MNEs foreign entry mode analysis

By | March 10, 2013

This Assignment Is Published With Permission From The Author For Online Review Only
All Rights Reserved @ ChinaAbout.Net

MNEs foreign entry mode analysis

–based on Hennart (2009)’s bundling assets theory

 

1.        Introduction

 

With the increasing importance of the foreign market in particular the emerging market such as BRIC (Brazil, Russia, India, and China), it is critical for the MNEs[1] to decide how they should enter into the specific markets which has been described as the choices of various foreign market entry modes. And the modes of entry are the format of the foreign market entries (Peng 2009, p.286). When our experiences in the international business have told us that a number of variables need to be considered before the final decision could be made, here in this study we will try to analyze a newly proposed model that could be helpful in this filed to provide recommendations to the MNEs in term of choosing the optimal mode of foreign market entry.

 

1.1    Objective of report

 

To provide an in-depth theoretical review in the field of foreign entry mode determination with the focus on the selected Hennart (2009)’s bundling assets theory

 

To carefully analyze and discuss the topic in the emerging market environment with the attempts of applying the relative theories into international business practices in the developing countries such as China and India

 

List out the recommendations to MNEs in making entry mode selection decisions based on the analysis and conclusions made

 

2.        Findings through complete description of the journal article

 

2.1    Objective of the journal article

 

On one hand the journal article has to explain the deficiencies of the current popular model in the field of foreign market entry and subsequent mode of operation through a literature review of the “MNE-centric theories” in Hennart (2009)’s word, and on the other hand the article also focuses on providing a model to explain the functioning system of how the MNEs make the initial and subsequent entry mode choices by checking two determinants: the assets held by the MNE and the complementary assets held by the local owners, and the interaction and selection of these two determinants forms the model proposed by Hennart (2009) in this journal article.

 

2.2    Theoretical review of the MNE centric theories in entry mode choices

 

Anderson and Gatignon (1986) proposed the hypostases that higher control entry modes should be used in the following scenarios: when the products are highly customized (e.g., corporate advisory); when knowledge is proprietary; when the products are less mature or they are relatively less mature in target market to be entered and when the MNEs have considerable international experience in the same industry (Mucchielli, Buckley & Cordell 1998, p.176). Padmanabhan and Cho (1996, p.47) entry mode choices “involve the tradeoffs related to the level of resource commitment, the degree of control, the degree of global rationalization, the specification and assumption of risks and returns. Two questions have been asked by Brouthers (1995, p11) as a representative of the focus of many popular MNE foreign entry mode choices: (1) to what extent of the resource commitment are the MNEs willing to make? (2) What level of control over the operations do the MNEs desire? And similar case could also be found in Buckley and Cassonf (1981)’s evolution of MNE entry modes from the exports to the licensing to the later foreign production in which the complementary local assets did not play any roles that attract attentions as accordingly to their model such evolutions are driven by the differences in the level of the fixed cost between these models.

 

2.3    Theoretical support toward asset-bundling mode

 

Despite the MNE centric theories in entry mode choices as discussed above, Hennart (2009) continued to the literature review by introduce other theories which he believed had taken the right direction in the research by taken into account of the influence of the complementary local assets in the determination of the foreign entry mode and following developments from which he claimed that the shared view of point of these theories is that the initial entry mode and its subsequent evolution are determined by the transactional characteristics of the assets being bundle. The first mentioned proof is the empirical studies carried out by Gomes-Casseres (1989); Hennart (1991) and Delios and Beamish (1999) which suggest that between the selections of EJVs[2] and WOSs[3], MNEs are more preferring to use EJVs in the resource-based industries in which the local partners are in more likely to posses privileged access to the natural resources. Another proof comes from the finding by Hennart and Reddy (1997) which states that the organization structure that the US companies used is the complementary assets that are desired by the Japanese companies and drive them more likely to use green EJVs or acquisitions when entering into the US market. And this also corresponds with Gomes-Casseres (1989)’s research conclusion that R&D-intensive Japanese firms did not show a greater probability in choosing WOSs than the common Japanese companies.

 

 

 

2.4    Introduction of the asset-bundling mode

 

 

Figure 1 Hennart (1988)’s model of equity joint venture

The model of equity joint venture Hennart (1988) as illustrated in the figure above is the prototype of the new proposed bundling model of foreign market entry mode, this prototype theory held that EVJs are more preferable than other options of entry into the market when bundling the assets through the market would incur higher information, bargaining, enforcement costs than other options. For example as illustrated in the matrix above, when the assets that firm A has which is needed within the cooperation of the two companies is marketable know-how which means that such assets could be obtain through the market without too much costs and the assets that firm B provide are non-marketable know-how, and in this case the best way that incurs least cost and so that helps generate optima results would be that A licenses B in the cooperation relationships. And only when the two parties both have non-marketable know-how would make the EVJs as the best strategy for the cooperation.

 

Based on his own prototype model and the suggestion that Hennart (2000) had made earlier saying that the 1998 matrix was able to be used to discuss the entry mode selection of the MNEs provided that some adaptations had to be made, a new model was developed to describe how which entry modes MNEs that have innovation advantages could choose to maximize the results when they decide to enter into a specific market with some local companies having some complementary resources on their hand which is needed for the MNEs in order to operate the value added services in the foreign market. There are two basic concepts based on which the model was developed and these two concepts help apprehend the model easier: (a) the relationship between markets for the service of assets, markets for assets, and market for firms; (2) the role of residual claimancy[4] in maximizing rents from the exchange. The model is also proposed in a most typical scenario in the emerging market that the MNEs own the knowledge advantage in term of advanced technology and management skills and while the local companies owns the resource advantages such as land, labor, policy preference. And both parties’ advantages are needed in order to operate the value added services.

 

Figure 2 Hennart (2009)’s bundling model of foreign market entry

 

2.5    Conclusions

 

2.5.1            Foreign entry mode determination

 

The Hennart (2009)’s bundling model of foreign market entry shows that the determination of which foreign market entry mode to be used depends on the interaction and leverage between the cost of the MNEs to gain the access to the complementary assets to utilize their knowledge into the local production of the service and goods and the cost of the local owner of the assets incurred when assessing the knowledge on all the markets (service of assets, markets for assets, and market for firms). Based on the bundling of the different local and MNEs’ assets in term of different transactional traits, four scenarios are listed out by the model with the suggestions provided on which entry modes should have been selected to minimize the total cost incurred for the final production of the desired services and products: (1) Like the Hennart (1988)’s model of equity joint venture, the Hennart (2009)’s bundling model did not provide a detail explanation of how the cooperation would be when both the knowledge and local assets owned by the MNEs and the local firms could be assessed in the efficient market which he described as “indeterminate”; (2) The second scenario describes the situation that the local firms has the privilege access to the local resources when the knowledge owned by the MNEs is easy to transact and the optimal option of foreign market entry for the MNEs would be wholly own operation of the local firms; (3) In contrast in the third scenario, when knowledge owned by the MNEs is subject to high transactional cost but in contrast the local assets needed could be assessed in the efficient market with low cost. Then the optimal option of foreign market entry for the MNEs would be to make the local firms wholly own subsidiaries (WOSs) of the MNEs; (4) In the fourth scenario in which both the assets provided by the MNEs and the local firms are inefficient in the market the best strategy for foreign entry to the MNEs would be to set up a joint venture firm between the MNEs and local partners. This means that the local firms in this case will share the residual claimants with the MNEs by contributing their part to the jointly owned business.

 

2.5.2            Choose between Greenfields, acquisitions or joint-ventures

 

Another conclusion had also been made beyond the bundling model to address the problem about how the wholly owned companies could be established. And the figure below provides in the journal article by Hennart (2009) helps address this issue.

 

Figure 3 Greenfields, acquisitions or joint-ventures

3.        Critical analysis

 

3.1    Comparisons between prevailing theories and Hennart (2009)’s bundling model

 

3.1.1            Dunning (1979, 1980)’s eclectic theory

 

Dunning (1979, 1980)’s ‘eclectic theory’ of the MNEs is a synthesis of several paradigms concluded from the neo-classical theories of trade and the locus of production (Erdilek 1985, p.68). This theory identifies three major categories of determinants of Foreign Direct Investment (FDI): ownership advantages which could the forms of a brand name, ownership of proprietary technology and so on; location advantage such as the low labor cost that the MNEs could enjoy in the foreign market than the home country market and internalization advantages which helps firms to acquire or increase the assets that provide with them ownership advantage in return (Ietto-Gillies 2005, p.114) and obviously control is advantageous. Dunning (1979, 1980)’s eclectic theory provides insightful examination about the factors that affect selection between home production (export) and host country production (FDI and joint venture), or host country production performed by other parties (licensing, franchising or contract manufacturing) (Griffin & Pustay 2010, p.361).

 

On one hand, Dunning (1979, 1980)’s eclectic theory does agree with Hennart (2009)’s bundling model of foreign market entry by recognizing the importance of the complementary local assets in term of the location advantages; but on the other hand as pointed out in the selected journal article, Dunning’s eclectic theory together with internalization school (Rugman, 1981; Rugman & Verbeke, 1990) did not clearly state the transactional characteristics in term whether the assets could be accessed easily or with high cost which could be influential in the further strategic move of the MNEs after their entry into the market.

 

3.1.2            Companies’ overall global strategy and foreign market entry mode

 

Hill, Hwang and Kim (1990) suggested that the popular theories that guided the foreign market entry practices in the international management field had been too fragmentary and did not make sufficient provision for the strategic variables in term of identifying which foreign entry mode would be more helpful to the MNEs in a strategic business perspective. A decision model had been provided by Hill, Hwang and Kim (1990) as illustrated in the figure below that had taken into the consideration of both strategic variables, environmental variables and transactional variables. This model also classifies the entry mode of licensing, joint venturing and wholly owned subsidiary (WOS) by three characteristics: control, resource and dissemination risk.

 

 

Figure 4 The decision framework in foreign market entry mode

Source: Hill, Hwang & Kim 1990, p. 120

 

This proposed theory had suggested that the strategic variables influence MNEs majorly through influence of the control requirements (John & Gillies 1997, p.269). They have come to the conclusion that companies that purse a multi-domestic strategy would prefer low-control foreign market entry mode and while other companies that adopt global strategy will favor high-control entry modes which meet the need of the MNEs for greater integration and co-ordination in a world wide scale.

 

With the comparison between Hill, Hwang and Kim (1990)’s decision framework and Hennart (2009)’s bundling model of foreign market entry, we can see that Hwang and Kim (1990)’s decision framework again like Dunning (1979, 1980)’s eclectic theory has the same deficiency that it has not cover the factor of the transactional characteristic of the local assets owned by the local firms but Hill, Hwang and Kim (1990)’s decision framework seems to be more comprehensive in term of taken into consideration of not only the transactional variables but also the strategic variables and environmental variables in particular that the decision framework had acknowledged the different characteristics of different entry mode in span of control, resource and dissemination risks and also provide different levels to the model in the three categories for the easy application for the MNEs in selecting their foreign market mode. In this point, the Hwang and Kim (1990)’s decision framework had done a better in relating as many variables that may have influences over the final decision of the selection of the foreign market entry mode while the Hennart (2009)’s bundling model of foreign market entry only focus on the transactional variables resulting in many possible defects.

 

3.2    New information learnt from the journal article

 

3.2.1            Provide justice to protection policy in the emerging markets

 

Take China as an example. Since the economy reform that took place in the 1980s and in particular after the China’s entry into the WTO, the Chinese government has been put under increasing pressure to open up its market in term of releasing the various domestic industry protection policies under the various names such as the requirement of the acknowledgement of the market economy by the developed countries, but is it in all case good to the health of the Chinese economy and even to the world’s economy development? While various theories have been given to the negative effects of the domestic industry protection policies enacted by the Chinese government, here the Hennart (2009)’s bundling model of foreign market entry help to explain the Chinese government’s intension by making such policies that seem to be creating more artificial difficulties and incontinences to the MNEs and domestic economy activities. The rational is like this, one of the actual facts after the release of such domestic industry protection policies which are usually take the form of restricting the proportion of the share owned by the foreign investors and maintain the Chinese firms’ control over the key appointed industries is that such protection policies have provided with the local companies an overwhelming local assets, the policy preference making the MNEs have no choices but to set up joint venture with the Chinese firms. And in a long term’s perspective, according to the Hennart (2009)’s bundling model of foreign market entry, if the knowledge and other assets owned by the MNEs become easy to transact then the local firms will gain the final control over the business which is very advantageous to the local economy.

 

3.2.2            The ownership persistence could be costly

 

As analyzed according to the Hennart (2009)’s bundling model of foreign market entry, the determination of the mode of foreign entry should be finalized by the comparisons of the two kind costs of the access to the MNEs’ assets such as knowledge advantage and local firms’ assets such as control of the local sale channel, so that whether the local firms or MNEs should be the owner or the one who finally control business should not only consider one party’s own assets and strategy, but also the partner’s situation should also be taken into consideration. And in order to pursue the minimum cost to the business operation, both MNEs and local companies should not focus too much on the ownership issues as in the economy perspective, being a wholly owned subsidiary to the other could also be beneficiary in the long run.

 

4.        Conclusions

 

Two basic conclusions could be obtained through the theoretical review and analysis that have been provided above: on one hand, the Hennart (2009)’s bundling model of foreign market entry that is proposed in the journal article which has been selected in this study provides us a useful theoretical reference when facing the choices between different foreign market entry modes after the identification of the target market. It does offer a new angle to look at the issue by not only checking the consideration of the MNEs, the major role among the international business, but also it has claimed that the local firms which possess the needed local assets does play the equal roles in the process of determining which entry mode to selected; but on the other hand there are also disadvantages about the new proposed theoretical model. Compared to the current prevailing theories, we can see that some deficiencies of the model could be found such as the lack of the cover of the strategic considerations and environmental factors that may have influences over the entry mode determination as talked about.

 

5.        Recommendations

 

Based on the conclusions, here some recommendations are provided to the MNEs when facing the dilemma of choosing the best entry mode into the desired market. Firstly, the MNEs not only have to make analysis of both the advantageous assets that they posses such as knowledge advantage but also have to check the local companies’ assets that are needed by the MNEs in the foreign business in term of whether the access to both parties’ assets in the foreign market is efficient and what is the cost of acquiring such assets not only in the short term’s perspective but also in the long term’s perspective which help decide the future of the MNEs international business development in the particular foreign market accordingly to the Hennart (2009)’s bundling model of foreign market entry. Secondly, though this provides us a useful theoretical reference when facing the choices between different foreign market entry modes MNEs should also take into consideration of the fact that this theoretical model is yet to be examined in the actual practices and what’s more this model has be built up to minimize the total cost of the international business when building up the cooperation between the MNEs and the local firms, but when it is focusing too much on the cost it lacks the consideration of the strategic business thinking and consideration by selecting a specific foreign entry mode. So that MNEs may find another model, Hwang and Kim (1990)’s decision framework, of more usefulness when the foreign entry is initiated due to strategic considerations.

Appendix 1 Journal article selected: “Down with MNE-centric theories! Market entry and expansion as the bundling of MNE and local assets”

 

 

Reference list

 

Anderson, E. & Gatignon, H., 1986. Modes of foreign entry: A transaction cost analysis and propositions. Journal of International business Studies, vol. 17, no. 3, pp. 1-26.

 

Brouthers, K. 1995. The influence of international risk on entry mode strategy. Management International review, 36(1): 7-28, p11

 

Buckley, P., & Casson, M. 1981. The optimal timing of a foreign direct investment. Economic Journal, 91(361): 75-87

 

Delios, A., & Beamish, P. 1999. Ownership strategy of Japanese firms: Transactional, institutional, and experience influences. Strategic Management Journal, 20(10): 915–933.

 

Dunning, J. H., 1979, Explaining changing patterns of international production: in defense of the eclectic theory, Oxford Bulletin of Economics and Statistics, Vol. 41 (94), 269-95

 

Erdilek, A. 1985, Multinationals as mutual invaders: intra-industry direct foreign investment, Sydney: Croom Helm Australia Pty Ltd, p.68

 

Griffin, R. W. & Pustay, M. W. 2010, International business, Global edition, 6 edition, New Jersey: Pearson Education, Inc., publishing, p.361

 

Gomes-Casseres, B., 1989. Ownership structures of foreign subsidiaries: Theory and evidence. Journal of Economic Behavior and Organization, 11(1): 1–25.

 

Hennart, J. F., & Reddy, S. 1997. The choice between mergers, acquisitions and joint ventures: The case of Japanese investors in the United States. Strategic Management Journal, 18(1): 1–12.

 

Hennart, J. F., 1991. The transaction costs theory of joint ventures: An empirical study of Japanese subsidiaries in the United States. Management Science, 37(4): 483–497.

 

Hennart, J. F., 2000. Transaction costs theory and the multinational enterprise. In C. Pitelis & R. Sugden (Eds), The nature of the transnational, (2nd ed.) 72–118. London: Routledge

 

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

 

Hill, C. W. L., Hwang, P. & Kim, C. W., 1990, An eclectic theory of the choice of international entry mode, Strategic Management Journal, 11, pp. 117- 28

 

Ietto-Gillies, G. 2005, Transnational corporations and international production: concepts, theories and effects, Cheltenham: Edward Elgar Publishing Limited, p.114

 

John, R. & Gillies, L. G., 1997, Global Business Strategy, London: Thomson, p.269

 

Mucchielli, J. L., Buckley, P. J., & Cordell, V. V., 1998, Globalization and regionalization: strategies, policies, and economic environments, New York: International Business Press, p.176

 

Padmanabhan, P., & Cho, K. 1996, Ownership strategy for a foreign affiliate; An empirical investigation of Japanese firms. Management International review, 36(1): 45-65, p.47

 

Peng, M. W., 2009, Global business, Mason; South-western Cengage Learning, p.286

 

Rugman, A. 1981. Inside the multinational: The economics of internal markets. New York: Columbia University Press.

 

Rugman, A. & Verbeke, A. 1990. Global corporate strategy and trade policy. London: Routledge.


[1] Multinational Enterprises

 

[2] Equity Joint Ventures

 

[3] Wholly owned subsidiaries

 

[4] The apportionment of equity

Leave a Reply