The interplay of top-down institutional pressures and bottom-up responses of transition economy firms on FDI entry mode choices.
| Verfasser | Chung, Chris Changwha |
| Posten | RESEARCH PAPER - Report |
Abstract This study examines the role of institutions in explaining the FDI entry mode choices of transition economy firms. Advancing an institution-based view of international business strategy, the paper proposes a model of interactive institutional processes that incorporates both top-down institutional pressures and the bottom-up heterogeneous responses of individual firms to such pressures. The findings are based on a sample of 594 outward FDI entries made by Chinese firms. The results indicate that institutional pressures exerted by the home country government have a significant effect on outward FDI ownership decisions, such that firms facing greater institutional pressures are more inclined to choose outward international joint ventures (OIJVs) over wholly owned foreign subsidiaries. However, the effect of institutional government pressures on FDI entry mode choices is weaker for firms which are less dependent on the Chinese government for resources and thus enjoy more institutional freedom. Specifically, the ownership structures of Chinese firms moderate the positive effect of home country government pressures on the choice of OIJVs, such that the positive effect is weaker for modernized firms (i.e., newly created private and reformed incorporated firms) than conventional firms (i.e., state-owned enterprises (SOEs) and collectives). The positive effect is weaker for collectives than SOEs, while the positive effect is weaker for private firms than reformed firms (i.e., private firms
Keywords Institutional pressures * Institutional freedom * Foreign direct investment * Outward international joint ventures * Transition economies * China
1 Introduction
The proposition that institutions matter is already widely accepted (North 1990; Peng 2002; Powell and DiMaggio 1991; Scott 1995); however, the growing interest in institutions has fueled a recurring debate concerning how institutions matter for international business (IB) research (Meyer and Peng 2005; Peng et al. 2008). To enrich our understanding of the "how" question and to answer Powell's (1996, p. 297) call to "tackle the harder and more interesting issues of how they [institutions] matter, under what circumstances, to what extent, and in what ways," we explore the role of institutional pressure in explaining the likelihood that internationalizing transition economy firms will choose outward international joint ventures (OIJVs) over wholly owned foreign subsidiaries (WOFSs) when conducting outward foreign direct investment (EDI). (1) Specifically, we explore the effect of institutional processes by delving into the interplay of top-down institutional pressures imposed by home country governments and bottom-up heterogeneous institutional conformity which depends on institutional freedom and resource independence. (2)
The way that firms choose to participate in foreign markets is one of the most central and long-discussed questions for IB scholars, dating back at least to Hymer's 1960 work (Brouthers 2013; Hennart and Slangen 2015; Shaver 2013). Currently there are a number of excellent reviews of the international entry mode literature (for recent reviews, see Brouthers and Hennart 2007; De Villa et al. 2015; Laufs and Schwens 2014; Morschett et al. 2010; Slangen and Hennart 2007; Tihanyi et al. 2005; Zhao et al. 2004). In particular, inspired by a recent debate between Hennart and Slangen (2015) and Shaver (2013), international entry mode research has recently gained extra attention both theoretically and empirically. The generally acknowledged theme of this line of research is that the choice of international entry mode is one of the most important strategic decisions the firm has to make in its quest for internationalization (Musteen et al. 2009; Shaver 2013). There is a large body of research dealing with international entry mode choice in general (e.g., Brouthers 2002; Chung and Beamish 2005a; Liang et al. 2009; Mani et al. 2007; Nielsen and Nielsen 2011; Papageorgiadis et al. 2013; Tan 2009), and foreign firms entering transition economies such as China in particular (e.g., Dikova and Van Witteloostuijn 2007; Filatotchev et al. 2007; Puck et al. 2009; Xia et al. 2008).
One large stream of research has looked at entry mode choice by adopting several theoretical perspectives, including transaction cost theory (e.g., Boeh and Beamish 2012; Demirbag et al. 2007; Hennart 2009; Lopez-Duarte and Vidal-Suarez 2010; Maekelburger et al. 2012), eclectic OLI and internalization theory (e.g., Buckley and Casson 1976; Dunning 1988; Dunning et al. 2007; Erramilli et al. 1997; Hennart et al. 2015), and the resource/knowledge-based view (e.g., Brouthers et al. 2008; Contractor et al. 2014; Kogut and Zander 1993). This extant research indicates that the choice of FDI entry modes is influenced by a variety of firm, industry, and country-related factors. This stream of research has improved our knowledge of the FDI entry mode choices of firms from developed economies, such as the United States, Europe, and Japan (see Brouthers and Hennart 2007, for a detailed review). However, there has been comparatively less attention paid to the FDI entry mode decisions of firms from transition economies, thus representing a significant research opportunity (Hitt et al. 2000; Lukas et al. 2001; Luo 2003).
Researchers have recently begun to look deeper into transition economies, such as China, to understand how these economies could have achieved such remarkable and unprecedented performance in conventionally ineffective, institutional frameworks. (3) In China, for instance, market-based institutional rules are not well developed and the institutions themselves differ significantly from those in developed economies, which represent a rather stable set of institutional frameworks (Meyer et al. 2011; Park et al. 2006; Peng 2003; Peng et al. 2008). The research reveals an increasing appreciation of the fact that institutions are much more than "background noise" and that institutional environments may constrain or motivate certain strategic actions, particularly in transition economies (Hoskisson et al. 2000; Wright et al. 2005). However, questions of whether and, more importantly, how institutions matter for the FDI entry mode decisions of transition economy firms remain largely empirically under-explored. Thus, it is difficult to fully comprehend the FDI entry mode choices of firms in transition economies without understanding how institutions affect their strategic choices.
A second, more relevant, stream of research is the work on the new institutional approach (see Brouthers and Hennart 2007, for a detailed review). In this field, IB researchers have made substantial efforts to synthesize institution-based literature by examining how institutional constraints and pressures influence firms' strategic choices or performance in foreign markets (Chan and Makino 2007; Chung and Beamish, 2005b; Demirbag et al. 2010; Hernandez and Nieto 2015; Uhlenbruck et al. 2006; Xia et al. 2008). Unfortunately, these research efforts have tended to take a top-down view of the effects of institutions on firms (Scott 2005), and overlooked the fact that firms have varying potential to respond to institutional pressures (Kostova et al. 2008). We argue that the institution-based view used in the prevailing, top-down models of institutional effects should be further advanced in order to better understand the interactive, institutional processes that incorporate both the top-down institutional pressures and the bottom-up firm responses to such institutional pressures. A firm's response to external institutional pressure will vary according to its freedom from institutional influence and its resource independence. As a result, firm responses could range from conforming to resisting, from passive to active, from preconscious to controlling, and from impotent to influential (Goodstein 1994; Oliver 1991).
One of the unique characteristics of institutional environments in transition economies is the diverse ownership identities that have emerged as a result of rapid institutional reform. For example, China has undergone a tremendous degree of institutional change since implementing liberalizing economic reform in the late 1970s; for instance, the ongoing reformation of ownership structures (Park et al. 2006). State-owned enterprises (SOEs) remain the dominant force in China's outward foreign direct investment (FDI) (Chen and Young 2010; Cui and Jiang 2012), but ongoing institutional reform has created new types of Chinese firms. There are now four common types of ownership identities in China; SOEs, collectives, reformed incorporated firms, and newly created private firms. This substantial variation in firm ownership identities provides a more complete picture of how home country government pressures and heterogeneous degrees of firm receptivity to such pressures interactively influence the ability and willingness of firms in transition economies to make FDI entry mode choices.
Empirically, our analysis is based on survey and archival data collected from 594 FDI entries made by internationalizing Chinese firms in the manufacturing sector. We chose China as our research context for three reasons. First, many Chinese firms have pursued internationalization and outward FDI due to China's rapid emergence as a dominant manufacturing power and the most representative internationalizing country among transition economies (Deng 2004; Luo and Tung 2007). Second, the Chinese government has exerted strong institutional pressures to govern the international initiatives of these firms, promote outward FDI, and nurture the growth of Chinese firms (Luo et al. 2010). This provides an ideal institutional context for understanding the critical role of the home country government in exerting institutional pressures to influence the choice of FDI entry modes. Finally, China has undergone tremendous institutional...
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