Amsterdam Business School
MSc Business Administration – International Management Final version master thesis
CORRUPTION DISTANCE AND ITS IMPACT ON
COMPANIES’ FOREIGN EQUITY COMMITMENT LEVELS:
EVIDENCE FROM WESTERN EUROPEAN FIRMS
By: Anne Godefrida Jacoba Schmitz
Student number: 6045782
Date: 28 June 2015 - first draft
Supervisor: Dr. Niccolò Pisani
Statement of originality
This thesis is written by Anne Schmitz who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
ABSTRACT
Companies are increasingly following international expansion strategies. The decision to expand abroad comprises decisions about how much equity should be committed in a foreign affiliate, which, among others, depends on the corruption distance between the home and host country. This study shows that both negative and positive corruption distance influence the level of equity commitment for companies in the largest Western European economies. Negative corruption distance has a negative effect on the amount of equity commitment, while both tangible and intangible resources have positive moderating effects. Positive corruption distance has a negative effect on the amount of equity commitment. This effect is negatively moderated by tangible resources and positively moderated by intangible resources. Research on how corruption affects companies’ strategy decisions is still in its infancy, so this study contributes to the general understanding of how corruption distance affects equity commitment decisions. It is another step towards a greater understanding of the influence of the home country corruption level, besides the already well-studied effect of the host country’s level of corruption. Moreover, this study can provide valuable insights into the behavior of competitors when analyzing expansion moves and patterns. If a company can predict its competitors’ entry modes into foreign countries, it can anticipate its strategies to make their internationalization processes more successful in the future.
Keywords: Corruption distance, Equity commitment, Entry modes, International expansion strategies
TABLE OF CONTENTS I INTRODUCTION ... 4 II LITERATURE REVIEW ... 7 2.1 Notion of corruption ... 7 2.1.1 Definition ... 7 2.1.2. Corruption distance ... 9
2.2 Entry modes and equity commitment... 10
2.3 Corruption and its relation to entry modes ... 14
2.3.1. The effect of pervasiveness and arbitrariness of corruption on entry modes ... 15
2.3.2 Corruption distance and its direction ... 18
2.4 Identification of the research gap ... 23
III THEORETICAL FRAMEWORK ... 25
3.1 The effect of corruption distance on the company’s level of equity commitment ... 25
3.1.1 The effect of negative corruption distance ... 25
3.1.2 The effect of positive corruption distance ... 28
3.2 Tangible and intangible resources as moderating effects... 29
3.2.1 The effect of tangible resources ... 30
3.2.2 The effect of intangible resources ... 31
IV METHODOLOGY ... 35
4.1 Sample and data collection ... 35
4.2 Variables... 37
4.2.1 Dependent variable ... 37
4.2.2 Independent variable ... 37
4.2.3 Moderating variables ... 39
4.2.4 Control variables... 39
4.3 Statistical analysis and results ... 41
V DISCUSSION ... 49
5.1 Academic relevance ... 50
5.2 Managerial implications ... 52
5.3 Limitations and suggestions for future research ... 53
VI CONCLUSION... 56
ACKNOWLEDGEMENT ... 58
I INTRODUCTION
Nowadays, companies are increasingly following international expansion strategies due to the intensifying globalization process, thereby crossing regions more and more (Rodriguez, Uhlenbruck & Eden, 2005). Companies then need to face the host country’s institutional environment, which can differ dramatically from their home country environment. There are economic phenomena and industry characteristics that play different roles in companies’ decision-making processes whether to make investments abroad (Habib & Zurawicki, 2002). The level of corruption is an important and highly relevant phenomenon that should be taken into account, since corruption is everywhere (Rodriguez, Uhlenbruck & Eden, 2005). Faced with an institutional environment that might differ extensively from its home country’s institutional environment, a company needs to decide whether it wants to expand to the country, the entry decision. This decision contains an important financial aspect, since the firm needs to decide how much equity it wants to commit in a foreign affiliate located in the selected host country. Equity commitment a company does abroad is called foreign direct investment (FDI). According to Johanson & Wiedersheim-Paul (1975), FDI is the most serious and risky commitment among all international business activities. Committing FDI in highly corrupt countries seems even like a more risky commitment, so it could be questioned why companies would be willing to do that. The most important reason is probably that companies consider the expansion as a strategic move for gaining competitiveness on international scale. Hence, corruption could at most be a barrier, but not a decisive factor in the realization of the investment’s full potential in the host country (Habib & Zurawicki, 2001).
When a company faces a certain level of corruption that differs considerably from the home country corruption level, its costs of doing business abroad increase. Hence, whenever
a company plans to invest abroad, the choice about the amount of equity it wants to commit in the foreign affiliate should be based on the tradeoff between risk and return. More equity commitment means more risk, but also more control. More control could reduce certain risks at the same time. The relationship between corruption and the equity commitment level has been investigated in detail. However, mixed results have been found. Probably one of the most important explanations is that the relationship between corruption and the level of equity commitment has been nuanced. Scholars argued that not just the static concept of the corruption level of the host country impacts the equity commitment decision. Duanmu (2011) and Godinez & Liu (2015) advocate that the corruption level in a host country is a relative phenomenon and that the impact of the corruption distance (the difference in corruption level between home country and host country) is a better measurement. In this study, I therefore try to answer the question: How does corruption distance between home and host country affect
a company’s equity commitment decision when expanding to the host country?
This study contributes to the existing literature in several ways. Firstly, the relationship between corruption and the equity commitment level is investigated, focused on the corruption distance, and it is determined whether this distance is positive or negative. By using corruption distance instead of the host country corruption level as the independent variable, it moves beyond the static perspective on the independent variable and sketches a more realistic image of how a company relates to a host country environment in terms of corruption. Cuervo-Cazurra (2006) states that different dimensions of corruption should be explored further. This study gives an overview of how the pervasiveness and arbitrariness of corruption in the host and home country have an impact on the effect of corruption distance. Second, the decision about the amount of equity commitment is influenced by different factors. Companies are not homogeneous, so company specific resources are expected to affect the relationship between corruption distance and the amount of equity commitment. In
this study, I investigate how firm specific assets moderate the relationship between both positive and negative corruption distance and the equity commitment level. A distinction is made between tangible resources (financial assets) and intangible resources (knowledge assets). Previous literature has not investigated these effects before. Third, contrary to most literature, I will treat the equity commitment decision on a continuous scale. Previous studies only measured under which circumstances an investing firm prefers the joint venture (JV) entry mode over the wholly owned subsidiary (WOS) entry mode and vice versa, without measuring exact percentages of equity commitment. Finally, subjects of this study are the largest companies of the six biggest Western European economies. This study is highly relevant for these countries since developed country multinational enterprises (MNEs) account for the majority of global foreign direct investment (Demirbag, Tatoglu & Glaister, 2009). Moreover, this study has the advantage that it is not US biased, since López-Duarte & Vidal-Suárez (2010) state that most empirical evidence on entry mode choice shows a US bias.
This study is structured as follows. First, the relevant existing literature about corruption and its impact on companies’ foreign investment decisions is analyzed. The relevant concepts for this research are introduced and defined. In the theoretical framework, relations between the concepts of study are defined and formulated in several hypotheses. The methodology section will provide information about the data collection, the variables and the tests which will be used for testing the hypotheses. The results will be analyzed and discussed and academic and managerial implications are explained. This study ends with an outline of the limitations of this study and suggestions for future research.
II LITERATURE REVIEW
2.1 Notion of corruption
As Godinez & Liu (2015) describe in their study, there are two views on the impact of a country’s corruption level on companies’ investment decisions. On the one hand, scholars say that corruption deters foreign FDI. It produces bottlenecks, heightens uncertainty and raises costs (Habib & Zurawicki, 2002). On the other hand, scholars argue that corruption is a necessary evil, outlining the phenomenon as stimulating transactions, especially in the case of institutional gaps in emerging economies. Some scholars even argue that corruption can be a way to ‘grease the wheels’ of commerce in a country (Duanmu, 2011). Besides, a competitive advantage could be acquired for MNEs who involve themselves with local corruption (Rodriguez, Uhlenbruck & Eden, 2005).
2.1.1 Definition
Before taking a deeper insight into the existing literature about corruption, it is important to have a clear understanding of the concept. The definition by Cuervo-Cazurra (2006, p. 807) is adopted here: “Corruption is the abuse of public power for private gain”. International organizations (UN) and Western governments equate corruption with improbity, so besides the fact it is illegal, it also contains issues that are improper (Malta Conference, 1994 as mentioned in Habib & Zurawicki, 2002). According to Peng et al. (2008), corruption can be considered as one of the most important institutions of a host country. Since corruption is an element of the norms and rules of a state, it both affects the external and internal legitimacy of the MNE’s affiliates in that corrupt host country (Rodriguez, Uhlenbruck & Eden, 2005). Corruption can be seen as an outcome that not only reflects a country’s political institutions, but also its economic, legal and cultural institutions (Godinez & Liu, 2015). Since local levels
of corruption are not only a result of the formal institutions, but are also determined by the informal institutions, it can become a normal practice in a country, whenever it is institutionalized (Godinez & Liu, 2015).
The existence of corruption in a country indicates a lack of respect for the rules and regulations that govern all the economic transactions in that country (Cuervo-Cazurra, 2006). When corruption exists, there is apparently a need for not playing by the rules to get things done (Kaufmann et al., 2003 as cited in Cuervo-Cazurra, 2006). However, on its turn, corruption can be just as harmful to firm growth and economic development as bad monetary policy or fiscal insolvency. A reduced degree of corruption is strongly linked to increased rates of economic growth (Rodriguez, Uhlenbruck & Eden, 2005). In the end, corruption still persists since some companies use it to advance their own interests. If every company, both domestic and foreign, resisted corruption, their combined power would have eradicated it (Habib & Zurawicki, 2002).
Corruption can be differentiated on both its transaction characteristics and its nature, or in other words, its pervasiveness and arbitrariness. The type of transaction describes the abuse or misuse of public power for private gain. The nature of corruption describes the statewide prominent relationship among public officials, established institutions and private companies (Rodriguez, Uhlenbruck & Eden, 2005).
Placing corruption into a bigger picture, it characterizes a country and contributes to the level of external uncertainty. Slangen & van Tulder (2009) advocate that control of corruption is one determinant along which countries differ in terms of their country’s governance quality, together with the political risk, government effectiveness, regulatory quality, rule of law and voice and accountability.
2.1.2 Corruption distance
Previous research has been studying the effect of the so-called corruption distance on FDI and found empirical evidence that not the host country corruption level itself affects companies’ investment decisions, but rather the corruption distance and its direction (Godinez & Liu, 2015 and Duanmu, 2011). Countries have different exposures to corruption. The greater this difference between two countries, the lower the likelihood that they know how to deal with the difference mutually (Habib & Zurawicki, 2002). The level and type of corruption in the firm’s home country influences this firm’s response to the level and type of corruption in the host country.
Dealing with corruption in the host country, which is seen as a major part of both the formal and informal institutional environment, will burden the investing company with an increased liability of foreignness (LOF): the extra costs a firm faces compared to domestic firms, due to the fact that they originate from a foreign country. These increased costs are caused by both regulative and normative constraints (Godinez & Liu, 2015). Scholars have argued that especially when the corruption level in the host country is high, a company’s LOF will increase considerably. This effect is even stronger because scholars found thatthe impact of corruption on local direct investments is substantially weaker than the impact on its foreign counterpart (Habib & Zurawicki, 2001). However, both Duanmu (2011) and Godinez & Liu (2015) make an important nuance to these existing thoughts. Whether the MNE will perceive a potential increase in its LOF when expanding to a country with a certain level of corruption, largely depends on the level and type of corruption in its home country. This is in line with the findings of Demirbag, Tatoglu & Glaister (2009), who highlight the equal importance of the institutional environment of both the home country and the host country.
Measuring the effect of the difference instead of considering the host country variable as a static measurement, is advocated by Slangen & Van Tulder (2009). The difference in the
levels of corruption in respectively the home and host country, makes up the corruption distance. A practical implication of the corruption distance is a conflict between a company’s internal and external legitimacy. When expanding abroad, a company wants to achieve institutional legitimacy in a host country. For achieving this in a considerably corrupt host country, the company needs to comply with the host country’s pressures to pay bribes, so accommodating with corrupt practices. However, its home country might prohibit these practices, which indicates a high institutional distance between the home and host country (Godinez & Liu, 2015). So “the larger the institutional distance between home and host countries, the more difficulties the company has building external legitimacy, and the greater the pressure on investors to tailor their strategies to local institutions” (Godinez & Liu, 2015, p. 35). In other words, corruption distance as an LOF is thus a subset of institutional distance involving both formal and informal institutions in the form of both normative and regulative constraints (Godinez & Liu, 2015). This is in line with Peng et al. (2008) who consider corruption as one of the most important institutions of a given location.
Corruption distance is defined as “the difference in the pervasiveness and arbitrariness of public sector corruption between the home and host countries”, a definition adopted from the paper of Godinez & Liu (2015, p.36).
2.2 Entry modes and equity commitment When expanding abroad, a company has several options how to enter the foreign market. The
entry mode selection is a very important, if not critical, strategic decision (Agarwal & Ramaswami, 1992) since it determines the company’s resource commitment, investment risk, degree of control, and share of profits from international operations (Rodriguez, Uhlenbruck & Eden, 2005). The most important consideration is whether it wants to make any equity commitment in the host country (committing FDI), thereby passing beyond the relatively
unbound option of a non-equity entry mode. Considering the level of equity commitment as a continuum, a company can decide to take any amount of stake in the foreign affiliate. Modelling entry modes on a continuum scale means a continuum of increasing levels of risk exposure, control, resource commitment, and profit potential, ranging from export and contractual agreements (non-equity modes) to wholly owning the affiliate (full equity mode) (Pan & Tse, 2000). When a company does not commit any equity when expanding to a certain host country, it has a 0% stake in the foreign country. Non-equity entry modes are exporting to the host country market and having contractual agreements with local partners (Pan & Tse, 2000). A company can also choose to enter the foreign market having one or more partners in a joint venture (JV), which can be a minority, equal or majority (Anderson & Gatignon, 1986). Taking a partial stake of less than 50% in the foreign company, gives the firm a minority stake. When a company collaborates with one other party, both taking an equal stake, they both own 50%. A JV with 2 parties will occur whenever the complementary inputs of two companies are more efficiently aggregated by giving both companies a claim on the result of the JV than by having one company that needs to pay ex ante for the input of the other company (Brouthers & Hennart, 2007). When a company takes more than 50% stake in the foreign company, it has a majority interest. Finally, a company can decide to have full ownership by either taking over an existing firm in the foreign country, or completely founding a new subsidiary from scratch. These two options are respectively called an acquisition and a green field investment. Both options are a wholly owned subsidiary (WOS) (Pan & Tse, 2000). According to Brouthers & Hennart (2007), a WOS will likely occur when a company can easily buy the complementary assets it needs on the market.
Dramatic differences exist among the different entry modes and among the criteria of choosing one. Different internal and external circumstances call for a different entry mode (Pan & Tse, 2000). A company’s entry mode is determined by both host country factors and
company specific factors, which are respectively macro-level and micro-level factors. At the level of choice between non-equity and equity entry modes, macro-level factors mostly play a role (Pan & Tse, 2000). Investment risk, industry structure and culture are such macro-level, host country conditions (Rodriguez, Uhlenbruck & Eden, 2005), also classified into the location factor and host country risk factor by Pan & Tse (2000) who also argue that these factors explain the choice between equity and non-equity entry modes, but not within these entry modes. Companies need to be both aware of the host country circumstances, but also of the unconscious influence of their home culture on their entry mode choice (Pan & Tse, 2000). The corruption distance between two countries is such a macro level factor that shows an interaction between home country conditions and host country conditions. Whenever a company chooses an equity entry mode, its choice for the amount of equity it takes in the foreign affiliate mostly depends from micro-level factors (Pan & Tse, 2000). A company’s position in its home country environment, resources, international experience, strategic disposition, and competitive advantage are such micro-level, MNE specific factors (Rodriguez, Uhlenbruck & Eden, 2005).
When it comes to the entry mode decision, the level of corruption in a host country and the accompanied corruption distance will be evaluated in terms of the before mentioned host country specific and company specific factors, so how corruption influences these factors that on their turn influence the equity commitment decision. Ideally, in choosing the entry mode, a company should arrive at a choice that maximizes the risk-adjusted return on investment (Anderson & Gatignon, 1986). Hence, a company needs to make an estimation about how the corruption impacts the investment risk. It might also impact the industry structure and overall culture in a country, especially in case the corruption is highly pervasive (Rodriguez, Uhlenbruck & Eden, 2005). The company’s home country environment and its corruption level, resources, international experience and competitive advantage might
determine how well the company can deal with the corruption in the host country. Finally, the strategic disposition will influence to a large degree if the MNE wants to collaborate with a (local) partner or not, a decision which could matter significantly in case of a highly corrupt host country.
In choosing the entry mode, one of the most important consequences that needs to be considered very well is the control a company obtains in the foreign affiliate. A WOS is intrinsically distinct from a JV based on management’s control (Woodcock, Beamish & Makino, 1994). Control is defined as “the ability to influence systems, methods, and decisions” (Anderson & Gatignon, 1986, p.3). It is a way to obtain a higher return. Without control, it is more difficult for a company to coordinate actions, carry out and revise strategies, and resolve disputes between two parties in a contract pursuing their own interests (Anderson & Gatignon, 1986). In a WOS, the company has full control. In a JV, a company’s equity ownership in the JV is treated as an indicator of the organizational control level and its accompanying specific control capabilities and capacities (Anderson & Gatignon, 1986; Agarwal & Ramaswami, 1992 and Woodcock, Beamish & Makino, 1994). There are costs associated with negotiating an initial control relationship between the parent companies (Woodcock, Beamish & Makino, 1994). Moreover, each level of equity commitment creates a different level of control costs that may be required for an ongoing management of the relationship between partners (Demirbag, Tatoglu & Glaister, 2009 and Woodcock, Beamish & Makino, 1994). The higher the level of equity commitment, the higher the level of control. However, it could happen that a company with a minority stake exercises influence in the affiliate out of proportion to its ownership. Reasons for this can be a contractual arrangement, expertise, or status as a government institution (Anderson & Gatignon, 1986). Control comes with responsibility and risk. More equity commitment leads to more risk, hence the WOS carries the highest risk level in terms of losses due to currency changes or high switching
costs which make leaving an unbeneficial market more difficult (Anderson & Gatignon, 1986). However, at the same time, a JV carries the risk of exposing and sharing its critical resources, a risk the WOS does not have. A company will only choose for the JV option if it finds a willing and suitable partner having appropriate resources to share or provide access to and this mutually resources sharing not having a negative impact on the firm strategically (Woodcock, Beamish & Makino, 1994).
Putting it into perspective, the level of equity commitment when expanding abroad is determined by many factors. A company experiences external and internal uncertainty in a foreign host country. The internal uncertainty is primarily determined by the cultural distance, whilst the external uncertainty is determined by both the cultural distance and the country’s governance quality, which is influenced by the corruption level among other factors (Slangen & Van Tulder, 2009). All these factors logically have their impact on the choice of the level of equity commitment.
2.3 Corruption and its relation to entry modes
Based on the many studies that have been dedicated to investigate this relationship, I conclude that there is a relation between corruption and firms’ investment decisions. Slangen & Van Tulder (2009) found that the corruption control determinant (Kaufmann et al., 2004), together with 4 other determinants, measures the quality of the current government policies and actions and has a great impact on the company’s entry mode decision in terms of their equity commitment. There is no consensus yet among scholars on how corruption influences inward FDI. Most studies hypothesize the negative impact of the host country’s level of corruption on the country’s general level of inward FDI. These studies measure the total amount of inward FDI for a country. However, there are also studies that find exactly the
opposite. Egger & Winner (2005) found empirical evidence for a positive relation between the level of corruption in a country and a country’s inward FDI.
In this study, I will not investigate how a certain corruption level in the host country might deter any form of expansion to the host country measured on a countrywide level. In this paper, I study companies actually expanding to host countries to discover how corruption affects their equity commitment decision, ranging from 0% (no equity commitment) to 100% (full equity commitment). Previous studies have also investigated this firm level relation. However, these studies conducted bivariate tests in which they only investigated when the company preferred a WOS over a JV and vice versa (Duanmu, 2011; Rodriguez, Uhlenbruck & Eden, 2005; Demirbag, McGuinness & Altay, 2010; Godinez & Liu, 2015).
2.3.1 The effect of pervasiveness and arbitrariness of corruption on entry modes
Any corrupt environment should not be considered as homogeneous since corrupt environments can be differentiated (Rodriguez, Uhlenbruck & Eden, 2005). Two phenomena characterizing the corruption in an environment are pervasiveness and arbitrariness. “Pervasiveness and arbitrariness capture fundamental features of the experience of corruption in a given state” (Rodriguez, Uhlenbruck & Eden, 2005, p. 387). To get a good indication of the host country’s corruption level, both phenomena should be considered. The nature of corruption influences the equity commitment decision of companies.
Pervasiveness - “Pervasiveness is the average firm’s likelihood of encountering
corruption in its normal interactions with state officials” (Rodriguez, Uhlenbruck & Eden, 2005, p.385). It reflects the degree to which a firm is forced to carry into effect corrupt behavior (Rodriguez, Uhlenbruck & Eden, 2005). The pervasiveness of corruption is often expressed in a country’s bribery index. Bribing is not for all companies a natural thing to do (Cuervo-Cazurra, 2006). Rodriguez, Uhlenbruck & Eden (2005) found that when the
pervasiveness of corruption is high, a company will tend to enter via full equity commitment (WOS) because in a highly pervasive corrupt country, corruption is socially valid. Companies obtain external legitimacy by complying with corrupt practices. The host country government provides them with resources and procurement contracts that make the corrupt practices look legitimate. That is how their visibility increases, they overcome their liability of foreignness and their need to integrate into local networks and partnering with a local company decreases (Rodriguez, Uhlenbruck & Eden, 2005).
However, Demirbag, McGuinness & Altay (2010) state that a higher level of pervasiveness of host country corruption increases the likelihood that foreign investors choose partial equity commitment (JV) over full equity commitment (WOS). They state that Rodriguez, Uhlenbruck & Eden (2005) mainly talk about MNEs from developed countries. MNEs from emerging countries can possibly benefit more when they form a JV in a highly pervasive corrupt environment. The company’s background appears to be important in the equity commitment decision and companies cannot be considered as homogenous (Demirbag, Tatoglu & Glaister, 2009).
Rodriguez, Uhlenbruck & Eden (2005) define a company’s background and experience as two external effects impacting the relation between the perceived level of pervasive corruption in the host country and the MNE’s equity commitment decision. They found that a company’s diversity of experiences in corrupt environments increases the company’s preference for full equity commitment. Experience gained in one environment gives an advantage when expanding to another host country environment by internalizing the information. By learning how to exploit corruption, its legitimacy rises and its institutional complexity decreases. There is no need for collaboration with a local partner to learn how to deal with corruption (Rodriguez, Uhlenbruck & Eden, 2005).
Arbitrariness - Arbitrariness is “the inherent degree of ambiguity associated with
corrupt transactions in a given nation or state” (Rodriguez, Uhlenbruck & Eden, 2005, p. 385). When the arbitrariness of corruption is high, there is a high degree of uncertainty. Important characteristics of corrupt transactions are unpredictable and not transparent (Habib & Zurawicki, 2001), since corrupt government officials will vary the set of necessary approvals and the structure from which they emerge to extract maximal bribes. Companies participating in corrupt transactions with the government are left in uncertainty about the size, target, and number of corrupt payments needed to obtain the government’s approval. Rules of behavior, expectations over outcomes, and the power and the line of sight are unstable (Rodriguez, Uhlenbruck & Eden, 2005). Obtaining legitimacy is very hard (Habib & Zurawicki, 2001). Logically, this influences the company’s degree of equity commitment. Scholars found that for high arbitrariness of corruption, the MNE will prefer partial equity commitment through collaborating with a local partner in a JV (Rodriguez, Uhlenbruck & Eden, 2005). Relational, interpersonal trust developed through repeated trades, reputation and social networks becomes very important, since the government will not protect the businesses’ property rights. Companies in a social network will create entry barriers for new firms by which business networks are developed and in which new companies are excluded. Price and quality become less important than access, since bribery takes place in secret (Habib & Zurawicki, 2002). A local partner increases a company’s external legitimacy, decreases the probability that corruption will limit its activities, functions as a source of information and reduces its interaction with government agencies and the associated high chances for meeting corrupt officials (Rodriguez, Uhlenbruck & Eden, 2005). In a host country with highly arbitrated corruption, MNEs cannot benefit much from previous gained experiences. Due to the high uncertainty, experiences are almost always new and of a varying nature so the experiences gained are very hard to apply in other situations.
Interaction effect between pervasiveness and arbitrariness - Companies should
consider the interaction effect between the pervasiveness and arbitrariness of the host country’s corruption. In an environment in which the corruption is both highly pervasive and arbitrary, the arbitrariness of corruption will dominate the equity commitment decision since it decreases the ability to exploit the benefits of the pervasiveness of corruption (Rodriguez, Uhlenbruck & Eden, 2005). An increasing level of arbitrariness of corruption decreases the company’s preference for a WOS when the pervasiveness of corruption is high.
2.3.2 Corruption distance and its direction
After having a good understanding of the host country’s corruption in terms of the pervasiveness and arbitrariness, companies should consider how this level of host country corruption relates to their home country corruption level. Although some statements Rodriguez, Uhlenbruck & Eden (2005) made imply the notion of corruption distance, in studying the effect of pervasive and arbitrated corruption on the equity commitment decision, they did not actually use the corruption distance measurement.
Cuervo-Cazurra (2006) studied how host country corruption impacts investors’ decisions to commit FDI. According to this author, host-country corruption is positively related to FDI conducted by MNEs stemming from countries with high corruption levels (Cuervo-Cazurra, 2006). This indicates a low corruption distance since both the host and home country have high corruption levels (Godinez & Liu, 2015). Hence, for low corruption distances due to high levels of corruption in both the home and host country, the level of host country corruption is positively related to FDI, or in other words, the total amount of equity committed by all foreign investors. Simultaneously, Cuervo-Cazurra (2006) states that the relation between host country corruption and FDI is negative for home countries with laws against bribery abroad. This implies a (high) negative corruption distance, since countries
with laws penalizing bribery abroad indicate low levels of corruption in these home countries (Godinez & Liu, 2015). So, for large negative corruption distances, the level of host country corruption is negatively related to inward FDI. It should be noted however that Cuervo-Cazurra investigated the impact on the total FDI of a country. This means that nothing can be learned from his study about how the corruption influences company level equity commitment decisions.
A more in-depth nuance of the effect of corruption, beyond considering whether the corruption distance is relatively high or low, is made by Godinez & Liu (2015). They introduce the concept of the direction of the corruption distance between a home and a host country. Corruption distance is defined as the home country corruption level minus the host country corruption level. That means that a negative corruption distance indicates that the host country has a higher level of corruption in relation to the home country, and a positive corruption distance indicates that the host country has a lower corruption level in relation to the home country (Godinez & Liu, 2015).
There have been contradicting findings in previous literature about the effect of a positive or negative corruption distance on the company’s decision about the amount of equity commitment when entering a foreign country. Below, the most important supporting and contradicting findings will be discussed.
The effect of negative corruption distance on the entry mode decision - Duanmu
(2011) states that MNEs from less corrupt countries compared to the host country (a negative corruption distance) prefer full equity commitment through a WOS over partial equity commitment through a JV. This could possibly sound counterintuitive since one could expect that a company from a less corrupt home country looks for a partnership with a local company to obtain the necessary skills and networks to operate in the host country that is impacted by corruption. However, many companies investing abroad that stem from
developed countries in which the corruption levels are low, are large companies. They do not need to be so-called institutional takers that need partners to help them deal with corrupt practices. Instead, these companies are often great bargainers and can have a long-term influence on the host country environment. Many large companies want to be assured that business is done in their own correct way. Evidence from Japan showed that large companies that want an easy application of organizational routines developed at home in their foreign affiliate, prefer a WOS over a JV (Padmanabhan & Cho, 1996). When McDonalds expanded to Moscow, it instilled its international standards and it did not make any compromise for the local corrupt environment. The name McDonalds helped to make a strong stand against corruption (Habib & Zurawicki, 2002).
Being in a JV in a relatively corrupt host country adds major risks to the company’s investment and increases its LOF since it does not have full control over its partners, who might participate in corrupt actions. First, for companies with a considerable negative corruption distance, their relatively low corrupted home countries exercise laws that penalize corrupt practices wherever in the company, hence also in their shared subsidiaries in corrupt host countries (Duanmu, 2011). Almost all countries have some laws against bribery, also highly corrupted host countries. However, with the application of this law in corrupt countries, a judge can be open to accept a bribe to alter the application. Even the state officials and judges are corrupt in that case. That is why other, less corrupt countries developed laws against bribery abroad (Cuervo-Cazurra, 2008). Second, there is another increased risk besides the risk of getting penalized by its home country government. A company will suffer from negative publicity when their partner participates or is only suspected of participating in corrupt practices. Negative information is almost always devastating (Ahluwalia, Burnkrant & Unnava, 2000). Researchers investigating negative publicity reveal that it has major effects on the focal company. It reduces the effectiveness of
a company’s advertising, it damages it reputation, it reduces brand equity and it leads to negative attitudes and unfavorable associations (Dahlen & Lange, 2006). These negative effects incur high extra costs. In sum, negative publicity affects sales, profits, and stock prices in a negative way (Einwiller, Fedorikhin, Johnson & Kamins, 2006). For these reasons, a company prefers to operate alone in a WOS and have full control in case of a considerable negative corruption distance (Duanmu, 2011).The advantage of full equity commitment in this situation is also acknowledged by López-Duarte & Vidal-Suárez (2010) who state that a WOS makes it unnecessary to collaborate with a partner whose decision and behavior rules are not known by the investing companies and can possibly be risky.
These findings are contradicted by a study of Demirbag, McGuinness & Altay (2010), who found that foreign investors that perceive the political and economic climate in a country as negative, will select a JV over a WOS. A high level of corruption in a potential host country possibly causes a negative perception of the overall political climate by companies from countries with low corruption levels. Companies with a considerable negative corruption distance most likely do not have any or very little experience with dealing with corruption. Habib & Zurawicki (2001) state that these companies consider corruption as a high risk that is costly and accompanied by high external uncertainty. Since committing more equity means taking more risk on the investment, partial equity commitment in a JV instead of full equity commitment in a WOS is often seen by scholars as the best way to reduce this risk (Demirbag, McGuinness & Altay, 2010). Habib & Zurawicki (2001) also argue for a JV instead of a WOS in case of negative corruption distance. According to these authors, searching connectivity with local partners in a JV in a corrupt host country can be both for adapting to the corrupt environment but also for resisting it. They state that such network resources can be particularly useful in entering countries where institutions that facilitate internationalization are lacking.
However, López-Duarte & Vidal-Suárez (2010) investigated if partial equity commitment through a JV indeed reduces the external uncertainty when the host county’s political risk is considerable. Political risk often comes out of political instability, which is positively correlated with corruption (Habib & Zurawicki, 2001). López-Duarte & Vidal-Suárez (2010) found that a JV will only benefit the MNE when the partner has the same mother tongue. When the partner has a different mother tongue, the language barriers will function as another LOF for the company. Power distortion can arise, when the MNE accommodates to the local partner’s language, since this partner can get a dominant position simply because of the language. Moreover, a language barrier between the MNE and its partner may prevent or disturb the information flow and can derive a loss of credibility and trust between them (López-Duarte & Vidal-Suárez, 2010). Also, differences in managerial values, that lead to extra costs in case of a JV, could be attributed to linguistic differences (Demirbag, Tatoglu & Glaister, 2009). These implications of language differences are highly relevant for this study. MNEs from six western European countries are the subjects of this research. All six countries have a different mother tongue, of which only the United Kingdom and Spain have respectively English and Spanish as their mother tongue, which belong to the most frequent spoken languages globally.
The effect of positive corruption distance on the entry mode decision – Scholars found
that MNEs stemming from countries with higher corruption levels than the host country (a positive corruption distance) are not affected by this corruption distance when it comes to their preference for an equity entry mode, either a JV or a WOS. Duanmu (2011)stated that companies from equally and more corrupt home countries (a zero and positive corruption distance) do not have any preference for either a WOS or a JV. These companies from equal and more corrupt home countries will also not be affected by the degree of the corruption distance, so whether this positive corruption distance will be large or small (Duanmu, 2011).
This is in line with the statement of Godinez & Liu (2015), who found that companies originating from corrupt countries are not scared away when expanding to other, equally or higher corrupt host countries.
2.4 Identification of the research gap
The relationship between corruption and the equity commitment decision has been studied extensively in previous literature. However, Duanmu (2011) states that the research on how corruption affects the entry strategy of companies is still in its infancy. Habib & Zurawicki (2001) bring up that priority should be given to examining the company level effect of corruption. The latest studies on this topic call for the use of corruption distance and its direction instead of taking host country corruption as a static measure (Duanmu, 2011 and Godinez & Liu, 2015). Studying the effect of corruption distance is highly relevant since contacts between less corrupt and more corrupt countries intensified in the past two decades (Habib & Zurawicki, 2002). However, no studies have been measuring the individual effects of negative and positive corruption distance on the company’s amount of equity commitment, so a new research opportunity is identified.
Many factors seem to have an effect on a company’s level of equity commitment when expanding abroad. Duanmu (2011) mentions the possible influence of the heterogeneity of companies’ strategies and other company specific features on the response to host country characteristics, like the corruption level. However, previous studies have not extensively focused yet on these firm-level differences. This is a gap in the existing literature.
In this study, I will investigate the individual effects of negative and positive corruption distance on the amount of foreign equity commitment and how company specific factors have an impact on this relation. These company specific factors will be split into tangible assets and intangible assets. An example of an intangible asset is tacit know-how,
which appears to be a predictor explaining a MNE’s preference for a WOS over a JV in knowledge intensive industries, but not in capital-intensive industries (Duanmu, 2011). Godinez & Liu (2015) and Cuervo-Cazurra (2006) suggest future research to investigate industry and company differences. By investigating the moderating effects of a company’s tangible and intangible assets in this study, the non-existing homogeneity of companies and industries will no longer hold.
All previous literature has focused either on the relation between corruption and the amount of inward FDI in general and countrywide, or on the relation between corruption and the company’s preference for either a JV or a WOS without measuring exact percentages of ownership in the foreign affiliate. This study will investigate the individual company’s preference for any amount of equity, so it is treated like a continuum. Building further on the theory of Duanmu (2011) and Godinez & Liu (2015), this study will feature the corruption distance and its direction instead of the host country’s corruption level.
III THEORETICAL FRAMEWORK
In this chapter, I consider how the corruption distance relates to the level of equity commitment when a company is expanding abroad. The equity commitment decision is considered along a continuum. That means that not the possible preference for having one or more partners or no partners at all is measured like in all previous literature, but rather how the equity commitment level changes along with an increase or decrease in the corruption distance.
3.1 The effect of corruption distance on the company’s level of equity commitment Although Godinez & Liu (2015) highlight the importance of distinguishing a positive and negative corruption distance, they did not investigate the individual impacts on the level of equity commitment. In this study, I try to emphasize the different impacts that both forms have. The assumption is made that higher levels of equity commitment means proportionally higher levels of control. Moreover, when considering equity commitment on a continuum, the assumption is made that the newly to be entered market has at least enough potential for the firm to recoup the overhead costs of committing high levels of equity, as noted by Anderson & Gatignon (1986).
3.1.1 The effect of negative corruption distance
A negative corruption distance means that the home country’s corruption level is lower than the host country’s corruption level. I argue that negative corruption distance negatively affects companies’ equity commitment which means that the larger the negative corruption distance, the higher the level of equity commitment in the foreign affiliate.
First, MNEs have long been seen as institutional takers, which is a redundant idea. MNEs are powerful companies that can have an active influence on the corrupt host country and do not need to engage in corrupt practices (Duanmu, 2011). In case of a large negative corruption distance, the investing firms likely stem from developed countries with relatively low corruption levels. Many of these firms are large and powerful. They do not want to participate in corrupt practices and want business to be done their way. The larger the negative corruption distance, the more prevalent corruption is in the host country. In that case, the importance to do business in their way and to stay out of corruption, increases. This demands higher levels of control, and therefore, the level of equity commitment in the foreign affiliate increases along. This is in line with the findings of Anderson & Gatignon (1986), who state that higher degrees of control are more appropriate for entrants that closely coordinate global strategies.
Second, in case of a considerable negative corruption distance, the company’s home country most likely exercises anti-corruption laws that can penalize the company for having partners that participate in corrupt practices (Duanmu, 2011). As the negative corruption distance increases, it is likely that the host country has a considerable corruption level. The chances that a partner participates in corrupt practices then also increases. The higher these chances, the more control a company wants to take to minimize this risk. For increasing levels of negative corruption distance, the company’s equity commitment therefore increases. The same applies to minimizing the risks to get negative publicity. As the chance that a company’s partner exhibits corrupt behaviour increases, companies increasingly want to have more control to reduce the risk of negative publicity. They obtain these higher levels of control by committing more equity in the foreign affiliate.
When the negative corruption distance is large but the corruption is highly pervasive, a company does not necessarily need a local partner, hence partial equity commitment.
Relevant knowledge and experience can be gained another way without taking the risk of negative publicity, which is really costly, or being penalized for corrupt practices conducted by their partners. The MNE could for example hire a manager with specific experience in the country and its corrupt practices (Cuervo-Cazurra, 2006). However, according to Rodriguez, Uhlenbruck & Eden (2005), companies increasingly look for a partner in case of highly arbitrated corruption, hence lower levels of equity commitment, to gain the necessary knowledge and experience and external legitimacy. However, these authors argue at the same time that in a highly arbitrated country, every corrupt transaction feels like new, since it is all very unsecure, and that the MNE can thus not benefit much from experience or knowledge obtained by partners. In the end, the government changes their demands from the company in a corrupt transaction all the time (Rodriguez, Uhlenbruck & Eden, 2005). Having partners increases their risks on home country penalties and negative publicity. Companies need to choose between two trade-offs. First, the trade-off between getting experience and knowledge that the company might be able to use at one hand but increasing their risks to get penalized by their home country and receiving negative publicity at the other hand. Second, the trade-off between not gaining knowledge and experience via a partner at one hand, but no risks on penalties or negative publicity on the other hand. In this study, I predict that the larger the negative corruption distance, the higher the risks of having a partner and hence, the stronger the preference for the second trade-off.
Moreover, to overcome the external uncertainty of the host country’s political risk in case of a high corruption level the company does not have experience with, a JV will only help when the partner has the same mother tongue as the MNE. If not, power distortion, the prevention and distortion of information flows between the JV partners and a loss of credibility and trust can arise (López-Duarte & Vidal-Suárez, 2010). In case of a high negative corruption distance, the host countries are often emerging countries like Brazil, India
and China. Most companies stemming from developed countries will have another mother tongue. The risks of the negative consequences of language differences increases, especially in case their partner has the same level or more control in the JV. To reduce this risk, companies want to exercise more control themselves by taking higher levels of equity commitment.
H1: When the corruption distance between home and host country is negative, its relationship with the degree of equity commitment in the company’s foreign affiliate is linear and negative.
3.1.2 The effect of positive corruption distance
A positive corruption distance means that the home country’s corruption level is higher than the host country’s corruption level. I argue that positive corruption distance negatively affects companies’ foreign equity commitment which means that the larger the positive corruption distance, the lower the level of equity commitment in the foreign affiliate.
In the existing literature, empirical findings have shown that companies with positive corruption distances do not have any preference for a certain amount of equity commitment (Godinez & Liu, 2015 and Duanmu, 2011). However, in this study I try to prove that positive corruption distance actually affects the company’s investment decision about how much equity to commit.
The larger the positive corruption distance, the more the company’s home country corruption level exceeds the host country corruption level. This means that the chance that the company is linked to corruption by the host country environment, and especially the host country’s customers, also increases proportionally. Simultaneously, the larger the positive corruption distance, the lower the company’s experience with dealing with the host institutional environment in which corruption is probably not a way of doing business. For
both reasons, decreasing the risk of being linked to corruption and increasing their credibility, and gaining experience in a host country, companies choose to collaborate with (local) partners in the JV entry mode. The larger the positive corruption distance, the higher the risk they get linked to corruption and the lower their experience with the new institutional environment will be, which is viewed as an LOF and thus an additional risk. Companies try to decrease these risks proportionally which implicates that the larger the positive corruption distance, the less equity they commit in their foreign affiliate.
H2: When the corruption distance between home and host country is positive, its relationship with the degree of equity commitment in the company’s foreign affiliate is linear and negative.
3.2 Tangible and intangible resources as moderating effects
The selection of the entry mode is influenced by diverse industry and company-specific factors (Caves & Mehra, 1986 as cited in Woodcock, Beamish & Makino, 1994). Hence, in this study, company specific factors are expected to have an impact on the relation between corruption distance and the level of equity commitment when doing an foreign investment. When a company decides on a certain amount of equity commitment in the foreign affiliate, it has to commit resources (Woodcock, Beamish & Makino, 1994). In this study, the individual effects of companies’ tangible and intangible resources will be tested. It is grounded in the resource based view of Barney (1991). An assumption of the resource based view is that full ownership, thus full equity commitment, is the preferred entry mode, until it is proven that it is not (Ekeledo & Sivakumar, 2004). A company aims to dynamically convert both tangible and intangible resources into other forms of value in their business model and aims to use value inputs to increase its resources (Allee, 2008). Resources are defined as “dedicated
assets that cannot be re-deployed to alternative uses without costs” (Hill, Hwang & Kim, 1990 as cited in Woodcock, Beamish & Makino, 1994, p. 257).
3.2.1 The effect of tangible resources
Tangible assets are the company’s assets that can be measured and include a company’s financial resources (Campello & Giambona, 2011). In research, tangible resources are often indicated with the availability of financial resources in the company, hence with a low indebtedness. In this study, tangible resources will represent a company’s liquid resources.
The effect of tangible resources in case of negative corruption distance – I expect that
the larger the negative corruption distance, the higher the level of equity commitment in the foreign investment. The larger the negative corruption distance, the more likely these companies stem from developed countries. They have high interests by doing business in their own way and they can, since they are no institutional takers as Duanmu (2011) argues. Having higher levels of tangible resources means that these investing companies have more bargaining power at the foreign market, since greater financial resources increase their financial power which positively strengthens them to do business in their own way by committing higher levels of equity. The larger the negative corruption distance, the higher the risks that partners in a JV involve themselves in corrupt practices. This means higher risks on home country penalties and negative publicity. Tangible resources help the company to reduce these risks because the higher the tangible resources, the greater its possibilities to do larger amounts of equity commitment and receiving more control in the foreign affiliate.
H3a: Tangible resources positively moderate the relationship as hypothesized in H1.
The effect of tangible resources in case of positive corruption distance – I expect that
foreign affiliate. Companies with large corruption distances would like to collaborate with partners so they get linked to trustworthy companies with good reputations and to learn from them how to do business in an institutional environment that is not similar to their own. I argue that financial resources will have a negative effect on the negative relation between positive corruption distance and the amount of equity commitment. With these financial resources, the company can decrease their risks of being linked to corruption and not having experience in an institutional environment. They could increasingly spent this money on advertising campaigns to create a trustworthy image. Consultants could be hired that help them to do business on the new market, or they can hire new or train current personnel to increase their market knowledge of the new institutional environment (Cuervo-Cazurra, 2006). For these reasons, I expect tangible resources to have a negative moderating effect on the relation between positive corruption distance and the amount of equity commitment in the company’s foreign affiliate.
H3b: Tangible resources negatively moderate the relationship as hypothesized in H2.
3.2.2 The effect of intangible resources
An intangible asset is defined as “an attribute that has no scale of measurement” (Saaty, Vargas & Dellmann, 2003, p.169). In his study, Hall (1992) lists the most important intangible resources and ranks them according to the relative importance of their contribution to the overall success of a business he investigated. Intangible resources include: company reputation, product reputation, employee know-how, culture, networks, specialist physical resources, data bases, supplier know-how, distributor know-how, public knowledge, contracts, intellectual property rights and trade secrets (Hall, 1992). Most of these intangible assets can be collected under the factor knowledge resources (Hall, 1992). In this study, the focus will be on the knowledge resources as the company’s intangible assets. Knowledge is
“an irreversible asset along which the company is uniquely advantaged” (Collis, 1991, p.52 as cited in Woodcock, Beamish & Makino, 1994).
The effect of intangible resources in case of negative corruption distance – I expect
that the larger the negative corruption distance, the higher the level of equity commitment in the foreign investment. The amount of knowledge a company possesses seems to strengthen this effect. Company specific knowledge includes knowledge about products and processes. It is often obtained from the company’s research and development efforts. Company specific knowledge functions as highly valuable assets. These are firm specific advantages (FSA) that can be used to decrease the risks expressed in their LOF, like the investment risk and the contractual risk.
Companies with specific knowledge as proprietary products or technologies have greater power to overcome the investment risk that is proportional to their level of equity commitment (Agarwal & Ramaswami, 1992). Proprietary product or technology knowledge increases the bargaining power over the host country’s government for providing the company with immunity against investment risks, which is especially valuable in countries with higher investment risks, like a high corruption level. An increasing level of equity commitment means a proportionally increasing level of investment risk, but because of the bargaining power acquired due to their proprietary knowledge, this risk decreases again.
Higher levels of equity commitment themselves also have a reducing effect on the investment risk for companies with company specific knowledge. The higher the level of control and thus the level of equity commitment, the more a firm can modify their investments in a way that the highly valuable assets they place in the host country are less profitable for the host country government in case they get expropriated by the host country. The larger the negative corruption distance, the higher this investment risk of expropriation becomes since the host country environment is relatively more corrupt (Agarwal &
Ramaswami, 1992). This is in line with the findings of Padmanabhan & Cho (1996), who state that the more R&D intensive an investing firm is, the higher its preference for a full ownership structure will be to protect their knowledge assets, especially given imperfections in the external markets for technology. Also Anderson & Gatignon (1986) found that the greater the combination of country risk and transaction-specificity of assets, which they indicate as proprietary content among other factors, the higher the appropriate degree of control, and thus, equity commitment.
Having highly valuable knowledge creates a company’s desire to be flexible to be able to adapt to future contingencies. When in a JV, companies have some sort of contract with their partner in which their control decreases proportionally with the equity commitment. A firm’s flexibility decreases along with the level of control, creating higher contractual risks. To reduce or exclude these contractual risks, which are very unfavorable for firms with knowledge as their important asset, companies take higher levels of equity (Agarwal & Ramaswami, 1992). In addition, any deal of partial equity commitment in a JV cannot allow the strategic control, change, and flexibility that are needed for securing long-term international competitiveness as a WOS does, as noted by Agarwal & Ramaswami (1992).
According to Mariotti et al. (2009), MNEs consider unintentional leakages of its valuable intellectual capital as something negative. This is a knowledge spillover. Knowledge spillovers can either be inflows and outflows of knowledge. When a company’s knowledge outflow is more valuable than any potential inflow from competitors or partners, the effect of the knowledge spillover is negative. MNEs are typically more technologically advanced and more productive than domestic firms (Caves, 1974 in Mariotti et al., 1998). They do not normally perceive any advantage from a conglomeration with domestic companies, as they fear the knowledge outflow to be higher than the knowledge inflow. Sharing or exposing
knowledge to a current partner could unintentionally lead to the loss of its future competitive advantage (Agarwal & Ramaswami, 1992) and long-term revenues (Woodcock, Beamish & Makino, 1994), since a partner that acquires the knowledge now can always decide to operate as a separate entity in the future (Agarwal & Ramaswami, 1992). In case of large negative corruption distances, it likely concerns large and multinational developed country firms expanding to emerging, higher risk countries. Hence, the larger the negative corruption distance, the higher the risk of negative knowledge spillovers for the investing firm. The more control a company takes in the affiliate which equals more equity commitment, the more they can control this unbeneficial effect.
H4a: Intangible resources positively moderate the relationship as hypothesized in H1.
The effect of intangible resources in case of positive corruption distance - I expect
that the larger the positive corruption distance, the lower the level of equity commitment in the foreign investment. When the investing firm with positive corruption distance has highly valuable company specific knowledge like proprietary products or technologies, its independency and interest to do business in its own way increases. This means that its need for control increases, which is obtained by increasing its level of equity commitment. That is why I expect that intangible resources in the form of knowledge assets will have a negative effect on the negative relationship between positive corruption distance and the level of equity commitment.
IV METHODOLOGY
4.1 Sample and data collection
To undertake the statistical research in this study, a sample is used consisting of nearly 720 companies having 114290 affiliates in total. This study specifies on six western European countries: the United Kingdom, the Netherlands, Germany, France, Spain and Italy. These six western European countries are selected because these are the six largest economies from Europe. All companies which are ranked in the Fortune 500 stemming from these countries are included in the sample. In fact, 116 companies in the worldwide Fortune 500 list originate from these six countries, which is a relatively big proportion of 23,2%. Specifically, the United Kingdom has 28 Fortune 500 companies, the Netherlands have 12, Germany has 28, France has 31, Spain has 8 and Italy has 9 companies ranked in the Fortune 500. The sample is expanded with the 100 largest companies of each of these 6 countries which are not listed in the Fortune 500.
In this study, I will investigate how corruption distances between western European countries and host countries affect the companies’ amounts of equity commitment. The companies from the six countries in the sample are large; many of them having a considerable amount of affiliates abroad. The majority of these companies does not only focus on developed markets. Instead, these companies also have affiliates in emerging countries, where corruption is often a normal part of doing business (Rodriguez, Uhlenbruck & Eden, 2005). This sample is used to test how these companies from a highly developed region respond to perceived corruption in the host country expressed in their amount of equity commitment. Whether a company decides for either full equity commitment or partial equity commitment has been studied by several scholars before. These studies solely focus on the preference for a wholly owned subsidiary or a joint venture (Godinez & Liu, 2015;
