2.2.1 New Hypotheses at the Host-Country Level
MNC location choice decisions are mainly driven by host-country characteristics, either in absolute terms or in terms of their differential to the same characteris-tics in the MNC’s home-country. To which extent those differentials will play a larger role or not in the final location decision obviously also depends on firm and industry level attributes. Given the simultaneity through which location and entry-mode decisions are usually – although not always – carried out, if one would like to separate the effects of regressors on the location decision from the effect on the
1See Hypothesis 3b in Chapter1.
entry-mode choice a two-step approach could be implemented. Modeling these deci-sions through a step-wise approach would introduce an artificial way of disentangling the effect of the same factors on the two dimensions of a cross-border entry-mode decision. None of the reviewed papers makes the different nature of those two di-mensions explicit. Indeed, until date literature has failed to use a methodological framework that allows for a differentiated assessment of host-country characteristics’
impact on location and on entry-mode. All 15 papers reviewed in the previous chap-ter that analyze MNC entries into multiple host-countries in a discrete dependent variable framework2 include some sort of host-country determinants, but mostly as control variables and capturing various aspects on a broader basis, e.g. using the host-country’s development3, or country risk4. Even in those studies in which con-crete hypotheses are looked at through host-country determinants, e.g. the impact of cultural distance on entry-mode decisions, there is no mention to the fact that in a multiple host-country context, those host-country-level determinants are also accounting for location decisions. In a two-step approach5, when trying to isolate the differentiated impact of host-country attributes on entry-mode decisions only, the use of additional host-country variables becomes more relevant.
For instance, certain host-country level characteristics while being considered of utmost importance for offshoring location decisions in the literature around site-selection are neglected in entry-mode decisions literature, although they may be of relevance for the latter type of decision too. For example, if one approaches cross-country entry-mode decisions within such a two-step framework, the infrastructure development or talent availability of a country may bias an MNC’s foreign-country location decision towards those countries with better infrastructure or talent pool.
Once an MNC has decided to enter a certain host-country – conditional on the coun-try choice and independently on how those host-councoun-try attributes determined the location choice – those same characteristics may be key to decide the establishment mode. Indeed, one may think of a worse infrastructure as a feature increasing the odds of M&A as opposed to GI, given that building something from scratch is more difficult in countries with bad infrastructure.
As was reviewed in Chapter 1, certain characteristics like the host-country’s cost differential with respect to country costs, the cultural distance between
home-2See Section1.4.2and Table1.3.
3SeeZejan (1990),Andersson and Svensson (1994),Barkema and Vermeulen (1998),Padmanabhan and Cho (1999) andNocke and Yeaple (2004).
4SeeBarkema and Vermeulen (1998).
5Please note that a detailed discussion on whether a two-step approach is adequate follows in the methodological section of this chapter.
and host-country, the degree of the host-country’s specialization, as well as its politi-cal and macroeconomic stability have been considered in the literature of entry-mode decisions. In this section I propose to account for additional host-country character-istics that may not be captured by the more general variables that are usually used in the literature6, e.g. dummies for country development or simply GDP per capita.
Please note that the numbering of hypothesis will follow up on the 13 hypotheses already described in Chapter 1.
The infrastructure of a country can be understood as determining entry-mode de-cisions as it affects the ability or difficulty an MNC will encounter when starting a new venture from scratch. In an M&A, the target is already operating in the environment, which guarantees that it has an adequate infrastructure and that the acquiring MNC will not have to invest too much effort in adapting, changing or generating new infrastructure. Therefore, if a country counts with a poorly devel-oped infrastructure, this characteristic may lower the odds of greenfield investments as opposed to M&A. In other words, a country with a low degree of infrastructure development will increase costs in a GI set-up, making a M&A entry more likely.
This yields the following hypothesis:
Hypothesis 14: Ceteris paribus, the worse the host-country’s infrastructure, the greater the likelihood of entering offshore ventures via M&A.
With respect to the business environment, a more friendly environment in terms of starting, registering, recruiting and hiring, as well as firing and closing a business will increase the likelihood of GI, as institutional variables determine how rigid the host-country is towards the starting of a venture from scratch. Since more rigidity implies more associated costs, it can be stated that:
Hypothesis 15:Ceteris paribus, the more friendly the host-country’s business en-vironment, the greater the likelihood of entering offshore ventures via GI.
Finally, a highly qualified and abundant talent pool of workers is a necessary condi-tion for every offshore venture, but it increases the chances of a GI, since greenfield investments will have to recruit their staff from the available talent pool, as opposed to M&A ventures, which will start with an existing human resources endowment.
The smaller the talent pool the higher the costs of finding employees and therefore the more attractive it is to enter via M&A since those costs have already been born:
6See Chapter 1.
Hypothesis 16:Ceteris paribus, the larger and better qualified the host-country’s talent pool, the greater the likelihood of entering offshore ventures via GI.
2.2.2 Results from previous studies
Although none of the additional hypotheses above has been included or discussed explicitly in previous studies, one could try to align the variables used by certain studies to hypotheses 14 to 16, interpreting them in the context of the arguments presented in the previous section and so look at potentially interesting “previous”
results.
None of the studies reviewed in Chapter 1 explicitly test for host-country infrastruc-ture as a determinant of the choice of entry-mode. Zejan (1990), Andersson and Svensson (1994), Barkema and Vermeulen (1998), Padmanabhan and Cho (1999) and Nocke and Yeaple (2004) include host-country development as a general variable aiming at capturing cost-differentials, infrastructure and macroeconomic conditions and stability. Developed countries are supposed to have less of a cost differential, better infrastructure and macroeconomic conditions. The latter two would suggest that GI are preferred, while a low cost differential speaks rather for the contrary, ac-cording to hypotheses 14, 15 and 13 respectively. Four of the aforementioned studies7 find a negative relationship between host-country development and greenfield entry, which points at the fact that the cost-differential argument seems to be predominant.
Hypothesis 15 makes reference to a host-country’s business-friendly environment.
Trying to account for the same spirit one can say that including the extent of the host-country’s unionization8, the existence of investment incentives and institutional advancement9 or the existence of restrictions to foreign acquisitions, ownership or investments10, can be understood as assessing the degree of friendliness of the busi-ness environment in the host-country. Here again there is no consistency among results: more institutional advancement yields lowers the likelihood for GI accord-ing to Dikova and van Witteloostuijn (2007), pointaccord-ing in a different direction as the one suggested by hypothesis 15. Government incentives and organized labor yield non-significant results11, as well as foreign ownership restrictions in Padmanabhan
7SeeZejan (1990),Andersson and Svensson (1994),Padmanabhan and Cho (1999) andNocke and Yeaple (2004).
8SeeO hUallach´ain and Reid (1997).
9SeeDikova and van Witteloostuijn (2007).
10SeeBarkema and Vermeulen (1998), Padmanabhan and Cho (1999), Cheng (2006) and Slangen and Hennart (2008b).
11SeeDikova and van Witteloostuijn (2007) andO hUallach´ain and Reid (1997), respectively.
and Cho (1999). Lopez-Duarte and Garcia-Canal (2002) find no significant results for the extent of sector regulation. Finally, legal or government restrictions are twice found to be positively related to GI likelihood12, and twice negatively associated with the odds of greenfields13.
Bertrand and Madariaga (2003) include host-country transaction costs – which can be understood as modeling either the cost differential or the friendliness of busi-ness environment – and obtain a positive relationship between the odds of GI and high host-country transaction costs, supporting both hypothesis 10 and hypothesis 15. Hypothesis 16 is neither operationalized, nor discussed in the reviewed literature.