The effect of home country factors on entry mode decision and the moderating role of host country corruption – A transaction cost approach

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The effect of home country factors on entry mode decision and the

moderating role of host country corruption – A transaction cost approach

International Business & Management (MSc)

University of Groningen

Faculty of Economics and Business

Thesis International Business & Management Author: Jeroen Stoop

Supervisor: Vincent Kunst Co-assessor: Gjalt de Jong Student number: 3010708

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University of Groningen | 1

Abstract

The factors that influence entry mode decisions of MNEs has gained much attention among academic researchers. One of the factors that gained much attentions is culture. Despite this overwhelming attention findings remained mixed and moderator effects are still unclear. On top of that, most literature focused on culture distance while this study focusses on home country culture. Cross-border activities involve interaction with other cultures, which means that MNEs are often faced with corrupt governments by entering a foreign country. To explain the

relationship that home country culture and host country corruption has on the entry mode

decisions, this study will use transaction costs economics. More specific, the role of opportunism and bounded rationality are used to explain the effect that culture has on an entry mode decision. Using a sample of 3818 subsidiaries of 21 home countries this study finds that MNEs that are faced with host country corruption prefer joint ventures above wholly owned subsidiaries. This relationship is present for individualistic, masculine and power distant countries.

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1. Introduction

“Cross-border business transactions involve interaction with different societal value systems” (Tihany et al., 2005: 270). Even though cultures are more and more beginning to look alike, firms often fail to overcome cultural aspects in international business (Cavusgil, Knight &

Riesenberger, 2008). One of the main tools firms have available to overcome cultural aspects is through the entry mode choice (Mayrhofer, 2004). The entry mode decisions of multinational enterprises (MNEs) is one that is critical in international business. Entry mode decisions determine whether a firm has full control over a company or whether it must share this control. Furthermore, entry mode decisions are difficult to change and therefore of high relevance for MNEs (Brouthers & Hennart, 2007). At the same time, entry mode decisions gained much attention in academic research (e.g. Sarkar & Cavusgil, 1996; Brouthers & Hennart, 2007; Canabal & White, 2008). The link between culture and entry mode decisions has gained so much attention among researchers that there are several meta-analyses studying this research topic (Zhao et al., 2004; Tihanyi et al., 2005; Magnusson et al, 2008; Morschett et al., 2010). Despite the rich literature in this research field, findings remain mixed (Morschett et al, 2010) and

research gaps still exist especially when it comes to moderating effects (Magnusson et al., 2008). So, although many academics have tried to find an answer that explains the effect of culture on entry mode decision a definite answer still doesn’t exist.

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Home country culture doesn’t only matter regarding to competitive advantage. Mayrhofer (2004) argued that the domestic environment plays and important role in the decision of the choice of entry modes of MNEs. He found that different strategies are chosen for firms with different home countries. Embedded systems and routines within cultures of nations ensure for these different strategies (Ill & Waring, 1999). On top of that, the home country culture of a firm is the main reason for differences in strategies (Doremas et al., 1998). “The norms and values of a firm’s home country have a strong imprinting effect that impacts decision-making process even when the firm operates outside of its home environment” (Stevens & Dykes, 2013: 388). Therefore, home country culture is of big importance by establishing foreign subsidiaries and is the main interest of this study.

As mentioned earlier, different societal values are happening with cross border activity (Tihanyi et al., 2005). These societal values are of great importance when the growth of emerging economies are taken into consideration. MNEs are faced with corrupt governments due to

globalization and the rise of these emerging economies (Uhlenbruck et al., 2006). Corruption is defined by the world bank (2000) as followed: “the abuse of power to obtain private benefits and includes payments of bribes, favoritisms, inappropriate use of influences and irregular payments in public contracting.”

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Therefore, this study will look at the effects of home country factors and the moderating effect of host country corruption on entry mode decisions. The culture dimensions of Hofstede (1980) will be used to test for the home country factors. Thus, the research question of this study is as followed: What are the effects of home country culture factors and what is the moderating effect of host country corruption on the entry mode decisions of MNEs?

International business has mostly relied on transaction cost economics to explain the entry mode choice of MNEs (Zhao et al., 2004; Brouthers & Hennart, 2007; López-Duarte & Vidal-Suárez, 2013). On the other hand, Erramilli (1996: 227) stated that: “if firms of a certain

nationality had an intrinsic desire for a certain level of ownership, then the traditional transaction-cost theory assumption that low-ownership, market modes represent the default choice would not be strictly valid (Erramilli, 1996; Makino & Neupert, 2000).” On top of that, Makino & Neupert (2000) added new institutional sociology to explain the entry mode choice. I won’t follow this line of reasoning and will solely use new institutional economics. This path is chosen since transaction cost economics is especially relevant to explain the role of uncertainty in the internationalization process of a MNE (Zhao et al., 2004). On top of that, it is effective in explaining the effect of external uncertainty on entry modes and the investment process during internalization (Brouthers & Hennart, 2007).

In this paper, I will analyze what and which home culture characteristics affect the entry mode decisions of MNEs and what the influence of host country corruption is. The contribution of this paper is threefold. First of all, this paper will develop a better understanding of the effect of culture on entry mode decision since a clear answer still doesn’t exist. Secondly, this paper will develop a better understanding of the moderating effects on entry mode decision and in this case the moderating effect of home country corruption. Finally, this paper could help decision makers within MNEs with their decision making among entry mode decisions.

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2. Literature review

2.1. Transaction cost theory

One of the application of transaction costs theory is to explain which governance mode is chosen for a certain economic interaction (Williamson, 1988). Two important behavioral

assumptions are made by transaction cost economics. The first is the bounded rationality of human agents. Individuals are assumed to be rational in their decision making but only limitedly since they have limited information (Williamson, 1988). This involves physical limits and language limits (Williamson, 1975). Second is the problem of opportunistic behavior.

Opportunism is: self-seeking interest with guile, which includes lying, stealing and cheating. On top of that, it includes incomplete disclosure of information, especially to mislead the other party. It is responsible for creating information asymmetry. Williamson (1979) distinguishes three dimensions to explain transaction costs. These are: investment idiosyncrasy or asset specificity, uncertainty and frequency. Asset specificity is: “the degree to which an asset can be redeployed to alternative uses and by alternative users without sacrifice of productive value”. (Williamson, 1988: 70). On top of that asset specificity refers to the costs of moving the activity or assets from one location to another (Zahariadis, 2001). Asset specificity is high when it’s expensive ex post to redeploy assets to alternative use. High asset specificity will increase the switching costs and creates the possibility of the more flexible party to exploit the other party (Hennart, 2007). The increased switching cost will push the governance mode from a market form to a more hybrid form since hybrid forms provide extra contractual safeguards. Furthermore, transactions with even higher asset specificity will push the governance mode towards hierarchy. The second dimension, uncertainty, doesn’t matter with low asset specificity since it’s easy to switch

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2.2. Entry mode

The choice of entry mode is one of the most critical decision for a firm, that tends to internationalize, to take (Agarwal & Ramaswami, 1992). Mukundhan and Nandakumar (2016) mention three reasons why this is such an important decision to take for internationalizing firms. (1) The entry mode choice has a permanent impact on the international performance of a firm; (2) setting up long lasting partnerships with foreign partners is a difficult time-consuming process and switching to a different mode involves huge costs; (3) An entry mode choice brings cross-cultural and organizational problems into the organization that is internationalizing. Once the firm decides to internationalize it has a second decision to make. This decision is whether you would like the complete ownership or that you would like to share the ownership (López-Duarte & Vidal-Suárez, 2013). A complete ownership is referred as a wholly owned subsidiary (WOS) and a shared ownership is called a joint venture.

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There are also costs attached to a joint venture which aren’t present in a WOS. Conflicts could for example arise within joint ventures. These conflicts are especially expected in the following cases: (1) when weak protected knowledge is transferred from the partner to the subsidiary; (2) when the same trademark is shared between the parent company and the subsidiary; (3) when there is export taking place to the home market by foreign subsidiaries (Hennart, 1991). Apart from these conflicts there are other clear advantages of WOS.

First, organizational costs of WOS are often lower due to the possibility of imposing your own management style and avoiding integration problems. On top of that, opportunistic behavior is easier managed in WOS since it’s easier to protect resources and the more effective mechanisms for monitoring (Papyrina, 2007).

Transaction costs related to entry mode can be divided into contractual hazards and political hazards (Henisz, 2000). Within contractual hazards several categories are important to acknowledge. First, asset specificity which is important since it bears the risk of unwanted dissemination of the assets and the failure to gain from rents generated (Teece, 1981). Second, the risk of technology that can be stolen and transferred to the partner. Last, the risk of misuse of a reputation or brand name (Gatingon & Anderson, 1988). Since every contract is to some extent incomplete and it’s hard to rely on the existing contract, opportunistic behavior will be of a bigger risk. Due to this opportunistic risk, Henisz (2000) found that MNEs will choose WOS as their entry mode when the incompleteness of contracts rises. On top of that, WOS will be preferred when assets are highly asset specific irrespective of the contextual uncertainty

(Williamson, 1991). When assets are specific the dependency on the other partner will increase. As a reaction coordination costs, will rise which makes joint ventures less efficient than WOS (Williamson, 1991).

At the same time a firm also faces political hazards. Political hazards come from the location of a certain activity and specific political systems in place (Henisz & Williamson, 1999). The risks that are present are for example changes in policy, taxation or dispossession. In the case of dispossession, the government could be transferring profits of the MNE directly to the

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information, local partners could get this information cheaper. On top of that, in case of dispossession that local partner will therefore bear a greater risk (Henisz, 2000)

Therefore, joint ventures will be more likely when political hazards increase. In general

transaction costs economics suggests that uncertainty is outside the control of the MNE, due to this assumption MNEs will be better off choosing low control entry modes such as joint ventures (Yiu & Makino, 2002).

2.3. Hypotheses development 2.3.1 Home country culture

Other studies already established that home country factors have an effect on entry mode decisions (Kogut & Singh, 1988; Boateng et al., 2017; Stevens & Dykes, 2013; Mayrhofer; 2004). Entry mode decisions are influenced by cultural and national factors of the home country (Kogut & Singh, 1988). National culture is described as: “to programs in which the identified group of people shares the same national environment.” (Hofstede 2001: 21). Hofstede developed six dimensions of national culture that influence values in the work environment (Hofstede, 2001: Hofstede, 2017). Previous research discussed four cultural dimensions that influenced entry mode decisions (e.g. Head & Sorenson, 2005; Weber, Shenkar & Raveh, 1996; Frijns et al., 2013). According to these studies the four dimensions that influenced entry mode decisions are: uncertainty avoidance, individualism vs collectivism, masculinity vs femininity and power distance.

Uncertainty avoidance index (UAI)

This dimension indicates the preferences in society for uncertainty avoidance. It gives an insight into what extent people can handle uncertainty and ambiguity. The most important issue here is if the society accept the future and see what happens, or that people want to control the future. In cultures where uncertainty avoidance is high, societies will reduce this uncertainty by imposing codes and structure. Furthermore, they will limit risk (López-Duarte & Vidal-Suárez, 2013). As described, there are different forces that have an influence on the entry mode choice of a MNE (Henisz, 2000). Conflicting findings are also found in the existing literature. According to Head & Sorenson (2005) residents from countries where uncertainty tends to be avoided, avoid situations with ambiguity and high risk. On the other hand, nations with a low uncertainty

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taking risks. Furthermore, they state (2005: 306): “a country whose regulatory bodies must have all the ‘answers’ before permitting development, will certainly discourage foreign direct

investment.” Firms originating from these countries would like much information before they take any actions that involve a lot of resources. On the other hand, Erramilli (1996) found that firms from countries with high UAI scores prefer higher levels of equity. He argued that managers rely on standardized and written rules and that subsidiaries would have hierarchal structures. On top of that, if the transaction cost approach is followed you would expect that countries with high UAI scores would prefer WOS above joint ventures. The reason for this is that contracts will never be fully complete and that opportunistic behavior will therefore always be a risk. Since residents with high UAI scores tend to avoid situations with ambiguity and high risk you would expect them to have a preference for WOS. Besides that, I assume that asset specificity is higher for joint ventures since the risk of unwanted dissemination is higher. This is especially the case for joint ventures in a foreign country because the costs of moving an asset from one location to another will be higher. Countries with high UAI scores will limit this risk and want to reduce this uncertainty. The hypotheses will therefore be:

Hypothesis 1: Firms originating from countries with a high uncertainty avoidance are more

likely to choose a WOS as their entry mode compared to countries with a low uncertainty avoidance.

Individualism versus collectivism (IDV)

This dimension indicates the preferences in society for individualism or collectivism. It refers to the behavior of people towards the group. An individualist is focused on his/her own goals, and takes care only of themselves and family members. The opposite of individualism is collectivism, which means that individuals can expect that family members or friends take care of each other, there is a so-called loyalty between different groups. “Collectivism stands for a society in which people from birth onwards are integrated into strong, cohesive in-groups, which throughout people’s lifetime continue to protect them in exchange for unquestioning loyalty (Hofstede, 2001: 225)”. “In countries where individualism is the norm, individual-level

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In these cultures, maximizing self-interest is accepted even without considering the effects on others (Ahern et al, 2015). Contrary in collectivistic cultures it’s likely that personal goals are sacrificed in order to be beneficial for the group as a whole (Ahern et al, 2015). On top of that, Head and Sorenson (2005: 307) quoted that: “the collectivist value leads to situations where the players are willing to work, and possibly make sacrifices, for building new businesses.”

Based on the transaction that are done, a distinction can be made between transactions involving solely people from within the same group or also outgroup people. “Transaction with outgroups include those between the self and a collectivity of which the self is not a member, or those between the self and individual members of that outgroup” (Chen et al., 2002: 574). Logically, ingroup transactions only consist of transactions with people that belong to the same group. When a transaction takes place that involves outgroups, research showed that people from collectivistic countries show more opportunistic behavior than people from individualistic

countries. This is argued since individualists, relative to collectivists, have a stronger trust in relationships that are outside of their group. In other words, individualists would earlier trust someone that is not familiar to them. On the other hand, collectivists show higher trust in ingroups (Chen et al., 2002). Clearly a joint venture involves more interaction with outgroups than WOS because unfamiliar entities are involved with joint ventures. Henisz (2002) found that every contract is to some extent incomplete which makes opportunism of a bigger risk. The result of this opportunistic behavior is that MNEs prefer WOS above joint ventures. Firms from

collectivistic countries will therefore prefer WOS above joint ventures. This leads to the following hypothesis:

Hypothesis 2: Firms originating from countries with a preference for individualism are more

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University of Groningen | 11 Masculinity versus femininity (MAS)

This dimension indicates the preferences in society for masculinity or femininity. In a society with a preference for masculinity there is more stress on values such as competition, success, wealth and ambition (López-Duarte & Vidal-Suárez, 2013). The focus lays on achievement, heroism, assertiveness and people are materialistic. In a feminine environment, there is less competition, people care for each other, especially for weaker people. It´s about cooperation, there is more room for consensus and the quality of life is important. Generally, masculine cultures tend to internationalize quicker since feminine cultures tend to think harder and longer before they make decisions (Head & Sorenson, 2005) and this is less the case for masculine cultures. Head and Sorenson (2005: 307) describe the decision making of masculine cultures as follows: “masculine cultures generally will decide with much less deliberation and with fewer bureaucratic layers to work through.” They highlighted that masculine cultures devote more resources to their internalization; they are more willing to take risks and do this to attain the economic advantages of it. For feminine cultures, economic motives are less relevant in compare to masculine countries. On top of that, Doney et al. (1998) argued that opportunism is unlikely to occur in feminine cultures. Self-seeking interests are not in line with the value system in feminine countries. “Feminine societies exhibit a pattern of nurture, and there is a tendency toward less aggressive, more cooperative behavior” (Doney et al., 1998: 610). Masculine countries, however, stresses more values towards achievement and aggressive behavior which makes opportunism in the home country more present. All these explanations make it likely that masculine countries have a higher possibility of opportunistic behavior. According to the transaction cost economics, you would therefore expect that due to likelihood of opportunism transactions cost rise. The result of this is that WOS are the more likely entry mode choice for firms from countries with a masculine culture. Therefore, I assume the following hypothesis.

Hypothesis: Firms originating from countries with a high masculinity are more likely to choose

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University of Groningen | 12 Power distance (PDI)

This dimension indicates the preferences in society for power distance. It gives an insight in to what extent less powerful people accept and expect that power is unequally distributed. It is mainly about how people deal with inequalities in their society. In cases of a high degree of power distance there is a hierarchical order, which is accepted by everyone and where no

explanation is needed. If the degree of power distance is low, people try to equalize the power in their society. In countries with high PDI scores, power is concentrated at the top of the firm and is in hands of a few people (Erramilli, 1996). On top of that, organizations are centralized and the population will ask less questions when a decision is taken (Head & Sorenson, 2005). In low PDI countries, on the other hand, power is more evenly distributed. The organization is flatter and there is less supervisory personnel. On top of that, decision-making happens decentralized in low PDI countries and managers are likely to ask advice to their subordinates. The internal control that takes places in low PDI societies will reduce the need for procedures or rules (Casson & Nicholas, 1989). Hofstede described this when he argued that: “smaller power distance leads to the feasibility of control systems based on trust in subordinates, in larger power distance

countries, such trust is missing" (Hofstede, 1980: 384). The preference for control is therefore higher in societies where the home country has high PDI scores. Moreover, in societies where power distance is high there is less interpersonal trust which will lead to greater needs for control (Shane, 1992). This need for control leads to higher transaction costs. Finally, Steenkamp & Geyskens (2012) found that in home countries where power distance was low opportunistic behavior is less common because of their liability to the group. Shane (1992) confirms this statement by saying that in situations with high trust control happens through shared values which lowers the chance of opportunistic behavior.

All in all, I expect that transaction costs are higher in countries with a high-power distance. There is less trust in high PDI countries which strengthens the need for control and makes opportunism more likely. This leads to the following hypothesis:

Hypothesis 4: Firms originating from countries with a high-power distance are more likely to

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2.3.2. Corruption

As mentioned earlier, the World Bank (2000) defines corruption as: “the abuse of power to obtain private benefits and includes payments of bribes, favoritisms, inappropriate use of influences, irregular payments in public contracting”. Two types of theories can be used to develop a better understanding of corruption, these are: transaction cost theory and institutional theory (Uhlenbruck et al., 2006; Ferreira et al., 2016). This study will merely focus on the transaction cost approach since this is in line with the whole study. There are two types of views towards corruption (Cuervo-Cazurra, 2006). The first view sees corruption as something positive. The term “grease in the wheels of commerce” describes this view of corruption. With this view corruption is seen as a phenomenon that facilitates transactions and that is makes procedures more efficient (Leff, 1964). On top of that, corruption enables market procedures to work in a setting of misguided regulation. Contrary of the positive view most researchers still view corruption as a negative thing. The term “sand in the wheels” describes this view of corruption. In their view corruption is a waste of resources and even if the bribe is paid you are not sure that the other party delivered on what you agreed (Cuervo-Cazurra, 2006). I will follow the negative view on corruption since transaction cost economics provide a clear explanation why transaction costs rise due to corruption.

The aim of the transaction costs economics is to explain the transfer costs that are incurred with a good or service between two parties. As described the two underlying

assumptions in the transaction costs economics are bounded rationality and opportunism. Both these assumptions can be directly linked to corruption. Bounded rationality is linked to corruption to the extent that it is very difficult for a manager to know by whom a certain transaction is handled, this is especially complicated in an environment such as developing countries. In these environments, there is a high ambiguity concerning the applicable rules and regulation and extensive paperwork must be used to address regulatory requirements. Due to these challenges planning becomes very difficult and not all contingencies can be provided. Under these

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Opportunism is linked to corruption to the extent that incomplete disclosure of

information, with the aim to mislead the other party, is more prominent in corrupted government relations with. Managers are often very depended on these government since the decision-making power is rooted in these governments. This dependency creates opportunities of opportunism in corrupted governments because they demand bribes in return of a certain good (Prasad &

Shivarajan, 2015). Therefore, transaction costs are higher when host country corruption increases because opportunistic behavior is more present in these circumstances. The overall uncertainty is higher which makes transaction costs rise (Williamson, 1985).

2.3.3. Moderating effect of host country corruption

Two dimensions are established to measure the uncertainty that incurs because of corruption. These are pervasiveness of corruption and arbitrariness of corruption. Pervasiveness of corruption refers to “the average firm's likelihood of encountering corruption in its normal interactions with state officials”. Whereas arbitrariness of corruption refers to: “the degree of ambiguity associated with corrupt transactions in a given state (Rodriquez et al., 2005)”. When uncertainty is high because of corruption, property rights are harder to protect. Corruption is a political hazard as described by Henisz (2000) and is often outside the control of the MNE.

Cultural dimensions and host country corruption

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As described previously, individualistic people show higher trust in people that are unfamiliar relative to collectivistic people. The result is that collectivistic cultures show more opportunistic behavior in transactions that involve people outside their own group. So, firms from individualistic countries would earlier choose joint ventures relatively to firms with collectivistic roots. In corrupted host countries, this trust in unfamiliar entities is even a bigger issue since it can be assumed that the differences between home and the host country are bigger. This

assumption is best explained through that of bounded rationality. In corrupt circumstances, it is hard to know who is responsible for a certain transaction. On top of that, the ambiguity

concerning rules and regulation is higher (Prasad & Shivarajan, 2015). Because of the way how individualistic cultures respond transaction with unfamiliar groups, I expect a different reaction to host country corruption than collectivistic countries. All in all, I expect that the described

relationship that individualistic countries tend to prefer joint ventures relative to collectivistic countries will be strengthened by host country corruption.

Masculine cultures stress more values towards success, wealth, ambition and

achievement. These values make opportunism more present in comparison to feminine cultures. Masculine cultures are therefore used to opportunistic behavior and have a better feeling how to deal with opportunism when they encounter it. Cuervo-Cazurro (2006) found that MNEs from corrupt countries, where opportunism is high, don’t limit their investments in countries that have high levels of corruption. They know how to deal with the corruption since they have

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University of Groningen | 16 Hypothesis 5: The moderating effect of host country corruption will weaken the effect of high

uncertainty avoidance scores on WOS as the entry mode strategy.

Hypothesis 6: The moderating effect of host country corruption will strengthen the effect of high

individualism scores on joint ventures as the entry mode strategy.

Hypothesis 7: The moderating effect of host country corruption will weaken the effect of high

masculinity scores on WOS as the entry mode strategy.

Hypothesis 8: The moderating effect of host country corruption will weaken the effect of

high-power distance scores on WOS as the entry mode strategy

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3. Methodology & Analysis

3.1. Data & Sample

For the purpose of this study it is important to collect data about the cultural dimension of a country, the entry mode choice of a firm from that country, and the level of host country

corruption. Obtaining this data makes it possible to test the hypotheses that are established above. Since research findings, concerning country culture and entry mode choices, remain mixed it is important to test what the role of home country culture is (Morschett et al, 2010). On top of that research gaps still exist when it comes to moderating effects (Magnusson et a., 2008). I will use the cultural value orientations of Schwartz (2006) to compose my sample. This method is chosen because Schwartz divided the world into 7 cultural groupings which makes it possible to divide the different countries into different cultures. Given these criteria the sample is established as follows.

First, Schwartz (2006) established an empirical mapping of 76 national cultures which identifies the following 7 transnational cultural groupings; West European, English-speaking, Latin America, East European, South Asian, Confucian influenced and African and Middle Eastern. For the purpose of this research there are three countries selected which represent each group. This is done to give a fair representation of the different cultures. The second criteria is that the country of a certain group is involved in establishing WOS or joint ventures, or at least that there is data available. The third criteria is, the availability of data of the year 2016, since this is the most recent available data for host country corruption. The fourth and last criteria is that the data of the four cultural dimensions of Hofstede are available. The sample consist of firms of 21 countries who are involved in joint ventures or WOS and in which the cultural dimensions of Hofstede play a role. According to the cultural grouping of Schwartz (2006) the following countries are selected:

Western-Europe: Netherlands, Germany and France;

English-speaking: United States, Australia and United Kingdom; Latin American: Argentina, Brazil and Chile;

Eastern-Europe: Czech Republic, Slovakia and Poland; South Asia: India, Thailand and Malaysia;

Confucian influenced: China, Taiwan and South-Korea;

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The total sample consist of 3816 subsidiaries with 21 different home countries and 140 different host countries. All the data concerning entry mode choices and firm level information in this study will be obtained from Orbis.

3.2. Dependent variable

The dependent variable is the choice of entry mode of an MNE. MNEs can choose between a joint venture or a wholly owned subsidiary. The entry mode choice is a dummy variable with value 1 if the investment is made through a WOS and 0 via a joint venture.

According to Yiu and Makino (2002), some researchers argue that a WOS could only be considered a WOS once it is owned by one party, irrespective of the equity involved. Other studies (López-Duarte & Vidal-Suárez, 2013; Hennart & Larimo, 1998), considered a subsidiary wholly owned if the equity was over 95%. Joint ventures, on the other hand, were considered subsidiaries with an equity size between 10% and 95%. Ownership below the threshold of 10% were not included since this could be portfolio investments rather than direct investments (López-Duarte & Vidal-Suárez, 2013). However, most studies (Hennart, 1991; Makino & Neupert, 2000; Papyrina, 2007) did use the 95% cutoff for WOS but had a different cutoff for joint ventures. They used a cutoff of 5% instead of 10%. Their argumentation to exclude small investments remains the same but they argue that this threshold should be 5%. A different approach is to use the actual percentage of the ownership instead of a dummy variable. “This, however, makes the implicit assumption that the intervals are constant over the entire range of ownership. Yet moving from a 50 to a 51 percent stake has much greater consequences for control than moving from 10 to 11 percent control” (Hennart, 1991: 488).

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3.3. Independent variable

The independent variable is the home country culture of a country. The home country culture is measured by using four of the six variables of Hofstede. Namely: uncertainty avoidance, individualism, masculinity and power distance.

I have chosen for the Hofstede dimensions to explain the home country culture since foreign entry mode studies mostly rely on the Hofstede framework. Even though it is widely used there is growing criticism on the Hofstede framework (Steenkamp, 2001; Shenkar, 2001). Despite this criticism, I will still use the Hofstede framework since a better alternative isn’t available (Drogendijk & Slangen, 2006) and most of the critique can be refuted. The major critique on the work of Hofstede is that it might be outdated since it is established on data collected more than 45 years ago (Beugelsdijk et al., 2015). Criticasters argue that cultural values could have changed over time (Bell, 1973; Inglehart, 1997). They argue that once countries grow richer their values change as well. Beugelsdijk et al. (2015) results support this statement and found that on average countries became more individualistic and that power distance decreased. However, these

changes didn’t change the relative positions of a country since other countries changed to the same direction. Therefore, they conclude that: “widespread values change notwithstanding, the relative positions of and differences between countries are remarkably stable” (Beugelsdijk et al., 2015: 237). On top of that, Drogendijk and Slangen (2006) found that both Hofstede and

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3.4. Moderator

The level of host country corruption is the moderator in this study. The transparency international index is used to measure the degree of host country corruption. In other words, I will look in which country the subsidiary is located and I will use the degree of corruption in that country as a moderator. According to the website of Transparency International (2016): “Every year, Transparency International publishes the corruption perception index which ranks

countries/territories based on how corrupt a country’s public sector is perceived to be. It is a composite index, drawing on corruption-related 16 data from expert and business surveys carried out by a variety of independent and reputable institutions”. Their database uses a scale from 0 to 100, with 0 for highly corrupt countries and 100 for countries with extremely low level of corruption. To simplify my study, I have inverted the corruption scores. This method is chosen since the Hofstede data offers a range of 0 to 100 with a score of 100 indicating a high score on the concerned dimension. To create the same circumstances for the corruption data the scores are inverted which creates high scores for highly corrupt countries.

The transparency international index is a widely-used measurement to test for corruption (Cuervo-Cazurra, 2007; Ferreira et al., 2016). However, there are also studies that use other data, namely the World Business Survey (2008), as a measurement for corruption (Uhlenbruck et al., 2006; Bogmans & Jong, 2011). Both measurements are a correct way to measure corruption since Ferreira et al. (2016) tested the correlation and found that there was a correlation of 0.949 with the transparency international index.

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3.5. Control variables

Several control variables are included to control for the entry mode choice of an MNE. These variables are especially related to the investing firm since there wasn’t enough information about the subsidiaries to control for. This study offers a control for firm age, asset size, return on equity and number of subsidiaries.

3.5.1. Total assets

The first control variable are the total assets of the investing firm. Transaction cost economics suggest that large firms prefer WOS over joint ventures (Bontempi & Prodi, 2009). This is suggested since it’s easier for large firms to gain access to information and there are more skills available to develop it. On top of that, larger firms are more risk-taking and are less

vulnerable for the consequences (Leung et al., 2003). Finally, there are more resources attached to an WOS. Therefore, asset size is an often used control variable in entry mode studies (Kogut & Singh, 1988; Gatignon and Anderson, 1988; Meyer, 2001). Previous studies (Caves & Mehra, 1986) found a positively relation between firm size and acquisitions. There are normally more managerial and financial resources attached to acquisitions than joint ventures. In line with previous, I will therefore control for firm size using the total assets of the investing firm (Kogut & Singh, 1988; Hennart, 1998; López-Duarte & Vidal-Suárez, 2013)

3.5.2. Firm age

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3.5.3. ROE

The third control variable controls for firm performance. This control is added since there is a possibility that financially better performing firms have a preference for WOS as compared joint ventures. To control for this a firm performance control variable is included. Most studies have chosen for ROA as the variable to control for performance. Since I already controlled for total assets, which is related to ROA, I have chosen to take the return on equity as a control variable. This is in line with the study of Kyaw & Theingi (2009).

3.5.4. Number of foreign subsidiaries

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3.6. Analytical procedure

Given that the dependent variable is dummy variable the method of testing is a binary logistic regression in this study. The first four hypotheses are tested by regressing entry mode decisions as the dependent variable on the four cultural dimensions. Total assets, firm age, return on equity and the number of subsidiaries will be the control variables. The last four hypotheses are tested using a moderated multiple regression. Interaction effects will be created between the four cultural dimensions and the host country corruption. These interaction effects will be regressed by using entry mode choice as the dependent variable. To check for outliers z scores are used. Any values of which the Z exceeds -3 or 3 (Sincich, 1986; Shiffler, 1988) will be removed from the dataset to increase the reliability. Finally, multicollinearity is checked by using the variance inflation factor.

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4. Results

4.1. Descriptive statistics

As mentioned, the total sample consist of 3816 subsidiaries with 21 different home countries and 140 different host countries. The complete distribution among the home countries can be seen in appendix 1. Especially the United States is remarkable since it covers more than a quarter of the sample. For 10 out of the 140 host countries data about the host corruption was missing, which decreases the sample for the moderator to 3425 observations. However, this makes the study stronger since the missing countries are considered as tax haven countries and the reason to move to these countries are often with different intentions. The Virgin Islands with 229 located subsidiaries offers the best example of this assumption.

Table 1

Descriptive statistics.

Variables Mean SD Min Max

1. Entry mode 0,74 0,439 0 1 2. PDI 49,16 15,7796 35 100 3. IDV 69,44 28,016 17 91 4. MAS 54,28 13,580 14 100 5. UAI 51,00 20,158 8 93 6. Host corruption 39,56 20,266 9 100 7. Total assets 369457,83 894295,932 0 5639304 8. ROE -16,64 61,015 -321 251 9. Firm Age 17,06 11,282 1 73 10. Number of subsidiaries 9,80 11,153 1 49

N=3816 for all variables except host corruption (which is based on N=3425). In this table, PDI, IDV, MAS and UAI are the Hofstede dimensions. Entry mode is dummy variable equal to one for WOS and zero for joint venture. Total assets, ROE, Age and number of subsidiaries are control variables.

Table one shows a summary of the descriptive statistics. Several outliers have been removed from the control variables to improve the validity of the study. On top of that, table two shows the Pearson correlations table, individualism correlate relatively strong with power

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University of Groningen | 25 Table 2 Pearson Correlation Variables 1 2 3 4 5 6 7 8 9 10 1. Entry mode 1,00 2. UAI 0,026 1,00 3. IDV -0,078** -0,121** 1,00 4. MAS -0,072** - 0,310** 0,399** 1,00 5. PDI 0,037* 0,138** -0,765** -0,296** 1,00 6. Host corruption -0,104** -0,074** -0,042* -0,046** -0,015 1,00 7. Total assets -0,020 0,011 -0,200** - 0,160** 0,104** 0,174** 1,00 8. ROE -0,014 0,049** -0,241** 0,066** 0,222** -0,059** 0,017 1,00 9. Age 0,019 0,256** - 0,219** -0,046** 0,273** -0,081** - 0,023 0,176** 1,00 10. Number of subs -0,007 -0,019 - 0,145** - 0,332** 0,077** 0,254** 0,463** -0,039* -0,043** 1,00

N=3816 for all variables except host corruption (which is based on N=3425). In this table, UAI, IDV, MAS and PDI are the Hofstede dimensions. Entry mode is dummy variable equal to one for WOS and zero for joint venture. Total assets, ROE, Age and number of subsidiaries are control variables

4.2. Regression results 4.2.1. Regression results

The results of the regression are presented in table 3. Hypothesis one concerning uncertainty avoidance doesn’t show a significant result and is therefore rejected. The second hypothesis, concerning individualistic cultures, a significant (p<0,01) and negative result. On top of that, the same result is present irrespective if the independent variable is run separately or combined with the other independent variables. This means that, as expected, MNEs from individualistic countries show a preference for joint ventures. The third hypothesis, concerning masculine cultures, shows a significant (p<0,01) result. However, this result is only present when the independent variable is run separately. On top of that, the result is negative which means that the hypothesis is rejected since a positive relationship was expected. The fourth hypothesis, concerning power distant countries, shows a significant (p<0,01) and positive result. The hypothesis is therefore confirmed. However, something remarkable happens when the

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Table 3

Binary logistic regression model

Variable 1 2 3 4 5 6 7 8 9 10 11 Control Total assets 0,000 (0,314) 0,000 (0,266) 0,000 (2,415) 0,000 (0,403) 0,000 (0,771) 0,000 (2,479) 0,000 (1,194) 0,000 (1,690) 0,000 (1,074) 0,000 (1,187) 0,000 (0,992) ROE -0,001* (3,047) -0,001* (3,085) -0,002*** (7,146) -0,001 (2,031) -0,002** (4,532) -0,002** (6,152) -0,002*** (7,110) -0,002*** (7,399) -0,002** (4,102 -0,002*** (7,143) -0,002** (3,909) Firm Age 0,010*** (6,393) 0,009 (5,282) 0,005 (1,479) 0,009** (5,027) 0,007* (2,914) 0,006 (2,305) 0,003 (0,412) 0,003 (0,444) 0,003 (0,410) 0,003 (0,387) 0,002 (0,359) Number of subsidiaries -0,003 (0,656) -0,003 (0,692) -0,001 (0,075) -0,006 (1,911) -0,002 (0,) -0,002 (0,136) 0,003 (0,446) 0,004 (0,638) 0,001 (0,033) 0,004 (0,576) 0,001 (0,038) Independen t UAI 0,001 (0,485) 0,000 (0,000) 0,000 (0,005) 0,001 (0,067) 0,001 (0,132) 0,001 (0,060) 0,001 (0,349) IDV -0,009*** (28,280) -0,012*** (22,446) -0,010*** (13,107) -0,009*** (11,871) -0.009*** (11,892) -0,010*** (12,940) -0.010*** (12,689) MAS -0,009*** (6,421) -0,001 (0,026) 0,000 (0,001) 0,000 (0,000) 0,002 (0,234) 0,000 (0,002) 0,002 (0,338) PDI 0,007*** (6,536) -0,008* (3,410) -0,005 (1,145) -0,005 (1,655) -0,005 (1,207) -0,005 (1,448) -0,006 (1,757) Moderator Host corruption -0,012*** (27,545) -0,012*** (27,048) -0,012*** (26,187) -0,012*** (27,140) -0,011*** (24,972) Interaction UAI x Host corruption 0,036 (0,644) -0,004 (0,005) IDV x Host corruption -0,098** (4,431) -0,186*** (6,321) MAS x Host corruption -0,123** (7,670) -0,104** (4,275) PDI x Host corruption 0,002 (0,002) -0,156** (5,414) Constant 0,877*** (86,848) 0,811*** (37,952) 1,569*** (95,523) 1,404*** (37,981) 0,555*** (12,869) 2,171*** (26,346) 2,301*** (26,012) 2,239*** (25,233) 2,109*** (22,554) 2,254*** (25,336) 2,118*** (22,148) Model Chi-square 9,823*** 8,449*** 39,479*** 16,403*** 16,436*** 42,931*** 53,804*** 57,602*** 60,849*** 53,161*** 67,883*** Df 4 5 5 5 5 8 10 10 10 10 13 Correctly classified 73,6 73,6 73,6 73,6 73,6 73,6 73,0 73,0 73,0 73,00 73,0 Cox and Snell R2 0,003 0,004 0,014 0,006 0,006 0,015 0,021 0,022 0,023 0,020 0,026 Nagelkerke R2 0,005 0,005 0,020 0,008 0,008 0,022 0,030 0,032 0,034 0,030 0,038

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4.2.2. Moderator regression results

The moderator on itself shows a highly significant (p<0,01) and negative result for all the three models. Therefore, joint ventures are the expected entry mode when a firm is confronted with high corrupted host countries. This is in line with the expectations from the literature. Of the last four hypotheses, concerning the interaction effects, show that three hypotheses are confirmed and one hypothesis are rejected.

Hypothesis five suggests that in the case of high host country corruption, home countries that score high on uncertainty avoidance are more likely to choose for a joint venture. This hypothesis is rejected since the results were not significant.

With regards to hypothesis six, seven and eight, the expected negative relation is significant and confirmed. In other words, for individualistic, masculine and power distant countries we see that joint ventures are the preferred choice when a firm is confronted with host country corruption.

For individualistic countries, the results are significant at the 1% significance level and for masculine and power distant countries the results are significant at the 5% significance level. A clear overview of the outcomes for every hypothesis is given in table 4.

Looking at the Nagelkerke R2 it indicates that model eleven, including the control, independent and interaction variables accounts for 3,8% of the outcome of the dependent

variable. On top of that, it is remarkable that of all the control variables only return on assets has a significance effect on the dependent variable.

Table 4

Hypotheses outcomes

Hypothesis Sign predicted Sign found Significance H1 Positive (+) Positive (+) not significant

H2 Negative (-) Negative (-) significant at 0,01 level H3 Positive (+) Negative (-) significant at 0,01 level H4 Positive (+) Positive (+) significant at 0,01 level H5 Negative (-) Negative (-) not significant

H6 Negative (-) Negative (-) marginally significant at 0,01 level H7 Negative (-) Negative (-) significant at 0,05 level

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4.3. Robustness tests

To be certain that the results are consistent, I have checked for the robustness of this study. On top of that, the Nagelkerke R2 is relatively small and with this check possible

differences can be observed. In this study, a cut-off percentage is used to define the dependent variable, the cut-off for WOS in this study is 95%. Two different cut-off percentages are taken into account and the entire binary logistic regression was rerun. For the first check, I have recoded the dependent variable into an 80% cut-off with is consistent with previous studies (Makino & Beamish, 1988; Makino & Neupert, 2000). For the second check the dependent variable was recoded into an 100% cut-off.

Irrespective of the cut-off percentage the results remain almost completely the same. The sign of the coefficients were exactly the same as they were in the original study for both checks. On top of that the same variables were significant as compared with the original study. The only small difference can be found in the accountability of the models (see appendix 2). The 80% cut-off had slightly lower scores on the Nagelkerke R2 and the 100% had slightly higher scores on the Nagelkerke R2.

Apart from the two different cut-off percentages, I have checked for robustness by rerun the entire logistic regression for smaller sample sizes. Since the United States was such a big part of the sample (see appendix 1), the entire regression has been redone by first excluding the United States as a home country and second excluding the United States as a host country. The outcome shows that, also for these two checks the results remain the same. The significant variables have the same direction and the volume of the coefficients also remains the same. A minor difference is the Nagelkerke R2. When the United States is excluded as a host country the R2 rises to 6,5% for model eleven. Finally, a small difference is also present in the correctly classified percentage. This increased to 78,5% for the sample excluding the United States as a home country and to 74,3 for the sample without the United States as a host country.

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5. Discussion and conclusion

5.1. Conclusion and implications

Entry mode decisions of MNEs in relation to culture are a well-studied research domain in international business literature. This study distinguishes from previous studies because this study focuses on home country culture instead of culture distance.

The aim of this research paper is to address the research question regarding whether home country culture factors influence the entry mode decision of MNEs. The home country cultures factors that are used are the four Hofstede dimensions: Uncertainty avoidance, individualism, masculinity and power distance. On top of that, this study studies show how this relationship might be influenced by the host country corruption that a MNE is facing. This paper thus not only contributes to the culture and entry mode related literature but also explores the moderating effect of host country corruption.

The results illustrate that, related to culture, it’s not only culture distance that determines an entry mode decision. Although the results are small home country culture has a significant effect on entry mode decisions of MNEs. Firms from countries with individualistic cultures show a preference for joint ventures in comparison to collectivistic cultures. Collectivistic cultures show more opportunistic behavior when a transaction takes place with an unknown entity. This result is found since individualists have more trust in relationships with unknown entities than collectivists. This leads to lower transaction costs concerning joint ventures for firms from

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The results regarding the moderator show indeed that MNEs prefer joint ventures above WOS when entering a relative corrupt country. Significant results for this relationship where found for individualistic, masculine and power distant countries. In other words, as the theory predicted, MNEs do prefer joint ventures in corrupt host environments because the political hazards are more presents in these circumstances which forces MNEs to choose for a joint venture. The underlying assumption behind this is that MNEs will safeguard themselves against threats in the host country such as dispossession and changing policies. On top of that, certain information is easier to gain for local partners, especially is corrupt environments. Due to this safeguard, joint ventures are the preferred entry mode. All these results are consistent irrespective of use of different cut-off points to define the ownership type and simple sizes.

This study provides useful insights for academics and managers. First, this study, helps to develop a better understanding of the effect of home country culture on entry mode decisions. Although the results were fairly small, home country culture has an effect on the entry mode decisions of MNEs originating from a certain country. Secondly, it enriches the literature with useful insights about the moderating effect of host country corruption. Despite the culture

typology the results were all the same. MNEs show a preference for joint ventures as compared to WOS in corrupt circumstances. On top of that, the relationship was remarkably stronger when MNEs entered corrupt countries. This means that host country corruption has a remarkable effect on how MNEs enter countries. Finally, it helps managers and policy makers with their decision-making process among entry mode decisions.

5.2. Limitations and future research

This study has several limitations with opportunities for future research. First of all, although the sample size was relatively big with 3816 observations compared to other studies, it still only contained 21 home countries. Future research could redo the entire study containing all the countries of the world.

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Thirdly, linked to the previous limitation, subsidiary age could be used to have a better control for the effect for host country corruption. Even though previous research found that corruption is stable over time (Pellegrini, 2011; Gupta et al., 1998), it would be more thorough to use the exact perceived corruption and not an average of the last five year.

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