international strategy and organization part iib: market entry decision: an integrative model josef...
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International Strategy and Organization
Part IIb: Market Entry Decision:
An Integrative Model
Josef WindspergerProfessor of Organization and Management
Center of Business Studies
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Internalization
Theory
Organizational
Capabilities
Cultural
Aspects
Eclectic Approach
Introduction
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Internalization Theory= the transaction cost economics theory of the MNE
all firms TC-Theory
MNE Internalization Theory
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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!
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Internalization Theory
Factors of the internalization Theory
Tacitness
Performance ambiguity
Interdependence
Asset specificity x environmental volatility
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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
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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
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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
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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
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Organizational Capabilities
Factors of the organizational capabilities perspectiveInternational capability
Transfer experience
Activity experience x environmental volatility
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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
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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
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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
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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
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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
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2. The cultural distance:
Distance between national
characteristics of the home base country and that of the target market
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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
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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.”
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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
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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.”
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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
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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