Abstract Despite over three decades of research focusing on the choice multinational enterprises make between establishing foreign operations through either cross-border acquisitions or greenfield start-ups our understanding of the issues that impact this choice and the performance outcomes of making this decision is still unclear. To help improve knowledge in this area we provide a comprehensive review of the empirical studies on international establishment mode choice published between 1980 and 2015. Through this method we gain a greater understanding of the theories used, the variables employed, and the empirical results. In this way we can detect inconsistencies and offer suggestions for future research. We identify a number of issues that future studies need to address: changes to the models, introducing new theories or combining theories, applying new or better methods, and most importantly linking this choice to performance. Hence, our study consolidates knowledge in this area and highlights several ways to improve our understanding of the international establishment mode decision.
Keywords International establishment mode choice * Greenfield * Acquisition * Literature review
Creating effective foreign market subsidiary units is arguably one of the more critical international business decisions (Brouthers and Hennart 2007). It is therefore not surprising that there has been substantial scholarly interest in the determinants of these business decisions particularly because the choice of establishment mode (a firm's decision to set up a foreign subsidiary via an acquisition or a greenfield startup venture) is difficult and costly to reverse, and has a direct impact on subsequent subsidiary performance (Shaver 1998; Shrader 2001). Establishing a foreign subsidiary via an acquisition, for example, requires a sizeable upfront payment to cover the acquisition value and a premium (King et al. 2004; Krishnan et al. 2007); it often entails difficulties with the integration of the acquired unit (Cording et al. 2008) which may negatively impact firm performance. Yet the alternative mode choice, a new startup (greenfield) venture can also significantly influence performance because starting a new venture takes time which can lead to lost opportunities (Pennings et al. 1994) and the entrance of a new player can impact capacity, generating fierce retaliation from incumbents (Hennart and Reddy 1997). So how should firms make this important decision? Under what circumstances would a greenfield (or an acquisition) establishment mode lead to better firm performance?
The motivation for this review is twofold. First, the literature on establishment mode choice has cut across various fields including international business, strategy, marketing, economics, finance, and entrepreneurship. Authors have drawn on diverse theoretical perspectives and used various ways to conceptualize predictors of the choice between greenfields and acquisitions. As a result, there is a clear need to consolidate this disparate knowledge and more clearly identify exactly what we know and what still needs to be explored. Past attempts to do so have, however, only examined a fraction of the published research and presented only a few theoretical lenses used in establishment mode studies (Slangen and Hennart 2007; Dikova and Brouthers 2009). In contrast, we identify, tabulate and provide detailed information on all theories and constructs used in empirical international establishment mode studies published in academic journals in the period 1980-2015. (1)
Second, despite our rich knowledge of the choice firms make between a non-equity or equity mode of entry and between an equity-based joint venture or wholly owned subsidiary (see reviews by Brouthers and Hennart 2007; Ahsan and Musteen 2011), our understanding of how a firm establishes its equity interest in a foreign subsidiary unit and the performance implications of this choice is far less clear. Neither of the previous reviews of the establishment mode literature (Slangen and Hennart 2007; Dikova and Brouthers 2009) addresses the issue of performance, yet we know that firm performance is affected by the establishment mode choice as it requires a significant investment abroad which is difficult to reverse without incurring substantial loss (Shaver 1998; Reus and Lamont 2009). Inconsistent results from both establishment mode research (e.g. Shaver 1998; Vermeulen and Barkema 2001; Slangen and Hennart 2008) and studies of acquisition performance (Reus and Lamont 2009; Chakrabarti et al. 2009) indicate that our knowledge of when acquisitions outperform greenfields is still limited. Thus, there is a growing need to explore further how establishment modes are chosen and how this impacts subsequent subsidiary performance. (1)
Our review of the international establishment mode choice literature adds to knowledge in several important ways. First, we make an essential contribution by consolidating and summarizing past research in the area. For over 30 years, scholars have explored this issue. Yet there is little consensus about what factors really make a difference and what theories can explain this strategic choice. Previous work (Dikova and Brouthers 2009; Slangen and Hennart 2007) has attempted to improve our knowledge in this area but suffer from several shortcomings such as a limited review of the literature and a lack of focus on moderating effects. Our more extensive review of about 104 studies provides much more detail and helps clarify what we know about the establishment mode choice.
Second, we investigate the link between establishment mode choice and performance (Shaver 1998). Choosing an appropriate establishment mode can allow a firm to balance its need for resources and knowledge about the foreign market with the costs involved in entering foreign markets, thus generating value (Meyer et al. 2009). Understanding this link between establishment mode choice and performance can help managers make better decisions. Our review helps advance our understanding of contextual issues and strategic choices that can lead to superior performance outcomes for foreign subsidiary units.
Finally, we contribute by identifying gaps in the literature. Through our review of the literature exploring this subject, we are able to identify significant areas where knowledge is lacking. As such we help move the literature forward, providing specific guidance to future researchers that can help improve our understanding of one critically important international business decision. By making recommendations about how to push forward the boundaries of international establishment mode research we help focus attention on critically important deficiencies in our knowledge.
To achieve these objectives, our paper is structured as follows. First, we provide a brief overview of the international establishment choice decision. Then we discuss our method and how we went about locating all the published establishment mode choice literature. Following that, we review the literature, focusing on the theories and variables used to predict establishment mode choice. Past research tends to explore four groups of variables: firm-level, country-level, industry-level and subsidiary-level. In an integrated fashion we examine these four types of variables and the related theoretical frameworks. We then focus attention on the moderating relationships included in past studies and the performance implications of making this choice. Finally, our paper ends with the identification and discussion of future research directions and how scholars can extend and expand our understanding of the international establishment mode choice decision.
2 Background and Method
Internationalizing firms can establish an equity interest in a foreign operation either by acquiring that interest in an existing organization or by setting up a new greenfield venture. Both methods of establishing the foreign venture can be used by firms to create a wholly owned subsidiary (WOS) or a joint venture (JV) with a partner that typically contributes complementary resources and skills (Brouthers and Hennart 2007). In general the choice of an acquisition versus a greenfield establishment mode depends on the investing firm's competitive advantage. For example, research shows that firms establish greenfield subsidiaries to exploit proprietary technology abroad while acquisitions are preferred as a means of overcoming technological barriers in R&D intensive industries or as a way to enter new markets quickly (Anand and Delios 2002; Kogut and Singh 1988).
Both greenfields and acquisitions create certain advantages and disadvantages for the investing firm. Although acquisitions offer speedy foreign market penetration, they often suffer from cross-cultural, organizational and technological mismatches between the acquirer and the target firm thus causing post-acquisition integration challenges or even failure (Dikova et al. 2010). Greenfield ventures provide an opportunity to preserve and replicate valuable corporate resources and capabilities abroad, however, this mode requires a longer period to become operational compared to acquisitions and more corporate attention may be required to set up the mechanisms for efficient knowledge transfer (Hennart and Park 1993). Because of this, choosing the best establishment mode requires consideration of parent firm-specific advantages, the potential to access complementary resources in the foreign market, industry-specific characteristic, and country-specific environmental contingencies.
We began our investigation of this important topic by searching online databases and article reference lists to identify all empirical papers published on international establishment mode choice between 1980 and 2015. Among the key words we used were foreign market entry, entry modes, establishment modes, diversification mode...