduce and implement new plans.
Consequently, this leads to more control for the parent firm, and a faster decision-making for the subsidiary. Against these advantages are naturally the disadvantages of not having a partner, i.e. solely bearing all costs and risks.
Other advantages and disadvantages of a full ownership are specific to the accompanied establishment mode. A full acquisition, for example, offers many of the benefits of an IJV (host-country knowledge, resources and capabilities, synergy and easy market-entry), without the difficulties of having to cooperate with another firm (Lasserre, 2012). Apart from these benefits, a full acquisition also has its own disadvantages. Acquiring another firm is often done against market value plus an additional average premium of 30 percent (Pearl & Rosenbaum, 2012). Moreover, also in this case cultural differences (both national and organizational) are one of the main causes acquisitions can end up in failure (Lasserre, 2013). First, differences in national cultures can impede
MNEs from finding any hidden liabilities and properly valuating the other party. As such, due diligence is more difficult for acquisitions taking place in foreign countries. This is also the reason why MNEs often abandon international acquisition deals before completion (Dikova, Sahib, & van Witteloostuijn, 2010). Second, in the case of a completed acquisition deal, cultural differences can obstruct the transition phase, i.e. the post-acquisition integration of both companies (Lasserre, 2012). Pre-acquisition experience is generally considered to smooth this transition phase (Uhlenbruck, 2004), but can be negatively moderated (Uhlenbruck, 2004) or nullified (Dikova, Sahib, & van Witteloostuijn, 2010) when the cultural distance is too large. Cultural differences within the organization can be overcome by opting a greenfield investment. A greenfield enables the MNE to hire local personnel who fit their national and organizational culture. This establishment is therefore often chosen for a WOS when cultural differences are too large to be overcome. It has the additional advantage that the subsidiary can easily replicate its parent’s firm management
infrastructure. However, whereas a full acquisition provides the MNE with a new foreign subsidiary that is instantly operational, the greenfield requires the MNE to start from scratch. Consequently, the subsidiary has to develop its own supply and distribution channels, workforce, and customer base. This liability of newness (Kor & Misangyi, 2008) consumes a lot of organizational resources. More importantly, starting from scratch means it can take much time before the MNE finally has a foothold in the foreign market. This entry mode is therefore not suitable for markets that are already saturated (Lasserre, 2012). Furthermore, by opting this entry mode the MNE essentially has nothing to bridge the distance of the host-country with. Without any connecting factors, the MNE is an outsider that has to compete with firms that are more familiar with the local market. Consequently, it faces a liability of foreignness (Zaheer, 1995).
2.1.1 Theories developed to model the choice of the different entry modes
Most of the literature that explains the choice of entry mode is built on the transaction
mode that is most efficient in terms of governance (Brouthers & Werner, 2003). Hence, firms will opt for WOS when the costs of sole ownership and market transactions are lower than the
production and transaction costs of an IJV. Studies applying the transaction cost theory often focus on firm- and industry-specific factors in their predictions (Madhok, 1997). Examples are firm’s: resources and capabilities (Holburn & Zelner, 2010; Madhok, 1997), international experience (Dikova & van Witteloostuijn, 2007; Gatignon & Anderson, 1987), international strategy (Kim & Hwang, 1992; Dikova & van Witteloostuin, 2007), technological intensity (Chang et al., 2013), industry growth and concentration (Caves & Mehra (1986), and even to what extent a firm is family owned (Kao, Kuo, & Chang, 2013).
One popular thought among proponents of the transaction cost theory is that subsidiaries of MNEs that lend most of their value from their intangible resources are governed more efficiently when they are wholly-owned (Chang et al., 2013). The use of an IJV and the corresponding transfer of an MNE‘s tacit intangible assets to the other partner brings forth the risk of free riding (Hennart, 1982). Conversely, transaction cost theory predicts an MNE may opt to enter a foreign country via an IJV when the (local) partner has complementary inputs (knowledge of local markets, access to distribution channels and natural resources) that cannot be transferred effectively using the market mechanism (Brouthers & Hennart, 2007; Hennart, 2009). Others consider the joint venture as a happy medium between contractual agreements (licensing and franchising) and fully owned subsidiaries in terms of control, commitment and risk (Brouthers & Hennart, 2007; Chang et al., 2013). It would therefore be suitable for MNEs with a lack of international experience (Dikova & Witteloostuijn, 2007), resources or capabilities (Holburn & Zelner, 2010; Madhok, 1997), or those who want to use the IJV to achieve temporary objectives (Cuypers & Martin, 2007) or as a real option to expand abroad under conditions of uncertainty (Kogut, 1991). However, many view the IJV as a a sub-optimal ownership strategy (Jung, Beamish, & Goerzen 2008). One important factor for that view is that the IJV requires consensus among several managements, something that slows down decision-making and negatively impacts performance (Pearce, 1997; Janger, 1980).
Consequently, as firms gain experience in a foreign country and risks decrease, they will eventually favor the use of WOS over that of the other entry and establishment modes (Johanson & Vahlne, 1977).
Other scholars view the selection of a foreign entry mode from an institutional perspective (Demirbag, Tatoglu, & Glaister, 2010; Dikova & Witteloostuijn, 2007). These scholars argue countries differ in institutions. Institutions are humanly devised constraints that dictate political, economic and social interactions (North, 1990). These constraints can be either formal (laws, constitutions, property right) or informal (taboos, customs, traditions). When an organization enters a new market it must comply with the rules and belief systems that dominate in that given market (DiMaggio and Powell, 1983). Some argue MNEs avoid investing in foreign markets when the institutions of the parent firm’s home country are too much in conflict with those of the host country. (Xu & Shenkar, 2002). When they do decide to perform FDI, MNEs will often select the entry mode that requires a lower level of risk and resource commitment, i.e. the IJV (Xu and Shenkar, 2002; Agarwal & Ramaswami, 1992; Anderson & Gatignon, 1986). Having a local IJV partner will also ensure the firm’s legitimacy of operating there (Yiu & Makino, 2002). Conversely, a full ownership mode is chosen when the institutional distance between home and host country is small. (Xu and Shenkar, 2002). For this reason, more US firms have started to enter China with WOS after the country revised parts of its legal system to make it more similar to the American one (Xu and Shenkar, 2002). MNEs will also prefer full control over their investments when formal institutions of the host country are strong (Meyer, Estrin, Bhaumik, & Peng, 2009; Yiu & Makino, 2002; Dikova & Witteloostuijn, 2007). A strong regulatory protection of intellectual property, particularly, encourages MNEs to opt for WOS (Delios & Beamish, 2002).
Finally, there are those who put emphasis on cultural distance in explaining each entry mode (Brouthers, 2002). National cultures can differ on several dimensions (Hofstede, 2006; Schwartz, 1994). Hofstede (1983) initially argued there are four dimensions. First, national cultures differ in terms of power distance. A large power distance index implies that the society accepts a certain
hierarchy, whereas a low one means that people strive to a fair distribution of power. The second dimension is individualism vs. collectivism, and specifies to what extent a society is either
individualistic or integrated into groups. The third dimension is uncertainty avoidance, and refers to the willingness of a society to embrace the possibility of change. Societies that score high on the uncertainty avoidance index typically place more value on strong codes of conducts and a strong enforcement of formal institutions. The fourth dimension (masculinity vs. Femininity) relates to the emphasis of competition (masculine) versus that of consensus (feminine) in a society. Hofstede (2006) later added a fifth and a sixth dimension. The fifth one is long-term orientation vs. short-term orientation. In other words, does a society cling to its past (short-short-term) or will it have a pragmatic approach (long-term) when anticipating future challenges. The last dimension Hofstede identified is indulgence vs. restraint, i.e. a society where there is a pursuit of joy versus one where joy is restricted by strict social norms. Scholars who study the choice of entry mode from a cultural perspective are divided on the subject. Some argue MNEs will choose an IJV entry mode as cultural distance (and consequently the risk of investment) increases (Sim & Pandian, 2003; Anand & Delios, 1997; Kogut & Singh, 1988). Partnering with a local partner thereby enables the MNE to bridge this distance. Conversely, others argue a greater cultural distance stimulates MNEs to wish for greater control over their foreign operations (Tihanyi et al., 2005; Brouthers & Brouthers, 2001; Barkema & Vermeulen, 1997). Johanson and Vahlne (1977) argue MNEs gradually increase their investments in foreign markets as they get more familiar with the other culture. When they have accumulated enough knowledge and experience to reduce the risks that result from the cultural distance the MNEs will eventually opt for a WOS. Consequently, in this view the IJV serves as the intermediate phase of an MNE’s foreign operations. Lastly, apart from the cultural distance between two countries, scholars also try to explain the choice of entry mode by looking solely at the
dimensional values of the MNE’s home country. For example, MNEs from countries with a high power distance and high uncertainty avoidance indexes are less willing to cooperate with another
foreign partner. Consequently, these MNEs will prefer the use of WOS (Makino & Neupert, 2000; Erramilli, 1996).
2.2 Entry modes and performance
2.2.1 Partially-owned subsidiaries
Scholars generally agree that IJV performance is the outcome that results from the implementation of strategies by the partnering firms’ personnel (Beamish & Lupton, 2009). However, they disagree on whether this outcome has historically been positive or not. Some argue the entry mode is a safe choice to expand abroad (Delios & Beamish, 2004). Other scholars take a cautious position and argue the entry mode is volatile. Hence, some IJVs are high-performing and efficient, whereas others are not (Nemeth & Nippa, 2013). However, the vast majority believes the majority of the IJVs ends in conflict between partners, and is therefore unstable and inefficient (Kogut, 1988; Hambrick, Li, Xin, & Tsui, 2001). Studies revealing the high failure rate of IJVs are most frequently cited to support this belief (Nemeth & Nippa, 2013). One study, for example, showed only ten percent of all IJVs end when the initial goals are accomplished, whereas 90 percent of IJV
terminations are unintended (Makino et al., 2007). This rate of failure is only comparable to that of WOS when one party has a considerable majority share (80 percent +) in the IJV (Dhanaraj & Beamish, 2004).
Yet, the existing research on IJV performance is criticized. The main critique involves the measure and the determinants of IJV performance (Beamish & Lupton, 2009; Ren, Gray, & Kim, 2009; Larimo, 2007). Researchers have used a wide array of constructs to measure performance. This ranges from objective constructs such as survival and longevity, to subjective ones based on the managers’ opinions (e.g. satisfaction and achievement of goals) (Ren et al., 2009; Beamish & Lupton, 2009). However, to conduct a meta-analysis of the literature the extensive use of a single measure is necessary. Others argue these are poor proxies to measure the performance of an entry
mode that is used for so many different purposes and that can have varying life cycles (Makino et al., 2007; Krishnan, Martin, & Noorderhaven, 2006). For example, when the objective of the IJV is to temporarily cooperate in order to gain knowledge or to create a new product, a proxy such as survival rate would not accurately align performance with objective. Also the choice of performance determinants is contested. Ten performance determinants in specific have extensively been
researched over the last few decades (Ren et al., 2009). Many of these determinants focus on a social and organizational fit between partners, and therefore focus on the prevention of conflicts. A few examples are strategic fit (Larimo, 2007; Kogut, 1988), cultural fit (Bener & Glaister, 2010; Larimo, 2007), trust (Brouthers & Bamossy, 2006; Krishnan, Martin, & Noorderhaven, 2006), and cooperation (Zhan & Luo, 2008). However, some argue the most decisive determinant of
performance does not prevent conflicts from occurring. Rather, the strongest driver of performance is the resolution of conflicts (Ren et al., 2009).
2.2.2 WOS
No research has been conducted that specifically studies the performance of WOS. Rather, existing literature focuses on the performance differences between foreign greenfields and acquisitions (Georgopoulos & Preusse, 2009; Slangen & Hennart, 2008). Which of these full ownership mode entries generates the highest performance is unclear. Some scholars found greenfields to outperform acquisitions (Li & Guisinger, 1991; Woodcock, Beamish, & Makino, 1994). One reason can be found in the higher costs to integrate acquired firms into the organization (Slangen & Hennart, 2008). Another important factor is the acquisition premium (Porter, 1989).These premiums should reflect the worth of future cash-flows, but are often too high as a result competitive bidding. These acquisitions generate by default a poor performance, and are often divested soon after. However, others believe that acquisitions outperform greenfields as a result of greenfields facing a liability of newness and a liability of foreignness (Georgopoulos & Preusse, 2009; Slangen & Hennart, 2008). In contrast, the foreign firms that are chosen by MNEs as a take-over target often already excel in
efficiency (Georgopoulos & Preusse, 2009) and face no liability of foreignness. Moreover, integration costs are lower for acquired firms that enjoy a high level of autonomy (Slangen & Hennart, 2008).
Literature in which the performance of wholly-owned and partially-owned subsidiaries is compared is still very limited (Chang et al., 2013; Brouthers, 2007; Jung, Beamish, & Goerzen, 2008; Delios & Beamish, 2004). As a result, there is no consensus among scholars which entry mode generates the highest performance. Studying the topic is complicated, as financial data of subsidiaries are often confidential or difficult to compare due to differing legal and accounting practices for
subsidiaries (Chang et al., 2013; Woodcock, Beamish, & Makino, 1994). Moreover, there are those who argue contextual factors (be they firm, industry, or country-specific) affect the performance of each entry mode (Chang et al, 2013; Delios & Beamish, 2004; Anand & Delios, 1997), further complicating the research on the topic. However, answering what entry mode generates the highest performance is important, as many of the world’s largest companies operate beyond their own national borders (Rugman & Verbeke, 2004). Further research can help shed more light on this relationship. The research question of this research is as follows:
Research question: What equity entry mode (full versus partial) should an MNE select for
3. Hypotheses development
3.1 WOS versus partially-owned subsidiaries
Studies aimed at answering the question which equity entry mode generates the highest
performance first emerged in the 90s. Li and Guisinger (1991) compared the average performance of each entry mode (greenfield, acquisition, and JV) in the US market. They found that greenfield entries generated the highest performance, whereas acquisition generated the lowest. The joint venture generated a median performance, although this position of the joint venture vis-à-vis the full ownership modes was not significant. One serious shortcoming of this study can be found in its methodology. The researchers measured the performance of the entry modes by looking at their rates of failure. However, this method makes no distinction between subsidiaries that were liquidated due to poor performance and those that were simply divested for other reasons. Hence, temporary IJVs, for example, that were disbanded after accomplishing objectives such as learning or creating a product were then interpreted as subsidiaries that failed due to poor performance (Delios & Beamish, 2004). Still, scholars often prefer the use of a proxy of this kind when comparing subsidiary performance (Chang et al., 2013; Delios & Beamish, 2001; Shaver, 1998). First, financial data of subsidiaries are often confidential, and therefore difficult to obtain (Chang et al., 2013). Second, even when researchers acquire these data, different performance measures used for subsidiaries (that are not bound by legal and accounting standards) can still impede them from making reliable comparisons (Woodcock, Beamish, & Makino, 1994). Nonetheless, a proxy only captures one facet of the concept of performance. As a result, studies that make use of them can produce erroneous results.
Woodcock, Beamish, and Makino (1994) circumvented this obstacle by measuring the subsidiary performance as it was perceived by its managers. A subsidiary was given either a 1 (in
approach regarding the selection of their sample. Although they hypothesized the logic explaining any performance differences between entry modes applies to both domestic and foreign subsidiaries, they nonetheless chose an international sample for their study (321 Japanese firms entering the North American market). Hence, their research directly compared the performance of both full ownership modes with that of the IJV. Interestingly, their study produced similar results, i.e. greenfield entries generated the highest performance and acquisitions the lowest. To test these results, three more similar studies followed in which researcher used the same method to measure the performance of Japanese foreign subsidiaries. The first study found that Japanese foreign
subsidiaries located in Western Europe generated the highest performance if they were IJVs (Nitsch, Beamish, & Makino, 1996). The second one analyzed the performance of Japanese subsidiaries operating in the wholesale and the retail sectors (Anand & Delios, 1997). This second study found that the greenfield entry mode led to highest performance for subsidiaries in the wholesale sector, but that IJVs (and acquisitions) outperformed greenfield entries in the retail sector. This meant performance differences in entry modes could be explained by industry-specific factors, such as the amount of local production required for the local market. The third study built further upon Li and Guisinger’s (1991) research by analyzing both the rates of failure and the perceived performance of 27,974 Japanese IJVs and WOS in 135 different countries (Delios & Beamish, 2004). The study found an IJV does indeed have a lower survival rate than a WOS for most of the IJV compositions that were tested. However, it has a similar survival rate when only two firms account for the IJV and the local partner has a minority stake. Moreover, the perceived financial performance of IJVs in which both partners have (near) equal stakes was higher than those of the WOS. Similar to the results produced by Anand and Delios (1997), it showed contextual factors determine which entry mode generates the highest performance.
The methodology that the aforementioned studies used made it impossible to quantify the differences in performance between the foreign subsidiaries that survived/made a profit. Moreover, all studies focused solely on foreign subsidiaries owned by Japanese MNEs. Although these foreign
subsidiaries were located worldwide, it nonetheless produced one-dimensional results. One explanation for the extensive analysis of Japanese subsidiaries is that databases containing the foreign activities of Japanese MNEs are easily accessible (Delios & Beamish, 2004). A study by Chang et al. (2013) broke this deadlock, by selecting a different sample and applying a new methodology. The purpose of their study was to support a hypothesis made by the transaction cost theory. The prediction is that WOS can outperform IJVs when the parent firm relies heavily on intangible assets for its FSAs (Chang et al., 2013). The reasons for this are twofold. First, in the case of a WOS an MNE does not have to worry about a partner appropriating its knowledge. It is therefore not impeded in transferring intangible assets to its subsidiary that are key to the MNE’s performance. Earlier research also found this uninhibited transfer of key assets to improve the subsidiary’s operational efficiency (Hollensen, 2007). Second, in the case of an IJV there is the possibility of opportunistic behavior on the part of the partner that could negatively impact performance. To test this hypothesis, Chang et al. (2013) focused on IJVs that were converted to WOS, and that operated in industries in which intangible assets are essential. The performance of such a new WOS was then compared with the performance it previously generated as an IJV. Corresponding the prediction of the transaction cost theory, they found that the newly converted foreign subsidiaries did indeed show a significant improvement of performance. Surprisingly, they also predicted that WOS would perform better than partially-owned subsidiaries in industries in which the IJV is the entry mode of choice per transaction cost theory.
The findings of Chang et al. (2013) have profound consequences. Per transaction cost theory, this would mean that the wholly-owned entry mode brings forth less costs than the partially-owned entry mode, and is therefore the most efficient equity entry mode in terms of governance. However, their study also has its limitations. First, the sample only consisted of foreign subsidiaries located in China. Second, the argument that the uninhibited transfer of intangible assets improves performance does not provide a proper explanation as to why WOS should also outperform
must therefore also be found outside the aforementioned operational advantage. Another obvious source of efficiency reserved to WOS that can help explain this superior efficiency is the strategic advantage of faster decision-making. With the use of a WOS, finding consensus among several managements to introduce and implement new plans in no longer needed. The third limitation of the study is that it measured the differences in performance of a single subsidiary. It disregarded the total financial impact on the parent firm when that individual subsidiary turned into a WOS.
I argue MNEs expanding abroad with a network of foreign WOS will outperform those that rely on the use of partially-owned ones. First, because, as Chang et al. (2013) demonstrated, a single WOS is more efficient than a partially-owned subsidiary. Second, because it enables the MNE to better exploit the new possible efficiency advantages that derive from having a large network of foreign subsidiaries. One financial advantage of having a large network of foreign subsidiaries is that the MNE is free to reallocate the earnings to other subsidiaries that have the potential to generate a higher performance. Another one is that the MNE can exploit differences in corporate taxes across the globe (Desai, Foley, & Hines, 2004). Having a network of subsidiaries also provides the MNE with an additional operational advantage. After having exploited a region, the MNE can reconfigure its network of subsidiaries, and coordinate the dispersed yet integrated production activities to leverage its competencies and assets, thereby improving the efficiency of the operational activities (Kim & Aguilera, 2015; Desai et al., 2004). A strategic advantage of having a network of foreign subsidiaries is that it stimulates intrafirm trade, which further reduces the costs of expanding international operations (Desai et al., 2004). Yet, these network-bound measures that stimulate efficiency are more easy to implement when the network consists of WOS (Desai et al., 2004; Harrigan, 1986). In the case of a network of partially-owned subsidiaries, the shared control over each foreign subsidiary limits the parent firm’s options to coordinate its foreign activities. This lack of control therefore limits the MNE to efficiently use its resources, and also obstructs it from fully implementing its international strategy (Talman, 2009). In sum, the study by Chang et al. (2013)
found that individual WOS are more efficient than a partially-owned ones in terms of transferring intangible assets. The full equity entry mode therefore generates a higher performance for the subsidiary. However, this thesis adds that selecting the full equity entry mode also provides the MNE with additional opportunities to exploit the financial, operational, and strategic sources of efficiency that stem from having a network of foreign subsidiaries. A greater use of WOS will therefore increasingly improve the performance of the MNE as a whole. Building forth on this theoretical grounding, I predict that a firm looking to expand in today’s global economy is best off selecting the full equity entry mode for its foreign subsidiaries. Hence, the first hypothesis is as follows:
Hypothesis 1: A foreign expansion based on wholly-owned (versus partially-owned)
subsidiaries is positively related to firm performance.
3.2 The moderating effect of global focus
Many of the world’s 500 largest firms operate beyond their own borders, but are mostly dependent on sales from their own region (Rugman & Verbeke, 2004). The theory that the world is in a state of semi-globalization offers an explanation for this phenomenon. Proponents of the this theory argue that the global integration of markets is far from complete. Rather, we are somewhere in the middle: countries are neither perfectly linked nor totally isolated from one another (Ghemawat, 2003; Kim & Aguilera, 2015). The world can be divided into regions, each consisting of countries that are equally well-integrated due to geographical and institutional proximity (Kim & Aguilera, 2015). Examples of such regions are the European Union and NAFTA. This semi-globalization has made it relatively easy for MNEs to expand within their own region. Only when they have fully exploited their regional markets and reconfigured their knowledge and assets accordingly, do they seek markets beyond their own region.
constraints. First, as it enters new countries its foreign subsidiaries will face a liability of regional foreignness (Kim & Aguilera, 2015), i.e. they will incur additional costs, risks, and managerial constraints over domestic competitors as a result of being foreign to that region. More importantly, as an MNE expands its global scope it faces progressively higher costs for coordinating and configuring these geographically dispersed subsidiaries (Pisani, Caldart, & Hopma, 2016).
Yet, there are MNEs that despite these challenges operate in multiple regions (Rugman & Verbeke, 2004). Apart from seeking new markets, natural resources or strategic assets, MNEs can expand to other regions (and thus to other nations) for efficiency seeking motives (Dunning & Lundan, 2008). An example of a financial source of efficiency an MNE can gain from is tax avoidance. This means that the MNE performs FDI in the country with the lowest corporate taxes. The tax haven subsidiary then enables the MNE to relocate the other subsidiaries’ profits into the low tax jurisdiction, thereby improving the MNE’s performance (Jones & Temouri, 2016). Expanding to another region can also deliver operational sources of efficiency. According to Dunning and Lundan (2008), MNEs enter new countries to exploit differences in comparative advantage, that result from the differences in the supply of traditional factor endowments such as labor, land, and capital. MNEs can also simply wish to further increase their economies of scale and scope, or to exploit new supply capabilities. Following the theoretical grounding of hypothesis 1, I argue these sources of efficiency found in different regions can also be exploited most effectively when an MNE has a network of wholly-owned (versus partially-owned) subsidiaries. Ultimately, it is more easy to reconfigure and coordinate the new network of subsidiaries when there are no partners whose approval is required. Moreover, for hypothesis 2, I argue that the advantages of these new sources of efficiency outweigh the additional constraints that result from intra-regional FDI, given that they are fully exploited.
In sum, I predict that MNEs that expand outside their home region with the use of WOS will not only encounter new markets, but also new financial, operational, and strategic advantages that enable the MNE to further employ its competencies and assets more efficiently. As a result, the
gains from expanding the geographical scope will outweigh the increase in coordination and configuring costs. Conversely, the more an MNE relies on foreign expansion with the use of partially-owned subsidiaries the harder it is to exploit these newly found efficiency-stimulating advantages (Chang et al., 2013; Harrigan, 1986). In this case, the benefits of entering the new regions are outweighed by the additional costs that result from extra coordination, and cooperating with foreign partners in unfamiliar regions. Hence, the second hypothesis is as follows:
Hypothesis 2: A firm’s global (versus regional) orientation positively moderates the
relationship hypothesized in H1.
3.3 The moderating effect of financial leverage
When an MNE opts for a wholly-owned (versus a partially-owned) subsidiary, it will be required to invest more. It has no partner to share costs with, and therefore bears all risks. Moreover, when the MNE has a whole network of foreign WOS, it will face higher coordination and configuring costs if it wishes to efficiently integrate it (Desai et al., 2004). In return, the MNE will gain sources of efficiency that improve MNE performance (hypothesis 1). The operational and strategic sources of efficiency that stem from the use of a single foreign WOS (uninhibited transfer of assets, fast decision-making) are embedded in the entry mode. The financial (profit reallocation and tax avoidance) and strategic (intrafirm trade) sources of efficiency the MNE can exploit by controlling a network of foreign WOS, also, do not necessarily require large investments. However, significant investments are required when the MNE wishes to fully exploit the operational source of efficiency that stems from the reconfiguration of a network of WOS (Desai et al., 2004).
Such a reconfiguration will integrate the operations formerly performed by each of the network’s subsidiaries individually, and make them interrelated. Some value chain activities will be clustered in the network, whereas others will be divested and reallocated. This network’s new value
not yet integrated and coordinated. For example, the reconfiguration enables the MNE to achieve economies of scale and scope.
However, to successfully reconfigure the network of WOS, the MNE will have to restructure its organization. In this restructured organization, certain WOS can be assigned a new and greater role to, whereas others may be divested or downsized. Costs that result from such a restructuring can range from the closing of divisions, product lines, and production facilities to the opening of new ones. Also the relocation of existing personnel, or the hiring and training of new employees can put a strain on a firm’s finances. If the MNE does not possess the financial resources to perform this restructuring, it can not fully exploit the operational source of efficiency that results from having a network of foreign WOS. Consequently, it will also lose an important advantage that otherwise endows the MNE with a higher performance compared to that of an MNE relying on partially-owned subsidiaries.
Given the need of resources to successfully exploit all sources of efficiency, I predict that having high financial leverage mitigates the positive relationship between a foreign expansion based on wholly-owned (versus partially-owned) subsidiaries and firm performance. Hence, the third hypothesis is as follows:
Hypothesis 3: A firm’s financial leverage negatively moderates the relationship
Fig. 1. Theoretical model: The relationship between the equity mode of foreign subsidiaries and firm performance.
4. Methods
4.1 Sample and data collection
This paper studies the effect of the equity entry mode of foreign subsidiaries on the performance of firms. Two possible moderating variables I identified are: (1) a firm’s global focus (versus regional orientation) and (2) its financial leverage. The sample for my research consists of the Global Fortune 500 firms listed in the year 2016. These 500 companies are ranked according to their total revenues in the year 2015. A more recent ranking, i.e. a list of firms ranked according to their revenues in the year 2016, is not possible as not all firms have yet published their annual reports.
The reasons this sample is appropriate for answering my research question are fourfold. First, a sample of 500 companies is large enough to find “power”, yet small enough to make the gathering of data manageable. Second, although firms from especially the largest economies are over-represented, the list nonetheless offers a diverse sample consisting of companies from many different countries. Third, the majority of the Global Fortune 500 firms consists of MNEs that have a significant number of foreign subsidiaries. Last, these firms often differ significantly in the degree to which they are leveraged and/or to the degree they operate regionally versus globally. In sum, the sample meets all requirements to be valid, and contains all components to perform my research.
To collect all relevant data from these 500 firms, I will primarily make use of data published in the firms’ annual reports of 2015. Additional data are extracted from the database Orbis. Orbis is especially useful as it neatly provides one with overviews of each firm’s subsidiaries and a firm’s stake in those subsidiaries (i.e. whether such a subsidiary is wholly-owned or partially-owned).
4.2 Variables
4.2.1 Independent variable
The independent variable for my research is equity mode, i.e. the degree to which a company relies on wholly-owned versus partially-owned subsidiaries in its foreign FDI expansion. To measure this, I will calculate for each firm its ratio WOS/total number of subsidiaries. The higher this ratio is, the more a firm from the sample is dependent on WOS for its operations abroad. Conversely, the lower this ratio is, the more a firm from the sample relies on partially-owned subsidiaries for its foreign activities. WOS are those owned for 100 percent by one single MNE. However, not all remaining stakes will by default be defined as owned subsidiaries. The stake will count as a partially-owned subsidiary when a parent holds between 10 to 99 percent of the equity.
4.2.2 Dependent variable
The dependent variable used for this research is performance. I will measure performance by looking at a firm’s return on assets (ROA) in percentages. Hence, performance will be measured by using the calculating for each firm EBIT/total assets x 100. This method to measure performance is commonly used to indicate a firm’s effectiveness in using its assets to generate net income (Nielsen & Nielsen, 2013).
4.2.3 Moderating variables
The first moderating variable is global focus. To determine whether a firm has a regional or a global orientation, I will look at a firm’s dispersion of sales. The geographic areas from which data of sales are collected are: (1) North America, (2) Europe, (3) Asia, (4) South and Central America, (5) Oceania, and (6) other regions. I deviate from the definitions of a global focus as elaborated by Rugman and Verbeke (2004). In their study, an MNE was considered a global player when less than 50 percent of its sales takes place in its home region, and relies on each region of the triad (North America, Europa, and Japan) for more than 20 percent of its total turnover. However, in their study they only found nine MNEs to be truly global. Hence, I will relax their definition to get a larger pool of companies matching the description of a global player. In accordance with others before me (Oh & Rugman, 2014; Rugman & Verbeke, 2004; Pisani, Caldart, & Hopma, 2016) I identify a firm to be a global player when it makes over 50 percent of its sales outside its home region.
The second moderating variable is financial leverage. The financial leverage (in
percentages) of the Global Fortune 500 firms is measured by multiplying the gearing ratio debt-to-equity (total debt / total debt-to-equity) by 100.
4.2.4 Control variables
firm size, another commonly used control variable. Due to their economies of scale and market power, larger firm sizes can increase revenues and decrease costs, thereby increasing return on assets. Firm size is measured by the number of employees working for the MNE. The third control variable I will use is firm industry. Although the sample provides 15 different industries in which the MNEs operate, the control variable will only include the five most frequently occurring ones.
5. Statistical analysis and results
Regarding the control variables the descriptive statistics (table 1) show that the average firm size of a Global Fortune 500 in terms of personnel was 130,200 (N= 452). The statistics also reveal that the average age of the firms listed in the year 2016 was 62.15 years, with a median age of 48 years (N= 456). The youngest firm is Alphabet (2 years), whereas United Barclays is the oldest listed firm (326 years). A total of 15 different industries in which the Global Fortune 500 operate are identified. Companies operating in the manufacturing (32.6 percent) and the financial (21.7 percent) industries
are predominant, and constitute well over half of the total sample. Conversely, there are also three industries that are represented by only one firm. These are: (1) agriculture, forestry and fishing, (2) water supply, and (3) the professional, scientific and technical industry. Concerning the moderating variables, the financial data acquired from the annual reports of the year 2015 made it possible to categorize 277 MNEs as either global or regional players. For the remaining 223 MNEs there were insufficient data to identify their scope and/or division of sales. 200 out of 277 (72.2 percent) MNEs were identified to have a regional focus. The remaining 77 MNEs were for more than 50 percent of their total turnover dependent on sales beyond their own home region. Hence, 27.8 percent of the identified firms had a global focus. The average financial leverage (N=326) was 135.92 percent. With respect to the independent and dependent variables, the statistics reveal the following: the average ratio of WOS/total subsidiaries was 0.53 (N= 404), whereas the average ROA was 4.75 percent (N= 413).
To test the hypotheses a hierarchical multiple regression was performed. In the first model of the hierarchical multiple regression, three control variables were entered: (1) firm age, (2) size, and (3) industry. One can argue older firms also have had more time to grow, and are thus more likely to be large companies. To test for collinearity between both control variables a single correlation test was performed. One indicator of collinearity is when predictor variables correlate more than r = 0.8 or 0.9. Bivariate analysis shows r = -.012 and correlation between both control variables was statistically insignificant .804; 0.05 < p. We can thus rule out collinearity and use both control variables simultaneously. For the regression missing values were not replaced by a mean. Instead, MNEs with missing values were excluded from the regression. Model 1 was statistically significant F (2.219), p = .008; with the model explaining 13.3 percent of the variance (Adjusted R Square = .075) in dependent variable performance. There was no support for any effects of company age and size on firm performance, as both control variables were not significant (table 2). The
manufacturing industry was the only one that had a significant positive effect on performance (B = 2.540, SE = 1.243, and p = .040) . Interestingly, the financial services industry, the second most
common industry in the sample, showed a great negative impact on performance (B = -3.120, SE = 1.416, and p = .024) compared to the reference industry ‘wholesale and retail trade’.
Model 2 contains the independent variable equity mode, and therefore tests the first
hypothesis of this thesis. Equity mode did not have a significant impact on performance (B = -.005, SE = .019, and p = .778). Therefore, adding this second model explained no additional variance in performance (R Square = .133, Adjusted R Square = .075). This means there is no statistical support for the prediction that foreign expansion based on wholly-owned (versus partially-owned)
subsidiaries is positively related to firm performance. Hypothesis 1 is therefore not supported. Models 3 and 4 of the multiple regression test the possible moderating effects of global scope and financial leverage on the relationship described in H1 and for which no support was found by model 2. Model 3 contains the moderating variable global scope, and examines the
validity of the second hypothesis of this study. The results did not indicate that a global (opposed to a regional) orientation positively affects the relationship hypothesized in H1. The moderating effect of global focus on the relationship between equity mode and performance was statistically
insignificant (B = .035, SE = .051, p = .497). Consequently, hypothesis 2 of this thesis is also not supported. In the fourth model of the multiple regression two predictor variables are added. The first one is leverage. To test for interaction of financial leverage on the relationship between equity mode and performance hypothesized in H1, all values of the predictor variables equity mode and leverage were standardized and computed into the second predictor variable of this model “leverage x equity mode”. Model 4 was statistically significant (F Change (4.010), p = .0201; and explains 17 percent variance in performance (Adjusted R Square = .119), equaling an additional 3.7 percent variance in performance compared to the baseline model. The predictor variable leverage was statistically significant (B = -.011, SE = .004, p = .006; p < .01). This means that for every percent increase in financial leverage performance will decrease by .011 percent. The interaction variable leverage x equity mode, however, was not statistically significant (B = -.502, SE = .475, p = .291). Consequently, hypothesis 3 is also not supported by the findings.
6. Discussion
6.1 Interpretation of the results
This study compared the performance of the Global Fortune 500 firms to test what equity entry mode (full versus partial) for foreign subsidiaries generates maximum firm performance. The prediction made in this paper was that a foreign expansion based on wholly-owned (versus partially-owned) subsidiaries is positively related to firm performance (hypothesis 1). This hypothesis was built on the theoretical grounding that expanding abroad with the use of WOS delivers the MNE financial, operational, and strategic sources of efficiency. Building forth on this theoretical grounding, this paper came with two more hypotheses, introducing two possible moderating variables that would positively (global focus) and negatively (financial leverage) moderate the relationship described in hypothesis 1. However, obtained findings are not in accordance with any of the hypotheses.
One possible explanation for these results is that possible sources of efficiency are nullified by sources of inefficiency reserved to WOS. In other words, the financial, operational, and strategic advantages reserved to the use of WOS are offset by areas in which the full equity entry mode is costlier to set up and maintain than the partial one. For example, Tatoglu and Glaister (1998), challenging the notion that the WOS is a more efficient entry mode than the IJV, argue that the full equity entry mode requires vast more resources. Therefore, if a WOS fails, the parent firm will also have to forfeit more resources. Others argue that the more resources are invested the more laborious it becomes to earn profits (Chowdhury, 1992). Perhaps the most inefficient aspect of the full equity entry mode (especially the greenfield entry mode) is its sensitivity to the liability of (regional) foreignness. Without a local partner, the MNE does not have the knowledge of the local market and other factors (economic or political ties) that is needed to be competitive vis-à-vis local players.
2013) and strategic sources of efficiency described in chapter 3, it does enjoy the same sources of efficiency that become available when the MNE has a vast network of subsidiaries. This would contradict the findings by Desai et al. (2004) and Harrigan (1986), who found that network-bound measures that stimulate financial, operational, and strategic efficiency are more easy to implement when the network consists of WOS. However, this interpretation would explain the finding by Chang et al. (2013) that individual WOS outperform partially-owned ones. It would also explain that when the focus is on the performance of the whole MNE (including the performances of its regional and global networks of foreign subsidiaries) different results are found.
A final explanation could be that expanding abroad with a network of partially-owned (versus wholly-owned) subsidiaries brings forth different sources of efficiency. This would mean that there are network-bound advantages reserved solely to the partial equity entry mode. These advantages then compensate the areas in which the partial equity entry mode (compared to the full equity entry mode) is inefficient, thereby generating a similar performance. For example, one may argue that an MNE with a large network of partially-owned subsidiaries can learn a lot from its large network of foreign partners, and spread this new knowledge throughout its network of
subsidiaries. It is also possible that through its partners the MNE comes into contact with resources (including tacit knowledge) that are complementary to its own resources (Rao, 2001; Shenkar & Li, 1999). Both cases enable the MNE to gain new resources that strengthen its competitive advantage (Lasserre, 2012; Rao, 2001).
6.2 Academic relevance
It has become widely accepted among scholars that the choice of entry mode is decisive for an MNE’s financial performance (Brouthers & Hennart, 2007). As a result, the impact of the two different equity-based entry modes on an MNE’s financial performance has, although inadequately, been studied. Earlier studies found mixed results, with some finding support for a superior
partial one (Nitsch, Beamish, & Makino, 1996). Studies also found contextual factors impacting the relationship between equity entry mode and firm performance (Anand & Delios, 1997). This thesis therefore aimed at clarifying the relationship between equity entry mode and firm performance. Contrary to the earlier studies, this thesis took a holistic approach on the subject. MNEs originating from various countries operating worldwide were selected. Moreover, this study measured the impact of all subsidiaries and their equity entry modes on a firm’s total performance. This approach has two advantages: (1) the financial performance can easily be found, thereby circumventing the limitation of early studies, and (2) this methods measures the full impact the choice of equity entry mode for foreign subsidiaries has on a firm’s performance, thereby addressing one of the limitations of Chang et al. (2013). In this thesis, it was predicted that opting for the full equity entry mode (as opposed to the partial one) for foreign subsidiaries generates a superior firm performance (H1). The findings support neither the superior performance of WOS (H1) and, oppositely, that of partially-owned ones. This is contradictory to the findings of all other studies before in which at least one equity entry mode was found to generate a higher performance. Yet, this performance (whether estimated by the use of proxies, or measured by actual financial data) always focused on that of individual subsidiaries. The findings produced by this thesis thus shed an entirely new light on the topic, and question the notion made by Brouthers and Hennart (2007) that an (equity) entry mode is decisive for an MNE’s financial performance.
6.3 Managerial implications
None of the hypothesis in this thesis are supported. Moreover, the results did not show one of the two equity entry modes generates a superior firm performance. Nonetheless, these findings do provide one important managerial implication for large MNEs, namely that the pursuit to having full ownership over foreign subsidiaries does not necessarily pay off in terms of financial
6.4 Limitations of the research and future suggestions
The first limitation of this study is that it depends on secondary data from Orbis. This source, used for measuring each MNE’s equity mode (i.e. ratio of WOS/total subsidiaries), has several
limitations. First, the list containing the MNEs’ subsidiaries and their stakes obtained from Orbis are not always accurate. For instance, the same subsidiary can be listed multiple times after it has changed its name. Second, subsidiaries that are already liquidated can still be listed. Third, and most important, the MNE’s direct stakes in an affiliate are often absent. This means that when calculating the ratio of an MNE’s use of WOS not all affiliates can be used. Hence, this research only uses a small portion of the stakes (those that are known) to explain the performance of the whole MNE. The actual ratio of an MNE’s use of WOS may in reality differ from the one estimated by the data readily available. Another limitation of this thesis is that it did not differentiate between domestic and foreign subsidiaries. Therefore, it did not eliminate the financial contributions of domestic subsidiaries on MNE performance.
Future research should aim at solving these limitations. The ratio of WOS/ total subsidiaries can be obtained by simply requesting these data from the MNEs. However, eliminating the financial contributions of domestic subsidiaries on MNE performance will be more time-consuming.
Financial data of (domestic) subsidiaries are often confidential, and therefore difficult to obtain (Chang et al., 2013). Second, even when researchers acquire these data, due to different legal and accounting standard for subsidiaries it will be a tedious task to see which performance measure is used for each subsidiary (Woodcock, Beamish, & Makino, 1994).
However, when the data are more conclusive obtained results will perhaps support the predictions made by this paper. Nonetheless, it is also desirable to experiment with different moderating variables. Chang et al. (2013) already showed industry-specific factors do not play a significant role on the relationship hypothesized in H1. Consequently, the moderating variables (global scope and financial leverage) used for this study were firm-specific. However, many more firm-specific factors that may have a moderating effect on the relationship hypothesized in H1
remain. Moreover, one may argue the same reasoning justifies the use moderating variables that are country-specific .
7. Conclusion
This paper sought to answer the research question “What equity entry mode (full versus partial) should an MNE select for its foreign expansion to achieve maximum firm performance?”. Although a recent study by Chang et al. (2013) shed more light on the relationship between the equity entry mode of subsidiaries and performance, it also had several limitations. To answer this research question further research was therefore necessary. This thesis predicted that a foreign expansion based on wholly-owned (versus partially-owned) subsidiaries is positively related to firm
performance (hypothesis 1). The MNE would therefore be best off selecting the full equity entry mode. This hypothesis was built on the theoretical grounding that (networks of) WOS deliver financial, operational, and strategic sources of efficiency to the parent firm. Furthermore, building forth on this theoretical grounding, this paper made two more predictions. One was that global MNEs relying on WOS find new sources of efficiency outweighing the additional constraints of intra-regional FDI. A global scope would therefore positively moderate the positive relationship between the full equity entry mode and firm performance (hypothesis 2). The other one was that financial leverage would impede the MNE from employing a significant operational source of efficiency reserved to a network of WOS (Desai et al., 2004): the reconfiguration of the network to coordinate geographically dispersed activities. Hence, the last hypothesis of this paper (hypothesis 3) is that financial leverage would mitigate the positive relationship hypothesized in H1.
To test these hypotheses a quantitative research was performed, using the Global Fortune 500 of the year 2016 as sample.The results indicated there is no statistical support for the prediction that foreign expansion based on wholly-owned (versus partially-owned) subsidiaries is positively related to firm performance. Results also did not show support for the hypothesized moderating
performance. All three hypotheses of this paper are therefore not supported. Consequently, although the choice of entry mode is decisive for an MNE’s financial performance (Brouthers & Hennart, 2007), based on the findings of this study this does not seem to be the case when choosing between equity entry modes. Hence, the answer to the research question as to which equity entry mode for foreign subsidiaries delivers the parent firm maximum performance, is that there is no support that the choice of equity entry mode makes a difference.
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