Disentangling the roles of international experience and distance in establishment mode choice.

Zusammenfassung

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RESEARCH ARTICLE

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Disentangling the roles of international experience and distance in establishment mode choice.

Abstract:

* The empirical results concerning the role of international experience in establishment mode choice decisions have, until now, been ambiguous and mixed. In an attempt to resolve this dilemma, experiential knowledge in an international setting is decomposed into two distinct dimensions and a more comprehensive set of distance measures are incorporated into the models predicting the establishment modes of Nordic FDI.

* The empirical results indicate that the two forms of experiential knowledge (cluster-specific experiential knowledge and general internationalization knowledge) are both significantly related to establishment mode choice, but in opposite directions.

* The results for this data set also show that when used to predict establishment mode choice, the broader range of distance measures explain 2.6 times as much variance as the Hofstedebased Kogut and Singh index.

* Moreover, the results demonstrate that not fully controlling for this broader range of distance measures significantly distorts the relationship between cluster-specific experiential knowledge and establishment mode. It appears there may be a similar type of distortion with respect to general internationalization knowledge but the effect size is much weaker and non-significant within this sample.

Keywords: Establishment mode * International experience * Cultural distance * Psychic distance

Introduction

The issue of international establishment mode (i.e. whether a firm decides to establish itself in a foreign market via acquisition or via greenfield investment) is arguably one of more critical international business decisions. Given the premiums typically paid when acquiring a firm (Zejan 1990), the choice of establishment mode can have a substantial impact on the overall performance of the foreign investment. Similarly, establishing a venture by a greenfield investment may allow the parent firm to avoid paying an acquisition premium, but the venture may be handicapped by a lack of knowledgeable local managers, slower penetration of the market and greater retaliation from incumbents (Hennart and Reddy 1997). Moreover, once this critical decision has been made, it can be difficult to change or correct. As a result, the choice of international establishment mode is an important issue and worthy of detailed investigation. In an extensive though not exhaustive review of existing establishment mode literature published in peer-reviewed journals, a total of 26 empirical papers have been identified (see Table 1). However, it is our contention that at least two major (and related) gaps still exist with respect to this body of knowledge.

The first gap concerns the role of international experience as a potential driver and predictor of establishment mode choice. The empirical results on this issue are at best confusing and contradictory (Slangen and Hennart 2007). The second gap concerns the manner in which the concept of distance (1) is included in establishment mode models. More specifically, we contend that the extremely narrow operationalization of the distance construct in most studies both understates the importance of distance in establishment mode choice, and may be contributing to the ambiguous results concerning international experience. As a result, the main contributions of this paper are focussed on the measurement and modelling of these two key constructs, and their impact on a firm's choice of establishment mode. International experience is decomposed into two distinct measures: experience in countries similar to the host market and experience in countries dissimilar to the host market. These two objective measures of experience allow us to test the impact of two underlying constructs: cluster-specific experiential knowledge and general internationalization knowledge. The precise relationship between these two forms of experience and knowledge are elaborated on in the next section. In addition to these more refined measures of experience, a broader set of distance scales, specifically those put forward by Dow and Karunaratna (2006), are also introduced and tested. These contributions are tested on an extensive database of foreign direct investments by Nordic firms over the period of 1993 to 1999.

Literature Review

International Experience

The role of international experience in establishment mode choice research has a long pedigree beginning with Wilson (1980), continuing on with Hennart and Park (1993), and more recently Slangen and Hennart (2008). Indeed, from amongst the published studies reviewed in Table 1, only Dikova and Van Witteloostuijn (2007) and Chen and Zeng (2004) do not have at least one measure of internati...

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