Entry Mode Choices

Emerging Markets
Fall 2019
Jakob Arnoldi
Learning goals
• Understand how entry modes are affected by institutional
development and need for complementary strategic capabilities in
emerging markets.
• Understand how research is being informed – and can combine –
specific theoretical approaches.
Outset the same as for EMMNCs
• Internationalization is risky – export mode(s) and/or sourcing always
easiest.
• Entry always entails liability of foreignness.
• Entry always means political risks (although that exposure may be
greater for exports).
Some basic points regarding
internationalization and entry modes
• Choice between non-equity and equity modes
• Factors that push towards equity modes:
• Transaction costs Equity
modes
• Need for local adaptation/local capabilities generally
• Institutional voids provide
more
• Market potentials control

However, these factors push for

different kinds of equity made
entry
Generic model for entry mode

Tradability high if transportation costs + transaction costs are low.

Competitive advantage high if few complementary (local) capabilities
needed)
Different entry/internationalization modes
Non equity (or transfer related) versus equity/FDI.

Non equity:
1. International subcontracting; Several of these advanced export
modes;
2. international leasing; include various forms of OEM activities
generally entails transfers of capabilities
3. international licensing and or resources (brand, equipment,
formula etc.)
4. international franchising
5. build- operate- transfer (BOT)
Main disadvantages: lack of control and
loss of future growth/revenue.
Different FDI (equity) modes
1. Joint Venture (equity but below also applies to contractual)
• Shares risk.
• Provides access to local capabilities.
• Creates co-ordination problems related to distance.
• Creates some degree of uncertainty due to lack of contractual enforcement/lack of
control over key capabilities.
2. Wholly owned subsidiary
• Acquisition
• Provides a bundle of local capabilities.
• Speedy solution.
• Needs managerial resources to integrate successfully.
• Provides a bundle of local liabilities.
• Require institutional support for markets of corporate control.
• Greenfield
• Provides ultimate degree of control.
• Time consuming.
• Success arguably dependent on local capabilities.
• Require relatively efficient factor markets.
Analyses of entry modes

Tests of likelihood
Tests of performance
Activity mode
• Hypothesis 1a: Firms are more likely to enter the BRIC countries through foreign
production than through export. Only supported for China and Brazil
• Hypothesis 1b: Firms entering the BRIC countries through
foreign production achieve greater market success than firms
entering through export. Supported

Holtbrügge, D., & Baron, Although export shields foreign firms from
A. (2013). Market entry problems stemming from institutional voids such as
strategies in emerging
markets: An institutional
corruption, export itself is also hindered by such
study in the BRIC voids for example in regards to tariffs and customs
countries. Thunderbird processing. Foreign production also exposes to
International Business
Review, 55(3), 237-252.
institutional voids but also offers more control
 Hypotheses 2 – Ownership Mode
A: Firms are more likely to enter the BRIC countries through joint
ventures than through wholly owned subsidiaries. S but not for
China
B: Firms entering the BRIC countries through joint ventures have
a greater market success than firms entering through wholly
owned subsidiaries. Not supported (and in China it is opposite)

Holtbrügge, D., & Baron,

A. (2013). Market entry
strategies in emerging Firms that enter into JVs reduce institutional distance,
markets: An institutional
study in the BRIC
they also gain more local legitimacy and increase their
countries. Thunderbird ties to important stakeholders. And of course they
International Business reduce the amount to investment needed.
Review, 55(3), 237-252.
Hypotheses 3 – Establishment mode
A: Firms are more likely to enter the BRIC countries through greenfield investments
than through acquisitions. S
B: Firms entering the BRIC countries through greenfield investments have a greater
market success than firms entering through acquisitions.Not supported

Holtbrügge, D., & Baron, Institutional voids means that acquisitions do not
A. (2013). Market entry offer the benefits normally associated with them
strategies in emerging
as factor markets (used for valuation) can be weak
markets: An institutional
study in the BRIC and contract enforcement inefficient. Also, costly
countries. Thunderbird restructurings are needed. And institutional
International Business
pressure of host countries to do greenfield.
Review, 55(3), 237-252.
 Hypothesis 4 - Timing
Firms with more years of operation in the BRIC countries achieve
greater market success than those with fewer years of operation.
Supported

Holtbrügge, D., & Baron,

A. (2013). Market entry The longer a firm has been present in the emerging
strategies in emerging market the more experience the firma has, the more
markets: An institutional
study in the BRIC legitimacy and brand recognition it has acquired and the
countries. Thunderbird more ties to stakeholders it has.
International Business
Review, 55(3), 237-252.
Analyzing institutional and resource based
factors.
• Institutional factors should impact on entry modes choice.
• Resources and capabilities will do the same.
• Do these two types of drivers interact and if so how?
Institutions – weak and strong
“These institutions include, for example, the legal framework and its
enforcement, property rights, information systems, and regulatory regimes.
We consider institutional arrangements to be ‘strong’ if they support the
voluntary exchange underpinning an effective market mechanism.
Conversely, we refer to institutions as ‘weak’ if they fail to ensure effective
markets or even undermine markets (as in the case of corrupt business
practices). Where institutions are strong in developed economies, their role,
though critical, may be almost invisible. In contrast, when markets
malfunction, as in some emerging economies, the absence of market-
supporting institutions is ‘conspicuous’ (McMillan, 2008).”
Meyer, K. E., Estrin, S., Bhaumik, S. K., and Peng, M.W. (2009) Institutions, resources, and entry strategies in
emerging economies. Strategic Management Journal, 30(1): 61–80.
Institutions – weak and strong (02)
“The strengthening of the institutional framework thus lowers costs of
doing business…and influences foreign entrants’ mode decisions by
moderating the costs of alternative organizational forms (Williamson,
1985). In consequence, the relative costs associated with different
entry modes are affected by the institutional framework (Henisz, 2000;
Meyer, 2001).”
Meyer, K. E., Estrin, S., Bhaumik, S. K., and Peng, M.W. (2009) Institutions, resources, and entry strategies in
emerging economies. Strategic Management Journal, 30(1): 61–80.
Countries in Sample of Study by Meyer et al.
• Egypt
• India
• South Africa
• Vietnam
Effects of institutional development and
capabilities
“that institutions discriminate primarily between JV and acquisition/
greenfield, while resource needs primarily discriminate between
greenfield and JV/acquisition.”
(Meyer et al 2009:66)
Interaction between (effects of) institutions
and types of capabilities
• If institutional voids no interaction

• If institutions develop (by emerging markets standard) – need for

tangible capabilities means greenfield while intangible means
acquisition.
H1: institutions
• The stronger market institutions, the smaller the likelihood of JV. S

Strong institutions means more efficient transactions hence easier to

buy either firms (acquisition) or resources needed for a firm
(greenfield).
If weak institutions, more costly to acquire equity, many resources
“built around non-market forms of transactions and thus difficult to
evaluate.”(Meyer et al.)

JV Institutional Acq/
development Greenfie
Inst weak Inst strong
ld
H2a and 2b: context specific capabilities
• The stronger the need for local resources, the less likely is greenfield.
NS (very weak support)
• This is an even stronger pattern if the local resources are intangible.
NS (very weak support).
If specific local capabilities
are needed they must be
accessed to through JV or
bought as part of a firm.
If local resources intangible they are even They cannot be created
harder for non locals to create, acquire from scratch by MNE.
and use. Two types of local
resources: Social capital
and local managerial
experience and expertise.
Illustration

JV/
Greenfield acquisition
Need for tangible and
especially intangible
small resources strong
3a and 3b. Strong institutions and (in)tangible
resources
• If strong institutions, and a need for intangible resources, the less
likely is greenfield. S
• If resources tangible they will not affect entry mode (which due to
strong institutions is less likely to be JV). S

Even if there are strong institutions, the

If resources are tangible they do not
moderate effect of institutional
development which is sole effect.
Firms thus either do greenfield or
acquire.
intangibility will make relying on local
more probable. Here MNE can choose
either JV or acquisition (latter made
possible due to market mechanism
now feasible)
Results
A somewhat problematic overview of
hypotheses
Interaction of institutional development and
local resource needs
Greenfield acquisition
+
Need for tangible and
especially intangible
resources

- +

Institutional
development

Combined effect
= significant of institutions and
intangible
= insignificant - resources
JV
Summation
• Institutional development has a significant effect on entry mode
choice JV Acq/greenfld.
• Need for capabilities may however change that.