Strategic orientation and the choice of foreign market entry mode: an empirical examination.
| Verfasser | Liang, Xin |
| Posten | RESEARCH ARTICLE |
Abstract:
* Drawing on the transaction costs, strategic capability and the strategic cognition perspectives, our study seeks to examine whether and how firms' strategic orientations at the business levei influence the entry mode choices that firms make in accessing foreign markets.
* The study uses a sample of 332 foreign market entries made by 62 U.S. based firms over a period of 6 years to test hypotheses linking firm business levei strategy to the choice of foreign entry modes.
* Findings indicate that Prospectors are more likely to choose equity-based foreign market entry modes than Defenders. In addition, Prospectors favor full-ownership entry modes, namely, greenfield investments and full acquisitions, over shared-ownership modes such as joint ventures and partial acquisitions.
Keywords: Strategic orientation * Foreign market penetration * Prospectors * Defenders * Entry mode
Introduction
In a competitive landscape characterized by increased globalization, the choice of entry mode represents a key strategic decision facing firms seeking expansion into international markets. Several foreign market entry options exist. They include exporting, contractual entry (licensing and franchising), joint ventures, greenfield investments and acquisitions with each entailing different levels of resource requirements, organizational control, expected future returns and risk exposure (Anderson/Gatignon 1986, Buckley/Casson 1998). Entry mode choice is also viewed as a "frontier issue" in international business research (Anderson/Gatignon 1986, Madhok 1997) and a "very important, if not critical, strategic decision" (Agarwal/Ramaswami 1992; p. 2). Not surprisingly, there has been a proliferation of research on entry mode choice over the past three decades (see Datta/ Herrmann/Rasheed 2002 for a review), much of it focusing on the antecedents of such choice, especially those related to entrant firm characteristics and host country conditions. In addition, a few studies (e.g., Hennart 1991, Stopford/Wells 1972, Wilson 1980) have examined how firms' corporate strategy (e.g., the degree of corporate diversification) influence decisions pertaining to entry mode choice. However, to the best our knowledge, no study, to date, has examined the influence of firms' business strategy on such choices. As a result, we currently have a limited understanding of how business strategy orientations of firms influence the selection of entry mode strategies.
Our study seeks to address this important gap. Strategic management scholars have long argued that firms with different business strategy orientations exhibit different behaviors as reflected in their willingness to take risks, resource allocation priorities, and preferences for specific organizing and controlling mechanisms (Miller/Droge 1986, Miles/Snow 1978, Porter 1980). We believe that such differences are also likely to be reflected in the strategic choices firms make in entering foreign markets. In the context entry modes, Pan and Tse (2000) argue that decisions related to foreign market entry are typically made in two stages. The first involves choosing between equity (i.e., joint ventures, wholly owned subsidiaries and acquisitions) and non-equity (i.e., exports and licensing) modes. The choice of an equity mode in the first stage leads to the next stage wherein firms decide on the level of ownership they seek in the foreign venture. They may opt for a full-ownership equity mode (e.g., a greenfield investment or a full acquisition) where they retain complete control of operations in the host country. Alternatively, they can choose a shared-ownership mode (e.g., a joint venture or a partial acquisition), wherein control is shared with a local entity.
Our study draws primarily on three theoretical perspectives to hypothesize specific relationships between firms' business strategy and their choice of entry modes. Specifically, we invoke theoretical perspectives in transaction cost economics (Hennart 1991), strategic capability (Madhok 1997) and strategic cognition (Thomas/Litschert/Ramaswamy 1991) to examine the relationships between business strategy orientation as exemplified by Prospectors and Defenders in the Miles and Snow typology (Miles/Snow 1978) and decisions pertaining to the selection of entry modes. In doing so, we expect our study to advance the literature in international management by highlighting the potential linkages that exist between firm strategies at the business level and strategies in the international context.
The paper unfolds as follows: In the following section we briefly discuss the business strategy typology developed by Miles and Snow (1978) along with the related empirical evidence supporting the typology. In the next section we advance arguments pertaining to the hypothesized relationships between two distinct business strategy types (Prospectors and Defenders) and the choice between (a) equity and non-equity, and (b) full-ownership and shared-ownership foreign market entry modes. Following that, we describe the study methodology including sample and measures. Next, we present the results of our analyses. Finally, we discuss the findings and their implications from the perspective of research and managerial practice and identify potential directions for future research.
Theoretical Overview
Firm Strategic Orientation
At the business level, firms are concerned with how best to compete in individual product markets (Schendel/Hofer 1979). Strategy scholars have, over the years, developed several classificatory schemes to study business level strategies. One of the most widely used is the Miles and Snow (1978) typology. In their seminal work, Miles and Snow (1978) posited that firms exhibit different behaviors as they adapt to changes in the external environment. These adaptive behaviors embody distinctive and identifiable patterns in firms' policies dealing with entrepreneurial, engineering, and administrative problems. Over time, in their adaptive cycle, firms demonstrate consistent strategic postures, which are typically driven by different perceptions of competition by firms' dominant coalitions (Cyert/March 1963) and are embodied in their adoption of compatible organizational structures (Rogers et al. 1999), processes (Segev 1987), and technologies (Borch/Huse/ Senneseth 1999).
Miles and Snow (1978) identified four strategic approaches used by firms for dealing with their entrepreneurial, engineering and administrative problems, which they labeled as "Prospectors", "Defenders', "Analyzers" and "Reactors." A key discriminating factor between these different strategy types is the rate at which firms change their products or markets (Hambrick 1983, Zahra/Pearce 1990). By definition, Prospectors are firms that compete primarily based on innovation. They have an external orientation, make relatively frequent changes in their product-market domain and play a pioneering role in the development of new products and markets (Miles/Snow/Meyer/Coleman 1978). Defenders, in contrast, emphasize eiticiency in how they position themselves in their competitive domain. They represent internally oriented firms that emphasize cost control and engage in limited new product or market development (Boyd/Salamin 2001). Compared to Prospectors, Defenders have a limited proclivity for change. In summary, while Prospectors emphasize growth, risk taking and innovation, Defenders seek stability, risk reduction and greater operational efficiency. The third strategy type in the Miles and Snow typology, namely, "Analyzers", represents a hybrid approach. Analyzers seek to balance the exploration of new opportunities with the exploitation of current markets through efficiency seeking behavior. "Reactors," are the final strategy type and represent unsuccessful firms that lack a clear, consistent approach in dealing with the three fundamental organizational problems.
The Miles and Snow typology has been the focus of extensive empirical research (e.g., Aragon-Sanchez/Sanchez-Marin 2005, Bird/Beechler 1995, Boyd/Salamin 2001, DeSarbo et al. 2005, Hambrick 1983, James/Hatten 1995, Kabanoff/Brown 2008, Olson/ Slater/Hunt 2005, Rajagopalan 1997, Rogers/Miller/Judge 1999, Shortell/Zajac 1990, Thomas et al. 1991). Studies have covered a wide range of manufacturing and service industries, including, the automobile, plastic, semiconductor, and air transportation (Snow/Hrebiniak 1980), computer (Thomas et al. 1991), electric utility (Rajagopalan 1997), retailing (Hawes/Crittenden 1984), hospital (Meyer 1982, Zajac/Shortell 1989), and the banking industry (James/Hatten 1995, Rogers et al. 1999). In addition, DeSarbo et al. (2005) conducted an extensive test of the typology involving organizations in three countries (China, Japan, and United States). Their study validated the Miles and Snow business types across countries. The recent studies also provide evidence of the staying power of the Miles and Snow typology. Commenting on this, Hambrick (2003, p. 116), mentions that "of the several strategy classifications introduced over the past 25 years, it has been the most enduring, the most scrutinized and the most used." More recently, Kabanoff and Brown (2008) have attributed the staying power of the Miles and Snow typology to the fact that it is both "parsimonious and rich" in describing how different strategic orientations are reflected in managers' decisions on how to deal with issues emanating from the entrepreneurial, engineering and administrative domains.
The different strategy types have been documented to vary systematically in terms of their investment patterns (Hambrick 1983), risk orientations (James/Hatten 1995, Shortell/Zajac 1990), and internal resource and capability configurations (DeSarbo et al. 2005, Hambrick 1983). For example, Hambrick (1983) observed that Prospectors spend significantly more on R&D and marketing than Defenders. Slater and Olson (2000) also found...
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