Table of Contents
2.1 Literature Review and Hypotheses
2.2 Data collection
2.3 Statistical methods
3. Conclusion & Limitations
Many companies want to expand their business by entering foreign markets. Therefore they can choose between several entry modes: Greenfield investments or acquisitions. The question whether to acquire an existing domestic firm or to establish a completely new one is discussed in several studies. This article, written in 2002, focuses on the corporate strategy of MNCs, since the way a company places itself regarding the global business environment plays an important role. The author Anne-Wil Harzing speaks about the influence of corporate strategy on the entry mode choice of MNCs concentrating on the distinction between global and multidomestic strategies. Researching this relation she formulated five hypotheses regarding the different managerial behaviors of global and multidomestic firms. These managerial distinctions are represented in issues like local responsiveness, level of expatriates and level of control. The report is structured as follows: Explaining the developed hypotheses, analyzing the data collection as well as the results, considering controversy in the literature and giving implications for further research.
2.1 Literature Review and Hypotheses
When it comes to the choice of an entry mode, a company has to consider several factors which influence the decision. Those factors have been discussed in a lot of previous studies, but none of those put the emphasis on the impact of the firm‘s international strategy.
The strategy of an MNC can be distinguished into two types: A global as well as a Multidomestic one. Companies following a global strategy usually face a large amount of globalised competition; they need to focus on efficiency and on achieving economies of scale. Therefore they integrate and standardise production and see their subsidiaries as „pipelines“, forcing them into a passive role. Multidomestic companies compete in local markets and adapt their products to local needs. Subsidiaries of these firms are relatively autonomous and very responsive to domestic markets.
Both types of strategies are associated with firm-specific advantages (FSA1 -perspective). Global companies are more likely to use non-location bound, home country based advantages (p.213),while multidomestic companies tend to use location-bound, host country based advantages. Those are hard to transfer without adaptation, while the non-location bound advantages can easily be implemented. Since multidomestic companies are dependent on local knowledge, they are more likely to choose an acquisition as an entry mode than global companies, which are mostly operating with economies of scale and standardisation and therefore using greenfield investments.
Based on the previous literature analysis the author derives her first hypothesis:
H1: Relative to companies following a multidomestic strategy, companies following a global strategy will have a higher proportion of greenfield subsidiaries, while companies following a multidomestic strategy will have a higher proportion of acquisitions relative to companies following a global strategy.
The author also expects a considerable difference in managing the subsidiaries, once the entry is completed. This can be seen as similar to the classical principal-agent problem, here stated as the headquarter-subsidiary relationship. One of the key aspects is the level of control exercised, which leads to the second hypothesis:
H2: Headquarters ‘ control over their greenfield subsidiaries will be higher than their control over acquisition subsidiaries.
Considering the FSA perspective, this statement is self-evident, since transfer of non-location bound, home country based FSAs is difficult, if the subsidiary operates independently.
Another important factor of the relationship between headquarters and their subsidiaries is the level of expatriates, as a basis for the third hypothesis:
H3: Headquarters ‘ will assign more expatriates to top positions in their greenfield subsidiaries than in their acquisition subsidiaries.
Expatriates are used to transfer knowledge and FSAs, but also to perform control, which is supposed to be required to a higher level in greenfields rather than in acquisitions.
The final element of the relationship is the level of local responsiveness of the subsidiaries. Since the exploitation of local knowledge requires a certain level of independence in decisions, it is obvious that acquisitions will have a higher level than greenfields. This is also stated in the forth hypothesis:
H4: Headquarters ‘ will permit their acquisition subsidiaries a higher level of local responsiveness than their greenfield subsidiaries.
As a conclusion of these hypotheses one can state that global companies should prefer greenfield investments with a high level of control as well as expatriate presence and a low level of local responsiveness while multidomestic companies should prefer acquisition subsidiaries with a low level of control and expatriates, but a high level of local responsiveness.
Consequently, the author also raises the question, whether the style of management changes over the time, if the entry through the preferred entry mode (see above) was not achievable. Therefore she develops hypotheses 5 a-d:
H5: Over time the characteristics of the headquarter-subsidiary relationship in subsidiaries will converge towards the characteristics of the “ preferred ” entry modes.
H5a: In multidomestic companies the characteristics of the headquarter-subsidiary relationship of greenfields will come to resemble those of acquisition. H5b: In multidomestic companies the characteristics of the headquarter-subsidiary relationship of acquisitions will not change.
H5c: In global companies the characteristics of the headquarter-subsidiary relationship of greenfields will not change.
H5d: In global companies the characteristics of the headquarter-subsidiary relationship of acquisitions will come to resemble those of greenfields.
There is a higher likelihood, that companies try to compensate the disadvantages of the wrong entry mode through applying their usual style of management.
1 FSA = Firm specific advantage