g; l o 7-6 i {a ’ IIIW '”Immmmn«rllulluumm J I! ”Hill 3 1293 00539 9815 LIBRARY 1 Michigan State ‘ University 1 WW This is to certify that the dissertation entitled MULTINATIONALS' STRATEGIC CHOICE OF INSTITUTIONAL MODE: A DECISION PDDEL FOR MARKET ENTRY presented by PETER JAN-HONG HWANG has been accepted towards fulfillment of the requirements for Ph- 13- degreein Marketing W550!- Date July 25, 1988 MSU is an Affirmative Action/Equal Opportunity Institution 0- 12771 TV1ESI_J RETURNING MATERIALS: Place in book drop to LiaaAalgs remove this checkout from “- your record. FINES will be charged if book is returned after the date stamped below. 9W’ m .12.‘ the"; ’ NULTINRTIONRLS’ STRATEGIC CHOICE OF INSTITUTIONAL MODE: 3 DECISION MODEL FOR MARKET ENTRY BY Peter Jan-Hang Hwang A DISSERTATION Submitted to Marketing State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Marketing and Transportation 1988 / 1/] J 9) ABSTRACT MULTINATIONALS ’ STRATEGIC CHOICE OF INSTITUTIONAL MODE: A DECISION MODEL FOR MARKET ENTRY BY Peter J . Hwang While the strategic choice of institutional mode for foreign market entry has a critical impact on the success of international Operations, existing studies provide either piecemeal or partial analysis of this decision making process. By focusing primarily on economic efficiency maximization of the entrant, current works overlook the importantxole a strategic fit between a firm and its competitive environment plays in choosing the most appropriate foreign entry modes. To overcome this shortfall, this study identifies and integrates the key variables involved in the entry mode decision by drawing on not only transaction cost but also strategic management literature. The propositions concerning the effects of these variables on the entry mode decision are then developed. The aim is to provide multinational managers with a comprehensive and managerially meaningful decision making framework for the foreign market entry mode choice. Data analyses were based on 113 multinationals selected from the International Directory of Corporate Affiliations, 1987/88 edition. The findings indicated that an integrated view of economic efficiency and strategic forces may be a useful perspective in explaining multinationals' choice of foreign market entry strategy. Significant variables that distinguish market entry modes come not only form the transaction cost set but also from the strategic set. Copyright by Peter Jan-Kong Hwang 1988 For my parents, whose unspoken love, expectations, and understanding have always been treasured by their son. ii ACKNOWLEDGMENTS The support and encouragement of many friends, colleagues, and professors have been the major ingredients of this dissertation. I am very fortunate to know them in this where once was a total foreign place to me. My dissertation committee - Dr. M. Bixby Cooper, Dr. S. Tamer Cavusgil, Dr. F. "Sam" Carter, and David K. Smith - deserve special thanks. I would like to thank Dr. Cooper, my chairperson, for his help and guidance throughout this dissertation. Dr. Cavusgil was instrumental in helping me design the questionnaire. Dr. Carter gave me his valuable comments in the statistical aspects of this research. Dr. Smith has always been very quick to give me his professional feedbacks. I would like to express my appreciation to a number of people who are both friends and colleagues. Sharon Grimes, William Burgers, Chris Lewis, and Scott Johnson provided emotional and intellectual support without which this long journey would certainly be even longer. Lastly, I would like to dedicate this accomplishment to my parents, who must have often wondered if this endeavor would ever end. It is their teaching in my early life the value of perseverance, patience, and endurance, that enables me to reach this end, and beginnings beyond. iii TABLES OF CONTENTS List Of Tables O O O ..... O O O O O O O O O O O O O O O O O O OOOOOOOOOOOOOO Vi List of Figures . ......... .... ......................... vii Chapter oneO INTRODUWION O O O O O O O O O O O O O O O O O O O OOOOOOOOOOOOOO 1 Objective of the Study ..................... 5 Research Questions ......................... 6 Contribution to Marketing Theory ........... 6 Contribution to Marketing Practice . ........ 8 Methodology .................... ............ 8 Organization ............ ................... 9 TWO. LITERATURE REVIEW .............. .............. 10 Modes of Foreign Market Entry and Control .. 11 Theoretical Development and Background of the Transaction Cost Approach .............. 16 Internalization Theory ... ........ ........ 18 International Horizontal Integration ..... 23 International Vertical Integration . ...... 28 The Business Strategy Literature ........... 32 Industry Evolution and Volatility ........ 34 Corporate Strategic Needs .......... ...... 42 Host Country Environment ............ ....... 48 Three. A DECISION MODEL FOR FOREIGN MARKET ENTRY STRATEGIES, DEFINITIONS, AND HYPOTHESES . ..... 55 Introduction to Models .. ....... . ........... 55 Definitions of Variables ......... .......... 58 Country Risk ................. ............ 58 Location Familiarity ..................... 59 Market Attractiveness ............ ........ 60 Market Stability ......................... 62 Transaction Complexity ...... ............. 63 Transaction Uncertainty ............ ...... 64 Synergy ...................... ............ 65 Exit Barriers ....... ............ . ........ 66 Global Market Presence .... ..... ...... ..... 68 Research Hypotheses ......... ....... . ....... 69 Four. METHODOLOGY ................... ............... 73 Sample ..................................... 73 The Survey Instrument ...................... 76 Profile of the Respondents ................. 76 Developing Operational Measures ............ 82 AnaIYSis Plan O O O O O O O O O O O O O O O O O O O OOOOOOOOOOO 96 Five. ANALYSIS AND RESULTS ..... .................... 100 The Classification of Sample Firms ......... 100 iv Initial Measure Purification . .............. 104 Underlying Dimensions of the Data Structure. 110 Test of Hypotheses ............... .......... 122 Summary of Tests of Hypotheses ............. 143 Six. CONCLUSION OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO 145 Major Contributions ........ ................ 145 The Research Approach .................... 145 Scale Development ................ ........ 147 The Major Findings ....................... 147 Finding 1 ................. ...... .. ..... 148 Finding 2 ................ ...... ........ 148 Finding 3 .... .......................... 149 Implications ....................... ..... . 150 Limitations .................. .............. 153 Limitations - Theory ..................... 153 Limitations - Methodology ..... ..... . ..... 154 Directions for Future Research ............. 155 Conclution .................. ............... 156 Appendices A-l COVER LETTER ...... ........................... 158 A-2 SURVEY QUESTIONNAIRE ..... .................... 159 References ............... ..... . ....................... 166 List of Tables 1. Root's Classification of Entry Modes ............... 12 2. Davidson's Four Dimensions of Participation ........ 13 3. Entry Mode Classified by the Entrant’s Level of .... 15 4. External and Internal Factors Influencing the Entry Mode Decision ............................... ...... 36-38 5. Key Variables and Theoretical Sources ...... ....... . 57 6. Hypothesized Profiles of Entry Modes .......... ..... 72 7. Titles of Respondents Representing the Firms ....... 78 8. Industry Classification of the Participating Firms . 79 9. Location of Foreign Operation ...................... 80 10. Size of the Participating Firms .................... 81 11. Classification of Firms ............................ 103 12. Reliability Analysis of Market Attractiveness ...... 106 13. Reliability Analysis of Market Stability .. ......... 107 14. Reliability Analysis of Transaction Complexity ..... 109 15. Reliability Analysis of Transaction Uncertainty .... 111 16. Factor Loadings for Market Attractiveness .......... 114 17. Factor Loadings for Market Stability ............... 115 18. Factor Loadings for Transaction Complexity ......... 116 19. Factor Loadings for Transaction Uncertainty ........ 117 20. Factor Loadings for All Indicators ......... ........ 118 21. Means, Standard Deviations, and Correlations ...... . 121 22. Discriminant Analysis for the Strategic Model ...... 126 23. Discriminant Analysis for the Transaction Cost Model.129 24. Discriminant Analysis for the Integrated Model ..... 131 25. Analysis of Covariance Results ........ ............. 136 26. Comparison of Control Groups Profiles ...... ........ 137 vi 1. 2. 3. 4. 5. List of Figures The Dimensions of Transaction Cost . ................ 21 Factors in the Foreign Market Entry Mode Decision .. 35 Deciding on the Right Entry Mode ...... ............. 39 An Integrated Model for Entry Mode Choice .. ........ 56 Scree test .............................. ........... 120 vii CHAPTER ONE W One eminent issue in today's market reality is the internationalization of markets. The phenomena of new international division of labor and production sharing have been recognized and widely discussed by both the business and academic communities. Along with the realignment of the world economy, the choice of mode of foreign market entry has become a major concern for many firms expanding internationally. In seeking to explain cross country investment, two conceptually distinct issues need to be addressed: (1) why production/marketing occurs where it does, and (2) why certain production/marketing activities occur under the control of foreign enterprises while others do not (Teece, 1985) . The second issue is the focus of this dissertation and is central to the theory of the multinational corporation (MNC) . Having decided to operate in a given foreign market, a multinational corporation faces choices of institutional mode in organizing its business activities. One can choose, for example, a nonequity contractual mode such as licensing, franchising, an equity based joint venture, or a wholly owned 2 subsidiary. The common denominator of these various arrangements reflects the degree of control possessed by the investing firms (Root, 1982: Davidson, 1982; Anderson and Gatignon, 1986). The institutional mode chosen and consequently the degree of control obtained in the process of foreign market expansion have a critical effect on the success of international operations (e.g., Root, 1983; Davidson, 1982; Killing, 1982). The existing literature, however, suggests very little about how these strategic choices are actually made. The accepted theory in explaining the proper degree of control demanded by firms contemplating international business ventures has been internalization theory, based on transaction cost analysis. This stream of thought, originated by Coase (1937), has focused on maximizing long term economic efficiency of transactions. Internalization theory sees the desire to gain the appropriate level of control in foreign operations as a response to market failure (Rugman, 1982; Hennart, 1982; Buckley and Casson, 1976). The theoretical underpinning rests on the proposition that internal governance structure could circumvent the problems when bilateral dependence causes opportunistic behavior and costly haggling (Williamson, 1975, 1979). According to this view, the incentives of internalizing market imperfections determine the appropriate governance structure of transactions. 3 Although the transaction cost approach offers a sound theoretical framework to the theory of the MNC, it has two major weaknesses. First, because this approach is concerned with maximizing the long term economic efficiency of a transactor, it essentially addresses the institutional mode issue at the business unit level. For a firm with multiple business units such as a multinational, however, sub- optimization of the long term economic efficiency of each business unit does not necessarily lead to global- optimization at the corporate level. In fact, an MNC's corporate efficiency maximization in today’s reality of global competition may often be achieved by having a particular business unit operate at a zero return or even at a loss to cross-subsidize a competitive battle for another strategically important affiliate (e.g., Hout, Porter, and Rudden, 1982; Hamel and Prahalad, 1985). Hence, competitive considerations forcing a business unit to operate at the optimal corporate strategic posture could outweigh the transaction cost economies obtained at the business unit level. Since a strategic fit between the organization and its competitive environment is a crucial dimension of the decision (Porter, 1980; Root, 1982; Harrigan, 1985a, 1985b), the efficiency based transaction cost approach, focusing on the efficiency maximization at the business unit level, may have limited value in explaining multinationals' entry mode choice. 4 Second, the transaction cost approach seems to overlook or downplay important non-transaction variables, such as competitors’ strategic posture, the firm's corporate strategy, and industry conditions, that play a major role in the operational reality of multinationals. For example, the emerging phenomenon of international joint ventures as an intermediate mode of entry is often the result of strategic considerations rather than transaction cost economies (Berlew, 1984; Killing, 1982). In contrast to the transaction cost approach focusing on long-run economic efficiency, the business strategy literature has offered another perspective on the choice of institutional mode. In particular, research on vertical integration (e.g., Porter, 1980; Harrigan, 1983, 1985a, 1985b) seems most relevant to the entry mode decision. These studies approach the range of choice (nonintegration, quasi- integration, taper-integration, and full integration) by explicitly considering corporate strategic needs and competitive settings. While these vertical integration studies have examined the entry mode issue mainly in a domestic context, the key variables and underlying logic used in their analyses can be extended into an international study. The factors reported to have a profound effect on the institutional mode decision include uncertainty concerning sales growth and industry development, industry traits affecting how firms compete, company attributes creating bargaining power vis-a-vis buyers/suppliers, and corporate 5 missions for the business unit or chain of businesses (Harrigan, 1983). Several case studies have also suggested the important role corporate strategic motivations play in foreign market entry decision (e.g., Hamel and Prahalad, 1985; Watson, 1982: Hout, Porter, and Rudden, 1982). In particular, they propose a dominant control mode for those MNCs which aim to achieve effective strategic coordination of their foreign business units to meet today's global competition. Thus, an integration of the above two research streams into a institutional mode decision model seems to be a fruitful task. OBJECTIVE OF THE STUDY This study, investigating foreign market entry strategy in the 80's, has three objectives. The first is to determine whether the overall profiles of the key variables differ on the basis of the MNC’s strategic choice of institutional mode. These key variables involved in the institutional mode decision are identified in the relevant literature and are integrated into a decision model to bridge the gap between economic and business strategic treatment of the institutional mode decision. To compare the performance of the overall variables relative to that of the transaction cost variables or the strategic variables in classifying the modes of foreign market entry decisions is the second 6 objective. The third is to examine specific differences on each of these key constructs with respect to the strategic choice of entry modes, holding the remaining constructs constant. RESEARCH QUESTIONS The research questions are presented according to the research objectives outlined above. 1. Does the choice of market entry mode in terms of high, medium, or low control differ on the basis of the variables identified? It is important to note that the final choice is the result of all the variables operating together. 2. How adequate is the integrated model compared with either the transaction cost or the strategic model in classifying high, medium, or low foreign market entry control modes? 3. Which variables are useful in differentiating high, medium, or low foreign market entry control modes? CONTRIBUTION TO MARKETING THEORY The success or failure of foreign operations is to a large extent affected by the choice of an appropriate market entry mode. Wind and Perlmuter (1977) identified foreign 7 market entry modes as a frontier issue in international marketing. Although theoretical work in this area has been fruitful, there is still much room to improve. Consider the following comment made by Anderson and Gatignon (1986): much of the literature contains many seemingly unrelated considerations, with no identification of key construct. ...Furthermore, relevant work is scattered across books and journals in several disciplines, obscured by varying terminology, and separated by differences in problem setup, theory, and method. (p. 2) To overcome these shortcomings, this dissertation addresses the following issues. First, the transaction cost paradigm may only offer a partial explanation of entry mode decision. This inadequacy mainly comes from overlooking the important role competitive forces and corporate strategic needs play in the decision making process, an inadequacy which is remedied by adding strategic variables to an integrated decision model (see Chapter Three for a detailed discussion). Second, empirical testing in this area of inquiry has been confined either to a specific type of market entry, such as international channel selection, or to a dichotomy market-hierarchy comparison (e.g., Anderson and Coughlan, 1987; Davidson and McFetridge, 1984). This dissertation offers an opportunity to conduct a comprehensive test of market entry strategies in general. CONTRIBUTION TO MARKETING PRACTICE This dissertation has significant implications for corporate managers. First, they need to know how to match foreign entry modes with different scenarios they are facing. By modeling key constructs of the entry mode decisions, managers could enhance their understanding of this important issue. Second, the expected results should indicate the importance of strategic effectiveness vis-a-vis economic efficiency in foreign entry strategies. In particular, empirical testing of the hypotheses should help isolate key variable differentiating among modes of market entry. METHODOLOGY A survey methodology was used to collect the data. The survey instrument was developed based on the key constructs identified in the decision model for foreign market entry. Samples of items representing the domains of each construct were generated through the relevant literature and interviews with firms operating abroad. Each construct was defined conceptually, and a poll of items were generated consistent with the definitions. Cronbach's alpha was the first measure calculated to assess the reliability of the constructs. Principal component factor analysis was then performed to examine the data structure. This was done to check whether the items 9 developed properly loaded on their respective construct. Multivariate data analyses were then used to test the hypotheses. Specifically, multivariate analysis of variance (MANOVA) was used to check the overall significance of three control mode decisions with respect to the nine constructs. Multiple discriminant analysis (MDA) was employed to compare the accuracy performance of the transaction cost model, strategic model, and integrated model. Analysis of covariance (ANCOVA) and planned comparisons were performed to explore further the effect of each construct on the choice of institutional mode. ORGANIZATION The organization of this dissertation is as follows. Chapter Two provides a background of the study through a literature review. It contains three sections. The first two review the economic and business strategy literature on the choice of institutional mode in foreign market entry. The third section reviews the effect of host country environment on this strategic decision. Based on the literature review, a decision model for foreign market entry is constructed in Chapter Three. Definitions are given to variables identified, and hypotheses are also formulated. Chapter Four contains a description of the methodology used to test the hypotheses. Chapter Five presents empirical analyses and results. Chapter Six discussed implications, limitations, and the directions for future research. CHAPTER TWO W This chapter develops the underlying theoretical structure for the research by reviewing the literature related to the research questions. The first section investigates alternative ways of organizing economic activities across national boundaries. It equates the choice among various institutional modes to the degree of control demanded by multinational corporations (MNCs) , which in turn shows the level of integration desired by them. The second section examines the rationale of foreign direct investment (FDI) and, consequently, the existence of MNCs found in the economics literature. This section explores theoretical development in the field. It is argued that, under certain circumstances, one institutional mode is more efficient for governing international economic activities than others. For reasons of simplicity and theoretical clarity, the market-hierarchy paradigm representing two extreme forms of-governance structures is used to illustrate the point of relative efficiency. Both international horizontal and vertical integration are discussed. Section three reviews the business strategy literature which stresses that the degree of integration is a function 10 11 not only of efficiency maximization but also of searching for a best fit between a firm, dynamic competitive forces, and corporate needs. Section four reviews the effect of host country environment on the degree of integration decisions. Two elements, county risk and location familiarity, are investigated. On the basis of the literature review, a decision model for an MNC's choice of institutional mode is proposed in Chapter Three. MODES OF FOREIGN MARKET ENTRY AND CONTROL A foreign market entry mode is an institutional arrangement whereby the entry of a company's products, technology, human skills, management, or other resources enter a foreign country (Root, 1982). Foreign economic activities can be organized in a variety of ways, ranging from anonymous spot market transactions at arm's length, through a variety of contractual arrangements, to full integration (Caves, 1982). Root (1982) provided a rather comprehensive list of entry modes, classifying into three major groups, export, contractual, and investment, as shown in Table 1. The basis of this classification is clear in that it represents three unique ways of entering foreign markets. 12 Table 1 Root’s Classification of Entry Modes Export Entry Modes Indirect Direct agent/distributor ' Direct branch/ subsidiary Other Contractual Entry Modes Licensing Franchising Technical agreements Service contracts Management contracts Construction/turnkey contracts Contract manufacture Co-production agreements Other Investment Entry Modes Sole venture : new establishment Sole venture: acquisition Joint venture: new establishment/acquisition Other ' Source: Root, Franklin R. , 1982, W Strategies, New York: Amacom, p. 7. 13 Table 2 Davidson's Four Dimensions of Participation DIMENSION LEVEL Ownership Managerial Marketing Manufacturing High Wholly Complete Internal Full Produc- owned responsibility staff and tion by parent sales force Majority Strategic Component Operation production Financial Co-owned Specialized, Distributors Assembly Limited re- sponsibility Import from by parent parent Minority Agents Low Licensee Passive Par- Brokers Indigeneous ent role procurement Source: Root, Franklin R., 1982, Foreign_n§;3§;_fin;;¥_ §§:a§§gig§, New York: Amacom, p. 7. 14 Davidson (1982) highlights four major dimensions of participation decisions in foreign operations, as shown in Table 2. Of special interest here is the correspondence between ownership participation and the degree of control in foreign operations. Anderson and Gatignon (1986) offered another entry mode classification scheme, presented in Table 3. It clusters modes on the basis of three level of control, high, medium, and low, in each, respectively, a firm would have dominant, balanced, and diffused interests. Note that this classification focuses on a firm's operation in foreign markets without addressing the export entry modes. It conceptually agrees with other research, which structures the issue in terms of the degree of control each mode affords the entrant (e.g., Daniels, Ogram, and Radebaugh, 1982: Robinson, 1978: Vernon and Wells, 1986). Conceivably, there are many other possible variations both as to overall classification and within any one form of entry mode (Kindleberger, 1984: Hayashi, 1978). The connection between the institutional mode of foreign market entry and the degree of control is of particular interest here. The concept of control is prominent in the entry mode literature because the optimal level of control should assure maximum economic efficiency and preserves strategic flexibility, which are two major concerns in foreign operations (Anderson and Gatignon, 1986). It is important to note that the level of control is generally 15 Table 3 Entry Mode Classified by the Entrant’s Level of Control - ° te es Wholly-owned subsidiary Dominant shareholder (many partners) Dominant shareholder (few partners) Dominant shareholder (one partner) MW Plurality shareholder (many partners) Plurality shareholder (few partners) Equal partner (50/50) Contractual joint venture Contract management Restrictive exclusive contract (e.g., distribution agreement, license) Franchise Nonexclusive restrictive contract Exclusive nonrestrictive contract WWW Nonexclusive, nonrestrictive contracts (e,g., intensive distribution, some licenses) Small shareholder (many partners) Small shareholder (few partners) Small shareholder (one partner) Source: Anderson, Erin and Hubert Gatignon, "Modes of foreign entry: A transaction cost analysis and propositions, " W 17 (Fall) . p. 16 related to the amount of resource commitment, which in turn leads to the degree of integration in foreign operations. Thus the factors influencing the degree of both vertical and horizontal integration also bear on the entry mode decision. THEORETICAL DEVELOPMENT AND BACKGROUND OF THE TRANSACTION COST APPROACH In the postwar world the main role of multinational enterprises has been the international diffusion of technology, marketing skills, management expertise, and other proprietary know-how. During the past few decades many researchers have attempted to explain the phenomenon of MNCs from different angles (e.g., Agarwal, 1982: Calvet, 1981: Caves, 1974, 1982: Teece, 1983: Dunning, 1981). In an excellent review article, Agarwal (1982) has surveyed the main currents of thought regarding foreign direct investment. The following discussion, based on Agarwal's work, briefly summarize these main currents as a backdrop to the theoretical development of concepts explaining the FDI phenomenon. Detailed discussion is not provided here since the focus of this review is on the dominant theoretical framework in this field, that is, the transaction cost paradigm. Several hypotheses assume full or nearly full competition in factor and/or product markets. For example, the portfolio hypothesis, postulates that investors consider not only the 17 rate of return but also the risk in selecting their portfolios (Rugman, 1979). Another group of hypotheses assume that output and/or factor markets are imperfect. In other words, it is assumed that firms investing in foreign countries have one or more comparative advantages over their rivals in the host countries (Vernon, 1979: Buckley and Casson, 1976: Caves, 1982). A third group of hypotheses focus on the factors influencing the propensities of countries, industries, or firms to undertake FDI. For example, one variant, the liquidity hypothesis, seeks to establish a positive relation between the internal cash flows and investment outlays of a firm (Barlow and Wender, 1955). The expansion of foreign operations is seen as occurring through reinvestment of local profits. A fourth body of hypotheses deal with the factors influencing the propensities of countries to attract FDI, such as political instability, incentives provided by the government, and cheap labor (Green and Cunningham, 1975: Korbin, 1976). Recognizing that each of these groups of hypotheses accounts only partially for the determinants of FDI, Agarwal (1982) concluded that a general theory is needed to integrate the existing relevant knowledge. Although there still is a long way to go toward this end, internalization theory, based on transaction cost analysis, has emerged as the dominant theoretical thrust (Rugman, 1980: Dunning, 1981: 18 Buckley and Casson, 1976: Teece, 1985: Caves, 1982). Rugman (1980) has commented on this issue: A large literature has developed in order to offer explanations of the phenomenon of foreign direct investment (FDI) and the reasons for international production by the multinational enterprise. It is argued in this study that the existing theories are sub-sets of the general theory of internalization. (p. 24) law The essence of internalization theory is that activities of foreign production and sales take place in response to imperfections in the goods and factor markets. The theme of market imperfections dates back to the seminal work of Hymer (1960), which was refined and publicized by Kindleberger (1969). The key argument is that firms must overcome disadvantages as regards the ignorance of local consumers' taste, legal system, institutional framework, business and other social customs, media system, language barriers, and so forth. Among the competitive advantages an MNC has or must have are brand name, trade secrets, patents, marketing skills, special access to markets, management expertise, cheap sources of financing, and economies of scale (Kindleberger, 1969). Recently, however, it was argued that these oligopolistic advantages resulting in market imperfections are necessary but not sufficient conditions for foreign operations (Teece, 1985: Agarwal, 1982: Dunning and Rugman, 1985). The reasoning advanced by Hymer and Kindleberger did not explain 19 why some firms possess these advantages yet serve foreign markets with exports or by selling to local firms in foreign countries (Caves, 1982: Teece, 1985: Dunning and Rugman, 1985). Dunning and Rugman (1985) pointed out that Hymer's work explicitly recognized that the MNC is a creature of market imperfections, but he missed the distinction between structural and transaction cost that is, cognitive market imperfections. According to these authors: Hymer's entire analysis is based upon structural imperfections...include scale economies, knowledge advantages, distribution networks, product differentiation, and credit advantages. All of these help the MNE to close markets and ,thereby increase its market power. ...On the other hand, cognitive imperfections are Williamson-type transaction costs. ...The MNE then responds to the transaction costs by creating an internal market. (p. 229) This recognition of cognitive market failure set the tone for the modern theory of the MNC. The internal markets created by MNCs allow firms to engage in transactions which may be costly through arm's length market mechanism. This theory was first developed by Coase (1937), who conceptualized a firm as an organization for allocating economic resources without the exchange of ownership. The optimal size of the firm or degree of internalization is determined by the margin at which costs and benefits of internalization are equalized. The literature subsequently developed is generally referred to as the transaction cost approach. Among other researchers, Williamson (1975, 1979) is recognized as the most significant contributor to the 20 transaction cost approach. Given the fact that transaction cost can be too broadly defined, Williamson (1979) highlights the factors on which general consensus appears to be developing. (1) Opportunism is a central concept in the transaction cost approach: (2) Opportunism is especially important for economic activity that involves transaction-specific investments in human and physical capital: (3) the efficient processing of information is an important and related concept: and (4) the assessment of transaction cost is a comparative institutional undertaking. Identifying the critical dimensions, Williamson was able to match governance structures to transactions with different characteristics. This is shown in Figure 1. Teece (1985) asserted that transaction costs embrace all the costs associated with organizing the economic system. He itemized transaction costs in a market and nonmarket context as follows. When transactions are governed by the market mechanism, transaction costs include the costs of discovering with whom one wishes to deal with: informing market agents that one wished to deal and on what terms: conducting negotiations leading up to the bargain: and understanding the inspection needed to make sure that the terms of the contract are being observed. When transactions are conducted within an organization, transaction costs include employing administrative processes to organize economic activities and identifying exchange opportunities. 21 H3356...“ 953033638 2033025 ERR. Hdwomwsonmnwo " 1 9 61.5 «macaw 09632.06 m m Azmoowmmmwomw oosnnmoasmv m m m u t . w, -.--.. ...... H u w l u m t .m _ a t m m 358an u 9.58 m m a 0063306 " oo .30. Table 13 reports the results Of reliability analysis for market stability. The initial run yielded alpha = .5695. Intensity Of competition and of technological change were deleted in the second run due to the low corrected item-to- 106 Table 12 Reliability Analysis of Market Attractiveness Items Initial Reliability Revised Reliability Corrected Alpha Corrected Alpha Item-to-total If Item Item-to-total If Item Correlation Deleted Correlation Deleted 1. .2427 .7890 ---- ---- 2. .4351 .7251 .4149 .7931 3. .4461 .7233 .4666 .7790 ' 4. .5385 .6962 .4848 .7793 5. .6770 .6539 .7564 .6797 6. .6510 .6634 .7352 .6892 Alpha .7476 .7890 Note: see "indicators of market attractiveness" in Chapter 4 for the meaning of items 1-6. 107 Table 13 Reliability Analysis of Market Stability Items Initial Reliability Revised Reliability Corrected Alpha Corrected Alpha Item-to-total If Item Item-to-total If Item Correlation Deleted Correlation Deleted 1. .2448 .5497 .3495 .8019 2. .3698 .5028 .5596 .7016 3. .5347 .4268 .6282 .6617 4. .5047 .4405 .7096 .6117 5. .1780 .5924 ---- ---- 6. .1559 .6142 ---- ---- Alpha .5695 .7593 Note: see the meaning of items 1-6. "indicators of market stability" in Chapter 4 for 108 total correlation (.1780 and .1559, respectively) and the sudden drop Off they represent. The revised reliability yielded a satisfactory alpha 8 .7593. The reliability for transaction complexity is reported in Table 14. For the same reason stated in the case of market stability (low corrected item—to-total correlation and sudden drop-Off), uniqueness of know-how and ease with which know- how can be transferred were dropped from the revised analysis. The resulting reliability improved from the initial run (alpha=.6113) to the second run (alpha-.6681). Three runs Of reliability for transaction uncertainty were conducted to achieve the targeted goal Of alpha > .60. The first analysis showed alpha - .4667. This low reliability was due apparently to several low corrected item- to-total correlations. Subsequently, the variable (extent to which the foreign operation could be run independently Of parent company) with extremely low corrected item-to-total correlation (.0575) was first deleted. The result was still unsatisfactory (alpha = .5210). Therefore, three more variables were further deleted due to their low corrected item-to-total correlations (ease with which other parties might copy know-how, extent to which the continued success of the foreign Operation depends on future inputs from parent company, and ease with which the proper functioning of the foreign operation can be monitored). The third reliability analysis showed alpha = .6096, which met the target. Since the remaining variables exhibited satisfactory corrected 109 Table 14 Reliability Analysis of Transaction Complexity Items Initial Reliability Revised Reliability Corrected Alpha Corrected Alpha Item-to-total If Item Correlation Deleted Item-to-total If Item Correlation Deleted 1. .4139 .5366 .3732 .6521 2. .2185 .6140 ---- ---- 3. .3843 .5500 .4039 .6309 4. .5100 .4947 .5431 .5373 5. .1151 .6467 ---- ---- 6. .4279 .5311 .4834 .5782 Alpha .6113 .6681 Note: see "indicators Of transaction complexity" in Chapter 4 for the meaning Of items 1-6. 110 item-to-total correlations, these were retained for further analysis. The results Of the three reliability runs are presented in Table 15. In summary, except for transaction uncertainty, the remaining three constructs showed satisfactory Cronbach's coefficient alpha ( >.60) in the second analysis. A third analysis has been conducted for transaction uncertainty in order to achieve the preset target. Even though the internal consistency was deemed adequate, an R-type principal components factor analysis with varimax rotation was used to verify that the items used in a scale were tapping the same construct and to gain additional insight into the meaningfulness of the scale. This is addressed in the next section. UNDERLYING DIMENSIONS OF THE DATA STRUCTURE Motivation for an R-type principal component factor analysis is derived, primarily, from considering the multidimensionality of the constructs of interest (Bohrnstedt, 1983: Nunnally, 1978). Factor analysis was performed for both the indicators of the individual construct and all indicators taken together. We use several criteria to judge how many factors should be retained. First, factors with eigenvalue > 1.0 were retained, and orthogonal rotations of the axes were performed using the varimax method (Kaiser, 1958: Green, 1976, 1978). This decision rule is based on the 111 Table 15 Reliability Analysis Of Transaction Uncertainty Revised Reliability Items Initial Reliability Corrected Alpha Corrected Alpha Item-to-total If Item Item-to-total If Item Correlation Deleted Correlation Deleted 1. .2515 .4129 .2921 (.3574) .4642 (.5965) 2. .2306 .4274 .1656 ( ----) .5189 ( ----) 3. .2771 .4000 .3645 (.3757) .4243 (.5723) 4. .3098 .3870 .3246 (.5322) .4482 (.3453) 5. .0575 .5210 ---- ( ----) ---- ( --—-) 6. .1801 .4502 .2048 ( ----) .5170 ( ----) 7. .3052 .3956 .2851 ( ----) .4704 ( —---) Alpha .4667 .5210 (.6096) Note: Coefficients in parentheses are third revised reliability. See "indicators of transaction uncertainty" in Chapter 4 for the meaning Of items 1- 7. 2 112 rationale that any principal component factor, being a measure Of common variance, should account for more variance than any single variable in the standardized score space (Green, 1976, 1978). Orthogonal rather than Oblique rotation was performed because our interest lies in the independent dimensions underlying the data structure. Note that factors resulting from the orthogonal rotation of principal components will remain statistically uncorrelated (Green, 1976, 1978). Second, since factors with eigenvalue greater than one do not mean statistical significance, a scree test was performed to facilitate the decision of retaining the substantial factors (Cattell, 1966). Finally, each factor's capability of explaining the amount of variation was also considered in determining the number Of factors to be retained (Green, 1976, 1978). First, principal component factor analysis for the indicators of each individual construct yielded a one-factor solution (eigenvalue > 1.0) for each construct. Examination Of the factor structure matrices and loadings showed that the solution was satisfactory. NO indicator was dropped since all the loadings were greater than .35 (Kerlinger and Pedhazur, 1973). The results are reported in Tables 16 to 19. The column headed by h2 contains the sum of the squares of the loadings Of each of the variables across all of the factors, or the commonalities. They represent the percentage Of the common variance of a given variable accounted for by 113 each factor. Since only one factor was extracted from each construct, no scree test was performed. Second, an R-type principal factor analysis of all indicators taken together was performed. Again, factors with eigenvalue greater than one were retained and rotated using the varimax method. As the factors were rotated orthogonally, the loadings define the major clusters of interrelationships among the variables, and the factors are independent. The factor structure matrix showed five factors underlying the data structure. Table 20 presents the results. Interpretation of a factor in terms of its meaning or conceptual content is necessarily subjective. The meaning of a factor, however, is generally inferred from those variables with higher loadings on it (Green, 1976, 1978). The indicators loaded most highly on the first factor include long-term sales growth, prospects for future profits, average industry sales growth, and industry profit margin. This factor then is named market attractiveness. The indicators with higher loadings on the second factor: profit stability, market share stability, predictability of demand, and stability Of demand. The second factor, therefore, represent market stability. Four indicators loaded highly on factor three are: difficulty of communicating know-how, difficulty Of pricing know-how, difficulty Of appreciating the value of know-how, and degree to which know-how is intangible. Together they represent transaction complexity. The legal 114 Table 16 Factor Loadings for Market Attractiveness Variable Varimax Factor Pattern h2 Factor 1 Long-term sales growth .5771 .3331 Prospects for future profits .6526 .4259 Average industry sales growth .6510 .4237 Industry profit margin .8915 .7948 Industry pretax profits .8764 .7681 Eigenvalue 2.7457 % common variance explained 54.9% Table Factor Loadings for 115 17 Market Stability fi TVariable Varimax Factor Pattern h2 Factor 1 Profit stability .5457 .2978 Market share stability .7632 .5825 Predictability of demand .8349 .6970 Stability of demand .8763 .7680 Eigenvalue 2.3453 % common variance explained 58.6% 116 Table 18 Factor Loadings for Transaction Complexity TVariable Varimax Factor Pattern h2 Factor 1 Difficulty of communicating know-how .6263 .3922 Difficulty of pricing know-how .6698 .4486 Difficulty Of appreciating the value of know-how .7923 .6277 Degree to which know-how is intangible .7413 .5496 Eigenvalue 2.0180 % common variance explained 50.5% 117 Table 19 Factor Loadings for Transaction Uncertainty _— Variable Varimax Factor Pattern h2 Factor 1 Know-how is legally protectable .6952 .4832 Ability to detect the unauthorized use of know-how .7178 .5152 Ability to punish the unauthorized use of know-how .8368 .7003 Eigenvalue 1.6987 % common variance explained 56.6% 118 Table 20 Factor Analysis of All Indicators Factor 1 2 3 4 5 Long-term sales growth .5137 .0727 .1983 .1525 .3918 Prospects for future profits .6366 .1313 .2837 .1605 .1763 Average industry sales growth .6738 .1005 .1172 .0732 .1048 Industry profit margin .8725 .1763 .0442 .0733 .0395 Industry pretax profits .8597 .1653 -.0122 .0481 .0467 Profit stability .2494 .4194 .0180 -.1087 .5326 Market share stability .0691 .7604 .0551 .0724 .0670 Predictability of demand .1351 .8519 -.0251 .1332 -.0706 Stability of demand .0363 .8725 -.0396 .0134 .1092 Difficulty Of communicating know-how .0348 .0031 .3200 .0207 .6663 Difficulty of pricing know-how .0442 .0165 .8001 .0086 .0024 Difficulty Of appreciating the value Of know-how .0146 .0373 .7645 .1236 .2113 Degree to which know-how is intangible .0250 .0262 .5320 .1445 .5155 Know-how is legally protectable .2110 -.0628 -.0362 .6674 .4325 Ability to detect the unauthorized use Of know-how .2344 -.0056 .0204 .7310 -.2556 Ability to punish the unauthorized use Of know-how .1035 .0734 .2064 .8017 .0557 Eigenvalue 3.5018 2.2584 1.9253 1.4751 1.0734 % common variance explained 21.9% 14.1% 12.0% 9.2% 6.7% 119 protectability of know-how, the ability to detect the unauthorized use of know-how, and the ability to punish the unauthorized use of know-how are highly loaded on factor four. Clearly, they represent transaction uncertainty. The meaning of factor five is not clear since its higher loadings contain indicators from the previous four constructs. However, note that the fifth factor explains the least amount of variance (6.7%) among the five factors. As stated above, a scree test was performed to facilitate the decision about retaining factors. As can be seen in Figure 5, a scree test showed that a four-factor solution is satisfactory. As discussed in detail in Chapter 4, once the indicators associated with each construct were reduced to a reliable set, a score for each construct was derived using a unit weighting scheme (Einhorn and Hogarth, 1975). Since the remaining five constructs are formative in nature, they are Operationalized through the summation of their associated indicators. The means and standard deviations of the nine constructs used in subsequent analysis and the correlations among them are reported in Table 21. In summary, a considerable gain in simplicity was reached using factor analysis. Fortunately, the pattern of loadings is relatively clear and unambiguous. There is no indication to drop indicators since all the higher loadings associated with each factor are greater than .35 (Kerlinger and Pedhazur, 1973). Consistently, principal component factor 120 ooocsnma moo - r . lb ioIlIl m w m o no up HN nu we am no wowsowpow naacoensnm mwmcno u wanna goon 121 Table21 Means, Standard Deviations, and Correlations Variables Mean Std. Dev. Min. Max. Country risk (CR) 13.85 6.33 4 28 Location familiarity (LF) 24.80 8.47 7 50 Market attractiveness (MA) 24.70 3.94 14 35 Market stability (MS) 18.85 3.55 10 26 Transaction complexity (TC) 16.88 4.49 4 26 Transaction uncertainty (TU) 13.27 3.93 4 21 Exit barriers (EXIT) 20.31 7.43 6 37 Synergy (SYN) 23.09 7.58 6 42 Global market presence (GMP) 25.39 5.87 12 40 Pearson Product-Moment Correlation CR LF MA Ms TC TU EXIT SYN GMP CR 1.000 LF -.64431.000 MA .079 -.002 1.000 MS -.092 -.005 .279b1.000 TC -.096 .083 .064 .0961.000 TU .117 .026 .147 .034 .19901.ooo EXIT -.031 .150 .154 -.053 .182 .1521.ooo SYN -.3683 .275b-.064 .016 .030 .014 -.024 1.000 GMP .013 -.067 -.127 -.086 .005 .050 .080-.1001.ooo Note: ap<.001 bp<.005 Cp<.05 122 analysis together with reliability analysis strongly indicate that there are four factors underlying the retained indicators: market attractiveness, market stability, transaction complexity, and transaction uncertainty. TEST OF HYPOTHESES This section describes the results of the test of the hypotheses set forth in chapter 3. In the following, each hypothesis was stated, the homogeneity of covariance structure among three control groups was tested using Box’s M statistic for hypothesis 1 and 2, and the statistical methods I and results for each hypothesis testing were reported. HYPQ;hE§i§_l_:_The_QY§Iéll_MQQel Hypothesis 1: There will be a significant difference among high, medium, and low control modes Of foreign market entry strategy with respect to the nine key variables: country risk, location familiarity, market attractiveness, market stability, transaction complexity, transaction uncertainty, exit barriers, synergy, and global market presence, taken as a whole. Hypothesis 1 explores the relationship of the set of key decision-making variables and the control mode choice. It was expected that MNCs with different foreign market entry strategies would exhibit different profiles Of the key 123 decision variables. Therefore, the existence of an overall difference is the interest of hypothesis 1. The analysis Of the relationship between modes of foreign market entry strategy and profiles of the decision-making elements consisted of a multivariate analysis of variance (MANOVA), with the former serving as the grouping variable and the latter being the variables that presumable differentiate the three control modes. It is worth noting that MANOVA has strength in that it takes the interrelationships among the constructs into account. Before MANOVA was performed, the homogeneity of covariance structures for the groups was tested. Box’s M statistic was used to do this test. The result of the homogeneity test showed that there is no significant differences among covariance structures Of the three control groups (Box’s M=121.33, F8 1.18, df=90, 25667, p< .118). The MANOVA results indicate that there are significant overall differences in the profiles of MNCs' decision making elements based on their choice of foreign market entry modes. Wilks’ lambda = .63156 for the overall model: F - 2.81291, df = 18, 196, p < 0.001. Thus, the profiles do vary, and Hypothesis 1 is not rejected. Statistically, this means that the mean vectors Of the three control groups are not all equal. Substantively, the significant MANOVA result indicates that there are overall differences in the profiles of distinct control modes with respect to market attractiveness, market stability, 124 transaction complexity, transaction uncertainty, country risk, location familiarity, global market presence, exit barriers, and synergy. Put differently, this would mean that the proposed framework presents a reasonable way to explain firms’ decision making behavior on the entry mode choice. Although a significant result from MANOVA was Obtained, it is not clear which Of the multiple dependent variables contribute most to the difference among the groups that are being compared. TO understand the relative importance of each variable, we now turn to the Multiple Discriminant Analysis (MDA). WWW Hypothesis 2: There will be a significant difference in classification accuracy (1) between the integrated and transaction cost model and (2) between the integrated and strategic model, with respect to the choice among high, medium, and low control modes of foreign market entry strategy. To achieve the test of Hypothesis 2 three discriminant analyses were performed, representing the strategic model, the transaction cost model, and the integrated model, respectively. Before these discriminant analyses were performed, the homogeneity of covariance structures with respect to the three control modes was tested using Box’s M statistic. Box’s M was not significant in all three models (p > .05). 125 For the strategic model, Box’s M=79.598: F=1.2839, df=56, 26879: p <.075. For the transaction cost model, Box's M=14.737: F= .6966: df=20, 36964: p < .8338. For the integrated model, Box's M=121.32: F=1.1794: df=50, 25668: p< .1180. This means that the homogeneity of covariance structures among three control groups with respect to each model was not rejected. The first discriminant analysis with strategic variables as the independent variables yielded two canonical discriminant functions. The tests Of significance Of the discriminant functions are reported in Table 22. As can be seen, the first and the second discriminant function explains 84.98% and 15.02% of the variance, respectively. Since function two is not statistically significant (p < .3991), only function one was retained. In order to give substantive meaning to the discriminant functions, structure coefficients rather than standardized coefficients were chosen for the interpretations. This is due to the fact that standardized coefficients lack stability since they are affected by the variability of the variables with which they are associated and by the intercorrelations among the variables (Perrault et al., 1979: Pedhazur, 1982: Tatsuoka, 1971). As a rule of thumb, it is suggested that structure coefficients >.30 be treated as meaningful (Pedhazur, 1982). According to this criterion, the meaningful coefficients on function one are those for country risk, location familiarity, market attractiveness, synergy, and exit 126 Table 22 Discriminant Analysis for the Strategic Model Standardized Coefficient Structure Coefficient Variable Function 1 Function 2 Function 1 Function 2 Country risk -.6335 .0107 -.6655 .0792 Location faliliarity .1638 -.4473 .5417 -.3763 Market attractiveness .5388 -.2033 .3788 -.3026 Market stability -.0146 .1185 .1187 .0295 Synergy .2152 .5782 .3933 .5242 Exit barrier .3414 .1544 .3292 -.3265 Global market presence .3941 .5933 .2289 .6950 Eigenvalue .3486 .0616 Wilks' lambda .6985 .9420 % of variance 84.98 15.02 Canonical correlation .5084 .2409 Chi square 37.323 6.2193 Degree Of freedom Significance, P< .0007 .3991 127 barriers, in descending order of importance. The positive signs of location familiarity, market attractiveness, and synergy are expected. This means that higher control modes would have greater scores on these variables than would the medium and lower control modes. The negative sign of country risk is also expected. It indicates that higher control modes show a lower score on country risk than do the lower control modes. Although marginally larger than .30, the positive sign of exit barriers is not expected. This is counter to our expectation that MNCs with higher exit barriers would adopt high control modes. The classification accuracy of the resulting discriminant function performed better than would a chance model. The overall hit ratio is 52.73%; 51.7% of the low control group, 36.60% of the medium control group, and 70.0% of the high control group are correctly classified. While the hit ratio of the low and the high group meets the criterion that a rough estimate of the acceptable level of predictive accuracy should be at least 25% greater than by chance (that is, 28%, 36%, and 36% for the low, medium, and high control group, respectively), the classifying accuracy of the medium control group does not perform well. This may be due to the sensitivity of the classification method in breaking firms into medium and low control groups. It does show, however, that the discrimination function performed well in classifying the more extreme groups. 128 The second discriminant analysis also showed two canonical discriminant functions. This discriminant model represents the transaction cost model, with transaction cost variables serving as the independent variables. Only the first discrimination function was retained for interpretation due to the insignificance of the second function (p < .5709). Table 23 exhibits the result of the analysis. As can be seen, the first function explains 93.14% of variance, and the second function explains 5.87% of variance. Note that country risk and location familiarity are again incorporated into this model due to their dual role as both strategic and transaction cost variables (see Chapter 3 for discussion). The importance of the coefficients in descending order are country risk, location familiarity, and transaction complexity. The signs of the coefficient are expected, with country risk being negative and others positive. The only variable in this function with loading < .30 is transaction uncertainty. A positive sign for transaction complexity, showed that the higher the transaction complexity the more likely are MNCs to choose high control modes. The meaning of the signs of location familiarity and country risk are the same as explained in the strategic discriminant model. The overall hit ratio of 55.86%, is slightly improved relative to the strategic discriminant model. The hit ratios for each individual group are: 51.6% for low control, 41.5% for medium control, and 74.4% for high control. Again, these ratios come very close to that of the strategic model. The 129 Table 23 Discriminant Analysis for the Transaction Cost Model Standardized coefficient Structure Coefficient Variable Function 1 Function 2 Function 1 Function 2 Country risk -.6682 .1840 -.7336 -.0971 Location familiarity .2088 .6521 .5927 .5361 Transaction complexity .5445 -.6757 .5867 -.5658 Transaction uncertainty .2716 .5918 .2449 .4833 Eigenvalue .3051 .0190 Wilks' lambda .7519 .9813 % of variance 93.14 5.87 Canonical correlation .4835 .1367 Chi square 30.366 2.0075 Degree of freedom 8 3 Significance, P< .0002 .5709 130 transaction cost model, like the strategic model, performs better in the high and low control modes than in the medium control modes. The third discriminant analysis deals with the integrated model, with all key decision elements identified in the model (see chapter 3) as independent variables. The results of statistical analysis are shown in Table 24. The first function again explains much more variance relative to the second function (84.38% compared with 15.62%). As in the previous two models, due to the insignificance of the second function, it is left uninterpreted (p < .3991). The meaningful coefficients in an order of descending importance are country risk, transaction complexity, location familiarity, synergy, and market attractiveness. Except for country risk, all variables showed positive signs. Note that exit barriers do not show an effect in the integrated model as it does in the strategic model. The meaning of signs are the same as reported before. The overall hit ratio (60.55%) shows some improvement over the previous two models. The individual hit ratio for the three control modes are: 55.2% for low control, 48.8% for medium control, and 76.9% for high control. These ratios show some marginal improvements relative to the previous two models. As with the strategic and transaction cost model, the integrated model again performs better in the high and low control modes than in the medium control mode. 131 Table 24 Discriminant Analysis for the Integrated Model Standardized Coefficient Structure Coefficient Variable Function 1 Function 2 Function 1 Function 2 Country risk -.5734 .2345 -.5567 .1762 Location familiarity .0853 -.3304 .4321 -.3968 Market attractiveness .4931 -.2443 .3380 -.3547 Market stability -.0670 .0953 .0994 .0068 Transaction complexity .4891 .4144 .5021 .2614 Transaction uncertainty .0932 -.3869 .1782 -.2784 Exit barrier .2209 -.2290 .2867 -.3567 Synergy .2124 .4774 .3490 .3301 Global market presence .3790 .4789 .2225 .5446 Eigenvalue .4593 .0850 Wilks' lambda .6316 .9216 % of variance 84.38 15.62 Canonical correlation .5610 .2799 Chi square _46.876 8.3244 Degree of freedom 8 Significance, P< .0007 .3991 132 In summary, the three discriminant models exhibit quite close results in many aspects. All models yield similar hit ratios both individually and overall. While two cannoncial discriminant functions were extracted in all three models, only the first discriminant function turned out to be significant and explained a substantial amount of variance. Except for exit barriers with factor loading marginally higher than .30 in the strategic model, all three models consistently revealed that country risk, transaction complexity, location familiarity, synergy, and market attractiveness are the relative important discriminators. One important implication that can be drawn from the discriminant analysis is that both strategic and transaction cost variables possess discriminant power in differentiating the three control modes. While the accuracy of classifications in all models is very close, as indicated by the hit ratios, it is of interest to compare their classification performance. The rationale for the accuracy comparisons run as follows. If the performance of two models do not differ significantly from each other, the probability that the cases are correctly classified by one model over the other, or vice versa, should not significantly differ from p=.5. A nonparametric sign test was conducted to test the accuracy performance of the integrated model relative to the strategic and the transaction model, respectively. When both models exhibited the same classification performance (that 133 is, either correctly or incorrectly) to a specific case, it was considered a tie. In comparing the integrated and the strategic model, the former performed better than the latter in 15 cases, while the opposite was true in 6 cases. There are 88 ties. The resulting probability of this comparison is p=.0784. The comparison between the integrated and the transaction cost model showed that the former performed better in 13 cases, and the latter performed better in 8 cases. There are again 88 ties. The probability is P=.3833. Hence, it was concluded that there are no differences as regards the accuracy performance of the integrated model relative to the other two models. This outcome may be due to the effect that location familiarity and country risk both possess high discriminant power in all three models. W Hypotheses 3a through 31 specified the nature of the expected differences in the high, medium, and low control profiles. Subsequent to the MANOVA findings of overall differences in the profiles and the MDA results indicating the discriminatory power of the profile variables, Analysis of Covariance (ANCOVA) was performed to identify the sources(s) of the overall effects. ANCOVA was used rather than univariate ANOVA because the interest was in the way the set of variables operate together rather than the independent influence of each variable. The covariance-controlled 134 partial F-ratio for each variable was computed to determine whether significant group differences remained after accounting for the impact of the other variables. Planned comparison, on an a priori basis, was then used to examine the source of differences for three control groups with respect to each of the significant independent variables. An a priori test rather than a post hoc test was used for two reasons. First, an a priori test is more powerful than a post hoc test. This advantage stems from the researcher's willingness to hypothesize the differences priori to the analysis (Pedhazur, 1982). An a priori test is appropriate here since the nature of the differences regarding the three control groups with respect to the nine independent variables was hypothesized on an a priori basis (see Table 6 in chapter 3). Second, while a post hoc comparison is performed only when the overall F ratio is significant, this need not be the case in an a priori test. Put differently, some of the a priori tests may have significant F ratios even when the overall F ratio is not significant (Pedhazur, 1982). Therefore, in order not to lose sight of the nature of the differences among three control groups due to an insignificant overall F ratio, an a priori comparison is considered appropriate to this study. Nine ANCOVAs were performed, with each key decision variable serving as the dependent variable and the remaining variables as covariates. Before discussing the ANCOVA tests it is necessary to examine the hypothesis of homogeneity of 135 slopes among three control groups with respect to each key decision variable (Pedhazur, 1982: Green, 1978). This amounts to testing the interaction effects between covariates and the factor (that is, the three control modes). It was determined that any interaction term with p< .05 is considered significant. The covariates with significant interaction effect were identified, and adjustments were made. Instead of using common slopes for the covariate with significant interaction effects in the ANCOVA analysis, different slopes within each group were used for partialing out the covariate impact on the key decision variable (Wildt and Ahtola, 1978; Kleinbaum and Kupper, 1978). The unadjusted means, adjusted means, and the partial F ratios are listed in Table 25. As stated above, planned comparisons among the three control groups were further performed to detect the pairwise differences, the results are summarized in Table 26. Hypothesis 3a stated that the higher the country risk, the lower is the level of control MNCs will demand in the foreign operation. Specifically, it was expected that the high control group would score lower on country risk than would the medium or low control group and that the medium group would score lower than would the low control group. The results indicate that the adjusted mean of country risk in the high control group has a significantly lower mean score than in the low control group. Other comparisons, however, did not show significant results. Therefore, H3a is partially supported. 136 Table 25 Analysis of Covariance Results Variable Unadjusted Covariate Adjusted Part- Means Means ial High Medium Low High Medium Low F CR 10.97 14.61 16.41 12.45 14.27 15.36 3.94a LF 28.18 23.29 22.76 27.05 24.40 25.06 2.19 MA 26.00 24.02 23.93 26.20 24.23 23.52 3.65a MS 19.12 18.80 18.52 18.59 18.95 18.91 .09 TC 18.46 17.05 14.69 18.21 17.27 14.72 4.413 TU 14.03 12.78 12.97 13.73 12.70 13.34 .64 EXIT 22.51 19.12 19.24 21.83 19.58 19.47 .90 SYN 24.56 23.66 19.86 24.54 24.15 20.88 2.74 GMP 25.92 26.41 23.38 26.68 26.15 22.89 3.09 Note: ap<.05 137 Table 26 Comparison of Control Groups Profiles Hypothesized Profiles Hypothesis Sample Findings F Country risk H < M Not significant 1.07 M < L Mot significant 3.48 H < L H < L 7.43b Location familiarity H > M H > M 4.14c M > L Not significant .22 H > L Hot significant 1.95 Market attractiveness H > M H > M 4.76c M > L Not significant .53 H>L H>L 6.24‘3 Market stability H > M Not significant .17 M > L Not significant .00 H > L Not significant .10 Transaction complexity H > M Not Significant .78 M>L M>L 5.440 H>L H>L 3.173 Transaction uncertainty H > M Not significant 1.19 M > L Mot significant .40 H > L Hot significant .12 Exit barrier H < M Mot significant 1.56 M < L Not significant .00 H < L Not significant 1.19 Synergy H > M Not significant .06 M > L Hot significant 3.87 H>L H>L 4.74° Global market presence H > M Not significant .13 M>L M>L 4.78° H>L H>L 5.06° Note: ap<.005 bp<.01 cp<.05 138 Hypothesis 3b stated that the more familiar with the host country, the higher is the level of control MNCs will demand in the foreign operation. Specifically, it was expected that the high control group would score higher on location familiarity than would the medium or low control groups and that the medium group would score higher than would the low control group. The partial F ratio of location familiarity was not significant. This may be due to the effect that location familiarity is highly correlated with country risk, and the mean scores of the latter did vary among control groups. Examining the group differences after adjusting for the covariates, however, the test of Hypothesis 3b revealed that the high control group has a higher mean score than does the medium group, while the other two comparisons do not show significant results. Although significant differences were not found in all three pairs with respect to the two location variables, in general, evidence suggests that MNCs tend to demand higher control when country risk is low and location familiarity is high. Hypothesis 3c stated that the more attractive the market is, the higher the level of control MNCs will demand in the foreign operation. Specifically, it was expected that the high control group would score higher on market attractiveness than would the medium or low control groups and that the medium group would score higher than would the low control group. The results only partially support H3c; the high control group has a significantly higher mean score 139 on market attractiveness than do the medium and low control groups. However, the medium control group does not show significant higher mean score than does the low control group. Hypothesis 3d stated that the higher the market stability, the higher is the level of control MNCs will demand in foreign operation. Specifically, it was expected that the high control group would score higher on market stability than would the medium or the low control groups and that the medium group would score higher than would the low control group. This hypothesis was not supported. None of the hypothesized directions regarding market stability was significant. Taken together, these findings suggest that while MNCs may demand higher control in more attractive markets, they all tend to choose stable markets when they enter. Said differently, managers may take a risk-averse position when they evaluate the market entry decision. This conservative attitude is understandable since a foreign market entry is usually irreversible, and tremendous resources are involved. Therefore, MNCs would reject the idea of foreign operations in the presence of profit and market share volatility. Hypothesis 3e stated that the higher the transaction complexity, the higher is the level of control MNCs will demand in the foreign operation. Specifically, it was expected that the high control group would score higher on transaction complexity than would the medium or low control 140 groups and that the medium group would score higher than would the low control group. Differences were found that partially support the hypothesis. While the high and medium control group showed higher mean score than did the low control group, there is no significant difference between the high and the medium control group. In general, findings about transaction complexity suggest that MNCs tend to exercise more control in situations in which know-how can be characterized as more intangible and more difficult to be communicated, priced, and appreciated. Hypothesis 3f stated that the higher the transaction uncertainty, the higher is the level of control MNCs will demand in the foreign operation. Specifically, it was expected that the high control group would score higher on transaction uncertainty than would the medium or low control groups and that the medium group would score higher than would the low control group. In view of no significant idifferences among pairs of high, medium, and low control groups, hypothesis 3f was not supported. It is surprising that no significant pairwise difference among the three control modes was found regarding transaction uncertainty. One possible explanation could be that MNCs are very careful about choosing partners when entering foreign markets to minimize the danger of unauthorized use of their know-how. More important, both parties may view a joint venture as an opportunity for joint value creation rather than as a zero- sum game (that is, the success of one organization thus 141 depends on the other). Once this long-term outlook is adopted by both sides, potential opportunism can be reduced (Jarillo, 1988). A recent research stream on strategic network points to this possibility (Thorelli, 1986: Stevenson, 1983). Hypothesis 39 stated that the greater the synergy between the entrant and other sister business units, the higher is the level of control MNCs will demand in the foreign operation. Specifically, it was expected that the high control group would score higher on synergy than would the medium or low control group and that the medium group would score higher than would the low control group. Group comparisons with respect to synergy showed only one significant difference; the high control group has a significant higher mean score than does the low control group. Thus, H3g is partially supported. The significant difference between the high and low control group regarding synergy indicates that synergistic effect does exert some influence on the control mode MNCs adopt. Hypothesis 3h stated that the higher the exit barriers, the lower is the level of control MNCs will demand in the foreign operation. Specifically, it was expected that the high control group would score lower on exit barrier heights than would the medium or low control group and that the medium group would score lower than would the low control group. This hypothesis was not supported, as the comparisons revealed no significant differences. The lack of 142 significance of exit barriers is not immediately obvious. "It may be that MNCs would experience difficulty finding partners to lower their resource commitment and relinquish control when exit barriers are high since the unwillingness to commit resources equally applies to all parties. Hypothesis 3i stated that the greater the importance of global market presence, the higher is the level of control MNCs will demand in the foreign operation. Specifically, it was expected that the high control group would score higher on global market presence than would the medium or low control group and that the medium group would score higher than would the low control group. Although the partial F ratio did not show significance at P < .05 regarding global market presence, it was found that the low control group had a significant lower mean score than both the medium and high control groups. There is no significant difference between the high and medium control group. Thus, hypothesis 3i is partially supported. In general, therefore, there is some indication that MNCs would like to gain more control when global market presence is important. Overall, none of the nine variables showed significant differences in all three pairs (high vs. low, high vs. medium, and medium vs. low). When differences were found, they existed for either one pair or two pairs. Three variables showed one pairwise difference: location familiarity, country risk, and synergy. Three variables showed two pairwise differences: market attractiveness, 143 transaction complexity, and global market presence. Finally, no pairwise difference was found in three variables: market stability, transaction uncertainty, and exit barriers. SUMMARY OF TESTS OF HYPOTHESES Hypothesis 1, that overall profile differences exist, is strongly supported. Hypothesis 2 is not supported in view of the insignificant results regarding the classification performance among the integrated, the strategic, and the transaction cost models. This could be attributed to the effect that location familiarity and country risk, playing the dual role of both strategic and transaction cost variables, are relatively important discriminator in all of the three models. Hypotheses 3a through 3i addressed the nature of the profiles; the results are summarized below. . Hypothesis 3a - partially supported: the high control group has a significantly higher mean score on market attractiveness than do the medium and low control groups. The medium control group does not show a significantly higher mean score than does the low control group. . Hypothesis 3b - not supported. . Hypothesis 3c - partially supported; while the high and medium control groups showed higher mean scores than did the low control group, there is no 144 significant difference between the high and the medium control groups. Hypothesis 3d - not supported. Hypothesis 3e - partially supported: the high control group has a significantly lower mean score than does the low control group. Other comparisons, however, did not show Significant results. Hypothesis 3f - partially supported; the high control group has a higher mean score than does the medium group, while the other comparisons did not show significant results. Hypothesis 3g - partially supported: the high and medium control groups revealed higher mean scores than did the low. However, no significance difference was found between the first two groups. Hypothesis 3h - not supported. Hypothesis 3i - partially supported: the high control group has a significantly higher mean score than does the low control group. No significant results were obtained from other comparisons. CHAPTER SIX W The final chapter of this dissertation reviews the contributions of this research to the foreign market entry literature, addresses the limitations of the research in terms of theory and methodology, and suggests directions for future research . MAJOR CONTRIBUTIONS This research was designed to gain some understanding of the choice of foreign market entry strategies by MNCs. The major contributions of the research lie in the approach taken, the scales developed, and the major findings and implications regarding the validity of the decision model used by managers in this sample. eac oah Much of the literature on the entry mode decision has presented either a list of considerations without identifying key constructs or an efficiency based analysis (that is, transaction cost) which tells firms what they should do to 145 146 maximize the entrant's economic efficiency in a theoretical setting. While the latter is an improvement over the former, it still overlooks the importance of attaining a strategic fit between a firm and its competitive environment. Previous studies thus provide either piecemeal or partial analysis which does not fully reflect managerial reality and hence has limited practical application. This study attempted to identify and integrate the key constructs involved in the entry mode decision by drawing not only on the transaction cost but also strategic management literature. This would advance us one step beyond previous work by offering an integrative view that is capable of incorporating the basic constructs from both disciplines. The aim is to provide multinational managers with a comprehensive and managerially meaningful decision-making framework for the foreign entry mode decision. Since no managerial reality demands either only efficiency or pure strategic fit but rather some combination, to examine the integrated model is crucial to our understanding of the decision making involved in foreign market entry. The main interest in this study is the choice of foreign market entry mode. Various entry modes were classified into high, medium, and low control groups. The specific factors were explored in terms of their associations with particular generic strategies were market attractiveness, market stability, transaction complexity, transaction uncertainty, country risk, location familiarity, global market presence, 147 exit barriers, and synergy. The approach taken here demonstrates the potential insights that can be gained from broadening the focus of study to include several disciplines. W There are no generally accepted, scientifically developed, reliable, and valid scales to measure any of the nine key variables used in this study. Thus, while scale development was not a prime objective of this research, careful construction of indices was an important antecedent to the subsequent analysis. Scales with fairly high coefficient alphas were developed for market attractiveness, market stability, transaction complexity, and transaction uncertainty. Principal factor analysis also lends support to these underlying dimensions of the data. Scale development should be of interest in itself, and future research could be extended to examine the unidimensionalilty of these constructs. The Major F; ndingg The three major findings in this dissertation, corresponding to the three objectives and research questions reported in Chapter 1 and three hypotheses postulated in Chapter 3 respectively, are reported in the following. 148 11111103.]. Significant overall differences exist regarding the profiles of MNCs’ decision-making elements with respect to the three control modes. One important finding of this study is that there are significant overall differences in the profiles of MNCs' decision making elements (country risk, location familiarity, market attractiveness and stability, transaction complexity and uncertainty, exit barriers, synergy, and global market presence) regarding the choice of foreign market entry mode (high, medium, and low). This would mean that the proposed framework presents a reasonable way to explain firms' decision-making behavior as to entry mode choice. To the extent that competitive firms' prevalent practice reflects, in a social Darwinian sense, successful strategic behavior (Brown, 1963; Lilien, 1979), one may then conclude that the proposed framework provides managers with a systematic and winning way to organize the decision variables for the entry mode choice. E°n3° 2 Although the classification accuracy of the integrated model does not differ significantly from that of the strategic or the transaction cost model, variables with discriminant power in differentiating the three control modes 149 come not only from the transaction cost set but also from the strategic set. The variables that are best able to discriminate among the three control modes based on the integrated model are country risk (-), transaction complexity (+), location familiarity (+), synergy (+), and market attractiveness (+). Note that both the strategic and transaction cost variables play roles in discriminating among the three control modes. Specifically, firms with higher scores on location familiarity, market attractiveness, transaction complexity, and synergy would be more likely to choose a higher control mode. On the contrary, firms with a higher score on country risk are likely to choose a lower control mode. While the classification accuracy of the integrated model does not significantly differ from that of the transaction cost model and strategic model, the finding indicates that variables from both models provide discriminant power in the actual mode chosen. 2' 3' 3 In general, hypotheses of pairwise differences in profiles among all three control modes with respect to each variable were either only partially supported or not supported. When significant differences were found, they were between two of the control groups rather than among all three. 150 Consistent with the discriminant analyses, pairwise differences among control modes exist both in the case of transaction cost variables and strategic variables. Except for market stability, transaction uncertainty, and exit barriers, pairwise differences in the remaining variables have been found. The sources of difference, however, come from either one pair or two pairs but not all three. Three variables showed a one pairwise difference: location familiarity, country risk, and synergy. Three variables showed a two pairwise differences: transaction complexity, market attractiveness, and global market presence. In sum, these findings indicate that: hypothesis one, corresponding to the first objective and research question, was supported: hypothesis two, related to the second objective and research question, was not supported: a set of hypotheses three, in connection with the third objective and research question, was partially supported. IMPLICATIONS The above findings suggest that an integrated view of economic efficiency and strategic forces is a useful perspective in explaining multinationals' choice of foreign market entry strategy. The implications of these findings are evaluated in the following. Firms tend to evaluate carefully the host country conditions when choosing a market entry mode. Important 151 considerations include their perceptions of the country risk, their prior knowledge about and experience with the location, and sociocultural similarities. Firms tend to opt for low control modes when situations are unfavorable to them, that is, there is high country risk and/or low familiarity with the environment. Motivations of such a strategic move may stem from reducing the risk of host government intervention and expropriation, minimizing loss through less resource commitment, and maintaining strategic flexibility (Korbin, 1983: Vernon, 1983: Davidson, 1980). The importance of country factors is also documented in a recent study using secondary data (Gatignon and Anderson, 1987). The market variables (market attractiveness and stability) exhibit mixed results. While MNCs are willing to commit resources and gain high control in an attractive market, they seem to view a stable market as a necessary condition to operate abroad. MNCs may abandon the entry project entirely once market volatility is detected. Presumably, MNCs are more risk averse in foreign countries than in domestic markets. Facing a volatile market, firms experience difficulty in forecasting demand and scheduling production runs, as well as in adjusting quickly as situations develop (Williamson, 1979: Harrigan, 1985a, 1985b; Porter, 1980). In general, MNCs exhibit a strong tendency to take control in foreign operations when transactions are difficult to organize and execute. This is consistent with Teece's 152 (1977, 1983) assertion that the use of market institutions often is inefficient when the technology to be transferred has a high tacit nature, causing complex transactions and high transaction cost. Surprisingly, however, transaction uncertainty does not seem to influence the entry mode choice. A likely explanation might come from factors beyond our framework. In particular, MNCs may be very careful in selecting partners and relegating control. Through this process, multinationals may be able to build mutual trust with partners, both sides may adopt a long-term viewpoint, realizing that cooperation rather than opportunistic behavior is actually the best strategy (Jarillo, 1988: Stevenson, 1983). The idea that transaction uncertainty could be managed by successful entrepreneurs illustrates this point (Jarillo, 1988, Thorelli, 1986). The results of the two variables related to business units also yielded mixed results. While MNCs are inclined to choose higher control modes when synergy exists, exit barriers do not seem to influence their entry mode decisions. One explanation may be that firms would be difficult to find partners to share resource outlays when exit barriers are high since the unwillingness to commit resources equally applied to all parties. Finally, when the preceding variables are held constant, MNCs tend to gain higher control in their foreign operations if physical presence abroad is important. Thus, in addition to business units, MNCs also 153 seem to pay attention to the whole corporate posture when making strategic decisions regarding foreign market entries. LIMITATIONS While this dissertation has made significant contributions to understanding entry mode decisions, it has limitations which restrict the generalizability of the findings. Limitations of the underlying theory and of the method used are addressed in this section. .Limitatiens_:_1neezx The decision model proposed is based on some implicit operational assumptions. First, it assumes a free choice of entry mode, ignoring restrictions of mode options due to government mandates and regulations. It is possible that MNCs would like to choose an alternative entry mode and gain more control without legal constraints. However, in view of the fact that MNCs must be willing to accept the legal boundaries set forth by host governments in order to operate, the mode chosen is at least satisfactory if not ideal to them. Otherwise, they could have invested in other places without such constraints. For this reason, it is reasonable to believe that to a large extent, the nine constructs would still exert impact on the mode chosen. Since it is a truism that the degree of control is constrained by legal 154 requirements, this statement is not set forth as a hypothesis to be tested. Second, the decision model developed and tested in this dissertation is a positive rather than a normative model. It is assumed that the observed firms exhibit rational behavior when entering foreign markets. W The entry mode choice studied was examined after the choice had been made rather than during the decision process, so there may be some bias in the retrospective reporting. Had actual decisions been observed in process the sample size would have been severely reduced. Clearly, a foreign market entry decision involves major business functions and has crucial strategic implications for MNCs. Hence, the decision is likely to be made by a group of top managers rather than any individual in the organization. It may be a questionable practice, therefore, to collect data from a single informant as a reflection of the organization's viewpoint (Philip, 1981: John and Reve, 1982). This problem is partially ameliorated by directing questionnaires to senior management who presumably play a key role in the decision (John, 1984). Another methodological limitation concerns the measurement of the nine constructs. Since no generally accepted measures used in this study exist, conclusions can only apply to the constructs measured here. More thorough 155 measurement analysis and other replications need to be made in order to establish the psychometric properties of these constructs. For instance, a multitrait-multimethod matrix could be employed in further testing of the convergent and discriminant validity of these measures (Bohrnstedt, 1983: Campbell and Fisk, 1959). DIRECTIONS FOR FUTURE RESEARCH Since a positive model was developed and tested, the primary purpose was explanation rather than prescription. The study describes and explains how MNCs make foreign market entry decisions in the real world rather than what they should do in the future. Only to the extent that the observed behavior, in a social Darwinian sense, represents rational and successful practice does the model connote normative meaning. An interesting extension of this study would be to incorporate some performance measures as criteria. For example, performance could be compared between firms who select the entry mode describe by the model and those who are not. Caution is needed, however, as to the possible lag between the time the entry was implemented and when performance is assessed. Another area of future research lies in using an experimental design that would examine managers' decisions under some hypothetical scenarios. While this approach would not rely on retrospective reporting, several compromises 156 would need to be made. First, in order to focus on treatment manipulations, fewer variables could be handled. Second, scenarios are not real, and the right subjects could be difficult to find. It is hoped, however, that the synthesis of the results obtained from both the survey methodology and experimental design used here would give a more clear picture of foreign market entry decisions. Finally, the model studied in this dissertation is static rather than dynamic. It does not address the transition from one mode to the other. Some theoretical work has indicated that the transaction between licensing and wholly owned subsidiary hinges upon the cost of serving the foreign market, demand conditions in that market, and host market growth (Buckley and Casson, 1981). Thus, the optimal timing of the switch in entry modes could be a fruitful area for future research. CONCLUSION A decision model, drawn from both the transaction cost and strategic management literature, was developed to describe the influence of a number of key constructs on the choice of foreign market entry. This decision model was operationalized, and propositions concerning the effects of these constructs on the entry mode decision were tested. Data analysis was based on the foreign market entry decision of 113 MNCs. Managerial input rather than secondary 157 information was used. Key conclusions, limitations, and avenues for future research were discussed. APPENDICIES 158 APPENDIX A-l MICHIGAN STATE UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION EAST LANSING ' MICHIGAN - 48824-1”! DEPARTMENT OF MARKETING AND TRANSPORTATION ADMINISTRATION MICHIGAN STATE UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION STUDY OF FOREIGN MARKET ENTRY STRATEGIES Dear I am doing my doctoral dissertation on multinational corporations’ strategic choices regarding the degree of ownership and control when entering foreign markets. I need a good response rate to complete my study and your response to this survey would be greatly appreciated. In return, I would like to send you a copy of the research findings summarizing important factors which could be of value to your company’s future foreign market entry decisions. Specifically, the summary would provide the following information: 1) key factors determine the appropriate amount of ownership and control in foreign operations. 2) A decision making framework which will assist managers in determining the most appropriate means of foreign market entry such as wholly owned subsidiary, joint venture, and strategic collaborations. Please note that this questionnaire 0293.091 require disclosure of any proprietary information concerning your firm. Please be assured that your responses will be kept WW. After you have completed the questionnaire, please return it in the enclosed envelope. It would be greatly appreciated if you could return it W so that I can send you the results quickly. Thank your very much in advance for your help in this research. Sincerely, Peter Hwang ”SC is as Al/imettve Autos/Equal Opportssttv Institution 159 APPENDIX A-2 A STUDY OF FOREIGN MARKET ENTRY STRATEGIES CONDUCTED BY : PETER HWANG AS A REQUIREMENT FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN THE DEPARTMENT OF MARKETING AND TRANSPORTATION MICHIGAN STATE UNIVERSITY FEBRUARY 1988 160 APPENDIX A-2 (cont'd.) I! NEED YOUR RESPONSE! The purpose of this study is to explore how companies make strategic choices regarding ownership and control of foreign operations. Companies use various entry strategies to exploit global market opportunities. There are two broad categories of means of market entry: ownership participation and contractual arrangement. Examples of ownership participation include: a wholly owned subsidiary: a majority owned, a equally owned, or a minority owned joint venture. Examples of contractual arrangement include: Licensing, Franchising, and Strategic Collaboration. Strategic Collaboration refers to partners from distant markets entering into contractual relationships that tend to be project specific. This research will address the above means of engaging in international business. However, it is not concerned with exporting operations. Consider now a recent foreign market entry project of your company with which you are familiar and then answer the following questions in the context of this particular project. (Note: please limit your choice of project to one which was initiated in the last eight years.) If you were not involved in such a project, please pass this questionnaire on to a colleague who has been involved in a recent foreign market entry venture. Please answer these questions based on the information available at the time your company committed itself to this project---not based on information you have available today. While we are interested in all of the above means of market entry, information regarding joint ventures and contract forms of market entry are of particular interest to us. Such data would be of great value to this study. 161 APPENDIX A-2 (cont'd.) 1. THE FOREIGN MARKET ENTRY PROJECT Where is your company headquartered? Which country was this project in? Your company's entry into this country was in l9— Whatwastheprimarynatureofthisproject? To obtain raw materials, parts, or components To set up manufacture and/0r marketing operation overseas To engage in joint research and development Other (Please specif!) 2. WHAT MOTIVATED YOU? For each of the following entry motivations, please indicate the extent they were relevant to this particular project. W NOT AT ALL HIGHLY W W To attack global competitors 1 2 3 4 5 6 7 To monitor global competitors 1 2 3 4 5 6 7 To expand globally l 2 3 4 5 6 7 To exploit competitive advantages 1 2 3 4 5 6 7 To build global business experience 1 2 3 4 s 6 7 To defend market abroad I 2 3 4 5 6 7 3. MEANS OF MARKET ENTRY ownedstockthat mhasanownershipparticipationonda linthisforen operation, “riffs: (:0 1'0 QUISI'IOM y ’8 our com involved in a contractual arran at w th this fore ration instead of guitar; mmfi'tust co ro ours-non 3mm” ' "n °°° 1g. Please indicate the degree of ownership your company had on day l in the foreign operation: Majority owned Equal partnership Minority owned Did the hpst country specify the maximum allowable percentage of ownership participation on your in part this foreign operation on day 1? No Yes How much? 96 Please specify the percentage of stock owned by your company in this foreign operation on day l: 96 Does your company have any partner(s) in the foreign operation? No (Please go to question 5) Yes How many? (Please go to question 4) 162 APPENDIX A-2 (cont'd.) 31. Please describe the nature of the contractual arrangement? Licensing Strategic Collaboration Franchising Other (Please Specify) Please go to question 4. 4. DEGREE OF CONTROL , What ree of manag rial influence or control did our com have in this fore' 0 ration 'n making mpgoriant decisions. Please check one response. y my I“ p. I Low control, that is, your partner(s) held major decision making power in influencing the —'potenual success of the foreign operation 'um. control, that is your com y hanged decisiop making power with your partner(s) in — uemnng the potential success 0 the oreign operation High control, that is, your company held major decision making power in influencing the potential succea of the foreign Operation If your compan and ur partner(s) had different views on the wa the forei n o ration should be managed, how oyften dig m company’s views prevail a far as theyfollowing ispigns are concerned? WEI OUR VIEWS OUR VII-2W5v Marketing Manufacturing Finance . Research a Development General Administrative issues e—e—e—e—a— NNNNN uuuwu 554555 “MUM“ 00000 99‘3““ 5. LOSS OF INVESTMENT 53% business conditions changed so that u nuded to liquidate the foreign operation. To what extent wo loss of investments occur in any of followtniia’reas? In other wo . to what extent can your com y ncoup the investments you have made m project? If no loss would occur please Circle '1'. If investment would be a total loss please circle '7'. W NO LOSS TOTAL ALA”. [.055 Market development 1 2 3 4 S 6 7 Human resources I 2 3 4 S 6 7 Operation facilities I 2 3 4 5 6 7 Research and development 1 2 3 4 5 6 7 If you were to liquidate the foreign operation. please evaluate the Siaeofimmediatelosstoyourcompany m2 3 4 5 5317‘“ Im of hqui‘ 'dation on the fitabili ofmerbusinessesinyourcopmopany W l 2 3 4 5 6 7 163 APPENDIX A-2 (cont'd.) 6. LOCATION FAMILIARITY We would like to know how familiar your firm was with the forei n country.involved at. the time g“! company. made.the commitment. For example, if your company no experience at all in doing ustness in this foreign country please circle ’1' in the first quesuon. If your company had extensive experience in this foreign counuy please CII’CIG '7'. W L91! HIGH Your compan ’s ' ' in do“ business in this orergn country m l 2 3 4 5 6 7 Your moan '8 new“ about the bgness e‘vuonmen o orergn country I 2 3 4 S 6 7 W VERY VERY Perceived difference between the country where your company s headquartered and this foreign country Culture 1 2 3 4 5 6 7 Business custom l 2 3 4 5 6 7 Political system I 2 3 4 5 6 7 Legal system 1 2 3 4 5 6 7 Economic conditions 1 2 3 4 5 6 7 7. YOUR PERCEPTIONS OF THE MARKET Think back about your assemment of the primary market for your products of the foreign operation at the time yep: company made the commitment. Please indicate your evaluation of the market relative to the usual cnterm your management employs. W E E Stability of demand Intensity of competition Intensity of technological changes Projected short-term (3 years) sales growth I 2 3 4 5 6 7 Projected long-term (4-10 years) sales growth 1 2 3 4 5 6 7 Prospects for future profits _ l 2 3 4 5 6 7 Projected average industry sales growth I 2 3 4 S 6 7 Industry profit margins l 2 3 4 5 6 7 Average industry pretax profits 1 2 3 4 S 6 7 Profit stability 1 2 3 4 5 6 7 Market share stability l 2 3 4 5 6 7 Predictability of future demand I 2 3 4 5 6 7 l 2 3 4 5 6 7 l 2 3 4 S 6 7 l 2 3 4 5 6 7 164 APPENDIX A-2 (cont'd.) s. rormcxt. us: Please indicate ur rceptions of the litical risk in the host coun relative to our home country at the time 3.2: cgompaey made the svestmeat. try y W Variability of the host country’s political ' conditions I 2 3 4 5 6 7 Uncertainty about host yernment actions that would limit your 0 p or effecuve control ofyourmterest 1234567 Uncertainty about host government policies that wouldconstrarnyouroperauons l 2 3 4 S 6 7 Possibili that host coun s curre would notbecrtrynvertible W ncy 1234567 9. THE RELATIONSHIP BETWEEN YOU AND YOUR FOREIGN OPERATION Please rate the relationship between yoour company. and the foreign Operation at. the time your company made thq investment. For examp ., if the foreign operation needed crucial mputs rom our company, p circle '1' in the first question. If the foreign operation could have been run total y independent 0 your company, please circle '7‘. RELATION BETWEEN YOUR COMPANY W Extent to which the forei operano' It could berunindependentlyofy'gurcompany l 2 3 4 S 6 7 Extent t9 which the condoned succfm of the f orergn operatron depended on uture inputs from your company I 2 3 4 S 6 7 Ease with which u could monitor the proper functioning of yoyu: foreign operation 1 2 3 4 5 6 7 10. SYNERGY OF THE FOREIGN VENTURE Please indicate the degm of synergy, that is, the expected mutual benefits your co my could share with ur forei operation on da 1. If no 3 was expected, please circle '1'. ery high synergy waswexpecterl?n please circle '7‘. y VII“!!! W LOW HIGH mm W Management expertise l 2 3 4 5 6 7 Marketing expertise l 2 3 4 5 6 7 Manufacturing technology 1 2 3 4 5 6 7 Rmearch a Development 1 2 3 4 5 6 7 Please indicate the extent to which the foreign operation on day l was expected to help your company reduce cost and risk: Costreductionexpected l 2 3 4 5 6 7 Riskreductionexpected 1234567 . 165 APPENDIX A-2 (cont'd.) 11. THE NATURE OF YOUR KNOW-HOW The term ”know-how“ refers to your comsnpy’s knowledge in doing business. .It can be in the areas of mana ement, marketin , production, or R8: . ease answer the following questions in. terms _of . your com #3 most valuable ow-how used In the forelgn operation. For exam 1e, if .there is no difficulty at _ .to communicate your company’s know-how to other parties, please circ e l" in the first question. If it is extremely difficult, please circle '7'. W— W Difficulty of communicating 'know-how’ to others I 2 3 4 5 6 [I Uniqueness of ur 'know-how' relative to otherme industry 1 2 3 4 5 6 7 Difficulty in pricing if you were to sell your 'know-how' to other parties I 2 3 4 5 6 7 ‘ Difficulty for others to appreciate the value before they use your 'ltnow-how' l 2 3 4 5 6 7 Base with which your 'ltnow-how' can be transferredtootherparties l 2 3 4 5 6 7 Degree to which our 'ltnow-how' is intan 'bl ' thatis.not' yperceivable 90' l 2 3 4 5 6 7 Extent to which or 'know-how' can be legal] protected yo y l 2 3 4 5 6 7 Easewithwhichotherparties‘ mi tco ur 'ltnow-how' without your permiss'ilt‘in W W Base with which you are able to detect the unauthormd use of your "know-how“ l 2 3 4 5 6 7 Your ability to punish the unauthorized me of your ‘ltnow-how" l 2 3 4 5 6 7 12. 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