Entry Mode Choice And Foreign Ownership Level

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Recognition the lack of the previous research and the importance of the entry mode choice and foreign ownership level, Eric W.K. Tsang attempts to examine the determinants and hypotheses of those two issues which might affect to a multinational firm in starting expanding business in a foreign country.

The research aims to provide a replication of Pan's study of equity joint venture (EJV) ownership level and then to indicate the hypotheses such as country risk, cultural distance, brand equity, competitive intensity, investment amount, duration, partner alignment and location that have significant impacts on the choice of entry mode. Although each country and each business might have their specific characteristics in country, industry and venture factors, the outcome of the research is so valuable and applicable in basic. Considering that multinational companies are the target, the research strongly pointed out that it is so important for the companies to refer and assess the determinants affecting ownership level and entry mode choice to debate for their business expansion in foreign country.

The research contributes to the flow of knowledge when introducing a combination of interpreting ownership level and entry mode choice simultaneously: which factors are influent on one issue will be compared with those are influent on other. The research suggests that choice of EJV ownership level is less based on different considerations and decision processes than choice of entry mode. Although, this is just a pioneer research in providing a comprehensive ownership strategy of multinational company, it is such an aggressive addition to this research with the integrated analysis.

Nowadays, with the impressive economic development in all parts of the world, internationalization is an essential strategy of all multinational companies who want to expand their business to different nations. Understand its necessity, this research provides a valuable reference for these companies to consider and make decision before starting business in foreign country.

2. Summary:

In their research, Eric W.K. Tsang (2005) clearly introduces the research topic to concentrate in influences on foreign ownership level and entry mode choice that multinational companies need to debate before making decision in business expansion in case of Vietnam.

The research summarizes "Pan's theoretical arguments concerning EJV ownership level and extend some of the arguments to the case of market entry mode choice". The author then produces the following definition of two issues as the basic premise.

"…EJV ownership level is the outcome of a negotiation process between the venture partners, reflecting what the MNC wants (ownership preference) and what it can or cannot get from the local side (ownership concession). Ownership preference can be explained by transaction cost theory, which stipulates that MNCs will choose a given ownership structure only if the associated benefits exceed the overall costs. Ownership concession is related to the bargaining power possessed by the parties concerned. In an emerging economy where the government often plays an active role in controlling inward FDIs, the MNC's entry mode choice is likely to be the outcome of a negotiating process between the firm and the host country government. As in any negotiation situation, the bargaining power of the parties involved is critical to the outcome".

These two theories apply (transaction cost and bargaining power theories) form the core of the theoretical framework of this paper.

The research is based on the hypotheses on determinants of foreign equity ownership level in EJVs then discussed with the related hypotheses concerning market entry mode choice. Eric W.K. Tsang classifies these hypotheses into three groups, moving from the macro to the more micro level factors such as country-, industry- and venture-specific factors. In more detail, these groups consist of eight hypotheses which are discussed in this paper: country risk, cultural distance, brand equity, competitive intensity, investment amount, duration partner alignment and location. The rest hypotheses: foreign capital input and local partner state ownership are excluded from this study as the absent corresponding variables in the Vietnam database.

To deliver on the research target - examine the influences of EJV ownership level and entry mode choice, Pan conducts some of models using different set of variables such as advertising intensity, EJV investment amount, location… and run binary logistic regression on sub-samples of the database. The models then produce indexes for each variables as well as hypotheses. To make the full use of information provided by the database, the research takes further step to run an ordinary least squares (OLS) regression on the percentage of foreign equity in an EJV and then delivery the results of comparison of hypotheses testing.

Discussing the limitations when using models, the author suggests that "decisions about entry mode and EJV ownership level may be based on rather different considerations and mechanisms although both are closely related to control and resource commitment". And "choice of entry mode is probably based on different considerations and decision processes than choice of EJV ownership level".

In short, although the research is just a first step "moving in the direction of providing a comprehensive account of ownership strategies of MNCs", Eric W.K. Tsang contributes to the value of the research by becoming a pioneer in combining two streams of research of ownership level and entry mode choice simultaneously.

3. Critiques:

3.1 Project rationale:

Eric W.K. Tsang was motivated by his research about the determinants of foreign ownership in equity joint venture and entry mode choice that facing any multinational company in the context of Vietnam. The research has studied and synthesized from various academic studies or relevant researches, identified the issues, and explained its significance in making investment decisions of MNCs.

For clearer understanding, the research has also applied the theories such as transaction cost and bargaining power theories to explain the ownership level as well as entry mode choice, formulated the hypotheses that affect both issues and then proposed which choice of entry mode is preferred in case of each hypotheses.

As research's findings which are collected from an emerging economy may not be generalizable to others, even though they have some common characteristics it is suggested for the need of replication by doing the same study again to re-test the reliability or point out the same issues in the same way. The objective of the research is to examine how far Pan's study in the specific context of China can be applied to Vietnam. This is such an effective and useful method to do a research on an emerging economy country which is less researched like Vietnam.

The research contributes to the flow of knowledge and to be more valuable when investigating both of issues - ownership level and entry mode choice simultaneously. As the fact that two streams of the research have been developing separately, this improvement analysis helps clarify the determinants of those issues effectively by comparing the influences of one's factors to another's that has not been done before.

3.2 Literature Review:

The extensive review of relevant literatures has been conducted by Eric W.K. Tsang on the concept of ownership level and entry mode choice, how they are applied in each related hypotheses that Pan's study formulated. According to Pan's theoretical arguments on EJV ownership level, the paper extends some arguments to the other issue - market entry mode choice which reflects multinational firms for making investment decisions in host country. That really helps readers to deeply understanding of both issues which are likely to be the outcome of a negotiation process between the venture partners (which applied for EJV ownership level) and between the firm and the host country government (which applied for entry mode choice).

The research also synthesizes and studies from previous findings as well as eclectic paradigm to offer some elements that affect to the ownership advantages based on concerning of transaction cost and bargaining power theory which form the core of the theoretical framework of this paper. Based on the relevant literatures, the research moves from the macro to the more micro level of factors to analysis, interpret and point out what choice of entry mode should be applied or not by MNCs to be best suitable with the level of equity ownership. Moreover, practical evidence was also used to clearly illustrate in the case of Vietnam, in addition with building an analytical framework for the assessment of each hypotheses as making conclusion after each hypotheses discussion to help readers easy understand and persuade them on their point of view.

Moreover, the research finds out that there are some gaps in previous studies. That is both issues equity ownership and entry mode choice have been developing separately and not been investigated simultaneously. Recognizing this problem, Eric W.K. Tsang becomes a pioneer in combining two streams of research together. By that way, it composes an integrative analysis by comparing the influences of both issues not only based on Pan's study but also other scholars' researches to contribute a deep knowledge of the determinants of EJV ownership level versus entry mode.

3.3 Objectivist paradigm and cross sectional design:

Taking the objectivist paradigm which is based on external viewpoint as Pan's study on "influences on foreign ownership level and entry mode choice in Vietnam" (1), Eric W.K. Tsang (2005) used the quantitative paradigm and deductive theory in his research: deducing the hypothesis based on the basis of what is known about the ownership level and entry mode choice, specifying how data can be collected according to the concept of each hypothesis, giving out the findings to confirm or reject the hypotheses and concluding the research by the revision of theory in the end.

In term of epistemology, the author constructs the conceptualization by summarizing Pan's arguments on EJV ownership level and choice of entry mode. Recognizing the omission of previous researches, Eric W.K. Tsang is the pioneer in combining two streams of research, namely entry mode choice and ownership level simultaneously. Ontologically, the author develops eight over ten hypotheses that make some effects to the two issues mentioned above. These hypotheses then be tested by some models and explained the significances of these determinants facing business in making investment decisions.

Using the cross sectional design "entails the collection of data on more than one case at a single point in time" (2), the research proposes models for the assessment of influences on foreign ownership level and entry mode choice in connection of two variables: dependent variable - the percentage of foreign equity and the entry mode progression of business cooperation contracts (BCCs), equity joint venture (EJV) and wholly owned subsidiary (WOS) and independent variables used for hypotheses testing. The major advantage of this cross sectional design is that data is so diversified as it can be collected from many various kinds of people and the disadvantage is that at a short period of time, you cannot "directly measure changes that are occurring in them over time." (3)

3.4 Method:

Eric W.K. Tsang (2005) uses the research method which has its roots in science of philosophy and sociology based on secondary data such as "The List of Licensed Projects published by the Ministry of Planning and Investment of Vietnam", "Almanac of Business and Industrial Ratios (1993 and 1998 editions)", "Institutional Investor" and so on. According to this method, author conducts and develops hypotheses which are embedded in social systems. From these hypotheses, some of models are built up to explain and refine the theory. For example, table 5 indicates that cultural distance and competitive intensity factors are fail in predicting entry mode choice than EJV ownership level preference.

The research has clearly pointed out the context, the influences on ownership level and entry mode choice. However, the measurement used in this research is likely not reliable. For example, the competitive intensity factor in this research is measured by the sales that small and medium firms generate in an industry. It is not enough, as we know, an industry includes not only small and medium firms but large firms and large firms also play a significant role in building up a competitive intensity of an industry. Or the other factor - advertising intensity should be considered as a marketing strategy, not measured by the advertising expenditure to net sales in this research.

Recognizing the fact that many firms in different locations may practice and implement the intervention of this research in different ways, Eric W.K. Tsang (2005) suggested that considerations should be taken when applying the suggested model in firm's globalization strategy. This is due to the fact that various countries will have various political environment and unique characteristics, so it is so hard to apply this study in all circumstances.

3.5 Results & Presentation:

As we know that research is designed to solve particular existing problem. And this research achieved its target of examining and interpreting the determinants of EJV ownership and entry mode choice based on hypotheses, scholars' studies and data collected from some reliable sources. That makes MNCs identify the importance of these determinants before making investment decisions or international business expansion. The research also introduces a comprehensive and theoretical framework of assessment which MNCs can use it as reference for their strategies.

The research is composed with clear structure: defining and developing hypotheses, discussing of research methodology, discussing of the key findings and implications of the study, moving from the macro to the more micro level factors, comparing with China for case of Vietnam and explaining the differences of two nations and so on, that conducts an effective communication and a salient study. The abstract of the research is so adequate and concise, using non-technical language that help readers summarize the content of the research and contain sufficient information such as aims, objectives of the research, conceptualization, methods, results, discussion and extension.

In the other side, the research still exposes some weaknesses. First, as the absent variables in the Vietnam database, two of ten hypotheses such as "the foreign capital input" and "local partner state ownership" are excluded, that makes research imperfect. Second, the reasons proposed for replication are admittedly speculative and it needs further "empirical studies to identify and investigate specific reasons for the discrepancies in findings". Third, the research may be not up to date to catch up the quickly growth of the current economy. With the basic academic theory, the research cannot be applied to all wide ranges of MNCs which own vast differences in management, investment decisions related to the entry mode choice and the ownership level. However, such negative things mentioned above do not reduce the reliability of the research as its purpose is adopting the flow of basic knowledge about the two issues. In overall, this research still carries crucial explanatory value.

4. Conclusion:

As a fresh man in expanding business to an emerging country like Vietnam, ownership level and entry mode choice are the two important things need to be considered by company before starting business project. Answering the question related to the influences on foreign ownership level and entry mode choice plays a significant role in making investment decisions: Would the company invest in non-deployable assets in a risky host country? Which market entry mode choice is preferred when the cultural distance between the home and the host countries increases? Or in general: how do multinational companies understand and deal with determinants influencing ownership level and choice of entry mode? And how do they apply these hypotheses in case of Vietnam, an emerging economy and less researched country?..

In an aggressive globalization progress happening around the world at presence, Eric's research contributes to the flow of knowledge on ownership level and entry mode choice facing multinational companies by answering these questions effectively in a basis. However, to become more comprehensive, further empirical studies are needed and the research should stimulate extensive discussions in this field.