International Strategy and Organization

Part IIb: Market Entry Decision:

An Integrative Model

Josef WindspergerProfessor of Organization and Management

Center of Business Studies

Internalization

Theory

Organizational

Capabilities

Cultural

Aspects

Eclectic Approach

Introduction

Internalization Theory= the transaction cost economics theory of the MNE

all firms TC-Theory

MNE Internalization Theory

Internalization TheoryBasic question:

Whether doing an activity within the firm by internalizing it

wholly owned subsidiary

or to by involving in some form of collaboration

Joint venture

licencing

Best entry mode: TC min!

Internalization Theory

Factors of the internalization Theory

Tacitness

Performance ambiguity

Interdependence

Asset specificity x environmental volatility

Internalization Theory

Factors of the internalization Theory

Tacit Know-How

the firm is unable to articulate the know-how

pricing and contracting problems

high TC

wholly owned subsidiaries

Tacitness

Performance ambiguity

Interdependence

Asset specificity x environmental volatility

Internalization TheoryFactors of the internalization Theory

Difficulties in specifying and measuring the performance of assets increased possibility of opportunistic behavior

high TC wholly owned subsidiaries

Tacitness

Performance ambiguity

Interdependence

Asset specificity x environmental volatility

Internalization Theory

high interdependence of operations in geographically wide spread units

need for central coordination to reduce TC wholly owned subsidiaries

Tacitness

Performance ambiguity

Interdependence

Asset specificity x environmental volatility

Internalization Theory

Factors of the internalization Theory

specific assets or investments

increased possibility of opportunistic behavior

risk can be reduced by comprehensive contracting

impossible in dynamic environement

wholly owned subsidiaries

Tacitness

Performance ambiguity

Interdependence

Asset specificity x environmental volatility

Organizational Capabilities

Factors of the organizational capabilities perspectiveInternational capability

Transfer experience

Activity experience x environmental volatility

Organizational Capabilities

Factors of the organizational capabilities perspective

little international experience

firm prefers entry modes where it is less involved (licencing)

much international experience

firm prefers entry modes where it is more involved (wos)

International capability

Transfer experience

Activity experience x environmental volatility

Organizational Capabilities

Prior patterns of transfering know-how develop capabilities in these entry modes and influence later transfers

licencing licencing

Joint venture Joint venture

w. o. subsidiary w. o. subsidiary

International capability

Transfer experience

Activity experience x environmental volatility

Organizational Capabilities

Factors of the organizational capabilities perspective

Missing activity experience can easily be built up in an stable environment

a dynamic environment causes high costs and much

time to acquire new experience

collaboration (JV, licensing)

International capability

Transfer experience

Activity experience x environmental volatility

Internalization Theory vs. Organizational Capabilities

Empirical study of Madhok:

Internalization theory aspects not significant

Organizational capabilities aspects significant

Acquisition and development of new capabilities is more important than just the deployment of existing ones at minimal costs

Cultural AspectsCulture can influence ownership strategiesin two

ways:

1.National Character:(set of national characteristics of the home base

country)◙ Power Distance◙ Uncertainty Avoidance◙ Individualism◙ Masculinity

2. The cultural distance:

Distance between national

characteristics of the home base country and that of the target market

National Character Theory

States: the strategies of the home base country will be influenced by the national culture of the countries in which they are based.

Focuses: two dimensions: power distance and uncertainty avoidance.

– Power distance: the extent to which individuals are comfortable with inequality in relationships

– Uncertainty avoidance: the tolerance for ambiguity

National Character Hypothesis

“The lower the power distance and the uncertainty avoidance indices of the home base of the investing firm, the greater the likelihood that it will enter the United States with shared-equity ventures.”

Cultural distance theory

Cultural distance is defined as the differencebetween national characteristics of the baseand the target countries considered

States: Company’s success in the target country requires: know-how, reputation, some types of distribution services, etc (to the differences of cultural factors)

→ high transaction costs→ interest to share equity with its affiliates

Cultural Distance Hypothesis

“The greater the cultural distance between the home base of the investors and the target country, the more likely that they will enter target country through shared-equity ventures.”

ResultsResearch based on results from pooling of 2 databasesin the target country United States

• Japanese manufacturing affiliates 1978 - 1987: 226 entries, 42% partially owned

• Finish manufacturing affiliates 1977 - 1993: 135 entries, 30% partially owned.

The research gave support for the Cultural Distance Hypothesis:

Japanese investors, (a country that is culturally further to the US than Finland) tend to have higher propensity to enter the US through joint ventures

Results

The research disproved the National Character Hypothesis:

Japan having higher values for power distance and uncertainty avoidance than Finland, should have higher preferences for wholly owned subsidiaries. Instead we find the reverse.

Two main explanations for the result of the logistic model:

1. psychological characteristics tend to affect the strategies of the companies domiciled there.2. patterns of entry are affected by cultural distance