Critical analysis of the Hennart’s bundling model of assets

By | April 14, 2014

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i Abstract


This essay begins with the introduction of the current economy crisis that has provides a good chance for the MNEs from the developing countries to expand their business into the developed countries and stating three objects of this study: to investigate the influence of complementary asset owned by local owners on the foreign entry mode selection of MNEs; to predict and explain the future of MNEs’ business after entering into the foreign market using Hennart (2009)’s bundling assets theory and to predict the future of the recent Volvo’s merger into Geely with the improved bundling model (Hennart 2009) created in this journal article And the essay continues by reviewing the article chosen from the Journal of Internal Business Studies, titled: “Down with MNE-centric theories! Market entry and expansion as the bundling of MNE and local assets”. Then by examining the article with the help of examples and many theories, analysis is focusing on the three fields related to the three objectives mentioned.


The article is mostly about the critically understand the Hennart (2009)’s bundling model of assets and use this model to explain and predict the international business in term of entry and subsequent development. The answers to the three objectives are given in the conclusion part while the whole recommendation part is contributed to providing advices to the recent debating Volvos’s acquisition into Geely using the bundling model.



ii Content page


i Abstract………………………………………………………………………………………………………… 1

ii Content page………………………………………………………………………………………………… 2

iii List of figure, chart and table………………………………………………………………………… 3

1.0       Introduction…………………………………………………………………………………………… 4

2.0       Summary of the literature………………………………………………………………………… 5

3.0       Discussion of the analysis………………………………………………………………………… 8

4.0       Conclusion…………………………………………………………………………………………… 14

5.0       Recommendations………………………………………………………………………………… 15

iv Appendix 1.0 the scholarly journal article………………………………………………………. 17

v Reference…………………………………………………………………………………………………… 18




iii List of figure


Figure 1 Optimal mode of foreign market entry………….………………………….6

Figure 2 Greenfields, acquisitions and joint ventures…….………………………….7

Figure 3 Trademarks of Geely and Volvo……………….…………………………..12

Figure 4 Geely’s entry mode…………………………………………………………13




1.0    Introduction


1.1    Brief background of the topic


While the current economy crisis which started from 2007 has hit the world economy so hard that some called it the “great recession”, the international business also sees a decline with the slowing growth or even decreases of FDI (foreign direct investment) in the some countries and regions especially the major developing countries such as India and China. Maybe because of the delay of the economy crisis impact spread from the developed countries to the developing countries, or that the relatively closed market has protected the developing countries from severe damages which are suffered by their developed counterparts, the fact that the large MNEs or MSEs from developing countries now are in a better position than their developed counterparts thanks to the better preserved economy. Now they possess the monetary resource that is urgently needed by the companies in the developed countries because of a lack of fluidity. International business under the current economy situation faces great challenges as well as opportunities. Obviously, it is a great chance for the less suffered companies in the developing countries to expand their business by ways such as acquiring the undervalued quality assets in the developed countries through mergers, acquisitions, setting up joint venture or FDI. It is this consideration to help these companies to select mode of foreign entry and predict future development that bring about this study.


1.2    Literature review objective


1.2.1            To investigate the influence of complementary asset owned by local owners on the foreign entry mode selection of MNEs


1.2.2            To predict and explain the future of MNEs’ business after entering into the foreign market using Hennart (2009)’s bundling assets theory

1.2.3            To predict the future of the recent Volvo’s merger into Geely with the improved bundling model (Hennart 2009) created in this journal article


2.0    Summary of the literature


Titled “Down with MNE-centric theories! Market entry and expansion as the bundling of MNE and local assets”, the article started by reviewing the major theories that are widely used in the field of foreign market entry mode selection for MNEs (multinational enterprises): Anderson and Gatingon’s (1986) “Modes of foreign entry” which focuses on the control over the foreign operation and tolerance over risks as the major factors influencing the entry modes chooses; Johanson and Vahlne’s Uppsala internationalization model (1990) which states that MNEs would gradually gain control from contractual entry to EJV (equity joint venture) and WOS (wholly owned subsidiary) with the increasing experiences in the foreign market; OLI and internalization theory of foreign production (Dunning, 1988; Dunning & Lundan, 2008; Rugman & Verbeke, 1990) and other theories that according to the author are very MNE-centric irrespective of the role of the owners of the complementary assets in the local market to which the MNEs try to enter and thus cannot explain and predict many international business practices. Then the author review two theories that are supportive to his viewpoint as the base of his model: Hennart’s (1988) transaction cost theory of joint-ventures (EJV) which hold that the entry mode and later development of the MNEs in a foreign market are determined by transactional characteristics of the bundled assets; and Teece’s (1986) model of “who profits from technological innovations” in which how innovators will gain profits from the innovation will depend on the nature of the interaction with the owners of the complementary assets. After brief introduction of the three markets in which the interactions between MNEs and local asset owners take place: the market for the services of assets, the market for asset and the market for firms owning the assets, base on these two complementary theories and the creation of two concepts: the relationships between the three markets and the role of residual claimancy in maximizing rents from the exchange; then the author built up a bundling model of foreign market entry mode as stated below (Figure 1). Then the author begins to explain the two axes of his model. The columns of his form of model refer to the cost incurred in the transferring the knowledge from MNEs to local owners of the complementary assets while the rows stands for the cost of access to the local assets.


Figure 1 Optimal mode of foreign market entry.


One important assumption that the author points out in this part is that the transactional characteristic of the both assets will not be unchanged with time passes; this assumption has set up the theoretical foundation for the changes of positions in the bundling model to predict the evolvement of interaction relationship. The author continues to explain that assets owned by MNEs like knowledge and complementary assets owned by local owners such as distribution network could both be easily transferrable or hardly transferrable which explains the transactional characteristic of the both assets. Later the article details the 4 cells of the matrix model with the title “determinants of MNE equity level” to show the actual application of the model with practical scenarios, the optimal choice of entry mode is determined by the interaction of the two assets in the markets. And here the author fights against many populous theories with the help of his model. The article goes on to explain how to make choices between the detailed entry modes, that is whether it is a wholly owned greenfield investment, greenfield EJV, full acquisitions or partial acquisition EJV. By using Figure 2 as shown below, the author demonstrates the determination of entry mode and then specify in explaining the conditions under which usage of acquisition is optimal: the assets are embedded in the local firms; the market for the firms is efficient and low management cost is incurred in the acquisitions. He then describes the four dimensions that measure these conditions; they are firm embeddedness, the costs of accessing assets embedded in the local firms; modularity and incentive loss which decide whether to choose a full acquisition or a partial acquisition.


Figure 2 Greenfields, acquisitions and joint ventures


Then it comes to the next part of the article under the topic of the dynamics of foreign expansion which is to predict the business trends of MNEs after entry into the foreign market. Here the article talks about the famous US dairy product manufacturer Borden’s case in Japan after foreign entry in the market using the entry mode of Greenfield EJV, with analysis of the failure of Borden in Japan the author manages to explain that MNEs will not necessarily move from EJV to WOS after gaining enough experience from the foreign market. The future of the MNEs in the foreign market will again depend on the transactional character of the MNEs’ asset and local assets in the future. In the conclusion of this article, besides review the mentioned theory and restate the bundling model, the author introduces the issue of the rising of the Dragon MNEs which cannot be explained by the traditional theory but is rational in his bundling model of assets. He points out that it is the wrong assumption that has long been held by the dominant international business theory that the local resources in the developing countries are implicitly free for assessment that created the wrong conclusion.


3.0    Discussion of the analysis


3.1    Assessment on the influence of complementary asset owned by local owners on the foreign entry mode selection of MNEs


The transaction cost theory, one of the major theories that the Hennart tried to prove wrong, was proposed by Anderson and Gatignon (1986) which was created based on the theory of “transaction cost economics” (Williamson 1975, 1985), in the TCA theory the MNEs owned asset specificity will playing an important role in choosing a specific market entry mode (Zhao & Decker 2004). If the asses are low specific which means that it is widely available in the target market, then the entrants will adopt low control modes of entry. The assets that incur transaction cost here obviously means the assets that owned by the MNEs, and the transactional cost character of the assets possessed by the local owners in the target market is not taken into consideration in this theory.


Below examinations will be done on several local assets that will possibly influence the choice of entry mode into foreign market for the MNEs, if the influences do exist and it is apparent enough, it is safe to come to the conclusion that Hennart (2009)’s bundling assets theory that take into consideration of the local asset transactional cost in deciding the entry mode selection is necessary and prudent.


The first local asset to be examined is land. For example, the Land Control Act in Kenya posts severe restrictions on the use of agricultural land in Kenya unless the use of the involved land is under consent by the land control board. But the consent will be refused if the land to be leased, transferred, sold or exchanged is not to a Kenyan citizen, a private company whose member are all local or a state owned corporation (Unknown 2008). With the Land Control Act, a foreign company that intend to develop the agriculture industry in Kenya will has no choice but select a local partner to start the business. Even though the MNEs could virtually hire all Kenya labor force to form a wholly owned subsidiary that is legitimate to use the land, but transfer of technology will become difficult to proceed. Likewise in many other countries, there are restrictions for the MNEs to use the local land resource and such policies vary according to the different institutional environments.


The secondly local asset to be examined is human resources. When a MNE try to enter into a foreign market, gaining necessary pool of human resource is critical, but in some cases there may not be enough of human resources available to the foreign entrants. Take Japan’s labor market as an example. The lifetime employment is considered to be the one of the stereotypical features (Unknown 2007) of the Japanese labor market. As most of the Japanese managers in large firms are provided with lifetime employment in their firms (Hennart 2009), MNEs that try to enter into the Japanese market through greefields found it difficult to hire experienced managers (Jones 1991). In this case entry mode options for the MNEs will be confined to acquisitions, equity joint venture rather than wholly owned subsidiary because the senior managers in the Japanese labor market are systematically embedded in the local firms.


The Thirdly local asset to be examined is distribution network. A distribution network bears good flow, cash flow and marketing information flow in two ways (Zeisj 2008). Marketing and distribution network are the most reasons that joint ventures are set up for. The research carried out by Jacque (1986) showed that 60 percent of the US- Japanese joint ventures in the America were to gain the marketing and distribution service. This fact shows that a under controlled distribution network is critical in MNEs’ marketing strategy and so it is much desired by them. For example, Vencomatic, a Netherlands origin poultry products provider that currently owns business over 60 countries around the world (Unknown 2010), in 2008 had established a joint venture with Shanghai Extra Machinery Co. Ltd which had comprehensive distribution network in China to expand the distribution network for the products of Vencomatic (Unknown 2008). So the need of building local and quality distribution network again compromises the MNEs’ plan to choose a greenfiled investment entry mode.


With the analysis of the three kinds of local assets that owned by the local owners, it is easy to see that local assets could possibly attribute to the high transactional cost of the foreign investment by the MNEs. And that has proved the viewpoint held by the Hennart (2009)’s bundling model of assets that the complementary assets has played an important role in the entry mode into foreign market.


3.2    Assessment on the prediction and explanation of the future of MNEs’ business after entering into the foreign market using Hennart (2009)’s bundling assets theory


The widely accepted Uppsala Internationalization Process Model (Johanson & Vahlne 1990) mainly focuses on the how the knowledge acquisition that influences the subsequent investment actions. The fundamental assumptions are: the insufficient knowledge about the foreign market is a major difficulty to the international business and “learning by doing” (Lindblom 1959; Johnson, 1988) that investment commitment will increase while the uncertainties will decrease by learning which means that if a MNE enters the foreign market by licensing say, then after a period of doing business successfully in the market the MNE will probably increase investment commitment by adopting equity joint venture or setting up a wholly owned subsidiary in the market. But according to Hennart (2009)’s bundling assets theory, this increasing investment commitment is not necessarily the result after a period of time of investment. It is depend on who has the residual claimant. Suppose a MNE enter into the foreign market with advanced manufacturing techniques and talents by setting up equity joint venture with a local firm who provide the land asset, there are three possible trend of the subsequent investment behavior:


The first possible trend is that the equity joint venture relationship is still unchanged. The cooperation relationship is unchanged when the transactional costs of the assets provided by both the two parties are still high. This situation is still like how it was at the beginning of their cooperation which could be categorized as no.4 cell in the Hennart (2009)’s bundling matrix. Under such circumstances, the both parties still own the residual claimant that tie them together, no party could continue the business without the other party’s contribution of the needed party. This result can be seen from many long term cooperation relationships between MNEs and when the local firms could not learn the necessary technology or get the special equipments and the MNEs cannot buy the land alone according to the local policy say.


The second possible trend is that the MNE gain the desired land asset, then it will establish its wholly owned subsidiary in the foreign market which the MNE has known pretty well though doing business there and cooperation with the local partner. Take Unilever as an example. Unilever launched 14 joint ventures in China during the term from 1986 to 1999 (Dasgupta & Dutta 2004). Until 2005 Unilever China was able to buy back all the shares from the local or state owned counterparts to become a wholly owned subsidiary of Unilever. At the time the policy had already allow the wholly owned foreign enterprises to do business and meanwhile Unilever also gained the experiences in doing business China. So in the Hennart (2009)’s bundling matrix, Unilever had move from cell no. 4 to cell no. 3 to increase its investment commitment.

The third trend of the MNE moves from the investment mode of equity joint venture back to contractual relationship or even leaves the market. This is considered to be a failure to the MNE. This happens when at the end of the cooperation; the MNE has lost its advantages in the assets but still cannot gain the necessary local assets. In this case, the local partner become wholly owned firm while the MNE has to release the control to the local partner who then has the residual claimant.


3.3    Assessment on the future of the recent Volvo’s merger into Geely with the improved bundling model (Hennart 2009)


Figure 3 Trademarks of Geely and Volvo


On March 2010, one of the most eminent vehicle brands, Volvo, was sold to the Chinese car manufacture Geely who signed with a $1.8 deal with the US car giant Ford (Leung 2010) as a part of effort to restructure its asset to provide sufficient liquidity to support its independent operation without seeking a TARP bailout loan from the US government (Swanson 2010). Even though Volvo is a world known prestigious car brand, it had not manage to make a profit since 2005 financial year (Unknown 2010). And Geely is the 12th largest automaker in China based on the production so far this year (Bradsher 2010) and it is positioning on the low-cost and small cars. Though the actual deal will only be carried out later this year, there are already a lot of debates and suspicions upon whether Geely could make a successful acquisition in term of management and turn Volvo around to profit making.


At the very beginning, understanding about Geely’s acquisition behavior within Hennart (2009)’s bundling model is necessary in order to use the model to predict the trend of the business. Look back at the Figure 1, before apprehending the final decision of full acquisition which Geely had made allocation of positioning of Geely’s and Volvo’s assets in the bundling matrix (Hennart 2009) is very important. What Geely offers so far are monetary resources that help Volvo in term of financial crisis. Such direct investment is easy to transact. And what Volvo has as complementary asset are modern management and vehicle making technology, note that with 70 years of focusing of safety (Unknown 2010) Volvo is famous for its safety technology which is the most desired by Geely. Technology is relatively easy to transfer but management is rather hard to transact. In this point the market mode that located in cell 3 (Figure 4).

Geely assets
Easy to transactDifficult to transact
Complementary asset held by VolvoEasy to transact1. Indeterminate3. Geely is sole residual claimant=wholly onwed affiliate of Geely
Difficult to transact2.Volvo is sole residual claimant=wholly owned operations of Volvo4. Joint venture


Figure 4 Geely’s entry mode (adapted from Hennart (2009)’s bundling model of assets)

In cell no.2, operation is still owned by Volvo because Volvo is the sole residual claimant. But the fact is that Geely adopts a strategy in cell no.3 to own Volvo as a wholly owned subsidiary. So according to Hennart (2009), this entry mode is not efficient.


Even this entry mode is not efficient, but for Geely in order to get the desired technology that owned by Volvo, full acquisition is necessary. Look back on Figure 2, as the complementary asset is not inefficient in the market. But the efficient market for the local firm is efficient as since 2008 Volvo had been put on the list for sale by Ford. Even though the efficient integration is under great suspicion, but partial acquisition EJV is not an option for Ford who tried hard to retreat liquidity from the selling to protect its own core brands. So at the end a full acquisition become the available choice.


For the future of Volvo, according to the matrix if Geely could not provide a hard to transact asset, Volvo will finally become independent from Geely away like it leave Ford because Volvo in this acquisition is the sole that owns the residual claimant, or else the result is not for the best of the both parties.


4.0    Conclusion


From the analysis given above, it is logical to come to some conclusions. Firstly, complementary assets provide by local owners are not always available in the efficient market, such as land, distribution network and human resources. This fact has made the complementary assets play an important role in the process for the MNEs to select optimal mode of entry into the local market. Secondly, residual the owner of residual claimant determine position and future of the business between MNEs and local owners of complementary assets desired by the MNEs. In other word, the party that has the core competency would largely decide the future of the business. Lastly, for the case of Volvo’s acquisitions into Geely, this is not an efficient entry mode for Geely, but as it wants to get accessed to Volvo’s asset, this seems to be the only practical option. There are some suggestions through applying Hennar (2009)’ bundling model into the case that could be adopted by Geely to maximize the interests for both the two parties in the future which will be stated in recommendations.


5.0    Recommendations


Below the recommendations will be mainly given to Geely to maximize the interest for Geely and Volvo:


Firstly, technology is the most desired complementary asset by Geely and it is easy to transact, so Geely could in a short time transfer the technology needed and sell Volvo again to retrieve investment. This is a conservative solution to protect both parties’ interests.


Secondly, keep the independent operation of Volvo, Geely could just act as a role of investor. Then Geely could through internal cooperation gradually transfer not only the technology but the management skills and distribution network. Keeping the independence of Volvo is of great important as people obviously do not have confident in Geely as a low cost car manufacturer running the big brand well in a short time.


Thirdly, another solution applicable for Geely as hinted by Figure 2 analysis, Geely could invite a local partner to form an equity joint venture. And Geely retreats as a partner of the partial acquisition to continue to acquire the assets such as management skills and distribution network building experiences that are deeply embedded in the Volvo as complementary that are not available in the efficient market.


Finally, on the other hand for Volvo to merge into Geely, it could mean great opportunity. When the global car industry has fall into recession, the Chinese had kept a fast growth rate, now China has passed US to own the largest car market in the world (Lewis 2010). Volvo could use this chance to expand its business into China to gain an advanced position in becoming a famous local brand in the world’s largest car market. And obviously Geely has just the needed local resources such as distribution network, human resources and public relations.



iv Appendix 1.0 the scholarly journal article



v Reference


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Bradsher, K. 2010. Ford Agrees to Sell Volvo to a Fast-Rising Chinese Company. Accessed on May 3rd 2010 [online] available:


Dasgupta Jayatri and Sanjib Dutta 2004, Unilever’s Strategies in China, ICMR Case #:BSTR 131.


Dunning, J. 1988. The theory of international production. The International Trade Journal, 3(1): 21–66.


Dunning, J., & Lundan, S. 2008. Multinational enterprises and the global economy. Cheltenham: Edward Elgar.


Hennart, J.-F. 1988. A transaction costs theory of equity joint ventures. Strategic Management Journal, 9(4): 361–374.


Hennart J. F. 2009. Down with MNE-centric theories! Market entry and expansion as the bundling of MNE and local assets. Journal of International Business Studies, 40, 1432-1454


Johanson, J., & Vahlne, J. 1990. The mechanism of internationalization. International Marketing Review, 7(4): 11–24.


Jones, K. 1991. The dilemma of foreign-affiliated companies: Surviving middle age in Japan. In J. Bleeke & D. Ernst (Eds), Collaborating to Compete: 145–163. New York: Wiley.


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Teece, D. 1986. Profiting from technological innovation: Implications for integration, collaboration, and public policy. Research Policy, 15(6): 285–305.


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Williamson, Oliver E. 1985, The Economic Institution of Capitalism. New York: Free Press.

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Zhao, X. & Decker, R., 2004, Choice of Foreign Market Entry Mode: Cognitions from Empirical and Theoretical Studies. Accessed on May 2nd 2010 [online] available:

Zeisj 2008, Channel of distribution, its importance & types. Accessed on May 2, 2010 [online] available: