PDF Ebook Acquisition Versus Greenfield Foreign Entry: Diversification Mode Choice In Central And Eastern Europe
Departing from the traditional transaction cost approach in diversification mode literature, this study investigates the influence of experimental organizational learning on the choice between acquisition and a greenfield investment. We provide empirical support that prior experience with acquisitions and/or greenfield investments, firm’s predominant international strategy (global or multidomestic) and the technological intensity of the parent play a crucial role in subsequent diversifications. Furthermore, contrary to extant arguments that foreign ownership decision is independent of a diversification mode choice we demonstrate that the type of ownership (joint venture vs. wholly owned subsidiary) is a significant predictor of firms’ preference for acquisition or a greenfield. Unlike Caves and Mehra (1986) and Larimo (2002) who found a positive relationship between acquisitions and full ownership, we show that acquisitions in Central and Eastern European (CEE) transition economies are unlikely to be wholly owned subsidiaries. In addition, we contribute to extant diversification literature by introducing another neglected predictor of firms’ diversification strategy: We demonstrate the incremental power of host-countries’ institutional structure on investors’ diversification choice.
When a multinational enterprise (MNE) decides to invest equity in a foreign country, it faces at least two strategically important decisions: firstly, whether to buy an existing foreign entity (launch an acquisition)1 or establish a foreign operation from scratch (invest in a greenfield facility); and, secondly, whether to do it alone (establish a wholly-owned subsidiary) or involve a local partner (create a joint venture). The decision as to whether to opt for a wholly- or jointly-owned acquisition or greenfield investment carries significant strategic importance due to the inherent benefits and risks of each foreign diversification mode. For instance, although acquisitions offer a speedy establishment of a local presence, they can be accompanied by post-acquisition integration failures, which are often rooted in cross-cultural differences and technological mismatches. Reversely, although greenfields offer an opportunity to preserve and replicate valuable corporate cultures abroad, they require a longer establishment period and more time to build business networks locally. In addition, joint ventures enable investors to tap into valuable resources of a local partner and minimize investment risks, but they also are at times challenging to administer due to the partners’ diverging capabilities, interests and goals. In contrast, wholly-owned subsidiaries offer the benefits of managerial autonomy and full control over local operations, yet the process of overcoming the liability of foreignness may be difficult without the legitimacy of a local partner.
Research on patterns and determinants of equity investment modes is abundant yet somewhat limited in focus. Some researchers have examined the factors that influence the decision to acquire an existing company or establish a greenfield subsidiary (Wilson, 1980; Hennart and Park, 1993; Andersson and Svensson, 1994; Cho and Padmanabhan, 1995; Padmanabhan and Cho, 1999; Barkema and Vermeulen, 1998; Meyer, 1998; Brouthers and Brouthers, 2000; Harzing, 2002; Larimo, 2002; Belderbos, 2003). Others have taken an ownership and control approach to determine the type of entry mode as a wholly-owned or a joint operation (Gatignon and Anderson, 1988; Kim and Hwang, 1992; Brouthers et al., 1998; Delios and Beamish, 1999; Davis and Desai, 2000; Pan and Tse, 2000; Brouthers and Brouthers, 2001; Luo, 2001; Meyer, 2001; Brouthers, 2002). Both streams of research are valuable but limited in one important way: A foreign direct investment decision is a complex matter concerning both the choice between acquisition or a greenfield investment, and the preference for a wholly-owned operation or a joint venture. Only a few studies investigate more than two equity investment options: Kogut and Singh (1988), Chang and Rozenzweig (2001), and Elango and Sambharya (2004) examine the choice between wholly-owned greenfields, wholly-owned acquisitions and joint ventures, but they do not investigate the possibility of jointly established acquisitions and greenfields. Caves and Mehra (1986) and Larimo (2002) take a step further by including a joint venture or wholly-owned predictor in their analyses of diversification modes. The current study makes a contribution to this extant literature on diversification modes in two ways. Firstly, we take both diversification and entry mode choice issues on board, and examine all equity investment modes: Acquisitions vis-à-vis greenfields, as well as joint ventures versus wholly-owned enterprises. Secondly, we test our set of diversification predictors within the two entry mode categories, joint ventures and wholly-owned subsidiaries, and conclude that indeed the influence of our predictors on the MNEs’ decision to invest in an acquisition or greenfield operation does change contingent on the type of ownership.
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