Master thesis
The effect of corruption distance and international
experience on multinational companies’ entry mode choices:
Evidence in India
Student name: Mengyao Zhao Student number: S3449912 Supervisor: Dr. Jiyoung Shin Co-assessor: Dr. Sarah Castaldi
Word count: 9,621
17th of June, 2019
MSc International Business & Management 2018-2019 University of Groningen
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Abstract
Inspired by previous literatures on the impact of corruption on multinational companies’ strategic decisions with respect to entry strategies, this paper explores the relationship between corruption distance and entry mode choices between wholly owned subsidiaries and joint ventures made by multinational companies entering India. Also, this paper investigates the moderating role of international experience in this relationship. By using data of 603 companies from 42 different countries and regions which were incorporated in India from 2013 to 2017, the empirical evidences show that greater corruption distance would lead to greater probability that multinational companies choose to enter Indian market via wholly owned subsidiaries rather than joint ventures, and that there is no significant interactive effects of corruption distance and international experience on multinational companies’ entry mode choices.
Keywords: corruption distance, entry mode choice, wholly owned subsidiary, joint venture,
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Table of contents
1. Introduction ... 5
2. Literature review and hypotheses ... 7
2.1 Corruption distance and entry mode choice ... 7
2.2 International experience ...11
3.Methodology ...15
3.1 Data and sample ...15
3.2 Dependent variable: Entry mode choice ...16
3.3 Independent variable: Corruption distance ...16
3.4 Moderating variable: International experience ...17
3.5 Control variables ...17
4. Data and results ...20
4.1 Descriptive statistics ...20
4.2 Model specification ...22
4.3 Research findings ...23
5. Discussion and conclusion ...28
5.1 Discussion ...28
5.2 Theoretical contribution ...31
5.3 Managerial implication ...31
5.4 Limitations and further research ...32
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List of graphs and tables Graphs:
Graph 2.1 Conceptual model 15
Tables: Table 3.1 Variables and measurement 19
Table 4.1 Home countries of sampling multinational companies 21
Table 4.2 Composition of multinational companies’ entry mode choices 21
Table 4.3 Composition of industrial characteristics of multinational companies 21
Table 4.4 Descriptive statistics and correlations matrix 26
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1. Introduction
When multinational companies decide to expand their operation beyond their national borders, they have different preferences for entry modes. The strategic decision on which mode a company choose to enter the foreign markets is the first and important step that influences the formulation of post-entry business strategies (Johnson & Tellis, 2008) and determines the success of the overseas business (Di Guardo, Marrocu, & Paci, 2016). The ownership position in the foreign affiliate determines the returns and costs of the investment, and it would cost a considerable amount of time and money if companies want to change their initial choices of entry modes (Luo, 2001b). As a result, entry mode selection should be a critical strategic decision with much deliberation. As the most popular entry modes that are investigated extensively in international business field (Morschett, Schramm-Klein, & Swoboda, 2010), joint venture and wholly owned subsidiary are chosen as the principal entry strategies to be researched in this paper.
6 This paper intends to check the extent to which multinational companies’ entry mode choices are influenced by the corruption distance between the home country and host country, and to examine how the impact of international experience moderates such relationship. The term of corruption distance was first studied by Habib and Zurawicki (2002) who found that the host-country corruption level and corruption distance show negative impacts on foreign direct investment. And the first empirical study applying corruption distance on entry mode was implemented by Tekin-Koru (2006). Besides, although the number of empirical studies on corruption distance and its effects is limited, some literatures show mixed findings. For instance, Duanmu (2011) found that multinational companies are more likely to choose wholly owned subsidiaries rather than joint ventures when they enter into Chinese market with increasing corruption distance, while the study of Karhunen and Ledyaeva (2012) shows that multinational companies are more likely to choose shared ownership strategy when they enter into Russia as corruption distance increases. Because of the inconsistent results, there is still a research gap for further empirical research. Additionally, multinational companies’ international experience is often taken as control variable in most previous studies on the impact of corruption on entry mode choice, because it as a company-specific advantage can influence companies’ entry strategies (e.g. Asiedu & Esfahani, 2001; Tekin-Kory, 2006; Uhlenbruck et al., 2006), leading to the lack of further research of the interactive impacts of corruption and international experience on multinational companies’ entry mode choices. Therefore, the moderating role that multinational companies’ international experience plays in the relationship between corruption distance and entry mode choices was explored in this paper.
7 can develop beneficial knowledge and capabilities from their prior experience in international business and thus influences their entry mode choices (Luo, 2001b; Tekin-Kory, 2006). The author argues that multinational companies would become adept at handling the collaboration with local partners through the process where they collect international experience. Also, they could develop corruption-related knowledge and capabilities from previous international experience, and thus they are able to cope with corrupt practice and corrupt officials even without the help of local partners. Besides, this paper contributes to the existing empirical studies by examining the effects of corruption distance on multinational companies’ entry strategy in India. With the increasing popularity of foreign direct investment over the past few years, multinational companies pay more attention to emerging markets (Doh, Rodriguez, Uhlenbruck, Collins, & Eden, 2003), whose relatively weak institutional framework is an hotbed for corruption. Studies by Tekin-Toru (2006), Duanmu (2011) and Karhunen and Ledyaeva (2012) have explored the multinational company’ strategic responses to corruption distance in terms of entry mode choice in Turkey, China and Russia respectively; however, Indian market as an important member of emerging markets has not been empirically tested. By exploring the entry mode choices made by 603 multinational companies entering Indian market between 2013 and 2017, this paper intends to enrich empirical research on the relationship between corruption distance and entry strategy of multinational companies.
The remaining of this paper is organized as follows: In the next section, the author will review the existing literatures on corruption and its relationship with multinational companies’ entry strategies, where hypotheses will be stated as well. Methodological considerations including data collection and variable measurements are covered in section three, and the model specification and the results of the empirical analysis are presented in section four. In the last part, a conclusions of the findings, limitations, and implications for future research will be presented.
2. Literature review and hypotheses
2.1 Corruption distance and entry mode choice
8 formal institutions, while informal institutions consist of rules representing norms and values (Karhunen & Ledyaeva, 2012). As a part of informal institutions, corruption shapes the institutional environment (Spencer & Gomez, 2011). When corruption is prevalent in the host countries, it can be considered as institutionalized and becomes an institutional factor that multinational companies have to consider when they develop business strategies (Gabbioneta, Greenwood, Mazzola, & Minoja, 2013). Corruption is often believed to be a hindrance, because it would undermine the efficiency of the markets where it is embedded (Sartor & Beamish, 2018) and would impede the economic growth of countries by attracting less foreign direct investments (Wei, 1999). As companies are embedded in the environment where they operate the business, the host-country institutional environment tends to influence multinational companies to be consistent with host-country institutional preferences (Meyer & Rowan, 1977). Corruption as an institutional feature also tends to shape companies’ behavior, such as the entry strategies to foreign markets which were addressed in this paper.
9 Carvalho and Reis (2018) employed unique data of Spanish and Portuguese multinational companies. The results revealed that a higher corruption distance results in greater ownership that multinational companies will seek in local subsidiaries. In sum, there are conflicts among the results of empirical studies, which could be explained in a way that multinational companies would weigh the pros and cons of entry modes before they make decisions in accordance with transaction cost theory (Henisz, 2000; Karhunen & Ledyaeva, 2012; Kuo, Ka, Chang, & Chiu, 2012). Entry mode choice can be regarded as multinational companies’ strategic responses under institutional condition. According to transaction cost theory, decisions regarding entry strategy can be considered to be a trade-off made based on the costs and gains provided by the entry modes. Generally, multinational companies would judge between the gains of seeking local partners and the costs of collaborating with them (Henisz, 2000; Karhunen & Ledyaeva, 2012; Kuo et al., 2012). Specifically, when multinational companies believe that the benefits of establishing partnership with local organizations to overcome the difficulty in institutional system outweigh the risks incurred from such partnership such as opportunistic behavior, they would favor joint ventures rather than wholly owned subsidiaries, and vice versa.
10 knowledge regarding the environment where they operate business such as the knowledge of the economy, politics, culture, and market, which effectively reduce the liability of foreignness and uncertainties caused by unfamiliar market and thus boost the post-entry performance (Makino & Delios, 1996). However, the need for knowledge can vary among multinational companies from different country, because multinational companies’ responses to host-country corruption vary based on their home-country corruption (Godinez & Liu, 2015), and the degrees of uncertainty they perceived also vary based on their home-country environment (Cuervo-Cazurra, 2006). As a result, the need for a local partner could also vary among multinational companies. It is found that the need for knowledge about informal institution increases with corruption distance rising, thus raising the need for establishing collaboration with local organizations (Estrin et al., 2009). Moreover, a local partner can provide companies with accesses to resources such as alliance partner and business network (Chung & Luo, 2013; Karhunen & Ledyaeva, 2012), by which companies are expected to develop competitive advantages (Meyer & Peng, 2005). Companies can also share the managerial burden to their partners in order to gain the reduction in operation costs (Brouthers & Brouthers, 2001). In the context of India, the inefficient government bureaucracy and the popular “bribery culture” cause obstacles for foreign investors. To start a business in India, investors have to go through a set of procedures in which bribery is common and network with corrupt officials is important. For those multinational companies from the countries whose corrupt practices are quite dissimilar with those of India, partnership with local organizations makes it possible to get a handle on corruption-related issues in India effectively and efficiently. Thus, the following hypothesis is developed:
Hypothesis 1a: The greater corruption distance existing between the home country and India, the more likely that multinational companies will choose joint ventures to enter Indian market.
11 country (Karhunen & Ledyaeva, 2012). Moreover, the process of seeking, negotiating and monitoring the actions of local partners would cause much costs (Brouthers, 2002). As a result, taking the risks and costs of having a local partner into consideration, wholly owned subsidiary would be more preferable in this case. Entering via wholly owned subsidiaries can reduce the risks and costs caused by joint ventures (Di Guardo et al., 2016). Thus, even the benefits from the local partners are attractive, foreign investors are still likely to choose to operate alone to avoid risks and costs. Besides, if multinational companies wish to successfully compete with local companies that have superior local knowledge and to develop sustainable competitive advantages, they need to transfer their company-specific resources and organizational capabilities effectively to their foreign affiliates (Zaheer, 1995; Kostova & Roth, 2002), which can be achieved by exerting control over the way business operation is conducted (Di Guardo et al., 2016). However, as institutional distance increase, the difficulty in communication and knowledge-transfer between parent companies and foreign affiliates would also increase (Kostovo & Roth, 2002). To ensure the effectiveness of communication and knowledge-transfer, wholly owned subsidiary performs better than joint venture does by having more control over the foreign affiliates (Gaur & Lu, 2007; Karhunen & Ledyaeva, 2012). Wholly owned subsidiary could make it possible for multinational companies to take full advantage of competitive advantages developed by idiosyncratic firm-characteristics which are embedded in the routines and practices of companies (Xu & Shenkar, 2002). As far as the multinational companies entering India are concerned, those companies might be from much less corrupt countries (i.e. the corruption distance between the home country and India is quite high). They would face relatively greater pressure to avoid corruption in their international business compared to those companies from countries that are closer to India with respect to corruption. As a result, they might think full-control mode is more preferable. This results in the following hypothesis which is contrary to hypothesis 1a:
Hypothesis 1b: The greater corruption distance existing between the home country and India, the more likely that multinational companies will choose wholly owned subsidiary to enter Indian market.
12 Not only individuals can learn throughout their stages of life, companies also go through a learning process throughout their life cycle which is identified as organizational learning by Huber (1991). Just as human being can take advantage of the experience accumulated in their past lives, companies are also able to gather knowledge through prior business operations during the “knowledge acquisition” stage of organizational learning process, which is also known as experiential learning (Huber, 1991). According to experience learning theory, experiential learning is elaborated as “the process whereby knowledge is created through the transformation of experience” (Kolb, 1984). Besides, Matsuo, Wong and Lai (2008) also state that organizations can acquire knowledge and skills from their prior experience. In a word, previous experience can be regarded as a crucial source of knowledge and skills which would be beneficial for the companies’ business management.
13 internationalization knowledge to and apply them in different markets (Blomstermo, Erikssona, Lindstrandb, & Sharma, 2004), which can effectively fill the knowledge gap.
Multinational companies can accumulate international experience by expanding international investment activities (Delios & Beamish, 2002), and international experience represents knowledge that can be transferred into organizational capability to handle international business activities (Luo, 2001b). Ambos, Ambos and Schlegelmilch (2006) also found that companies can collect and use knowledge from their existing foreign dispersed affiliates, and the knowledge transferred from those foreign affiliates becomes a crucial resource which accelerates the development of new and useful ideas (ul Haq, Drogendijk, & Holm, 2017). Besides, Chang (1995) states that experienced companies would have a better understanding of the foreign compared to those inexperienced ones. Also, with the knowledge gathered from prior experience, companies’ capability to deal with liability of foreignness is strengthened, and companies are able to perceive less uncertainty in the foreign market (Chang, 1995). In brief, as international experience is collected and internationalization knowledge is built up, multinational companies are expected to be able to develop the capability to cope with foreign business.
14 to seek local partners. According to the study implemented by Shetty (1979), multinational companies based in Europe are found to show less fear to collaborate with local organizations and are more likely to enter into joint ventures compared to American companies, because they seems more skilled in dealing with local partners. With international experience growing, multinational companies could be considered to gather an increasingly considerable amount of information and knowledge about international markets. Experienced companies are able to get a better understanding about local environment (Chang, 1995), which provides them a chance to get closer to local companies and government and also help them to establish good and even trustworthy relationship with local organizations. Thus, companies would have a keener sense of the benefits of having a local partner with reduced worries about the risks and costs such as the potential opportunistic behavior of partners. Therefore, the author assumes that as multinational companies expand their business overseas, they are able to acquire experience of collaboration with local organizations in different foreign markets, and then they develop the knowledge and capability to reduce the potential costs and risks in international joint ventures. Hence, the following hypothesis is formulated based on hypothesis 1a:
Hypothesis 2a: As international experience increases, multinational companies are more likely to
enter Indian market via joint venture with rising corruption distance.
15 multinational companies have such capability, they are able to reduce the costs caused by the liability of foreignness and perceive less uncertainty about the host country by themselves, which are the benefits that a local partner can bring about (Di Guardo et al., 2016). As a result, the benefits of having a local partner may become less attractive and multinational companies might turn to paying more attention to potential costs and risks caused by this partnership. Additionally, based on the idea that multinational companies make decision regarding entry strategies by weighting the pros and cons of having a local partner, companies would be more likely to choose to operate alone when they realize that the benefits from the collaboration with local organizations cannot overweigh the costs and risks. Therefore, I formulate the following hypothesis on the basis of Hypothesis 1b:
Hypothesis 2b: As international experience increases, multinational companies are more likely to enter Indian market via wholly owned subsidiaries with rising corruption distance.
Graph 2.1 below depicts the proposed effects.
Graph 2.1-Conceptual model
Source: The author
3.Methodology 3.1 Data and sample
Corruption
Distance
International
Experience
Entry Mode Choice
Joint ventureWholly owned subsidiary
H1b H1a
16 The collection of data began with an initial sample of 857 companies that had foreign ownership and were incorporated in India over 5-year period from 2013 to 2017. The multinational company list was obtained from Orbis database. Orbis contains financial and non-financial profiles of over 120 million listed and unlisted private companies. This sample comprises companies that are wholly owned by one multinational company and joint ventures between one multinational company and local organizations in India. For further data filtration, this study excluded the companies whose parent companies were from countries that were not listed in Corruption Perception Index because of the inaccessibility of main explanatory variable of interest (i.e. corruption distance). Furthermore, the companies with a foreign ownership of less than 10% are excluded based on the definition of joint ventures by Hennart (1991). Accordingly, the final sample contains 603 companies from 42 countries and regions over the world.
3.2 Dependent variable: Entry mode choice
Entry mode choice is measured by the ownership level of the subsidiaries located in India held by the multinational companies, which is drawn from Orbis database. Following Hennart (1991), the entry modes are defined as wholly owned subsidiary if the multinational companies hold 95% or more of the subsidiary’s shares and are defined as joint venture if the multinational companies own more than 10% but less than 95%. In order to test how multinational companies’ entry strategies respond to corruption distance, a binary dependent variable is utilized which is equal to 1 if companies choose wholly owned subsidiaries to enter India and is equal to 0 if companies choose joint ventures.
3.3 Independent variable: Corruption distance
17 Following formula is used to calculate corruption distance:
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑑𝑑𝐶𝐶𝑑𝑑𝐶𝐶𝑑𝑑𝐶𝐶𝑑𝑑𝑑𝑑𝑗𝑗𝑗𝑗 = |𝐶𝐶𝐶𝐶𝐶𝐶𝑗𝑗 − 𝐶𝐶𝐶𝐶𝐶𝐶𝑗𝑗|
where 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑑𝑑𝐶𝐶𝑑𝑑𝐶𝐶𝑑𝑑𝐶𝐶𝑑𝑑𝑑𝑑𝑗𝑗𝑗𝑗 is the absolute value of corruption distance between the jth home country and India, 𝐶𝐶𝐶𝐶𝐶𝐶𝑗𝑗 represents the perceived corruption level of the jth home country, and 𝐶𝐶𝐶𝐶𝐶𝐶𝑗𝑗 indicates the perceived corruption level of India.
3.4 Moderating variable: International experience
Multinational companies can accumulate international experience by expanding international investment activities (Delios & Beamish, 2002). Thus, following Delios and Beamish (2002), the moderator is assessed as the total amount of multinational companies’ overseas investments in which the company is involved either as a majority or minority equity partner, which is obtained from Orbis database.
3.5 Control variables
On the basis of previous empirical researches that study the influences of corruption distance on multinational companies’ entry mode choices, a set of control explanatory variables were selected as follows:
18 of cultural dimensions is from the studies of Schwartz (2006), and the cultural distance between the home country and India is calculated following Kogut and Singh (1988) composite formula as below:
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑑𝑑𝐶𝐶 𝑑𝑑𝐶𝐶𝑑𝑑𝐶𝐶𝑑𝑑𝐶𝐶𝑑𝑑𝑑𝑑𝑗𝑗 = � [�𝐶𝐶𝑖𝑖𝑗𝑗 − 𝐶𝐶𝑖𝑖𝑗𝑗�2/𝑉𝑉𝑖𝑖 7
𝑖𝑖=1 ]/7
in which 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑑𝑑𝐶𝐶 𝑑𝑑𝐶𝐶𝑑𝑑𝐶𝐶𝑑𝑑𝐶𝐶𝑑𝑑𝑑𝑑𝑗𝑗 is the national cultural distance between the jth home country and India, 𝐶𝐶𝑖𝑖𝑗𝑗 indicates the ith cultural dimension of the jth home country, 𝐶𝐶𝑖𝑖𝑗𝑗 indicates the ith cultural dimension of India where I indicates India, and 𝑉𝑉𝑖𝑖 represents the variance of all sampling countries’ scores in the study of Schwartz (2006) on the ith cultural dimension.
Moreover, the industry-specific factor is also taken into account. Because it is hard for foreign companies to acquire natural resources that are often controlled by local companies, resource-intensive industries provide a relatively unfriendly environment for foreign investors and tend to allow high participation for local organizations (Chen & Hennart, 2002). According to Demirbag, Glaister and Tatoglu (2007), resource-intensive industries include agriculture, forestry, farming, agricultural processing, mining, oil and natural gas, wood, paper, rubber and tires, black metal processing and metal processing, non-mineral mineral manufacturing, indigenous craft products, and recycling and waste management, etc. Industrial information is drawn from Orbis database. Dummy values are used to identify whether the companies belong to resource-intensive industries: 1 indicates that companies are in resource-intensive industries and 0 otherwise.
Furthermore, apart from the country- and industry-level factors, the company-specific characteristics such as parent company size also turn out to be a necessary determinant in entry strategies. Companies that are larger are supposed to have ample resources or skills to expand their operation into a great number of overseas markets compared to smaller ones (Agarwal & Ramaswami, 1992), and lager companies typically prefer full control entry modes (Sanchez-Peinado, Pla-Barber, & Héber, 2007). Parent company size is measured by the of total amount of employee of parent company (Freeman, Carroll, & Hannan, 1983), which is taken from Orbis database.
19 Table 3.1 Variables and measurement
Variables Description Data source
Dependent variable Entry mode choice
Dummy variable: 1-Wholly owned subsidiary; 0-Joint
venture Orbis Database
Independent variable Corruption distance
The absolute value of the CPI score difference between
the home country and India Corruption Perception Index Moderating variable
International experience The of total number of parent’s foreign investments Orbis Database Control variables
Geographic distance
Geographic distance between the capitals of the home
country and India GeoDataSource
Cultural distance Cultural distance between the home country and India Schwartz (2006); Kogut and Singh (1988) Resource-intensive
Industry
Dummy variable: 1-Resource-intensive industry;
20
4. Data and results 4.1 Descriptive statistics
In this paper, the dependent variable was measured in the year when the multinational companies entered India (i.e. the year when the foreign affiliates were incorporated in India), and other explanatory variables were measured one year before the entry year to justify the time lag happening between the decision on the entry strategy and the actual implementation of the strategy. Before analyzing, the datasheet was checked to see whether there were missing data. Because of the fact that not all multinational companies in the sample are listed companies, there is a huge amount of missing values in the company-level control variable (i.e. parent company size) which could not be ignored. According to Kang (2013), missing data would cause a lot of problems such as reduction of statistical power and bias in the estimation of parameters. As a result, this paper employed multiple imputation approach to handle the missing data problem. Multiple imputation allows for the uncertainty about missing data by replacing missing values with plausible values, which has potential to improve the valid of research (Sterne, White, Carlin, Spratt, Royston, Kenward, Wood, & Carpenter, 2009). After the treatment for missing data, there are still 603 observations containing 531 multinational companies without changing the sample profile.
21 Table 4.1 Home countries of sampling multinational companies
Home country Count Home country Count Home country Count
United States of America 124 Cyprus 8 Luxembourg 2
Netherlands 72 Thailand 6 Malaysia 2
Mauritius 65 United Arab Emirates 6 Norway 2
Hong Kong 55 Kuwait 5 Slovakia 2
Germany 45 Austria 4 South Africa 2
Singapore 27 Belgium 4 Ireland 1
United Kingdom 27 Canada 4 Lebanon 1
Switzerland 23 Denmark 4 New Zealand 1
Japan 21 Taiwan 4 Oman 1
France 18 China 3 Pakistan 1
Spain 16 Poland 3 Panama 1
Italy 15 Finland 2 Qatar 1
Republic of Korea 10 Indonesia 2 Saudi Arabia 1
Sweden 9 Israel 2 Sri Lanka 1
Table 4.2 Composition of multinational companies’ entry mode choices
Entry mode Count Percentage
Joint venture 199 33%
Wholly owned Subsidiary 404 67%
Total 603 100%
Table 4.3 Composition of industrial characteristics of multinational companies
Industry Count Percentage
Resource-Intensive 81 13.43%
Non-resource-intensive 522 86.57%
Total 603 100%
22 would not exceed 4 if the correlation coefficients are less than 0.87, variance inflation factors of variables were calculated to double check that there is no multicollinearity. The results show that the maximum value of the variance inflation factor statistics is 1.42 (parent company size), which is far below the usual cut-off of 10 (O’Berien, 2007). Consequently, correlations between variables indicate no multicollinearity problem.
4.2 Model specification
This paper used a binary logistic regression to investigate the proposed impacts of corruption distance and international experience on multinational companies’ entry strategies. Binary logistic regression is appropriate because the dependent variable (i.e. entry mode choice) is a binary dummy variable, and binary logistic model is commonly used in the studies on the impacts of various factors on entry mode choice (e.g. Karhunen & Ledyaeva, 2012; Lu, 2002). To test hypotheses, all models were based on the following formula of the logistic modelling:
𝑌𝑌 = 𝐿𝐿𝐶𝐶 �1 − 𝐶𝐶� = 𝛽𝛽𝐶𝐶 0+ 𝛽𝛽1𝑋𝑋1+ ⋯ + 𝛽𝛽𝑖𝑖𝑋𝑋𝑖𝑖
where 𝑌𝑌 presents the dependent variable (i.e. the entry mode choices made by multinational companies); 𝐶𝐶 is the probability of a multinational company to select wholly owned subsidiary to enter Indian market; 𝛽𝛽0 is the constant term, and 𝛽𝛽1, 𝛽𝛽2, 𝛽𝛽3, 𝛽𝛽4, 𝛽𝛽5, 𝛽𝛽6, 𝛽𝛽7 are the coefficients of interest; 𝑋𝑋1 demonstrates the independent variable (i.e. corruption distance), 𝑋𝑋2 indicates the moderating variable (i.e. international experience), and 𝑋𝑋3, 𝑋𝑋4, 𝑋𝑋5, 𝑋𝑋6 are control variables which indicate geographic distance, cultural distance, resource-intensive industry and parent company size respectively; 𝑋𝑋7 presents the interaction term (i.e. Corruption distance # International experience). Based on the formula above, a positive coefficient implies that multinational companies tend to favor wholly owned subsidiaries, whereas a negative coefficient indicates that they are more likely to choose joint ventures.
23 Model 1 is the baseline model which contains only the control variables without independent variable and moderating variable, using the following formula:
𝑌𝑌 = 𝛽𝛽0+ 𝛽𝛽3𝑋𝑋3+ 𝛽𝛽4𝑋𝑋4+ 𝛽𝛽5𝑋𝑋5+ 𝛽𝛽6𝑋𝑋6
Model 2 is the main effect model which examines the effects of corruption distance on entry strategies after controlling for control variables, and the following model was utilized:
𝑌𝑌 = 𝛽𝛽0+ 𝛽𝛽1𝑋𝑋1+ 𝛽𝛽3𝑋𝑋3+ 𝛽𝛽4𝑋𝑋4+ 𝛽𝛽5𝑋𝑋5+ 𝛽𝛽6𝑋𝑋6
Model 3 displays the relationship between the dependent variables and all other explanatory variables including the independent variable, moderating variable and control variables, which is presented by the formula below:
𝑌𝑌 = 𝛽𝛽0+ 𝛽𝛽1𝑋𝑋1+ 𝛽𝛽2𝑋𝑋2+ 𝛽𝛽3𝑋𝑋3+ 𝛽𝛽4𝑋𝑋4+ 𝛽𝛽5𝑋𝑋5+ 𝛽𝛽6𝑋𝑋6
Model 4 is the full analysis incorporating the interactive effect of international experience and corruption distance on entry strategies, which is displayed by the following model:
𝑌𝑌 = 𝛽𝛽0+ 𝛽𝛽1𝑋𝑋1+ 𝛽𝛽2𝑋𝑋2+ 𝛽𝛽3𝑋𝑋3+ 𝛽𝛽4𝑋𝑋4+ 𝛽𝛽5𝑋𝑋5+ 𝛽𝛽6𝑋𝑋6+ 𝛽𝛽7𝑋𝑋7
4.3 Research findings
Table 4.5 shows the results of binary logistic regression on entry strategies of multinational companies entering Indian market. Besides, log likelihood ratio and LR chi-square were employed to demonstrate the explanatory power of models. Overall, corruption distance was found to have effects on multinational companies’ entry mode choices; however, the interaction of corruption distance and international experience might not have any effect on the entry strategies.
24 is inconsistent with most studies on the relationship between cultural distance and entry strategies of multinational companies (e.g. Demirbag et al., 2007; Tihanyi et al., 2005); however, the results could be consistent with the research written by Gooris and Peeters (2014) who found greater cultural distance would increase the likelihood for companies to integrate their value chains with captive affiliates rather than to outsource them to the third party. This might imply that multinational companies would like to cope with uncertainty resulted from cultural distance through the collaboration between parent companies and foreign affiliates. Thirdly, the evidence indicates that multinational companies with larger company size are more likely to favor wholly owned subsidiaries over joint ventures.
Model 2 examines the relationship between corruption distance and multinational companies’ strategic decision-making regarding entry mode choices after controlling for control variables. As shown by a positive and significant coefficient, corruption distance significantly affect multinational companies’ entry strategies in the way that greater corruption distance leads to higher likelihood for multinational companies to choose wholly owned subsidiaries over joint ventures. As a result, Hypothesis 1b rather than Hypothesis 1a is supported. This shows that when multinational companies enter Indian market, they may choose to enter via wholly owned subsidiary in order to avoid the risks and costs of having a local partner and they may have the motivation to transfer their company-specific resources and organizational capabilities to foreign affiliates. Control variables in Model 2 show significant effects as in Model 1. Additionally, compared with Model 1, the log likelihood ratio in Model 1 slightly increases from 354.95 to -351.77, and LR chi-square also witnesses an increase from 54.93 to 61.29, which indicates that the power of explanation of the model is enhanced by introducing the corruption distance.
25 value, reaching -351.76 and 61.32 respectively; however, these small increase contributes little to the explanatory power of the model.
26 Table 4.4 Descriptive statistics and correlations matrix
Variables Mean Std. Dev. 1 2 3 4 5 6 7
1. Entry mode choice 0.67 0.47 1
2. Corruption distance 34.41 12.47 0.0712 1
3. International experience 21.43 47.55 0.0635 0.0629 1
4. Geographic distance 6918.90 2990.59 0.0345 0.1423* -0.0077 1
5. Cultural distance 2.61 1.73 0.0539 -0.0048 0.2890* -0.2083* 1
6. Resource-intensive industry 0.13 0.34 -0.0028 0.0033 -0.0479 -0.0565 0.1130* 1
27 Table 4.5 Results of the analysis of the impact of corruption distance and international experience on entry mode choice
Dependent varibale: 1-wholly owned subsidiary; 0- joint venture
Model 1 Model 2 Model 3 Model 4
Independent variable Corruption distance 0.0181* 0.0183* 0.0171* (0.0072) (0.0072) (0.0080) Moderating variable International experience -0.0004 0.0285 (0.0023) (0.0210) Interaction term
Corruption distance # International experience -0.0000
28
5. Discussion and conclusion 5.1 Discussion
29 This paper utilized unique data to empirically investigate the relationship between corruption distance and entry mode choices between wholly owned subsidiaries and joint ventures by multinational companies when they enter Indian market. By employing binary logistic model, this paper tested the impact of corruption distance and the interactive impact of corruption distance and international experience on entry strategies. The results showed that the hypotheses were partially supported.
30 conducting business, wholly owned subsidiaries allow multinational companies to develop competitive advantages over local competitors by transferring idiosyncratic firm-specific resources and capabilities more effectively (Di Guardo et al, 2016). Accordingly, multinational companies might favor wholly owned subsidiaries over joint ventures.
31 international experience to corruption and thus do not perceive the usefulness of knowledge generated from experience to handle corruption-related issues. As a result, international experience would probably have no significant impact on the relationship between corruption distance and entry strategies.
5.2 Theoretical contribution
This paper contributes the existing literatures of the impact of corruption on entry strategies of multinational companies. By introducing the concept of corruption distance, this paper found that corruption distance between the home country and India affects the entry strategies of multinational companies to enter Indian market. More specifically, multinational companies are more likely to choose wholly owned subsidiaries than joint ventures as corruption distance increases. This finding is consistent with the limited number of existing empirical researches (e.g. Tekin-Koru, 2006; Duanmu, 2011; Faria, Carvalho & Reis, 2018). The empirical findings reveal that multinational companies choose wholly owned subsidiaries to mitigate the costs and risks of having a local partner. Besides, this paper tried to shed light on the effect of international experience on entry strategies in the context of corruption, which has not been explored in existing researches. The empirical findings indicate insignificant interactive effects between corruption distance and international experience on multinational companies’ entry mode choice between wholly owned subsidiaries and joint ventures. In addition, this paper empirically applies the studies on the impact of corruption distance on entry mode choices of multinational companies in Indian market. Empirical studies on this subject is limited, and this paper is among the first to investigate the relationship between corruption distance and multinational companies’ entry strategies in India.
5.3 Managerial implication
32 environment where they do business and how to handle the negative influences caused by corruption. Entry via joint ventures is a “two-edged weapon” in the context of corruption. While having a local partner can help multinational companies cope with corruption-related activities, it also incurs risks for multinational companies in terms of reputation image and legal consequences. This paper treats entry strategy as a trade-off based on the costs and benefits of entry mode choices under corrupt context, and therefore could provide some implications of decision-making regarding entry strategies for international managers.
Besides, this paper has implications for policy-makers. Corruption reduces the legitimacy of government (Anderson & Tverdova, 2003) and poses barriers for foreign investors which suppress the foreign direct investments and thus inhibit the economic growth (Habib & Zurawicki, 2002; Mauro, 1995). Foreign investors could find a local partner to mitigate the influences of corruption, but they have to afford the costs and risks of seeking a trustworthy partner which often refrains them from investing. As a result, an anti-corruption act to fight against corruption could be needed for policy-makers to provide a safer business environment for foreign investors. Moreover, according to Tanzi (1998) and Treisman (2000), institutional factors such as lack of transparency and ineffective legal system play an important role in generating corruption, and policy-makers could also consider to implement reforms regarding these factors to improve the business environment.
5.4 Limitations and further research
33 wholly owned subsidiaries and joint ventures, ignoring the fact that there exist other alternative strategies for multinational companies to mitigate the impacts of corruption. According to Michailova, McCarthy, Puffer, Karhunen, and Kosonen (2013), for example, multinational companies can choose to outsource the business involving corrupt practices to an agent with political connections. Future research can consider more entry alternatives in their models. Moreover, despite the fact that this paper has contained some factors as control variables at country-, industry-, and company-level, there are still some project-related factors affecting multinational companies’ entry strategies such as orientation and size (Luo, 2001a). Control for the project-level in the data analysis was not realized because of the unavailability of data.
34
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