UNIVERSITY OF GRONINGEN
The Asymmetry of Distance
and Entry Mode Choices
Master Thesis
Jiang Chongjing
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The Asymmetry of Distance and
Entry Mode Choices
Abstract
‘Liability of foreignness’ (LOF) has been proved to exist and its effects have been accepted by most researchers. It has been agreed that as distance increases between home countries and host countries, LOF increases. And to mitigate LOF certain entry modes can be applied. However, the same distance does not necessarily lead to the same LOF, which means different choices of entry mode. Due to the asymmetric effect of distance, the LOF MNEs encounter would be different when one goes from country A to country B compared with what it is from B to A, though the distance is the same. So do the most frequently used entry modes. This research proves that distance has direction and this asymmetry can adjust distance’s effects on entry mode choices through causing different LOF. Generally as distance enlarges, MNEs prefer high-commitment entry modes like wholly-owned subsidiaries or acquisition. However, when MNEs enter developing markets from developed home countries, they tend to choose lower-commitment entry modes compared to MNEs whose home countries are developing countries and want to expand to advanced markets. Implication is that distance does have direction and it plays an important role in shaping MNEs’ entry mode choices.
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Content
CHAPTER 1 INTRODUCTION ... 4
CHAPTER 2 THEORETICAL CONSIDERATIONS ... 8
2.1 Distance, liability of foreignness and level of commitment ... 8
2.2 Asymmetry in distance and liability of foreignness ... 9
2.2.1 Administrative distance ... 10
2.2.2 Economic distance ... 12
2.3 Asymmetry in distance and level of commitment ... 13
CHAPTER 3 DATA AND METHOD ... 17
3.1 Data Collection ... 17
3.2 Measurement ... 18
3.2.1 Dependent Variable ... 18
3.2.2 Independent Variable ... 18
3.3 Testing Hypotheses ... 20
CHAPTER 4 EMPIRICAL RESULTS ... 21
4.1 Visualized evidence ... 21
4.2 Statistical Evidence... 23
4.3 Implications ... 26
CHAPTER 5 DISCUSSION AND CONCLUSION ... 30
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CHAPTER 1 INTRODUCTION
Globalization has become a popular phenomenon and an inevitable trend in the last few decades. As technology grows more advanced and open policies occur more often, doing business abroad becomes more common and easier, especially for the companies that are successful and not satisfied with only being active in domestic markets (Bernard et.al, 2011; Harzing, 2004).
However, when a company is trying to expand and open new units in foreign markets, there are several issues that should be taken into consideration and several obstacles they may encounter. As Hymer (1976) and Kindleberger (1969) mentioned, when a multinational enterprise (MNE) tries to start business abroad, this will incur some costs that result in a competitive disadvantage for the new subunit, which is identified as ‘liability of foreignness’ (LOF). This liability of foreignness can be caused by high transporting costs, lack of legitimacy, and lack of knowledge about the local customers’ preferences or the financial situation of the new market.
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acquisitions) when cultural distance between the home country and new markets enlarges (Chen & Hu, 2002; Gatignon & Anderson, 1988; Taylor, Zhou & Osland, 1998).
Despite the fact that the influence of cultural distance on entry mode choices is still blurring and debatable, more and more researchers have found out that cultural distance is not the only factor that can influence LOF and shape the choices of entry modes (Harzing, 2004). For example, the preference for equity-based entry modes in international alliances could very well be due to the differences in legal systems (Chen, 2003; Harzing, 2004; Sengupta & Perry, 1997). Moreover, this is also rooted by other researchers. As Kostova and Zaheer (1999) argued, MNEs operate in a variety of institutional environments and have to comply with institutional pressures from both home and host countries. A large institutional distance has been associated with the difficulty of both the gain of legitimacy in the host country and the transfer of organizational practices and competencies from home country. Hence the MNEs’ choices of entry modes that are made to overcome liability of foreignness while going abroad, could be affected by distance between home country and host country; not only cultural distance, but also institutional distance (Xu & Shenkar, 2002).
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namely inducing the liability of foreignness in the new market (Ghemawat, 2001). In order to mitigate these costs caused by distance, which means to overcome LOF and outperform the local firms; MNEs can choose certain entry mode which is tailored for solving the problems brought by distance (Zaheer, 1995).
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B compared to from point B to A), which may also lead to differences in level of commitment a MNE is willing to make while entering new markets.
Therefore my research question is: Is there an asymmetry in distance which might cause different amount of ‘liability of foreignness’ within a country pair, when expanding business along two opposite directions? And if so, how does this asymmetric effect adjust distance’s impacts on level of commitment of MNEs’ entry mode choices? To answer these questions, the possible correlation between liability of foreignness and level of commitment of entry modes will be hypothesized. Also the asymmetry of distance will be examined. 11 countries are involved and six of them are developed countries and rest five developing countries. To make sure the asymmetry can be easily observed, it is better to focus on large distances. Hence in this research 30 country pairs are formed, with one of the developed countries and one of the developing countries. In this way the long distance enables the possible effects of asymmetry becoming easier to discover. While on the other hand forming pairs is more convenient to make comparisons of MNEs’ entry mode choices, thanks to the fixed distance they enjoy within each country pair. All the available data about two kinds of MNEs’ entry modes within these country pairs from 2002 to present in Zephyr Database will be involved. As a result, there will be a clearer clue about whether there is an asymmetry in distance and what role does it play in shaping MNEs’ entry mode choices.
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CHAPTER 2 THEORETICAL CONSIDERATIONS
In this chapter, key concepts of this research- distance, liability of foreignness, level of commitment and asymmetry in distance- are explained and explored in accordance to prior studies. The potential relationships among these terms are both hypothesized and proposed.
2.1 Distance, liability of foreignness and level of commitment
As explained in the first chapter, there is ‘liability of foreignness’ that a firm will encounter when it starts to do business in a new country (Hymer, 1976). And as the distance between the home country and the host country increases, the liability of foreignness becomes larger. To overcome this liability of foreignness and mitigate the costs incurred by it, MNEs tend to use different entry modes tailored for certain situations (Kostava & Zaheer, 1999). Especially when the new market is extremely distant, namely the liability of foreignness is high, a proper entry mode is pivotal for the company. It makes sure that firm can transfer and maintain its competitive strength and outperforms the local corporations. To invest in a distant host country inevitably means a shortage of local knowledge, which includes the business environments, business behaviors, law systems, etc. (Brouthers & Brouthers, 2000; Scott, 1995; Xu & Shenkar, 2002; Zaheers, 1995).
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relationship between LOF and level of commitment of entry mode choices will be monodirectional and curvilinear instead of being U-shape or an inverted one. And so do all the other hypothesized relationships in this research. This leads to the following hypothesis:
Hypothesis 1a: The distance between home country and host country, which can be a proxy of the amount of LOF in the host country, is negatively related to the level of commitment of entry modes preferred by MNEs.
However, the long distance could also be the reason of applying high-commitment entry modes like wholly-owned subsidiaries or acquisitions. Due to the high uncertainty involved in a very distant market, the transaction costs become very high and monitoring agents becomes harder (Gartignon & Anderson, 1988). Instead of spending lots of money on transporting export goods or counting on the cooperation with local partners, companies would rather acquire or set one of their own subsidiaries in the new market (Chen & Hu, 2002; Taylor, Zhou & Osland, 1998). The new affiliate can inherit the competency of parent firm and it also allows easier application of management practices which are developed at home (Cho & Padmanabhan, 1995). This leads to the following hypothesis:
Hypothesis 1b: The distance between home country and host country, which can be a proxy of the amount of LOF in the host country, is positively related to the level of commitment of entry modes preferred by MNEs.
2.2 Asymmetry in distance and liability of foreignness
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to different liability of foreignness, even within the same country pair and enjoys the same distance.
Though according to Ghemawat’s (2001) distance theory there are four dimensions: cultural distance, administrative distance, geographic distance and economic distance, not all of them enjoy a stark asymmetry which might make a difference in inducing LOF. In this research, it is being argued that the unbalance of liability of foreignness within a country pair is mainly being caused by asymmetry in administrative and economic distance instead of cultural distance and geographic distance. It is undoubtedly that geographic distance can increase the costs of doing business abroad due to the high transportation costs. But the costs would be the same when the distance is fixed, no matter which direction a MNE goes along. Thus there is no asymmetry in geographic distance that could lead to a variation in LOF and then shapes entry mode choices of MNEs. As for cultural distance, its effect on the differentiated LOF within a country pair can also be overlooked. For example, there is no significant difference in liability of foreignness when MNEs enter a highly individualistic society from a highly collectivistic society compared to the other way around. A big cultural distance can lead to a lack of knowledge about local business environment and behaviors that can increase LOF, but it makes no difference with the direction a MNE is going along when the distance is identifies. Only when it comes to the lack of legitimacy which is caused by the distinction of legal system or financial support, namely administrative distance and economic distance, the asymmetry might play an important role in distinguishing LOF and shaping entry mode preferences.
2.2.1 Administrative distance
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administrative systems compared to developing countries: complete legal system, more transparent business environment and better corporate control.
When a company starts to enter a new market, it tends to abide the rules of the host country, especially from regulative aspects (Scott, 1995). It is the most pivotal and reasonable way for company gaining legitimacy in the new country. It is also the first step when a MNE tries to adapt to the new environment. When companies start a new business in a developed country, which owns a highly-developed administrative system, before they try anything they can always find explicitly-indicated rules about it. In this way it is easy to find out what can be done and what would be considered as a violation of law. Thus the firms are able to successfully gain legitimacy and can to some degree mitigate the LOF brought by distance.
However, it seems more difficult to gain legitimacy in a developing country. This is due to its lack of clearly-stated formal institutions but more powerful cultural norms compared with what it is in an advanced country. Instead of being strictly regulated by legislation, developing countries tend to be regulated sometimes by informal institutions like peer pressure, network, etc. This may cause confusion and difficulties during companies’ decision-making while expanding to a new market. A simple example is that some behaviors like bribe and corruption are regarded as legitimate in developing countries, while at the same time are illegal in developed countries. This difference in conception of the same behavior might make it hard to gain legitimacy and to outperform local companies, especially in countries that are underdeveloped in administrative system. This can get even worse when the MNEs already get used to the way doing business under detailed instruction from formal institution of their home countries. They may find it challenging to fit in the new environment.
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developing countries. This leads to the following proposition:
Proposition 1a: Ceteris paribus, the liability of foreignness due to distance is higher when MNEs originating from developed countries enter developing countries, compared with the other way around.
2.2.2 Economic distance
Nevertheless, from economic distance’s perspective, it can be argued in a totally different way. Economic distance indicates the difference of level of economic development. Countries which are better developed in economy would allow people with higher incomes and high purchasing powers, which is definitely a signal of attractive market. And for the investors in these countries, they can acquire information, human and financial resources with better quality (Ghemawat, 2001). Whereas in less developed countries the consumers’ purchasing power might be low, but the costs of labor are also low. These lead to a trade-off and should be taken into consideration when companies going abroad, which makes it one of many ways how economic distance shapes MNEs’ entry mode choices.
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weakness. Therefore compared with companies which expand into advanced markets from emerging countries, MNEs that headquartered in developed economies are faced with lower liability of foreignness when they try to enter emerging markets. This leads to the following proposition:
Proposition 1b: Ceteris paribus, the liability of foreignness due to distance is lower when MNEs originating from developed countries enter developing countries, compared with the other way around.
2.3 Asymmetry in distance and level of commitment
The distance and differences between developed countries and developing countries are large. MNEs are facing institutional pressures from both home country and host country (Kostova & Shenkar, 1999). As argued before in Proposition 1a, this pressure from host country can be even bigger when it is a developing country, due to its difficulty to gain legitimacy. The lack of local political, cultural and societal norms urges a MNE to either choose a safe way as exporting or work with a local partner instead of barging into the new market all on its own.
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controlled and minimized.
To conclude, when companies start new business in developing countries which are famous with implicitly-indicated informal institutions, the difficulty of blending into local environment in a short time prevents them from starting on their own. Especially when they get used to doing business in a transparent and strictly regulated environment of their home countries, this obstacle can be even harder to overcome. Yet for MNEs entering developed countries from developing countries, the institutional pressure they are under is less, which makes them more willing to make high commitment. This leads to the following hypothesis:
Hypothesis 2a: When MNEs originating from developed countries enter developing countries, the level of commitment of entry modes they prefer is lower than the other way around.
However, there are always costs and uncertainty involved when working closely with foreign partners as is the case in joint ventures. In that situation, wholly-owned subsidiaries might be more appropriate to allow easy application of organizational routines developed in the home country (Harzing, 2004). This is especially the case when MNEs go to developing countries from developed countries. Companies in developed countries tend to be more advanced in both technology and management practices than those in emerging countries. If the entry mode is low-commitment, firms’ performance might be hindered since they have to rely on the lagged techniques in emerging countries. Only by starting their own subunits can MNEs transfer and maintain their initial competencies in the new market. And a majorly-owned subsidiary works better to allow easy application of organizational routines developed in the home country (Harzing, 2004).
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establishment of new subsidiaries can also be welcomed and supported by governments of developing countries since it brings them lots of employment opportunities.
Besides, due to the highly developed informal system in developing countries, there are more to be considered when forging a partnership, such as network, corruption, etc. Transaction costs would be high due to the complexity and high uncertainty. And it would be hard to monitor agents or unreliable to count on partners. In this way MNEs would rather have their own subsidiary than sharing ownership with local firms. However, from the perspective of developing countries’ companies which want to invest in developed countries, low-commitment entry mode may be in their favor. As argued before in Proposition 1b, the economic development in developed countries is more advanced, and this unavoidably leads to higher expenses in the host country. Yet the earnings from home country are relatively low, which reflects a lower quality of financial support. Under this circumstance, it would be more profitable for companies to produce domestically and then export. To keep as much work in home country as possible, namely apply low-commitment entry mode, these firms can enjoy the cheap labor and resources rather than hiring expensive workers and buying costly materials in the host country.
Thus when MNEs go along the direction from developed countries to developing countries, it is in their interest to commit more in host countries so that they can maintain their competencies of being advanced and also enjoy the low costs on labor. As for MNEs whose home countries are emerging countries and want to invest in developed countries, they tend to choose low-commitment ways so that costs can be minimized and profits can be maximized. This leads to the following hypothesis:
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CHAPTER 3 DATA AND METHOD
To test the hypotheses, two main factors should be stressed and measured: distance and level of commitment of entry modes. First of all, based on the presumption that the liability of foreignness increases as distance increases, the relationship between level of commitment of entry modes and distance will be investigated, which solves the paradox of how liability of foreignness shapes the level of commitment of entry modes. Secondly the difference in level of commitment of MNEs’ entry mode preferences within country pairs is examined. If there is a variation, it means that the liability of foreignness a MNE encounters is not the same when it invests from A to B than from B to A. Thus the existence of asymmetry in distance can be proved and afterwards its contribution in shaping entry mode choices can be found out.
3.1 Data Collection
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FIGURE 1 30 Country Pairs Formed by Developed and Developing Countries
3.2 Measurement
3.2.1 Dependent Variable
The level of commitment of entry mode choices is the dependent variable in this research. All the data is collected from a database named Zephyr, which is regarded as the most comprehensive database of deal information that contains information on M&A, IPO, private equity and venture capital deals and rumors. According to the availability of data, there are two types of entry modes being focused on: Acquisition which enjoys a relatively high level of commitment and Joint Venture which enjoys a relatively low level of commitment. All the cross-border deals about sample countries available in Zephyr from 2002 to present are involved (5085 deals). And a dummy is applied to represent dependent variable: 0 for Joint Venture and 1 for Acquisition, which is also in accordance to the higher or lower level of commitment.
3.2.2 Independent Variable
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economic distances are dominant in shaping distinguishing entry mode choices within country pairs. To measure administrative distance, data from World Bank WGI are applied. The Worldwide Governance Indicators (WGI) capture six key dimensions of governance (Voice & Accountability, Political Stability and Lack of Violence, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption), which are based on a long-standing research program of the World Bank. Among these six indicators, Regulatory Quality and Government Effectiveness seem to be the two factors that are most appropriate to reflect the completeness and development of a country’s administrative system. Due to the relatively high correlation of these two groups of data (0.63, p<0.01), only Government Effectiveness is being selected to measure the administrative distance within country pairs. This is due to the fact that doing business is not only about the quality of legal system, but also many other issues like introducing new policies, verdict of business proposals, etc. Thus Government Effectiveness seems more relevant and proper in this case. As for economic distance between home country and host country, the difference of economic power of different countries can be calculated based on GDP data provided by World Bank World Development Indicator (WDI), which is a widely approved way of representing a country’s economic development level.
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TABLE 1 Descriptive Statistics and Bivariate Correlations
Variable Mean S.d. 1. 2. 3. 4. Level of commitment 0.52 0.50 1 Administrative distance 1.54 0.28 0.12* 1 Economic distance 0.34 0.86 0.13* 0.02* 1 Direction 0.18 0.38 0.34* 0.09* 0.06* 1 Notes: *p<0.01. Number of observations = 5085. 3.3 Testing Hypotheses
Since the dependent variable is a dummy variable and only has two outcomes, Binary Logistic Regression Analysis has been chosen to test the hypotheses. Hypothesis 1 examines the relationship between level of commitment of entry mode choices and LOF, with the latter being proxied by distance. Therefore the dummy variable for entry modes (0 for Joint Venture which is lower commitment, 1 for Acquisition which is higher commitment) and the data about administrative and economic distance within 30 country pairs will be involved and analyzed.
When it comes to Hypothesis 2, which tests the effect of FDI’s direction on the level of commitment of entry modes, a logistic regression is also applied. What is different is that the dummy variable of direction (0 for direction from advanced countries to developing countries, 1 for the other way around) will be involved so that direction’s effects can be revealed.
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CHAPTER 4 EMPIRICAL RESULTS
In this chapter, results of the tests and their implications are revealed. Before showing the results from statistical analyses, a chart is provided to give readers some rough idea about the possible existence of asymmetry in distance.
4.1 Visualized evidence
Table 2 shows all the cross-border deals within 30 country pairs which are formed by one of the six developed countries (United States, United Kingdom, Germany, France, Japan and Singapore) and one of the five developing countries (Russia, Brazil, China, India and Thailand). There are three groups of data: total deal numbers of Acquisitions and Joint Ventures, the percentage of Acquisitions and the percentage of Joint Ventures. Lines with arrow show the general direction of FDI, which help readers to understand. From a glance at the table it is easy to see that the preference of entry modes are not the same for MNEs in different countries (the percentages of certain entry mode are different), even the two within a country pair and have the same distance. Take the country pair of China and US as an example, among all the deals that America’s MNEs had from 2002 to present when entering Chinese market, 48.05% are acquisitions and 51.95% are joint ventures. However, the choices China’s MNEs made when entering American market are a lot different. There is a strong preference for acquisition which is as high as 88.89% among all the deals, while the joint venture only holds a percentage of 11.11%.
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TABLE 2 Different Level of Commitment of Entry Modes within 30 Country Pairs Level of
Commitment of Entry Mode Choices
Home Countries of MNEs Western Developed Countries
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Therefore, to seek for more evidences from formal statistical analysis and to further test the hypotheses, Logistic Regression Analysis is applied and the results are given in the following part.
4.2 Statistical Evidence
As mentioned before in Chapter 3, there are one dependent variable and three independent variables in this research to test the hypotheses. The dependent variable is a dummy variable which stands for the entry mode choice of MNEs when they are targeting foreign markets. There are two kinds of entry modes in this research: Acquisition and Joint venture, and to align with the real order in level of commitment, acquisition is represented by 1 whereas joint venture 0. With the dependent variable being a dummy variable, Logistic Regression Analysis has been applied. As for the three independent variables, one is dummy variable which stands for the different directions within a country pair and the rest two measure distances: administrative distance and economic distance.
As illustrated in Table 1, the correlations among dependent variables are quite low, therefore brings the possibility to involve all of them in the same regression test without causing multicollinearity. Table 3 shows the results from the Logistic Regression Tests. Numbers in square parentheses are exponentiated raw coefficients. The meaning of it is that as independent variable increases with one unit, the odds of the appearance of dummy-coded-1 dependent variable
(
𝑃𝐴𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛⁄𝑃𝐽𝑜𝑖𝑛𝑡 𝑣𝑒𝑛𝑡𝑢𝑟𝑒)
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higher level of commitment of entry mode like acquisition, instead of joint venture.
TABLE 1The Impact of Distance and Direction on Entry Mode Choices: Binary Logistic Regression Analysis (AD=Administrative distance, ED=Economic distance)
Model 1 Model 2 Model 3 Model 4 Model 5 Constant 0.071⁺ (0.028) [1.073] 0.071⁺ (0.028) [1.073] -0.253* (0.031) [0.776] -0.241* (0.032) [0.786] -0.239* (0.032) [0.788] AD 0.901* (0.109) [2.461] 0.707* (0.109) [2.028] 0.935* (0.124) [2.546] ED 3.002* (0.335) [20.128] 2.888* (0.362) [17.956] 2.352* (0.387) [10.510] Direction 2.284* (0.108) [9.818] 2.248* (0.109) [9.467] 2.331* (0.116) [10.285] AD*Direction -1.502* (0.387) [0.349] ED*Direction 2.949* (1.137) [19.081] R2 0.02 0.02 0.17 0.19 0.20 Notes: Values are standardized regression coefficients.
⁺p<0.05, *p<0.01.
Standard errors appear in parentheses.
Exponentiated raw coefficients (increase in odds per unit) appear in square parentheses. Number of observations = 5085.
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opposite direction. Thus Hypothesis 2b, which suggested a higher level of commitment is associated with the direction from developed countries to developing markets, is rejected.
Since the results already showed that the level of commitment of entry modes increases as distance between MNEs’ home country and targeting country enlarges, which means the larger the LOF, the higher the level of commitment. Besides, it has also been discovered that higher level of commitment is associated with the direction of MNEs which headquartered in developing countries and expand to developed countries. Therefore it can be inferred that within a country pair, ceteris paribus, when a developed country’s MNEs try to enter emerging markets, they prefer higher level of commitment of entry modes and will encounter with higher liability of foreignness. In this way Proposition 1b can be supported and 1a is rejected, since the prior one argues a higher LOF for MNEs originating from developed countries who want to invest in emerging markets while the latter suggests the other way around. In sum, Hypotheses 1b, 2a are supported, while Hypotheses 1a, 2b are rejected. Proposition 1b tends to be correct and Proposition 1a is not.
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Model 5 from Table 3 can be written as Formula 1 and Formula 2:
𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦𝐴𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛= 1+𝑒1−𝑔(𝑥); (1) while 𝑔(𝑥) = −0.237 + 0.935 ∙ 𝐴𝐷 + 2.352 ∙ 𝐸𝐷 + 2.323 ∙ 𝐷𝑖𝑟𝑒𝑐𝑡𝑖𝑜𝑛
−0.943 ∙ 𝐴𝐷 ∙ 𝐷𝑖𝑟𝑒𝑐𝑡𝑖𝑜𝑛 + 3.074 ∙ 𝐸𝐷 ∙ 𝐷𝑖𝑟𝑒𝑐𝑡𝑖𝑜𝑛 (2) And the predicted probability of joint venture being chosen as an entry mode is 1 − ProbabilityAcquisition.
In the following part a few graphs of regression results are provided to show a clearer picture about the relationship between distance, direction of FDI and level of commitment of entry mode choices.
4.3 Implications
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FIGURE 2The Impact of Distance within Country Pairs on Entry Mode Choices (AD=Administrative distance, ED=Economic distance)
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FIGURE 3 The Impact of Administrative Distance with Direction on Entry Mode Choices (1=from developing countries to developed countries, 0=from developed countries to
developing countries)
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to developed markets are far less than the other way around (848 deals compared with 3771 deals).
FIGURE 4 The Impact of Economic Distance with Direction on Entry Mode Choices (1=from developing countries to developed countries, 0=from developed countries to developing
countries)
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CHAPTER 5 DISCUSSION AND CONCLUSION
This research shed some light on the relationship between distance, LOF, direction of FDI and entry mode choices. Even though some of them are already studied over and over again, still there are two main contributions of this research. First of all, it has been proved again that the larger the distance between home country and host country it is, namely the higher the liability of foreignness it is, MNEs tend to make higher level of commitment when it comes to entry mode. This goes along with findings of many other prior researches (Chen & Hu, 2002; Cho & Padmanabhan, 1995; Gartignon & Anderson, 1988; Taylor, Zhou & Osland, 1998). When entering a very distant market, the extreme unfamiliarity may lead to difficulties in building trust with any local partners. The transaction costs can be high and monitoring agents can be really resource-consuming. In this case companies may be more willing to start from scratch, which also enables bringing certain practices and protocols that are already proved to be effective in parent firm.
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modes grows together with administrative distance, the impact is still not as strong as economic distance.
The second main contribution is about distance’s asymmetry and its effect on entry mode choices. After Shenkar brought up the idea in 2001 that distance has direction when it comes to FDI (Shenkar, 2001), little research has been done to elaborate more on this subject. This research proves the existence of asymmetry in distance, and it plays a significant role in shaping MNEs’ decision-making about entry modes. Even enjoys the same distance within a country pair, the LOF MNEs have to overcome along different orientations varies. So do companies’ choices about how to enter new markets. The results of this research has illustrated that MNEs that headquartered in developing countries tend to suffer from larger liability of foreignness when they try to expand their business in emerging markets, compared to the other way around. The level of commitment of entry modes which are most frequently applied is also higher in this situation. MNEs from developing countries prefer acquiring firms in advanced markets instead of establishing partnership with them. Whereas companies headquartered in developed countries show less interests in acquisition when targeting emerging markets. This may be explained by both two kinds of distance: administrative distance and economic distance:
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When it comes to economic distance, the explanation has been argued before. With a poorer economic performance in parent country, the companies may lag behind in technology, human resources, know-how, etc. On one hand, local firms which enjoy better resources in advanced countries may not agree to become alliances with these companies, due to the lack of knowledge that are worth being learned or absorbed (Khanna, Gulati & Nohria, 1998). On the other hand, even alliances can be built, firms with better resources are more powerful in this partnership. This can lead to unfair bargaining and unstable collaboration. Hence MNEs from countries with poor economic performance may tend to choose acquisition over joint venture. However, things are totally different for MNEs which try to do business in developing countries. The alliances with local firms make them the dominant party in this relationship and there are plenty of advantages to take from the partners. Therefore companies which headquartered in advanced countries show less interest in acquisition than MNEs originate from developing countries.
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