Market Entry Strategies and Performance of Chinese Firms in Germany: The Moderating Effect of Home Government Support.

VerfasserHoltbriigge, Dirk

1 Problem and Objective

It is widely acknowledged that the tremendous growth of outward foreign direct investment (OFDI) of Chinese firms since 2001 did not only follow unprecedented patterns (Liu et al. 2005; Peng et al. 2008; Kolstad and Wiig 2012), but also offers rich opportunities for testing and extending established internationalization theories (Mathews 2006; Boisot and Meyer 2008; Holtbrugge and Berning 2012; Ramamurti 2012). Recent studies on Chinese OFDI examined, for example, their determinants (e.g., Voss et al. 2010; Buckley et al. 2007), investment motives (e.g., Child and Rodrigues 2005; Rui and Yip 2008; Lu et al. 2010) and the entry mode decisions (e.g., Cui and Jiang 2009; Klossek et al. 2012). While they provide valuable insights into the initial market entry strategies there are only a few studies that focus on the post-entry performance of Chinese firms (Morck et al. 2008; Buckley et al. 2014), especially with regard to developed markets (Zhong et al. 2013). In particular, it is unclear how successful different entry modes are and which factors favor or impede their success. Further, most of these studies rely on aggregate data which make firm-level conclusions difficult. Moreover, despite the finding that Chinese OFDI cannot be understood without taking the role of the home government into account (Luo et al. 2010; Cui and Jiang 2012), the impact of Chinese government policies on the relationship between market entry modes and performance is largely unexplored (Berning and Holtbrugge 2014).

Against this background, this study examines the relationship between market entry strategies and performance of Chinese firms investing in developed markets, focusing specifically on Germany as the host country. By using data at the subsidiary level, we analyze how successful Chinese firms in Germany are, and if home government support has a moderating effect on this relationship.

As a theoretical framework we apply the revisited Uppsala internationalization process model of Johanson and Vahlne (2009). Based on the conceptualization of internationalization as learning process, we regard this approach as appropriate for our purpose because existing research has frequently supported that relevance of knowledge acquisition is an important strategic investment motive of Chinese firms (e.g., Hitt et al. 2000; Buckley et al. 2007; Luo and Tung 2007; Kedia et al. 2012). Moreover, China and Germany are characterized by a large psychic distance which requires Chinese firms to quickly acquire relevant market knowledge in order to overcome their liability of foreignness and to perform successfully. In addition, the internationalization process model is highly pertinent because China's emphasis on gradualism and experimentation regarding its transition from a planned to a market economy, which only functions due to incorporated learning processes, is the central characteristic of China's successful economic development (Guthrie 2005). For this reason, scholars have called for applying a process and learning perspective as a theoretical lens to analyze OFDI of Chinese firms (Meyer 2014).

Based on the revisited Uppsala internationalization process model, we develop six hypotheses on the impact of different entry modes on performance, and on the moderating effect of government support on this relationship. In order to conduct this firm-level analysis, data from 556 Chinese firms in Germany was extracted from Dafne database. Supplemented by secondary data, we will test the hypotheses against this dataset.

The theoretical contribution of our study lies in extending the Uppsala internationalization process model by considering the performance implications of different entry modes. Moreover, we integrate the role of home country institutions and their ability to support learning processes. While previous studies tend to analyze the impact of the host government on internationalization strategies (e.g., Osland and Bjoerkman 1998; Luo 2001), we focus on the effects of home government support. We conceptualize this as learning facilitation that supports firms in both acquiring and exploiting foreign market knowledge in order to amplify the advantages of more learning-intensive market entry modes (Wei et al. 2015; Clegg et al. 2016).

The remainder of the paper is organized as follows. After outlining the objectives and aims of the study, the theoretical framework is explained and the research hypotheses are derived. Afterwards, the methodology is explained, followed by the presentation and discussion of the results. In the final section, the main contributions, limitations and the implications for future research are outlined.

2 Theory and Hypotheses

2.1 Theoretical Framework: The Uppsala Internationalization Process Model

The learning theory (Uppsala model) put forward by Johanson and Wiedersheim-Paul (1975) and subsequently extended by Johanson and Vahlne (1977) is among the most applied theories aimed to explain the internationalization of firms. While other theories of internationalization, such as the eclectic paradigm of Dunning (1980) or the internalization approach of Buckley and Casson (1998), provide economic arguments for the internationalization of companies, the learning theory proposes the relevance of experiential knowledge for international expansion. It states that firms at the beginning of internationalization produce and sell at their domestic markets to gain experience that can later be exploited in other markets. When firms start to internationalize, they do so first in psychically close countries and subsequently move incrementally to psychically more distant countries which are associated with higher uncertainty. This uncertainty decreases over time due to the knowledge acquired through operating in culturally similar countries and therefore makes further expansion possible (psychic distance chain). The learning theory also posits that the internationalization of firms starts with the exporting of goods before arriving at the stage of installing production subsidiaries in foreign countries. That is, over the course of their internationalization, firms progressively increase their level of commitment (establishment chain).

On account of the massive changes in business practices and theoretical advances, the 1977 Uppsala model was revised in 2009. It kept essentially the same change mechanisms, but added trust-building and knowledge creation "to recognize the fact that new knowledge is developed in relationships" (Johanson and Vahlne 2009, p. 1411). Based on a business network view of the environment in which the internationalizing firm operates, the core argument says that insidership in relevant networks is necessary for successful internationalization, and that relationships offer opportunities for learning, trust-building and commitment which are prerequisites for internationalization (Johanson and Vahlne 2009, 2011).

While the underlying assumptions of the 2009 model are uncertainty and bounded rationality, it also consists of two change mechanisms. The first relates to firm changes due to learning from experiences of operations in foreign markets. The second change happens through commitment decisions made to strengthen firm position in the foreign market. Hence, experiences build firm knowledge, and this knowledge influences the next level of commitment which in turn enables further learning processes (Johanson and Vahlne 2009, 2013).

By extending the original Uppsala model, Johanson and Vahlne (2009) argue that the main liability of an internationalizing firm is not one of foreignness, but one of network outsidership. As some types of knowledge are not accessible to everyone, but are confined to network insiders, the access to local networks becomes indispensable for knowledge acquisition and thus for successful internationalization (Johanson and Vahlne 2011, 2013). Following this argumentation, internationalization becomes an incremental network extension process, and market entry is described in network terms (Hilmersson and Jansson 2011). How firms plug into the specific host country's business networks becomes an aspect of superior importance, under which entry modes have to be subsumed (Hilmersson and Jansson 2012; Bangara et al. 2012). Therefore the key challenge in international expansion is not that a new local context may be foreign in terms of psychic distance with the home environment, but rather that being an outsider to relevant business networks (Meyer et al. 2011; Hutzschenreuter et al. 2011). The most efficient way of decreasing uncertainty, getting access to tacit local knowledge, and building lasting relationships is network insidership (Johanson and Vahlne 2009; Tan and Meyer 2011; Schweizer 2013) which in turn decisively determines market entry strategies (Johanson and Vahlne 2011; Boeh and Beamish 2012; Gammelgaard et al. 2012; Ivarsson and Alvstam 2013).

In summary, in order to overcome the liability of outsidership, firms' foreign market entry can be understood as position-building process in a foreign market network (Johanson and Vahlne 2009, 2013). The central tenet of the revisited Uppsala model is that existing business relationships make it possible to identify and exploit opportunities, and that these relationships have a considerable impact on location choice and entry mode. Johanson and Vahlne (2011) also explicitly propose that "entry into new markets (...) can preferably be undertaken in cooperation with partners who are already insiders" (Johanson and Vahlne 2011, p. 489).

The learning theory of Johanson and Vahlne has been successfully applied to MNEs from developed countries and generally supported. More recently, also emerging market MNEs (EMNEs) have been investigated through the lens of the learning theory, particularly in terms of their internationalization patterns. For instance, Amal and colleagues (2013) found that learning and...

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