Entry Mode Degree of Control, Firm Performance and Host Country Institutional Development: A Meta-Analysis.
| Verfasser | Giachetti, Claudio |
| Posten | RESEARCH ARTICLE - Report |
1 Introduction
"Researchers differ substantially in their findings with regard to the control structure-performance link. [...] Future research is encouraged to continue this path to uncover the situational factors that influence [this] relationship" (Ren et al. 2009, pp. 816-817). Entry mode choice has been regarded by international management scholars as one of the most critical decisions in international expansion, with strong implications for firm performance. Research has expanded in the past three decades to explore performance outcomes in relation to the chosen entry mode (e.g., Brouthers 2013; Gao et al. 2008; Geringer and Hebert 1991; Killing 1982; Ren et al. 2009; Robson et al. 2002; Zeng et al. 2013). The 'entry mode degree of control'--the extent to which a firm's activities in the country where it entered are owned and directly managed by the firm itself (Anderson and Gatignon 1986; Isobe et al. 2000)--has been regarded as a key factor for the analysis of the entry mode choice's performance outcome. The export of goods has the lowest degree of control; licenses and franchises provide a higher degree of control; equity-based entries, such as joint ventures and, in particular, wholly owned subsidiaries, afford the highest control (Anderson and Gatignon 1986; Beamish 1985; Johnson and Tellis 2008; Li 1995; Pan and Chi 1999). Despite the growing popularity of studies on the relationship between entry mode degree of control and performance, various authors have noted that results derived from decades of research offer no clear consensus regarding the type of entry mode that gives firms the greatest performance advantage (Brouthers 2013; Ren et al. 2009). Whereas some studies have indicated a positive relationship between the entry mode degree of control and firm performance (e.g., Chatterjee 1990; Johnson and Tellis 2008), others have found either a negative relationship (e.g., Ma and Delios 2007), or a not significant one (Tihanyi et al. 2005). This disagreement is not only fueled by ambiguous research findings, but also by the different theoretical perspectives used to explain the entry mode degree of control-firm performance relationship, including but not limited to the transaction cost view, the resource-based view and the institution-based view. Moreover, interestingly, mixed arguments and results can be found also among different studies using the same theoretical lens (Zhao et al. 2017).
In light of these conflicting findings, the purpose of this study is two-fold. First, we aim at shedding new light on this research area with the help of meta-analytic techniques. As highlighted by Eden (2002), meta-analyses are useful in addressing open research questions with data that are closer to definitive than those reported in any single primary study. Our study thus begins with a meta-analytic review to examine the mixed empirical findings in the literature on the performance outcomes of entry mode degree of control decisions.
Second, since both Eden (2002) and Combs et al. (2010) noted that meta-analyses are also a useful tool to extend existing theories, we also employ a set of more advanced meta-analytic techniques to evaluate hypotheses that go beyond the mere main effect of entry mode degree of control on firm performance, and that would be difficult to assess in single-sample primary studies. Our theory-extending hypotheses aims at exploring best performing entry mode decisions in developing countries, by bridging the "transaction cost analysis (Williamson 1985), [that] is the most widely used theoretical perspective in environmental entry mode research" (Brouthers and Hennart 2007, p. 400), with the institution-based view of strategies (e.g., Agarwal and Ramaswami 1992; Brouthers 2002; Brouthers et al. 2008; Meyer et al. 2009), that centers on how institutions in a firm's host country affect entry mode decisions. Our study starts from Brouthers and colleagues' observation (Brouthers et al. 1999; Brouthers 2002; Brouthers and Nakos 2004) that each firm is likely to make a different entry mode choice because its traits are heterogeneous. In this view, we contend that the degree of control per se is not a valid predictor of firm entry mode performance, unless we impose boundary conditions on the type of transaction costs firms would encounter when entering a certain type of countries. More specifically, our focus here is the uncertainties firms have to cope with when entering developing countries as opposed to developed countries. In fact, as developing countries fall short of effective market-supporting institutions, firms entering these markets face high costs and risks (Khanna and Palepu 2010). Our hypotheses point to the fact that firms are exposed to two contrasting forces when entering developing countries: the need to mitigate behavioral uncertainty and the need to mitigate environmental uncertainty. However, despite these uncertainties are both present in developing countries, the extant literature offers opposing prescriptions in terms of the entry mode degree of control a firm should use to cope with these uncertainties. Our meta-analytic review examines whether the priority to mitigate one type of uncertainty outweighs the other, and thus whether high- as opposed to low-control entry modes are preferable when firms enter developing countries (as opposed to developed ones).
To tackle the two above-mentioned points, first, by using meta-analysis techniques, we assess the bivariate association of entry mode degree of control with firm performance relying on a relatively large sample of articles (i.e., 133 studies; total sample size of 740,114 observations) published across a wide time period (i.e., from 1994 to 2014), and referring to a set of analyses conducted on a large time frame (i.e., 1980-2010) (see "Appendix"). This large time frame also allows examining the evolutionary dynamics of the relationship. Second, by means of meta-regression techniques, we test whether the entry mode degree of control-performance relationship changes depending on the level of economic development of the host country, distinguishing between developing and developed countries.
2 Theory Background and Hypotheses
2.1 Main Effect of Entry Mode Degree of Control on Firm Performance: Competing Arguments and Theoretical Lenses
Opposing theoretical arguments suggest alternative performance outcomes as entry mode degree of control increases, and interestingly, mixed arguments and results can be found also among different studies using the same theoretical lens (Zhao et al. 2017). We first start summarizing studies that provide support for a positive relationship between entry mode degree of control and performance, and later we will turn our attention to those offering support for a negative relationship.
According to various resource-based view scholars, all the other things being equal, as the entry mode degree of control increases, the firm's performance increases because it can deploy key resources that are essential to success (Gatignon and Anderson 1988; Isobe et al. 2000). These resources can be intangible assets, such as brand equity and marketing knowledge, or tangible assets, such as own sales force and retail chain. Control over such assets gives a firm a certain freedom in its deployment and offers the possibility of exploiting them to a greater extent, thus enhancing its chances of success (Johnson and Tellis 2008). For example, Tang and Yu (1990) found that a wholly owned subsidiary is the optimal strategy because it generates the highest level of economic profit and maximizes control of critical knowledge indefinitely. Woodcock et al. (1994) found that new venture direct investment and the joint venture mode outperform lower control entry modes because they help the firm to monitor success and failure closely. Likewise, other studies found support for a positive relationship between entry mode degree of control and performance, with the main explanation being that higher foreign ownership level brings in more advanced foreign technology and thus leads to higher productivity (e.g., Anand and Delios 1997; Delios and Beamish 2004).
While resource-based view studies on entry mode choices focus on how entry mode decisions can optimize the use of resources in the host country, the transaction cost perspective describes the entry mode choice as a critical decision of governance and recommends an entry mode that can minimize the costs associated with governing and monitoring transactions (Beamish and Kachra 2004; Brouthers 2002; Chung and Beamish 2012). Among those studies drawing on the transaction cost view, some found a positive relationship between entry mode degree of control and firm performance, with the main explanations being that the need of greater control results in higher investment in intangible and tangible resources, fast decision making, and better control over partners in the host country (e.g., Chang et al. 2013).
Other scholars explained the entry mode-performance relationship using the 'OLF or 'eclectic' approach to the study of foreign direct investment (FDI), initially developed by Dunning (1977). 'OLF stands for Ownership, Location, and Internalization, three potential sources of advantage for a firm that wants to become a multinational. Ownership advantages suggests that a successful MNE has some firm-specific advantages which allow it to overcome the costs of operating in a foreign country. Location advantages refer to the benefits of where an MNE chooses to locate its business functions. Finally, internalization advantages refer to entry modes choices, trading off the savings in transactions, holdup and monitoring costs of high-control entry modes, against the advantages of low-control entry strategies. By drawing on the OLI framework, some authors found support for a positive relationship between entry mode degree of control and firm performance, with the main...
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