The influence of institutional environment on choice of
entry mode over time
A case of a large multinational enterprise in the service industry
MARA GOORTS Supervisor: Dr. Andreea N. Kiss University of Groningen Faculty of Economics and Business MSc International Business and Management
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Index
1 Introduction ... 7
2 Literature review ... 10
2.1 The institutional perspective on choice of entry mode ... 10
2.2 Institutional distance and the tension between global integration and local responsiveness ... 11
2.3 Regulative distance and choice of entry mode ... 13
2.4 Normative distance and choice of entry mode ... 14
2.5 Cognitive distance and choice of entry mode ... 15
3 Propositions ... 17
3.1 Regulatory dimension ... 17
3.2 Normative dimension ... 18
3.3 Cognitive dimension ... 19
3.4 The most dominant pressure ... 19
3.5 Conceptual model... 20
4 Methodology... 22
4.1 Regulative, normative and cognitive distance by the Global Competitive Index... 23
5 Results... 28
5.1 The entry mode strategy of the firm ... 28
5.2 The internationalization path of the firm ... 28
5.3 The objective and the focus of the firm... 30
5.4 The level of influence of the regulative dimension on the choice of entry mode ... 31
5.4.1 Proposition 1a ... 31
5.4.2 Proposition 1b ... 33
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5.6 The level of influence of the cognitive dimension on the choice of entry mode... 35
5.7 The most dominant pressure ... 37
6 Discussion ... 40
6.1 The entry mode strategy of the firm in institutionally close countries ... 40
6.2 The institutional distance with Spain... 41
7 Conclusion... 43
7.1 The main research question... 43
7.2 Limitations... 45
7.3 Possible further research ... 45
References ... 47 Appendices ... 50 Interview 1 ... 50 Interview 2 ... 55 Interview 3 ... 64 Interview 4 ... 74 Interview 5 ... 82 Interview 6 ... 93
Figures
Figure 1: Conceptual model that summarizes the stated propositions ... 216 | P a g e
Tables
Table 1: Selected items from the Global Competitive Index 2011-2012 to measure the regulative,
normative and cognitive distance ... 25
Table 2: Country scores on the regulative dimension and compared with the home country ... 26
Table 3: Country scores on the normative dimension and compared with the home country ... 26
Table 4: Country scores on the cognitive dimension and compared with the home country ... 27
Table 5: Cutoff point between high and low distance countries in comparing with the Netherlands ... 27
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1 Introduction
Firms use various modes of entry when they choose to operate in foreign markets. Typical entry modes include exporting, licensing, franchising, management-service contracts, joint ventures, and wholly owned foreign direct investments (FDI) such as green-field investments or mergers and acquisitions. These entry modes vary in resource deployment patterns, level of control, and risk and political and cultural awareness (Davis, Desai and Francis, 2000). High control modes such as FDI are used when there is a need to safeguard the contributed assets of the firm, in contrast to low control modes such as exporting, which are used to gain complementary assets for international expansion (Lu, 2002). Different theories such as the transaction-cost theory, the eclectic theory, the resource-based theory, and the institutional theory have discussed the choice of entry mode from different perspectives. The transaction-cost theory is the most common perspective in the study of foreign entry mode. Lu (2002) confirmed empirically that the ideas from the institutional perspective apply and have an explanatory power over and above the transaction cost model. These results imply the importance of institutional factors on the formulation and implementation of international strategy. This thesis will question how elements pertaining to institutional theory affect the choice of entry mode of a firm.
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country of the investing firm and the host country in which the investment takes place (Erramilli, Agarwal and Dev, 2002; Brouthers and Hennart, 2007).
The number of studies that examined the international entry mode research increased in the last twenty years, with about 100 empirical studies done by 2007 (Brouthers and Hennart, 2007). Until 2008, only ten studies of these studies had an institutional perspective (Canabal and White, 2008). From those studies, Brouthers (2002) and Meyer and Nguyen (2006) examined the regulatory dimension, and found that this dimension has a significant influence on selecting an entry mode. The normative dimension is an important component of the institutional environment but its impacts on the choice of entry mode might be indirect resulting from investment risk or decision-specific experience (Brouthers and Hennart, 2007). Davis et al. (2000) and Lu (2002) researched the cognitive dimension and although they have mixed results, they suggest that firms tend to conform to mimetic isomorphic pressures in their entry mode selection. Isomorphism could be defined as “a constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions” (DiMaggio and Powell, 1983: 149). Because of the still limited research on the institutional theory this study will focus on how these three elements influence the entry mode selection.
In sum, this thesis will contribute to academic literature with examining how a firm selects an entry mode, considering the elements from the institutional theory. With the focus on one single firm, the institutional elements of all geographic areas of its subsidiaries could be examined. By using a timeframe from the firm’s establishment in 1994 until 2012, the influence of the institutional environment on the entry mode selection over time will become visible. The research question that will be answered in this thesis is:
“How does the institutional environment influence the entry mode selection of a firm over time?”
The research question will be divided into four sub questions. The first three cover each one part of the institutional theory; the last sub question examines the interrelation of these dimensions.
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3. How does the cognitive dimension influence the choice of entry mode of a firm?
4. What is the interrelation between the regulative, normative and cognitive dimension and the impact on the choice of entry mode?
In order to estimate the extent of influence of the institutional theory on the choice of entry mode, this thesis will take the internationalization process of the firm over time into consideration. The objective of internationalization, the chosen strategy (global integration vs. local responsiveness) and the size and growth of the firm could show the necessity to react and adapt to different institutional pressures. This study has an interpretive approach and is aimed at producing an understanding of the context, in which the different concepts influences and are influenced by each other. This research focuses on the full complexity and therefore does not predefine dependent and independent variables (Kaplan and Maxwell, 1994). A single case study is applicable for this thesis, because “a case study is a research strategy which focuses on understanding the dynamics and complexity present within single settings” (Eisenhardt, 1989: 534). The firm which is chosen for this case study is an employment agency which focuses on the hospitality industry. The firm operates in a niche market and offers trained hospitality employees for small projects such as one-day events for hotels and caterers.
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2 Literature review
2.1 The institutional perspective on choice of entry mode
Different entry modes can be explained by the degree of equity of firm wants to invest for their international expansion. Non-equity entry modes are exporting, licensing, franchising and management-service contracts. Exporting is when a firm sells their product or management-service across the border and is entirely dependent on the ability to identify reliable distribution channels. Licensing is an agreement which gives a firm in the host country the right to produce and sell a product or service for a specified period in return of a fee. Franchising is relatively similar to licensing, because for a fee and royalty payments the franchisee receives a complete package of the franchiser’s trademark, products and services, and a complete set of operating principles. Management-service contracts contain a combination of royalties, supply chain markups, management fees and a share of profits. Equity entry modes are joint ventures and wholly owned foreign direct investment (FDI). A joint venture is an agreement by two or more companies to produce a product or service together. An FDI can be a green-field investment, setting up a new subsidiary from inception, or a merger and acquisition. A merger is usually a result of a friendly arrangement between companies of roughly equal size, whereas acquisitions are unequal partnerships and often the product of a hard-fought battle between the acquiring and the target companies (Gooderham and Nordhaug, 2003). Moreover, only exporting and FDI are entry modes without an intermediate and therefore all other choices of entry mode fall in the category of intermediate entry modes.
From the institutional perspective a firm chooses an entry mode that complies with external institutional pressures in order to enhance firm survival (Kostova Roth and Dacin, 2008). According to this perspective firms use a reactive role in their interaction with institutions. The institutional theory suggests that because of the pressure of coexisting institutions firms adopt certain structures, processes, policies and procedures (Kostova and Roth, 2002). The organizational behavior and strategy making of a firm are thus also influenced by institutional arrangements (Peng, Wang and Jiang, 2008).
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promotes certain behavior and restricts others (Kostova, 1999). The normative dimension reflects the norms, values and beliefs in a certain country. The cognitive dimension defines how inhabitants interact with each other - are the inhabitants independent or interdependent? -and this pillar shows the role of someone in the society and the consequences of his or her choices dependent on this role (Markus and Zajonc, 1985). These three different dimensions can guide, favor, or restrict business activity (Scott, 1995). Each of these pillars affects the practices, policies, and the structure of a firm; because the firm will modify their business operations towards the preferences of different external institutions. If the preferences of the different dimensions are not adopted, it will have consequences to the success transfer of the business operations to the host country (Kostova, 1999).
The difference between those pillars is that “the regulatory pillar defines what organizations may or may not do (where ‘may’ implies permission), the normative pillar defines what they should or should not do; and the cognitive pillar defines what is or is not true and can or cannot be done” (Eden and Miller, 2004: 15). The feasibility of the practices of a firm increase when the policies of the firm follow the normative guidelines set by governmental and social institutions and regulatory constraints which are imposed upon these guidelines (Child and Tsai, 2005). By complying with the local pressures the firm seeks legitimacy for their actions, particularly from those with physical, human, financial or reputational capital to offer (Dacin, Oliver and Roy, 2007).
2.2 Institutional distance and the tension between global integration and local responsiveness
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because the transfer of the business operations becomes more difficult, and conflicting pressures rise (Kostova and Roth, 2002).
However, firms that choose for local responsiveness and conform to the isomorphic pressures from the three pillars are rewarded with increased legitimacy, resources and survival capabilities (Kostova and Zaheer, 1999). This legitimacy could be obtained by complying explicitly with the stated requirements of the regulatory pillar in the host country. Legitimacy also increases when the firm confirms with societal values and support the cultural beliefs of the host country. Furthermore, when firms conform to the established cognitive structures of the host country, they legitimate with a “taken for granted” status of the society (Kostova and Zaheer, 1999: 69). These three different dimensions are dependent on each other. The regulation in a host country is influenced by and influences the local values and the cognitive structures. By socialization and education the normative and cognitive dimensions emerge (Kostova and Zaheer, 1999).
On the contrary, the pressures for global integration also need to be taken into consideration. When a host country is very different in its regulative dimension in comparing with the home country, firms are more reluctant to internationalize because they are not willing to transfer practices that are illegal in the host country (Xu and Shenkar, 2002). Furthermore, host countries in which inhabitants have more difficulty with learning new practices (cognitive dimension) are not very interesting either. The normative pillar could involve more difficulties than expected because different cultural assumptions and value systems could be much greater than it appears (Xu and Shenkar, 2002). However, firms with a global integration strategy disapprove local adaptation and learning from the host country and could remain unfamiliar with the local environment years after entry (Eden and Miller, 2004).
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exercise of the practice is consistent with their norms and values, the employees’ motivation increase and the normative dimension is in favor of the firm. However, when the firm adopts the regulatory practices of the host country, employees may view the exercise of the practice as coercive because of the quality management enforcement (Kostova and Roth, 2002). Thus, complying with the cognitive and normative pressures could result in increased motivation and acceptation of the host country inhabitants towards the transferred assets (Kostova, 1999; Kostova and Roth, 2002).
In a host country with a high institutional distance, a lower equity mode could be more appropriate than a high equity mode, because a firm faces “twin difficulties of obtaining external legitimacy in the host country and transferring managerial practices to the subsidiary” (Xu and Shenkar 2002: 609). In host countries with a low institutional distance, firms can pursue a global integration strategy more easily and tend to use FDI as choice of entry mode (Davis et al., 2000; Xu and Shenkar, 2002). Yiu and Makino (2002) suggested that firms with more restrictions in the regulative and normative dimensions in the host country tend to use joint ventures over FDI. This indicates that firms tend to use a lower mode of equity in situations that are more difficult to influence. Concerning the cognitive dimension, later entrants follow the entry patterns of earlier entrants in a host country (Lu, 2002; Yiu and Makino, 2002).
2.3 Regulative distance and choice of entry mode
The regulatory dimension is the easiest dimension for firms to observe and implement because the preferences are formalized in rules and procedures (Kostova, 1999). This formal pressure from other organizations to the behavior of the firm are also known as “coercive isomorphism” (Kostova and Roth, 2002: 216) and requires adoption of the social patterns. When a firm does not submit the regulatory institutions, the employees in the subsidiary will perceive a conflict situation with the regulatory institutions which hampers the implementation of the transfer of the business operations.
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In addition, in some host countries the regulations create barriers and ‘may restrict foreign choice of entry mode to increase domestic ownership’ (Brouthers, 2002). In order to gain legitimacy as well as efficiency in high regulative host countries, firms in those countries tend to use joint ventures over FDI (Brouthers, 2002; Yiu and Makino, 2002). With choosing an intermediate mode with a local partner the firm legitimates their rights to conduct business in the new market. On the contrary, in host countries with low regulative restrictions firms tend to choose FDI over joint ventures (Brouthers, 2002).
Lastly, institutions can vary within one country. Meyer and Nguyen (2006: 77) show in their research that “some regions like industrial zones are easier to access than others in terms of business licenses, information of local regulation and equal treatment”. Areas that are less market oriented are more often entered by joint ventures than green-field investments in order to access the local resources (Meyer and Nguyen, 2006). Although differences could exist within one country, local regulation is always dependent on the regulations of national institutions and therefore the national institutional environment should be taken into consideration for determining the institutional distance (Kostova and Zaheer, 1999).
2.4 Normative distance and choice of entry mode
The normative dimension reflects the norms and values of a society and specifies how things should or should not be done (Kostova and Roth, 2002). These pressures are informally driven by culture and tacit understandings. The confirmation to the normative standards that are established by external institutions is known as “normative isomorphism” (Kostova and Roth, 2002: 216). Firms with subsidiaries in foreign countries should take into account that there are different value systems set by the national cultures and should be consistent with these value systems in order to successfully implement the business operations internationally (Kostova, 1999).
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Furthermore, comparing green-field investments to acquisitions, green-field investments are preferred when the normative distance is high (Xu and Shenkar, 2002). Eden and Miller (2004) explained this with the following example: in a host country with a high normative distance it is more difficult for local employees to change the current practices to the practices of the acquired firm than for local employees in a green-field investment which are starting from scratch with adopting the practices of the acquired firm.
2.5 Cognitive distance and choice of entry mode
Cognitive institutions affect “the way people notice, characterize, and interpret stimuli from the environment” which happens in schemas, stereotyping, and frameworks people use for selecting and implementing information (Kostova, 1999: 314). Firms use “mimetic isomorphism” (imitation of structures by other organizations) in order to respond to cognitive pressures (Kostova and Roth, 2002: 216). Different interpretations of certain practices and policies exist among different countries, and employees in a subsidiary could have difficulties with understanding, judging, and implementing the business operations correctly; which could affect the success of the international business operations. Furthermore, cognitive structures affect the learning practices, where learning a new practice that is consistent with the local practice is easier than learning new practices that are inconsistent with the local practices (Kostova, 1999).
The perception of locals to the firm’s product is important in order to determine the choice of entry mode. Host countries with a high cognitive distance could view foreign firms with stereotyping because they are unfamiliar with outsiders (Kostova and Zaheer, 1999). This could be an unfavorable perception for outsiders such as ethnocentrism or favorable like the country-of-origin effect. In case of ethnocentrism, a local partner that does not share this ethnocentrism can reduce the anti-foreign sentiments and create respect and support of other locals (Eden and Miller, 2004). When a firm perceives advantages of the country-of-origin effect, like French wine or Swiss watches, with their product; the advantages disappear when the firm moves the production to the host country or chooses a joint venture entry mode. In such case, licensing is a more favorable equity mode because it allows the firm to avoid local production and increases local market knowledge (Eden and Miller, 2004).
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embeddedness is about “the degree to which economic transactions take place through social relationships and networks of relationships that use social and noncommercial criteria to govern business dealings” (Eden and Miller, 2004: 23). Without a local partner a firm is not connected to the right relationships and will raise the discriminatory hazards for itself (Eden and Miller, 2004). However, building trust with a local partner could also be difficult because of the already embedded other set of relationships at the local partner (Eden and Miller, 2004).
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3 Propositions
Taking it all together, a firm that wants to transfer its business operations internationally deals with the regulative, normative and cognitive pressures from the host country. In this study the different pressures are all examined separately. Each different pillar in the host country could create a high institutional distance with the home country and looking at the choice of entry mode, firms that perceive a high institutional distance tend to conform to a lower equity mode than FDI (Xu and Shenkar, 2002). A higher level of institutional distance between the host and home country requires more effort from the firm to comply with the local demands (Goerzen and Beamish, 2003). A high level of local responsiveness of the firm towards the host country is rewarded with increased legitimacy, resources and survival capabilities (Kostova and Zaheer, 1999). In host countries that are institutionally close to the home country, the transfer of business practices is easier and the firm could pursue a global integration strategy.
However, firms with a global integration strategy disapprove local adaptation and therefore conflicting pressures between the firm and the local environment rise (Kostova and Zaheer, 1999; Eden and Miller, 2004). The global integration strategy seems therefore only applicable if the institutional distance is small in the normative and cognitive dimension. The regulative dimension will not have much impact on the global strategy because the differences could easily be built in the firm’s routines (Xu and Shenkar, 2002). Firms which are not part of a different class because of their foreignness like large multinationals need to comply with different institutional pressures to increase legitimacy.
Although the three dimensions are dependent on each other, a high institutional distance in one dimension does not necessarily mean a high distance in other dimensions or a high overall institutional distance. Therefore, all three dimensions will be examined separately below. Finally, the propositions based on the literature review will be summarized and visualized in a conceptual model in figure 1.
3.1 Regulatory dimension
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firm to transfer practices only to host countries where their way of operating is legal (Xu and Shenkar, 2002). However, choosing to adopt the local responsiveness strategy to a large extent and the enforcement of quality management of the local environment could be viewed by employees as coercive, has a negative effect and puts the firm into an unfavorable position (Kostova and Roth, 2002). Although the regulatory dimension becomes more identical by developed economies (Eden and Miller, 2004), differences between regulatory dimensions still exist. The regulatory dimension could directly influence the choice of entry mode by creating barriers to FDI (Brouthers, 2002) or indirectly by a lack of intellectual property rights or missing property rights (Xu and Shenkar, 2002). In case of direct restrictions by the regulatory institutions, a local partner could legitimate the business of the firm in the host country (Brouthers, 2002). In case of indirect restrictions, a local partner is undesirable in comparing with exporting or FDI as choice of entry mode (Xu and Shenkar, 2002). This leads to the following propositions:
Proposition 1a: Firms use a local partner and thus an intermediate entry mode when they want to overcome direct regulatory restrictions in a host country with a high regulative distance.
Proposition 1b: Firms choose for exporting or FDI as entry mode when they want to circumvent indirect regulatory restrictions in the host country with a high regulative distance.
3.2 Normative dimension
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ability to build business relationships (Yiu and Makino, 2002). Furthermore, with a local partner the firm increases their legitimacy (Yiu and Makino, 2002). Therefore, the following proposition is set:
Proposition 2: Firms use a local partner and thus an intermediate entry mode when they want to overcome a high normative distance.
3.3 Cognitive dimension
The cognitive dimension covers informal constraints and explains “the way people notice, characterize and interpret stimuli from the environment” (Kostova, 1999: 314). From the global integration strategy’s perspective, host countries are only interesting when the inhabitants have no difficulty with learning new practices (Xu and Shenkar, 2002). Firms with the local responsiveness strategy adapt the business practices to the local environment with the result employees understand the practice and know how they have to interpret the practice (Kostova and Roth, 2002). In order to overcome the cognitive distance between home and host country a local partner could help in the social embeddedness and build trust, gain legitimacy and let a firm become part of the insiders-group concerning information sharing (Eden and Miller, 2004). However, finding a local partner for the intermediate entry mode could be difficult because of the social embedded relationships of the local partner (Eden and Miller, 2004). Nevertheless, the third proposition is:
Proposition 3: Firms use a local partner and thus an intermediate entry mode when they want to overcome a high cognitive distance.
3.4 The most dominant pressure
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pressures of the local norm in favor of their network and relationships. Furthermore, their results show that the state influences, the mimetic isomorphism (imitation of structures by other organizations) and historical norm have a stronger influence on the choice of entry mode than cultural distance and ethnocentrism (Yiu and Makino, 2002). State influences are positioned in the regulative pillar, mimetic isomorphism and historical norm in the cognitive pillar. Additionally, cultural distance is a combination of the normative and cognitive dimension and ethnocentrism is positioned in the cognitive pillar. Therefore, the regulative pillar has a strong influence on the choice of entry mode, the cognitive pillar a semi-strong influence and the normative pillar a weak influence. In other words, the regulative pressures are the most dominant pressures and most critical for the choice of entry mode. This is in line with Xu and Shenkar (2002), who stated that introducing the concept of regulative distance predicts when high cultural distance influences the choice of entry mode. Finally, the last proposition is:
Proposition 4: The regulative pressures are most dominant and most critical for the choice of entry mode in countries with a high institutional distance.
3.5 Conceptual model
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4 Methodology
With the propositions set, it is time to investigate the value of those propositions. Therefore the case of an employment agency in the hospitality industry will be used. The firm operates in a niche market and offers trained hospitality employees for small projects such as one-day events for hotels and caterers, for example: congresses, receptions, exhibitions, sport events, music concerts and festivals, wedding parties, staff parties or charity dinners. The firm has over 5000 employees and a turnover of €50 million a year, which positions the firm as a large multinational enterprise. It is possible to explore the possible institutional pressures on the choice of entry mode in a service industry with a case-study. The firm that will be used in this case-study has its foundation in the Netherlands in 1994 and already from establishment they exported Dutch employees to Germany and Belgium for work. Besides the growth and development of the firm within the Netherlands, the firm decided to open a subsidiary in Germany in 1999 and Belgium followed soon. Currently, the firm has 42 subsidiaries located in the Netherlands, Belgium, Germany, Austria, Spain, and Curacao. The firm has also been active in South Africa for a short term, which did not succeed and they are currently finalizing their businesses. Including South Africa, the firm has to deal with six different institutional environments that differ in their institutional distance from their home country.
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of the firm. Nevertheless, these questions about the internationalization process are asked at all founders of the firm to ascertain differences and similarities within the board.
The interviews will take place face-to-face and will be semi-structured, because “semi-structured interviews will conduct the specific data needed and allows for interaction with respondents” (Thomas, 2004 p.165). Because of the Dutch mother tongue of the respondents and the interviewer, the interviews are held in Dutch. This contributes to a better understanding of the situation in which language is not relevant. However, a limitation of this paper is the fact that the interviewer chooses the English vocabulary for the transcription of the interviews and it is very difficult to decide whether the correct words are chosen to describe the whole. The respondent has the ability to read and correct the transcription after the interview.
The findings of the Global Competitive Index will be examined below, the transcriptions of the interviews are ordered in the appendices.
4.1 Regulative, normative and cognitive distance by the Global Competitive Index
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Each host country where the firm is active in will be considered and compared with the scores of the home country: The Netherlands. The following host countries will be examined: Austria, Belgium, Germany, South Africa and Spain. The firm also has a subsidiary at Curacao, an island that is an autonomic country within the Kingdom of The Netherlands. Unfortunately no data is available in the Global Competitive Index about Curacao. Because of the close ties with The Netherlands for years, the regulative conditions of Curacao are considered to be the same as the regulative conditions in The Netherlands. Curacao is part of the Leeward Islands chain off to the Venezuelan coast and many employees in Curacao are from Venezuela. Therefore, the normative and cognitive conditions in Curacao are considered to be the same as in Venezuela and the data of Venezuela will be used for explaining the normative and cognitive conditions in Curacao. After the examination of the scores per different country, the distance per different pillar will then be calculated by the absolute difference between the home and host country. The scores are presented in Table 2, 3 and 4.
26 | P a g e Table 2: Country scores on the regulative dimension and compared with the home country
27 | P a g e Table 4: Country scores on the cognitive dimension and compared with the home country
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5 Results
This results section will explain the choice of entry mode, the internationalization path and the objective and focus of the firm first, before it will continue with the three dimensions of the institutional theory. In the end of this chapter a summary of the results takes place.
5.1 The entry mode strategy of the firm
If the firm enters a new country, the firm uses a green-field strategy; except for the internationalization to South Africa. The firm examines the direct regulations within each country and after approval of all regulative constraints the firm enters the new country. Within this new country, the firm starts small in a rental place with low costs. The head of the subsidiary has been an employee of the firm for over five years and has done all different steps down the path. This employee is from, has family linkages or has a great ambition and is full of passion of a particular country. Although the firm helps during the start-up with their overarching network, the head of the subsidiary needs to dig in the local community as soon as possible. This makes the intermediate entry mode redundant for the firm. The mission statement of the firm, ‘Making friends and creating synergy’ is deeply integrated in every aspect of the firm and this is also the main principle in a new country.
From every subsidiary, the board keeps a minimum of 51% of the shares in order to hold grip on the business practices. The head of the subsidiary is co-owner and therefore, is more willing to make it a success instead of a manager who is put in position. Furthermore, the board offers in return for a fee of 2.5% a framework with subjects that are important for the firm, the interpretation of these subjects differ per subsidiary. This implicates that 95% of the business practices have a global line and approximately 5% is open for adaptation of the local environment. Beyond dispute are the regulations, these needs to be adapted in order to do business.
5.2 The internationalization path of the firm
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businesses were conducted in the Netherlands, Germany and Belgium. The firm started with a buyout of all these mediators and therefore, directly after establishment the firm was exporting Dutch students to Germany and Belgium. Several reasons resulted in a change of entry mode in 1999: people took the initiative to start-up in Germany and Belgium, regulations forced to pay taxes and social contributions in the beneficiary country and namely through the Belgian culture, the firm realized that clients became more supportive when businesses were done by local employees.
In countries where the firm has already establishments, a ‘cell division’ theory is pursued that implicates that subsidiaries grow to a maximum of 300 employees before a new subsidiary in the neighborhood is set up. This growth strategy is examined in articles of Hosmer, Cooper and Vesper (1977) and D’Amboise and Muldowney (1988) and is explained as when an organizational mass expands, adding staff personnel bolster the crucial pressure points on the surface. Furthermore, the firm has different brands and wants to spread all the brands across the all subsidiaries.
In 2007 the firm internationalized to Austria, in 2009 to Curacao and in 2010 to South Africa and Spain. The firm internationalized to Austria because it seemed a logical step from Germany, seen from the ‘cell division’ theory. One of the founders immigrated to Curacao and saw opportunities at the island, at that moment Curacao was still part from the Netherlands. During the FIFA World Cup in Germany in 2008 important business relationships were set for the FIFA Confederations Cup in South Africa in 2009 and the FIFA World Cup in South Africa in 2010. During these events in South Africa the firm was the exclusive hospitality staff supplier for MATCH Hospitality and after the event the firm started a joint venture and worked for local hotels, caterers and restaurants. Because the firm totally misunderstood the local market, made a misconception and failed, the firm finished the business practices in South Africa. Lastly, because of serendipity a subsidiary in Barcelona in Spain is set up. One of the founders made friends with a couple with much hospitality experience that lives close to Barcelona. The firm took this opportunity and loosened for one time the requirements of being an insider of the firm. The internationalization path of the firm is summarized in figure 2.
30 | P a g e Figure 2: Timeline with the internationalization path of the firm
5.3 The objective and the focus of the firm
Human growth and personal development are most interesting for the firm and especially the trail someone is following. The aim of the firm is to touch the heart of people. The vision of the firm, ‘we turn your vision into reality’, is focused on students between the age of 18 and 28 years with a bachelor or master level of education. Those students are supervised by the Human Talent Management Team of the firm who encourage the personal growth of the students within the firm. The students could develop to project manager, office manager, head of a subsidiary and doing national coordinated businesses. When those employees turn into their thirties, they settle down and leave or they choose to start up a subsidiary in a new city or country. The initiative is at the employee itself.
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The firm learned by doing that supervision outside Europe was too difficult because of travel distance, time zones and different languages. Nowadays the subsidiary at Curacao is under full responsibility of the concerning founder and the subsidiary is allowed to use the framework and the online platform in return for the fee. This seems a franchise strategy; however, the entrepreneur needs to come from inside the firm. If employees of the firm will start outside Europe in the near future, it is their full responsibility, but they need to pay a fee to the firm. Because of the large normative and cognitive distance, it is necessary to reinvent the formula of the firm in order to apply it to the local culture and therefore, those (former) employees need to be real entrepreneurs instead of solely managers.
Within Europe, the firm wants to keep the majority of the shares of a subsidiary. With the relatively small normative and cognitive distance between the countries, the firm is able to set out a global line and culture only haves limited influence on the business practices. This influence is easy to overcome and therefore, the local culture is not an issue; only the investment climate.
5.4 The level of influence of the regulative dimension on the choice of entry mode 5.4.1 Proposition 1a
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The government wants to prevent companies from undeclared working. This makes the government the biggest disturbing factor for the firm. The payment for students who are working a part-time job differs per country. For example in Belgium, one country that is considered as a high regulative country in comparing with the Netherlands, students have a fixed salary and the age does not matter, but there exists a maximum on working hours. They are only allowed to work twice 23 days or their parents will lose the child allowances. Therefore, a higher request of employees for the same turnover as elsewhere is needed. These employees come from the Netherlands; they need a one-day contract in Belgium with a Belgian insurance number before they are allowed to start working. The firm started cooperation with an ICT company for a software to arrange this administration all automatically throughout the whole company.
All the above mentioned regulations make the business practices more difficult, but do not influence the current choice of entry mode. They influenced the choice of entry mode in the early years of the firm, when the firm was solely active in Belgium and Germany. The firm decided to change from exporting to the green-field strategy because the regulative institutions forced the firm to pay their taxes in the beneficiary countries instead of in the Netherlands and to work with local people.
Recently, the choice of entry mode is influenced only once by regulations of South Africa. The regulatory environment of South Africa could be considered as hostile, because firms are only allowed to start a business when the Black Empowerment Law is respected. This implies that a minimum of 50% of the firm has to be in hands of ‘black people’, citizens or permanent residents. Therefore, the firm started with the joint venture strategy in South Africa.
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5.4.2 Proposition 1b
Proposition 1b: ‘Firms choose for exporting or FDI as mode of entry when they want to circumvent indirect regulatory restrictions in the host country with a high regulative distance’, is not supported. The choice of entry mode has never been dependent on the indirect regulatory restrictions of a host country.
Protection of the intellectual property is still a major issue for the firm; this is why the development of the framework is set. A gap in the employment contract resulted that a former employee started with an eponymous firm in Hamburg in Germany before the firm was active in Hamburg itself. In present the firm is located in the same street just on the other side of the eponymous firm. There is nothing to do with it, the firm could only strike hard and be irritating.
In Curacao, the former manager of the subsidiary is now the main competitor of the firm. She used her gained knowledge together with her local knowledge to start an employment agency specialized in the hospitality industry by herself. For the firm it is much harder to compete with her, namely because the current manager is an ‘outsider’ for the island and the former manager is a local and completely socially embedded in the society.
The firm defines itself as a ‘training center’ and helps people with their personal development and growth. Using the acquired knowledge such as what happened in Germany and Curacao is not illegal, but it are examples how the objective of the firm could also work against the firm.
5.5 The level of influence of the normative dimension on the choice of entry mode
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could wear sneakers instead of loafers or bootees, do not have shoeshine and wear blouses that are shining through and have spots in their collar. At home there is no washing machine or computer, which turns out that the firm needs to adapt the business practices. Every day at every project a presence control and clothing check is needed to make certain all quality values of the firm are exercised. In fact, it is normal to help out your family during work. The hotel manager could be a relative of an employee and he will not tell when the employees arrive late or when the work carried out was bad. Besides, it is common for employees to call a family member who needs work and let him work instead of start working together at the same job. The aim of work of employees in Curacao is to contribute to the payment of the primary living costs of the family. Hence, they do not have a drink after work together from the just-earned money, neither because there is no public transport at night.
In South Africa, a normative pressure that was raised is the fact that business are not willing to pay for waiters. The result of paying less is the fact that employees are coming late or do not even show up, have no or limited experience and thus, double of the employees are acquired. The firm had tried to fill that gap, but businesses are not willing to pay for guarantees as quality and punctuality, and labor is worth nothing. Besides, it is normal that the employer provides food twice a day for employees. Work is a safe haven in comparing with their homes, where violence and crime are just outside their front door. At work it is warmer, dryer and healthier than back home. Employees are willing to take jobs with a travel time that is longer than the actual working time, just for these values. The firm normally organizes the transport, but in South Africa the employees need to live close to the work location or have to be able to travel with the transport of the business client. These adaptions are made in respect to the firm’s values responsibility and punctuality.
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Overall, the challenges accompanied with the presence in Curacao and South Africa has required a lot of effort. The firm paid a lot of dues to understand these differences. Even though the Global Competitive Index noticed Spain as a country with a high normative distance, according to the firm this distance is limited. It seems that the firm makes decisions in Spain with the same ease as in other European countries which are perceived as normatively close in comparing with the Netherlands. The normative distance of Curacao and South Africa has influenced the firm to such an extent that the firm changed their focus from a ‘global mind’ to ‘Europe’. Employees who want to start outside Europe are allowed to use the framework and the online platform in return for a fee, but are responsible for the entire operation and will have all shares of the subsidiary. This implicates an adapted franchise strategy in which the local partner needs to come from inside the firm. In conclusion, because of the fact that the franchise strategy is a type of an intermediate entry mode, the second proposition: ‘Firms use a local partner and thus an intermediate entry mode when they want to overcome a high normative distance’, is supported for countries outside Europe, but not supported for countries with a high normative distance within Europe like Spain.
5.6 The level of influence of the cognitive dimension on the choice of entry mode
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has to explain everything. The locals who have the intention to move to Europe definitely became more open to the western norms and values.
In South Africa, the employees are willing and eager to learn, although the business practices are completely different than they are used to. Every possibility to work for western firms increases their chances on the employment market. South Africa deals with the problem that the feeling of apartheid is still alive. It is hard to deal with the social injustices in the society for the firm. Emphasizing the European descent results in emphasizing the apartheid and the firm will lose its self-esteem.
On the contrary, the Dutch nationality works in the firm’s favor in Spain. At the moment, the firm is only active in Catalonia that is seen as distinctive from Spain. It is the duty of the head of the subsidiary to treat and manage the different regions like one country. The service the firm brought into the country is unusual and the firm really feels they are pioneering, that is also in favor of the firm.
The nationalistic tendencies are perceptive in all countries the firm is active in. The Dutch way of doing business is seen as attractive, open, direct and humorous. But often too greedy could be added to this list. The firm is set down as an international company instead when the Dutch nationality could work in their favor. However, emphasizing the Dutch nationality could also limit the local entrepreneurship and makes it more difficult to integrate in the local society. Namely quick integration in the local community is very important for the firm, because network is most important for business deals. The mission statement ‘Making friends and creating synergy’ is only achievable when the firm is able to shift to the other’s point of view. Start thinking from the local culture and communicate with local in their own language. Communicating in the local’s language could be very difficult; for example the biggest difference between Belgian and Dutch people is the interpretation of words and the use of sayings that are explained differently in both countries.
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views Spain from the same perspective as other European countries with a small cognitive distance with the Netherlands. Therefore, Spain is not taken into consideration. Curacao is set up such as every other subsidiary, the co-owner invested in the shares and the same for the board of the firm. Because the firm noticed that the business practices were affected by the actual distance, close coaching is far more difficult because of logistic problems, the focus of the firm changed to Europe. The actual departure of the co-owner in Curacao resulted in a redistribution of the shares in Curacao. The founder of the subsidiary owns all shares nowadays and he has hired a Dutch woman from Antillean descent for managing the business. The founder pays a fee to the firm for using the framework and the online platform, and the board has no involvement any more in the daily business practices. In other words, a modified version of the franchise strategy is nowadays applied in Curacao. Therefore, the third proposition: ‘Firms use a local partner and thus an intermediate entry mode when they want to overcome a high cognitive distance’, is supported for countries outside Europe, but not supported for countries with a high cognitive distance within Europe like Spain.
5.7 The most dominant pressure
Internationalizing overseas is connected with large normative and cognitive distances in comparing with the Netherlands. The firm has set their business values to the western norms and values and these business values are easily understood by employees from European countries. These business values were very different for employees in Curacao and South Africa, where everything need to be explained precisely. The norms, values and habits in daily life are completely different and managers of the subsidiary need to understand and learn the best method for managing the daily operations at the office. Furthermore, the social injustices are larger in Curacao and South Africa and it is more difficult to understand how to handle those situations for managers of the firm. In those situations the decisions need to be arbitrated with pros and cons. The logistic problems made it more difficult for the board to supervise and coach the managers.
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outside Europe in the near future, the same strategy as in Curacao will be applied. This is a modified franchise strategy; the entrepreneur should come from within the firm and pays a fee to use the framework and the online platform of the firm. This implicates that a high institutional distance does affect the entry strategy of the firm, because the firm changes their strategy to the intermediate mode of entry for countries outside Europe. Therefore, after experiencing the influence of the normative and cognitive pressures derived from countries with a high institutional distance, the firm has chosen to change their entry strategy. However, the regulative pressures already influenced the entry strategy of the firm before the firm actually started in a country, using South Africa as example. In conclusion, the fourth proposition: ‘The regulative pressures are most dominant and most critical for the choice of entry mode in countries with a high institutional distance’, is supported for countries outside Europe.
Within Europe, the firm wants to stay close to its business practices and keep using the green-field strategy. This strategy is applied to institutionally close countries and to countries with a higher institutional distance like Spain. European subsidiaries are able to apply up to 95% of the business practices which are set by the board. The remaining percentage is mainly for complying with the local regulative pressures and a small percentage is for the local routines. Therefore, in Europe these regulative pressures are most dominant in comparing with the normative and cognitive pressures. Nevertheless, these pressures will have no influence on the choice of entry mode within Europe. To summarize, the fourth proposition: ‘The regulative pressures are most dominant and most critical for the choice of entry mode in countries with a high institutional distance’, is not supported because within Europe the choice of entry mode is not affected; only the level of adaptation to the local business practices.
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6 Discussion
This discussion section will cover two aspects that emerged in this paper. Firstly, the firm uses two different entry mode strategies: a green-field strategy and a modified version of the franchise strategy. From the view of the institutional theory this is because overseas the institutional distance is large and the environment uncertain, that makes an intermediate entry mode appropriate. Within Europe the countries are institutionally close, therefore the differences are easy to overcome and FDI such as green-field is most appropriate. Nevertheless, the reason why subsidiaries within Europe pay a fee is unclear and will be examined. Secondly, according to the literature the institutional distance with Spain is large concerning all three dimensions. This would implicate that the institutional environment of Spain is uncertain and the firm has difficulty with gaining legitimacy. However, the firm seems not affected by this large institutional distance of Spain.
6.1 The entry mode strategy of the firm in institutionally close countries
The institutional theory explains that countries with high institutional distance tend to get entered with an intermediate entry mode and FDI is used for institutionally close countries. This is similar to the firm’s strategy. The only modification is that the entrepreneur that wants to start in a new country needs to come from the firm. This is related to the objective of the firm, human growth and personal development.
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needs to pay a fee for using a framework that is required for daily business operations. Therefore, the firm is using two entry mode strategies, also the modified franchise strategy.
This occurrence is not a transition phase; the green-field strategy is in favor because of the board’s supervision and the close commitment with the subsidiaries. The board takes responsibility for the largest part of the investment, because the financial investment for a complete subsidiary is barely feasible for the co-owner and would slow down the internationalization process. Furthermore, the change from ownership structure is accompanied with financial consequences and bureaucracy.
The reason for this fee is to generate a more equal distribution of the costs. Before this fee, the headquarters situated in the Netherlands facilitated the brand, the ICT, the Human Talent Management team and the network relations. Other countries mainly benefited from these facilities. With a small contribution of all subsidiaries the costs of the framework and online platform are equally divided. Therefore, the firm does not consider a franchise strategy at all and also outside Europe the firm insists on equal distribution of the costs.
6.2 The institutional distance with Spain
Within the European Commission Spain is ranked as one of the lowest European countries in terms of entrepreneurial climate and activity rates (De la Vega García-Pastor, Coduras, Cruz, Justo and González, 2009, 2010). Gómez-Haro, Aragón-Correa and Cordón-Pozo (2011) explain this situation with three factors:
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The firm brought something new to the country, a service that was unknown so far and the firm felt they were pioneers. The firm is innovative for Spanish terms. The business values of the firm that are connected to the high standards of western countries have a great influence in a country that is less prestigious in daily life. The firm brought proactivity and innovativeness to a country that is weak in these factors itself.
Therefore, the current bad economic climate in Spain is not bad at all for the firm. The normative and cognitive pressures of the country have received a minor role, because the bad economic climate enforces the employees and the business clients to adapt to the normative standards set by the firm in order to stay in business. The firm does comply with the regulative pressures in Spain in order to gain legitimacy, but a change of entry mode is not an issue. The balance of power in the country is disturbed and the locals are dependent stable companies like the firm in order to rebuild the economy.
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7 Conclusion
In this chapter the main research question of the paper is answered, followed with the limitations of the study and further research possibilities.
7.1 The main research question
The aim of this paper was to contribute to the academic literature with examining how a firm selects an entry mode, considering the elements from the institutional theory. The extent of influence of the institutional theory on the entry mode strategy is estimated by taking the internationalization process of the firm over time into consideration. This study had an interpretive approach and was aimed at understanding of the context, in which the different concepts influences and are influenced by each other. The main research question that was set was:
“How does the institutional environment influence the entry mode selection of a firm over time?” This research question was divided into three sub questions, that each covered one part of the institutional theory. Furthermore, the interrelation between the three pillars of the theory is examined. First of all, the regulative dimension has a direct effect on the local business practices of the firm. Before internationalizing to a new market, the firm wants to comply with all regulative pressures. These regulative pressures are examined from the green-field strategy and because these pressures are easy to observe, they are relatively easy to overcome. The choice of entry mode stays mainly untouched. The firm only once complied with regulative pressures in South Africa and changed their entry mode to a joint venture. However, the firm is less willing to comply again.
Secondly, the normative dimension has a direct effect on the local business operations of high distance countries. At the workplace, the value system of the firm is pursued that show a quality international clients prefer. At the daily business operations, the firm needs to adapt to the local environment that is dissimilar of the European market.
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normative and cognitive effects on the local business operations made the firm change their internationalization focus to institutionally close countries. Europe is considered as institutionally close and could be entered with FDI; everything outside Europe is considered as countries with a high institutional distance and could be entered with the franchising strategy. No distinction is made between the institutionally distances within Europe.
The interrelations of these dimensions show that the regulative pressures are most easy to observe, before actually entering the new market it is already clear which formal constraints need to be complied with in order to gain legitimacy. The cognitive pressures become clear when the firm is actually active in the new market. Mimetic isomorphism could be a possibility to overcome the high cognitive distance. The normative dimension is most difficult to observe. The normative differences could involve more difficulties than expected in the decisive phase. These differences become evident after a longer period of activity in the new country.
Overall, institutional environment definitely influenced the choice of entry mode over time. In the beginning, the firm is complied with inter alia regulative pressures to change from exporting to a green-field strategy. The firm started in South Africa by using a joint venture strategy because of the Black Empowerment Law. The normative and cognitive pressures in Curacao and South Africa made the firm reconsider their focus from ‘global mind’ to ‘Europe’. The firm changed the internationalization focus to Europe; a continent which they consider only consists of institutionally close countries with normative and cognitive differences that are easy to overcome. In these institutionally close countries, the institutional theory as only limited effect on the business practices and the firm could stay with its green-field strategy. For high distance countries, everything outside Europe, the entrepreneur from within the firm should take the initiative and is responsible for the whole investment and success of the subsidiary. The firm wants a fee for the use of its framework and online platform in return. This is a variation of the franchise strategy. Thus, over time the firm has changed their internationalization focus to secure the current choice of entry mode as a consequence of the experiences with countries with a high institutional distance.
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If this paper could contain only one message, this would be the mission statement of the firm from the case study: ‘Making friends and creating synergy’. Having a local network and social embeddedness are key to success.
7.2 Limitations
The main limitation of this thesis is the use of a single case-study instead of multiple cases. With multiple cases the propositions are more deeply grounded in varied empirical evidence, that makes the theory more consistent, and robust (Eisenhardt and Graebner, 2007). Besides, the theory from multiple cases is more generalizable and testable because the constructs and relationships are better specified (Eisenhardt and Graebner, 2007).
Secondly, the informants for the data are all from the same hierarchical level and functional area. Interviews with informants from different levels and geographical markets would have viewed the phenomena from diverse insights.
Thirdly, the interviews are flavored with the interests and opinions of the interviewer. Semi-structured interviews are organized in terms of the issues that are discussed, but the follow-up questions are depending on the opinion of the interviewer. To avoid the misunderstanding and misinterpretations of words the interviews are held in Dutch, the mother tongue of the respondents and the interviewer. In order to increase the reliability all interviews are recorded. However, the transcriptions are written in English and the translation is completely dependent on the interviewer. The transcriptions are sent to the respondents for approval before the transcriptions were implemented.
7.3 Possible further research
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