-Master Thesis-

-Master Thesis-

Institutional Environment and Entry Mode Choice:

Differences between EM MNCs and AEM MNCs

June 2011

Author:

Katharina Pleus

S1937391

K.M.Pleus@student.rug.nl

Supervisor: Andreea Kiss

Co- assessor: G. Willenborg

University of Groningen

Faculty of Economics and Business

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Abstract

This study builds on institutional theory and deals with multinational corporations from emerging (EM MNCs) and advanced emerging countries (AEM MNCs) and their choice of entry mode. By means of a multiple case study covering four companies it is investigated whether there exist differences in the entry mode choice of EM MNCs and AEM MNCs and whether these differences can be attributed to the home country institutional environment. The home country institutional environment is defined by the home country‟s culture, its political, legal and social system, the government‟s policy towards outward foreign investment, and the level of economic development.

The results show that there do not exist significant differences between EM MNCs and AEM MNCs and their choice of entry mode. All companies repeatedly make use of equity entry modes (acquisitions and joint ventures). The home country culture, the political and the social system are found to have no impact on entry mode choice whereas the legal system, the government policy, the educational system and mimetic pressures are observed to determine the entry mode selection. The companies‟ entry mode choice is only indirectly influenced by the economic development of the home country. A lower level of economic development is associated with lower wages and lower reputation of products made in the country. Every firm that originates in a less developed country, no matter if AEM or EM, suffers from a bad image (low quality). Hence, firms from AEM and EM tend to acquire famous brand names to overcome to negative quality perception. Due to the fact that the two countries, Turkey and China, both are characterized by a weak institutional environment, the companies try to escape the unfavorable environment at home. Similar factors that influence the choice of entry mode can be detected. Additionally, the entry mode choice is significantly influenced by the geographical distance to the target country.

Keywords:

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Table of Contents

List of Abbreviations ... 5

List of Figures ... 6

List of Tables ... 6

1.

Introduction ... 7

1.2. Structure of the paper ... 11

1.3. Contribution and importance of the s tudy... 13

2.

MNCs’ entry strategies ... 13

2.1. Entry mode choice ... 14

2.2. Factors influencing entry mode choice ... 15

2.2.1. Host- country factors ... 15

2.2.2. Home- country factors ... 17

2.3. Institutional theory and entry mode choice ... 18

2.4. Evaluation ... 19

3.

Emerging Market Literature ... 20

3.1. EM MNCs’ internationalization ... 20

3.2. EM MNC’s entry mode choice ... 21

3.3. Evaluation ... 23

4.

Research Design ... 24

4.1. Methodology ... 24

4.2. Case studies ... 25

4.3. Institutional environment v ariables ... 27

4.4. Conceptual model ... 29

4.5. Data collection ... 30

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5.

Home- country institutional environment ... 32

5.1. Home- country institutions compared ... 32

5.2. Conclusion ... 39

6.

Entry Mode Choice: AEM MNCs vs. EM MNCs ... 41

6.1. China ... 41 6.1.1. Haier ... 41 6.1.2. TCL ... 43 6.2. Turkey ... 44 6.2.1. Arcelik A.S. ... 44 6.2.2. Vestel ... 46

7.

Discussion ... 47

8.

Conclusion ... 67

9.

Limitations and Future Research ... 73

References ... 75

Appendix ... 85

Appendix A: Overview of factors influencing entry mode choice ... 85

Appendix B: Haier and TCL ... 86

Appendix C: Arçelik A.S and Vestel Group ... 87

Appendix D: Home country institutional environment - China ... 89

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List of Abbreviations

AEMs Advanced emerging markets (BRIC+ Mexico)

AEM MNCs Multinational corporations from advanced emerging markets

AKP Justice and Development Party

BRIC Brazil, Russia, India, China

CCP Chinese Communist Party

DCs Developed countries

DC MNCs Multinational corporations from developed countries

EMs Emerging markets

EM MNCs Multinational corporations from emerging markets

FDI Foreign Direct Investment

IDV Individualism

IMF International Monetary Fund

JV Joint Venture

MAS Masculinity

M&As Merger and Acquisitions

MNC = MNE Multinational corporation = Multinational enterprise

MOFERT Ministry of Foreign Economic Relations and Trade

OBM Original Brand Manufacturing

OFI Outward Foreign Investment

OEM Original Equipment Manufacturing

PDI Power Distance Index

R&D Research and Development

TCA Transaction cost analysis

UAI Uncertainty Avoidance Index

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List of Figures

Figure 1: Conceptual Framework ... 12

Figure 2: Conceptual Model: Home- country institutions and entry mode choice ... 30

Figure 3: Hofstede‟s dimensions: Comparison China and Turkey ... 32

Figure 4: Comparison Governance Indicators ... 33

Figure 5: GDP growth rate China and Turkey ... 37

Figure 6: GDP per capita in US $ ... 38

Figure 7: Comparison of Hofstede‟s dimensions: China, Turkey and Europe ... 50

Figure 8: Revised Conceptual Model ... 68

Figure 9: Hofstede‟s dimensions: China ... 89

Figure 10: China‟s OFI policy regime ... 94

Figure 11: Hofstede‟s dimensions: Turkey ... 96

List of Tables

Table 2: Overview of the Companies ... 27

Table 3: Comparison of Home- country institutional environment ... 39

Table 4: Haier‟s internationalization ... 42

Table 5: TCL‟s internationalization ... 44

Table 6: Arcelik‟s internationalization ... 45

Table 7: Vestel‟s intenationalization ... 46

Table 8: Legal System and Entry Mode Choice ... 55

Table 9: Government Policy and Entry Mode Choice ... 58

Table 10: Economic Development and Entry Mode Choice ... 62

Table 11: Educational System and Entry Mode Choice ... 65

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1. Introduction

“The importance of home-country factors in strategy came to prominence through Porter (1990), who argues that the home-country environment is the main cause of international competitive advantage. […] Because the importance of home-country effects on entry-mode

strategies has been questioned in empirical research, it is necessary to investigate the relationship between the two variables further” (Mayrhofer, 2004).

But what about advanced emerging and emerging markets?

The past decades have observed rapid growth and considerable transformation in emerging markets (EMs). Although developed country multinational enterprises (MNEs) account for the majority of global foreign direct investment (FDI), MNEs from emerging countries have shown an unprecedented increase both in numbers and the value of outward FDI. According to the World Investment Report 2010, FDI outflows from developing countries amounted to $229 billion in 2009 compared to $304 billion in 2007. After a five- year upward trend, the FDI outflow decreased. Nevertheless, this decrease in outflows is less severe than in developed countries. Consequently, developing and transition economies further strengthened their global position as sources of FDI in 2009. In total, developing countries increased their share to 25 % (19% in 2008) (UNCTAD, 2008; UNCTAD, 2010). This increase in total share confirms the fact that, due to developing and transition economies‟ economic growth, and the growing competitive pressure at home, the outward foreign investment (OFI) of EM MNCs increases (UNCTAD, 2010).

But what exactly are countries that are referred to as EMs? Emerging markets represent “countries whose national economies have grown rapidly, where industries have undergone and are continuing to undergo dramatic structural changes, and whose markets hold promise despite volatile and weak legal systems” (Luo and Tung, 2007: 483).

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By using the definitions named above, nowadays, a huge number of countries exist that can be described as emerging markets. Major emerging markets are – according to Luo and Tung (2007): China, Brazil, India, Russia and Mexico (BRIC + Mexico). However, there are of course other EMs that share the features of the major EMs but are still less developed. Poland, Ukraine, Thailand, South Africa, Chile, Argentina, Turkey, and Malaysia, among others, can therefore be classified as EMs as well.

For the purpose of my study I will classify the major emerging markets named above as advanced emerging markets (AEMs). EMs that are less developed than those major emerging markets are simply referred to as emerging markets (EMs).

1.1. Problem Statement

The internationalization processes of firms have been studied in basically two contexts: one focusing on firms from developed countries (DCs), and the other on firms from developing economies (Buckley et al., 2007; Li, 2007; Panond, 2007; Yaprak and Karademir, 2010). Nevertheless, although firms from emerging markets and especially firms from advanced emerging markets are becoming significant global players (UNCTAD, 2010), less research has focused on the processes through which these latecomer countries catch up with already existing multinational corporations (MNCs).

Nowadays, there is a well established literature on internationalization and market entry mode choice of DC MNEs (Brouthers and Hennart, 2007). However, it is suggested that these theoretical views may not always explain the internationalization behavior of AEM and EM MNCs (Child and Rodrigues, 2005; Yiu et al., 2007). Additionally, researchers argue that the development and internationalization paths of EM MNEs are different than those of DC MNEs (Bonaglia et al., 2007; Khanna and Palepu, 2006; Luo and Tung, 2007). In past decades EM MNEs expanded into other developing countries and had more resource oriented activities (Kumar, 1982). However, as recent trends indicate, AEM as well as EM MNEs expand their operations to both developed and developing markets (Li, 2007, Luo and Tung, 2007; UNCTAD, 2010).

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have examined EM MNEs‟ strategies (Bonaglia et al., 2007; Buckley et al., 2007; Filatotchev et al., 2007; Yiu et al., 2007), the entry mode selection of EM MNCs to developed and other emerging and developing countries has not find enough attention yet (Brouthers and Hennart, 2007).

Additionally, although Luo and Tung (2007) argue that EM MNCs mainly use acquisitions as entry modes to foreign countries in order to be able to secure tacit knowledge from culturally distant markets, this argument seems to contradict the entry mode literature, which is largely based on the experiences of developed country MNEs (Brouthers and Hennart, 2007). Additionally, the review by Brouthers and Hennart (2007) finds that the main home countries from which international entry has been examined include North America, Japan, and Western Europe, hence a study is lacking focusing on other countries/ areas.

Taken these limitations and contradictions into consideration, it can be stated that no real consensus exists regarding the appropriate entry mode firms from other EMs make use of and whether their decision is dependent on their industry or other home country factors. Studies that deal with issues concerning entry mode selection - such as studies that examine which factors determine entry mode choice of EM MNCs- only pay attention to either firm- specific characteristics (resources, capabilities) or target- country factors (political factors, infrastructure, host industry competition, etc.) (Demirbag et al., 2009; Cui and Jiang, 2009). Nevertheless, the influence of macro-level factors of the home country has been largely ignored in these studies.

While firm- specific resources and capabilities as well as target country factors are important in determining strategies and entry mode (Root, 1998; Koch 2001; Peng, 2001) other studies suggest that strategies are also influenced by the characteristics of the particular context in which firms operate (Hoskisson et al., 2000; Meyer and Peng, 2005; Meyer et al., 2009). Especially institutions in the target economy also considerably influence firm strategies such as foreign market entry (Peng, 2003; Wright et al., 2005). According to Oliver (1997) and North (1990) institutions describe the „rules of the game‟ and contain laws and regulations of the host country.

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(2009) and other researchers only focus on the role that institutions play in the host country, but not on the possible influence that institutions in the home country of EMs may have.

Hence, given the increasing number of FDI outflows from AEMs and EMs entering other emerging and developed markets, it becomes crucial to examine their entry modes and what home- country institutional factors determine their choice of entry mode.

To be able to gain an understanding of how companies from AEMs and from EMs internationalize in contrast to MNCs from developed regions, and to see whether there are differences between emerging markets in different stages of economic development, a study is needed that integrates diverse countries of origin that are in a different phase of economic development (emerging markets, advanced emerging countries).

This research gap that seems to exist in literature leads to following research question which is dealt with in this study:

What differences are observed in the entry mode choice of AEM MNCs and EM MNCs and can those differences be explained by home- country institutions?

This main research question will be split into smaller units of investigation that –in the end- lead to the answer of the main question. To answer the main research question and to structure the report, following sub- questions will be dealt with:

1. What entry modes can a firm chose and what factors influence entry mode choice (based on literature about Western companies)?

2. What are institutions and how do they relate to entry mode choice?

3. What entry modes do EM MNCs use when internationalizing into foreign countries? a. What entry modes do AEM MNCs use when they expand into developed and

emerging countries?

b. What entry modes do EM MNCs use when they expand into developed and emerging countries?

4. How is the institutional environment of the chosen countries constructed? 5. How are the entry mode choices influenced by home country institutions?

6. What differences can be observed in the entry mode choices of emerging markets having different levels of economic developments?

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1.2. Structure of the paper

This paper deals with theoretical aspects which are already known as well as case studies investigating the „unknown aspects‟. Although the previous section already gave some idea about how I intend to structure the report by means of the sub- questions, I will briefly indicate how the study is organized.

First of all an in- depth literature review on existing literature about entry mode choice and institutions is given. This is followed by a description of the research design, including the method, data collection and the conceptual model.

To be able to answer the research question a multiple case study comprising four companies will be used. Afterwards, a comparison will be drawn and it is discussed which home country institutions may have had an influence on the entry mode choice of the companies.

In the last part of the paper the theoretical part will be combined with the case studies to see whether differences and similarities can be established between the entry mode choices of MNCs vs. AEM MNCs and EM MNCs. Besides, an adjusted conceptual model will be provided.

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China: Haier, TCL Turkey: Arcelik, Vestel

Figure 1: Conceptual Framework (Author’s construction)

Emerging Market Conceptual Framework Advanced Emerging Market Comparison

Observed Entry Mode Choice Institutions - Culture - Political System - Legal System - Social system -Government Policy Economic Development

ENTRY MODE CHOICE What institutions may have

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1.3. Contribution and Importance of the Study

This study intends to close the gap that seems to exist in entry mode literature. Therefore, the study is of interest to researchers as well as managers.

For researchers and students the study might give some new insights on the home institutional factors that influence entry mode decisions. Especially due to the fact that MNCs from EMs are more and more prevalent on the world market place, it is interesting to see whether EM MNCs‟ entry mode choices differ from those of MNCs from developed markets and whether there exist differences between EMs having different levels of economic development.

For managers this study might be of interest since it offers new insights in factors that influence entry mode decision. Managers from EM MNCs or AEM MNCs may use this study to aid them in the decision making process related to entry mode selection. By comparing the entry modes of EM MNCs and AEM MNCs to that of DC MNCs in the end of this study, managers may be able to detect some weaknesses or strengths in the entry mode decision made by firms from less developed countries. Managers can evaluate whether they should adapt their entry mode strategies to that of developed countries‟ firms or whether they should keep their current pattern of entry mode decision.

2. MNCs’ entry strategies

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However, Wright et al. (2005) and Meyer et al. (2009) argue that institutions are much more than background conditions. Instead they prove that institutional issues considerably affect the ownership and entry mode decision of a company. Besides, they assume that this role of institutional frameworks is especially important in emerging economies since EMs‟ institutions differ significantly from those in developed economies. Hence, this study further focuses on institutional theory.

2.1. Entry mode choice

Once a firm has decided to expand in foreign markets it has to choose an appropriate entry mode. Since entry modes have a great impact on the company‟s business performance abroad, the selection of entry mode is seen as a critical international business decision. Entry mode selection is an important decision in international expansion since it is tied to MNE‟s competitiveness, control over subsidiaries, parent-subsidiary relations and vulnerability to external changes in a host country (Gomes- Casseres, 1990; Root, 1998). Research on the relative importance of entry mode decisions has been conducted by Root (1998) who claimed that the choice of market entry mode is one of the most critical strategic decisions for multinational enterprises (MNEs). It affects future decisions and performance in foreign markets and it entails a concomitant level of resource commitment which is difficult to transfer from one to another, especially from high level to low level. Companies that want to internationalize have the possibility to choose from several different entry modes: export modes (low risk), intermediate modes (shared risk) and hierarchical modes (high risk) (Hollensen, 2008: 210).

Similarly, Root (1998) classifies entry modes into three categories (Root, 1998: 6): 1) Export Entry Modes (Indirect, Direct agent/ distributor, Direct branch/ subsidiary),

2) Contractual Entry Modes (Licensing, Franchising, Technical agreements, Service contracts, Management contracts, Construction contracts, Co- production agreements), and

3) Investment Entry Modes (Greenfield investment, Acquisition, Joint venture)

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2.2. Factors influencing entry mode choice

Literature on entry mode choice offers a broad view on which factors will influence entry mode decision. Koch (2001) proposes that market selection and entry mode selection should be seen as part of the same decision process. This process of decision making is influenced by a large amount of external and internal environment factors (Koch, 2001: 73). Koch (2001) divides those factors into internal, external and mixed factors. Similarly, Root (1998) classifies influencing factors into internal and external ones. Factors can also be classified as pull factors like trade barriers, low labor and raw materials costs, market size and favorable government policies (Kumar and Kim, 1984), and push factors (Seyf, 2001) such as political instability, labor unrest and unfavorable taxation at home country (Arpan et al., 1981).

For the purpose of my study I classify these factors into those that are specific for the host country, and factors that refer to the home country of the company. Nevertheless, one has to bear in mind that there are of course other factors that have an influence on entry mode choice. For instance firm- specific factors may have an impact on entry mode selection, such as company size/resources (Stopford and Wells, 1972; Koch, 2001; Root 1998), product factors (Root, 1998), corporate policy (Stopfors and Wells, 1972), and management culture (Koch, 2001). Nevertheless, this review only deals with home- and host country factors since those factors are related to the research question. Firm- specific factors are not relevant for this study and are thus not considered further (see appendix A for a short overview of all factors that are dealt with in this section, including some firm- specific factors).

2.2.1. Host- country factors

Factors that influence the entry mode choice can be attributed to the target country. When expanding and investing overseas, companies face several uncertainties arising from unfamiliarity with new environments of the host country. Several studies (Goodnow, 1985; Parks and Flores, 2000; Luo 2002) demonstrate that economic, legal, political, socio-cultural and technological conditions can have complex positive and negative influences on all components of entry strategy.

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high, it is expected that modes with only a low commitment of resources (e.g. exporting) are chosen. Besides, the authors suggest other impacts on entry mode choice such as foreign ownership restrictions and local content requirements.

Regarding further factors that influence entry mode choice Kalliny and Lemaster (2005) present a model of animosity (for instance war, economic, cultural and religious) and their impact on entry modes. Their discussion is mainly focused on joint ventures, wholly-owned subsidiaries, exporting and licensing, as the primary modes of entry into foreign markets. In their model they propose that animosities represented by war, economic, cultural and religious will determine the level of country risk. Furthermore, they say that the country risk level will determine the amount of resources that the firm will be willing to commit when entering a foreign country. Hence, the higher the country risk level, the less the firm will make use of more equity- based modes.

Other influencing factors that were identified by Dunning (1988) and Goodnow (1985) relate to the economic conditions of the target country. The host- economic environment is said to largely define opportunities for international business. The size of population, the economic growth, income levels, consumer consumption, and purchasing power determine the market size of the target country and are critical to entry mode decisions. In smaller markets, firms are expected to reduce commitment and accept lower degrees of ownership. Root (1998) indicates that entry modes such as indirect exporting and licensing are favored in small markets characterized by low sales potential. Markets that have high sales potential are mainly entered through entry modes with a high breakeven sales volume, such as subsidiaries and local production. Another crucial aspect of the target market is its competitive structure. Root (1998) classifies markets from atomistic – a market with many competitors- to oligopolistic – a market with a few dominant competitors- and monopolistic – a market with one single firm. A market that is classified as being atomistic is more likely to be entered via export entry modes whereas oligopolistic or monopolistic markets often require an entry through equity investment in production. By this, the company will be able to compete against dominant companies in the target market. In markets where there is too strong competition the company should choose licensing or other contractual modes when entering the foreign market.

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trustworthy. In the absence of adequate partners, the firm may be forced to integrate and use modes with higher investments (such as acquisition).

Regarding the influence that culture may have on entry mode choice, Meyer (1998) highlights factors as: language and religious differences; lack of personal and private contacts; geographic distance; and different attitudes to work and leadership. Additionally, Meyer (1998) argues that perceived risks of various types of entry modes increase if investors have less understanding of the host country‟s environment. Firms tend to be more knowledgeable of foreign markets that are culturally close to the home market. Host- countries that are culturally distant are, according to Root (1998), entered using low commitment modes. In order to gain knowledge about the foreign market it is also likely that companies make use of joint ventures with local partners that are knowledgeable about the host- country (Root, 1998). Similarly, Madhok (1997) argues that cultural distance hampers the transfer of firm-specific routines, making partnership and collaboration more attractive than hierarchy. Furthermore, Dow and Larimo (2009) focus on psychic and cultural distances. They suggest that the most obvious difference – a language difference- seems to be one of the least important factors. Issues, such as differences in religion, degree of democracy, industrial development, have a much greater impact on entry mode choice.

2.2.2. Home- country factors

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2.3. Institutional theory and entry mode choice

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In contrast, North (1990) argues that efficient institutions lower the transaction costs and reduce the uncertainty. So in countries that have efficient institutions more equity- based entry modes can be chosen, while in countries with weak institutions companies should prefer low- commitment modes.

Closely connected to the literature about institutional influences are studies of national cultural distance. As Yiu and Makino (2002) suggest, cultural distance reflects differences in normative belief systems between home and host countries. These studies use the cultural distance index of Kogut and Singh (1988) and find that cultural distance plays an important part in explaining mode choice (Hennart and Larimo, 1998; Kogut and Singh, 1988). Additionally, other studies focus on specific national cultural components (as defined by Hofstede) and find that cultural components such as power distance (PD) and uncertainty avoidance (UA) influence entry mode choice (Barkema and Vermeulen, 1997).

2.4. Evaluation

This chapter reviewed previous literature about entry mode choice and institutional theory. It becomes obvious that the entry mode choice and factors that have an influence on entry mode choice is a topic that has gained much attention in literature so far. However, it seems that research on home- country factors is not that elaborated as research on host country factors. I assume that this might be due to the fact that almost all host- country factors that relate to culture, politics, and legislation can be converted and applied to the home country environment as well. Nevertheless, it might be interesting to see which of these factors do have an influence on entry mode choice. This is why I intend to convert some of the host- country factors named above into home country factors and examine whether they have an influence on entry mode choice or not (for the factors that are selected in this study please see section 4.3.).

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institutional environment. The specificities of EMs‟ institutional environments may imply that they also bring about institutionally distinct MNCs and that EM MNCs follow different evolutionary trajectories from DC MNCs. However, as can be derived from the literature review, the discussion about the institutional environment is only based on the role that the host institutional environment has on firm strategy and entry mode choice (Brouthers and Brouthers, 2002; Delios and Beamish, 1999). Thus, this study intends to look at the other side: the role that the home institutional environment has on entry mode choice. Besides, the review by Brouthers and Hennart (2007) finds that the main home countries from which international entry has been examined only include DCs as North America, Japan, and Western Europe and thus this paper looks at developing countries to see whether those theories can also be applied to countries that are less developed.

3. Emerging Market Literature

In this chapter, the existing literature on EM MNCs‟ internationalization is discussed. First the motives that lead many EM MNCs to expand abroad are outlined in brief. Although limited research on EM MNCs‟ entry mode choice exist, few authors established some views on EM MNCs‟ entry mode choice.

3.1. EM MNCs’ internationalization

Research on EMs notes that internationalization of firms from emerging markets focuses on asset- seeking motives (such as technological know- how and managerial skills) rather than the asset- exploiting arguments on which developed country internationalization process models are based (Li, 2007). Mathews‟s (2002) offers the idea that EM MNCs are usually resource - poor and hence engage in searches to capture resources. Those resources can then be internalized and transformed into capabilities that are crucial for competing in technology-intensive markets. Mathews (2002, 2006) argues that internalization of dynamic capabilities is a function of: linkages, leverages and learning (LLL).

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Several other studies established different motivations for EM MNCs to expand abroad. The following table will give an overview of those studies concerning internationalization motives.

Motivation Reference

Acquire critical resources needed to compete against global rivals; Gaining managerial know how and marketing skills; internalization of specific assets

Li (2007), Luo and Tung (2007), Mathews (2002), UNCTAD (2006), Chen and Chen (1998)

Secure supplies of crucial inputs in the face of uncertainty or asset specificity

Wells (1983), UNCTAD (2006)

Overcome growth restrictions imposed by government Wells (1983), UNCTAD (2006)

Follow home- country customers as they expand horizontally to

other countries Wells (1983)

Achieve new competitive advantages via external linkage,

leverage and learning (LLL) Mathews (2002,2006)

Market- and asset seeking motives

Dunning and Narula (1996), Demirbag et al. (2009)

Technological innovation and organizational learning Hunt (2000) Reduce institutional and market constraints at home, overcome

late- mover disadvantage Luo and Tung (2007)

Table 1: Internationalization motives of EM MNCs

3.2. EM MNC’s entry mode choice

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direct contact with international markets since they rely on third party distributors for their sales abroad.

Nevertheless, the current activities by EM MNCs provide a reason to look at a novel phenomenon. In contrast to earlier literature, Li (2007) states that neither the Uppsala model (Johanson and Vahlne, 1977), nor the OLI model (Dunning, 1988) and the LLL model (Mathews, 2002) are complete in explaining the internationalization of EM MNCs. Hence, a synthesized model that incorporates the merits of each of these models will explain the international expansion patterns of EM MNCs properly.

For instance, one noteworthy feature of OFI by EM MNCs is the importance of M&As. Especially when investing in advanced economies, EM MNCs have shown a frequent interest in acquisitions (UNCTAD, 2006), an aspect that has been neglected by previous theories. One reason why FDI in DCs through acquisitions has increased is possibly that these economies are further up the technological ladder. With respect to M&As, acquisitions offer improved and faster opportunities for learning (Barkema and Vermeulen, 1998). Besides, immediate access to wanted skills and capabilities, ownership enables the EM MNCs more discretion in how it taps into those skills for learning purposes. Garcia- Canal et al. (2002) find that EM MNCs make use of global alliances to simultaneously overcome liability of foreignness in the target country and to gain access to their competitive advantages of the partner. Buckley et al. (2008) also argue that EM MNCs prefer to expand into foreign markets by engaging in JVs and other forms of alliances since this will help reduce entry costs and increase their opportunities for learning.

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measures. Additionally, many of the growing firms from EMs, in contrast to those from developed areas, pursue rapid internationalization through acquisitions and thereby try to leapfrog the early stage of the traditional internationalization process (Mathews, 2002).

3.3. Evaluation

The preceding review on literature covering EM MNCs‟ internationalization and entry mode choice shows that no consensus exists about why and especially how EM MNCs expand abroad. Earlier studies rely more on the so called Uppsala stages model (Johanson and Vahlne, 1977) while more recent literature argues that EM MNCs leapfrog stages of internationalization to catch up with developing markets (Mathews, 2002). Here their preferred modes of entry are the use of global alliances (Garcia- Canal et al., 2002) and acquisitions (Barkema and Vermeulen, 1998; Luo and Tung, 2007; Li, 2007; UNCTAD, 2006). I will investigate this aspect further in order to contribute to the discussion about which entry modes EM MNCs make use of. Additionally, I intend to close the gap that exists in current literature: whether or not entry modes taken by firms from countries with different economic developments differ or not. Besides, most studies on EM MNCs blend institutional theory with other perspectives, such as TCA. However, in my opinion, one study is needed that only focuses on the institutional perspective.

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4. Research Design

4.1. Methodology

Concerning the methodology it can be said that due to the explanatory nature of this study, a qualitative approach is considered most appropriate (Thomas, 2004). Explanatory study is defined as the type of study that goes further than describing and attempts to explain the reasons for the phenomenon that the descriptive study has only observed. In an explanatory case study, the researcher uses theories to account for the forces that caused a certain phenomenon to occur (Blumberg, 2005; Yin, 1993).This approach is principally appropriate when the aim is to explain and understand the “why” and “how” of decision making process. According to Blumberg (2005) quantitative studies rely on quantitative information (i.e. numbers and figures) whereas qualitative studies base their assumptions on qualitative information, such as words, sentences and narratives (Blumberg 2005: 191,192). Due to the fact that no real figures etc. exist to investigate the topic, qualitative information is needed. Besides, since little is known about entry mode choices of EM MNCs and the home institutional factors influencing the choice, an “intensive study of one or a small number of instances of it can be undertaken in order to produce detailed descriptions of typical cases” (Thomas, 2004: 128). In contrast to cross- sectional surveys, embedded longitudinal case studies have the best prospect of advancing more complete and consistent knowledge about the dynamic and paradoxical nature of organization (Eisenhardt, 1989; Yin, 2003). Additionally, case study research is capable of providing testable, novel and empirically valid theory (Eisenhardt, 1989) and thus, in order to be able to offer a revised conceptual model that gives an indication about the relation at the end, this research is conducted as a case study.

Advantages of the case study are that this method can be used to provide a rich context for understanding the phenomena under study, it provides for in-depth and detailed qualitative data and has the best prospect of advancing more complete knowledge about the dynamic nature of an organization (Yin, 2003).

In order to get an in-depth view on the different choices of firms from different countries, a multiple- case study is realized. Advantage of the multiple-case design over the single-case design is that the evidence from multiple cases is often more convincing and the study is thus considered more robust (Yin, 2003).

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are chosen to design a “two- tail” design (Yin, 2003) that covers two extremes. In this study the „extremes‟ are not chosen as positive and negative cases but cases that originate in different economic stages of development. According to Yin (2003) this multiple case study design is complicated because the study should still have at least two individual cases within each of the subgroups. By this “the theoretical replications across subgroups are complemented by literal replications within each subgroup (Yin, 2003:59). Hence, I will choose two companies from every country, thus investigating four companies in total. From each country two MNCs will be chosen that have a similar degree of multinationality. Hence, other internal and firm specific factors that might influence the entry mode selection, such as firm size and firm resources, are controlled for. Besides, all companies need to be in the same industry to avoid „noise‟ introduced by variations in industries.

The criteria for being a MNC have been defined by several researchers (e.g. Annavarjula and Beldona, 2000; Maisonrouge, 1974). I follow the common definition made by Dunning (1993) that “a multinational enterprise is one that owns or controls facilities [or value-adding

activities] in more than one country” (Dunning, 1993). Concerning the degree of

multinationality, the existing literature on multinationality has mainly identified four dimensions to capture the degree of multinationality: (1) operational performance (the ratio of foreign to total sales); (2) operational structure (the ratio of foreign to total assets); (3) attitudinal attributes (e.g. top management‟s international orientation); and (4) stock ownership (the percentage of common equity owned by foreign companies) (Annavarjula and Beldona, 2000; Dunning, 1993; Sullivan, 1994a, b). In this study, the degree of multinationality is measured by taking the operational performance and the countries active in into consideration.

4.2. Case Studies

For the purpose of this study different emerging markets with different levels of economic development are taken into consideration. For an AEM, countries that are among the BRICs + Mexico can be chosen. For the purpose of my study China, as a representative of an AEM, is chosen since it is the major emerging market that already surpassed Japan as world‟s second largest economy in 2010 (Bloomberg News, 2010) and is hence an appropriate case as far as the one side of the „extreme‟ (Yin, 2003) is concerned.

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investigating Turkey provides an interesting setting, characterized by attempts to become a more Western style market economy and ongoing membership negotiations with the EU. Turkey is the first Muslim country to bid for EU membership (Demirbag et al., 2009).

Those two countries are chosen to design a “two- tail” design (Yin, 2003) that covers two extremes. China is the AEM since it already the second largest economy. Turkey, in contrast, is not as developed as China and does not belong to the AEMs (the BRIC + Mexico). Hence, Turkey is seen as an EM, which is kind of “in the middle”. It is not possible to select another „more extreme‟ EM –like for instance Vietnam or Ecuador- since there exist no real MNCs with foreign activities from those countries and thus data collection becomes difficult and the purpose is not fulfilled.

According to Yin (2003) this multiple case study design should still have at least two individual cases within each of the subgroups. Hence, I will choose two companies from every country. Following criteria for the selection of the companies are put forward:

 The companies need to be active in at least more than three countries (hence being MNCs) and they need to have a similar degree of multinationality (at least those from the same country)

 The companies need to be active in the same (or related) industries so that industry- specific factors that might influence the entry mode choice are controlled for and the companies can be compared with each other, thus avoiding „noise‟  The companies need to be publicly traded so that enough information about each

company is disclosed and can be found

Taking the above mentioned criteria into consideration, the following companies are selected: As representatives for Chinese MNCs, the Haier Group and TCL are further investigated in this study since both are amongst the biggest Chinese companies (conglomerates) and both are active in the same industry, namely the electronic industry (white- goods sector and consumer electronics) (for short company descriptions please see Appendix B).

27 Company Country of Origin Industry Countries active in (2009) Operational Performance*

Haier Group China Electronic 160 27,3 %

TCL China Electronic 46 25,8 %

Arcelik A.S. Turkey Electronic 113 29,7 %

Vestel Turkey Electronic 127 23,2 %

Table 2: Overview of the Companies (Source: Company Annual Reports, 2000- 2010)

*average for the years 2000-2009

Concluding the above, it can be said that those companies fulfill the criteria set above and thus, the chosen companies are good case examples for this study.

4.3. Institutional Environment Variables

Institutional theorists look at the constraining forces exerted by economic, social, and political institutions, with which organizations have to cope in making decisions (Scott, 1995). The institutional environment as defined by Scott (1995) looks at three pillars of the institutional environment: the regulative, normative and cognitive pillar. However, these pillars are quite hard to apply and hence I make use of the classification by Wan and Hoskisson (2003) who separate institutions into political, legal, and societal institutions.

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Additional components of the institutional environment that were modeled by Dow and Larimo (2009) are educational and religious institutions (next to legal and political institutions). They suggest that issues, such as differences in religion, degree of democracy, industrial development, have a considerable impact on entry mode choice. However, I do not expect the educational system and the religion of the home country to have a noticeable impact on entry mode choice and hence I will not consider these factors.

Regarding national culture, Hofstede et al. (2002) suggest that culture is „„a substratum of institutional arrangements‟‟ (Hofstede et al., 2002: 800). I will follow this perspective and view culture as a part of informal institutions in the environment. Hence, culture is one further variable of a country‟s institutional environment.

Besides, since the aim of the study is to find out whether the economic development of the country has an influence on entry mode choice as well, this variable will be included, too.

Given these views on institutions and the institutional environment, this study includes following institutional factors that I think are of importance:

 Culture  Political system  Legal system  Social system  Government policy  Economic development

Since these country factors are mainly seen as host- country institutional factors it will be interesting to see how these factors – that are converted into home- country institutional factors- might influence entry mode choice of MNCs.

After having outlined the factors I will shortly indicate how I measure each factor.

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The political system of the country is measured by its overall system (democracy etc.), its stability, and whether the implementation of policy is effective. Furthermore, the level of corruption will be considered.

The legal system is measured by its independency of the government and its neutrality. Besides, the legal environment for starting a business in the given country is looked at.

As far as the social system is concerned, the demography of the country‟s population is considered as well as the income distribution.

Another important variable is the government policy towards OFI. Here it is investigated whether the government offers help and incentives for firms to go abroad or whether the government does not offer special services or even hampers internationalization.

Regarding the economic development of the chosen countries, I will use the GDP growth rate as well as the GDP per capita (in US $). Additionally, I will take into consideration the unemployment rate and the classification made in the beginning that the BRIC countries and Mexico are seen as AEM and that all other emerging markets are EMs.

The relevant data that is needed in order to measure each variable is gathered by already existing country studies, including those of the UNCTAD, EIU and Datamonitor. Additionally, current and past GDP growth rates and GDP per capita figures are gathered from the World Bank Database. The World Bank also launched a project which is called „the Worldwide Governance Indicators (WGI) project‟ in which 213 economies are measured on six indicators (e.g. government effectiveness). The ranking which has been developed during this project will be considered, too.

4.4. Conceptual Model

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mode choice, hence, it is written in bold. The institutional variables identified in the previous section can be translated into following conceptual model (figure 2).

Figure 2: Conceptual Model: Home- country institutions and entry mode choice (Author’s construction)

At this point it is not possible to give a clear assumption on the relation between those factors and the entry mode choice of EM MNCs or whether there exist any relation at all. During my study each home- country institutional variable and its relation to entry mode choice will be investigated. After finishing the investigation it will be possible to more accurately define the relationship between home- country institutional factors and entry mode choice. After the actual case studies a new conceptual model will be given which can be tested quantitatively in future research.

4.5. Data collection

According to Thomas (2004) the case study strategy often means engaging in a wide range of research methods (such as observation, interviews, etc.). However, due to the limited time frame and the probability of not getting in contact with the companies, this study uses secondary data in order to answer the research question. Secondary data will be collected through literature research. For the theoretical parts books, journals, and other electronic sources are used.

For the case studies archived documents such as annual reports of the companies, already conducted research on the companies, and other internet sources are taken into consideration. Additionally, the „LexisNexis‟ Database is used to search for announcements

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and comments made by the selected companies. For the case studies primary data about the selected companies gained by open in- depth interviews would probably lead to more specific and reliable information. However, due to limited time, limited budget and of course translation problems, personal interviews with managers of the companies cannot be conducted. Due to the above mentioned barriers and limitations only secondary data is used in this study. Though primary data mostly is regarded as important and reliable as far as case studies are concerned, using secondary data can also be an advantage. In my study not only recent activities are investigated, but also foreign activities that took place several years ago. The weakness of interviews or questionnaires here is that managers tend to forget about some important motives or thoughts that they had years ago, thus official company statements in the respective year are more authentic. Additionally, it might be possible that managers that were in charge for decisions in the respective year already retired or left to another company. In this case no knowledgeable interviewee can be found anymore and less reliable information is gained in an interview with a present manager. Therefore, after weighting the pros and cons of using secondary data, it can be argued that for my study secondary data is a good and reliable option, but still some important information might not be gained.

4.6. Data analysis

32 0 20 40 60 80 100 120 140

PDI UAI IND MAS LTO

China Turkey

5. Home- country institutional environment

In this chapter the home- country institutional environment of the chosen countries (China and Turkey) is investigated and compared. As already defined in chapter 4.3, the institutional environment consists of the country‟s culture, its political, legal and social system, its government‟s policy towards internationalization and the economic development.

For a detailed description of China‟s and Turkey‟s home country institutional environment, please see appendix D an E, respectively. The following comparison is based on the information given in the appendix.

5.1. Home- country institutions compared Culture

When looking at figure 5, as far as culture is concerned, it can be concluded that China and Turkey score almost the same on PDI and MAS, meaning that both countries‟ cultures create hierarchies and are concerned with „male values‟ of achievement. Additionally, both countries are more collectivist than individualist, paying more attention to the group or family than to the individual itself. One noticeable

difference lies in the UAI. Here, Turkey scores much higher than China which indicates that Turkey‟s society relies much more on rules and laws than China does, thus, China‟s society is much more liberal.

Political system

China is a one-party state that has been ruled by the Chinese Communist Party (CCP) since 1949. Although other minor political parties exist, they are authorized by the CCP, operate under its leadership, and are effectively powerless. Hence, no independently organized and established political parties are tolerated, making China a one-party state (Martin, 2010). Moreover, order and authority between the different levels of party and government structure can be weak, which leads to ineffective implementation of policy and serious problems with corruption (Martin, 2010).

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As opposed to the one- party state of China, Turkey is a secular democracy with a majority of Muslim population. The Justice and Development Party (AKP), a centre-right party with Islamist roots, has held power since 2002 (EIU, 2009; World Fact Book). The government of Turkey is based on the principle of democratic representation, and divides power between several ruling bodies. Turkey is a strong promoter of liberal trade and investment policies and recent governments have shown a sustained commitment to focus on improving economic policies. It has an open trading system, especially with the countries in the EU with which it created a customs union agreement in 1996. This agreement led to a positive shift in Turkey‟s trade policy, allowing many Turkish firms to extend their presence in the global economy. However, increasing corruption and a perceived lack of political commitment continue to discourage prospective international investors (EIU, 2009; Datamonitor, 2009b).

The WGI project launched by the Worldbank (2009) offers a ranking on six indicators which are shown in the figure below (100 being the highest and best score).

Figure 4: Comparison Governance Indicators (Worldbank, 2009)

As can be derived from figure 7, according to the Worldbank (2009) political stability1 in Turkey and China is low, Turkey being very unstable. As far as the indicator „Voice and Accountability2‟ is concerned, China scores very low, indicating that the country‟s people are not free in selecting their government and express their opinion freely. Besides, neither the

1 _{Political stability and absence of violence measures the perceptions of the likelihood that the government will}

be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism (Worldbank, 2009).

2

Voice and accountability captures perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media (Worldbank, 2009). 0 10 20 30 40 50 60 70 Voice and Accountability Political Stability Government Effectiveness Regulatory Quality

Rule of Law Control of Corruption

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overall effectiveness of both governments3 nor the ability of the government to formulate and implement sound policies and regulations are ranked sufficiently. As far as the indicator of corruption is concerned, it gets obvious that China suffers from high corruption while Turkey is scored somewhat in the middle.

Overall, it can be argued that both countries‟ political systems are not stable and weak. Hence, one can conclude that the political system is a weakness of both countries. China has the most unstable and weak system due to its suppression of the public and its high level of corruption.

Legal system

It is essential to note that China does not precisely have an independent legal system that operates outside the influence of the ruling Chinese Communist Party (World Savvy Monitor, 2008; Datamonitor, 2009a). This distinguishes China and Western democracies in which the court system is a significant component of the checks and balances placed on the other branches of government. The missing independent legal system in China leads to a lack of effective recourse available to individuals whose interests are harmed by the excesses of CCP officials, laws, and institutions (World Savvy Monitor, 2008). Most importantly, China's legal system lacks neutrality. Another weakness of the Chinese legal system is reporting and accounting. The reporting and accounting standards in China are far behind the Western system of transparent and accurate accounting.

As far as the establishment of business operations in China is concerned, according to the Doing Business survey by the World Bank, the processes of doing business in China have improved significantly. The 2008 indicator demonstrates that the number of days required to start a business in China is 35 (compared to the Asian average of 47 days), which indicates an efficient business environment (Datamonitor, 2009a).

The judicial system of Turkey can be described as a tripartite system (Datamonitor, 2009b). The supreme courts of Turkey include the Constitutional Court, the Military High Court of Appeals and High Military Administrative Court, the Council of State, and the Court of Jurisdictional Conflicts. Nevertheless, the judiciary system in Turkey is subject to influences

3 _{Government effectiveness captures perceptions of the quality of public services, the quality of the civil service}

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and political interference in high-profile cases, and thus a need exists to revise judicial reforms to introduce qualified judges and improve the infrastructure of the legal system.

After tax reforms in the country, the business environment in Turkey has improved considerably. The corporate tax rate was reduced from 30% in 2006 to 20% in 2007 (Datamonitor, 2009b). However, the employment regulations are inflexible and strict and have been a cause of decline in the overall productivity growth.

For entrepreneurs, Turkey offers a good investment opportunity. The entrepreneur in Turkey does not face long registration processes for starting business. The freedom to start, run and close business is protected by the regulatory environment. It takes an average of six days to start a business in Turkey (EIU, 2009; Datamonitor, 2009b) while it takes an average of 35 days to start a business in China.

Social system

One of China‟s major problems has been its growing population. However, since its adoption of the one-child policy (1979), the population growth rate has considerably decreased. On the other hand, the drawback of the implementation of this policy is that China is now a country with an increasingly ageing population (Datamonitor, 2009a).

Since the economic reform (from 1978 onwards), China has seen long-term growth, which has reduced poverty levels in the country by increasing the per capita income. The population below the poverty line came down from around 64% (before the reforms) to around 10% in 2004. As the country continues to be on the growth path, the advantages of development are increasingly trickling down and poverty is set to decline further (Datamonitor, 2009a).

Considering the demographic composition of Turkey, it emerges that more than half of Turkey's population is below the age of 30, indicating a very young population, as opposed to China‟s increasingly ageing population. Nevertheless, Turkey's highly regulated labor market has led to high employment costs and high levels of unemployment. The government has taken several initiatives to implement policies aimed at improving the social benefits and quality of life experienced by its citizens. However, the Turkish healthcare system still lags behind those of other European countries (Datamonitor, 2009b).

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Government policy

Since the start of the “open door” policy in 1978, the government has made some adjustments to OFI policy in response to its perception of the political and economic needs of the country. Since the government‟s policy to OFI has changed from „tightly restricting‟ to „encouraging Chinese enterprises to invest abroad‟, the policy framework has been adjusted to reflect the government‟s degree of willingness to allow Chinese enterprises‟ OFI. By the late 1990s, the government‟s policy towards OFI changed from „merely allowing‟ to „actively encouraging‟ Chinese enterprises. Since the early 2000s the government‟s policy to promote OFI has been given increased drive under the title of “go global”: Enterprises under all forms of ownership are encouraged to invest in overseas operations and expand their international market shares (OECD, 2008). The government now offers several incentives for investing abroad (e.g. tax relief, credit support) as well as guidance on how and where to expand.

Regarding Turkey, the beginning of 1980s represents a turning point in the economic life, since the government decided to shift the economy from a rather inward oriented and protective environment to an outward oriented and more liberalized one. In 1980 the Turkish government started a series of reforms to achieve a change in policy from import substitution to an export led growth strategy (mainly by liberalizing foreign trade).

As the Turkish economy became more outward-oriented since the 1980s, the government began to liberalize Turkey‟s OFI regulatory environment. This improved policy environment was a key factor driving Turkish companies to expand through OFI.

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Economic development

Since the initiation of economic reforms in 1979, China has moved from a centrally planned system to a more market -oriented one that plays a major global role. In 2010 China became the world's largest exporter and is one of the world‟s fastest-growing economies (see also figure 6 below). The most important initiative implemented by the government has been the three-step development strategy that started in 1987. The government achieved its first two steps of doubling and quadrupling the gross national product (GNP). The third step is to increase the per-capita GNP to the level of developed countries (Datamonitor, 2009a), since still, per capita income is below the world average.

When comparing the GDP growth rate of China with that of Turkey (see figure 6), it becomes obvious that China‟s growth rate is more robust and steadily increasing over the years from 2000 – 2010, whereas Turkey‟s growth rate is more fluctuating. China‟s growth rate was not affected as severe by the recent economic crisis as the Turkish one. However, the Turkish growth rate recovered fast and is increasing again.

Figure 5: GDP growth rate China and Turkey (Source: World Bank, Datamonitor, 2009a,b)

Based on the GDP growth rate, China seems to be the more successful country with higher economic development and economic growth. Nevertheless, as far as per capita income is concerned, China is far behind the Turkish GDP per capita (see figure 7 below). Hence, despite China is seen as an AEM, per capita income is still low, which might be attributed to the high number of population and the income disparity (rural areas versus cities). The economic growth is only limited to urban areas while rural areas still lack behind. If the wages

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in a country are low, then the GDP per capita is low as well4. Even a small GDP per capita, when multiplied by a large population, gives a high GDP. Hence, since China has the highest number of population worldwide (more than 1.3 billion), its GDP is respectable (see growth rates) although per capita income is still low (IMF Homepage).

Figure 6: GDP per capita in US $ (Source: World Bank, Datamonitor, 2009a,b)

Taken the total population into account it has to be noted that also China has a low GDP per capita, it has a high GDP and high GDP growth rates and is thus an AEM. Turkey, with a total population of approximately 78 million (World Fact Book) has a higher GDP per capita but its total GDP and its GDP growth rates are considerably smaller than that of China and consequently, Turkey can be seen as an EM.

4

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5.2. Conclusion

Overall, the home- country institutional context which has been compared above can be summarized in the following table in order to present a brief overview.

China

Turkey

Culture

liberal society (lower UAI) society relies more on rules (higher UAI)

more collectivist than

individualist more collectivist than individualist creation of hierarchies (scores are

slightly higher than those of Turkey)

creation of hierarchies

values of „male achievement‟ (e.g.

success, money) values of „male achievement‟

Political system

One- party state Democracy (+)

Public is not free to select the government corruption corruption ineffective implementation of policy (-) Ineffective implementation of policy Legal system

No independent legal system (-) tripartite system (+) lacks neutrality (-) political interference (-) Weak reporting and accounting

standards (-)

average of 35 days to start a business (-)

average of 6 days to start a business (+)

Social system ageing population (-) young population (+)

income disparity income disparity

Government policy

favorable government policies (+) no specific government policies (-) good trade relations (+) Market liberalization (+) Negative public perception of OFI

(-)

Economic development

robust growth rates (one of the world‟s fastest growing economy)

(+)

humble growth rates (-)

low GDP per capita (-) higher GDP per capita (+) Rising unemployment high unemployment (-) Table 3: Comparison of Home- country institutional environment

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As can be derived from the table above, Turkey offers a better business environment for firms due to its political, legal and social system. However, factors still exist that disturb the rather positive institutional environment, such as corruption, the income disparity, high unemployment and the fact that there do not exist specific government policies that enable easier and faster OFI. However, the Turkish government established good trade relations and hence exports in foreign countries are facilitated. Regarding China, it becomes obvious that the economy is already well developed (high growth rates) but nevertheless, the income disparity is high and income per capita is low as well. Besides, the political and legal system seem to be weak in comparison to that of Turkey since the government has much influence on what is happening in politics and legal affairs. However, the Chinese government offers strong incentives for firms to go abroad and hence, Chinese firms will find it easier to invest and internationalize in foreign countries.