MNC entry mode: it is not just about choice!

The main topic of my PhD in international management was control mechanisms in MNCs and the role of expatriates as linking pins between HQ and subsidiaries. However, one of the questions included in my international mail survey asked the respondents - subsidiary manager directors - whether the subsdiary in question had been established as a greenfield or as an acquisition. As I felt that entry mode research was turning into a rather anodyne branch of International Business Strategy, focusing mostly on explanatory variables that could be operationalised with secondary data, rather than on the explanatory variables that might be most relevant, I was keen to make a contribution in this field. I am particularly proud I was able to do so by publishing in the top journal in the Strategy field: Strategic Management Journal, even though I am not a strategy researcher.

I must admit that SMJ wasn't my first choice; the paper was rejected at three other journals (including JIBS and Management Science) before I ended up at SMJ. In the end, I am happy the paper took such a long route as the third contribution of the paper - the change in the management of entry modes over time - was inspired directly by a comment from one of the reviewers. So to this reviewer: who-ever you are, where-ever you are, I hope you are reading this and still remember it. After nearly 20 years I don't think disclosing your identity is a problem. Hence, if you are willing to do so, I am happy to buy you lunch at the next AIB meeting! If not, at least let me say "Thank you!!!!"

  • Harzing, A.W. (2002) Acquisitions versus greenfield investments: International strategy and management of entry modes, Strategic Management Journal, 23, March): 211-227. Available online... - Publisher’s version

How does international strategy impact on entry mode choice?

Although prior research had investigated a host of factors as determinants of entry mode choice - R&D intensity, the degree of diversification, the level of foreign experience, cultural distance, the size of the foreign direct investment in comparison to the size of the investing company, and the time of entry - the type of international strategy the MNC follows was not one of them. Given that entry mode choice is such a strategic decision, I thought this was rather surprising and thus decided to use my PhD data to study this topic.

In my study I found that, when controlling for all six factors identified above, acquisitions are more likely for companies following a multidomestic strategy and greenfields are more likely for companies following a global strategy (see also Testing key IB typologies: Bartlett & Ghoshal and Gupta & Govindarajan). However, this was not the only contribution of my study. If it had been, it would never have been published in SMJ :-). I also looked at the management of entry modes.

Management of entry modes: acquisitions vs. greenfields

Somewhat surprisingly, none of the earlier studies in this field had posed the question: what happens after the choice of entry mode has been made? Are greenfields and acquisitions managed in the same way or do headquarters-subsidiary relationships differ between the two entry modes? Obviously, the fact that virtually all previous entry mode studies had used secondary data had made this type of analysis very difficult.

My study combined secondary and primary data and was thus able to provide both sides of the picture, using MNC strategy as the link between the choice for a particular entry mode and the subsequent management of the acquisition or greenfield. As hypothesised, I found that acquisitions experienced a lower level of control from headquarters, showed a lower level of expatriate presence, and displayed a higher level of local responsiveness.

Does entry mode management change over time?

My third and final research question was: does the way in these two distinct entry modes are managed remain similar or does it change over time? More specifically, I proposed that over time the management of a subsidiary would converge to the management of the preferred entry mode option for that type of strategy. Hence in global companies the management of acquisitions would come to resemble the management of greenfields, while in multidomestic companies the management of greenfields would come to resemble the management of acquisitions. I did not expect any changes in the management of the subsidiaries that were established according to the preferred entry mode for both strategies.

Overall, I found a high level of support for the “no change” hypotheses and a more limited level of support for the “change to the way of management of the preferred mode of entry” hypotheses. This could be partly due to small sample sizes (below 50) for the “less preferred mode of entry”. However, the results do provide very interesting indications that MNCs might indeed try to change the management of their subsidiaries over time if they were not able to use their "preferred" entry mode choice.

Difference in management interacts with host region

In the late 2000s I conducted a study with Markus Pudelko on the role of language in HQ-subsidiary relationships, in which we collected data from more than 800 subsidiaries in more than a dozen host countries. Several blogposts reporting on the main findings of this study are: Hablas vielleicht un peu la mia language? and The many benefits of a shared language in multinationals and Language barriers in multinational companies.

However, as we also included entry mode as a control variable in our study, the following (unpublished) information might be of interest. It shows that the difference in expatriate presence between acquisitions and greenfields might in fact be influenced by the host region in which the subsidiary is located.

Whereas in Europe (France, Germany, Nordic countries, Spain, UK) expatriate presence is low, regardless of whether the subsidiary was established by greenfield or acquisition, in Asia (China, Japan, Korea) greenfields have a significantly higher proportion of expatriates than acquisitions do, both in the managing director position and in the top-management team as a whole. This could not be explained by a differential sample distribution in terms of industry or home country. It thus seems that the picture is even more complex than I originally thought.

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Free pre-publication versions of these papers are hyperlinked. If you’d like to have an official reprint for these papers, just drop me an email.

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