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Table of ContentsWeek 47: Down with MNE-centric theories! Market entry and expansion as the bundling of MNE and local
assets....................................................................................................................................................................1
Week 47: The ownership structure contingency in the sequential international entry mode decision process:
Family owners and institutional investors in family dominant versus family-influenced firms..............................7
Week 48: Navigating the New Normal: Political Affinity and Multinationals’ Post-Acquisition Performance......10
Week 48: Public sentiment is everything: Host-country public sentiment toward home country and acquisition
ownership during institutional transition............................................................................................................13
Week 49: Alliance Concentration in Multinational Companies: Examining Alliance Portfolios, Firm Structure, and
Firm Performance................................................................................................................................................16
Week 49: Alliance Portfolio Internationalization and Firm Performance.............................................................18
Week 50: Chinese and Indian MNEs’ shopping spree in advanced countries. How good is it for their.................21
innovative output?..............................................................................................................................................21
Week 50: Failure to Complete Cross-Border M&As: ‘‘To’’ vs. ‘‘From’’ Emerging Markets....................................24
Week 2: Beyond entry mode choice: Explaining the conversion of joint ventures into wholly owned subsidiaries
in the People’s Republic of China........................................................................................................................28
Week 2: Multiparty cooperation and performance in international equity joint ventures..................................31
Week 47: Down with MNE-centric theories! Market entry and expansion as the
bundling of MNE and local assets
, - A joint venture (JV) is a combination of two or more parties that seek the development of a single enterprise or project for profit,
sharing the risks associated with its development. The parties to the joint venture must be at least a combination of two natural
persons or entities.
- A wholly-owned subsidiary (WOS) is a corporation with 100% shares held by another corporation, the parent company. Although a
corporation may become a wholly-owned subsidiary through take over by the parent company or split off from the parent company.
The parent company holds a normal subsidiary from 51% to 99%.
- A green-field investment is a type of foreign direct investment (FDI) in which a parent company creates a subsidiary in a different
country, building its operations from the ground up.
- Differences of international acquisitions and green field investment: International acquisitions involve acquiring a company that is
already in existence. A green field investment involves building completely new business through a business plan developed by the
parent company.
- Complementary local assets = location or country-specific advantages
Introduction
• In order to operate in a foreign country, MNEs need to bundle their transferable firm-specific advantages on one hand and
location or country specific advantages, such as natural resources and low-cost labor on the other hand.
• The quality and quantity of these host-country assets, called location advantages (or complementary local assets) or CSAs, thus
determine an MNE’s choice between exports and foreign production.
• The relative strength of these CSAs determines whether firms will serve foreign markets through exports from the home
country or through local production, and in the latter case, which markets they will decide to enter.
The optimal mode of entry must maximize the welfare of the CSA owners (by increasing their profits) as well as that of the
MNE and that the end result may be that those local owners end up with the bulk of the profits.
MNE-centric theories of initial and subsequent entry mode choices
• The traditional view in IB literature is that MNEs unilaterally decide on the mode of entry into foreign markets.
• Anderson and Gatignon’s (1986) theoretical framework states that MNEs ‘‘trade various levels of control for reduction of
resource commitments in the hope of reducing some forms of risk while increasing their returns’’. They propose that MNEs
should insist on a WOS when exploiting highly proprietary products and processes abroad, but choose EJVs when their products
and processes are not proprietary. When MNEs have considerable international experience they should also choose a WOS.
• Brouthers (1995) states that MNEs have to answer 2 questions in order to select the most suitable entry mode:
1. what level of resource commitment are they willing to make?
2. What level of control over operations do they desire?
• Other IB models of the evolution of MNE in a host country also see it as determined primarily by the MNE itself, with owners
of complementary local assets playing no explicit role in the outcome.
• None of these authors explicitly consider the transactional characteristics of CSAs that may influence whether and how they
can be accessed by MNEs. Yet, as I will show, the level of transaction costs involved in accessing these complementary local
assets impacts the MNE’s mode of entry and its subsequent footprint in the host country.
The extant asset-bundling literature
• However, a number of authors have taken an asset-bundling approach in which the initial entry mode and its subsequent
evolution are determined by the transactional characteristics of the assets being bundled rather than solely being determined by
the MNE's preferences or capabilities.
• Hennart (1991), and Delios and Beamish (1999) argue that MNEs are more likely to opt for EJVs when venturing abroad in
resource-based industries because local firms often enjoy privileged access to natural resources.
• Teece (1986) models whether innovators will capture the profits from their innovations based on the nature of their
interaction with owners of complementary assets.
Hennart (1988, 2000):
• Hennart develops a theory of EJVs as resulting from the interaction between at least two owners of complementary assets.
• The goal of Hennart is to show that transaction cost theory can be used to describe the necessary and sufficient conditions for
the choice of EJVs as a first-best strategy (EJVs defined as both green-field joint ventures and partial acquisitions).
EJVs occur whenever the knowledge contributed by both A and B is subject to high information, bargaining, and enforcement
costs, and licensing when this is the case for only the knowledge held by A or that held by B.
• EJVs is preferable to Greenfields, or to acquisitions (both wholly owned subsidiary methods):
- EJVs are preferable to acquisitions whenever bundling the assets via the market for firms would incur higher
information, bargaining, and enforcement costs than other options.
o Besides cases where acquisitions are illegal, or would lead to ill will, EJVs are preferable to full acquisitions
when the assets that each party needs are a subset of the assets held by the respective firms, but are hard to
separate from the assets that are not needed.
- EJVs are preferable to greenfields whenever assets can be shared by many users without reducing the amount available
to each (considered ‘‘public goods’’ by economists), since in that case it is cheaper to obtain access to an existing asset
than to replicate it.
, EJVs defined as both green-field joint
ventures and partial acquisitions.
When a company’s (marvel) almost all outstanding shares are owned by another company (parent, Disney), it can be said that it
is a wholly owned subsidiary of that company and the parent company controls it.
A BUNDLING MODEL OF FOREIGN MARKET ENTRY MODE:
• The figure below modifies Hennart’s (1998) original matrix to address the optimal way in which two parties, a foreign firm
seeking to exploit innovations (an MNE) on one hand, and a local owner of complementary resources on the other, combine
their assets in order to undertake value-adding activities in a foreign market.
• I will assume that knowledge (ideas, information of various types, new management techniques, business models, and new
products and processes) is the main FSA (transferable firm-specific advantages) that MNEs seek to exploit in foreign markets.
• The axes in the figure refer to the transaction costs that are incurred in selling knowledge and complementary local assets in
the markets for the services of assets, in the market for assets, and in the market for firms owning the assets.
• I start by developing two fundamental concepts:
1. the relationship between markets for the service of assets, markets for assets, and markets for firms
• Interactions between economic agents can take place in three markets: the market for the services of assets, the market for
assets, and the market for firms owning the assets. An MNE eager to exploit its knowledge has three choices:
1. sell it on the market for asset services by licensing a foreign manufacturer.
2. access the market for assets, by bundling its know-how directly with a variety of purchased assets and incorporating all
of these into goods and services, thereby engaging in exporting or producing abroad close to the foreign customer.
3. access the market for firms, by selling itself or parts of itself to another firm. Likewise, a local firm that owns land that is
needed by an MNE can rent it in the market for land services, sell title to it in the market for land, or sell itself to the
MNE, and ipso facto transfer its land. Plus, when one market is subject to high transaction costs, agents may switch to
another.
2. the role of residual claimancy (the apportionment of equity) in maximizing rents from the exchange.
- What is the most efficient way to bundle the services of complementary assets when their sale is subject to positive
transaction costs? Property rights theory suggests that the person who should be the residual claimant (the one entitles
to the income left over after all expenses are paid) is the one whose behavior is the most difficult to monitor. This
person is usually the one who incurs the highest transaction costs, meaning it's harder to measure their contribution to
the venture.
• Let us now examine the two axes of Figure 2: the transaction costs involved in transferring knowledge from MNEs to owners of
complementary assets, and those of transferring local complementary assets to MNEs.
I begin by discussing what determines whether the transfer of knowledge incurs high or low transaction costs, before
investigating the determinants of transaction costs in the transfer of complementary local assets.
Markets for knowledge and appropriability
• the MNE stands here for innovators based outside the host country.
• The columns of the figure above refer to the costs incurred in transferring knowledge from MNEs to local owners of
complementary assets (high or low).
• Various alternative markets in which knowledge can be traded and show that the efficiency of its transfer varies significantly
across knowledge types and institutional environments.
- Knowledge is sometimes available on the licensing market. It is put into a patent and its use licensed to others.
, o Some types of knowledge, such as formulae for chemicals and pharmaceuticals, can be efficiently transferred through
licensing, but others cannot. In some cases, knowledge is easily available in the market for consulting services: specialized
engineering firms are routinely hired to design and construct chemical plants, and best-practice management and
advertising skills can often be bought from professional service firms.
- Knowledge can be tacit (difficult to transfer or communicate to others through language or written documentation),
and consequently embedded in individuals. It can then be accessed in the employment market.
o The Chinese firm Huawei built up its expertize in optical network technologies by buying OptiMight and Cognigine, two
small high-tech US firms. Accessing knowledge by hiring experts or by taking over firms that employ them requires
sophisticated management skills, because employees are free to defect at any time.
- Knowledge is sometimes embedded in products.
o By buying components, laptop PC assemblers can access up-to-date PC technology and incorporate it into products sold to
final users. Manufacturing technology can also be obtained by purchasing equipment and being trained in its use.
• To sum up, knowledge can be accessed on three alternative markets, and at transaction costs that range from low to high.
Markets for complementary local assets
• The rows of Figure 2 refer to complementary local assets.
• MNEs that integrate into foreign markets need access to such assets, such as manufacturing and distribution which require
land, utilities, and labor and managerial services.
• Contrary to the implicit assumptions of OLI and internalization theories, these local complementary assets (country-specific
assets or location advantages) are not always freely accessible to MNEs. In some cases, contracting for the services of these local
assets, for the assets themselves, or for the firms that hold them, will incur high transaction costs.
• As examples of markets for local complementary assets, I will focus on just one physical asset, land, and one human asset,
distribution skills. I show below that:
1. complementary physical assets can be transacted on a variety of markets, while the employment market and the
market for firms are alternative ways of obtaining the services of human assets;
2. the efficiency by which these markets can transfer complementary local assets varies with the type of asset and the
host country’s institutional environment.
• Land services can often be accessed in rental markets. This poses problems when there is site specificity, i.e., when the value
of land is affected by the actions of the renter.
- When this is the case, renters are exposed to the possible expropriation (gedwongen overdracht van het
eigendomsrecht van particulieren aan de overheid) of their quasi-rents through the ex-post abrogation or renegotiation
of their lease.
- When rental contracts fail because of site specificity, one alternative is for MNEs to buy the land on which they want to
establish their business. This may be difficult if there are no private property rights in land, if land titles are insecure
owing to non-existent or poorly kept land registers, or if they are not fully transferable – for example because they are
subject to zoning laws.
- A third solution is to acquire the firms that occupy the desired land. This is not always fail-safe, because it still exposes
the MNE to expropriation in countries without enforceable property rights. Hence the ability and the method chosen by
MNEs to access the land they need are likely to depend on the foreign country’s institutional environment.
• Distribution is one asset that MNEs entering a foreign country need to access to commercialize their innovations. Logistical
services can usually be bought in competitive markets.
- However, if consumers rely on distributors for advice, demonstration, and repair, effective distribution may require that
distributors make significant physical (warehouses and repair facilities), intellectual (understanding the product), and
relational investments (understanding customer needs). Independent distributors may refuse to make the optimal
amount of investments if they see them as specific to particular manufacturers, for fear of being held up by those
manufacturers.
- Distribution contracts may also fail when the successful sale of a product requires its adaptation to local conditions.
Independent distributors may resist providing marketing feedback if they fear that by doing so they run the chance of
being replaced by employees of the manufacturer.
- A third reason why distribution contracts may incur high transaction costs is that successful sales sometimes require the
joint effort of manufacturers and distributors, so that buyers cannot easily separate their respective contributions, and
may blame one for the failings of the other. Manufacturers can in principle solve this problem by putting behavioral
constraints on distributors, requiring them to make the necessary investments in stores, equipment, and stock, and to
undergo proper training, but this works only if these measures are reliably correlated with performance.
• Whenever contracting for distribution services experiences these types of problems, MNEs will have to integrate into local
distribution, either by hiring their own sales force or by taking over existing distributors. This can be quite difficult. In some
countries, MNEs are prohibited from establishing a local distribution network. Even when permitted, it can be a difficult and
lengthy process, as local customers may have formed strong bonds with existing local distributors. Taking over these distributors
may be blocked by host-country governments. If allowed, it may require sophisticated post-integration management skills.
Hence access to host-country distribution is often a challenge, and, as we will see below, the inability of MNEs to do so has often
hampered their entry and jeopardized their survival.
• To sum up, MNEs can access complementary local assets on alternative markets, but it cannot be assumed that there will
always be one efficient market where they can obtain the services of these assets.
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