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Factors affecting perceptions of the choice between acquisition and greenfield entry: the case of Western FDI in an emerging market.



Abstract and Key Results

* This study provides a comprehensive account of foreign establishment mode strategies of firms investing in Turkey. The results of the logistic regression In statistics, logistic regression is a regression model for binomially distributed response/dependent variables. It is useful for modeling the probability of an event occurring as a function of other factors.  modeling provide support to the hypothesized relationships that take into account the impact of host country specific motives of MNEs on their choice between acquisitions and greenfield Greenfield, town (1990 pop. 18,666), seat of Franklin co., NW Mass., at the confluence of the Deerfield and Green rivers, near their junction with the Connecticut; settled 1686, set off from Deerfield and inc. 1753.  investments.

* The host country motives quality of inputs and market potential have significant negative coefficients, indicating that an MNE will favor the acquisition mode over a greenfield mode as the relative importance of both motives increases.

* The host country motive motive or motif (mōtēf`), in music, a short phrase or passage of two or more notes and repeated or elaborated throughout the composition. The term is usually used synonymously with figure.  of investment risk has a significant positive coefficient coefficient /co·ef·fi·cient/ (ko?ah-fish´int)
1. an expression of the change or effect produced by variation in certain factors, or of the ratio between two different quantities.

2.
, which increases the likelihood of the venture being a greenfield investment A Greenfield Investment is the investment in a manufacturing plant, office, or other physical company-related structure or group of structures in an area where no previous facilities exist. .

* Our results also show that the main investing firm specific and subsidiary level determinants of FDI FDI

See: Foreign direct investment
 modal Mode-oriented. A modal operation switches from one mode to another. Contrast with non-modal.

1. modal - (Of an interface) Having modes. Modeless interfaces are generally considered to be superior because the user does not have to remember which mode he is in.
2.
 choice identified in prior research also influence the establishment mode choice of Western MNEs when investing in Turkey. Parent diversity, previous commercial association, ownership pattern and resource-intensiveness of the target industry have the expected impact on the foreign investor's choice between a greenfield investment and an acquisition.

* No support is found, however, for the impact of cultural distance and foreign parent size on establishment mode choice. Similarly, the control variables of home region of the investing firm, timing of entry and industrial sector of investment do not affect modal choice.

Key Words

Acquisition * Greenfield Investment * Institutional Theory * Emerging Markets * Turkey

Introduction

Spurred by the growth in global commercial activity and the increasing number of firms operating in international markets, the multinational enterprise's (MNE) choice of entry mode into a foreign market has received a good deal of attention from researchers. First, a firm that decides to enter a foreign market has to choose between two related but distinct issues. It has to choose between non-equity modes, such as exporting and licensing, and equity-based entry modes, with either full ownership, i.e., a wholly owned subsidiary Wholly Owned Subsidiary

A subsidiary whose parent company owns 100% of its common stock.

Notes:
In other words, the parent company owns the company outright and there are no minority owners.
 (WOS), or shared ownership, i.e., a joint venture (JV). Each of these modes varies significantly in terms of resource commitment and risk, with equity-based entry modes involving the highest level of control.

Following the choice of entering a foreign market by either full or shared equity investments, a second decision is whether to acquire an existing local firm (acquisition) or to create a new venture (greenfield investment). Cornpared with research on the MNE's choice of ownership of foreign ventures, there has been limited empirical work on the determinants of choice between acquisitions and greenfield investments. The majority of prior research on this strategic choice has been confined con·fine  
v. con·fined, con·fin·ing, con·fines

v.tr.
1. To keep within bounds; restrict: Please confine your remarks to the issues at hand. See Synonyms at limit.
 to examining firms from a single source country (Hennart/Park 1993, Barkema/Vermeulen 1998, Padmanabhan/Cho 1999, Brouthers/Brouthers 2000). However, there are a few exceptions, which examine the establishment mode decisions of foreign investors from multiple source countries (Caves/Mehra 1986, Kogut/Singh 1988, Larimo 2003).

The prior literature focuses on firm specific factors that affect entry mode choice of MNEs, with relatively few studies examining host country specific factors. This is understandable because the prior studies mostly consider mature economies. The host country specific factors are of secondary importance for these economies and so they have been neglected. In emerging market economies, however, host country specific factors have a direct impact on the entry mode choice and appear to be as important as firm and industry specific factors. Building on the prior literature this paper seeks to provide new insights into the host country factors motivating foreign multinationals to engage in foreign equity venture formulation formulation /for·mu·la·tion/ (for?mu-la´shun) the act or product of formulating.

American Law Institute Formulation
 in the context of an emerging market economy.

As described by Malhotra (2003), modes of entry are alternative routes or means available to a firm for transferring resources from the home country to the host country. The Turkish context in this regard provides a good illustration of the phenomenon of the massive entry of MN Es into emerging markets and their strategic choice of the establishment mode of their investments. Along with its strategic location and ongoing membership negotiations with the EU, it is envisaged that soon Turkey will attract a large volume of European FDI. Foreign firms have already made serious inroads inroads
Noun, pl

make inroads into to start affecting or reducing: my gambling has made great inroads into my savings

inroads npl to make inroads into [+
 into the Turkish economy since the mid-1980s, following the radical economic and policy changes to liberalize lib·er·al·ize  
v. lib·er·al·ized, lib·er·al·iz·ing, lib·er·al·iz·es

v.tr.
To make liberal or more liberal: "Our standards of private conduct have been greatly liberalized . . .
 the economy. The high growth of the Turkish economy and the country's large and growing population also played their part. Government economic policies, especially with regard to the reform of foreign exchange policy, capital markets, the privatization privatization: see nationalization.
privatization

Transfer of government services or assets to the private sector. State-owned assets may be sold to private owners, or statutory restrictions on competition between privately and publicly owned
 of state-owned enterprises, and foreign investment options, have all contributed to Turkey's attractiveness for foreign investors (Tatoglu/Glaister 2000). The number of foreign equity venture formations during the 1980-2003 period reached a total of over 6,500 with the amount of cumulative FDI totaling nearly $17 billion (GDFI GDFI Gross Domestic Fixed Investment
GDFI Guiuan Development Foundation, Inc.
 2004).

Drawing on survey data from a sample of 145 Western MNEs, this study makes two contributions to the establishment mode literature. First, it builds upon prior research by providing a comprehensive account of foreign establishment mode strategies of firms from numerous countries investing in Turkey. Second, given the increasing wave of foreign acquisitions recently in Turkey on its way to become an EU member, this study contributes to our understanding of FDI modal choice of European investors. Third, our work extends previous research undertaken in other contexts and shows the extent to which the main determinants of establishment mode strategies reported in prior studies influence the foreign establishment mode strategies of Western MNEs in Turkey.

The paper is organized as follows. The next section provides background and develops the hypotheses of the study. The research methods are presented in the third section. Results and discussion are in section four followed by managerial and policy implications. Conclusions are provided in the final section.

The Changing Pattern of FDI in Emerging Markets

Recent evidence on the pattern of FDI entries to emerging market economies indicates a shift towards acquisitions while in the past entries were predominantly pre·dom·i·nant  
adj.
1. Having greatest ascendancy, importance, influence, authority, or force. See Synonyms at dominant.

2.
 greenfield ventures. Turkey, in this context provides a good example where there have been some institutional changes. Findings from this study also have potential for generalization gen·er·al·i·za·tion
n.
1. The act or an instance of generalizing.

2. A principle, a statement, or an idea having general application.
 to other emerging market economies which, with dynamic changes and differing factor endowments, differ from mature economies.

The aggregate data presented in Figure 1, indicate that FDI flows to emerging market economies surged during the 1990s, and this surge was accompanied by a dramatic change in the FDI pattern with the proportion of acquisitions within total FDI shifting from almost negligible This article or section is written like a personal reflection or and may require .
Please [ improve this article] by rewriting this article or section in an .
 to a significant level over the decade. This increased proportion of acquisitions can be explained by a number of factors, which vary between mature economies and emerging markets (e.g., an improved investment environment coupled with privatization of state enterprises in a number of emerging market economies and the availability of acquirable private sector companies in these countries). The change in the pattern of FDI in emerging markets also coincides with the greater flexibility, in terms of equity ownership of MNEs, introduced by host governments throughout the 1990s.

[FIGURE 1 OMITTED]

According to according to
prep.
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

3.
 UNCTAD UNCTAD United Nations Conference on Trade & Development  (2000), mergers and acquisitions are the favored option for expansion in Europe (including Eastern Europe Eastern Europe

The countries of eastern Europe, especially those that were allied with the USSR in the Warsaw Pact, which was established in 1955 and dissolved in 1991.
) and North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere. , followed by greenfield investments and strategic alliances. In Central and Eastern Europe The term "Central and Eastern Europe" came into wide spread use, replacing "Eastern bloc", to describe former Communist countries in Europe, after the collapse of the Iron Curtain in 1989/90. , executives of major MNEs surveyed by UNCTAD clearly favor acquisitions (32 percent) more than greenfield investments (23 percent) (UNCTAD 2000).

A similar trend also has been reported by a number of commentators on Turkey. Ernst and Young (2004) reported that in 2003 and 2004 the total number of large scale acquisitions by foreign firms was 38 and the total value of acquisitions was $916 million, while the total FDI in 2003 and 2004 in cumulative terms was $1,483 million (Ernst/Young 2004, Turkan 2005). These figures indicate that a large proportion (61 percent) of FDI inflows in 2003 and 2004 were in the form of acquisition of existing companies, while only 39 percent of FDI inflows were in the form of greenfield investments. Further, in 2005, the total foreign acquisitions in Turkey reached a record level of $18.6 bn. Although some of these entries were large acquisitions (64 large acquisitions in 2005) mainly concentrated in the banking and finance sector, there was also an upsurge of acquisitions of smaller and medium size companies by MNEs. While acquisitions of larger firms may constitute a high proportion of FDI entries in terms of acquisitions, data indicates a similar pattern with regard to cross-border acquisitions of smaller firms in Turkey. In 2004 29 percent of all FDI entries, in 2005, 22 percent of all FDI entries and in 2006 (as of August) 25 percent of all FDI entries in Turkey were in the form of partial or complete foreign acquisitions. The increase in acquisitions over the last decade has dramatically increased foreign MNEs' share of the top 500 manufacturing companies in Turkey, from 21 percent in 1990 to 33 percent in 2003 (Turkan 2005). In contrast, greenfield FDI inflows to Turkey have remained unchanged in recent years.

Recent developments including Turkey's application for membership of the EU, a more liberal FDI policy regime (which came into effect in 2003) and privatization policy, have led a number of observers to expect an increase in mergers and acquisition activity in Turkey (Ernst/Young 2004, Erdilek 2003). Some indications of this have already emerged. Examples include HSBC's full acquisition of Demirbank in 2001; BNP BNP B-type natriuretic peptide, brain natriuretic peptide Physiology A 32-residue peptide hormone produced predominantly in the ventricles, secreted in response to fluid overload–eg, CHF. See Atrial natriuretic peptide.  Paribas's 50 percent acquisition of TEB TEB Test & Evaluation Board
TEB Third Eye Blind (band name)
TEB Thread Environment Block
TEB Turkiye Ekonomi Bankasi
TEB Triethylborane
TEB Technical Evaluation Board
TEB Traffic Engineering Bureau (Pakistan) 
 (Turk Economy Bank) for $216.8 million in 2004; Unicredito and Koc Group's joint acquisition of Yapi Kredi Bank (57 percent valued at $1.6 billion) in 2004; Vodafone's acquisition of Telsim for $4.550 bn; North Cape North Cape or Nordkapp (nōr`käp), promontory, rising steeply c.1,000 ft (300 m) from the Arctic Ocean, near but not at the north end of Magerøya island, Finnmark co., N Norway.  Mineral's acquisition of Beykrom and International Power's acquisition of Trakya Elektrik (power generator). Fortis became the latest European group to enter the Turkish banking industry with its acquisition of family-controlled Disbank for about $1.28 billion in cash (Financial Times 2005). An agreement has also been reached regarding the acquisition by GE Consumer Finance of a 25.5 percent share in Garanti Bank Garanti Bank is the third largest-private bank in Turkey with USD$24.4 billion in assets as of September 30, 2005. Garanti provides retail, commercial, corporate and private banking services to over five million customers. , Turkey's third largest private bank. Alpha's purchase of 13 percent of the shares of Turkcell (for $1.6 billion), Turkey's largest cellular network is another large scale acquisition in Turkey. The emerging pattern of FDI entries discussed in this section highlights the importance of change, or perceived change in host country related factors and institutions in determining MNEs' choice between acquisition and greenfield entry. As there have been mixed results in terms of success of some of the acquisitions in emerging market economies, Turkey appears to be a good testing ground Noun 1. testing ground - a region resembling a laboratory inasmuch as it offers opportunities for observation and practice and experimentation; "the new nation is a testing ground for socioeconomic theories"; "Pakistan is a laboratory for studying the use of American  to examine the importance of host country factors and institutions in determining MNEs' choice of a particular market entry mode.

Background Literature and Hypotheses Development

While there is no well-developed theory of the determinants of the choice between acquisitions and greenfield investments, previous studies have investigated the influence of a number of variables that discriminate dis·crim·i·nate  
v. dis·crim·i·nat·ed, dis·crim·i·nat·ing, dis·crim·i·nates

v.intr.
1.
a.
 between these two modes, largely drawing on the basic premises of transaction cost theory, the bargaining power model, the cultural model, organizational capability and the learning perspective. The five models identified here are not mutually exclusive Adj. 1. mutually exclusive - unable to be both true at the same time
contradictory

incompatible - not compatible; "incompatible personalities"; "incompatible colors"
. Both the cultural model and the bargaining model could be considered as derivatives of the more basic transaction cost approach (Padmanabhan/Cho 1995).

Transaction cost theory proposes a variety of factors, including both firm-related factors and host country-related factors that potentially could influence the benefits and costs associated with alternative establishment modes. Although there has been a rich literature examining MNE's choice between wholly owned subsidiary (WOS) and joint venture (JV), there has not been a major attempt to extend transaction cost theory to firms' choice between greenfield investments and acquisitions. This paper attempts to fill this gap in the literature. The main argument behind the transaction cost explanation of international market entry modes lies in the transfer or use of the firm specific advantages in cross-border operations. Transaction cost economics suggests that asset specificity Asset specificity is a term related to the inter-party relationships of a transaction. It has been extensively studied in a variety of management and economics areas such as marketing, accounting, organizational behavior and management information systems.  is an important factor in MNEs entry mode decision where "the degree to which an asset can be redeployed to alternative uses and by alternative users without sacrifice of productive value" (Williamson 1996, p. 59) is limited. Hennart and Park (1993) dichotomize di·chot·o·mize  
v. di·chot·o·mized, di·chot·o·miz·ing, di·chot·o·miz·es

v.tr.
To separate into two parts or classifications.

v.intr.
To be or become divided into parts or branches; fork.
 two types of firm specific advantages. The first type is the organization's ability or technical expertise (i.e., codifiable knowledge), which can be separated from the organization. The second type is rather difficult to separate from the organization and may be deeply embedded Inserted into. See embedded system. . For the first type of firm specific advantages, the international market entrant en·trant  
n.
One that enters, especially one that enters a competition.



[French, from present participle of entrer, to enter, from Old French; see enter.
 can combine its resources with embodied em·bod·y  
tr.v. em·bod·ied, em·bod·y·ing, em·bod·ies
1. To give a bodily form to; incarnate.

2. To represent in bodily or material form:
 resources of the acquired firm. As for the second type of advantage, such a combination may not be possible since it is tightly embedded in the investor organization. In this case a direct entry through a clone clone, group of organisms, all of which are descended from a single individual through asexual reproduction, as in a pure cell culture of bacteria. Except for changes in the hereditary material that come about by mutation, all members of a clone are genetically  of the foreign partner would be a more efficient strategy to enter a new market. (Hennart/Reddy 1997, Hennart/Park 1993). The divisibility di·vis·i·ble  
adj.
Capable of being divided, especially with no remainder: 15 is divisible by 3 and 5.



di·vis
 problem and unwanted resources of potentially acquirable firms may also increase the transaction costs of acquisitions. In some cases even when the divisibility is possible, unbundling A regulatory requirement that enables a competing service provider to purchase parts of the incumbent local exchange carrier's network in order to provide service to its customers. See ILEC.  of resources may lead to loss of firm specific "quasirents", especially when resources are related (Chatterjee 1990). If we extend this line of argument for the choice between greenfield and acquisition, then the greenfield entry mode seems most efficient, making it possible to install the firm's managerial practices from the outset (Hennart/Reddy 1997, Hennart/Park 1993).

Institutional theory extends the transaction cost theory by adding the institutional dimension. Institutional theory draws its theoretical logic from the argument that different environments are endowed en·dow  
tr.v. en·dowed, en·dow·ing, en·dows
1. To provide with property, income, or a source of income.

2.
a.
 with different levels of resources and institutions of varying effectiveness (Wan/Hoskisson 2003). Meyer and Nguyen (2005), and Henisz (2000) argue that the institutional context in many emerging markets plays a crucial role in the firm's entry mode decision. Institutions in the host countries not only design and implement policies; they also have preferences and are known to favor local business. Institutions also regulate the business environment, which may influence MNEs' location choice and entry mode, and affect foreign investors' perceived risk (Brouthers 2002).

Based on the premises of institutional economics, Wan and Hoskisson (2003) described the home country environment as consisting of factors and institutions. Factors are classified into three categories, endowed factors (derived from the natural environment), advanced factors (e.g., a country's physical infrastructure, capital goods Capital Goods

Any goods used by an organization to produce other goods.

Notes:
Examples of capital goods include office buildings, equipment, and machinery.
See also: Capital Expenditure, Disinvestment



Capital goods
, and financial resources) and human factors (e.g., the quality of labour). While institutions provide a less tangible form of support to organizations, their efficiency would facilitate a better business environment (facilitating transactions) for the business units and organizations alike. Host country institutions can be broadly classified as political, legal and societal so·ci·e·tal  
adj.
Of or relating to the structure, organization, or functioning of society.



so·cie·tal·ly adv.

Adj.
 institutions. Institutional theory postulates that effectiveness of these institutions will facilitate better performance of MNE affiliates. Dunning Dunning

The process of communicating with customers to ensure the collection of accounts receivable.

Notes:
Dunning can start with gentle reminders and then progress to nearly threatening letters as accounts become more past due.
 (2005) in his recent work extends the eclectic paradigm Eclectic Paradigm

A theory that provides a three-tiered framework for a company to follow when determining if it is beneficial to pursue direct foreign investment.

Notes:
 by integrating the institutional perspective to Ownership (O) and Location (L) advantages. As Meyer and Nguyen (2005), and Henisz (2000) argue, the institutional context in many emerging markets plays a crucial role in the firm's entry mode decision. The host country institutional environment influences the MNE's entry mode by equity composition and mode of entry to the market. Political risk is formulated for·mu·late  
tr.v. for·mu·lat·ed, for·mu·lat·ing, for·mu·lates
1.
a. To state as or reduce to a formula.

b. To express in systematic terms or concepts.

c.
 as a function of institutional environment, which influences MNE's equity ownership level in cross-border operations. The institutional environment in a given host country also affects the MNE's choice between greenfield and acquisition mode, since the local institutional framework shapes transaction costs, business risk, and executives' perceptions on institutional stability of the country. It is possible that the same institutions generate different outcomes suggesting that managers' perceptions of institutions at the time of decision also have impact on the decision (Mudambi/Navara 2002).

Previous research indicates that the institutional environment in which MNEs operate has a significant impact on firm strategies and outcomes including entry mode decisions (Henisz 2000, Meyer/Nguyen 2005). Porter's (1990) main argument on the competitive advantages of nations also revolves around the quality of resource provision, presence of supporting industries and institutional context. In emerging market economies, institutions and institutional factors are particularly important because institutional immaturity im·ma·ture  
adj.
1. Not fully grown or developed. See Synonyms at young.

2. Marked by or suggesting a lack of normal maturity: silly, immature behavior.
 raises transaction costs and risk level (Child et al. 2003, Meyer 2001, 2004, Uhlenbruck 2004). The quality of institutions is likely to be an important determinant determinant, a polynomial expression that is inherent in the entries of a square matrix. The size n of the square matrix, as determined from the number of entries in any row or column, is called the order of the determinant.  of the MNE's location and acquisition-greenfield entry decisions, particularly for emerging market economies due to poor legal protection, entrant firm's need for networking and relationship with local authorities. Child et al. (2003, p. 243) refer to natural selection and argue that "firms operating under more favorable fa·vor·a·ble  
adj.
1. Advantageous; helpful: favorable winds.

2. Encouraging; propitious: a favorable diagnosis.

3.
 external circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact.
     2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or
 have a better chance of prospering pros·per  
intr.v. pros·pered, pros·per·ing, pros·pers
To be fortunate or successful, especially in terms of one's finances; thrive.
". Peng (2000) and Makino et al. (2004) have both stressed the importance of economic, political, social, cultural and institutional differences across countries and asserted that "countries do matter" in explaining the variation in behavior and performance of MNEs.

Drawing on these theories and associated perspectives, this study considers the influence of a set of host country, investing firm and subsidiary level variables on the establishment mode choice of foreign investors. Of these variables, host country specific factors are taken as the main indicator variables, as they have not been explored fully in the prior literature. The impact of investing firm and subsidiary level variables are treated as control variables.

Some of the firm-related factors include the size of the parent firm (Caves/Mehra 1986, Kogut/Singh 1988), multinational experience of the parent firm (Kogut/Singh 1988, Hennart/Reddy 1997, Mudambi/Mudambi 2002), research and development intensity of the parent firm (Kogut/Singh 1988, Padmanabhan/Cho 1995, 1999, Brouthers/Brouthers 2000), relative size of the investment (Caves/Mehra 1986, Hennart/Park 1993, Padmanabhan/Cho 1995, Brouthers/Brouthers 2000), degree of product diversity (Caves/Mehra 1986, Zejan 1990, Barkema/Vermeulen 1998), and foreign experience (Wilson 1980, Barkema/Vermeulen 1998, Padmanabhan/Cho 1999). Typical examples of the host country-related factors are the level of development and the size of the host country market (Zejan 1990, Padmanabhan/Cho 1995, Brouthers/Brouthers 2000, Mudambi/Mudambi 2002).

Host Country Specific Factors

The elements of host country location motives can be broadly classified into two types. First, there are Ricardian type endowments which mainly comprise of natural resources, most kinds of labour and proximity to markets. Second, there exists a range of environmental variables that act as a function of political, economic, legal and infrastructural factors of a host country. Both types of factors play a crucial role in a firm's decison to enter a host country (Kobrin 1976, Maclayton et al. 1980). The sub themes dealing with host country location factors can be summarised as: market size and economic growth (Aharoni 1966, Kobrin 1979, Davidson 1980, Buckley/Mathew 1980, Root 1987, Young et al. 1989, Sabi 1988), raw materials and labour supply (Moxon 1975, Buckley/Casson 1985, Dunning 1988), political and legal environment (Goodnow/Hansz 1972, Kobrin 1979, Anderson/Gatignon 1986, Agarwal 1994, Root/Ahmed 1978), host government policies (Davidson/McFetridge 1985, Goodnow 1985, Loree/Guisinger 1995), level of industry competition in the host country market (Goodnow 1985, Harrigan 1985a, 1985b), geographical proximity and transportation costs (Goodnow/Hansz 1972, Davidson/ McFetridge 1985) host country infrastructure (Dunning/Kundu 1995, Ulgado 1996), and availability of incentives and tax advantages (Loree/Guisinger 1995, Dunning 1993, Sethi et al. 2003). The following subsections provide the rationale for the hypothesised effects of host country specific factors on the MNEs establishment mode decisions.

Host Country Investment Risk

In entering a new market, firms aim to minimize the risks associated with operating in the environment. This is particularly the case when the perceived risk is higher than the manageable level. Gatignon and Anderson Anderson, river, Canada
Anderson, river, c.465 mi (750 km) long, rising in several lakes in N central Northwest Territories, Canada. It meanders north and west before receiving the Carnwath River and flowing north to Liverpool Bay, an arm of the Arctic
 (1988) define environmental uncertainties as the extent to which a country's political, legal, cultural and economic environments threaten the stability of a business operation. Thus the level of risk perceived by MNEs plays a crucial role in the entry mode decision (Franko 1971, Ahmed et al. 2002). Brouthers et al. (2002) used the perceived environmental uncertainty concept in explaining MNEs' choice between a wholly owned subsidiary and a joint venture. Brouthers and Brouthers (2003) highlighted that risk propensity variables were significant determinants of both manufacturing and service sector international entry mode decisions.

In this paper, we extend this argument to the firm's entry mode decision of greenfield investment or acquisition. Our argument draws from both institutional theory (North 1991, Coase 1992, Williamson 2000) and capital market failure (Chatterjee 1990). Since institutions moderate transaction costs and influence foreign investors' perceived risk in the host country, the stability/instability of host country institutions may impact MNEs' greenfield or acquisition entry decisions. In emerging market economies change of institutional environment is evidently high therefore one may expect institutions to create particular constraints CONSTRAINTS - A language for solving constraints using value inference.

["CONSTRAINTS: A Language for Expressing Almost-Hierarchical Descriptions", G.J. Sussman et al, Artif Intell 14(1):1-39 (Aug 1980)].
 or facilitation Facilitation

The process of providing a market for a security. Normally, this refers to bids and offers made for large blocks of securities, such as those traded by institutions.
 of an entry mode choice. Meyer and Nguyen (2005, p. 76) strengthen this argument by hypothesizing that "efficiency of institutions in supporting markets for critical resources encourages FDI in the form of greenfield".

The counter argument to the institutional perspective is developed by the capital market failure explanation of the choice between acquisition and greenfield market entry modes (Chatterjee 1990). This argument is mainly based on the divisibility of assets and the complementarity of resources of the acquired company. The probability of acquiring unwanted resources may increase utilization costs and increases business risk since the business targeted for acquisition will generally have resources besides the complementary ones. These will tie up financial resources, which will increase the entrant's utilization costs. Due to the indivisibility in·di·vis·i·ble  
adj.
1. Incapable of undergoing division.

2. Mathematics Incapable of being divided without a remainder: The number 15 is indivisible by 7.
 of these resources and a weaker capital market structure in emerging markets, the acquirer may not be able to recover extra financial outlay by selling these resources. Therefore, in the case of the decision to acquire, in an international context the integration of the acquired company may prove to be a complex process. In order to minimize potential managerial, cultural and organizational fit problems in cross-border acquisitions (and concerns over the organizational compatibility of the acquiree and acquirer--see for example McCloughan/Stone 1998) MNEs tend to go for greenfield investments. Furthermore, in a greenfield investment the managerial link between the parent organization and the affiliate is expected to be stronger (Brouthers et al. 1999, Buckley/Casson 1998, Ahmed et al. 2002, Newbury/Zeira 1997, Kumar/Subramaniam 1997, McCloughan/Stone 1998). This leads to the following hypothesis.

Hypothesis 1. A foreign investor is more likely to choose a greenfield entry mode over an acquisition mode when the perceived host country investment risk is high.

Market Potential

The market potential in the host country is an important determinant of the MNE's entry mode decision. Although it is clear that market growth would often attract entry (Chatterjee 1990) it is not equally clear if the rate of growth will influence the mode of entry. As Luo (2001, p. 452) puts it "industrial sales growth conditions in a host market affect expected net returns and firm growth during international expansion. This then affects resource commitments, strategic orientations and entry mode decisions".

In a growing market, one may expect MNEs to use a direct entry mode to capture market share and realize growth goals (Porter 1980), but to establish an early presence in the market may require an acquisition rather than a greenfield investment. Buckley and Casson (1998) argue that when a large monopoly of rents exists, the entrant will favor acquisition over greenfield both in manufacturing and distribution. This is because of the entrant's desire to establish long-term control over the domestic rivals' production or distribution facilities. When an investor decides to make a fast move and capitalize on Cap´i`tal`ize on`   

v. t. 1. To turn (an opportunity) to one's advantage; to take advantage of (a situation); to profit from; as, to capitalize on an opponent's mistakes s>.
 first mover mover /mov·er/ (moo´ver) that which produces motion.

prime mover  a muscle that acts directly to bring about a desired movement.
 advantages, an acquisition of a local business with an existing network may be preferred to a greenfield investment. Greenfield investments, in the face of rapid market growth, may be too slow to achieve the new entrant's strategic objectives (Buckley/Casson 1998, Meyer 2001, Peng 2000, Laurila/Ropponen 2003). In a high growth market there may be opportunities to purchase established businesses that are financially weak. There have been a number of entries of this nature in emerging market economies when firms have been available tbr acquisition. This argument can also be strengthened from an institutional perspective. Market oriented o·ri·ent  
n.
1. Orient The countries of Asia, especially of eastern Asia.

2.
a. The luster characteristic of a pearl of high quality.

b. A pearl having exceptional luster.

3.
 firms (for which the market size and growth rate is more important than export oriented firms) are more concerned with linking with local networks and accessing resources through their local partners (Meyer/Nguyen 2005). The institutional perspective appears to support the argument that export oriented FDI is more frequently in the form of greenfield investment since their local network needs are relatively less, whereas market oriented firms may suffer more from liability of foreignness and informal institutions may have motives to inhibit inhibit /in·hib·it/ (in-hib´it) to retard, arrest, or restrain.

in·hib·it
v.
1. To hold back; restrain.

2.
 greenfield entries. Institutional analysis further suggests that there may be strong incumbents in market-oriented operations, which would motivate foreign investors to seek acquisitions rather than greenfield investments. An existing firm would be acquired to overcome these incumbents (mainly for complementary effects such as gaining legitimacy LEGITIMACY. The state of being born in wedlock; that is, in a lawful manner.
     2. Marriage is considered by all civilized nations as the only source of legitimacy; the qualities of husband and wife must be possessed by the parents in order to make the offspring
, lobbying power of local players and established network of existing firms). This argument may not hold for young industries characterized char·ac·ter·ize  
tr.v. character·ized, character·iz·ing, character·iz·es
1. To describe the qualities or peculiarities of: characterized the warden as ruthless.

2.
 by rapid growth, as there may be no firms available for acquisition (Chatterjee 1990). Therefore we hypothesize hy·poth·e·size  
v. hy·poth·e·sized, hy·poth·e·siz·ing, hy·poth·e·siz·es

v.tr.
To assert as a hypothesis.

v.intr.
To form a hypothesis.
 that:

Hypothesis 2. A foreign investor is more likely to choose an acquisition mode over a greenfield mode when a significant market potential is perceived.

Government Regulations and Incentives

Investment agencies in developing countries tend to provide more incentives for greenfield investments than for acquisitions. This is because they are primarily concerned to facilitate an increase in employment, and transmission of knowledge and technology through greenfield investments. MNEs, however, do not have fixed convictions, and in many cases it is reported that they behave in response to the competitive environment (Mudambi 1998). Taxation policy and special economic zones play an important role not only in location choice decision but also in entry mode choice. Several studies have found that taxation policy deters Deters may refer to:
  • Joe Deters, American politician
  • Kevin Deters, American story artist
 FDI or induces firms to invest in high incentive regions in the host country (Szanyi 2001, Meyer/Nguyen 2005). Based on a survey of FDI in Hungary, Szanyi (2001, p. 30) concludes that "investment incentives can play an additional role in motivating foreign investors. In Hungary, the conditions for such incentives have most easily been met by large greenfield investors". This is mainly due to the host government's perception of employment creating effects of greenfield investments. Governments in emerging market economies are also keen to strengthen their export oriented industries and these employment and export generating industries are high incentive sectors.

In a recent study of the Czech Republic's national investment incentive scheme, Mallya et al. (2004) found that there may be a selection bias in favor of upon the side of; favorable to; for the advantage of.

See also: favor
 new and greenfield FDI. A similar conclusion was also drawn by Mudambi (1998). Meyer and Nguyen (2005) argue that the institutional set up in emerging market economies including local authorities and business would have fewer motives to inhibit greenfield investments. Incentives in many emerging market economies are provided for less developed regions where numbers of acquirable established companies are relatively scarce which leaves the new entrant with no option but a greenfield investment. Although in Turkey incentives apply equally to both greenfield investments and acquisitions, many potential acquisitions are not located in high incentive regions and therefore do not qualify for incentives. Therefore we hypothesize that:

Hypothesis 3. A foreign investor is more likely to choose a greenfield investment over an acquisition mode when investment incentives are perceived as important.

Comparative Cost Advantages and Quality of Inputs

Comparative cost advantages coupled with input quality in the host country may influence the foreign investor's entry mode decision. The expected reduction in the cost of operations offered by the two modes of entry depends on a number of factors including the nature of the excess resources, the number of potential entrants, and the extent of competition in the target industry (Chatterjee 1990). When the new entrant expects a large reduction in operating costs operating costs nplgastos mpl operacionales  from excess resources and requires few complementary resources, then the likelihood of a greenfield investment is higher. There is some evidence to support this argument. Hennart and Park (1993) found that acquisition was favored over greenfield investment when the new entrant seeks access to complementary inputs. Transaction cost economists argue that complementary inputs such as product specific knowledge may be acquired more cheaply in a going concern than in disembodied form through market exchange (Chang/Rosenzweig 2001).

In contrast, Brouthers and Brouthers (2000) argue that greenfield investment may provide a superior method to capture the "economies of independent activities" than do acquisitions. When a firm is motivated mo·ti·vate  
tr.v. mo·ti·vat·ed, mo·ti·vat·ing, mo·ti·vates
To provide with an incentive; move to action; impel.



mo
 by access to quality inputs, acquisition may be favored over greenfield investment. In a study of FDI and entry mode in Hungary, Szanyi (2001) pointed out that foreign investors opted for an acquisition when there was an acquirable company with an established reputation in terms of finished or semi finished goods. Szanyi (2001) also reports that quality of human resources The fancy word for "people." The human resources department within an organization, years ago known as the "personnel department," manages the administrative aspects of the employees.  and skills available in local companies motivate MNEs in their acquisition decisions in Hungary. In cost oriented operations, however, Antaloczy and Sass (2001) argue that especially when labor-intensive production processes are transferred to a low-wage location, MNEs prefer a greenfield entry mode. In a study of CEE cee  
n.
The letter c.
 countries, based on the EBRD EBRD

See: European Bank for Reconstruction and Development
 database, Wes and Lankes (2001) found that the proportion of skilled labor costs in total production costs was much higher for greenfield investments than for acquisitions, while the share of unskilled labor was more than twice higher for acquisitions than for greenfield investments. They further report that although wage rates for greenfield investments and acquisitions stay approximately the same, in the case of skilled labor the productivity is significantly higher for greenfield investments than acquisitions. However, the relatively low cost of labor is not the only input that the host country can provide. An existing marketing network and knowledge based resources, quality of the labour force, and complementary resources are also important factors in greenfield--acquisition decisions. Due to the ambiguity Ambiguity
Delphic oracle

ultimate authority in ancient Greece; often speaks in ambiguous terms. [Gk. Hist.: Leach, 305]

Iseult’s vow

pledge to husband has double meaning. [Arth.
 of the prior literature on comparative cost advantages and quality of inputs, we propose the following two-part hypothesis:

Hypothesis 4a. A foreign investor is more likely to choose a greenfield investment over an acquisition mode when the cost of production is a dominant motive.

Hypothesis 4b. A foreign investor is more likely to choose an acquisition mode over a greenfield mode when the perceived input quality is higher in the country of entry.

Investing Firm Specific Factors

Input Dependency

The relationship between input dependency and entry mode can be explained by both resource dependency and the resource-based views (Yah/Gray 1994, Pfeffer/Salancik 1978, Lecraw 1984, Lee et al. 1998, Das/Teng 2000). Resource dependency theory Dependency theory is a body of social science theories, both from developed and developing nations, that are predicated on the notion that there is a center of wealthy states and a periphery of poor, underdeveloped states.  (Pfeffer/Salancik 1978) portrays the organization as facing a complex set of dependencies between itself and its environment. Thus, MNEs would choose greenfield investments so as to better manage these complexities and uncertainties. A high input dependency between the parent firm and the affiliate may also facilitate a vertical control mechanism. Input dependency of the affiliate on the parent organization tends to reduce the affiliate's autonomy, hence increasing the parent firm's influence on overall strategy of the affiliate (Pfeffer/Salancik 1978, Lecraw 1984, Lee et al. 1998). According to the resource-based view The resource-based view (RBV) is an economic tool used to determine the strategic resources available to a firm. The fundamental principle of the RBV is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the  of the finn, where resources are imperfectly im·per·fect  
adj.
1. Not perfect.

2. Grammar Of or being the tense of a verb that shows, usually in the past, an action or a condition as incomplete, continuous, or coincident with another action.

3.
 imitable im·i·ta·ble  
adj.
1. That can be imitated: the imitable sounds of a bird.

2. Worthy of imitation: imitable behavior. 
 and imperfectly substitutable, a greenfield investment rather than the acquisition of an existing company would better protect a firm's resources and knowledge. A greenfield investment would also facilitate efficient knowledge transmission between parent and subsidiary. Finally, cultural and organizational fit problems associated with international acquisitions would be avoided.

Extent of Diversification Diversification

A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance.

Notes:
Diversification is possibly the greatest way to reduce the risk.
 

Diversified diversified (di·verˑ·s  firms are expected to prefer acquisitions rather than greenfield investments. The rationale behind this argument is the assumption that diversified firms have sophisticated management control systems that can minimize transaction costs and achieve efficiency (Brouthers/Brouthers 2000, 2003, Harzing 2002, Larimo 2003, Mudambi/Mudambi 2002, Laurila/Ropponen 2003, Chang/Rosenzweig 2001). This implies that less diversified firms lack the relevant expertise to manage and control expansion through acquisitions and should therefore prefer greenfield ventures. Empirical studies Empirical studies in social sciences are when the research ends are based on evidence and not just theory. This is done to comply with the scientific method that asserts the objective discovery of knowledge based on verifiable facts of evidence.  have produced ambiguous findings. Harzing (2002) did not find any significant relationship between entry mode and parent firm's diversification, whereas Laurila and Ropponen (2003) concluded that Finnish based firms in the paper industry used acquisitions for foreign expansion but they did not diversify diversify

To acquire a variety of assets that do not tend to change in value at the same time. To diversify a securities portfolio is to purchase different types of securities in different companies in unrelated industries.
 into totally new product areas or areas of previously minor importance. Barkema and Vermeulen (1998) found a positive relationship between the greenfield mode and the extent of the parent firm's diversification. Other researchers have found some empirical support for the argument that firms favor the acquisition mode when the parent firm is diversified (Wilson 1980, Yip 1982, Zejan 1990, Hennart 1991, Caves/Mehra 1986, Zejan 1990, Barkema/Vermeulen 1998).

Previous Commercial Association

Although some researchers have included multinational experience of the firm in their research design, the impact of previous commercial association has not been fully explored. Previous commercial experience with the host country may interact differentially in terms of entry strategy. Chang and Rosenweig (2001) argued that the choice of entry mode in subsequent investment decisions might be affected by initial experience with a particular entry mode. This notion is known as path dependency. Path dependency means that, all else being equal, if the firm's previous experience with greenfield investment or acquisition is satisfactory, the firm may follow the same entry mode in future market entries.

This notion of path dependency can be extended to the firm's experience of previous commercial association in the host country. Some researchers argue that firms with previous commercial association in the host country will find it easier to make an acquisition rather than a greenfield investment (Wilson 1980, Caves 1982, Madhok 1995, Demirbag et al. 1995, Larimo 2003). This argument is based on the notion that relationships developed in the context of previous commercial association will lead to lower transaction costs (Chatterjee 1990, Madhok 1995) and hence would facilitate expansion through acquisitions in the host country. Larimo (2003), however, argues that parent firms with previous association with the host nation would have presumably pre·sum·a·ble  
adj.
That can be presumed or taken for granted; reasonable as a supposition: presumable causes of the disaster.
 accumulated ac·cu·mu·late  
v. ac·cu·mu·lat·ed, ac·cu·mu·lat·ing, ac·cu·mu·lates

v.tr.
To gather or pile up; amass. See Synonyms at gather.

v.intr.
To mount up; increase.
 country specific knowledge in-house, and consequently would have less need to acquire local knowledge, which might motivate them to prefer a greenfield investment. The counter theoretical argument is that the previous association of the organization with the host country might provide the firm with an effective management and control of the acquired firm. Clearly, these two theoretical arguments conflict and evidence from empirical studies is also mixed (Kogut/Singh 1988, Andersson/Swensson 1994, Hennart/Reddy 1997, Ellis 2000, Chang/Rosenzweig 2001, Larimo 2003). Although the relationship between local experience and the entry is ambiguous, it can be argued that when internal uncertainty is high (due to lack of host country experience) performance of the operation might be difficult to assess. Transaction cost theory would then suggest that the firm might find it easier to monitor the performance of its operation when it is fully integrated (Erramilli 1991).

Cultural Distance

The concept of cultural distance has been well known since the work of Hofstede (1980) and widely used for predicting the entry mode of MNEs (Harzing 2002). Cultural distance is defined as "the difference between national cultural characteristics of home and host countries" (Hennart/Larimo 1998, Anderson/Gatignon 1986, Brouthers 2002). There are two basic arguments on the impact of cultural distance on MNEs' choice between a greenfield investment and acquisition. The first argument is based on the relationship between cultural dissimilarity and the transaction cost of the entry. As cultural dissimilarity between the home and host country increases, investment in non-redeployable assets in the host country becomes riskier (Tatoglu et al. 2003, Kogut/Singh 1988, Gatignon/Anderson 1988, Erramilli/Rao 1993, Padmanabhan/Cho 1995, Barkema/Vermeulen 1998). This largely stems from the differences in the host country context, which makes a firm's management techniques and procedures less appropriate, and erodes the applicability and value of its organizing principles and routines (Madhok 1998). This argument leads some researchers to conclude that the larger the cultural distance between the home and host countries, the higher the probability of greenfield investment. The second argument is that the larger is the cultural distance between the home and host country, the greater will be the tendency towards a co-operative venture through a partial acquisition of an existing local firm. In line with this view Brouthers and Brouthers (2000) argue that in entering culturally similar countries, MNEs prefer greenfield investment which may facilitate them to maximize firm specific advantages. Chang and Rosenzweig (2001, p. 755) argue that "as firms learn about the host market and become familiar with its culture and institutional environment, one would expect the preference for greenfield investment to diminish". In this case a strategy of initially involving a local partner would help the new venture to acquire local political, legal and societal knowledge.

Some studies report a significant relationship between cultural distance and greenfield entry mode (Kogut/Singh 1988, Barkema/Vermeulen 1998, Chang/Rosenzweig 2001, Harzing 2002, Larimo 2003), while other studies do not find any significant relationship (Padmanabhan/Cho 1995, Anand/Delios 1997, Brouthers/Brouthers 2000). Harzing (2002) argued that these contrasting findings stem from home country effects inherent in single source country surveys (i.e., US and Canadian companies This is a list of companies from Canada.
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 are adept at acquisition while Japanese companies tend to go for greenfield investments). In this study we balance the sample between firms from the US, Japan and European countries in order to minimize the home country effect in the analysis.

Parent Size

Transaction cost arguments predict that there is a relationship between the size of the parent firm and the entry mode. Hennart and Park (1993), for instance, argued that managerial constraints on greenfield expansion might be especially tight when the investor is a relatively small size organization. Kogut and Singh (1988) show that the greater the size of the parent organization, the greater the likelihood of a greenfield entry. Caves and Mehra (1986) also found that larger firms are more likely to enter by a greenfield investment. In contrast other studies (Padmanabhan/Cho 1995, Barkema/Vermeulen 1998, Shaver 1998, Harzing 2002, Yip 1982, Mudambi/Mudambi 2002) have reported that larger firms tend to prefer acquisitions rather than greenfield investment. The rationale behind this set of findings is that in large firms the managerial resources and capabilities may facilitate the integration and the control of the acquired or partly acquired company. Other studies have produced mixed results, Larimo (2003) examined the entry mode of Nordic firms and found a significant relationship between firm size and entry mode of Finnish firms, but not in the case of Danish, Norwegian or Swedish MNEs. Chang and Rosenzweig (2001) were unable to find any significant relationship between the size of the parent firm and the entry mode. It is perhaps the case that the findings of some of the studies are confounded by the cultural distance between the home and the host countries, the timing of the investment decision and the nature of the selected host countries (developed or developing countries).

Affiliate Specific Factors

Ownership Pattern

The ownership pattern or equity control of the affiliate is expected to have an impact on the MNE's entry mode decisions in emerging markets. However, it can be argued that the degree of ownership is relatively independent of the entry mode, as it is determined by the foreign parent's requirements for complementary inputs. Such requirements may be served equally well by both greenfield or acquisition entry modes. Perhaps not surprisingly, empirical studies report mixed evidence on the relationship between degree of ownership and the entry mode. Gomes-Casseres (1989) noted a relationship between acquisitions and JVs, while Caves and Mehra (1986) reported that acquisitions were less likely in establishing JVs. Hennart and Park (1993), however, found that the ownership level of the affiliate (JV) had no significant impact on the entry mode. Hennart and Larimo (1998) highlighted that Finnish firms tend to choose full ownership of their acquisitions, but use joint ventures for greenfield investments. In a more recent study of Nordic firms, Larimo (2003) found that wholly owned subsidiaries were more likely to be acquisitions. In their survey of FDI in CEE countries, Wes and Lankes (2001) concluded that "greenfield investments were twice more likely to be under full foreign ownership than acquisitions". Given the market structure in Turkey, we expect MNEs to follow a similar strategy to that of entry to other emerging markets in the region.

Resource Intensity

A large proportion of affiliates in emerging markets are in resource-intensive industries. In resource-intensive industries (i.e., mining, food and beverages, tobacco, textile, petroleum, rubber and primary metals), local firms are assumed to have more privileged access to these resources. Gomes-Casseres (1989) argues that the likelihood of MNEs establishing JVs with local companies in these industries is high. The resource-intensive industries, as in many other developing countries, were amongst the priority sectors for Turkish industrialization industrialization

Process of converting to a socioeconomic order in which industry is dominant. The changes that took place in Britain during the Industrial Revolution of the late 18th and 19th century led the way for the early industrializing nations of western Europe and
. MNEs entering these industries would have a resource-seeking motive. We expect that resource intensity of the affiliate's industry will have some impact on MNEs' preference between greenfield and acquisition (Laurila/Ropponen 2003). Lipsey (2000), for instance, argues that US FDI tends to move to countries with comparative disadvantages in trade relative to the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. . In resource-intensive industries, however, US FDI seems to move towards "countries with comparative advantages in trade relative to the US". In the light of this argument, Lipsey (2000) concludes that while company comparative advantages dominate investment in manufacturing, country comparative advantages dominate in resource intensive industries. In resource intensive industries host governments would prefer to have JVs in the form of greenfield investments. High asset intensity requires larger commitments in terms of capital or other distinctive resources. In an environment of high uncertainty, MNEs may opt for a co-operative form or an acquisition of an existing local company. However, if the new venture is in a resource-intensive industry (which may not require high capital investment or other distinctive resource commitments) then MNEs may prefer greenfield investment over an acquisition.

Research Methods

Dataset

Empirical studies of MNEs' entry mode decisions have relied on both primary and secondary data. Survey data of managers' perceptions of host country environment and institutions has been widely used in examining entry mode decisions of foreign investors between joint ventures and wholly owned subsidiaries or between greenfield investments and acquisitions (Agarwal/Ramaswami 1992, Brouthers 1995, Barkema/Varmeulen 1998, Luo 2001, Harzing 2002, Brouthers 2002, Brouthers/Brouthers 2002, Brouthers et al. 2002). As Agarwal and Ramaswami (1992, p. 2) argue the "survey technique provides direct measures which are obtained by evaluating managerial perceptions about market potential and investment risk (location advantages)". In a similar vein, Henisz (2000) notes that, in researching political risk "the literature has moved away from attempts to directly quantify Quantify - A performance analysis tool from Pure Software.  hazards and has, instead, adopted the proxy of managerial perception of hazards" (for a detailed discussion, see also Sethi/Luther 1986, Agarwal/Ramaswami 1992). In a research design involving a single recipient country, managerial perceptions are important for the assessment of environmental factors, which are exogenous Exogenous

Describes facts outside the control of the firm. Converse of endogenous.
 and constant across firms for the given country. Also, executives' perceptions of the host country and institutions are important because past experience shows that these constructs are difficult to operationalize in entry mode decisions (Agarwal/Ramaswami 1992).

Measuring institutional, industry and firm level variables as a function of managers' perception of institutional environment, industrial and organization related factors on decisions appears to receive significant support from the organization behavior and strategic management literature (Cyert/March 1963, Aharoni 1966, Agarwal/Ramaswami 1992). As Agarwal and Ramaswami (1992, p. 3) argue "these perceptions may be different due to variations in managers' past experiences in that country, level of knowledge of that country, individual biases, etc." The research design of this paper was based on the premise that executives' perceptions of the host country environment would be important determinants of their entry mode decision (greenfield vs. acquisitions).

The analysis in this study is based on the collection of primary data at the firm level. The sample, which includes the foreign partners of Western MNEs headquartered in the USA and Western Europe Western Europe

The countries of western Europe, especially those that are allied with the United States and Canada in the North Atlantic Treaty Organization (established 1949 and usually known as NATO).
, results from the pooling of the databases of two surveys. For both surveys, a purposive pur·po·sive  
adj.
1. Having or serving a purpose.

2. Purposeful: purposive behavior.



pur
 sample of foreign investors was drawn from the database of the General Directorate of Foreign Investment (GDFI) on the basis of the following selection criteria: (i) partners from Europe and the USA, (ii) having an affiliate with an equity stake of more than 10 percent, (iii) having an affiliate with capital value of more than 1 million USD USD

In currencies, this is the abbreviation for the U.S. Dollar.

Notes:
The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion.
. It was also decided to investigate only one affiliate for each of the multi-affiliate foreign investors. For these firms the affiliate chosen was the one most recently established.

The data for the first survey were collected in 1995 by means of personal interviews with senior executives in several countries including the UK, Germany, France and Belgium. Data for the second survey were collected in 1999 by means of an international mail survey. The second survey contains items from the earlier survey, and data were collected from recent entries and the ones that were not covered not covered Health care adjective Referring to a procedure, test or other health service to which a policy holder or insurance beneficiary is not entitled under the terms of the policy or payment system–eg, Medicare. Cf Covered.  in the first survey. The first survey mainly included entries prior to 1980s, while the second survey largely focused on entries post 1990. The aim was to capture implications of policy and institutional changes throughout 1980s and 1990s by an integrated dataset. Efforts were thus made in both surveys to reach key informants. For the information needed for the postal survey, key informants were typically either president or CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board.  of the investing firms. In those cases where a known area manager was involved in the entry decision from the very outset, then questionnaires were sent to these area managers. Both surveys followed the guidelines guidelines,
n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks.
 developed by Huber and Power (1985) for using single informants, and the structured nature of both surveys enabled us to merge both data sets.

All interviews and the questionnaires designed for data collection were in English. The composite database consists of 145 foreign affiliates formed by Western MNEs from 15 different countries. Potential for any bias that may stem from the pooling of datasets was checked in order to examine the generalizability of the study's findings. First, the responses provided to the questions were investigated for each sample and showed no significant differences (p > 0.1). Second, the responding companies from each sample were also compared across the main characteristics of the sample such as parent size, time period of formation and ownership pattern and again showed no clear differences (p > 0.1).

There is not a well established method for merging datasets in international business research; however, there are two main approaches which have been applied by researchers: the means-based approach and regression-based imputation IMPUTATION. The judgment by which we declare that an agent is the cause of his free action, or of the result of it, whether good or ill. Wolff, Sec. 3.  (Schofield/Polette 1999, Brown 2002). The means-based approach has been mainly applied to smaller datasets while the regression-based imputation technique has been used for merging larger datasets and estimating missing values In statistics, missing values are a common occurrence. Several statistical methods have been developed to deal with this problem. Missing values mean that no data value is stored for the variable in the current observation.  (Brown 2002). With the means-based approach (also called the cell-based approach), if there are no significant differences between means of variables from the two datasets, then the variables from the datasets are pooled into a merged dataset. This approach has commonly been used by health economists (Cameron/ Wolfson 1994, Schofield/Polette 1999) for simulation purposes. Lane et al. (2001) used the means-based approach to compare and identify absorptive capacity In business administration, absorptive capacity is theory or model used to measure a firm's ability to value, assimilate, and apply new knowledge. It is studied on multiple levels (individual, group, firm, and national level).  and learning in international joint ventures in Hungary. The regression regression, in psychology: see defense mechanism.
regression

In statistics, a process for determining a line or curve that best represents the general trend of a data set.
 approach relies on mathematical models, which goes beyond the scope of this paper. Although the means-based approach has some limitations for larger datasets (Cameron/Wolfson 1994), it is relatively simple to apply as it relies on tables of average values associated with a particular variable, rather than complicated mathematical models (Schofield/Polette 1999). Secondly, the technique is flexible and depends on only a small number of readily available variables. This study uses the means-based data merging technique. We pooled data from the two surveys to establish a larger dataset which facilitates more rigorous testing of hypotheses. The merged dataset also enabled us to cover a larger time scale to identify impacts of policy changes throughout the second half of the 1990s.

For the full set of sample firms, 99 (68.3 percent) have greenfield investments and 46 (31.7 percent) have acquisitions. In terms of the time period of formation of affiliates, about 66 percent of the affiliates were established in the period 1987-94, 14 percent formed in the period 1980-1986, and the remaining 20 percent formed prior to 1980. Table 1 summarizes the characteristics of the sample.

Measurement of Variables

The dependent variable, the mode by which the operation was established, was captured by a dummy variable This article is not about "dummy variables" as that term is usually understood in mathematics. See free variables and bound variables.

In regression analysis, a dummy variable
, which takes the value of 0 if the entry is made by acquisition and 1 if the entry is made by greenfield investment.

The independent variables were measured as follows:

Based on institutional theory, Dunning's (1993) concept of locational choice of MNEs and transaction cost explanation of international production, we identified a set of 15 host country specific motives drawn from an extensive review of the extant literature Extant literature refers to texts that have survived from the past to the present time. Extant literature can be divided into extant original manuscripts, copies of original manuscripts, quotations and paraphrases of passages of non-extant texts contained in other works, . The questions relating to relating to relate prepconcernant

relating to relate prepbezüglich +gen, mit Bezug auf +acc 
 host country motives were ex post measures of foreign parent managers' perceptions of the relative importance of the locational factors at the time of the investment decision. Respondents In the context of marketing research, a representative sample drawn from a larger population of people from whom information is collected and used to develop or confirm marketing strategy.  were asked: "How important were the following factors in your decision to choose Turkey as a location for the equity venture?" Responses were assessed using five-point scales (i.e., 1 = "of no importance" to 5 = "of major importance"). These items are reproduced in Appendix A. The correlation matrix Noun 1. correlation matrix - a matrix giving the correlations between all pairs of data sets
statistics - a branch of applied mathematics concerned with the collection and interpretation of quantitative data and the use of probability theory to estimate population
 of the 15 host country location factors revealed a number of low to moderate inter-correlations between motives. Due to potential conceptual and statistical overlap, exploratory factor analysis using varimax rotation was undertaken to extract a parsimonious par·si·mo·ni·ous  
adj.
Excessively sparing or frugal.



parsi·mo
 set of variables. Host country selection criteria with factor loadings greater than 0.4 were grouped for each factor derived. There were no double loading factors above the sort criteria of 0.4.The factor analysis produced six underlying factors that make good conceptual sense and explained a total of 68.7 percent of the observed variance The discrepancy between what a party to a lawsuit alleges will be proved in pleadings and what the party actually proves at trial.

In Zoning law, an official permit to use property in a manner that departs from the way in which other property in the same locality
, as shown in Table 2. The six factors may be summarized as: investment risk, government regulations, financial incentives, quality of inputs, comparative cost advantages, and market potential. An internal reliability test exhibited strong Cronbach alpha values for the underlying factors ranging from 0.53 through 0.94. Thus, scales exhibited well over 0.50 reliability levels suggested by Nunnally (1978) as a minimum level for acceptable reliability. For a validity check, the sample was split randomly and Cronbach alphas were recalculated for the factors on each subsample sub·sam·ple  
n.
A sample drawn from a larger sample.

tr.v. sub·sam·pled, sub·sam·pling, sub·sam·ples
To take a subsample from (a larger sample).
. Alphas continued to be satisfactory with a range of 0.52 to 0.91.

The control variables were measured as follows:

Input dependency of affiliate (INPUT) was categorized cat·e·go·rize  
tr.v. cat·e·go·rized, cat·e·go·riz·ing, cat·e·go·riz·es
To put into a category or categories; classify.



cat
 as no dependency, 1-20 percent dependency, 21-50 percent dependency and higher than 50 percent dependency (Appendix B). An ordinal (mathematics) ordinal - An isomorphism class of well-ordered sets.  variable was created that takes the value from 1 to 4 to represent each category respectively.

Parent diversity (DIVER diver, general term used to refer to many diving birds, e.g., the loon, the grebe, and some ducks, auks, and penguins. ) was measured using Rumelt's (1974) categories, i.e., single business, dominant business, related business, and unrelated business (Appendix C). An ordinal variable was created that takes the value from 1 to 4 to represent each category respectively.

Previous commercial association (EXPERIENCE) is a dummy variable that takes a value of 1 if the foreign parent firm has previous commercial association with the Turkish market in the forms ranging from foreign trade and arms length contracts (e.g., licensing, patent, marketing agreement) to FDI (e.g., JV or WOS) and 0 otherwise.

Cultural distance (CULT-DIS) was measured by Kogut and Singh's (1988) composite index Composite Index

A grouping of equities, indexes or other factors combined in a standardized way, providing a useful statistical measure of overall market or sector performance over time. Also known simply as a "composite".
, which measures the overall difference between two countries on each of Hofstede's (1980) cultural dimensions Cultural dimensions are the mostly psychological dimensions, or value constructs, which can be used to describe a specific culture. These are often used in Intercultural communication-/Cross-cultural communication-based research.

See also: Edward T.
, i.e., power distance, uncertainty avoidance, masculinity/femininity, and individualism individualism

Political and social philosophy that emphasizes individual freedom. Modern individualism emerged in Britain with the ideas of Adam Smith and Jeremy Bentham, and the concept was described by Alexis de Tocqueville as fundamental to the American temper.
.

Foreign parent size (PAR-SIZE) was measured by eight size categories determined by the number of employees, as shown in Table 1. An ordinal variable was created that takes the value from 1 to 8 to represent each category.

Natural resource intensity of target industry (RESOURCE) is a dummy variable given the value of 1 if the affiliate is in a resource-intensive industry and 0 otherwise. Following Gomes-Casseres (1989), resource-intensive industries were identified as food, beverages, textiles, rubber, tobacco, paper, petroleum, and mining.

Ownership mode of affiliate (OWN) is measured by a dummy variable that takes the value of 1 if the affiliate is a WOS or 0 if it is a JV. A venture is defined as a JV when foreign equity ownership ranges from 10 percent to 90 percent, while a venture with foreign equity shareholding of over 90 per cent is considered to be a WOS. This range is consistent with the definition of a JV used by the U.S. Department of Commerce. Park and Ungson (1997), and Hladik (1985) also followed the same definitions. Although there are some other studies defining joint ventures as "ventures where two or more partners establish a separate organization in which each partner holds a minimum equity stake of 5 percent (Beamish/Kachra 2004), we excluded those ventures with less than 10 percent foreign ownership, which makes our study reasonably consistent with previous studies of this nature (Beamish 1988, Gomes-Casseres 1989, 1990, Chowdhury 1992).

In addition to the control variables discussed above, three further variables are included in the model to control for possible extraneous ex·tra·ne·ous  
adj.
1. Not constituting a vital element or part.

2. Inessential or unrelated to the topic or matter at hand; irrelevant. See Synonyms at irrelevant.

3.
 variation:

Date of entry. The entry mode literature (Laurila/Ropponen 2003, Mudambi/Mudambi 2002, Harzing 2002, Larimo 2003) predicts that the timing of entry is an important variable in the MNE's entry strategy decision. A dummy variable for the timing of entry (DATE) was assigned as·sign  
tr.v. as·signed, as·sign·ing, as·signs
1. To set apart for a particular purpose; designate: assigned a day for the inspection.

2.
 to control for variation that might result from the enactment of new ownership related legislation in Turkey in 1986. A value of 0 was given for pre-1986 entries and 1 for post- 1986 entries.

Region of origin. Although cultural distance can measure certain dimensions of variance between individual countries, a broad region of origin variable is introduced to control for variations between Anglo-American and continental European MNEs' choice of a particular mode of entry. A dummy variable (COUNTRY) was assigned with 1 = Anglo-American, and 0 = Continental Europe.

Industry of affiliate. To control for industry variations, four broad industrial groupings (automobile, electrical, chemical, and finance and trade) are introduced as dummy Sham; make-believe; pretended; imitation. Person who serves in place of another, or who serves until the proper person is named or available to take his place (e.g., dummy corporate directors; dummy owners of real estate).  variables.

Analysis

Binomial binomial (bī'nō`mēəl), polynomial expression (see polynomial) containing two terms, for example, x+y. The binomial theorem, or binomial formula, gives the expansion of the nth power of a binomial (x+  logit analysis estimates the probability of an event occurring and has been utilized frequently in studies on foreign establishment mode strategies (Hennart/Park 1993, Andersson/Swensson 1994, Padmanabhan/Cho 1995, 1999, Brouthers/Brouthers 2000). The binomial logit model can be expressed as:

P([Y.sub.i] = l)= l/[l + exp exp
abbr.
1. exponent

2. exponential
(-a - [X.sub.i] B)]

where [Y.sub.i] is the dependent variable, defined by a dummy variable either 1 or 0. The value of 1 denotes the probability of an event occurring rather than another as shown by the value of 0. [X.sub.i] is the vector of independent variables for ith observation, a is the intercept parameter (1) Any value passed to a program by the user or by another program in order to customize the program for a particular purpose. A parameter may be anything; for example, a file name, a coordinate, a range of values, a money amount or a code of some kind. , B is the vector of the regression parameters (Amemiya 1981). The regression coefficients estimate the impact of the independent variables on the probability of an event that occurs. A positive sign for the coefficient means that the variable increases the probability of the event occurring, a negative sign signifies the opposite. The maximum likelihood estimates of the parameters were obtained employing logistic regression.

The explanatory ex·plan·a·to·ry  
adj.
Serving or intended to explain: an explanatory paragraph.



ex·plan
 power of the model is assessed using the model chi-square statistics, which test the null A character that is all 0 bits. Also written as "NUL," it is the first character in the ASCII and EBCDIC data codes. In hex, it displays and prints as 00; in decimal, it may appear as a single zero in a chart of codes, but displays and prints as a blank space.  hypotheses that all parameter coefficients are zero, except the intercept term. Large chi-square values and small p values indicate good fit. The predictive ability of the model can be determined by the correct classification rate, which shows the percentage reduction in classification errors with respect to random selection. However, to identify an acceptable level of predictive accuracy, the obtained classification rate has to be compared to the rate that would have been obtained by chance. In the case of unequal group sizes the standard to calculate this rate should be proportional proportional

values expressed as a proportion of the total number of values in a series.


proportional dwarf
the patient is a miniature without disproportionate reductions or enlargements of body parts.
 chance criterion. The formula for this criterion is: [[alpha].sup.2] + [(1 - [alpha]).sup.2] where [alpha] is the proportion of cases in group 1 and 1 - [alpha] is the proportion of cases in group 2. For a rough estimate of the acceptable level of predictive accuracy, Hair et al. (1995) suggest that the classification rate should be at least one-fourth greater than the proportional chance criterion.

Results and Discussion

The hypotheses were tested by conducting binomial logistic lo·gis·tic   also lo·gis·ti·cal
adj.
1. Of or relating to symbolic logic.

2. Of or relating to logistics.



[Medieval Latin logisticus, of calculation
 regressions on the functional relationships between the hypothesized effect variables and foreign investors' acquisition/greenfield choice. Prior to running the binomial logistic regression, a correlation matrix of the variables was prepared. The pairwise correlations were not large enough to warrant concern about possible multicollinearity problems. The results of the binomial logistic model for Western MNEs' acquisition/greenfield choice are shown in Table 3. The models have high overall explanatory power with significant chi-square values (p < 0.01). Table 3 shows that all four models have good correct classification rates (79.3 percent to 83.4 percent) that are well above the base line rate. While the specificity (their ability to correctly predict acquisitions) of all models leaves room for improvement (58.7 percent to 65.2 percent), their sensitivity (their ability to correctly predict greenfield investments) is excellent (88.9 percent to 91.9 percent). Pseudo Similar to; made up to appear like something else. See pseudo compiler, pseudo language and pseudonymous.

(jargon) pseudo - /soo'doh/ (Usenet) Pseudonym.

1. An electronic-mail or Usenet persona adopted by a human for amusement value or as a means of avoiding negative
 R-square measures confirm that the models have relatively good explanatory power.

A summary of the hypotheses with the independent and control variables and their predicted and actual signs is shown in Table 4. Three of the hypothesized variables receive consistent and significant support in all four models: investment risk, quality of inputs and market potential. Five of the control variables also have expected signs: input dependency, parent diversity, resource intensity, previous commercial association and mode of ownership. Of the remaining variables, government regulations, financial incentives, comparative cost advantages, cultural distance and parent size are insignificant in all four models.

Host Country Specific Factors

Three of the six host country-specific factors have significant coefficients, i.e., investment risk (FACT1) (p < 0.05), quality of inputs (FACT4) (p < 0.01), and market potential (FACT6) (p < 0.05). The coefficient of investment risk (FACT1) is positive at p < 0.05, suggesting a moderate level of support for Hypothesis' 1. The finding that the factor of investment risk positively affects the MNE's choice of greenfield mode can be partially explained by the higher level of financial resource commitments required for an acquisition compared to a new venture. Moreover, similar to many other emerging markets, the Turkish market poses particular challenges to foreign investors because the legal and institutional environment is relatively poorly developed, capital markets are thin and there are numerous market failures. Such market inefficiencies and weak resource bases may increase the riskiness of the investment and thus affect an MNE's choice of alternative entry modes. While an acquisition allows quick entry and immediate access to local resources, the acquired company may require deep restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics).  to overcome organizational and cultural misfits between the two organizations. Especially in emerging markets, this restructuring may be so extensive that the new operation resembles a greenfield investment and hence makes acquisition a much costlier option than a greenfield investment (Meyer/Estrin 2001). So where the host country market offers a higher level of investment risk, MNEs may prefer to enter by establishing new ventures rather than via acquisitions.

The coefficients of market potential (FACT6) and quality of inputs (FACT4) are negative and significant (p < 0.05 and p < 0.01), which increase the likelihood of the venture being an acquisition. These findings provide some support for Hypothesis 2 and Hypothesis 4b. Two factors in particular play a critical role for Western MNEs' preference for acquisitions. First, Turkey has a rich source of good quality inputs, including an abundant and well-qualified labor force, which can be obtained at a relatively low cost by acquiring partial or full ownership of an existing local business. Second, Turkey is one of the key emerging markets characterized by high economic growth and a rapidly increasing population, which will induce in·duce
v.
1. To bring about or stimulate the occurrence of something, such as labor.

2. To initiate or increase the production of an enzyme or other protein at the level of genetic transcription.

3.
 market-seeking FDI. This potential has been shown in a recent survey (Loewendahl/Ertugal-Loewendahl 2000) that compares Turkey with Central and East European countries in terms of attractiveness to MNEs. Based on the perceptions of senior MNE executives, Turkey was ranked first as the most favorable location for market-seeking MNEs.

There was no support for Hypothesis 3. The coefficients of both government regulations and financial incentives were positive but insignificant (p > 0.1). This indicates that government regulations and financial incentives did not influence the Western MNEs' choice of establishing a new venture or making an acquisition.

Investing Firm Specific Factors

The coefficient of input dependency (INPUT) is positive and significant (p < 0.01), substantiating sub·stan·ti·ate  
tr.v. sub·stan·ti·at·ed, sub·stan·ti·at·ing, sub·stan·ti·ates
1. To support with proof or evidence; verify: substantiate an accusation. See Synonyms at confirm.
 the arguments associated with both resource dependency and the resource-based views. This finding supports the view that Western MNEs are more likely to choose a greenfield mode over an acquisition when their affiliates are highly dependent on parents' resources. Western MNEs prefer greenfield investments in order to manage the complexities and uncertainties of the environment and to enable efficient knowledge transmission between parent and subsidiary. Greenfield investments also avoid problems of potential cultural and organizational misfit mis·fit  
n.
1. Something of the wrong size or shape for its purpose.

2. One who is unable to adjust to one's environment or circumstances or is considered to be disturbingly different from others.
 often encountered in international acquisitions.

The coefficient of DIVER is negative and significant (p < 0.05), suggesting that highly diversified MNEs will prefer to enter the host country via acquisitions. This finding is consistent with earlier studies (Yip 1982, Caves/Mehra 1986, Brouthers/Brouthers 2000), arguing that firms pursuing a diversification strategy, whether in their national markets or abroad, tend to use acquisitions in order to obtain the industry-specific assets that they lack. More diversified firms also have relatively sophisticated management control systems, which can be exploited through acquisitions, thus increasing organizational efficiency (Hennart/Park 1993).

The negative and significant coefficient for EXPERIENCE (p < 0.05) corroborates prior research that draws on the organizational learning perspective. MNEs with extensive host country experience or previous commercial association may understand how to handle acquisitions from this acquired knowledge and thus be more likely to choose an acquisition over a greenfield investment (Caves/Mehra 1986, Barkema/Vermeulen 1998). Where a foreign firm has an established affiliate, local staff may be able to assist in identifying local targets, and in analyzing, negotiating and managing an acquisition. In contrast when a firm is contemplating entry for the first time into a new market, there are likely to be problems associated with a lack of familiarity with the host country, such as information gaps and lack of expertise in local negotiations. Organizational and cultural fit may also be more problematic when the venture is a first entry into a host country. This is in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[]

As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh.
 with the findings of Barkema et al. (1996), and Very and Schweiger (2001), who noted that host country experience facilitates further investments by way of acquisitions and increases the chances of success for new acquisitions.

Cultural distance (CULT-DIS) and foreign parent size (PAR-SIZE) were found to be not significantly related to establishment mode choice. Other studies that investigated the effect of cultural distance on entry mode choice also failed to report significant results (Barkema et al. 1996, Brouthers/Brouthers 2000). Similarly, prior research examining the influence of foreign parent size on entry mode choice reported no significant results (Yip 1982, Kogut/ Singh 1988, Barkema/Vermeulen 1998, Padmanabhan/Cho 1999). Prior studies that have reported significant results for these variables also produced conflicting findings (see Kogut/ Singh 1988). It appears that the predictive ability of both variables is rather limited, consequently receiving little support as major determinants of modal choice.

Affiliate Specific Factors

The positive and significant coefficient on mode of ownership (OWN) (p < 0.01) is in line with those of Wes and Lankes (2001) regarding FDI in CEE countries and confirms the view that Western MNEs will favor a greenfield investment over an acquisition when the affiliate is a WOS.

The positive and significant coefficient on RESOURCE (p < 0.05) tends to confirm our view that the foreign investor is more likely to choose a greenfield investment over an acquisition when the affiliate is in a resource-intensive industry. Market-seeking FDI in emerging markets is often best served through acquisition of local firms. A greenfield entry could be too risky or too slow for a market-seeking foreign investor who wishes to make a rapid market entry and serve country-specific customer preferences in the quickest way. In such cases the best way to obtain control over marketing assets may be through the purchasing of a local firm rather than building a subsidiary from scratch. In contrast, resource-seeking FDI, aimed at utilizing host country raw materials and human capital, may be facilitated better by a greenfield entry. Where host country markets readily provide access to qualified local labor, good quality raw materials and supplies of intermediate goods, such inputs may be obtained through a greenfield venture.

None of the additional control variables, which include date of entry (DATE), region of origin (COUNTRY) and industry of affiliate, are significant. When these variables are included in the model there is little change in the size of the coefficients of the independent variables. The findings show that there was no significant impact of these control variables on Western MNEs' choice of either greenfield investment or acquisition.

Managerial and Policy Implications

The paper has investigated factors influencing the choice between an acquisition and a greenfield entry mode in an emerging market context. A relatively large dataset enabled the testing of a number of hypotheses in order to investigate the relationship between host country, investing firm and subsidiary level factors and entry mode choice in Turkey. Each entry mode has its own implications for managerial practice and public policy.

Our first Hypothesis l received significant support, implying that potential for political hazards was taken into account by MNEs in entry mode decisions. Although policy makers in emerging market economies place high emphasis on investment incentives, potential political or economic hazards (i.e., economic stability, political stability) seem to play a more important role in the firm's decision of establishing greenfield investment.

Findings presented in this paper are of some importance to policy makers in emerging countries in general and inward investment Inward investment is the injection of money from an external source into a region, in order to purchase capital goods for a branch of a corporation to locate or develop its presence in the region.  agencies in particular. We did not find support for Hypothesis 3, where we expected executives' perception of investment incentives to be an important determinant of greenfield investments. As investment incentives in Turkey apply equally to both acquisitions and greenfield investment this may explain why we did not find support for Hypothesis 3. However, it seems that incentives do not significantly influence MNEs' choice of greenfield or acquisitions, a finding that policy makers should be aware of.

The acquisition of existing local brands by MNEs may create some anxiety amongst policy makers, consumers and other players in the market (i.e., suppliers, distributors). These anxieties can be observed through reactions of actors related to FDI. At a recent news conference, the head of Foreign Investors' Association (YASED) stated that "acquisitions should not be perceived as a bad ripe of foreign investment, this is a new trend in the world. Since we have so many privatizable and acquirable companies, we expect foreign investors to play their role" (Hurriyet 2005). To overcome such anxieties acquirer companies' investments in culture transmission and rehabilitation rehabilitation: see physical therapy. , and the internationalization The support for monetary values, time and date for countries around the world. It also embraces the use of native characters and symbols in the different alphabets. See localization, i18n, Unicode and IDN.

internationalization - internationalisation
 of local brands need to be highlighted as major contributions to the host economy.

Our study finds a significant relationship between the perceived market potential and entry mode decision, implying that the current trend of increasing acquisition may stabilize stabilize

See peg.
 at some point. The market potential in certain sectors (e.g., banking, telecoms, and power generation) is still large enough to attract acquisitions rather than greenfield investment. First mover advantages seem to be an underlying motive here; however, the parent company may not be able to avoid lengthy negotiations, which may increase transaction costs. Failure to integrate a new acquisition within the existing MNE network of affiliates may also diminish potential benefits.

Cultural distance was not found to be statistically significant with respect to establishment mode choice. Nevertheless, managers of foreign firms may still prefer acquisitions as they can provide investors with the opportunity to establish local links in an effort to overcome a liability of foreignness. A major disadvantage of entering the host country through an acquisition, however, is the management costs involved in integrating the acquired firm with the parent firm. This disadvantage tends to be greater as the cultural distance between the acquirer and the acquired firm's country increases (Hennart/Reddy 1997). Another way of seeking to overcome a liability to foreignness is to establish a collaborative venture with a local partner. Firms without previous experience in the host market are unlikely to have the knowledge of the local market and marketing channels. Linking with a local partner might be an effective way of providing them with such knowledge as well as additional managerial, technical and financial resources. The initiation of such a collaborative venture is likely to come from the foreign firm rather than the local partner.

Our findings suggest that MNEs with previous commercial association with the host country market tend to choose an acquisition over a greenfield investment. A recent World Bank study indicated that greenfield investments in emerging markets follow acquisitions (Calderon et al. 2004). This is particularly important as inward investment agencies in emerging economies are primarily concerned with attracting greenfield investments from MNEs. Further to our findings, Mudambi (1998) also argued that firms with previous experience of the local market are the ones with the highest probabilities of making new investments in the area. Official regulations, or political pressure requiring greenfield investment may therefore discourage MNEs causing them to locate their investments in what they perceive to be more favorable areas. This is also important in the sense that MNEs tend to rationalize ra·tion·al·ize
v.
1. To make rational.

2. To devise self-satisfying but false or inconsistent reasons for one's behavior, especially as an unconscious defense mechanism through which irrational acts or feelings are made to appear
 their operations between regions and countries.

The level of bureaucracy and red tape may be an important factor determining MNEs' actions and entry mode selection. As Meyer and Estrin (2001) argued, "the markets for complementary resources are fairly efficient in mature economies, but not necessarily in emerging economies". Inefficiencies, for example, arising from overly bureaucratic bu·reau·crat  
n.
1. An official of a bureaucracy.

2. An official who is rigidly devoted to the details of administrative procedure.



bu
 procedures, may affect MNEs' entry mode decisions causing them to prefer acquisition where the bureaucratic impact might be considerably less compared to a greenfield investment.

Conclusions

This study builds on prior research by providing a comprehensive account of foreign establishment mode strategies of firms from numerous countries investing in Turkey. The results of the logistic regression modeling provided support to the hypothesized relationships that take into account the impact of host country specific motives of MNEs on their choice between acquisitions and greenfield investments. The host country motives quality of inputs and market potential have significant negative coefficients, which indicate that an MNE will favor the acquisition mode over a greenfield mode as the relative importance of both motives increases. The host country motive of investment risk has a significant positive coefficient, which increases the likelihood of the venture being a greenfield investment.

Our results also show that the main investing firm specific and subsidiary level determinants of FDI modal choice identified in prior research also influence the establishment mode choice of Western MNEs when investing in Turkey. Parent diversity, previous commercial association, ownership pattern and resource-intensiveness of the target industry have the expected impact on the foreign investor's choice between a greenfield investment and an acquisition. The high level of support found between input dependency and MNEs' choice of establishment mode tends to confirm the arguments of the resource dependency and resource-based views. No support is found, however, for the impact of cultural distance and foreign parent size on establishment mode choice. Similarly, the control variables of home region of the investing firm, timing of entry and industrial sector of investment do not affect modal choice.

Although each emerging market has its own development path and institutions, our results may be applicable to other emerging markets with a large stock of acquirable companies. The investment risk (capturing aspects of political risk) hypothesis could be extended to other emerging markets where institutional development has not yet reached the desired level resulting in high transaction costs because of the prevalent bureaucracy, red tape and potential for intervention A procedure used in a lawsuit by which the court allows a third person who was not originally a party to the suit to become a party, by joining with either the plaintiff or the defendant. . The role of financial incentives provided differentially to greenfield investments and acquisitions may be valid in other emerging markets. Our results indicate that different country, industry and subsidiary level factors affect foreign investors' entry mode decisions of greenfield or acquisitions. Once the pool of acquirable companies decreases, MNEs may place more emphasis on factors providing comparative advantages, and incentives. This may escalate es·ca·late  
v. es·ca·lat·ed, es·ca·lat·ing, es·ca·lates

v.tr.
To increase, enlarge, or intensify: escalated the hostilities in the Persian Gulf.

v.intr.
 competition for FDI in the region, given the fact that some of the new EU countries offer attractive packages for MNEs (e.g., flat tax rate and some other new incentives).

This study extends prior research in several ways. Apart from some notable exceptions undertaken largely in the CEE context (e.g., Meyer 2001, Meyer/Estrin 2001, Wes/Lankes 2001, Szanyi 2001), previous studies have paid insufficient attention to the establishment mode decision of foreign investors in emerging economies. These economies have become increasingly important to MNE operations. This study, therefore, adds to the scant scant  
adj. scant·er, scant·est
1. Barely sufficient: paid scant attention to the lecture.

2. Falling short of a specific measure: a scant cup of sugar.
 literature on FDI modal choice of Western MNEs in emerging economies. A second contribution lies in the methodology adopted. The study examines the importance of a comprehensive set of host country motives drawing on the perceptions of senior MNE executives. This approach provides a realistic picture of the impact of locational factors on FDI modal choice. A third area of contribution stems from the composition of the sample. Our sample consists of foreign investors from numerous countries; in contrast prior studies on the establishment mode choice of foreign investors tend to be confined to be in childbed.

See also: Confine
 to a single source country. Finally, the study contributes further evidence to the international business literature by replicating the findings of previous research in the different context of an emerging market economy.

We recognize that the present study has limitations. (i) Our indicators may be viewed as somewhat parsimonious with a more elaborated set of data inputs required to fully support the set of constructs analyzed an·a·lyze  
tr.v. an·a·lyzed, an·a·lyz·ing, an·a·lyz·es
1. To examine methodically by separating into parts and studying their interrelations.

2. Chemistry To make a chemical analysis of.

3.
. This should be taken into account in future research. (ii) The data set does not encompass relatively recent FDI to Turkey. It should be noted that there may be differences in findings had more recent FDIs been included in the data. It would be useful in future research to expand the time period under consideration. (iii) R&D expenditures of MNEs and their research intensity are not covered in our surveys, therefore we could not test the relationship between R&D expenditure and entry mode. (iv) Our research design allowed us to collect data on surviving entries, therefore, firms divested before the surveys are excluded from our study. (v) Measuring cultural-distance through an aggregate measure has been criticized for not capturing the richness of cultural diversity (Barkema/Vermeulen 1998), and such criticism also applies to our research. Further, Hofstede's fifth dimension has not been derived for Turkey, which limits our interpretation of the impact of cultural distance. Despite this limitation, it is still the case that many studies continue to use Hofstede's four original dimensions. (vi) Although there are different patterns of institutional changes in different emerging market economies, by implication we assume that Turkey is representative of this group of countries. Nevertheless, the usual caveat applies, as this study is of an exploratory nature using only one country and the results are not necessarily generalisable to other countries. Future studies should therefore incorporate more countries into the research design.

Several areas may be identified for future research. First, this study examined the determinants of choice between greenfield investment and acquisition in a host country at the time the venture is established. Future research should endeavor to provide a longitudinal lon·gi·tu·di·nal
adj.
Running in the direction of the long axis of the body or any of its parts.
 examination of factors underlying FDI modal choice. As the relationships tested are host country-specific, the hypotheses would benefit from further testing in different country contexts in order to examine whether our findings for Turkey hold in other emerging markets. It would also be useful for future research to examine the consequences of establishment mode choice in terms of subsequent subsidiary performance in an attempt to test the validity of the chosen mode. Our research highlights that new research designs in this area may be strengthened by perspectives borrowed from knowledge management (i.e., comparative study of knowledge management in greenfield joint ventures and in joint ventures formed through acquisitions). Finally, as the choice between greenfield investment and acquisition is a highly complex and dynamic process involving a large number of contingencies Contingencies (ISSN 1048-9851) is the bimonthly magazine of the American Academy of Actuaries, providing a large and diverse readership with general interest and technical articles on a wide range of issues related to the actuarial profession. , there is a need to develop an integrative theoretical perspective that draws on relevant aspects of the disparate existing theories in order to better explain the nature of this process.

Appendix A. Host Country-specific Motives

How important were the following factors in your decision to choose Turkey as a location for your operations? (Please circle according to the importance of each motive on the scales below where 1 = 'of no importance', 5 = 'of major importance')
Q#    Host Country Specific Motives

Q1    Market size                                       1-2-3-4-5
Q2    Growth rate of Turkish economy                    1-2-3-4-5
Q3    Political stability in Turkey                     1-2-3-4-5
Q4    Economic stability in Turkey                      1-2-3-4-5
Q5    Availability of qualified local personnel         1-2-3-4-5
Q6    Turkish government policy towards                 1-2-3-4-5
        foreign direct investment
Q7    International transport and communication costs   1-2-3-4-5
Q8    Repatriability of profits                         1-2-3-4-5
Q9    Availability of incentives                        1-2-3-4-5
Q10   Availability of good quality inputs (raw          1-2-3-4-5
        material, labour, etc.)
Q11   Availability of low cost inputs                   1-2-3-4-5
Q12   Availability of tax advantages                    1-2-3-4-5
Q13   Geographical proximity                            1-2-3-4-5
Q14   Level of industry competition                     1-2-3-4-5
Q15   Suitability of Turkish market to access           1-2-3-4-5
        neighbouring markets


Appendix B. Input Dependency of Affiliate

Please indicate what proportion of inputs of your Turkish affiliate is purchased from your company? Please tick tick: see mite.
tick

Any of some 825 parasitic arachnid species (suborder Ixodida, order Parasitiformes), found worldwide. Adults may be slightly more than an inch (30 mm) long, but most species are much smaller.
.

(i) 0%

(ii) 1-20%

(iii) 21-50%

(iv) Over 50%

Appendix C. Parent Diversity

Which of the following best describes your company?

(i) Dependent on single product

(ii) Dependent on one major area of related products

(iii) Diversified into related product areas

(iv) Diversified into unrelated product areas

Manuscript manuscript, a handwritten work as distinguished from printing. The oldest manuscripts, those found in Egyptian tombs, were written on papyrus; the earliest dates from c.3500 B.C.  received June 2006, revised October 2006, final revision received February 2007.

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A decision by a brokerage to fill an order with the firm's own inventory of stock.

Notes:
When a brokerage receives an order they have numerous choices as to how it should be filled.
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Of, relating to, or prescribing a norm or standard: normative grammar.



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Ekrem Tatoglu ([mail])

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Istanbul, Turkey.

Keith W. Glaister ([mail])

Dean and Professor of International Strategic Management, Management School, University of Sheffield,

Sheffield, United Kingdom.
Table 1. Sample Characteristics

Industry of Affiliate                   N      %

Auto, transport and related equipment   24   16.6
Electricals and electrical machinery    23   15.9
Food/drink manufacturing                 8    5.5
Chemicals                               28   19.3
Textile, apparel and leather             5    3.4
Computer and software                    5    3.4
Metal, iron and steel                    7    4.8
Other manufacturing                     14    9.7
Export-import trading                   11    7.6
Tourism                                  2    1.4
Financial and consultancy services      10    6.9
Construction and transport services      5    3.5
Other services                           3    2.1

Country of Origin

Germany                                 32   22.1
Switzerland                              5    3.4
United Kingdom                          25   17.2
Netherlands                              7    4.8
France                                   8    5.5
Belgium                                  3    2.1
Italy                                    7    4.8
Finland                                  3    2.1
Japan                                    4    2.8
Canada                                   1    0.7
US                                      42   29.0
Sweden                                   4    2.8
Denmark                                  2    1.4
Austria                                  1    0.7
Norway                                   1    0.7

Time Period of Formation                N      %

Pre-1986                                49   33.8
Post-1986                               96   66.2

Market Entry Mode of Affiliate

Greenfield                              99   68.3
Acquisition                             46   31.7

Foreign Parent's Diversity

Single business                         13    9.0
Dominant business                       65   44.8
Related business                        51   35.2
Unrelated business                      16   11.0
Previous Association
Yes                                     95   65.5
No                                      50   34.5

Mode of Ownership

WOS                                     59   41.0
JV                                      86   59.0

Number of FP Employees

0-49                                     2    1.4
50-99                                    2    1.4
100-499                                 15   10.3
500-999                                  7    4.8
1000-4999                               22   15.2
5000-9999                                9    6.2
10000-19999                             16   11.0
Greater or equal 20,000                 72   49.7

Input Dependency of Affiliate

No dependency                           27   18.6
1-20% dependency                        56   38.6
21-50% dependency                       23   15.9
Over 50% dependency                     39   26.9

Table 2. Factors of Host Country Specific Motivation

Factors                               Factor-   Eigen-   % Variance
                                       loads    value    Explained

Factor 1:                                        3.11      20.73
Investment risk
Economic stability                     0.95
Political stability                    0.94

Factor 2:                                        1.96      13.04
Government regulations
Level of industry competition          0.71
Repatriability of profits              0.67
Government policy towards FDI          0.54

Factor 3:                                        1.60      10.65
Financial incentives
Availability of incentives             0.85
Availability of tax advantages         0.74

Factor 4:                                        1.32       8.82
Quality of inputs
Availability of qualified local        0.88
  personnel
Availability of good quality inputs    0.85

Factor 5:                                        1.18       7.87
Comparative cost advantages
Geographical proximity                 0.75
Access to neighboring markets          0.72
Availability of low cost inputs        0.52
International transport and            0.45
communication costs

Factor 6:                                        1.13       7.56
Market potential
Growth rate of Turkish economy         0.87
Market size                            0.64

Factors                                Cum.     Cronhach
                                      Percent    Alpha

Factor 1:                              20.73      0.94
Investment risk
Economic stability
Political stability

Factor 2:                              33.77      0.61
Government regulations
Level of industry competition
Repatriability of profits
Government policy towards FDI

Factor 3:                              44.42      0.66
Financial incentives
Availability of incentives
Availability of tax advantages

Factor 4:                              53.24      0.75
Quality of inputs
Availability of qualified local
  personnel
Availability of good quality inputs

Factor 5:                              61.11      0.53
Comparative cost advantages
Geographical proximity
Access to neighboring markets
Availability of low cost inputs
International transport and
communication costs

Factor 6:                              68.67      0.59
Market potential
Growth rate of Turkish economy
Market size

K-M-O Measure of Sampling Adequacy = 0.78; Bartlett Test of
Sphericity = 613.757; p < 0.0000.

Table 3. Logistic Regression Results

                                             Model 1
Variables        Definition
                                     Coefficient   Wald-stat.

                 Intercept             1.53           1.58
FACT1            Investment risk       0.51 **        4.59
FACT2            Government            0.16           0.41
                   regulations
FACT3            Financial             0.28           1.31
                   incentives
FACT4            Quality              -0.57 ***       5.46
                   of inputs
FACT5            Comparative          -0.15           0.39
                   cost
                   advantages
FACT6            Market potential     -0.47 **        3.42
INPUT            Input dependency      0.70 ***       7.68
DIVER            Parent diversity     -0.59 **        3.60
RESOURCE         Resource              0.94 **        2.72
                   intensiveness
                   of affiliate
EXPERIENCE       Previous             -1.13 **        4.54
                   commercial
                   association
CULT-DIS         Cultural distance    -0.29           0.76
PAR-SIZE         Parent size          -0.11           0.69
OWN              Mode of ownership     1.48 ***       8.25
DATE             Period of
                   formation
COUNTRY          Broad home
                   country origin
AUTO             Automobile
ELECT            Electrical
CHEMICAL         Chemical
FIN_ TRADE       Finance and Trade
Model                                        51.17 ***
  chi-square
N                                           145
Sensitivity                                  88.9
Specificity                                  58.7
Correct ratio                                79.3
Baseline rate                                56.6
Cox and Snell                                 0.297
  R sq.
Nagelkerke                                    0.417
  R sq.

                                              Model 2
Variables        Definition
                                     Coefficient   Wald-stat.

                 Intercept             1.16           0.82
FACT1            Investment risk       0.51 **        4.63
FACT2            Government            0.15           0.37
                   regulations
FACT3            Financial             0.30           1.46
                   incentives
FACT4            Quality              -0.58 ***       5.65
                   of inputs
FACT5            Comparative          -0.16           0.47
                   cost
                   advantages
FACT6            Market potential     -0.46 **        3.22
INPUT            Input dependency      0.71  ***      7.71
DIVER            Parent diversity     -0.63 **        4.00
RESOURCE         Resource              0.97 **        2.89
                   intensiveness
                   of affiliate
EXPERIENCE       Previous             -1.18 **        4.86
                   commercial
                   association
CULT-DIS         Cultural distance    -0.27           0.66
PAR-SIZE         Parent size          -0.09           0.53
OWN              Mode of ownership    1.49 ***        8.39
DATE             Period of            0.41            0.72
                   formation
COUNTRY          Broad home
                   country origin
AUTO             Automobile
ELECT            Electrical
CHEMICAL         Chemical
FIN_ TRADE       Finance and Trade
Model                                        51.89 ***
  chi-square
N                                           145
Sensitivity                                  88.9
Specificity                                  60.9
Correct ratio                                80.7
Baseline rate                                56.6
Cox and Snell                                 0.301
  R sq.
Nagelkerke                                    0.422
  R sq.

                                             Model 3
Variables        Definition
                                     Coefficient   Wald-stat.

                 Intercept             1.27           0.94
FACT1            Investment risk       0.49 **        3.71
FACT2            Government            0.16           0.42
                   regulations
FACT3            Financial             0.30           1.49
                   incentives
FACT4            Quality              -0.57 ***       5.44
                   of inputs
FACT5            Comparative          -0.15           0.41
                   cost
                   advantages
FACT6            Market potential     -0.45 **        3.09
INPUT            Input dependency      0.70 ***       7.66
DIVER            Parent diversity     -0.63 **        4.020
RESOURCE         Resource              0.99 **        2.96
                   intensiveness
                   of affiliate
EXPERIENCE       Previous             -1.14 **        4.52
                   commercial
                   association
CULT-DIS         Cultural distance    -0.36           0.77
PAR-SIZE         Parent size          -0.10           0.48
OWN              Mode of ownership     1.48 ***       8.16
DATE             Period of             0.42           0.74
                   formation
COUNTRY          Broad home            0.23           0.14
                   country origin
AUTO             Automobile
ELECT            Electrical
CHEMICAL         Chemical
FIN_ TRADE       Finance and Trade
Model                                        52.03 ***
  chi-square
N                                           145
Sensitivity                                  89.9
Specificity                                  60.9
Correct ratio                                80.0
Baseline rate                                56.6
Cox and Snell                                 0.301
  R sq.
Nagelkerke                                    0.423
  R sq.

                                             Model 4
Variables        Definition
                                     Coefficient   Wald-stat.

                 Intercept             3.98           2.27
FACT1            Investment risk       0.42 **        2.83
FACT2            Government            0.09           0.15
                   regulations
FACT3            Financial             0.25           0.96
                   incentives
FACT4            Quality              -0.59 ***       5.23
                   of inputs
FACT5            Comparative          -0.16           0.45
                   cost
                   advantages
FACT6            Market potential     -0.49 **        3.21
INPUT            Input dependency      0.67 ***       6.68
DIVER            Parent diversity     -0.55 **        3.37
RESOURCE         Resource              1.51 **        5.03
                   intensiveness
                   of affiliate
EXPERIENCE       Previous             -1.12 **        4.62
                   commercial
                   association
CULT-DIS         Cultural distance    -0.44           1.02
PAR-SIZE         Parent size          -0.23           1.98
OWN              Mode of ownership     2.12 ***      10.40
DATE             Period of             0.23           0.54
                   formation
COUNTRY          Broad home            0.33           0.28
                   country origin
AUTO             Automobile            0.33           0.32
ELECT            Electrical           -0.62           0.96
CHEMICAL         Chemical              0.38           0.52
FIN_ TRADE       Finance and Trade    -0.32           0.22
Model                                        60.62 ***
  chi-square
N                                           145
Sensitivity                                  91.9
Specificity                                  65.2
Correct ratio                                83.4
Baseline rate                                56.6
Cox and Snell                                 0.342
  R sq.
Nagelkerke                                    0.479
  R sq.

* p < 0.1; ** p < 0.05; *** p < 0.01 (all one-tailed)

Positive signs indicate a higher likelihood of greenfields, negative
signs a higher likelihood of acquisitions.

Table 4. Summary of Hypotheses and Control Variables

       Hypothesis                 Variable    Expected   Actual
                                    Name        Sign      Sign

Hl.    A foreign investor is        FACT1        (+)      (+) **
       more likely to choose a
       greenfield entry mode
       over an acquisition
       mode when the perceived
       host country investment
       risk is high.

H2.    A foreign investor is        FACT6        (-)      (-) **
       more likely to choose an
       acquisition mode over
       a greenfield mode when
       a significant market po-
       tential is perceived.

H3.    A foreign investor is        FACT2        (+)       n.s.
       more likely to choose a
       greenfield investment
       over an acquisition          FACT3
       mode when investment
       incentives are
       perceived as important.

H4a.   A foreign investor is        FACT5        (+)       n.s.
       more likely to choose a
       greenfield investment
       over an acquisition mode
       when the cost of
       production is a
       dominant motive.

H4b.   A foreign investor is        FACT4
       more likely to choose
       an acquisition mode
       over a greenfield mode
       when the perceived input
       quality is higher
       in the country of entry.

       Control Variables

Investing Firm Specific Factors

Input dependency                    INPUT        (+)      (+) ***
Extent of diversification           DIVER
Previous commercial association   EXPERIENCE
Cultural distance                  CULT DIS     (+/-)      n.s.
Parent size                        PAR-SIZE      (+)       n.s.
Broad home country origin          COUNTRY       (?)       n.s.
Affiliate Specific Factors
Mode of ownership                    OWN         (+)      (+) ***
Resource intensiveness             RESOURCE      (+)      (+) **
  of affiliate
Period of formation                  DATE       (+/-)      n.s.
Automobile                           AUTO        (?)       n.s.
Electrical                          ELECT        (?)       n.s.
Chemical                           CHEMICAL      (?)       n.s.
Finance and trade                 FIN TRADE      (?)       n.s.

* p < 0.1; ** p < 0.05; *** p < 0.01 (one-tailed test)
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Title Annotation:foreign direct investment
Author:Demirbag, Mehmet; Tatoglu, Ekrem; Glaister, Keith W.
Publication:Management International Review
Geographic Code:7TURK
Date:Jan 1, 2008
Words:17491
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