Determinants of Ownership-Based Entry Mode Choice of Mnes: Evidence From Mongolia

Zusammenfassung

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This paper provides a comprehensive analysis of foreign investors' ownership strategies in the land-locked transition economy of Mongolia. Drawing on a sample of 1.033 affiliates of foreign investors with varying levels of foreign ownership, the paper examines the choice between a wholly owned subsidiary (WOS) and a joint venture (JV). The results show that the main determinants of foreign equity ownership found in previous research also influence the ownership structure of foreign affiliates in Mongolia. The extent of FDI concentration, natural resource intensity of target industry and location of the affiliate have the expected impact on the foreign investor's choice between a JV and a WOS. However, no support has been found for the impact of capital size of affiliate on the level of equity ownership of foreign affiliates.

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Determinants of Ownership-Based Entry Mode Choice of Mnes: Evidence From Mongolia

Introduction

Over the past two decades, few issues have dominated the attention of international business scholars more than the multinational enterprises' (MNEs) choice of entry mode into host country markets, particularly emerging economies. Firms seeking to enter a foreign market may choose from a variety of different modes. Broadly, these modes are classified as non-equity-based and equity-based. Contractual agreements, such as licensing and franchising, and exporting constitute non-equity modes. Equity joint ventures (JVs) and wholly owned subsidiaries (WOSs) comprise equity modes of foreign direct investment (FDI). Each entry mode is associated with varying degrees of resource commitment, market attractiveness, competitive advantage, control and risk exposure. The equity modes involve higher resource commitment and higher levels of control, higher profit potential and low flexibility than do the non-equity modes (Hill/Hwang/Kim 1990).

A key decision faced by a multinational enterprise (MNE) engaged in cross-border FDI is what level of equity ownership to assume. As noted the MNE has two options when determining the foreign affiliate's ownership structure: full ownership, i.e., a WOS, or shared ownership, i.e., a JV The most extensive form of participation is majority or 100 percent ownership achieved by start-up of new operations, known as greenfield operations or greenfield investments, or by merger and acquisition (M&A) of an existing enterprise. On the other hand, shared ownership allows for sharing of risk and combining complementary strengths, especially local market knowledge of target market partner. This could be the entry mode most strongly supported by emerging market environments. The choice of affiliate ownership structure can be very complex since it is contingent on national, industrial, organizational and project factors (Luo 2001).

It is indicated that all of the world trade growth in the next two decades; almost 75 percent is expected to come from developing countries. With this background, the purpose of this empirical study is to provide a comprehensive account of foreign investors' ownership strategies in a land-locked developing emerging market, Mongolia, which is an interesting case of a post-communist transition economy. It is at the extreme end of the spectrum of transition economies and is one of the poorest transition economies isolated from external sources of financial and human capital with virtually no historical experience of capitalism (Anderson et al. 2000). The country, however, has an advantageous location betwee...

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