Factors Affecting Perceptions of the Choice Between Acquisition and Greenfield Entry: The Case of Western Fdi in an Emerging Market

Zusammenfassung

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This study provides a comprehensive account of foreign establishment mode strategies of firms investing in Turkey. The results of the logistic regression modeling provide support to the hypothesized relationships that take into account the impact of host country specific motives of MNEs on their choice between acquisitions and greenfield investments. The host country motives quality of inputs and market potential have significant negative coefficients, indicating that an MNE will favor the acquisition mode over a greenfield mode as the relative importance of both motives increases. The host country motive of investment risk has a significant positive coefficient, which increases the likelihood of the venture being a greenfield investment. The results also show that the main investing firm specific and subsidiary level determinants of FDI modal choice identified in prior research also influence the establishment mode choice of Western MNEs when investing in Turkey.

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Auszug

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Factors Affecting Perceptions of the Choice Between Acquisition and Greenfield Entry: The Case of Western Fdi in an Emerging Market

Introduction

Spurred by the growth in global commercial activity and the increasing number of firms operating in international markets, the multinational enterprise's (MNE) choice of entry mode into a foreign market has received a good deal of attention from researchers. First, a firm that decides to enter a foreign market has to choose between two related but distinct issues. It has to choose between non-equity modes, such as exporting and licensing, and equity-based entry modes, with either full ownership, i.e., a wholly owned subsidiary (WOS), or shared ownership, i.e., a joint venture (JV). Each of these modes varies significantly in terms of resource commitment and risk, with equity-based entry modes involving the highest level of control.

Following the choice of entering a foreign market by either full or shared equity investments, a second decision is whether to acquire an existing local firm (acquisition) or to create a new venture (greenfield investment). Compared with research on the MNE's choice of ownership of foreign ventures, there has been limited empirical work on the determinants of choice between acquisitions and greenfield investments. The majority of prior research on this strategic choice has been confined to examining firms from a single source country (Hennart/Park 1993, Barkema/Vermeulen 1998, Padmanabhan/Cho 1999, Brouthers/Brouthers 2000). However, there are a few exceptions, which examine the establishment mode decisions of foreign investors from multiple source countries (Caves/ Mehra 1986, Kogut/Singh 1988, Larimo 2003).

The prior literature focuses on firm specific factors that affect entry mode choice of MNEs, with relatively few studies examining host country specific factors. This is understandable because the prior studies mostly consider mature economies. The host country specific factors are of secondary importance for these economies and so they have been neglected. In emerging market economies, however, host country specific factors have a direct impact on the entry mode choice and appear to be as important as firm and industry specific factors. Building on the prior literature this paper seeks to provide new insights into the host country factors motivating foreign multinationals to engage in foreign equity venture formation in the context of an emerging market economy.

As described by Malhotra (2003), modes of entry are alternative routes or means available to a firm for transferring resources from the home country to the host country. The Turkish context in this regard provides a good illustration of the phenomenon of the massive entry of MNEs into emerging markets and their strategic choice of the establishment mode of their investments. Along with its strategic location and ongoing membership negotiations with the EU, it is envisaged that soon Turkey will attract a large volume of European FDI. Foreign firms have already made serious inroads into the Turkish economy since the mid-1980s, following the radical economic and policy changes to liberalize the economy. The high growth of the Turkish economy and the country's large and growing population also played their part. Government economic policies, especially with regard to the reform of foreign exchange policy, capital markets, the privatization of state-owned enterprises, and foreign investment options, have all contributed to Turkey's attractiveness for foreign investors (Tatoglu/Glaister 2000). The number of foreign equity venture formations during the 1980-2003 period reached a total of over 6,500 with the amount of cumulative FDI totaling nearly $17 billion (GDFI 2004).

Drawing on survey data from a sample of 145 Western MNEs, this study makes two contributions to the establishment mode literature. First, it builds upon prior research by providing a comprehensive account of foreign establishment mode strategies of firms from numerous countries investing in Turkey. Second, given the increasing wave of foreign acquisitions recently in Turkey on its way to become an EU member, this study contributes to our understanding of FDI modal choice of European investors. Third, our work extends previous res...

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