How institutional factors influence entry mdoe decisions : a learning and knowledge management strategy

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How Institutional Factors Influence Entry Mode Decisions: a

Learning and Knowledge Management Strategy

Author Bart Christian Teerhuis BSc. Student number 10499415

Supervisor E. Dirksen MSc. Second reader dr. I. Haxhi Master Thesis International Management June, 2017

Amsterdam Business School

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 2

Statement of originality

This document is written by student Bart Christian Teerhuis 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 have 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.

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Abstract

This study proposes a framework for learning opportunities that multinational corporations (MNCs) encounter when conducting business in different institutional environments. Its main research question is whether MNCs spent more on particular entry modes (i.e. equity versus non-equity) when conducting business activities in opposite institutional countries compared to their home country. The rationale behind this theory is that different institutions require different skills from MNCs in order to be successful abroad. Particular entry modes, as this study proposes, can contribute to this learning process. To investigate this theory, foreign direct investment (FDI) and export data are obtained from 46 partner countries that conducted business with opposite institutional countries: strong formal institutional country the United States of America (the USA) and strong informal institutional country South Korea. In addition, two hypotheses are formulated and subsequently tested in a one-way MANOVA to assess if differences exist in entry mode spending for countries from both weak and strong institutions in their earliest years abroad. Unfortunately, no statistically significance was found. Nevertheless, this study has attempted to close the gap between entry mode choice and the possibility to learn when conducting business with different institutional environments. It is the first study in the business literature that investigates if MNCs from different institutional environments choose different modes of entry. Moreover it created a basic, but effective comparison tool to measure institutional differences between countries. A limitation of this study is the incomplete measurement for non-equity modes. Another shortcoming is the integration of an effective measurement tool addressing links between learning possibilities and particular entry modes.

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Table of contents 1. Introduction ... 5 2. Literature review ... 6 3. Method ... 17 3.1 Procedure ... 17 3.2 Sample ... 19 3.3 Data analysis ... 21 4. Results ... 22 5. Discussion ... 25 5.1 Limitations ... 28 6. Conclusions ... 31 7. References ... 33

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy

1. Introduction

Learning and knowledge management (LKM) is gaining importance in de contemporary international business literature. When expanding abroad, both developed nation multinational

corporations (DMNCs) and emerging market multinational corporations (EMNCs) need to learn how to gather knowledge from various foreign stakeholders, such as local competitors and business partners. In addition, MNCs should map each countries institutional factors in order to select an appropriate entry strategy (Khanna, Palepu, & Sinha, 2011). But is it possible that a particular entry mode choice contributes to the learning opportunities of a MNC when expanding to a different institutional host environment? This study examines exactly that. More specifically, the main research question examines if MNCs use different entry modes when conducting business in opposite institutional countries.

Based on two international business themes - theoretical foundations for studying international business and a multi-national business perspective - this study will develop a conceptual model to

understand how the use of specific entry modes to opposite foreign institutions might contribute to foreign learning opportunities for MNCs. It starts by setting forth the two theories that have been used: the

institution-based view of business strategy and the hierarchical model of market entry modes along with other leading theories in the international business literature. Well-known theories like the OLI-paradigm (Dunning, 1980), the Uppsala internationalization model (Johanson & Vahlne, 1977), institutional theory (Scott, 1995), Transaction Cost Theory (Coase, 1937), and others have all proven their value in the international business literature. Nonetheless, none of them relates learning with particular entry mode choices for MNCs when these companies enter institutional environments to which they are unfamiliar. This study, however, presents a conceptual model that suggests that MNCs use particular entry modes as a motive for learning when conducting business in different institutional environments. In addition, two research hypotheses will be formulated and empirically tested for differences in entry mode spending using an one-way between-groups multivariate analysis of variance (MANOVA) with FDI and export data from 46 countries. Because companies have little or no experience in opposite institutional countries when they

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 6 first go abroad, learning still has to occur. Hence, this study obtained the earliest years of expanding to different institutions by MNCs (i.e. the first reported year per country of origin) to incorporate learning. The results will subsequently be analysed, before the final part of this document will be dedicated to contributions, further research and limitations. The closing part will be drawing some conclusions.

2. Literature review

The institution-based view is a relatively new perspective in the world of business strategy research. After reviewing some prevailing theories in contemporary business strategy literature, the emergence of this theory will be briefly described. Next, its contribution and the way it affects strategic choices will be considered. The last part will be dedicated to some critical comments.

In an attempt to understand what business strategy is and why MNC strategies differ, research has long focused on the industry-level and firm-specific level: the industry- and resource-based views

respectively (Porter 1980; Barney, 1991). Both theories, however, neglect the fact that organizations are in constant interaction with institutions, which have a significant impact on strategic management choices (Peng, 2006, 2009). The industry-based view, for instance, is primarily concerned with analysing external industry conditions, such as competitive barriers, favourable positions and generic strategies (Scherer & Ross, 1990). The resource-based view, on the other hand, uses an inside-out perspective by attempting to create (sustained) competitive advantage through developing VRIN-resources (Barney, 1991; Collis, 1991; Zou, Fang & Zhao, 2003). However, whether or not a resource matches the VRIN conditions, depends to a large extent on the external context. Hence, in order to understand the ‘big picture’ of business strategy, research should take into consideration the importance of institutions, both formal and informal (Peng 2002, 2003). North (1990) states that institutions are ‘the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction’ (p. 3). Formal constraints, according to Scott (1995), can be described as ‘political rules, judicial decisions, and economic contracts’, whereas informal constraints include ‘norms of behaviour, culture and ideology’ (p. 33). In addition, Davis, North & Smorodin (1971) define institutional frameworks as ‘the set of fundamental political, social, and legal ground rules that establish the basis for production, exchange, and distribution’ (p. 6). Though, in situations where formal institutions fall short, informal institutions tend to take over (North, 1990). This

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 7 reduces the uncertainty for organizations as they rationally pursue their interest within a given institutional framework (Lee, Peng & Barney, 2007). Hence, institutions do play a significant role in the final entry mode decision (Meyer & Nguyen, 2005; Uhlenbruck, Rodriguez, Doh, & Eden, 2006).

Recent studies have, however, criticized the institutional theory (Kostova, Roth & Dacin, 2008). For instance, Phillips, Tracey & Karra (2009) state that both institutional distance and the degree of institutionalization in a country is not clearly defined in the literature. In addition, they argue that an unclear definition has serious consequences for a firms’ decision whether or not to enter a host country, since it measures the extent of institutional distance between home and host country. Nevertheless we can conclude that institutions play an important role in the strategic decision making process, especially for MNCs operating in different institutional environments. Moreover, scholars discovered that the broader context matters (Powell & DiMaggio, 1991; Scott, 1995) concluding that strategy choices should not be based solely on industry conditions and firm resources (Khanna & Palepu, 1997; Peng, 2000a). The result is the emergence of an institution-based view of international business strategy (Meyer & Peng, 2005; Peng, 2002, 2003; Peng, Wang & Jiang, 2008).

When firms have the intention to expand internationally, they face a considerable number of entry mode choices out of which they can choose. Although the final choice is a crucial determinant in the expected success of the foreign operation (Root, 1994; Davidson, 1982), they do vary significantly in costs and benefits (Sharma & Erramilli, 2004). Based on empirical research, Pan & Tse (2000) propose a hierarchical model of entry modes that makes it easier for firms to choose.

Sharma & Erramilli (2004) define entry mode as ‘a structural agreement that allows a firm to implement its product market strategy in a host country either by carrying out only the marketing operations, or both production and marketing operations either by itself or in partnership with others’ (p. 2). According to Pan & Tse (2000) entry modes can be divided into two separate categories. These include equity-based and non-equity-based modes. Equity-based modes, on the one hand, consist of wholly owned operations (acquisition, greenfield, others) and equity joint ventures (majority equity joint ventures / 50% share / minority), while on the other hand, non-equity-based modes are contractual agreements (alliances, R&D contracts, licensing, others) and export (direct export, indirect export, others). But which entry mode should firms choose when planning to go abroad? Kumar & Subramaniam (1997) argue that the choice of

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 8 entry mode can be investigated from a hierarchical point of view. This suggests the existence of a multi-level hierarchy that needs to be examined by managers in order to pick the right entry mode. In other words, at each hierarchy level managers should consider only a few critical factors that are different at each level (Pan & Tse, 2000). Though, as shown by the authors in their study, macro-level factors strongly influence the decision for either equity-modes (wholly owned operations and equity joint ventures) or non-equity modes (contractual agreements and export). These factors include prioritized location, host country risk, risk orientation, power distance, extent of interaction between host and home country and industry factors. These macro-level factors do not play a decisive role at the lower level of the hierarchy in separating equity joint ventures from wholly owned operations or export from contractual agreements. Host country risk, for example, has a strong influence in the highest level (decision between equity mode and non-equity mode). Yet, it plays no significant role at a lower level (decision between either export or contractual agreements).

However, after managers decision upon the first category, factors that drive the decision within each lower level category remains somewhat unanswered. True, the authors mention some micro level firm-factors such as human resource issues, contract terms and distribution channels that could influence the decision. But does this hold? Deng (2001) argued, for instance, that the most popular way to enter China was through the establishment of wholly foreign-owned enterprises (WFOEs). This within equity mode replaced the well know EJVs as the most popular entry mode due to changes in government regulations and less environmental uncertainty (Yan & Warner, 2002). Both can clearly be identified as macro-factors, which is therefore in contradiction with the study of Pan & Tse (2000). In another study, Hessels & Terjesen (2007) concluded that the choice of small and medium sized enterprises (SMEs) to export either directly or indirectly largely depends on the presence of domestic suppliers. This matches with the assumption in this study that within non-equity mode choices depend on micro level firm-factors.

Another influential theory that predicts international business activities of young MNCs is the Uppsala internationalization model (Johanson & Vahlne, 1977). This theory is based on the assumption that new foreign activities are uncertain and thus should happen in baby-steps. Internationalization happens close to the home country due to uncertainty regarding foreign markets, and can be defined as ‘the process of adapting firms operations (i.e. strategy, structure, resource) to international environments’ (Calof &

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 9 Beamish, 1995, p. 116). In addition, the Uppsala internationalization model assumes bounded rationality which assumes that companies cannot oversee everything and cannot capture every aspect when analysing foreign markets. Hence caution has to be taken when conducting business in foreign markets.

The Uppsala internationalization model distinguishes four steps when entering a foreign country. In their early research, Johanson and Vahlne (1977), follow foreign Swedish-owned subsidiaries that began internationalisation with sporadic exporting to foreign international markets (Forsgren & Kinch, 1970). In addition, when companies gain more market knowledge and profits are made, they start exporting through independent representatives in the foreign market on a more regular basis. Subsequently, as sales growth continues, the foreign market will get more important to the young MNC and a foreign sales department is established. This means that the focal company starts selling their own product(s) in the new business environment, without interference of an independent representative. In addition, when a company’s investment in the foreign market grows, the commitment to the market increases. This makes it more difficult for the company to withdraw, which causes less flexibility. The last step of internationalization is made when the company actually sets up a foreign subsidiary and starts its own production and

manufacturing process. During this whole internationalization process, companies acquire knowledge from foreign market experience. Consequently, they add changes to their internationalization process. In short, market experience and market commitment are the two most important indicators for predicting foreign business activities according to this theory.

Criticists, however, suggest the contemporary internationalization steps by businesses are changing: entry mode choices can no longer be predicted by the incremental steps of the model. Rapid changes in technology, communication and transport cause companies to accelerate foreign business activities (i.e. skipping the internationalization steps) and become ‘born globals’ (Chetty & Campbell, 2003; Knight & Casvusgil, 2009; Oviatt, McDougall & Loper, 1995). In this respect, slow

internationalization can cause companies to miss opportunities in the foreign market. This forces

companies to invest regardless of their knowledge about the foreign market (Andersson, Forsgren & Holm, 2001). Another weakness of the internationalization theory is that the model does not take into account joint ventures, franchising and licencing (Andersen, 1997), and the role of management initiatives when deciding upon expansion to different foreign markets (Axinn & Matthyssens, 2002).

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The eclectic paradigm (Dunning, 1980) suggests that companies become multinationals based on ownership, location, and internalization (i.e. OLI-framework) advantages in the host country. Companies should consider this holistic framework to assess multiple factors in the host country before initial expansion or when growth is considered regarding existing activities (Dunning & Robson, 1987).

Ownership advantage explains why MNCs go abroad and refers to assets that a company possesses in the host country. For example, the focal company owns patents, marketing skills and production developments that other competitors lack (Helpman, 1984). Hence, a competitive advantage for the MNC. In addition, a location advantage answers the question where production facilities can be located. When foreign

production facilities are owned, it saves trade cost (i.e. economic advantages). Moreover, when a MNC possess such abroad production facilities, Dunning (1993) states, it can benefit from material and labor cost, natural resources, communication infrastructure, tax and other incentives’ (p.82). Though, when production facilities are no longer centralized in the home country, the focal company pays higher fixed costs and other overhead expenses. A second location-advantage emerges when host governments have favourable policies for inward FDI or when flexible policies regarding intra-firm trading exists that companies benefit from (i.e. political advantages). A third location advantage relates to customers attitude towards foreign business, physical distance between home and host country and other social differences (i.e. cultural advantages). Since all former location motives are important to consider, an important trade off needs to be made by a firms top management regarding location-advantages (Yeaple, 2003).

Finally, internalization advantage explains why some activities are performed within firms and others by markets. According to Dunning (1993, p. 82) it explains ‘the way of involvement’ and considers the question how MNCs go abroad. Internalization advantage arises when markets fail and ownership advantages, so the company believes, are best exploit internally due to the company’s core competences rather than by third party agreements such as joint ventures or other contractual arrangements (Dunning, 1980). Such an advantage is predominant when the focal company, for instance, has superior information about the production of a highly advanced technical product that it does not wish to share with a potential licensee. Hence, according to Dunning’s (1993) view, the MNC will internalize production ‘to ensure stability of supplies at right price; control markets. Wish to reduce transaction or information costs, buyer ignorance, or uncertainty to protect property rights’ (p. 82). In addition, Dunning (1980) states that FDI is

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 11 preferred when all three advantages are met. However, when a country falls short on location advantages (as perceived by the potential investing MNC), an export strategy should be considered. Moreover, when ownership advantages (e.g. potential benefits through own production process) are missing and no internalization advantages exist, licensing agreements with foreign parties are preferable. If a MNC only finds potential internalization advantage in the host country, it will lead to an export strategy (Dunning, 1993).

However, besides the fact that Dunning’s OLI-paradigm has been adjusted overtime, critique on some critical points of Dunning’s OLI-paradigm remains, mainly due to its broad and loose structure. For example: are the three factors (O, L, I) independent and are they essential for successful FDI? First,

Rugman (2006) argues that the difference between ownership and internalization advantages is unclear due to overlapping of both factors. Dunning (1988), in turn, responds to Rugman’s argument by emphasizing that ownership and internalization advantages have the tendency to become inseparable. Casson (1987) adds to this argument that the existence of a MNC is due to market failure in intermediate product markets, as explained by the transaction cost/internalization theory (Buckley & Casson, 1998; Hennart, 1984). When markets fail, Itaki (1991) states, ownership advantage should be seen as an internalization advantage in the meaning that the MNCs has made it its core competence over time. Dunning (1995) states that the eclectic paradigm is different from the internalization theory treating the competitive advantages (i.e. ownership advantages) of MNCs as endogenous rather than as exogenous variables. Another school of thought advices MNCs to consider the national culture when they expand. Scholars and business practitioners frequently use Hofstede’s (1980) measurement for cultural distance. Miller (1993) calls uncertainty the unpredictability of environmental or organizational variables that have an impact on corporate performance. In addition, more studies link the importance of host culture to economic growth (Gray, 1996; Jones, 1995). Deeper examination of cultural differences is however beyond the scope of this study.

The Transaction Cost Theory (TCT), founded by Ronald Coase (1937), is a theory that explains why companies exist. Specifically, it explains why certain economic activities are performed within a company and others by external markets (Williamson, 1994). At the time, this theory challenged other traditional theories because scholars mostly studied the existence of the company from a micro-level

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 12 perspective (i.e. how do we maximise profits and minimise production costs?). However, according to the TCT, companies also need to consider the transaction costs that occur when economic exchanges are made (Coase, 1960). These costs arise when both parties (i.e. buyer and seller) feel ‘friction’ when ‘drafting, negotiating, and safeguarding any exchange or transaction’ (Williamson, 1985, p. 2). Hence, transaction costs are an important part of a company’s total cost beside the costs of production. According to Williamson (1985), transaction costs are made before and after any economic exchange. These costs consist of 1) searching and information, 2) drafting and negotiating an agreement, 3) safeguarding the agreement, 4) evaluating the input, 5) measuring the output, and 6) monitoring and enforcement

(Williamson, 1985). Such transaction costs are not included in the ‘normal’ price mechanisms because the slightest change in a contract could end up in new negotiations. TCT is therefore more comprehensive then the neoclassic view of the company, which sees it as ‘a black box. Into this box went labor and capital, and out came products’ (Alchian & Woodward, 1988, p. 65). TCT is thus really concerned with how

companies operate (i.e. from within the black box), how they create value and reduce transaction costs compared to external markets.

Based on the previous described theories, this section develops a conceptual model that consists of an interaction between institutional factors, entry mode decisions and learning opportunities. In order to determine how specific entry modes contribute to learning opportunities of MNCs when expanding to different institutional contexts, three key questions need to be answered: what is learning and knowledge management, are there learning opportunities for MNCs when expanding to different institutional

environments, and how do entry modes (equity versus non-equity) contribute to learning opportunities for MNCs when expanding to different institutional contexts. Before examining the latter two questions more thoroughly, first an introduction of LKM.

Nowadays, the creation of knowledge through effective ways of learning is becoming a crucial resource for firms in order to survive. Knowledge creation, Nonaka & Toyama (2003) state, ‘…is a synthesizing process through which an organization interacts with individuals and the environment to transcend emerging contradictions that the organization faces’ (p. 3). According to White (2004) learning and knowledge creation can even been seen as a strategic resource. Increasingly, more studies (Hult, Ketchen & Slater, 2005; Morgan, Vorhies & Mason, 2009) focus on firms that learn through

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market-How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 13 orientation (MO). MO corporations are typically concentrated on learning from competitors, customers and the external environment. This information is subsequently internally processed in an attempt to create a successful strategy (Kohli & Jaworski, 1990). It is precisely this information acquired from the external environment that this study is interested in. Hence, for the purpose of this study, the following definition will be used when referring to LKM: ‘…any process or practice of creating, acquiring, capturing, sharing and using knowledge, wherever it resides, to enhance learning and performance in organizations’

(Scarbrough, Swan & Preston, 1999, p. 80).

Recall that the institutional environment influences how a firm conducts business, deals with customers, manages people and interacts with the government (Kostova & Zaheer, 1999; Scott, 1995). In addition, the institutional environment consists of both a formal and informal part. Countries with strong formal institutions are typically those with high levels of written rules and contracts that are determined through a formal position, like authority or ownership. Consider for instance Germany: the largest economy in Europe that is well known for its friendly business environment. Such developed economies tend to have strong institutional structures in terms of well-controlled tariffs and other trade restrictions enforced by authorities (Beyer & Fening, 2012). Informal institutions, on the other hand, are characterized by implicit understandings such as social norms, political processes and routines (Zenger, Lazzarini & Poppo, 2002). Somalia, for instance, is an emerging economy that lacks strong institutional structures compared to Germany. Moreover, Somalia has a more restrictive trade environment due to government interference: it lacks right protection of the poor and, unfortunately, pursues unofficial policies that cause unfair local competition that, in turn, can lead to corruption (Beyer & Fening, 2012). Developing countries with weak formal institutions are thus compensated by stronger informal institutions, which generally lead to ineffective markets (Meyer, Estrin, Bhaumik & Peng, 2009).

Assuming no previous business experience in the host country, the likelihood of success for MNCs from either of these example countries would be very uncertain when deciding to enter unfamiliar

institutional territory. Therefore, it is critical for MNCs to learn how they can survive in different institutional environments (Sirmon, Hitt & Ireland, 2007). DMNCs from a strong formal institutional environment (mostly developed countries) need to learn how to deal with different society norms, (unfair) government policies and other incentives, whereas EMNCs from countries which lack strong formal

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 14 structures (mainly developing countries) need to learn how to cope with legal restrictions, formal rules and other regulations. With regard to a MNCs learning process, this study uses Nonaka & Takeuchi’s (1995) SECI model that consists of four phases of knowledge creation: socialisation, externalisation, combination and internalization. First, socialization ‘is the process of converting new tacit knowledge through shared experiences (Nonaka, Toyama, & Konno, 2000). When MNCs conduct business in different institutional environments they need to convert tactic knowledge from the new institutional environment into a shared experience within the entire MNC. This means that the entire company should experience the new environmental conditions through interaction. For instance, a DMNC should experience informal networks, business habits and other cultural habitats that exist in partner countries with strong informal structures. On the other hand, an EMNC has to experience formal rules and other strict regulations from the business partner’s country with the strong formal institutions. Once again, key is that foreign experience is shared inside the entire MNC. In addition, the second phase of externalization is reached when tacit knowledge is made explicit through documents and tactical manuals. For an EMNC, tacit knowledge is made by explicitly writing down all formal rules, procedures and actions that strong formal institutional countries consider to be normal with regard to business activities. DMNCs, on the other hand, should map informal habitats like influential business persons or groups that need be contacted in order to conduct effective business in the host country. These informal procedures should be written down and made familiar to the entire company. The third phase, combination, refers to the process of integrating obtained and writing information into a knowledge system (

Yeh, Huang, & Yeh,

2011). When new and existing explicit knowledge is gathered in and outside company, it subsequently is disseminated among organizational members (Nonaka, 1994). Examples of MNCs knowledge systems are databases, computer programs and learning groups. In the final phase of knowledge creation, the internalization process, ‘.. can be understood as praxis, where knowledge is applied and used in practical situations and becomes the base for new routines’ (Nonaka & Toyama 2003, p. 5). Explicit knowledge regarding customer preferences, market routines, and production procedures can now be used in practise by the MNC. For example, newly hired employees can internalize explicit knowledge regarding job descriptions that are now documented (Nonaka & Toyama, 2003). In addition, a MNC can offer employees training about the new business environment, how they should target customers in the foreign country, what their product preferences are,

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 15 and how to reflect upon these.

In a nutshell, it offers more learning and knowledge creation opportunities for a DMNC in Germany to do business in Somalia than, for instance, in Switzerland where formal structures are also predominate: both countries are ‘familiar’ with the formal institutional structures in their home countries. The contrary is also true: cross-border expansion, for instance, for an EMNC from Somalia to Germany provides greater learning opportunities than to another developing country such as Afghanistan. Thus, when MNCs expand to different institutional environments compared to their home country, it enhances learning- and knowledge creation opportunities. A summary of the learning opportunities for MNCs provided by different institutional contexts is presented in table 1.

Table 1

Learning- and knowledge creation opportunities for MNCs provided by different institutional contexts

Source: B.C. Teerhuis

A lack of strong formal structures in an economy can have serious consequences for the entry mode choice of foreign firms. An appropriate entry strategy is thus to a great extent influenced by a countries’ institutional framework. This leads to the conclusion that entering developing economies requires a different entry mode strategy compared to entering developed economies. From a learning point of view, firms need to gather information about these institutional differences in order to develop an effective response (Chan & Makino, 2007). In this case, a correct decision is required in terms of entry mode strategy. With regard to cross-border expansion, a DMNC searching for ways to enter a developing economy can be impeded by weak formal structures. Such a lack raises entry barriers against acquisitions (Meyer et al., 2009). Acquisition is therefore more appropriate to enter developed economies (Meyer et al., 2009). However, as described in the previous part, governmental restrictions in developing economies (i.e. weak formal structures) can hinder FDI. Thus, an equity-based mode strategy through greenfield and

Home/host country institutions Formal Informal

Formal Low High

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 16 acquisitions seems to be less appropriate for a DMNC entering developing economies. Non-equity-based modes, such as exporting and contractual agreements, seem more appropriate since they carry less risk and provide DMNCs the opportunity to assess foreign institutional environments more thoroughly in terms of cultural norms and ethics (Beyer & Fening, 2012). As a result, the internal organizational knowledge of the foreign environment increases. On the other hand, the establishment of new ventures of EMNC in

developed economies is preferred due to reduced procedures, a shorter start up process, and lower cost (Yamakawa, Peng & Deeds, 2008). Wholly owned subsidiaries such as greenfield and acquisitions are therefore more appropriate. Moreover, the establishment of new ventures in developed economies offers EMNCs ‘…greater market potential, lower levels of institutional or country risks, and enhanced learning opportunities’ (Yamakawa, Khavul, Peng & Deeds, 2013, p. 10). In addition, Mathews (2002, 2006) stresses that EMNCs are eager to engage in alliances and joint ventures with incumbent DMNCs with regard to resources leveraging, learning and imitating. Hence, in order to deal with formal rules, legal restrictions and other foreign regulations in developed countries, this study proposes that an EMNCs learning and knowledge process could be best be achieved through equity-based entry modes. Consequently, the following two hypotheses can be formulated:

H1: Equity-based entry modes are used by EMNCs when entering developed countries with strong formal structures.

H2: Non-equity-based entry modes are used by DMNCs when entering developing countries with strong informal structures.

MNC learning is, however, not incorporated as a moderator variable in this study. Hence, both hypotheses do not include some sort of learning effect in its formulation and thus only test for MNC entry mode choice to different foreign institutions. With regard to MNC learning, this study only assumes that MNCs use particular entry modes as a motive for learning when conducting business in foreign

institutional environments - as mentioned in the previous sections. The conceptual model, as shown in figure 1, summarizes how institutional factors influence entry mode decisions from a LKM perspective.

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 17 Figure 1

How institutional factors influence entry mode decisions: a learning and knowledge management strategy.

3. Method

3.1 Procedure

The main objective of this study is to determine if MNCs spent more money on particular entry modes (i.e. equity versus non-equity) when they enter different foreign institutions compared to their home country. The study compares two groups of countries from the Organisation for Economic Co-operation and Development (OECD) member states on different institutional environments, namely countries strong on formal institutions and countries strong on informal institutions. To do so, knowledge of different institutional environments within the countries is necessary. To determine these institutional differences, this study used aggregated categorical data on political and civil rights obtained from the Freedom House Index (2017). Business practitioners and scholars frequently use this database for empirical research. Their annual reports rank over 200 countries based on government functioning, political pluralism and

participation, freedom of expression and belief, organizational rights, rule of law, personal autonomy and individual rights.

Quantitative data was obtained and modified for 204 countries from 1973 till 2016. Political rights and civil rights are both measured on a scale from 1 (complete freedom) to 7 (no freedom). In addition, both scores where added together and then divided by two, resulting in an average score for each country over a period of 43 years. Average scores were then categorised in three groups: complete freedom (scores between 1.0 and 2.5), partly free (scores between 3.0 and 5.0), and not free (scores between 5.5 and 7.0). For the purpose of this study, average scores where reordered, incomplete recordings removed and then Country strong on informal institutions Country strong on formal institutions Equity entry modes

Non-equity entry modes

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 18 ranked by the notion of freedom. Subsequently, both rankings were reduced to a minimum set of countries by analysing historical data of freedom. This resulted in an overall ranking of 31 countries that are strong on formal institutions (score 1) and 32 countries that are strong on informal institutions (score 7).

From these two opposite ‘institutional’ groups, the USA appeared to have the highest score in terms of formal institutions, and is therefore the strongest formal institutional country. The Republic of Korea (i.e. South Korea) appeared to have the highest score on informal institutions, and is therefore the strongest informal institutional country. Consequently, those two countries were used to compare the inflow of the country groups with the opposite institutional environment (i.e. the countries with formal institutional environments and the countries with informal institutional environments).

To determine the difference in businesses activities between the formal and informal country groups, knowledge of specific amounts on entry mode spending is necessary. This study was based on the equity and non-equity mode from Pan & Tse (2000). Therefore, the equity entry modes represent all acquisitions, greenfield investments and majority/minority joint ventures, which corresponds with FDI and was measured by the outward investment from a home country to the partner country in U.S. dollars. In addition, the non-equity entry modes correspond with contractual agreements and export. The study only used export outflows for non-equity entry modes, due to unavailable data regarding contractual

agreements. Export outflows were measured in goods and services outflows from the home to the partner country in U.S. dollars. Consequently, comparison of two different types of entry modes for both formal and informal institutional countries, that had business activity in the USA and South Korea, was

conducted.

The entry mode data was obtained from two databases that contain comprehensive numbers of business between partner countries around the globe. The FDI data was collected from the Organisation for Economic Co-operation and Development (2017). First, the USA was selected as the reporting country for FDI inflow. Secondly, the amounts spend on FDI were obtained for the selected countries on both formal and informal institutions. The same was done for South Korea as reporting country for FDI inflow. Likewise, the export data was collected from The World Bank Group (2016). While obtaining the data for the preliminary selected countries that are strong on formal and strong on informal institutions, it appeared that complete data was only available for 28 countries strong on formal institutions and 26 countries strong

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 19 on informal institutions. Unfortunately, due to a lack of observed proportions on FDI, three countries (i.e. Barbados, Costa Rica, Croatia) strong on formal institutions and six countries (i.e. Afghanistan, Albania, Central African Republic, North Korea, Somalia, South Sudan, Uzbekistan) strong on informal institutions needed to be removed from the dataset. This resulted in a total of 54 countries based on the data collection.

Because companies have little or no experience in opposite institutional countries when they first go abroad, learning still has to occur. Hence, this study obtained the earliest years of expanding to different institutions by MNCs (i.e. the first reported year per country of origin). In addition, the choice was made to use the data for the first available year for both the USA and South Korea per country within an entry mode. This means that within the same country different years can be obtained for different entry modes (i.e. FDI and export).

3.2 Sample

The sample of this study consisted of 46 countries (i.e. after removing outliers), of which 22 countries are strong in formal institutions and 24 countries are strong on informal institutions (see table 2).

Table 2

Countries strong on formal and strong on informal institutions

Formal institutions Informal institutions

1 Luxembourg 12 Italy 1 Kuwait 13 Malaysia

2 Germany 13 Denmark 2 Lebanon 14 Panama

3 New Zealand 14 Belgium 3 Venezuela 15 United Arab Emirates

4 Sweden 15 Iceland 4 Vietnam 16 Israel

5 Hungary 16 Poland 5 Armenia 17 Chile

6 Austria 17 Belize 6 Ecuador 18 Mexico

7 Switzerland 18 Greece 7 Egypt 19 Singapore

8 Ireland 19 The Bahamas 8 Philippines 20 Saudi Arabia

9 Norway 20 Malta 9 Pakistan 21 Turkmenistan

10 Spain 21 India 10 Thailand 22 Equatorial Guinea

11 Finland 22 Estonia 11 Uruguay 23 Syria

12 Indonesia 24 Eritrea

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From the total country population, 41.3 % of the countries are part of Europe, 32.6% of the countries are part of Asia, 10.9% of the countries are part of South America, 6.5% of the countries are part of North America, 6.5% of the countries are part of Africa, and 2.2% of the countries are part of Australia.

The years during which the equity entry mode was measured ranged from 1988 to 2006 (M = 1993.65, SD = 4.92) and the years during which the non-equity entry mode was measured ranged from 1988 to 2003 (M = 1993.67, SD = 4.35). The mean score on the equity entry mode from the countries to the USA was $138,130,434.78 (SD = $486,053,477.11) and the mean score on the equity entry mode from the countries to South Korea was $1,926,086.96 (SD = $6,977,883.626). The mean score on the non-equity entry mode from the countries to the USA was $3,435,682,863.48 (SD = $5,398,304,412.73) and the mean score on the non-equity entry mode from the countries to South Korea was $250,449,426.96 (SD =

$425,821,097.84). The mean score on conducted business to the USA for all countries was

$3,573,813,298.26 (SD = $5,644,926,381.25) and the mean score on conducted business to South Korea for all countries was $252,375,513.91 (SD = $428,505,593.18). The mean score on the equity entry mode for all countries was $140,056,521.74 (SD = $489,559,529.76) and the mean score on the non-equity entry mode for all countries was $3,686,132,290.43 (SD = $5,708,701,522.95). The mean score for the non-equity entry mode for both strong formal and informal institutional countries (i.e. DMNCs and EMNCs) is higher than the mean score for the equity entry mode for these institutional country groups (see table 3). Table 3

Expenditure for the formal and informal institutional countries on the equity and non-equity entry mode in U.S. dollars

Equity Non-equity

n M SD M SD

IIC 24 8,645,833.33 159,498,805 3,634,361,447.50 4,880,904,676.502 FIC 22 283,413,636 666,668,647 3,742,609,573.64 6,613,292,908.62 IIC, Informal Institutional Countries; FIC, Formal Institutional Countries; n, number of countries; M, mean; SD,

Standard deviation.

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In addition, the standard deviations for all the data is relatively high. Some countries pulled back business activities from the foreign countries in which they had invested. This meant a negative value for some of the countries and subsequently resulted in high standard deviations.

3.3 Data analysis

All statistical analyses are conducted using the SPSS program version 20.0. First, preliminary analyses were conducted. Thereafter, preliminary assumption testing was done and final, a one-way

MANOVA was performed to test both hypotheses. It was stated that EMNCs from 24 countries with strong informal institutions spend more money on equity modes when entering a country with strong formal institutions (i.e. the USA). On the other hand, it was stated that DMNCs from 22 countries with strong formal institutions spend more money on non-equity modes when expanding to a country with strong informal structures (i.e. South Korea). The analysis of variance consisted of one categorical, independent variable (i.e. countries strong on formal institutions / countries strong on informal institutions) and four continuous, dependent variables (i.e. equity money spent in U.S. dollars to the USA, equity money spent in U.S. dollars to Korea, non-equity money spent in U.S. dollars to the USA and non-equity money spent in U.S. dollars to Korea).

First, the multivariate tests of significance will indicate whether there are statistically significant differences among the formal and informal institution countries on a linear combination of the dependent variables. If a significance level less than .05 is obtained, it is concluded that there is a difference among the groups of formal and informal institution countries. When this is the case, further investigation is needed about the relation between each of the dependent variables. A higher alpha level of .013 will be set (i.e. .05 divided by the four dependent variables), to reduce the chance of a Type 1 error. The differences between the groups will be considered significant only if the probability value is less than .013. In addition, the effect sizes and directions of these differences will be obtained. Besides checking the significance of the model, the individual dependent variables will be reviewed. When differences in variance between formal and informal institutional groups on the individual dependent variables are found, those variables will be further examined using an independent sample t-test.

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4. Results

A one-way MANOVA was performed to investigate differences in institutions of the country of origin by used entry mode while conducting business in foreign countries. Four dependent variables were used: equity to South Korea, equity to the USA, non-equity to South Korea, and non-equity to the USA. The independent variable was institution type (i.e. formal or informal) of the country of origin.

Preliminary assumption testing was conducted to check for normality, linearity, univariate and multivariate outliers, homogeneity of variance-covariance matrices and multicollinearity. First, the power of the analyses was obtained. Tabachnick & Fidell (2007) conducted a rule of thumb, namely, the number of independent variables multiplied by eight plus 50, to evaluate the power of the test. When the sample is bigger than the number from the calculation, the sample satisfies a medium effect size with a power of .80 (ß = .20). This means, the sample should contain 58 countries, instead of the 46 countries now involved. Unfortunately, this means that the power of the test is not big enough and a non-significant result may be due to insufficient power. However, the sample size in each cell consists of more cases than dependent variables and the robustness of the sample size is at least 20 in each cell (i.e. 22 and 24). Therefore, the sample should be big enough for the analysis. It appeared that all of the dependent variables showed a violation of the assumption of normality, were positively skewed and had a positive Kurtosis value (see table 4).

Table 4

Kolmogorov-Smirnov (R), Skewness and Kurtosis scores

Kolmogorov-Smirnov Skewness Kurtosis

R df p Statistic SE Statistic SE

Equity to South Korea

Formal countries .39 22 .000 3.72 .350 14.34 .688 Informal countries .51 24 .000

Equity to the USA Formal countries .33 22 .000 3.20 .350 11.48 .688 Informal countries .29 24 .000 Non-equity to South Korea Formal countries .34 22 .000 2.67 .350 7.12 .688 Informal countries .24 24 .001 Non-equity to the USA Formal countries .30 22 .000 2.48 .350 6.91 .688 Informal countries .24 24 .001

R, Kolmogorov-Smirnov; df, degrees of freedom; p, significance level (2-tailed); SE, Standard Error.

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The inspection of the normal probability plots, however, showed a reasonable normal distribution pattern. In addition, the box plots for the four dependent variables were obtained. The countries with more than 3.0 box-lengths from the edge of the box were considered as outliers. Subsequently, it was

investigated if the scores were harming the data. This was based on the 5% Trimmed Mean score. Therefore, it was decided to delete the data for the Netherlands, Japan, the United Kingdom and Canada. This meant a total of 50 countries instead of the earlier 54. This procedure was repeated, and the variable of the countries strong on informal institutions to South Korea still showed a relatively big difference between the mean score and the 5% Trimmed Mean score (see table 5). However, based on the range of the remaining data, it was more wisely to keep all of the remaining data in.

Table 5

Mean scores and 5% Trimmed Mean scores in U.S. dollars

Mean 5% Trimmed Mean

Statistic SE Statistic

Equity to South Korea Formal countries

314,090,909 203,397,186 201,060,606 Informal

countries

81,250,000 627,778,245 19,351,852 Equity to the USA Formal

countries 280,272,727 141,106,652 212,429,293 Informal countries 783,333,333 324,227,994 952,777,778 Non-equity to South Korea Formal countries 266,981,146 109,988,915 194,544,712 Informal countries 235,295,351 680,867,539 194,685,760 Non-equity to the USA Formal

countries

3,480,000,000 1,306,000,000 2,470,000,000 Informal

countries

3,400,000,000 974,105,677 2,820,000,000

SE, Standard Error. Source: B.C. Teerhuis

The four dependent variables of the study have a critical value of 18.47 with alpha .001

(Tabachnick & Fidell, 1996). While checking for the multivariate normality, a score of R = 29.08 for the Mahalanobis distance was found. Based on this score, three countries (i.e. France, R = 29.00, China, R = 22,13 and Australia, R = 21,66), were considered outliers and were removed from the data. A total of 47 countries remained. To check for linearity, a matrix of scatterplots between each pair of the dependent variables, separately for both groups, was made. The scatterplots showed no obvious evidence of non-linearity; therefore, the assumption of linearity is satisfied. Also, the assumptions of multicollinearity and singularity were not violated (see table 6).

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 24 Table 6

The Pearson correlation coefficients (r) for the four dependent variables Equity to the USA Non-equity to South Korea Non-equity to the USA n r p R p r p

Equity to South Korea 46 .50 .000 .38 .01 .42 .004

Equity to the USA 46 - - .41 .005 .47 .001

Non-equity to South Korea 46 - - .71 .000

Non-equity to the USA 46 - -

n, number of countries; r, Pearson correlation coefficient; p, significance level (2-tailed).

Finally, the homogeneity of the data was checked. The variances for the two institutional groups appeared not to be equal (F = 7.46, p = .000), and therefore, the assumption of homogeneity of variance is violated. However, the analysis of variance is reasonably robust to violations of this assumption when the sizes of the groups are reasonably similar. Fortunately, this is the case for this study (i.e. 22 countries strong on formal institutions and 24 countries strong on informal institutions). The Levene’s test shows that the two variables for the equity entry mode have violated the assumption of equality of variance, so we cannot assume equal variances between the groups (F (1, 44) = 5.93, p = .019 for equity to South Korea; F (1, 44) = 12.64, p = .001 for equity to the USA). The other two variables have not violated this assumption, so equal variances between the groups can be assumed (F (1, 44) = .52, p = .457 for non-equity to South Korea; F (1, 44) = .014, p = .906 for non-equity to the USA).

While the violation of the assumption of equality of variance may impact the overall analyses, the difference in variance is also important. More dollars were spend on the variable ‘equity to South Korea’ from countries strong on formal institutions in comparison to countries originating from strong informal institutions (N = 22, M = 3,140,909.09, SD = 9,540,173.66 for formal institutions; N = 24, M = 812,500.00, SD = 3,075,472.75 for informal institutions). This indicates that countries strong on formal institutions (i.e. DMNCs) are more eager to use the equity entry mode than countries strong on informal institutions (i.e. EMNCs) when conducting business activities in foreign countries with strong informal institutions (i.e. South Korea). In addition, for the variable ‘equity to the USA’, a similar pattern was observed for the

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 25 strong formal countries: they have spent more dollars than countries strong on informal institutions (N = 22, M = 280,272,727, SD = 661,848,866 for formal institutions; N = 24, M = 7,833,333.33, SD = 158,838,629 for informal institutions). This indicates that countries strong on formal institutions (i.e. DMNCs) are also more eager to use the equity entry mode when conducting business activities with strong formal institutions (i.e. the USA), than countries strong on informal institutions (i.e. EMNCs) do.

In short, countries strong on formal institutions spend more money on the equity entry mode than countries strong on informal institutions. For the non-equity entry mode, no differences between the countries of origin (i.e. the group strong on formal institutions and the group strong on informal institutions) were found.

After the assumptions for the one-way MANOVA were checked, the analysis for the conceptual model was conducted. Unfortunately, there was no statistically significant difference between formal and informal institutions on the combined dependent variables, F (4, 41) = 1.21, p = .320; Wilks’ Lambda = .89; partial eta squared = .11. Therefore, the results for the dependent variables were not considered separately.

5. Discussion

This study has investigated if MNCs use different entry modes when conducting business in opposite institutional countries. It resulted in two hypotheses, namely equity-based entry modes are used by EMNCs when entering developed countries with strong formal structures (H1), and non-equity-based entry modes are used by DMNCs when entering developing countries with strong informal structures (H2). Based on the output of an one-way MANOVA statistical test, no significant results were found. Hence, both hypotheses were rejected. This concludes that entry modes are chosen by countries whatever their institutional type (i.e. formal or informal).

The motive behind this theory was based on the assumption that MNCs can learn to ‘deal’ with the new environment through their way of entry. However, reviewing the test results and literature, the LKM entry mode theory did not fulfil its assumption. It revealed that learning through a particular entry mode decision is not an obvious motive for the 46 countries that conducted business activities to two OECD countries (i.e. USA and South Korea). Moreover, this suggests that MNCs do not always choose for

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 26 learning opportunities, but instead prefer riskier, higher level entry modes. Learning is, however, not a guarantee for successful foreign expansion. Probably because the final entry mode choice depends on other macro- and firm factors, such as country risk, competitive environment, resource commitment, ownership and control, and manager motives (Czinkota & Ronkainen, 1995; Johansson, 1997; Hollensen, 1998). In addition, Nakos & Brouthers (2002) argue that optimal entry mode choice is determined by a combination of cultural variables, transaction costs, and legal restrictions. Past international experience, competitive moves and market potential also matter (Cateora & Graham, 1999), as well as too confident CEO’s (Lai, Lin & Chen, 2017). Moreover, because this study obtained FDI and export data for countries as early as possible, it is likely that countries began their international adventure taking small steps by expanding to countries close to their home country before going overseas. Probably due to familiar institutions, which decreases uncertainty for the MNC (Johanson & Vahlne, 1977).

A different cause for the non-significant result can be due to the importance of some unique advantages in the host country in which a MNC wants to be present fast. A big oil company like Shell, for example, does not start with an export entry mode to an oil rich country. Postponing FDI could end up disastrous because competitors can take advantage of host country location advantages first (Dunning, 1979). In addition, this studies sample size contains multiple big and small countries that have different spending patterns with regard to their business activities that influence the results in this study. Hence, future studies should therefore control for country size.

Another question that might be asked, after analysing the results in this study, is related to the fairness in comparing FDI and export in dollars: can entry mode choice accurately be measured by

spending numbers? Some would argue that this study is more appropriate to compare real frequencies (i.e. counting one export versus one FDI) instead of spending numbers like most contemporary business scholars do. However, secondary data to these are not available and should thus be work for future investigators. In addition, a precise measurement of learning is not incorporated in this study. True, there are many ways to measure MNC learning, like R&D expenditures, number of knowledge transfers within the MNC (Bresman, Birkinshaw & Nobel, 1999), number of foreign networks, number of information systems, and number of multidisciplinary teams. Further research should aim to incorporate these global measurements of learning in their studies.

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Another possible reason why both hypotheses are rejected is due to the sample size: only 46 partner countries were tested for FDI and export to two OECD countries. Although this study has reached a minimum level sample size for testing, insufficient power can directly relate to non-significant test results. However, due to a lack of FDI data in secondary databases, some countries had to be deleted from the dataset, which may have negatively influenced the power of the model. Moreover, the test only

incorporates spending data on FDI and export related to the early years of business activities. Nowadays, economic indicators, such as FDI and export, are substantially better obtained and registered compared to the period during which the data was collected used in this study. It is therefore possible that results alter when more FDI and export numbers for multiple countries are combined and tested over a longer period of time. For that matter, Makino, Beamish & Zhao (2004) found that Japanese FDI to stable developed countries (i.e. strong formal institutions) reduce variability in both financial performance and the likelihood of survival over a 1991-1992 period. Hence, greenfield and high levels of subsidiary ownership where preferred. In addition, low levels of control were preferred by Japanese FDI in developing countries (i.e. strong informal institutions).

Although Japan is a strong institutional environment according to the measurements in this study, their findings adhere to some aspects of the proposed theories in the conceptual model of this study: especially when expanding to stable institutional environments. On the other hand, Gomes-Casseres (1990) found that restrictive policies had no effect on MNC investments compared to open countries. This could indicate that investment initiatives are subject to change. Perhaps due to the evolution of technology and its rapid change, which makes learning utmost important for MNCs. In that regard, Jindra, Hassan & Cantner (2016) found that EMNCs from developing countries pay more attention to knowledge spillovers from affiliates in EU countries compared to DMNCs investors. Hence, EMNCs choose equity entry modes over non-equity modes to enter, which is exactly what the first hypothesis in this study predicts. On the other hand, studying inward investments in Nigeria in the 2002 – 2014 period, Ajide (2017) finds that the quality of institutions has no significant effect on FDI inflows from multiple partner countries.

The study found that countries strong on formal institutions (i.e. DMNCs) spend more money on the equity entry mode than countries strong on informal institutions (i.e. EMNCs). One explanation for the higher amounts spend on business activities by countries strong on formal institutions compared to the

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 28 expenditure of strong informal institutional countries on the equity entry mode, can be that they have more money to spend than countries with strong informal institutions (i.e. DMNCs coming from wealthier countries). If so, one could expect higher amounts spend on the non-equity entry mode by strong formal institutional countries compared to informal institutional countries as well. However, this is not the case. Instead, the different institutional countries (i.e. formal and informal countries) spend approximately the same amounts on non-equity entry modes to informal institutional countries. Apparently, strong informal institutional countries (i.e. EMNCs) spend relatively less money on the equity entry mode than on the non-equity entry mode (see table 3). Though, strong formal institutional countries also spend relatively less money on the equity entry mode than on the non-equity entry mode (see table 3).

This study used data from the (assumed) earliest years that countries conducted business activities in foreign countries. Recall that this study assumes that MNC learning still has to happen in those earliest years abroad and that a particular entry mode (depending on the host institution) enables MNCs to learn. When knowledge, with regard to the host institutional environment, is not available within the MNC, the MNC apparently chooses a less risky entry mode strategy. Hence, both DMNCs and EMNCs choose a non-equity entry mode in their earliest years abroad. In addition, when foreign institutional knowledge is gained over time, MNCs are more likely to choose a different entry mode (i.e. a riskier higher level entry mode). Hence, when foreign institutional knowledge is present in the MNC, entry mode choice might be riskier (i.e. equity entry modes) and more frequently chosen by the MNC. This means that the findings in this study might be due to its data gathering method (i.e. the earliest year of conducting business activities).

5.1 Limitations

Some important limitations exist that one should take notice of when analysing the study results. First and foremost, this study did not incorporate a learning effect, as a moderator, for MNCs entry mode choice to different foreign institutions: it assumed learning as a motive for MNC entry mode choice when studying the international business literature. True, it has used the earliest years of expanding to different institutions by MNCs (i.e. the first reported year per country of origin) to incorporate learning, but in real life, MNCs consider multiple macro, meso, and micro factors (mentioned in the previous section) that eventually lead to a final entry mode choice. Moreover, it is questionable whether the first reported

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How Institutional Factors Influence Entry Mode Decisions: a Learning and Knowledge Management Strategy; Master Thesis International Management; B.C. Teerhuis, BSc., 10499415 29 expenditure year of a MNC to an opposite institutional country initiates a learning process. It is certainly possible that MNCs had some business activities in foreign countries before the time that this study obtained this data. This would diminish, or at least reduce the effect of learning and consequently not ‘capture’ the full learning cycle of MNCs in this study.

Secondly, this study raised the question if entry mode choices by MNCs can accurately be measured by spending numbers on both FDI and export. Real FDI and export frequencies should be more appropriate to compare and test MNC equity and non-equity entry mode choice, but were not obtainable when this study was conducted. In addition, with regard to non-equity entry mode, this study only incorporated export spending numbers. Non-equity entry modes, however, consist of more entry mode choices like contractual agreements, licencing, and R&D contracts. Hence, non-equity entry modes in this study can be perceived as an incomplete measurement.

Thirdly, due to extreme values in MNC spending on both equity and non-equity entry modes, some countries had to be deleted from the dataset. This resulted in a total of 46 countries, instead of the 58 countries that are at least needed in this study to generate enough power (Tabachnick & Fidell, 2007). This could mean that the insignificant results in this study may be due to insufficient power, and thus caution is required when interpreting the results.

A fourth shortcoming is the collection of FDI and export data during several years per country: each country had a different starting year (i.e. their first registered business activity abroad). Hence, first FDI and export expenditure data was sometimes gathered over a range of different years. However, while most expenditure data was obtained within just a few years separate from each other, in some countries the years were further split-up. During this time, economic situations in both the home- and host country could have changed, which impacts FDI and export expenditures. For instance, when expenditure data regarding Germany’s first export was obtained in 1982 and subsequently the first FDI in 1986, a gap of four years exists. In those four years Germany’s export grew and MNCs from within that country probably learned a lot about foreign business activities. Hence, this study ‘missed’ some early expenditure years while foreign learning was taking place. This missing data could have influenced the results of this study due to possible different expenditures in the first year abroad or by changes in the economic situation in the home country. Hence, caution should be taken when interpreting the study results. In addition, while some expenditure