Corruption practices and MNEs’ Entry Strategies in the
Shipping Industry: an empirical investigation using an
Institutional Approach.
Author:
Matteo Rambaldi S3566145
m.rambaldi@student.rug.nl
Supervisor:
Dr. J. Canello
Co-assessor:
Dr. E. Mendiratta
Faculty of Economics and Business
University of Groningen
Duisenberg Building, Nettelbosje 2, 9747 AE Groningen, The Netherlands P.O. Box
800, 9700 AV Groningen, The Netherlands
Abstract
Multinational Enterprises (MNEs) are subjected to various pressures when it comes to maintain or improve their competitive position within the global market. Competition is getting higher and more aggressive within the World Trade Economy. Scholars have deeply observed the relevance of firm’s entry mode selection and the relative link with the firm’s competitive advantage (Pan & Tse, 1996). This study aims to provide a contribution to the existing literature concerning the relationship between entry mode strategies and corruption, which is considered to be a significant external driver for the decision-making process. Foreign companies, when coping with substantial low institutional system level, tend to opt for partial investments rather than wholly ones, to benefit from local partners. However, such a relationship between host country corruption and firms’ entry modes might be altered by firms’ origin country corruption level. By using an institutional theory approach, the present research investigates the effects of the host and home country corruption among firms’ internationalization process. A specific subdivision will be made between wholly owned ownership, WOS, and Joint Venture, JV, which constitute the analyzed Dependent Variable, MNEs’ Entry Strategy. These two classes will be coded as (1) and (0) respectively, and so implementing a binary variable. Host and Home country corruption will be addressed as Independent Variables. This research takes advantage of a sample of 654 Shipping firms analyzed within 32 countries in the years of 2013-2017. The results will demonstrate that high corruption level in the host country will lead firms to adopt Joint Ventures (JVs). While firms coming from corrupt countries will favor Wholly Owned Ownership, (WOS) over Joint Venture.
Abstract ... 2
1. Introduction ... 4
2. Theoretical framework ... 7
2.1 The Role of firm-level and environmental factors in explaining
internationalization decision: from early IB theories to the institutional approach .. 7
2.2 What is Corruption? ... 10
2.3 Navigating in a Corrupt Ocean ... 12
2.4 Corruption and its Effect on Entry Mode Strategy ... 15
2.5 Conceptual Model ... 18
3. Research Design ... 19
3.1 Data Collection and Sample Description ... 19
3.2 Dependent Variable ... 20
3.3 Independent Variables ... 21
3.4 Control Variables ... 22
3.5 Methodology ... 25
4. Results ... 26
4.1 Descriptive Statistics ... 26
4.2 Multicollinearity ... 28
4.3 Logistic Regression ... 29
4.4 Robustness Check ... 32
5. Discussion ... 34
5.1 Discussion ... 34
5.2 Limitations and Future Recommendations ... 36
6. Conclusions and Implications ... 38
1. Introduction
The way companies decide how to get into foreign markets has been studied for many years since it appears to be a topic of keen interest to researchers in international business and marketing (Agarwal & Ramaswami 1992). A growing concern has raised regarding the importance of the institutions as a strategy decision driver, and their respective role in the organizations.
Globalization and the respectively Multinational Enterprises (MNEs) expansions characterize the today world trade economy. Companies struggle to preserve and eventually enhance their market shares since numerous developing country enterprises are gaining strength and undermining developed country firms’ status. Internationalization has become the keyword for many firms, driving the respectively market choices and strategies.
Institutions provide the trigger for structuring a steady economy. With the evolution of these first devices, a society fallows a developing path aimed at prospective economic growth (Globerman & Shapiro, 1999). When it comes to the institutional level that characterized a given country, multiple and various aspects might come up, due to a relative factor deficiency.
Corruption, which is one of the outcomes of a low institutional level, and its effects on MNEs’ Entry Strategies, are becoming a theme of increasing concern. The word corruption can be identified as the abuse of the public empowerment for own benefit, implying a tendency to look the other way and support an attitude of “don’t ask, don’t tell (Boddewyn et al., 1994). Corruption has received high emphasis from numerous economists and scholars (Beets, 2005; Cuervo-Cazura, 2006; Rose at al., 2011). This practice can also be summarized as the misappropriation of federal authority for private plans (Beets, 2005). Corruption determines uncertainty regarding operation costs, and it is seen as an illegal tax on business. (Shleifer et al., 1993). Therefore, choosing the proper entry strategy might be crucial when dealing with external factors, such as corruption, which can influence future firms’ performance.
institutions and their corresponding part in the economic and social systems. Recently, multinational enterprises have been paying more attention to the relevance of these structures (North, 1991). For this reason, the current research aimed at proving such a correlation between host country corruption and the accordingly entry mode choices adopted by companies.
The present research adopts a particular differentiation from the others (Spencer & Gomez, 2011; Uhlenbruck, Rodriguez, Doh & Eden, 2006), focusing on a specific industry sector. The Shipping industry has been considered as being “exposed to more levels of corruption than any other industry” and as one of the most “high-level risk” industries to be affected by anti-corruption legislation (Chambers, 2015). In this sector, corruption practices can involve illegal purchasing letters of credit, improper payments to marine inspectors, and procuring contracts with the help of bribes (Rose at al., 2011). Additionally, actions more closely connected to port operations involve tariff evasion/under-invoicing and making illegal payments in conjunction with smuggling or for the overlooking of impropriety or procedural requirements (Rohit, 2015).
Therefore, this paper focuses on the effect that corruption practices exercise over firms’ entry mode strategies, arguing that a higher level of corruption in the host country will foster Shipping firms to adopt partial control strategies rather than wholly own ones. Partnering with local agents will allow entering firms to reduce the liability of foreignness (LOF) and reducing the likelihood of incurring in remarkable risks and costs of doing business. Therefore, relying on local firms, which have more experience, seems to be the most appropriate choice when dealing with unpredictable and untrustworthy markets (Uhlenbruck, Rodriguez, Doh & Eden, 2006).
In addition, this study deals with a further corruption effect that might influence the relationship with the analyzed dependent variable, MNEs’ Entry Mode Strategy. Firms coming from countries characterized by consistent corruption level will behave in a different way from what previously assumed. Being used to corruption practices and all the aspects that they entail, these firms will be not discouraged by high levels of corruption but rather drawn to them, undertaking full involvement strategies such as WOSs.
internationalization process and hence by settling down new subsidiaries. Because of this, the study will be based on 654 Shipping firms derived from the ORBIS database.
The results of the conducted regression, support the first hypothesis, stressing the fact that host country corruption levels induce MNEs to opt for Joint Venture rather than Wholly Owned Ownership. The second hypothesis is equally supported, stating that corrupt origin country firms will be more prone to adopt WOS rather than JV. Therefore, both hypothesized assumptions results are significant and in line with expectations.
2. Theoretical framework
The present section will treat several and different concepts, developing for each of them, a theoretical explanation based on previous research. This section will start with an overview of the Institutional Theory Development, followed by an introduction of the Corruption concept and successively concluding with the Hypothesis formulation within the paragraph concerning entry mode strategy, and the according relationship with corruption. This section will end with the description and disclosure of the theorized conceptual model.
2.1 The Role of Firm-Level and Environmental Factors in Explaining
Internationalization Decision: From Early IB Theories to The
Institutional Approach
The internationalization process has become more significant during the past decades. Small, medium, and even large size firms are becoming increasingly active in the global market, providing a substantial contribution to the world economic growth (Reynolds, 1997). Beamish (1990) defines internationalization as “…the process by which firms both increase their awareness of the direct and indirect influence of the international transactions on their future, and establish and conduct transactions with other countries.” Although this process has been identified as a valuable resource for firms, since capable of improving their competitive position within the world financial market, it also has inherent disadvantages. Hymer (1960) pointed out the Liability of Foreignness (LOF) as the main downsize coming from the internationalization process. This concept is originated from a profound lack of familiarity with the host environment.
when internationalizing should persist in taking full control strategies (WOS) when selling their own products/services while choosing Joint Ventures when they are not the owner. An additional view, still based on the MNE as the central driver, is the Uppsala model, presented by Johanson and Vahlne in 1990. This model predicts that MNEs will gradually strengthen their commitment to a specific economy, favoring WOS over JV, as they acquire further experience from their current operating activities in the host country. None of these theories take into account external factors but only focus on MNE as the core of the decision-making process.
However, new schools of thought started to introduce different and innovative points of view, focusing no longer on MNE-centric role but preferably on external factors as the main drivers. Institutions were considered to be more than simple background conditions. These structures directly determine what kind of arrows an organization possess in its quiver, considering that it struggles to create and implement strategies and maintain or build competitive advantages (Ingram at al., 2002). For this reason, a significant shift on the believed internationalization factors was made, focusing on a new spreading doctrine, the Institutional-based Theory, which considers institutions as a crucial element of the social environment affecting the organization compositions (Yang & Konrad, 2011).
Regarded as being the “rules of the game” since in a foreign host economy multinational enterprises are subjected to the local barriers; the term institution reflects those behaviors and normative considered to be human constraints. Institutions are known as tools that affect the political, economic, and social structure (Peng et al., 2003). Constituted by two different aspects, such as informal information, encompassing taboos, customs, traditions, and codes of conduct and formal rules concerning constitutions, laws and property rights, institutions represent the structure at the society base (Douglas, 1991). Throughout the years, institutions have been implemented by human beings to establish order and decrease uncertainty. Along with the typical economic limitations, they determine transaction and production costs and therefore, the profitability and probability of engaging in economic activity (Douglas, 1991).
of the institutional constraints faced by firms in the host country (Rodriguez et al., 2005; Wan & Hoskisson, 2003). Formal laws determine the permissible range of entry modes, but at the same time, the informal ones prevent the entrance or affect the choice (Ingram at al., 2002).
For this reason, when it comes to institutions, a specific evaluation is required, especially in terms of reliability and robustness. Institutional arrangements are considered to be active if they support the voluntary, stable, and continuous information exchange (MacMillan, 2007). Conversely, a failure in ensuring markets effectiveness or even worse, undermining the markets itself, characterize a weak level of the institution as in the case of corrupt economies (MacMillan, 2007). Institutions provide valuable and useful information about business partners and their likely behavior that, in its turn, reduces information asymmetries, representing one of the most common risks affecting international business procedures. (Arrow, 1971; Casson, 1997). Corrupt markets are known to be characterized by a low level of institutions and weak contract enforcement, hence a prospective asymmetry risk is even higher. Such inconveniencies would lead to subsequent costs involved in information gathering. (Tong et al., 2008).
Numerous studies started to look into the corruption aspect as a new external driver for MNEs’ internationalization, analyzing and investigating antecedents and likely consequences of corruption on the international economy (Rose-Ackerman, 1975; Shleifer & Vishny, 1993; Husted, 1994; Macrae, 1982). Tanzi (1998) described corruption as a common element in countries where processes and laws are barely transparent. Alam (1995) and Macrae (1982), defined corruption as a result of low institutional level and income inequalities.
Given the vast and different institutional differences that affect markets, a related question should come to mind. In which way does a company adapt its entry strategies when facing new environments?
out the importance of information sharing when venturing in a foreign low-level institution system, hence a good knowledge of the surrounding environment. Network, according to these authors, is one of the numerous critical elements for successful integration, only accessible by partnering with a local firm.
2.2 What is Corruption?
Before the pronounced changes that accompanied the globalization of business in the 1980s and 1990s, research on corruption and its relationship to firms' activities were almost non-existent (Rodriguez et al., 2006). However, the increasing development of international trade due to a high level of globalization and global business competition led to an increase in worldwide corruption practices (Johnstone et al., 2004). In particular, as foreign firms started to expand their boundaries toward new undiscovered and developing markets, managers and scholars developed a higher awareness of the significance of corruption and the need for understanding its influence. Consequently, research on corruption has proliferated over the past decade, answering some fundamental questions and highlighting its relevance within the business world.
Nowadays, increasing concern regarding the relevance of the low level of the institution in foreign markets has gained more importance (Johnstone et al., 2004). When it comes to a lack of laws and weak government structures, a specific characteristic and feature come to mind. Corruption results to be the outcome of the underdeveloped and weak institutional environment that characterized both developed and developing countries (Rose-Ackerman, 1975; Shleifer & Vishny, 1993). Rodriguez, Siegel, Hillman, and Eden (2006) defined corruption as the abuse of public power for private gain, but implementing the word “authority” instead of “public power”. Corruption manifests itself, in unpredictable and weak institutions level countries, in the shape of unauthorized payments on business, such as "gifts" (Shleifer et al., 1993; Beets, 2005).
as a "grease in the wheel" since they help MNEs to speed up those procedures that otherwise would have implied twice as much time. Investing firms, with a strong desire to enter in these corrupt countries, tend to come to terms with corruption in order to achieve prefixed goals. (Huntington, 1968; Le 1989)
Conversely, many researchers argue the fact that illegal practices, in particular bribes, result to be; metaphorically speaking "sand in the wheel" for both local and foreign firms, preventing Multinational Enterprises from performing as initially planned and leading them to constant delays and downturns (Wheeler & Mody, 1992). These inconvenient might results in more significant adverse effects for the corrupt country. High level of illegal practices and the likelihood of encountering hampers when operating, may affect the overall country growth and local firms’ prosperity (Boatright 2000). Numerous studies (Drabeck & Payne, 1999; Wei, 2000; Busse et al., 1996) investigating the relationship between corruption and FDI, always found a negative effect. Yet, although this unique unethical practice might be seen by someone as a humper for the economic development, it persists over the years because both companies and countries took advantage of its illegality (Le, 1989).
Nevertheless, some studies do not even find a negative relationship between corrupted practices and foreign direct investments but discuss how these activities can be profitable for those firms willing to expand their boundaries and venturing in new economies (Beets, 2005).
According to the aforementioned theories, whether it is profitable or not, corruption has become an integral component of the MNEs’ performances outcome, especially when internationalizing. Nowadays, running a company and maintain its competitive position entails the adoption of numerous and various sensitive decisions, as well as facing challenging and dynamic environments. Corruption can be considered either detrimental or beneficial, however, from both of these views, it possesses a relative remarkable influence on MNEs’ management decision-making and therefore on the way firms expand their boundaries in new foreign markets.
rival market (Malta Conference, 1994). Countless entrepreneurs and MNEs may refrain from investing in such unstable and precarious environment, or opt for strategies involving local partnerships in order to overcome such difficulties (Boatright, 2000; Cuervo-Cazura, 2006).
On the other hand, although illegal practices may increase risks and liability of foreignness costs (LOF), Cuervo-Cazura (2006) argued that experienced firms coming from corrupt economies might even target these markets. Being accustomed to corruption and its implications, allow firms to break those barriers and prosper in the host country economy, venturing via full-control options.
2.3 Navigating in a Corrupt Ocean
Ocean, liner shipping firms, perform a prominent role in promoting international trade, not just by facilitating the physical transport of the cargoes but also through their involvement in the financial and marketing aspects of global business (Malhotra et al., 2003). The development of international and global marketing has been fostered by the rapid growth and integration of Asia Pacific countries; the creation of regional trading blocs; the advent of market economies, particularly in Eastern Europe; and signs of progress in production and communications technologies (Slack et al., 2002). Over the last years, the container shipping industry has undergone one of the most significant developments.
However, Shipping has been considered as being endangered by higher levels of corruption than any other sector and as one of the most high-level risk industries to be plagued by anti-corruption legislation (Chambers, 2015). Numerous research (Mahajan et al., 2015; Anderson, 2012), have highlighted different reasons why corruption is considered to be so prominent and worthy of note in the shipping industry.
anti-
corruption policies and procedures, such as the BIMCO Clause, are relatively new in facing this spreading issue (Chambers, 2015).
According to the 2014 OECD report, 256 out of the 427 cases analyzed, involved bribes and illegal procedures, and over the 15% concerned the Transportation and the Storage sectors. Three-quarters of the cases have seen custom agents as the main responsible. Additionally, after specific investigations, it has been confirmed that customs officials accepted more than 11% of all the reported bribes, which in its turn result to be the second highest of all officials’ category. Most of the time, bribes were paid to obtain public procurement contracts (57%), followed by clearance of customs procedures (12%) (OECD, 2014).
When it comes to the Shipping industry, we should emphasize the high presence of corruption in all its facets. Corruption can take many forms at all stages of commercial activity (Rohit et al., 2015). Corruption practices can involve illegal purchasing letters of credit, improper payments to marine inspectors, and procuring contracts with the help of bribes (Rose at al., 2011). Related to dock and terminal procedures, illegal and fraudulent activities involve speed-up process and improper payments concurrently with smuggling actions or for the violation of procedural terms (Rohit et al., 2015).
Related to ports and shipping context, facilitation payments might be seen as “gifts”, such as cigarettes or alcohol, and give them to customs and port officials in order to process the ship and the respective cargo in the supposed due time, avoiding delays that would occur otherwise (Cooper at al., 2012). A reasonable question could be: should a ship refuse to accomplish those requests made by corrupted officials?. Withholding to their “duty,” ships would incur in significant consequences, that may include delays, higher costs, and expensive fines (Anderson, 2012). Additionally, this kind of refrain in fulfilling the demands made by local port structure could lead to a significant threat to the ship’s employees (Rohit et al., 2015). A remarkable example is the one from 2009 that took place in a Ukrainian Black Sea port, where a tanker that refused to pay a USD 600-facilitation payment was fined USD 12.000 for “failing” a ballast water test although the ship was in compliance.
In April 2015, an associate authority with a marine surveying firm was charged by the local Singapore High Court for requesting bribes from a ship on three different events, in order to issue a declaration of a positive inspection report that would permit the vessel to have access to an oil terminal. In the first two occasions, the official amplified his findings by declaring some non-existent high-risk deficiencies to promptly request bribes amounting to USD 3,000 in return for a positive inspection report. However, in the last occasion, the surveyor attempted to elicit a bribe in exchange for which the consultant would issue a false statement without mentioning the real ship’s shortcomings, but a sting operation, organized by the Singapore Corrupt Practices Investigation, managed to prevent it from happening. Consequently, the official consultant was condemned to 6 months’ imprisonment (Deloitte, 2015).
Moreover, during the past years, additional cases came out, such as the one of the Dutch logistics company, Maersk Group, which bribed an official of Brazil’s state-owned Petroleo Brasileiro SA, in order to grant shipping contracts to Maersk during a bid process. Furthermore, a different but similar corrupt case witnessed a Venezuelan subsidiary of one of the most notorious US based Oil & Gas-Exploration company, the Helmerich & Payne, which made improper payments through their agents to local Argentinian and Venezuelan officials to permit and speed up the import and export of equipment and supplies. Lastly, the Emery Transnational, a Filipino company which was a former subsidiary of Conway Inc. allegedly made illegal and unethical payments amounting to USD 244,000 to the Philippines Bureau of Customs and the Philippines Economic Zone area officials. Such payments were made to bypass customs protocols and circumventing proper penalties (Deloitte, 2015).
2.4 Corruption and its Effect on Entry Mode Strategy
The internationalization process of Multinational Enterprises is occurring at an increasing rate. During the past decades, firms have redirected their orientation from domestic to global; they started to aim at global marketing instead of multidomestic marketing. The evolution of the worldwide economy, along with the worldwide trade, have led firms to opt for a broader approach in terms of the operating zone. Wan, 2003 and Peng et al. (2008) stressed the idea that such intensification has been fostered by numerous determinants such as the rapid expansion of the Asian economies along with the establishment of regional trading alliances, the Eastern Europe economies growth and the corresponding progress undergone by communication sector.
In addition, increasing concern regarding political and economic risks have been drawn attention during the years, especially from management practitioners and scholars. This is because the corruption practices exist and continue to be present “below the radar screen” of many corporate officers (Ahlstrom et al., 2001). Studies based on corruption stressed its remarkable economic wide grasp and in its relevant implications for Multinational Enterprises’ Internationalization procedures (Doh et al., 2003; Habib & Zurawicki, 2002; Rodriguez et al., 2005).
When it comes to MNEs and their entry strategies, commitment level, direct subsidiary management and subsidiary interaction with local government agencies should be taken into account (Hill et al., 1990, Pan & Tse, 2000). Subsidiaries require several papers when operating in foreign economies such as local registration, permits, and various other government services, all involving opportunities of incurring in illegal and unethical procedures (Radaev, 2000). MNEs are adaptive performers with defined rationality and limited resources. As a result, firms are constantly challenged by the need to simultaneously exploit existing resources and explore future opportunities (March, 1991).
and operating costs, providing a higher level of confidence in the short-term economic gains. Therefore, entry via wholly owned subsidiaries provides more control and profit potential (Gulati & Singh, 1998).
However, when it comes to unreliable and risky economic environments, partnering with experienced firms, decreases the likelihood of incurring in unpleasant situations, while increasing the host country knowledge in all its respects (Tolbert & Zucker, 1983). The exploitation of Joint Ventures with local firms, allow the venturing MNE reducing the uncertainty associated with host country corruption by receiving information on how to deal with it. Various kinds of research have observed that firms entering into markets characterized by a significant level of uncertainty, caused by a high level of corruption, opt for Joint Venture rather than Wholly Owned subsidiary since it provides fewer risks exposition (Delios & Beamish, 1999). In other words, they may find it more beneficial to utilize alliance relationships instead of seeking more acquisitions, which also tend to bear higher market uncertainty (Folta and Miller, 2002). Therefore, I hypothesize that:
H1: The higher the host country corruption, the higher is the likelihood MNEs will engage JVs with a local agent rather than WOSs.
Single venturing firms will not always be willing or able to avoid investment in economies troubled by corruption. Numerous firms attempt to counteract the direct costs of corruption within a selection of distinct entry modes and structures. For instance, within the Eastern European markets and the late Soviet economies, the likelihood of an MNE investing abroad through a Joint Venture rather than a Wholly Owned subsidiary grows with the level of corruption. This reason is due to the fact that partnering reduces investment risk in two ways: cutting resource commitment by dividing resource inputs among partners, and increasing knowledge about the host-country environment gained from local partners (Folta & Miller, 2002).
The Internationalization process requires dealing with several costs of doing business (Hymer,1976) and significant liability of foreignness barriers (LOF) (Zaheer, 1995). Some of these costs involve coping with corruption in the host country (Calhoun, 2002). Two sets of such costs have been identified. Firstly, when dealing with corrupt environments, investors need to take into consideration those costs of knowing how to bribe. Indeed, manager operating in low-level of institutions, hence high corrupt scenarios have to start thinking differently and get over the idea of illegal transactions as a way of doing and maintain business operations (Cuervo-Cazura 2006).
Secondly, changing such deep-seated attitudes and beliefs about the way business should be rightfully conducted, might be extremely challenging (Prahalad & Bettis, 1986), especially when venturing in a relatively new market (e.g., Johanson and Vahlne, 1977; Eriksson et al., 1997). Gaining such knowledge and skills is anything except fast and cheap. There are no guides or consulting firms that can provide such intangible values about how to successfully bribe; its illegal nature precludes such services (Cuervo-Cazura, 2006).
Cuervo-Cazura (2006) pointed out two aspects of why MNEs accustomed to bribing procedures are favored when dealing with equally unpredictable markets. First of all, corruption experienced firms would face lower restrictions and costs of doing business when venturing in an equal or greater corrupt economy. Secondly, such particular investors might be even prone to target markets characterized by high levels of corruption, due to the institutional condition similarities, compared to their home country.
Therefore, as previously addressed, investors possessing a good level of corruption knowledge, thanks to their low-level institutional origin country, and to the fact that they already embraced such illegal practices with all the entail subtleties, they will be not deterred from investing in equally or higher corrupt markets. For this reason, in line with what investigated by Cuervo-Cazura (2006), a strong inclination toward a fully control entry mode strategy adoption is expected, from those investors possessing a good understanding of the corrupt businesses. Therefore, I hypothesize that:
2.5 Conceptual Model
According to the above-mentioned literature review, a specific conceptual model has been created showing the discussed relationships at their best. The Dependent Variable, shown on the right-hand side of the graph, is the MNEs’ Entry Strategy, which can be identified either as a 100% ownership, hence a WOS or as a partially owned such as JV. The Independent Variables, instead, are reported on the left side. The Host Country Corruption is the main factor characterizing Hypothesis 1, according to which higher level of corruption in the targeted country leads MNEs to adopt lower risks involvement strategies as JVs. Conversely, the second Independent Variable, Home Country Corruption, hypothesizes that higher or equal levels of corruption coming from the firms’ origin countries tend to shift MNEs’ decisions from JV to WOS when internationalizing.
3. Research Design
The following paragraphs will introduce the research methodology of the present study. Firstly, the data collection and the sample description will be provided, followed by the variables' explanation for both main and control ones. Subsequently, the adopted statistical technique will be introduced, which will be used to analyze the collected data and to test the hypothesized relationships. Additionally, this latest section will include the arguments and ideologies behind the utilized method.
3.1 Data Collection and Sample Description
The purpose of this study is to investigate the relationship between host and home country corruption and multinational entry mode strategies. Most of the already existent research treat this sensitive topic analyzing it through multiple data coming from MNEs operating in different sectors. Therefore, hereby, I will try to investigate the same significant issue that affects our global economies, but within a single specific Sector. Therefore, in order to examine the relationship, a sample of firms will be extrapolated from the Shipping Industry.
The pooled firms sample has been chosen based on specific characteristics and features. These companies, in order to be included, need to comply with different criteria. Being a shipping company (ORBIS, NACE 5020) must be the primary one, followed by the country in which the firm operates, which should be one of the 32 reported by the BEEPS (Appendix A, Figure 1). Additionally, for the purpose of narrowing down the research, further qualities were integrated. Sample Firms must possess a foreign shareholder with more than 10 percent of ownership, along with having subsidiaries located in one of the 32 BEEPS countries (Appendix A, Figure 1).
Therefore, data of multinationals operating in the Shipping Sector, conform with the aforementioned criteria, were taken from the Orbis database. Orbis, provided by Bureau van Dijk, is the world's most powerful comparable data resource on private companies with data on around 300 million firms across the globe. The final obtained sample consisted of 654 Shipping Firms having operating subsidiaries located in the BEEPS analyzed countries.
report that summarises feedback from the managers of firms in 29 transition countries about what they regard as the principal improvements, and the remaining challenges in the business environment that they experienced on a daily basis. The BEEPS database has values ranging from 1 to 4, where higher scores indicate greater level of corruption (Appendix B, Figure 2). The Worldwide Governance (WWG), possesses indicators on the quality of the country governance which are provided by a large number of company, citizen, and expert survey respondents in industrial and emerging countries. Categories such as Regulatory Quality, Government Effectiveness, and Control of Corruption were combined due to the high correlation and compatibility of the values and the concepts themselves. All these three subdivisions have scores that range between -2.5 and 2.5, with higher values indicating better governance and institutional status hence less corruption (Appendix B, Figure 3).
All the three databases, Orbis, BEEPS, and WWG have been combined to investigate the corruption effects exercised over MNEs’ decision-making process when entering in new markets. The aggregation of these databases allowed the study to examine such corruption impacts from distinct points of view, providing valuable support for checking the robustness and validity of the performed analytical method.
3.2 Dependent Variable
The MNEs’ Entry Strategy, the research Dependent Variable, encompasses two different aspects. Therefore, a dichotomous dependent variable was implemented. Partial or shared-control entry mode was coded as (0), which represents a commonly known strategy, Joint Venture (JV). Conversely, full-control ownership, such as Wholly Owned Ownership (WOS), was coded as (1). Partial control hence shared assets and operating costs and risks can be identified as a unique internationalization strategy, Joint Venture. On the other hand, when a single company possesses the 100% of a firm's equity a different approach takes over, defined as full-control, hence Wholly Owned Ownership (Brouthers et al., 2008).
non-
Ownerships and Joint Ventures as main equity strategies. On the other hand, adopting my two categories subdivision, but implementing a different threshold, Brouthers et al. (2008) identified as full-control strategies, those firms involving a percentage equal or greater than 95%.
Nevertheless, according to the present research, two different behaviors are expected to be held by the dependent variable, MNEs’ Entry Mode Strategy, when coming to contact with the analyzed Independent Variables, Host and Home Country Corruption. Indeed, when dealing with host country corruption during the internationalization process, MNEs are expected to favor Joint Venture strategies rather than Wholly Owned Ownership (Hypothesis 1). Conversely, when high levels of corruption characterize the internationalizing firms’ home country, a full control strategy (WOS) is excepted to be the proper choice, due to an already gained experience of illegal and unethical practices by the venturing MNE (Hypothesis 2).
3.3 Independent Variables
Host Country Corruption
Home Country Corruption
As the research, will treat the cause-effect relationship between Country Corruption level and the relative MNEs’ Entry Strategy choices, an additional aspect should be taken into account. The Home Country Institutional System and the Governance effectiveness, hence the presence of corrupt practices within the company home country, might have an effect on the willingness and predisposition of the given company in undertaking such illegal actions when operating in a foreign market. Therefore, an additional independent variable will be implemented in the present study for further analysis. Data will be pulled out from the BEEPS database (Appendix B, Figure 2) and subsequently replaced by the WWG data (Appendix B, Figure 3) in order to test the validity and reliability of the findings throughout a Robustness Check (Paragraph 4.4). Given Hypothesis 2, it is expected that a higher level of corruption in the firm’s origin country will foster the given MNE to opt for a Wholly Owned Ownership (WOS) rather than a Joint Venture (JV).
3.4 Control Variables
In addition, the model includes a set of control variables, which are supposed to have an important influence on the explanation of the Companies’ Entry Mode Strategy and the according relationship with corruption practices. These variables will be presented in the following part of this chapter, providing academic supports and describing the expected behaviors.
Parent Firm’s Age
Parent Listed/Unlisted
According to Firth (1979), this study controls for firms listed or unlisted. Large-sized and well-established firms tend to be listed on the Stock Exchange and may go to the stock market to finance their operations, that might involve internationalization processes hence entering in new foreign economies. Therefore, listed companies might have a higher resource in terms of equity and experience that would lead them to pursue a full-control strategy (WOS) rather than a partial one (JV). Data concerning this variable were extrapolated from the ORBIS database. Concerning the implemented threshold, values equal to (1) were assigned to those companies reported as listed, while for those not quoted on the Stock Exchange were represented by (0).
Parent Firm’s Size
Additionally, the study controls for the Parent Firm’s Size, calculated as the number of employees within the company organization. Indeed, such a decision has been fostered by prior research, according to which “firm size” factor has a significant impact on firms’ entry mode choice decisions (Brouthers & Brouthers, 2003). Larger firms have more capabilities and resource coming from the headquarter (Inkpen & Beamish, 1997). Data have been derived from the ORBIS database. Parent firm size is identified using a dummy equal to (1) if the firm has less than 50 employees and (0) otherwise. This threshold is consistent with the definition of the European Commission, which defines small firms as those having less than 50 employees. Given previous findings in the literature (Ferreira et al., 2017; Nielsen & Nielsen, 2011) it is expected that larger firms are more likely to choose Wholly Owned Ownership options rather than Joint Venture due to a higher level of resources for undertaking full-control strategy.
Parent Subsidiaries Number
Conversely, significant experience levels are expected to be a result of a high number of controlled subsidiaries (Padmanabhan & Cho, 199). Therefore, running the statistical analysis I expected that a higher number of possessed subsidiaries would have entailed a higher level of experience, hence knowledge, and skills that in their turn would lead the company to adopt an entry strategy involving a higher percentage of ownership (WOS).
Host Country Openness
According to previous studies such as Wei (2000), I decided to control for restrictions to trade and to FDI, which can be interpreted as an integral component of a broader concept as the internationalization process. Restrictions to FDI are likely to have a negative impact on the host country since the foreign government actively blocks them. I measure these with the indicator freedom of FDI of the Heritage Foundation (The Heritage Foundation, 2019). Constraints to trade are predisposed to have a resolute impact on FDI because they might deter foreign investors from settling new business. Such indicators have been all integrated into a unique set of values obtained by a simple average formula. Factors like Business Freedom, Monetary Freedom, Investment Freedom, Labor Freedom, Trade Freedom, and Financial Freedom were all taken into account in order to provide a better picture of the country openness status. Scores range between 0 to 100, where higher indexes indicate freer market place and low level of government intervention. Therefore, it is expected that countries characterized by higher openness levels will induce MNEs in embracing more involved procedure and so entering via Wholly Owned Ownership rather than Joint Venture.
Host Country GDP per Capita
The study also controls for Per Capita Country’s Gross Domestic Product, which is
considered to be highly correlated with the availability and quality of the demand for infrastructure services, the quality of social services, and the stability of long-term economic growth rates
(Easterly 2000, Rose-Ackerman 1999). In this model, the market size is identified using a set of dummy variables, defined using the thresholds identified by the World Bank (WB). According to Asiedu and Esfahani (2001), GDP per Capita reflects the market size and potential economic growth. Therefore, a larger size of the market is expected to be associated with a higher probability of firms choosing fully control strategies (WOSs), due to a greater expectation of economic
model does not have any country falling within the WB’s Category 1 (≤ 995$). Therefore, following the applied threshold inserted with the STATA “i.” function:
Category 1: ≤ 3.895$
Category 2: = 3.896$ - 12.055$ Category 3: ≥ 12056$
Host Country Rule of Law
Asiedu and Esfahani (2001) controlled their work for Country Rule of Law. According to them, this factor reflects the country institutional instability situation affecting MNEs’ Entry Mode Strategy decisions. Rule of Law values were extrapolated from the World-Wide Governance database (WWG), which reflect perceptions of the extent to which agents have trust in and abide by the rules of society, and in particular the status of contract enforcement, property rights, the police, the courts, and as well as the likelihood of crime and violence. The scores range between -2.5 and 2.5, with higher values indicating better law system. Nevertheless, when conducting the logistic regression, a specific threshold has been assigned to the current variable, following a dummy procedure. Values greater than (0), representing good level of government presence were coded as (1), while data smaller than (0) received a corresponding value equal to (0) Therefore, I expect that higher level of Rule of Law will induce MNEs in opting for Wholly Owned Ownership rather than Joint Venture.
3.5 Methodology
The present study aims to answer the question of whether corruption affects MNEs’ Entry Mode Strategy decisions. A dichotomous dependent variable has been implemented in the current model, having as values a binary code (1 & 0). Full-control, hence Wholly Owned Ownership has coded as (1), while partial or shared control strategies, Joint Venture, have been encrypted with (0). In order to analyze and test the two research hypotheses, I implemented a Logistic Regression examination, which has been run using STATA analytics software (version 15). The choice of this statistic approach has been fostered by the presence of a categorical dependent variable, which subsequently has been divided into a dual-dimensional dummy (Burns & Burns, 2008).
derived from the ORBIS database. A double data extraction has been conducted in order to obtain an exhaustive and detailed list of shipping companies. Indeed, after that the first pool of firms has been produced, getting all the parents’ information, a further research was conducted. Searching for the parent identification number (BvD ID number), detailed subsidiaries’ data were obtained.
Research answers will be provided throughout the use of five different models. In the first model, only the dependent variable, Entry Mode Strategy, is regressed against the Firm-level Control Variables. The second model adds Country-level Control Variables. The third and fourth models add the two independent variables, the Host Country Corruption, and the Home Country Corruption respectively, but without a combining analysis. Only the final and fifth model investigates both Independent Variables at the same time, along with all the others already implemented firm and country-level Control Variables.
4. Results
This section will show the descriptive statistics of the variables utilized in the logistic regression models. Subsequently, the obtained regression results will be discussed to evaluate whether there is support for the two hypotheses. Finally, a robustness check will be run for the purpose of checking the validity of the regression results.
4.1 Descriptive Statistics
GDP/Capita” (Obs=652; Mean=3.42; SD=0.62), “Host Country Openness” (Obs=652; Mean=67.61; SD=3.47) and “Host Country Rule of Law” (Obs=651; Mean=0.568; SD=0.496) have observations with a slight deviation from the total sampling. Conversely, “Home Country Corruption”, which has values that range between 1 to 4, a mean of (1.99) and a sd equal to (0.18), reports significant observations decrease of almost 32%. A plausible explanation for this inconvenient is the fact that not all the firms’ origin countries were included in the 32 BEEPS analyzed countries (Appendix A, Figure 1) since many parent firms have Headquarters located in different and various areas.
However, although the variable undergoes a significant reduction, it might be still considered a valuable sample size for a logistic regression, considering that has more than 400 specimens (Hair et al., 2010).
VARIABLES N Mean SD Min Max
Home Country Corruption (BEEPS) 446 1.99 0.18 1.72 2.53
Parent Subsidiaries N. 654 82.68 80.93 1 255
Parent Listed/Unlisted 654 0.45 0.49 0 1
Host Country Corruption (BEEPS) 645 2.08 0.23 1.72 2.53
Host Country GDP/Capita 652 3.42 0.62 2 4
Host Country Openness 652 67.61 3.47 61.69 72.81
Entry Mode Strategy 652 0.20 0.40 0 1
Parent Fi Parent Firm’s Age 654 36.84 39.00 2 137
Parent Firm’s Size 654 0.176 0.381 0 1
Host Country Rule of Law 651 0.568 0.496 0 1
4.2 Multicollinearity
It is considered multicollinearity that situation where between two or more variables, there is a high correlation, and therefore, the final result can be biased (Grapentine, 1997). Table 3 reports the Pearson Correlation Matrix between the investigated variables. Consistent with various theories of macroeconomic enhancement and several studies such as La Porta et al., (2000) and Easterly, (2000), “Host Country GDP per Capita,” “Host Country Openness” and “Host Country Rule of Law” are profoundly positively correlated to each other. Moreover, an additional striking correlation result to be the one between “Host Country Corruption” and “Home Country Corruption,” (0,655), due to the fact that a high number of the analyzed countries are present in both categories since many companies tend to invest in similar and closer markets. However, to verify the potential presence of multicollinearity in the model, the Variance Inflation Factors Analysis (VIF) was calculated for the full model. According to (Acock, 2010) factors below the value of (10) are not considered to be highly correlated. Therefore, results do not suggest the presence of multicollinearity, given the maximum VIF is equal to (7.60) and the overall mean to (4.44).
4.3 Logistic Regression
As aforementioned indicated, the present study analyses the relationship between corruption and MNEs’ Entry Mode Strategies, which are reported in a binary form. To the Wholly Owned Ownership modes (WOSs) has been assigned a value equal to (1), while for Joint Ventures strategies (JVs) a value equal to (0) has been given. The regression has been divided into five main models, which are shown in the below Table 4. Additionally, in order to verify and test the validity of the results, a robustness check has been run over all the models (Table 5).
Considering the MNEs’ Entry Strategy as the Dependent Variable, the following models were run: Model 1: Firm-level Control Variables
Model 2: Firm-level Control Variables + Country-level Control Variables
Model 3: Firm-level Control Variables + Country-level Control Variables + Host Country Corruption Model 4: Firm-level Control Variables + Country-level Control Variables + Home Country
Corruption
Model 5: Firm-level Control Variables + Country-level Control Variables + Host Country Corruption + Home Country Corruption
The second model adds the Country-level Control Variables, which are “Country Openness,” “Country GDP/Capita,” and “Country Rule of Law.” All of these variables result to be highly significant. Country Openness variable scores (B=-.304, p=.013) suggest that at a higher level of country openness induce firms to adopt partial control strategies (JV), hence going against what expected. The effect of Country GDP/Capita, which is divided into three different categories but having roughly the same values, Category 2 (B=-3.245, p=.000) Category 3 (B=-3.450, p=.000), implies that at greater country growth prospective firms tend to opt for less involved strategies such Joint Ventures, not what expected. However, to test the significance of all the three categories the STATA function (test 1. group 2. group 3. group) has been run. Conversely, and in line with the expectations, the Country Rule of Law variable (B=3.026, p=.002) suggests that in situations of better institution and governance qualities, MNEs will undertake a strategy involving higher ownership degree (WOS).
Model 3 introduces within the analysis the first Independent Variable, Host Country Corruption, along with the Firm and Country- level Control Variables. According to the reported scores (B=-5.846, p=.000), a higher level of corruption in the targeted country will lead firms to favor JV over WOS, as argued by Folta and Miller (2002). Providing support for Hypothesis 1.
The fourth model represents the second discussed Independent Variable, Home Country Corruption, which is assumed to have an influence on the decisions made by MNEs regarding the Entry Mode Strategies. The effect of the Home Country Corruption seems to have no significance on the analyzed relationship. Therefore, an additional model will be integrated in order to verify whether this variable might have any sort of influence.
Additionally, attention must be paid to the increase borne by the pseudo-R-square and chi-square indicators. Undergoing only a slight decrease in Model 4, the two indexes, follow a constant growth over the whole model, demonstrating, especially in model 5, a higher explanatory power of the investigated logistic regression. Indeed, higher pseudo-R-squared indicates which model better predicts the outcome (UCLA, 2019)
4.4 Robustness Check
In order to ensure that the obtained results have sufficient validity, an additional set of logistic regressions was implemented using a different database to measure both Host and Home Country Corruption. Therefore, the present Dependent Variable, “MNEs’ Entry Strategy,” has been evaluated using country corruption data, coming from the World-Wide Governance database. A data collection, that reflects the perceived corruption within the analyzed countries, with values that range from -2.5 to 2.5, where higher indexes indicate fewer corruption levels hence a greater governance ability to ensure laws fulfillment and contracts enforcement. Although this database has a higher number of observations regarding firms’ home countries, compared to the BEEPS database, the analysis will be conducted on the same sample size investigated in the previous logistic regression, in order to produce a coherent and robust comparison.
The results of the robustness check are shown in Table 5, which seems to partly confirm the findings of the main model reported in Table 4. Such outcomes provide similar results for what concerns the importance of Country Corruption when it comes to MNEs’ Entry Mode Strategies. As in Table 4, the following Robustness chart reports a structure made up of 5 different models, each of them showing distinct variables and results. The results of the firm and country-level Control Variables, reported in model 1 and 2 of Table 5, are precisely the same obtained values illustrated in the logistic regression of Table 4.
Model 4 adds to the firm and country-level Control Variables a second Independent Variable, Home Country Corruption. Similarly, to the previous logistic regression, this variable seems to be no significant when analyzed in the fourth model. Therefore, further investigation will be conducted in the coming and last model in order to verify Hypothesis 2.
Model 5, the last analyzed section, involves both the Independent Variables, Host and Home Country Corruption. According to the reported values, Host Country Corruption (B=1.767, p=.000), even in this model, appears to be significant and in line with the hypothesized theory. Conversely, the Home Country Corruption still has no significance. For that reason, no valuable support is provided for Hypothesis 2.
5. Discussion
The following paragraphs will discuss the results of the conducted logistic regressions comparing them with the research hypotheses addressed by the present study. In order to provide a better understanding of the obtained findings, a theoretical explanation will be given based on previous research. In the end, study limitations and prospective future research proposal will be presented.
5.1 Discussion
In the present research, I examined the effect that illegal and unethical actions, which can be embodied by the word “Corruption,” have on the decision-making management regarding the internationalization process and so the according entry mode strategies adopted when deciding to enter in new and unstable markets. Previous studies have documented such relationship between corruption and entry mode strategies (Cuervo-Cazura, 2006; Habib & Zurawicki, 2002;
The second Hypothesis is centered on the rule and influence that corruption might have on MNEs’ Entry Mode decision-making when such firms come from countries with equal or even higher corruption degree. According to the logistic regression results, the effect of Home Country Corruption, Model 5 (B=4.024; p=.025), implies that the host situation might not refrain firms coming from equally corrupt countries when internationalizing but rather attracted them, due to an already gained experience in dealing with such unstable environments. Therefore, it is expected that these MNEs will favor an individual and full-control strategy (WOS) over a mere partial and less involved procedure, (JV), (Cuervo-Cazura, 2006). Dealing with those kinds of economies, required managers to adapt themselves to illegal actions and unethical behaviors. However, changing already rooted beliefs and attitudes might be difficult for the single individual, but at the same time costly for the firm since managers’ “trainings” must be provided (Johanson & Vahlne, 1977; Eriksson et al., 1997). Therefore, home country corruption experienced managers allow firms to reduce the costs of engaging in bribes (Eriksson et al., 1997).
5.2 Limitations and Future Recommendations
Several limitations are presented in the current analysis, which they arise from the nature of the utilized data, and that might be addressed in future research. The first limitation is that I have investigated only a handful of countries; therefore, such assumptions would be considered to be pretentious, whether worldwide generalized. All of the analyzed countries are more or less located within a specific area, more precisely between Eastern Europe and North-East Africa. It might be interesting to see what would be the effect if implementing additional geographic regions such as the Americas and Oceania. Additionally, it would also be interesting to analyze these countries, making a distinction between emerging and developed economies. Future research could, therefore, focus and center prospective studies in a broader range of countries.
A plausible second limitation could be that, although I considered a single industry sector investigation to be a point in favor to my research, it can also be questioned as a remarkable restriction since every sector is unique in its kind in some various and particular respects. Indeed, focusing on a single industry might have significant advantages; however, it can also inhibit generalization. This specific sector, the Shipping Industry, involving a higher volume of government interactions such as permits, licenses, warrant, and customs inspections, might be more inclined to deal with facilitation payments and unethical behaviors that depict a greater humper known as corruption. Therefore, my results could be inconsistent, whether applied to a different sector.
In this study, the Dependent Variable, the MNEs’ Entry Strategy, is subdivided into two different categories, which are Wholly Owned Ownership (WOS) and Joint Venture (JV). Some studies have also make a distinction between Acquisitions, Greenfields, and JV strategies (Woodcock, Beamish & Makino 1994). While others have defined macro areas such as equity and non-equity entry mode in order to better frame this sensitive topic (Uhlenbruck, Rodriguez, Doh & Eden, 2006). These different but useful category distinctions possess pros and cons. It would be enlightening to observe what would be the regression results whether implementing a further and diverse categorization of the internationalization procedures.
6. Conclusions and Implications
This study discussed the effect that corruption has on the MNEs’ Entry Mode Strategies, subdividing them into two different categories, WOS and JV. What differentiates such investigation is the single sector focus, the Shipping Industry, which is considered to involve over 95% of the world trade. The research has analyzed corruption over two separate aspects. The first one concerns the driver effect that this common phenomenon exercised over MNEs’ Entry Mode choices, when present in a foreign economy, hence the effect of shifting decisions from one to another. Additionally, the study argued that corruption might have a further influence if MNEs are coming from equally or higher corruption country level. Therefore, my research aimed to analyze how corruption affects firms’ internationalization process (MNEs’ Entry Strategy).
Numerous previous studies have already treated the corruption effects, with particular regard to the relationship with entry mode strategies (Eriksson et al., 1997; Cuervo-Cazura, 2006 Woodcock, Beamish & Makino 1994). However, this research aims to contribute to the existing ones looking into this sensitive relationship, trying to provide valuable insights for a better understanding. In particular, this study attempted to look into a specific and unique sector, which can be defined as a good observational ground. Frequently, these investigations focus on the logical decision, not accounting for managerial characteristics and the consequent choices (Cuervo-Cazura, 2006; Nielsen & Nielsen, 2011).
6.1 Theoretical Implications
confidence in the ability and willingness to defend property rights, stressing the importance of trust (Pearce, 2001; Rose-Ackerman, 2001).
The second Hypothesis of this study adds a further focus on a different effect held by corruption on the relationship with MNEs’ Entry Mode Strategies. It is argued that when it comes to internationalizing, firms coming from equally or higher corrupt origin countries, compared to the targeted ones, tend to be more prone to adopt fully-control strategies, WOSs, rather than less involved choices, JVs. The obtained results are moderately significant (B=4.024; p=.025), and in line with Hypothesis two, providing support to it. As argued by Cuervo-Cazura (2006), MNEs coming from countries with high corruption may not only be undeterred by foreign country corruption but even be attracted by it. Such a scenario might be favorable for investors coming from corrupt economies, cutting down costs of doing business, and reducing the liability of foreignness barriers (LOF). Dealing with corruption implies an in-depth knowledge and a good understanding of all the facets that it entails. Most of the times, it is difficult for managers to get the difference from mere cultural norms gift to an illegal payment (Donaldson, 1996).
6.2 Practical Implications
The results of this research paper can have implications for both managers and scholars. This study will help managers in making entry mode decisions when dealing with corrupt environments. Moreover, the obtained findings may add valuable resources to the already existent research on the relationship between corruption and MNEs’ decision-making process. Scholars could take advantage of the present study, in order to conduct new investigations that might shed light on still undiscovered aspects concerning this sensitive themes. According to the achieved results, managers need to pay significant attention to the foreign country corruption status as a prominent external decision-making driver. Choices made between fully control strategies and partial ones are fostered by the unreliable and unstable host country conditions. Therefore, being aware of the relevant influence that corruption exercised over the internationalization process must be a managers’ priority.
targeted country institutional conditions may be a turning point for the whole firm’s operation, providing valuable insights to overcome obstacles and drawbacks. The results of this study are significant and add, to the discussion about the effect that corruption has on entry mode strategies, valuable insights for both scholars and firms’ decision-making departments.
7. Acknowledgments
Within the current section, I would like to take a moment and express my sincere gratitude to my supervisor Dr. Jacopo Canello of the University of Groningen, for his continuous support. The door to Professor Canello was always open whenever I run into an obstacle or had a question concerning my research. His insights were crucial and vital for the development of this master thesis. He continuously allowed this paper to be my work but addressing me in the right direction whenever needed. Moreover, I have been given the proper autonomy for the purpose of developing my own research skills.
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