Foreign equity commitment and distance : an application of the CAGE model to the foreign direct investments of the 100 Italian largest corporations

Foreign equity commitment and distance: An

application of the CAGE model to the Foreign

Direct Investments of the 100 Italian largest

corporations.

Sebastiano Della Noce

10828990

15 August 2015

MSc  Business  Administration:  International  Management  

University  of  Amsterdam    

Final  Version  Master  Thesis  Supervisor:  Dr.  Niccolò  Pisani    

Second  Reader:  Dr.  Francesca  Ciulli  

STATEMENT OF ORIGINALITY

This document is written by Sebastiano Della Noce 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

Extensive research has been conducted about the internalization process of the firm and its entry strategy in a host market. However, there is still a lack of consensus concerning which entry mode, in terms of equity commitment, a firm should choose according to

distance from the home country to the host one.

This because most of the studies in the field have focused their attention only on the cultural dimension of distance, which in turn has resulted in the “Cultural distance paradox”

(Brouthers & Brouthers, 2001) according to which firms can deal effectively with distance both with a high or a low equity commitment in the investment.

This thesis aims is to examine distance in all its aspects, as identified by the CAGE framework by Ghemawat (2001), in order to trace more conclusive patterns concerning the entry strategies of Italian multinational enterprises (MNEs).

Using the 100 largest Italian firms’ foreign direct investments (FDIs), the relationship between Equity commitment in the host country and distance will be analysed considering the cultural, administrative, geographic and economic distance between the two countries. Moreover, also the moderating effect of R&D intensity on this relation will be studied.

The findings show a major relevance of the administrative distance between the home and host country suggesting that the institutional profile of the target country plays a relevant role in the investment decision.

Concerning the moderating effect of R&D intensity, a positive moderating effect has been found on the relationship between geographic distance and equity commitment.

Keywords: Italian Multinational enterprises; Foreign Direct Investment; distance; equity commitment; ownership structure

TABLE OF CONTENT

1. INTRODUCTION……….. 5

2. LITERATURE REVIEW……….. 7

2.1 Challenges related to international expansion: Liability of Foreigness and Cost of doing business abroad……….. 7

2.2 Different aspects of Distance between Home and Host country and its effects on Internationalization patterns………11

2.3 Foreign entry mode………...16

2.3.2 Equity Modes………....…. 20

2.4 Research Gap……… 22

3. THEORETICAL FRAMEWORK……… 23

3.1 Foreign Equity commitment and risk………... 23

3.2 How distance affects risk: Culture, Administration, Geography and Economy...26

3.2.1 Cultural distance………... 28

3.2.2 Administrative distance………. 30

3.2.3 Geographic distance... 31

3.2.4 Economic distance……… 33

3.3 The moderating effect of R&D intensity………. 34

4. METHODOLOGY………. 35

4.1 Sample and data collection………. 35

4.2 Variables………...………. 36

4.2.1 Dependent variable....36

4.2.2 Independent variables………...… 37

4.2.3 Control variables... 38

4.2.4 Moderator variable………... 38

4.3 Analysis and results……….. 39

5. DISCUSSION………... 43

5.1 Academic relevance………. 44

5.2 Managerial implications, limitations and future research……… 46

6. CONCLUSION………...………. 48

7. ACKNOWLEDGEMENT……….. 51

8. REFERENCES……….52

LIST OF TABLES TABLE 1. Descriptive Statistics: means, standard deviations and correlations……...……… 38

1) INTRODUCTION

In order to survive to a new wave of competitive pressure from worldwide players, every firm needs now to consider the opportunities given by internationalization and the access to foreign markets. The globalization of the market has forced firms to extend their area of competence, and now performance depends also from the ability to cope with

environments culturally and institutionally different, to coordinate geographically dispersed resources and to leverage the knowledge flow among different countries (Carpenter,

Sanders, Gregersen, 2001); however the global arena offers as many opportunities as challenges and risks, that confer to the choice to “go abroad” a high strategic relevance.

MNEs can choose among different entry strategies and ownership structure in order to begin the operations with its subsidiaries in a host market. An accepted classification of entry modes is the one between Equity and Non-Equity ones (Anderson & Gatignon, 1986). More specifically the Equity modes are divided in Wholly owned subsidiaries (WOS) and Joint ventures (JV) while Non-Equity ones in Exporting and Licensing.

Non-Equity modes, however, are not considered FDIs since do not imply any commitment of capital, such as manufacturing plants for instance, in the host country (Rugman, 1985); accordingly the focus of this thesis will be on the Equity entry modes, which imply a commitment of resources and capital in the host country and an extension of the organizational boundaries as well (Brouthers & Hennart, 2007).

The two equity modes differ one from the other in terms of equity commitment or, in other words, in the level of ownership in the investment. WOS are greenfield investments fully incurred by the investing firm, while JV’s imply the share of the ownership with an investing partner.

Nowadays extensive research has been conducted pointing out the different benefits and risks concerning FDIs strategies, aiming to suggest the most suitable entry mode

according to the different characteristics of the host country. These different characteristics, such as a different culture, a different institutional environment or a different economic development generate challenges for the investing firm; this because foreign investors have to adapt their organizational structure and business model to local features of the host country in order to become profitable (Xu, Pan, Beamish, 2004; Ghemawat 2001). The above-mentioned differences have been identified as given by the distance between the two countries and extensive research has studied all its different aspects in order to understand how to deal with it.

The most comprehensive framework concerning distance is the CAGE by Ghemawat (2001), which includes all the observed dimensions of distance.

The identified dimensions are the Cultural, Administrative, Geographic and Economic ones and in this thesis they are hypothesized to have an effect on the FDIs strategy of the 100 largest Italian firms. More specifically the four dimensions of distance are supposed to affect the choice of the equity entry mode, by influencing the choice concerning the right degree of equity to be committed to the host country.

A firm can choose to deal with higher distances by choosing a major equity

commitment, in order to have the totality of control over the investment (Rivoli & Salorio, 1996), or can opt for a reduced equity commitment, which implies a shared ownership, in order to integrate its own competences with the local knowledge provided by the

counterpart (Osland, Taylor, Zou, 2001; Inkpen & Beamish, 1997; Makino & Delios, 1996). Existing research has no consensus about the right strategic choice; accordingly this thesis

aims to find any relevant pattern concerning the internationalization process, in terms of equity commitment, from the 100 largest Italian firms.

The thesis is structured as follows. In the first section will be discussed the relevant literature concerning internationalization challenges, different aspects of distance and foreign entry modes. Subsequently, in section 3, will be stated a theoretical framework with the development of the hypotheses. The data collection, the chosen variables, the method used to carry out the research and the results of the analysis will be discussed in the methodology section.

The interpretation of the results, the managerial and academic implications and the limitations will be discussed in section 5. Finally, in section 6, will be stated some concluding remarks.

2) LITERATURE REVIEW

In the following paragraphs the literature concerning the international expansion process, its challenges given by different aspects of distance between home and host country, and the most common strategies in order to deal with them, will be reviewed in order to introduce the gap on which the theoretical framework is based.

2.1) Challenges related to international expansion: Liability of

Foreigness and Cost of doing business abroad.

Due to the globalization of economy, the entry in foreign markets has become a more common and pursued strategy from firms. “Going abroad” has gained more and more

strategic relevance; it has somehow become necessary in order to exploit the owned assets in more different markets and to increase firm’s revenues (Caves, 1996; Hymer, 1960).

But even if going abroad has become a common action, it still has several challenges to be defined a successful choice; this because operating in different countries augments the operative risk due to the exposure to different contexts, each of those could experience a unfavourable moment, in economic terms, due to currency shocks, recessions or political crisis for instance. Being a “foreigner” can also generate operative challenges, due to uncertainty about local market conditions, for MNEs that in turn generate higher costs for the firm when operating in the host environment.

The first author to develop a theoretical concept of Costs of doing business abroad was Hymer (1960; 1976), arguing that foreign firms, because of their foreignness, have to face barriers to entry in overseas markets such as trade barriers or worst treatment from local actors. The aim of his work is to describe the comparative disadvantages that foreign subsidiaries of MNEs have to face in the host environment, relative to local firms.

These additional costs can arise from the lack of knowledge about the local market and from the discriminatory attitude toward foreign firms by local actors such as employees, suppliers and customers (Kostova & Zaheer, 1999; Zaheer, 1995). Also formal institutions, with the creation of barriers to free trade and with the implementation of policies

unfavourable to foreign investors, can create comparative disadvantages for foreign firms (Hymer, 1960).

Another set of costs arise from the mere physical distance between the headquarter and the subsidiary: on one hand the parent firm could lack the proper knowledge about the local market mechanisms and local customers preferences (Rosenzweig & Nohria, 1994;

Westney, 1993), while on the other there may be difficulties in transferring knowledge and best practices from the parent firm to the new borne entity.

According to Zaheer (2002) the quantitative definition of distance has always been confusing: both the “Costs of doing the business abroad” (CDBA) and the “Liability of Foreignness” (LOF) have been used to define it. LOF expresses the social costs to do business in a given country while CDBA is given by the sum of LOF costs and the economical and market-driven costs, related to geographic distance, that have to be overcome in order to do business abroad (Eden & Miller, 2001).

However, since the economic costs arising from geographic distance can be evaluated and forecasted, the most critical effects of distance on FDIs strategies can be resumed in the narrower concept of Liability of Foreignness (Eden & Miller, 2001) and its related costs “arising from the unfamiliarity of the environment, cultural, political, and economic differences, and from the need for coordination across geographic distance, among other factors” (Zaheer, 1995).

These costs can also arise from “ the unfamiliarity, relational and discriminatory hazards that foreign firms face” (Zaheer, 2002). In other words these costs can be considered as given by the distance between the home and the host country in terms of legitimacy with the local actors reflecting thus a more socio-economic shade of the concept of LOF compared to CDBA; moreover costs arising from LOF must be considered as given by the institutional distance, both formal and informal ones, between the home and the target country, which is reflected by the lack of legitimacy (Xu & Shenkar, 2002) with local actors such as customers, suppliers and local institutions, that the foreign firm experiences in the host economy. It follows that a firm must be able to calculate the distance from home

and host country in all of its features and costs, as shown by the dualism of LOF and CDBA, in order to develop the most suitable entry strategy.

Johanson and Vahlne included both these aspects of distance in the first version of the “Uppsala Model” (1997), as well as in the following revisitations. They recognized that firms do not choose how to entry into a market by analysing only their own resources and competences, the risks and the related cost of entry; but instead they start to face the

international arena, and the obstacle given by CDBA and LOF by investing in countries that are closer both in geographic and socio-economic terms.

Accordingly, firm internationalize themselves in an incremental way that favours learning and experience creation: from the first steps made with exportation, to a path with increase of the assets and equity committed in the host country, such as the case of wholly owned subsidiaries, if the local results have been favourable and promising. This

incremental internationalization pattern is known as “Establishment chain” (Johanson & Vahlne, 2009), giving thus the idea of a sub-sequential chain of undertaken of FDI’s with the former having less resources, and so risk, committed compared to the latter ones. Based on a database of Swedish owned subsidiaries, the authors (Johanson & Vahlne, 1977) observed that Swedish firms invested at first in psychically and culturally closer countries, shifting then gradually to further ones.

This incremental model has its origins in the concept of liability of foreignness, that states that a foreign investors need to have any kind of Firm-specific advantage or local competence in order to result successful in a distant, both physically and culturally, host environment. (Hymer, 1976; Zaheer, 1995). Or again, citing the words of Johanson & Vahlne (2009, p: 1415), liability of outsidership must be overcome in order to become profitable in the host country: a first approach to the host market with a low equity

commitment mode such as exporting would allow the firm to develop, with a low degree of risk, the local competence and knowledge in order to compete more effectively with local players.

2.2) Different aspects of Distance between Home and Host country

and its effects on Internationalization patterns

Hofstede’s “Culture and organizations” (1980) is probably the most recognized work about cultural distance with collections of data covering 50 different countries and in

continuous evolution; however, and this is one of its main limitations, it is mainly

concerned on cultural differences between countries, reflecting thus a more social focus. Hofstede identified initially four dimensions of national culture, with a fifth and a sixth ones added respectively in 1991 and 2010, by which was possible to classify each country compared to the others. The identified dimensions are: Power distance, Masculinity vs Femininity, Individualism vs Collectivism, Uncertainty avoidance, Long term vs Short term orientation and Indulgence vs Restraint; each country can be classified along each dimension with a score from 0 to 100, score that if combined and compared to the one of the host country for instance, expresses the relative distance between the two observed

countries. Another limitation of Hofstede’s work is that it is based on a sample of

observations collected from a survey among IBM employees worldwide; this could have made the sample biased due to the influence of the organizational culture on the different national cultures within the organization, modifying somehow the cultural traits observed.

Based on the work of Hofstede, Kogut and Singh (1988) developed their own single index which reflects, in a unique number, the sum of the single effects of the Hofstede’s indicators and expresses distance between country A and country B.

The distance is calculated from the deviation along each of the cultural dimensions of the host country from the home one; these deviations were then corrected according to the difference in variance for each dimension and then arithmetically averaged (Kogut & Singh, 1988).

However studies covering the relation between the cultural distance and the

ownership modes accordingly chosen by MNEs, have shown several conflicting findings: high cultural distances between the home and the host country have been associated with a greater equity commitment (Erramilli, Agarwal, & Kim 1997; Gatignon & Anderson, 1988; Padmanabhan & Cho, 1996), suggesting that a major equity commitment, such as the case of a Greenfield, can allow firms to “respond to competitors more quickly with their own subsidiaries” thanks to the major control granted by the sole ownership (Taylor, Zou & Osland, 2001, p.159); or have been associated with shared ownership mode, and thus a lower equity commitment (Brouthers & Brouthers, 2001; Erramilli & Rao, 1993; Gatignon & Anderson, 1988; Kogut & Singh, 1988; Meyer, 2001; Pak & Park, 2004) this in order to keep the flexibility required and to be ready to leave the new entered market when the costs and challenges of doing business in the host country overcome the benefits of being there; another stream of literature, however, have found that cultural distance and degree of ownership do not have any relation at all (Erramilli, 1996; Gatignon & Anderson, 1988).

These unclear findings, recognized as the “cultural distance paradox” (Brouthers & Brouthers, 2001), could be explained by the failure from the cultural dimension in

a given market in the target country (Claver, Quer, Rienda, 2007), giving thus a limited evaluation of the real bunch of risk affecting the FDI. In other words, to rely on an assessment of distance from a cultural perspective only, could lead firms to choose the

wrong entry mode, in term of equity ownership, to result successful in the host market. In the same period, there has been a focus on institutional differences between

countries by the “organizational theorists” (Di Maggio & Powell, 1983). These theorists focused their studies on dissimilarities in terms of regulative (rules and laws that ensure the order and stability of a society), normative (values and norms that drive people’s behaviour) and cognitive (cognitive rules that constitute the nature of reality) pillars of institutions (Eden & Miller, 2001). This because, according to Zaheer and Kostova (1999), what causes the most challenges is the difficulty to the MNE in gaining legitimacy with the local pillars of institutions when operating in a host environment.

In other words, when there is a higher distance in terms of regulative, normative and

cognitive rules, the more difficult would be for an MNE to gain legitimacy, and thus operate in the most optimal way, in the host country (Xu, Pan, Beamish, 2004).

This change of focus suggests a shift from the cultural differences to the institutional ones when suiting the best entry strategy and more specifically, “larger regulative and normative distance might be associated with lower equity control in the foreign subsidiary” (Xu and Shenkar, 2002); this in order to reduce the risk given by a lack of legitimacy in the host environment and the possible negative outcomes from an expropriation by the local government (Henisz, 2000).

To sum up, distance is hypothesized to manifest its effects in two ways: on one hand through the economic costs of doing business abroad and on the other through “socio-economics” cost, enclosed in the concept of LOF, arising from cultural distance (Kogut and

Singh, 1988) and from differences in terms of regulative and normative distance, the two pillars relevant for subsidiary control strategies (Xu and Shenkar, 2002); however the use of cultural distance as a proxy for differences between countries could lead to an

over-simplification of the complex issue of national environment (Xu, Pan, Beamish; 2004) or to an unclear theoretical pattern as shown by the cultural distance paradox.

According to Slangen & van Tulder (2009), managers do not base their entry strategy on an assessment of a single aspect of the target environment, but rather on an overall

evaluation of the contextual situation. A theoretical framework that conciliates all the different aspects of distance is the “CAGE” from Ghemawat (2001), which considers the Cultural, Administrative, Geographical and Economic dimensions of distance when

assessing the distance between two countries; in the model are identified several drivers of distance whose effect is to increase the risk and difficulties when operating abroad. To have different languages, for instance, increases transaction costs (Demirbag, Tatoglu & Glaister, 2007) and reduce the likely of interactions between two countries.

The cultural distance represents the difference in how people interact among each other’s and with firms and institutions (Ghemawat, 2001); this distance can also be

increased by differences in religious belief, race and language spoken for instance. Different cultural attributes generate distance between two countries by influencing in a

different way of the local customers and their tastes. Cultural distance generates challenges, not only in terms of customer preferences, but also in gaining operative legitimacy in the country, with regard to local actors and institutions (Xu & Shenkar, 2002; Zaheer & Kostova, 1999); according to this, a strategy that implies to rely on a local partner would

help the firm in gaining this legitimacy to operate in the host market. The cultural distance between two countries, however, can also results in different

administrative practices and employees expectations; accordingly, the more cultural distance between two countries, the lower will be the organizational fit between two organizations from the considered countries making thus the choice of a shared ownership

mode a risky one as well (Lincoln, Hanada and Holson 1981). The Administrative distance reflects the distance in term of institutional setting; it

arises when the governments of the considered countries are very different in terms of market and competition regulations, when there is the absence of any colonial ties, common currency or monetary union or when the two countries are hostile to each other. More specifically countries having a colony-colonizer relationship have been found to have

+900% in international trade compared to those without. (Ghemawat, 2001). A way for governments to reduce the administrative distance with another country could be

the setting of a preferred trade agreement (PTA) or the creation a common regional trading block, solutions that have been shown to lower trade volatility and risk between the two countries (Mansfield & Reinhardt, 2008) by reducing the uncertainty concerning trading regulations.

The Geographic distance consists in the physical distance between the two countries; however, it doesn’t consist only in the mere physical distance between the two, but it is also

expressed in terms of accessibility and infrastructures in the host country. According to Ghemawat (2001) other features that need to be taken in account when

assessing geographic distance are the size of the host country, access to waterways and oceans and the overall topography of the country. These geographic features augment, or decrease, the cost of transportation, having thus an effect on the investments outcome as well.

countries and their inhabitants: difference in consumers income and differences in cost and quality of local materials, both raw material and human resources, increase the economic distance between two countries. It follows that a firm needs to adapt its offer proposition accordingly to the economic profile of local customers and suppliers in order to maintain its profitability.

Considering the failure from the cultural dimension in identifying relevant patterns concerning the foreign equity commitment by itself, the above-mentioned dimensions of distance are hypothesized to be a more comprehensive and effective tool to assess the internationalization patterns of Italian firms and how they deal with distance in terms of entry modes strategy.

2.3) Foreign entry mode

In the following sections there will be a shift of the focus to the international entry modes, which are the strategic decisional outcome of the distance assessment by firms aiming to invest in a given foreign country.

It’s generally recognized in the international business literature that a firm which aims to perform a business function outside its home country must choose among several different entry modes (Anderson & Gatignon, 1986) that modify the organizational boundaries of the firm (Brouthers & Hennart, 2007). A generally accepted classification of the entry modes is between non-Equity and Equity modes. Firms have to decide between these two options accordingly to host country institutions, resources owned (Brouthers & Hennart, 2007), transaction cost analysis of internalization cost as opposed to open market transactions (Gatingnon & Anderson, 1986) and Locations specific advantages given by the host country (Dunning, 1988).

According to Institutional theory, the institutional environment of the host country, by defining the “rules of the game”, affects entry mode choice in a given market (Brouthers & Hennart, 2007). Previous studies concerning the institutional environment (Brouthers et al., 2002) have examined five types of risk arising from the difference in the institutional setting that determine entry mode choice: product, government policy, macroeconomic, materials and competition. They found that the larger the risk perceived from differences in the institutional context, the lower was the commitment of resources, and thus equity, by the investing firms which opted for a shared ownership of the investment in order to share the risks. From a transaction cost point of view, however, the cost of integrating an operation within the organizational boundaries of the firm must be compared with the costs of relying on a local counterpart, and more specifically identification, negotiation and management of the relationship costs (Williamson, 1985).

The Entry modes can be also classified on a continuum of three characteristics: resources committed, amount of control and level of risk (Osland, Taylor, Zou; 2001). Several Authors (Johanson & Vahlne, 1977; Pan & Tse, 2000) have examined the different entry modes and presented them on the above-mentioned continuum of commitment, resource and risk.

These differences in terms of resources and commitment are the main issues underlying the tradeoff between the different entry modes: an equity mode, for instance, would imply not only a major control but a higher commitment of resources, and thus risk, as well.

According to Anderson & Gatignon (1986) the literature doesn’t suggest how managers should evaluate tradeoffs, and, accordingly, majority of firms make unconscious choices concerning their entry modes.

Johanson and Vahlne, on the other hand, suggested in their Uppsala model (1977) an incremental, and thus rationally structured, approach to international activity by starting from those entry modes (such as exportation) that require less resource, and consequently have a minor risk, in order to gain resources and experience to face more challenging entry modes and targets in the future. This suggests a resource-based approach to the tradeoff, implying a higher emphasis on the role of experience as a necessary resource for the investing firm in order to reduce the perceived distance with the host country.

In the following sections will be introduced the two main sub-groups of entry modes, Equity and Non-Equity ones, and the main risk and advantages related to them.

2.3.1) Non-Equity modes

Non-Equity modes are generally recognized as the modes that require a lower

commitment in terms of resources; this because there is no need to establish a Greenfield, or an independent organization, when entering the target country and the relationship between the parties is regulated by a contractual agreement (Pan & Tse, 2000).

The two main Non-Equity modes are Exports and Licensing (Root, 1994). Export can then be divided in direct export, with the MNE using its own local agents in the host country to sell its product, and indirect export, with the MNE selling its products to an export firm that in turn will import it in the host country. The fact that the final, or intermediate, product is manufactured outside the host country is the main difference between exporting and other entry modes (Osland, Taylor, Zou; 2001).

A risk concerning export is related to transportation cost: when the MNE have to sustain a huge transportation expenditure, then this cost would imply an higher price in the local

market and thus a lower competitiveness with products manufactured locally. These extra costs, however, can be overcome thanks to the eventual presence of a highly recognized brand, a firm specific asset, which would justify a higher price (Dunning, 2000).

The second Non-Equity mode is Licensing, according to which the MNE transfers to a local counterpart, after the payment of a royalty, the right to use some properties or rights such as the brand, the patents and technologies.

The main risk related to licensing concerns the control over the licensee, which, for

instance, could sell the licensed product at a higher price than the generally defined one, or could produce it with lower quality materials and without quality control in general,

lowering thus the value associated to the brand.

To sum up, as showed, the main risks associated with Non-Equity modes are related to the low control over the investment, and to difficulties in managing a network of players, such as export agents or licensees, external from the organization’s boundaries and with different expectations due to cultural differences.

2.3.2) Equity modes

Equity modes, as suggested by their definition, imply the investment, or better the immobilization, of a certain amount of capital and resources in order to set up operations overseas. This equity commitment, in turn, empowers the investing MNE with a higher control over the operations in general but, at the same time, augments risk due to the irreversibility of the resources committed (Rivoli & Salorio, 1996).

The two main Equity modes are Joint Venture (JV) and Wholly owned subsidiaries (WOS) (Osland, Taylor, Zou; 2001) and they differ in the equity stake controlled by the

firm: a 100% ownership by the investing firm in case of a WOS and a ownership shared with a partner, whose shares are defined by the initial contract between the two firms, in the case of a JV. Joint ventures can be “new entities” formed by two investing firms that share the resources that need to be invested in order to create a third separate firm or can be entities resulted from the partial acquisition, or divestiture, of a partial stake of a subsidiary (Brouthers & Hennart, 2007). Each partner can contribute to the JV with different resources such as technology, capital, or experience and knowledge about the local environment in which the JV is called to operate (Osland, Taylor, Zou; 2001).

To involve a local counter-part in the investment (Inkpen & Beamish, 1997; Makino & Delios, 1996) could also be a way to adapt to the local environment, gaining thus

legitimacy; this because as the equity is owned also by a local actor, it will reduce the perception of the MNE as “foreign” by the local institutions (Xu, Pan, Beamish, 2004); however, in culturally distant countries this setting up of joint operations could lead to cultural clashes between the two organizations due to the low organizational fit given by cultural distance (Lincoln, Hanada and Holson 1981).

The two investing firms share not only the resources committed, but also the ownership, the management, the profits and risks of the newly formed entity according to the ratio of ownership set by the initial agreement. Accordingly, is possible to define as joint ventures all of those subsidiaries that are characterized by a shared ownership.

Reality, however, shows us that this is not the case because there is the need to consider the strategic reason behind the acquisition, or divestiture, of a certain equity stake.

It can be the case that a certain stake have been acquired simply as a financial participation, in this case would be no-sense to talk about a JV since there is the absence of a strategic rationale behind the acquisition.

The opposite situation could be the strategic acquisition of a certain stake in order to set up a JV with the divesting counterpart. According to this, it would be difficult to analyse each of the observed FDIs from such a qualitative point of view in order to know the

strategic rationale behind the JV, hence here the term “Joint venture” will be associated to each observation in which there is a shared ownership both in the cases of a minority or a majority stake.

Wholly owned subsidiaries (WOS) are subsidiaries set up in host countries through an acquisition or a greenfield investment (Brouthers & Hennart, 2007) by the investing firm, which maintains the total control and ownership over it.

WOS is the entry mode that requires the highest commitment of resources both in terms of quantity and irreversibility, this because the MNE is the unique owner on which all the profits, but also the risks, accrue.

To invest through WOS could be considered a choice with a high strategic relevance since it enables the MNE to protect its business model, its competences and technologies from third parts or from a partner such in the case of the JV; this because control reduces the risk of technology leakages (Osland, Taylor, Zou; 2001).

To sum up Equity modes differ from the Non-Equity ones since they are

characterized by a higher irreversibility of the investment, irreversibility which is given by the major amount of resources necessaries to set up the business, and JV differs from WOS since the former are investments whose ownership is shared between more actors while the costs of the latter accrues only on the investing firms.

2.4) Research Gap

The different Entry modes account for the risk profile of each investment: as shown by literature, Equity modes imply a higher commitment of resources, making thus FDI generally more expensive and risky.

On another hand, a higher commitment of resources allows a higher control over the

operations, and enhance the investing firm with a superior responsiveness to market changes (Ghemawat, 2008)

Distant environments are by definition “challenging” ones: when we think about market penetration, for instance, the four dimensions of distance modify the perceived and the actual risks of failure, as shown in the literature part. According to this, firms have two way to face this risk: to own the majority of the investment in order to keep the control over the operations, modifying thus the value proposition thanks to the enhanced control; or to own a minor stake in the investment, in order to keep the organizational structure flexible to any sort of change in the local environment, allowing also an eventual exit from the

investment by divesting the stake.

It becomes now clear the gap in the literature whether firms, when facing very distant environments, should firms keep the totality of control of the investment, or should

participate in the investment with a lower stake.

As shown in the previous parts, antecedent streams of literature have not reached a common answer to this dilemma. Moreover, as showed by the “cultural distance paradox”, to assess distance only through the lens of culture would lead to unclear results as well: an high cultural distance could be overcome with the inclusion of a local partner, with the proper

legitimacy to operate in the host country, or without the local partner, in order to avoid eventual cultural clashes in setting up joint operations.

Accordingly distance, and the subsequent equity commitment choice, will be assessed in its four dimension identified by Ghemawat in his CAGE model.

Four hypotheses that link the chosen equity commitment, our dependent variable, with distance between Italy and the host country, our independent variables, will be developed in order to understand whether firms prefer a higher control, and thus a higher equity

commitment, or viceversa.

2) THEORETICAL FRAMEWORK

3.1) Foreign Equity commitment and risk

To invest abroad has become a necessity for modern firms whose aim is to keep the pace of globalization. But if every firm, or at least the successful ones, is provided with a strong competence about its local environment, this does not always hold when investing abroad. At the firm level, several firms lack the right knowledge about local actors such as

customers, suppliers and institutions; it follows that the main aspects of risk arise from the distance between the home and the host country, as shown in the literature chapter.

This lack of local knowledge creates a higher uncertainty about the possible results that the firm could achieve in the foreign market; this uncertainty, in turn, generates risk to which firms have to deal with. According to previous literature (Erramilli, Agarwal, & Kim 1997; Gatignon & Anderson, 1988; Padmanabhan & Cho, 1996) some firms prefer to deal

with risk and uncertainty by owning high stakes of equity of their investments while others do the opposite (Brouthers & Brouthers, 2001; Erramilli & Rao, 1993; Gatignon &

Anderson, 1988; Kogut & Singh, 1988; Meyer, 2001; Pak & Park, 2004).

Choosing a major equity commitment enhances the MNE in terms of control over the investment itself, and over all the different operations it requires (Taylor, Zou & Osland, 2001). A major control over the investment allows the firm to freely manage operations, to identify more easily eventual frictions among the organization arising from distance, and to solve them out more quickly, increasing thus firm’s responsiveness.

Another advantage given by a higher equity commitment arises, again, from the control over the investment: a majority stake allows the firm to properly position itself in the

competitive scenario according to its own characteristics and relying on its own strength and core capabilities instead of relying on a local counterpart that could lacks the expertise of the MNE. Moreover, a major commitment to a particular strategy, such as the one chosen when entering the host country, is a pre-requisite to a sustainable superior profitability in highly competitive situation (Ghemawat & del Sol, 1998)

Controlling a higher equity stake in the investment, however, make the firm deal with the issue of “irreversibility” of the investment (Rivoli & Salorio, 1996) that is the

impossibility for the investing firm to divest the committed resources in order to avoid certain losses. This clearly augments the risk that MNEs have to manage when choosing a higher equity commitment.

On the opposite side, those firms that opt for a lower equity commitment in the investment are enhanced with the possibility to easily divest their resources in case of negative performance of the investment. Flexibility could also be a key factor to succeed in fast moving competitive scenarios, in which the change of track in short time and at a low

cost can keep the firm in a profitable position avoiding the “failure” of divestiture

(Ghemawat & del Sol, 1998). Moreover, to own a minor equity stake, such as the case of the joint venture, requires a lower initial commitment of resource, avoiding thus big losses in case of negative outcomes (Kim & Hwang, 1992).

Owning a minority stake in the investment implies a counterpart, or better a partner, that could provide the expertise about local actors such as institutions and customers (Anand & Delios, 1997). This increases the investing firm legitimacy in operating in the host

country, and reduces, again, the risk of a negative outcome. However, to share the

ownership means also to share control and profits, accordingly a JV could be less profitable, in terms of revenues, than a WOS.

The share of control could lead to a situation in which the strategy is not unified and clear, as shown in previous chapters cultural clashes between the partners could arise, resulting in a reduced performance; while the share of profits simply means a lower performance

compared to a sole owner.

3.2) How distance affects risk: Culture, Administration, Geography

and Economy.

As shown in the previous paragraphs the main factor affecting the choice of the level of resources committed in the investment, beyond its motives, is risk and how to deal with it. Risk, in turn and as shown in the literature chapter, is generated by distance and more specifically by its several facets given by the broad concept of Cost Of Doing Business Abroad.

This group of facets need to be analysed through the lens of a comprehensive framework that goes beyond the mere cultural distance that, according also to the “Cultural Distance paradox”, gives us very few answers or insights concerning the right level of ownership to choose when investing abroad.

The CAGE framework by Ghemawat (2001) is probably the most recognized work when assessing the distance, and the related risk for investments, between two countries. It focuses on four dimension of distance: Cultural, Administrative, Geographic and Economic.

The Cultural and the Administrative distances can be used as proxies for the informal and formal institutional distance since they are given by differences in Language, Norms, Values (Cultural) and Currency and presence of trade agreements (Administrative) for instance. More specifically, to share the same language has been shown to increase the trade between to countries of around 200%, while to share the same currency of around 340% (Ghemawat, 2001). To share the same Norms and Values, moreover, would facilitate the integration between the subsidiary, and its local staff, the parent-subsidiary relationship in case of Greenfield, or the collaboration between the two parts of a JV; it follows that in more distant countries, in terms of norms and values, the generation of a JV will be more difficult than in a closer one. However, as shown by the “Cultural distance paradox” this distance between the normative systems of the two countries could also lead to the need to “adopt” a local counter-part in order to gain legitimacy with the local environment.

The Geographic and Economic distances, on another hand, can be used as proxies to quantify those costs arising from the operative side of foreign activity and from risks that a firm incur when operating in a different context.

A higher Geographic distance increases the issues and the costs for intra-firm trade of goods, such as semi-finished good or raw materials. These extra-cost reduce the operative margin and make the break-even point more difficult to reach.

The Economic distance consists mainly in the differences between the economic environments in which the MNE aims to operate. Among these differences we have the GDP, the GDP pro capita or the average income or the availability and quality of local resources. All these aspect force the firm to modify its offer, adapting it to the local economic profile of its customers: a manufacturing firm that compete in the high-end market in Italy and is willing to entry an emerging country market, for instance, will probably have to reconsider its pricing strategy in order to keep its profitability.

This necessity to adapt the strategy to the host country economic profile augment the risk that the strategy, winner in the home country, would lead to an hard defeat in the foreign market, and thus losses.

In the following parts each of the four dimensions of distance will be taken

separately in order to generate four hypotheses concerning the relationship between distance and equity commitment.

3.2.1) Cultural distance

The majority of studies about distance and equity commitment are focused on the relation between cultural distance and equity ownership. However, as also stated by the Cultural Distance paradox, they show different findings.

To enter a culturally distant country presents several challenges due to uncertainty regarding the local environment and social norms. According to a stream of literature

(Brouthers & Brouthers, 2001; Erramilli & Rao, 1993; Gatignon & Anderson, 1988; Kogut & Singh, 1988; Meyer, 2001; Pak & Park, 2004) these challenges are addressed by choosing for a low equity commitment entry-mode such as licensing or JV; this because greater

cultural differences can lead to higher costs perception and generate extra costs in managing a network of employees with different expectations (Brouthers & Brouthers, 2001).

According to Anand & Delios (1997, p.591) “subsidiaries established in culturally distant countries encounter larger knowledge barriers”.

These barriers can be overcame by relying on a local partner (Gatignon & Anderson 1988) that acts as a bridge covering the cultural gap. Moreover, the local partner could integrate the MNEs knowledge with its own one about local market mechanisms and customer’s preferences, creating thus more possibilities of success. The inclusion of a local partner in the JV facilitates also the relationship with local institutions and, in highly

politically instable countries, reduces the risk of expropriation from the host government (Gatignon & Anderson, 1988).

On the other hand, high cultural distance may increase the cost of control over the counter-part (Brouthers & Brouthers, 2001); this is possible due to the market volatility in the host country, which can make more difficult for firms to forecast all possible outcomes, increasing thus transaction costs and management costs (Sutcliffe & Zaheer, 1998; Hennart, 1989). According to the Transaction Cost Economics (TCE) this increase in monitoring costs can lead to the choice of a wholly owned subsidiary when investing in a culturally distant country; more specifically, a WOS will be chosen when the cost of finding,

negotiating and enforcing a cooperative agreement are higher than the cost of direct control (Brouthers & Brouthers, 2001)(Erramilli & Rao, 1993; Hennart, 1989; Bowen & Jones, 1986).

However, the inclusion of a local partner in the investment could generate another set of challenges for the investing firm. When setting up joint operations there may be cultural clashes between the employees, due to their different common norms and values.

The choice of Wholly owned entry modes allows the MNE to avoid this eventual cultural frictions and to reduce the external uncertainty, and reduces also the cost of communication thanks to the centralization of decision making (Klein, Frazier and Roth, 1990; John & Weitz, 1988).

Both the streams of literature have provided strong results, and still nowadays the Cultural Distance paradox stands. According to this we can hypothesize that with low cultural distance between the two countries there is no real need of a local counterpart; at medium levels of distance firms rely on a local counterpart; while, when facing very high cultural distances, the challenges in setting up and monitoring joint operations with culturally distant partner could overcome the benefits of the JV.

Accordingly our first Hypothesis can be developed:

Hypothesis 1) The relationship between Cultural Distance between home and host country and the Equity commitment in the host country is U-Shaped.

3.2.2) Administrative Distance

Administrations play a relevant role in defining the economic activity of a country; they set the boundaries of what is legally admitted and what is not, and influence the flow of goods through the creation of barriers to free trade by depreciating, for instance, the national currency.

Another set of threats for MNEs can arise from the level of political risk of the host country, which is given by the probability of an unfavourable change in legislation or policies

(Henisz, 2000). This makes a target market more volatile by rendering its conditions and mechanisms less predictable for an investing firm; moreover, but this could happen only in case of regimes, there is also the possibility of an expropriation of the investment itself, generating thus a huge loss that cannot be addressed anyway by the investing firm (Gatignon & Anderson, 1988).

A way to reduce this set of risks is to include a local partner in the investment that could provide the knowledge about how to deal with local institutions and would reasonably reduce the probabilities of expropriation from the local government (Gatignon & Anderson, 1988).The host government itself could also force the foreign investing firm to “adopt” a local partner: before the accession of China in the World Trade Organization, in 2001, it was mandatory for foreign firms aiming to invest in China to select a local firm to include in the investment, this because the government wanted to improve local economy by forcing foreign firms to collaborate with local ones in order to enrich their set of competences and knowledge.

Corruption plays another relevant role in the location choice of FDIs: Habib & Zurawicki (2002) found that foreign investors tend to avoid corrupted nations since with a corrupted administration would be costly and risky. Moreover they found that not only corruption in general has a negative effect on FDIs, but also the relative difference in corruption levels between the host and the home country has an effect as well (Habib & Zurawicki, 2002).The results of their study, so, confirm what predicted in the Uppsala model: MNEs tend to prefer similar countries, in this case with a similar corruption level, when investing abroad.

To sum up, an institutionally distant country is perceived by MNEs as an unfriendly environment, with several unpredictable features. This, in turn, generates a higher risk for those MNEs investing in institutionally distant countries, risk which MNEs could prefer to deal with by opting for minority stakes in the investment.

To own a minority stake would protect the firm from the risk of expropriation and,

moreover, will enhance it with the inclusion of a local counter-part that can deal in a better way with local institutions. Hence, our second hypothesis:

Hypothesis 2) The Administrative distance between home and host country is negatively related to the equity commitment in the host country.

3.2.3) Geographic Distance

In the main literature concerning investments strategy, little attention has been paid to geographical distance. Some authors, such as Johanson and Vahlne (1977), have used it as a proxy for psychic distance while others (Caves, 1996) to proxy logistic and

transportation costs. According to Ghemawat (2001), generally, the farther a country is, the more difficult will be to conduct business in that country. This because distance affects the cost of transportation and communication, rendering thus operations more complex.

Geographic distance is not only the simple distance between country A and country B, but is also given by the “accessibility” of the country in terms of airports, seaports and infrastructure in general. Moreover, the concept is not only applied to physical goods but also to information flow, which can be measured through the telephone traffic and the communication infrastructure in the target country. By choosing to enter a distant country

through a WOS, an MNE could internalize the flow of information between the subsidiary and the parent and exert a better control over a very distant subsidiary.

If the investing firm, when acquiring a local asset, keeps the transaction external to the organization, information asymmetry could happen also in the negotiating process, due to the seller’s incentives in not to present the real value of the asset exchanged, or can arise as the investor do not have the right knowledge about the local economic environment

(Ragozzino, 2009).

In the M&A activity, for instance, have been found that, due to information

asymmetry, acquiring firms register higher returns over the investment when investing in geographically closer countries (Ragozzino, 2009). More specifically, Grote and Rucker (2007), by analyzing a sample of acquisitions, found that German firms experience positive abnormal returns on the investment of 6,5% when investing in geographically closer

countries, while they experience an average loss of 4,4% in other deals.

Moreover, according to Ghemawat (2001), trade and economic activity in general between two countries is increased of around 330% when the two countries share the same regional trading block, as the case of the European Union ones.

To sum up, due to the information asymmetry that arises from distance, and the generally lower returns registered in the M&A activity, it is possible to conjecture that investing firms opt for a lower ownership in the stake in order to diversify their portfolio of foreign investments (Ragozzino, 2009).

Thus our third hypothesis can be developed:

Hypothesis 3) When investing abroad, a higher geographic distance is associated with a lower equity commitment.

3.2.4) Economic Distance

With the term “Economic Distance”, Ghemawat (2001) refers to the differences in wealth and income of local consumers and to differences in the cost and quality of workforce.The “economic profile” of the local customers has a massive effect on the uncertainty and the risk perceived by an MNE in the host country.

This because in economically close countries, and thus with similar customer’s base, an MNE aiming to enter the market would need to replicate its own strategy with very few adaptations to local conditions (Ghemawat 2001). Accordingly, since there is no need of implementation of resources such as local market knowledge from an external local partner, MNEs are hypothesized to opt for a WOS when entering the host country. Also Tsang and Yip (2007) have analysed economic distance at national level in terms of developed and developing countries and found that acquisition and WOS made in developed countries, by MNEs from developed countries as well, were more successful than FDIs made in

developing ones.

When investing in economically distant countries, with different customer’s base, a MNE is required not to adapt, but more likely to significantly modify its competitive strategy and its cost structure in order to keep its profitability. This requirement clearly increases the operative risk that the MNE have to face and generate the need of

implementation of resources, such as local market knowledge, provided by a local partner. To share the ownership with a local counterpart would provide the firm with the right competences about local pricings, distribution channels and volumes supported by the market, in order to develop a better entry strategy.

According to Ghemawat (2001) however, the economic distance between two countries is positively related to differences in information or knowledge and in quality of

human resources. In order to avoid frictions that would overcome the benefits of a JV, MNEs are more likely to invest in highly economically distant countries with a greenfield. To fully own the operations and the assets, moreover, would enhance the firm with a better control on the operations’ quality and to have a better flow of information between the divisions. Hence, the hypothesized relationship between economic distance and equity commitment is a u-shaped one.

Hypothesis 4) The relationship between Economic Distance between home and host country and the Equity commitment in the host country is U-Shaped.

3.3) The Moderating effect of R&D intensity

It is generally accepted that competitive advantage for MNEs lies in the interaction of two sets of advantages: location specific ones (LSA) and firm specific ones (FSA). LSAs are factors external to the firm; more specifically are unique advantages from the host country such as low cost of labour, low corporate taxation or other elements that have a comparable advantage compared to another country (Rugman, 1981).

FSAs, on the other hand, are the roots of competitive advantage, because they

differentiate the firm from its competitors. They are those unique assets owned by the firm, such as its brand or its machinery and technologies, whose possession allows the firm to overperform its competitors. The possession of R&D advantages (FSA), could help the firm in finding an adequate and coherent positioning in the host country, avoiding legitimacy problems with the local environment; this may happen for chemical firms for instance that, with their superior technology can achieve higher performance, reducing thus the perceived risks in the initial phase of the investment. From another perspective, technology intensive MNEs are more likely to invest with a major equity commitment in order to avoid any

technology leakage from a local counterpart; investing through a WOS would also allow the firm to protect its patents.

For this reasons, firms with high R&D intensity, may perceive the target country as less distant due to the moderating effect of R&D on the perceived risk and costs.

Accordingly R&D intensity is hypothesized to have a positive moderating effect on the relationship between equity commitment and all the aspects of distance.

Hence, our last Hypothesis:

Hypothesis 5) Innovation positively moderates the relationships hypothesized in hypotheses 1,2,3 and 4.

4) METHODOLOGY

4.1) Sample and data collection

The sample consists of the 100 largest Italian firms, according to their revenues in 2013. Given the aim of the study, the sample is restricted to firms whose Global Ultimate Owner (GUO) is head-quartered in Italy. The firm specific data was obtained from ORBIS, a database provided by the Bureau van Dijk containing information, from financial reports to shareholder composition, on companies worldwide.

The data taken from ORBIS have then been integrated with the information provided by the annual reports (2013) published by companies on their own websites.

If no reports were available, the cells containing the relative observations (i.e total sales, R&D and Marketing Expenditure) have been left empty.

The original sample was composed by 4787 foreign subsidiaries; however some of the observations missed data about the percentage of ownership by the controlling firm,

providing thus no information concerning the ownership structure of the considered

subsidiary; accordingly those observations have been removed from the sample reducing it to 2481 observations. Since the aim of the paper is to assess the internationalization patterns of Italian firms or, in other words how Italian firms deal with distance when investing abroad, also the subsidiaries located in Italy have been removed from the sample lowering thus the number of significant observation to 1698.

The categorization of countries according to specific regions was achieved through the use of the United Nations country classification as done in prior research (Banalieva &

Dhanaraj, 2013).

4.2) Variables

4.2.1) Dependent Variable:

Total Stake in the affiliate: It is expressed as a dummy variable with two possible outcomes: 0 when the ownership is shared (total stake < 100%) and 1 when the firm possesses the 100% of the equity of the subsidiary (total stake =100%).

4.2.2) Independent Variables:

Cultural Distance: Express the cultural distance from Italy to the target country taken into account. It has been calculated through the Kogut & Singh index. The distance is calculated from the deviation along each of the cultural dimensions of the host country from the home one; these deviations were then corrected according to the difference in variance for each dimension and then arithmetically averaged (Kogut & Singh, 1988).

Administrative Distance: Express the difference in terms of Economic freedom to do business in the country, a score has then be developed in order to rank countries from the

most “institutionally friendly” to the less one; data has been taken from the 2014 Fraser index of Economic freedom of the World, by the Fraser Institute. The index, in practice, measures the size of the government, from expenditures and taxes, the legal structure and security of property rights, the access to capital, the freedom to trade internationally and the regulation of credit, labor and business. All the scores are then combined into a single number, from 0 to 10, which represent the Economic freedom, in terms of administrative and political setting, in the country.

Geographic Distance: It has been calculated in two ways:

1) as the distance in KM from Rome to the capital of the host country

2) with a dichotomous variable indicating whether the host country is in Europe or not: The categorization of countries according to specific regions was achieved through the use of the United Nations country classification as done in prior research (Banalieva & Dhanaraj, 2013).

Economic Distance: Calculated as the difference in GDP procapita between Italy and the Host country.

4.2.3) Control variables

Firm’s age: Firm’s age represent the extent of time from which the firm is operating in its business, this makes it a very useful proxy for firm’s experience. An older firm is more likely to have more experience in dealing with FDIs and in managing overseas operations such as partnerships or licensing. Experience increases the firm’s market knowledge, reduces uncertainty and is thus considered a firm-specific advantage (Dunning, 1988). Accordingly a more experienced firm may perceive a reduced effect of distance, in its four aspects, on the decision process concerning the equity commitment in the investment.

Firm’s size: Firm size represents the extent to which the organizational boundaries are extended. It is commonly used as a proxy to measure the amount of resources available to the firm. From an operative point of view, for instance, bigger firms can rely on scale advantages while from a financial point of view, it has been found that larger firms can rely on a lower costs for financial resources in terms of lower interest rate on loans (Kurshev, A. & Strebulaev, I.A., 2005). Accordingly we can assume that larger firms have an easier access to resources and competences within the organization itself, it follow that there is a lower perceived risk concerning the feasibility of the investment. Moreover a better access to resources would allow the firm not to rely on any counterpart, which share the investment with.The reduction of the perceived risk, due to the easier access to resources, reduces, in turn, the effect of distance on the equity commitment choice.

4.2.4) Moderator Variable

R&D Intensity: Calculated as the ratio between research & development expenditure and total sales, it is commonly used as a proxy for the possession of intangible assets by the firm. A common topic dilemma international activities is whether a firm should enter the foreign market through its own subsidiary production or opt for other entry strategies such as export and licensing. The main answers concern the possession, by the firm, of some resources such as superior technology or an established brand. According to Dunning

(1988) the possession of any firm specific advantage, such as a superior technology, allows, if not forces, the firm to internalize the operations in order to keep the control over the traded asset.

In other words, a firm with a superior technology and that uses a shared ownership entry mode in the foreign market could experience a reduction of the value associated to its

technology due to its spillover to the counterpart that could re-invent or reproduce the shared technology; moreover a diffusion of the technology could in turn lead to a

technology leak from competitors, reducing the added value of the technology; accordingly would be better to enter in the mentioned foreign market through a full ownership mode in order to keep the control and the sole possession of the asset.

4.3) Analysis & Results:

A total of four models have been run in order to test the hypotheses, and the control and moderating effect of the variables.

The results of descriptive statistics and correlation among variables are shown in table 1.

The first two models (table 2), a binomial logistic regression, have been run to test the hypothesized linear relationship among the variables, including the control ones, and, accordingly, to test the hypotheses number 2 and 3.

Logistic regression has been chosen because it allows to predict the relationship between a set of independent variables and a dependent one categorized in two groups.

Accordingly, the dependent variable’s observations have been categorized in two groups: Sole ownership (=100%, labelled as 1) and shared ownership (<100%, labelled as 0); this in order to find any relevant pattern concerning the relationship between degree of ownership and distance. Logistic regression analysis doesn’t require any check concerning normal

distribution, linearity and covariance, this because it doesn’t assume any distribution of the predictor variables (Ho, 2013). The only requirements for a binomial logistic analysis are: classification into categorical data for the dependent variable and a sample size great enough.

As measures for the fit of the model, the Hosmer and Lameshow test and the

Negelkerke pseudo R-square have been used; their parameters values are not acceptable for significance (Hosmer and Lameshow, Sig.= 0.003; pseudo R square= 0.153).

Hypothesis number 2 can be accepted (Sig= 0.000) and show a positive correlation (B= 0.611) between administrative distance and equity commitment.

Considering that hypothesis 2 associates a greater administrative distance with a lower equity commitment, and that our model shows a positive relation, hypothesis 2 is not confirmed. In this model, moreover, we have to reject hypothesis 3 due to low significance for both its independent variables (Sig= 0.674 // Sig= 0.380).

The third model includes also the quadratic terms, in order to test the U-shaped relationship between equity commitment in the host country and cultural distance between home and host country in hypothesis 1 and between economic distance and equity

commitment in hypothesis 4. Model number 3 has a very low explanatory power due to the low R-square value (0.167) and a Hosmer and Lameshow test significance of 0.000.

As shown by table 3, hypothesis 1 is accepted in terms of significance (0.008); however the U-shaped relationship between cultural distance and equity commitment is not confirmed due to the negative value of B (-0.148).

Concerning the hypothesized U-shaped relationship between economic distance and equity commitment, it must be rejected due to low significance (Sig.=0.066)

The analysis for the moderation was run in Model 4; where the interaction terms and the moderating variable are considered. Again the model shows a low explanatory power due to the low R Square value (0.187) and a low significance for the Hosmer and

Lameshow test (0.000). The moderating effect of R&D intensity is tested in all the analysed relationships among equity commitment and the different aspects of distance.

A negative moderating effect has been found between cultural distance and equity

commitment (B=-.202), suggesting that firms investing more in R&D will deal with higher distances with major equity commitment compared to same firms but with a lower R&D expenditure. However, due to low significance (Sig.=0.872), hypothesis 1b is rejected. Due to low significance, also the hypothesis suggesting a positive moderation effect between equity commitment and administrative distance have to be rejected (Sig.=0.192). Accordingly hypothesis 2b is rejected.

The moderating effect between equity commitment and geographic distance, due to low significance (Sig.=0.134) of the variable calculated as kilometric distance, is analysed through the dichotomous variable “belonging to the same region”. The effect has been found to be a positive one, with a B=0.845 and a significance of 0.048 hence, hypothesis 3b is confirmed.

Also the last hypothesis, 4b, that suggests a positive moderating effect between equity commitment and economic distance, is accepted for its significance level (Sig.=0.006). The found relationship, however, is a neutral one (B= 0.000); hence hypothesis 4b is not

confirmed.