Economics

The study on the Hierarchical Model proposes and tests a hierarchical model of market entry modes. To begin with, the entry modes were viewed as equity-based versus non-equity-based. In Equity-based modes, the choice was and is between wholly owned operations and equity joint ventures, while within non equity based modes, the choice was and is between contractual agreements and exports. In the hierarchical model, entry modes have been additionally modeled in to two the first way is to model as a continuum of increasing levels of resource commitment, risk exposure, control and profit potential from export to wholly owned subsidiaries, while the second way is to set a mode as baseline against which other modes are put side by side. It has also been argued that the entry modes choices can be critically examined from a hierarchical perspective. The first hierarchical level is choosing between equity and non-equity entry modes, the managers will thereafter decide which specific mode within equity or non-equity to consider.
 
The dependent variable is the entry mode in to china adopted by the foreign firms. The entry mode dependent variable is divided in to four categories wholly owned subsidiaries, Equity Joint Ventures (EJVs), contractual agreements and exports. The independent variables are Location, country risk of China, Uncertainty avoidance and power distance, Extend of interaction between the host and home countries and the industry factors. The Control variables are the yearly and overall importexport ratio of China versus the world as a whole and the other is the annual exportimport ratio of each home country versus the world as a whole. To test the proposition, the entry modes were first divided in to equity and non-equity modes and a binary logistic regression was run. The results showed that the hypothesized factors differentiate well between equity and non-equity modes. The study also demonstrates that the choice of entry modes is a hierarchical process that begins with a choice between equity and non-equity modes. The moment firms decide on equity or non equity modes, they move down the hierarchy to a lower level, managers would then put their focus on more micro-level factors, such as specific contract terms, human resource matters, distributions channel and so on. There are two competing approaches one approach treats modes as a continuum of increasing levels of commitment, risk, control and profit potential. The other approach is the baseline model. In most cases, the export is set as the baseline mode, against which wholly owned operations, Equity Joint Ventures (EJVs) and contractual agreements are compared.

This study proposes that entry modes can first be viewed as a choice between equity versus non-equity choices. The consideration factors used at this level may be different from those employed at the lower level of choice hierarchy. First and foremost, it provides a precise representation of what affects the choice of entry modes and at what specific level. The study shows that many country specific factors impact the mode choice at the equity versus non- equity level. This can keep away the mistakes of writing off a number of determinants in the event that they fail to show a significant impact within the equity modes or within the non-equity modes.  

The study also shows that country risks exert significant influence at the level of comparing equity modes to non-equity modes, but rather weak influence within the equity modes. Secondly, our study illustrates that there are country factors affecting the adoption of equity modes in the host countrys policy makers. In other words there are a number of things that the host country government can persuade foreign firms to adopt equity modes instead of non-equity modes. Thirdly, the hierarchical process can be useful to managers who are to handle the information overload and the complexity of the choice decision. The study shows that quite a number of country specific variables are significant at this level of hierarchy. Apart from the host country circumstances, they need to be conscious of the unconscious influence of their home culture on their mode choices so as to shun making sub-optimal decisions.

The purpose of the study on The National Culture Effects on Entry Mode Choices was first to describe the original data observing the choice of entry mode by foreign firms in terms of country and industry patterns, and secondly to statistically analyze the factors that influence the choice between joint ventures, wholly owned Greenfield (start-up) investments and acquisitions. This article built up a theoretical argument for why culture should influence the choice of entry. Two hypotheses are obtained which relate culture to entry mode choice, the first one focusing on the cultural distance between countries, and the second on attitudes towards uncertainty avoidance. The first hypothesis is the greater the cultural distance between the country of the investing firm and the country of entry, the more likely a firm will choose a joint venture or wholly owned Greenfield over an acquisition. The second one is, the greater the culture of the investing firm is characterized by uncertainty avoidance regarding organizational practices, the more likely that firm will choose a joint venture or wholly owned green field over an acquisition.
 
Using the multinomial logit model, the hypotheses are tested by analyzing data on 228 entries in to the United States market by acquisition, wholly owned Greenfield, and joint ventures. A multinomial logit model is particularly used to estimate effects of the explanatory factors on the chance that each of the alternatives would be chosen. The hypothesis results illustrated that the effect of Cultural Distance is to increase the chance of choosing a joint venture over an acquisition and is significant at the 0.001 level. Its effect is only significant at the 0.1 level for Greenfield. The results for Uncertainty Avoidance are quite striking, with the coefficients correctly signed and significant at 0.001 and 0.05 for joint ventures and Greenfield, respectively. It was also noted that the greater the American partners size, the more likely to joint venture than acquire. The effect of U.S. asset size on choosing Greenfield is negative and significant in both the uncertainty avoidance and cultural distance runs at the 0.1 and 0.5 levels, respectively. This outcomes stem from the asset size measurement for Greenfield in terms of the investment and for acquisition or joint ventures in terms of the size of the asset of the target or partner. The Non-U.S. Asset Size effects are insignificant for joint ventures in the cultural distance estimation, but correctly signed, although still insignificant for the uncertainty avoidance estimation.

The study does not find diversified firms more likely to enter by acquisition. On the contrary, the variable Diversified is positively signed, showing that diversified firms tend to enter by joint venture or Greenfield. The study also suggests that advertising is negatively related to joint ventures and Greenfield investments. This relationship is anticipated to be additionally pronounced for mature industries. The results of the study also argues that the cultural results are majorly driven by outliers, for instance, Japan scores highly distant in Culture from the United States and scores high on uncertainty avoidance. At the same time Japanese firms tend towards Greenfield and joint venture entries. The results may be interpreted as a primary Japanese effect.

The Uncertainty Avoidance effect is insignificant in the case of Joint Ventures but significant at 0.05 for Greenfield. Interestingly, Multi-nationality is positively signed, demonstrating that acquisitions are not encouraged for the more multinationals of corporations. On the other hand, Experience increases in significance in the runs, and is significant in 3 of the runs at 0.1 using a 1 tail test. In summary, the arithmetical assessments give strong support that cultural distance and national attitudes towards uncertainty avoidance influence the choice of entry mode. It should also be noted that these relationships are robust despite the controls added for industry and firm level effects. It is striking, therefore that cultural effects still appear persistent despite the sample size reduction and the diminishment in variance of the cultural variables.

Empirically, the Hierarchical study has made two progressive views. First, it incorporates all the four major modes of entry. Second, it is based on a large sample of over 10,000 observations which runs over a twenty year time period.

Unfortunately, this model does not tell if Equity Joint Ventures (EJVs) or wholly owned operations differ from the contractual arrangements. It also does not explain why the results are weak when contractual arrangements are compared to exports. There are some more limitations in the results. First and fore most, data published by China Business Review might be biased in favor of huge foreign business activities in China. Several minor activities from Hong Kong and Taiwan were missing in the database. Second, due to the nature and size of the data base, it is difficult to construct the firm specific variables such as RD intensity. Third, the use U.S industry data in a study that involves so many countries could be problematic. Fourth, the results in this study are inferred from the outcome of the firms entry mode decisions. More process-oriented studies investigating how managers make entry mode decisions are required to cross-validate the results in this study.

The effect of National Culture study suggests that the cultural characteristics are likely to have profound implications. Whereas theories of internalization and the firm are assumed to be culturally robust, their empirical application in a comparative setting seem to necessitate the consideration of cultural difference on the costs and risks which managers attach to different modes of transacting. It should also be noted that the management of these firms are influenced by the dominant country culture. The weaker results for the subsample when the Japanese entries are removed are partially a result of the decreased sample size (case drop from 228 t0 173) and partially a result of the outlier effect of Japan.