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Entry mode and performance of Japanese FDI in Western Europe.

Introduction

This paper examines the links between entry mode and performance of Japanese direct investment in Western Europe, adding to the body of international business research in two areas. The first of these is Japanese-European foreign direct investment (FDI), which has received sparse attention in the literature. The United States has been a frequent subject of research, both as home country of parent firms and host country to foreign investment. In recent years, Japan has attracted considerable scholarly attention as an outward-investing country. In contrast, Europe has not been as frequent a subject of research, not even as Japanse and other foreign investment were becoming increasingly prevalent in the region. We report recent data on the entry mode characteristics of Japanese investment in Europe.

The second area investigated is the effect of entry mode choice on subsidiary performance. This paper adopts the transaction coast approach in analyzing the relative performance of ownership-based foreign entry modes. This approach has a long and rich history in international research, and has been recently employed by Anderson and Gatignon (1986), Gatignon and Anderson (1988), Erramilli and Rao (1993), among others. Subsequent sections of the paper will review the literature on entry mode research, outline a theoretical argument for why entry mode is an important determinant of performance, and present the results of the analysis of two sets of data on Japanese subsidiaries in Europe. Preliminary findings and areas for future research form the conclusion.

Entry Mode Research

Selection of entry mode by multinational firms has been widely studied, and a number of contingency variables have been empirically linked to the entry mode choice. Some of the earliest research in the area proposed an incremental, to some extent time-based, model of internationalization, in which a firm moved through ever-increasing levels of international resource commitment as its size, product diversity, and foreign experience grew. Stopford and Wells (1972) observed a link between entry mode (defined by parent company structure) and international experience and level of product diversification.

Johanson and Vahlne (1977) made the incremental process more explicit, adding the theoretical rationale that mangers' growing understanding of foreign markets over time and exposure leads to a higher comfort level with succeedingly more "psychically distant" locations. Increasing familiarity would tend to reduce managers' perceived uncertainty about internationalizing, and lead to an increasing willingness to commit their firms' resources in foreign countries.

More recent research has focused on country and firm-specific contingencies as discriminating variables among entry mode decisions. Kogut and Singh (1988) found that home-country cultural attributes influenced the mode preferences of firms investing in the U.S. In addition, several industry- and firm-specific variables were found to be linked to wholly-owned and joint venture modes. Kogut and Zander (1993) differentiated between licensing or joint ventures and wholly owned subsidiaries in their study of the impact of knowledge transfer on mode choice. Noting that knowledge-transfer is most efficient (least costly) in wholly owned subsidiaries, they showed that the more tacit, less "teachable", and more complex firm-specific knowledge is, the more likely it will be transferred abroad via a wholly owned subsidiary. This suggests that marketing- and technology-intensive companies with greater reliance on difficult-to-transfer knowledge will prefer the wholly owned mode to others, a conclusion supported by Anderson and Gatignon (1986) and Kim and Hwang (1992).

In a partial departure from the incremental models adopted by earlier researchers, Caves and Mehra (1986) argued that previous investments in a country were irrelevant, and that the selection between greenfield and acquisition modes was fully explained (while controlling for joint ventures) by the degree of multinationality, the product diversity, and the size of the parent firm. A strong industry effect also significantly influenced the choice of acquisition over greenfield modes.

This previous research suggests that entry mode decisions are related to a number of contingencies; further, the non-uniform distribution of these contingency factors among modes suggests that each mode has a unique "contingency profile" which influences its performance.

Performance as a Dependent Variable

Despite the large volume of research confirming a link between contingency variables and entry mode choice, few studies have linked mode choice to performance. One explanation for this lack of apparent interest is circumstantial, since subsidiary performance data are notoriously difficult to obtain. Differing national financial reporting conventions, reluctance of parent firms to divulge non-consolidated data, and the problems of reconciling internal data from different firms even when they are obtainable are some of the reasons why the mode-performance link has not been explored more fully. A second reason may be that researchers feel the performance issue is really secondary to mode choice; in a world of rational economic actors, each will evaluate the available options (including mode choice) on a risk-return basis, and choose the one with the highest expected payoff. If mode and performance happen to covary systematically across a number of cases, it might be argued that industry, country and/or firm-specific factors influenced both, rather than one directly influencing the other.

Li and Guisinger (1991) investigated the performance of wholly-owned entries into the United States, using failure rate as a performance proxy. They found that acquisitions ceased operations or went into bankruptcy at a significantly higher rate than new startups. A second study that explicitly attempted to link entry mode with performance was Simmonds (1990). Using accounting measures of performance, he was unable to infer any significant differences between firms using exclusively new startups and acquisitions during the period from 1975 to 1984. The results were, however, in the hypothesized direction, with acquisitions being less profitable than new ventures. The fact that the performance data were at the whole enterprise instead of the subsidiary level may have impaired the study's ability to pick up significant differences.

The present study investigates whether different ownership-based entry modes have characteristics which lead to a hierarchy of performance, irrespective of, or in addition to industry, firm, or country factors. We base our hypotheses on a transaction cost analysis of greenfield, joint venture, and acquisition entry modes, predicting the three modes' relative performance based on their anticipated costs. This approach tests the transaction cost rationale which seek to explain why firms sometimes internalize market transactions.

The following section breaks the anticipated costs of entry modes into two components, following the reasoning of Woodcock, Beamish, and Makino (1994): the cost of initial resource acquisition and the cost of post-entry management control. The theoretical argument is followed by supporting data from a study of Japanese subsidiaries in Europe.

Theory

Theoretical justification for the contention that some entry modes should consistently outperform others is based on previous entry mode research in the contingency tradition. The Eclectic Theory of international production (Dunning 1988) is used as a general point of departure for developing the argument that mode selection has an impact on subsidiary performance. Within this framework, ownership, location, and internalization advantages determine an MNE's actions with regard to its international direct investment choices.

Ownership advantages are tangible and intangible assets in the focal firm's possession that lead to a competitive advantage: proprietary products or technologies, specialized know-how about production, and marketing expertise. R & D intensity, advertising intensity, international experience, product diversity and firm size are resource-based concepts that have been empirically linked to the choice of wholly-owned modes (Agarwal and Ramaswami 1992, Caves and Mehra 1986, Kogut and Singh 1986, Kogut and Zander 1993). The ability to innovate (meta-knowledge) may itself be a further, second-order form of knowledge (Buckley and Casson 1976), even more intangible and difficult to transfer, but no less important in many industries. These variables are operationalizations of the assets possessed by a firm, or the necessary assets required to compete effectively in a given industry. They were used in these studies to explain the intensity with which companies seek unambiguous control, or alternatively, their propensity to seek local partners.

Location advantages are country-specific and relative, and may include raw material availability, a large market access to an appropriately-trained and/or low-cost labour force, a stable political regime, or a favourable regulatory environment. This study controls (partially) for location by considering only Japanese subsidiaries in Europe. We treat Europe as a single market for these reasons:

1. Its three most significant economies (Germany, France, and the U.K.) are very similar on broad-based economic measures, and all are highly developed industrial economies who share membership in the G-7 and European Union (EU).

2. Over 70% of the cases in our sample are located in these countries.

3. At the economic and (perhaps to a lesser extent) the political level, there appear to be strong forces working to homogenize Europe, at least in terms of the way in which commerce is conducted.

We recognize that significant cultural and other differences exist between European countries, but feel that grouping them in this fashion is defensible in light of the EU's stated objective of developing a "common market".

Internalization explains the cost advantages of internal hierarchies over arms-length market transactions for intermediate products, including knowledge and information. It may also include co-ordination benefits resulting from things such as transfer pricing to reduce tax liabilities, the flexibility to shift production quickly into and out of different areas, the ability to respond instantly to competitive threats, and the like.

In the context of this study, internalization relates to the control costs borne by a firm in a given entry mode. Previously-studied concepts that are linked to entry mode and have an impact on control costs include: ownership control, firm culture, and knowledge transfer (Killing 1983, Kim and Hwang 1992, Kogut and Singh 1986, Kogut and Zander 1993).

This study concerns itself with three ownership-based entry modes. Of these, greenfield and acquisition are wholly-owned modes, and the third, joint ventures, is characterized by shared ownership between Japanese and host-country parents. A hierarchy of performance is developed from entry mode research, comparing each pair of these modes in turn, and using the ownership/resource requirements and internalization/control costs concepts from the Eclectic Theory.

Greenfield vs. Acquisition Performance

Domestic research on acquisition performance is abundant, and suggests, in general, that acquiring firms do not appear to benefit financially from their purchase. Financial studies using short-term stock market indicators as performance measures have generally been inconclusive in terms of the performance of the acquiring firm (e.g.: Caves 1989, Jensen and Ruback 1983). Studies with a longer post-acquisition time horizon are less equivocal: acquiring firms experience negative returns (Caves 1989).

Behaviourally-based studies on post-acquisition performance reveal a similar negative outlook. Over the long run, most acquisitions come to grief because of integration problems. This may result from strategic and cultural differences (Navandi and Maleksadeh 1988), or differences in the views of top managers (Chatterjee, Lubatkin, Schweiger, and Weber 1992). One point argued strongly by many acquisition studies is that the synergies often used to justify takeovers and mergers rarely materialize (e.g.: Chatterjee 1992, Porter 1987), leading to underperformance relative to expectations, and often, if not usually, negative returns to the price paid.

Ownership/Resource Commitment Costs

The acquisition mode choice is motivated by a desire to obtain a set of resources previously not possessed by the firm, while the greenfield or new venture mode amounts to a deployment of existing resources in a new market. Whether the resource is tangible (such as a proprietary product), or intangible (as in the case of R & D capability), the firm which must acquire new resources in a market transaction is exposed to costs and risks not faced by its new-venturing counterpart.

The new venture option is simply a use or expenditure of slack resources in such a way as to improve a firm's efficiency or effectiveness (Teece 1982). The firm already owns the resources and is merely finding ways to extract profits from their employment in a new setting. In addition, there is relatively little uncertainty about what is being paid for in launching a greenfield venture, since most startup expenditures are in areas such as real estate, equipment, and labour, where there is a reasonably efficient market in most countries.

An acquisition, on the other hand, brings with it a substantial risk of overpayment by the acquirer. This is due to information asymmetry between buyer and seller about the exact nature and value of what is being purchased, and to the fact that the transaction is a one-time event (Woodcock et al. 1994). As a result, greenfield investments are expected to have lower resource commitment costs than acquisitions.

Internalization/Management Control Costs

Greenfield investments also tend to outperform acquisitions because of lower control costs. Literature cited above suggests that integration and control issues are linked to the failure of many acquisitions to perform up to their purchasers' expectations. When a wholly-owned new venture, a firm faces only minimal control costs, since there is no question of having to integrate different corporate cultures, divergent strategic viewpoints, and separate policies. The new entity becomes an extension of the existing one, admittedly with some start-up costs, but with a much lower long-term risk of continuing integration problems faced by acquired units. Because they bear lower costs of both resource acquisition and subsequent management control, greenfield direct investments are expected to perform better, on average, than aquisitions.

Greenfield vs. Joint Venture Performance

One of the few studies that has examined mode-performance links in an international context is that of Li and Guisinger (1991), who compared acquisition, wholly-owned new venture, and joint venture modes using failure rate as a measure of performance. They hypothesized that joint ventures would fail at a higher rate than greenfield entries, due to coordination problems and conflicts between parent firms, and because of the risk of unintended knowledge leakage. Significant results supported the hypothesis that new ventures and acquisitions would, respectively, have the lowest and highest failure rates. However, the joint venture mode did not display a failure rate that was significantly different from either of the others. While Li and Guisinger offered no explanation for this finding, it must be pointed out that their results, although not statistically significant, supported their hypothesis with respect to the direction of the relationship between greenfield and joint venture mode performance.

Ownership/Resource Commitment Costs

As with acquisitions, joint ventures are used by firms to gain access to resources they do not already own. The associated costs are twofold:

(1) search costs in finding a suitable partner, including some measure of the risk of making a poor choice; and

(2) the risk of exposing and losing sole ownership of core resources to a partner. The latter is borne out by studies which suggest that firm-specific core knowledge which is tacit and difficult to transfer is more likely to be exposed through a joint venture arrangement than an easily-imitated resource (Kim and Hwang 1992, Kogut and Zander 1993).

Greenfield investments also require resources when they enter a new market. However, compared with the other modes, the parent of a greenfield subsidiary already possesses these resources, and is simply redeploying them to earn more revenue at a small cost. Both joint ventures and acquisitions are, at least in part, motivated by the need to correct a resource deficiency. All three modes will ultimately own a similar bundle of essential core resources (of the necessary-but-not-sufficient variety, in terms of competitive advantage), but the cost of this ownership will differ in a systematic way that favors greenfield entries.

Internalization/Management Control Costs

The shared ownership of joint ventures brings about higher control costs than wholly-owned modes, both in the initial negotiation of control between the partners and in the ongoing management of the venture (Beamish and Banks 1987, Killing 1983). For effective control, joint ventures may depend on mechanisms that take time to develop and consume managerial attention, such as trust. They also bear the additional cost of having more relationships to manage: the entity itself has two parents, as opposed to one, and the parents themselves also must maintain a relationship (Woodcock et al. 1994).

In contrast, greenfield ventures are under their parent firm's sole management and control from the outset, thus attracting only those additional costs or risks associated with being distant from the parent. These base costs are, of course, common to all foreign investments. Since the joint venture mode bears higher resource acquisition and management control costs, it is expected to perform at a lower level than the greenfield mode.

Acquisition vs. Joint Venture Performance

Ownership/Resource Costs

The motivation underlying both acquisition and joint venture entry modes is to rectify a resource deficiency. However, acquisitions must bear the additional transaction cost-based risks noted above, in connection with information asymmetry and non-repetitive transactions. The joint venture, on the other hand, is a long-term relationship, and presents each partner with similar uncertainties. This enables neither to cheat without some fear of reprisal, and each partner perceives the need for trust and mutual forbearance (Buckley and Casson 1988). The propensity for parties to a joint venture to cheat is further reduced because both stand to benefit from the success of the venture, supplying strong incentives for knowledge- and resource-pooling, which decreases information costs (Beamish and Banks 1987). Thus, while joint ventures and acquisitions share, to some degree, the search costs of finding a suitable investment target, the risk-adjusted cost of resource acquisition must be lower for joint ventures.

Internalization/Management Control Costs

As noted above, both acquisitions and joint ventures have high ongoing control costs, albeit for different reasons. Acquisitions must integrate two different sets of organizational cultures, management philosophies, and institutionalized procedures, while joint ventures have to manage the complexities of a three-way inter-dependency among two parents and a subsidiary. Since control costs for both modes are high, but resource acquisition costs are lower for the joint venture mode, joint ventures are expected to outperform acquisitions.

Three-way Performance Comparison

The relative costs of resources and control for each mode are summarized in Table 1. Based on the foregoing analysis, greenfield ventures appear to have low costs, while acquisitions score high in both categories. Joint ventures fall somewhere in between the two wholly-owned options, having medium costs associated with resource procurement, and high control costs.
Table 1. Costs Associated with Entry Modes


Mode Resource costs Control costs Total costs


Greenfield Low Low Low
Joint Venture Medium High Medium to High
Acquisition High High High


Source: Woodcock, Beamish, and Makino (1994)


This results in the following hypotheses:

H1(a): Greenfield entries will perform better, on average, than joint ventures.

H1(b): Greenfield entries will perform better, on average, than acquisitions.

H2: Joint Ventures will perform better, on average, than acquisitions.

Data

The data used in this study are a subset of the Toyo Keizai (1992, 1994) datasets, consisting of manufacturing subsidiaries in Europe whose parent firms are listed on the major Japanese stock exchanges. This information has been published annually since 1970, but perhaps because it was in Japanese, it has not been extensively used by researchers. The current version lists a total of over 13,500 ongoing FDI cases, which is estimated to be 41% of the total of all Japanese FDI (Makino 1995). It is expected that large parent firms would be over-represented in a database of this nature, because of the public nature of the data sources. Thus, while the estimate of 41% of total Japanese outward investment may seem low, the large-parent bias means that a much larger proportion of total invested capital, subsidiary employees, and subsidiary sales is actually accounted for by this sample.

The information was compiled by Toyo Keizai in 1991 and 1993, from public data and from a survey of the top Japanese manager in each subsidiary. Locational factors were partially controlled for by focusing on Japanese entries into Europe. The database lists the original mode of entry and year of subsidiary formation, as well as the host country. Most importantly for this study, performance information at the subsidiary level is also coded. Performance was measured by asking the top Japanese manager in each subsidiary to respond to a three-point scale, representing "Loss", "Break-even", and "Gain". This measure has the virtue of being comparable across host countries and firms, since respondents were all from Japan, and were at similar levels in their organizations. The use of subjective, perceptual measures of performance is well supported in the literature, and has been shown to be highly correlated with objective, accounting-based measures (Geringer and Hebert 1991). The use of a single measure to operationalize a multi-dimensional construct is justified on these grounds. This is also one of the few databases that includes subsidiary-level performance data of any kind for Japanese multinationals, which gives an indication of the reluctance with which Japanese firms release this kind of information.

The original samples contained 167 and 180 Japanese entries into Western Europe, collected in 1992 and 1994 respectively. Subsidiaries were included if they [TABULAR DATA FOR TABLE 2 OMITTED] operated in manufacturing industries, and if a single Japanese shareholder owned more than 5% of their equity. Because of the tendency for new subsidiaries to take some time before their performance stabilizes, this study follows Woodcock et al. (1994) in analyzing only those subsidiaries which were at least two years old at the time of the data collection. Woodcock et al. (1994) used piece-wise linear regression with a break-point on the entire dataset to determine: 1) that two distinct performance profiles based on subsidiary age existed, and 2) that two years after subsidiary foundation the performance of each mode stabilized and remained constant.

After running the age screen, 124 and 173 cases remained (1992 and 1994 data respectively) that satisfied the operational definition of "Greenfield", "Joint Venture", and "Acquisition" entry modes, as well as having performance information available. The number of each cases in each group, as well as firm size characteristics in the two sets of data are presented in Table 2. With the exception of the volume of sales, the two sets are roughly comparable on three measures of firm size. Most importantly, within each set of data a one-way analysis of variance determined that subsidiaries did not differ significantly in size across modes, or in being biased towards either capital-intensive or non-capital-intensive industries.

Analysis and Results

Four tests were employed to determine if a statistically significant relationship exists between entry mode and performance in each subset of the data. The Pearson chi-squared is often used with categorical variables, employing a frequency table to test the differences between predicted and observed occurrences. The Kruskal-Wallis ANOVA non-parametric test was used as an alternative to a one-way analysis of variance, because of concerns about the equality of within-group variances in our data. The parametric ANOVA is fairly robust when sample size [TABULAR DATA FOR TABLE 3 OMITTED] is large and the groups are similar in size, but our data had one group (acquisitions) which was quite small, and a sample size that is borderline. Like a conventional (parametric) ANOVA, the Kruskal-Wallis tests the null hypothesis that all sub-groups come from the same population. In addition, the relationships were tested using Spearman's Rank Correlation test, a non-parametric analogue to the typical Pearson correlation coefficient that returns values ranging from -1 to +1. This was used to measure the extent to which modes covaried with performance. Finally, the Wilcoxon Rank Sum test was used to compare pairs of modes against one another. Like most non-parametric tests, it is based on comparing the rank sums of two groups. The test statistic has a Mann-Whitney U distribution, and a power efficiency of 95.5% compared to the corresponding parametric test (an unpaired T-test).

Performance means and percentages within mode classifications are shown in Table 2, together with the results of significance tests. In the 1992 sample, statistically significant differences are confirmed between acquisition and the other two modes. The strongest result was the greenfield/acquisition comparison, which was significant at p = 0.043, followed by the joint venture/acquisition pairing at p = 0.072. No significant difference appeared to exist between the greenfield and joint venture modes, although the slight difference in their means was in the hypothesized direction.

In the 1994 sample, the greenfield/acquisition comparison proved to be significant at p = 0.095. Although the other tests did not support the hypotheses quite as strongly as with the 1992 data, the mode-performance relationships remained as predicted by our theoretical argument. The basic Greenfield [greater than] Joint Venture [greater than] Acquisition performance hierarchy was maintained [ILLUSTRATION FOR FIGURE 1 OMITTED], and the Greenfield and Acquisition modes were statistically supported as the endpoints of the performance continuum.

The study by Woodcock et al. (1994) used similar statistical tests and achieved, overall, even more convincing results (p = 0.04 on the chi-square, p = 0.03 on the Kruskal-Wallis, and p = 0.01 on the Spearman). Three possible explanations for this are put forward. First, the sample size (321) on the earlier study was more than twice the size of this one. The ability of a statistical procedure to identify an effect of equal size is reduced the smaller the sample (Cohen 1977). Second, cases in the current study were not as evenly distributed across categories as in the Woodcock et al. sample. More to the point, there were only 14 (1992) and 21 (1994) cases in the Acquisition category, and the mode/profit cross-tabulation for the 1992 dataset resulted in two cells out of nine having expected values less than five. This is slightly over the guideline which suggests that 20% of cells may have this low an expected value, and may have affected the results.

Finally, and perhaps most importantly, the Woodcock et al. study was done in a single host country, whereas the data in this research come from thirteen countries. Even though all are in Western Europe, and most are members of the EU, this is still not as homogeneous a region as the United States. The influence of locational factors on many aspects of FDI is well known, and may have contributed to the difference in results. Indeed, the fact that a 0.10 significance level (or better) was achieved in spite of only imperfect control for location may be testimony to the robustness of the theoretical model.

Discussion and Conclusions

Despite the ambivalent results with one subset of the data, the results of this study taken as a whole are interpreted as providing strong support for the underlying transaction cost reasoning. As further (though less objective) evidence, Figure 1 provides a graphical representation of the performance distributions found in both our datasets. Visually, there can be little doubt that:

1. the Greenfield mode tends to have the highest proportion of grains relative to losses,

2. Joint Ventures are not far behind, and

3. Acquisitions have, at best, mixed performance.

Figure 1 also highlights some possible reasons why the more recent (1994) results were less statistically significant. In each set of modes, the tops of the 1994 bars tend to have a flatter slope than the 1992 bars. This is especially true of the Acquisition mode, which for 1994 has a uniform distribution across the three performance categories. It should also be noted that the performance mean for Greenfield and Joint Venture modes fell slightly, while Acquisitions improved a small amount. The seemingly small convergence compared to the 1992 data was sufficient to eliminate some statistically significant differences with this sample.

Considered together with the results reported by Woodcock et al. (1994), there appears to be considerable evidence for the mode-performance relationships we have hypothesized. This study, in extending the work of Woodcock et al. (1994), provides further evidence for a link between ownership-based entry mode choice and performance. The theoretical foundation for this was laid by identifying the different levels of cost that are associated with resource procurement and management control, depending on mode of entry. The resource-based and transaction cost-based contingency factors alluded to are supported by previous entry mode research.

Woodcock et al. (1994) investigated manufacturing subsidiaries in the United States, while the sample in this study consisted of European manufacturing subsidiaries. Both samples were drawn from a subset of all Japanese multinationals. This immediately suggests some limitations to generalizability, as well as some opportunities to refine and extend the model. First, the observed performance characteristics of ownership-based entry modes may be unique to manufacturing subsidiaries owned by Japanese firms; different results may be observed in service industries and with other home countries. Secondly, the host locations in both studies were highly developed industrial economies. These results may not be supported with different pairings of home-country/host-country economic attributes.

In this and the Woodcock et al. study, the acquisition mode was unequivocally the least successful choice, while greenfield entries were the most likely to show a financial gain. The question raised by the two studies is: if certain entry modes are predictably more or less profitable than the rest, why do companies make choices that appear to be in conflict with the predicted outcomes? There are cases, of course, where parent firms are compelled to choose a joint venture because of host-country ownership restrictions, or where there is overcapacity in a given industry which would lead to a preference for an acquisition over greenfield investment. However, these special circumstances do not explain all non-greenfield investment.

The theoretical model outlined above suggests that, if appropriate income-generating resources are lacking within an investing firm, it must acquire them through acquisition or joint venture. Thus a resource-deficient firm would first eliminate the greenfield option from its menu of choices, since starting a new venture without the requisite resources would guarantee failure. It is then left to choose between an acquisition and a joint venture if it wishes to pursue its investment plans.

This decision (between acquisition and joint venture) relies on circumstances and contingencies inherent in the mode choice decision process, such as the fact that FDI decisions are made under conditions of bounded rationality. Managers make a risk-adjusted calculation of the future value of a proposed investment, of which costs are only a part. In their study of the effect of national culture on entry mode decisions Kogut and Singh (1988) stated:

Assuming revenues constant across alternatives, managers will choose the entry mode which minimizes the perceived costs attached to the mode of entry and subsequent management of the subsidiary. (p. 414, emphasis added)

In other words, the cost term in the profit equation is only part of the complete picture. Revenue also plays an important role in determining the success or failure of a foreign subsidiary. This may explain how joint ventures are able to overcome their managerial cost burden, since it is not difficult to imagine how a local partner could significantly enhance a subsidiary's potential revenues.

Bounded rationality may also explain why acquisitions typically have such poor returns. Misplaced managerial optimism, growing out of inaccurate perceptions and opportunism, may lead to fanciful assessments of the cost-benefit relationship in an acquisition situation. Managers in a parent firm may perceive an acquisition target as a "cant't miss" bargain, or as a chance to acquire knowledge at virtually no cost. In the excitement of making the deal, realistic estimates of the costs and risks of such things as post-merger integration may be ignored or discounted. Similarly, potential synergies are often relied upon for additional benefits, to a degree that is not supported by subsequent events. These factors tend to lead to a non-optimal mode choice for the firm.

The link between foreign entry mode and subsidiary performance has only begun to be investigated. While location and industry factors were partially controlled for in this and in the Woodcock et al. study, a more fine-grained analysis which controls for these and various other variables would provide further insight. In a cross-sectional, cross-industry study such as this, much detail is lost that could illuminate the characteristics of both the entry mode choice and firm performance.

The relationship between firm-specific factors, country factors, transaction costs, entry mode, and finally, performance, is much more complex than the methodology employed here could hope to reveal. It is hoped that future research will be successful in developing a more robust, generalized model of this process.

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Detlev Nitsch, Doctoral Candidate, Business Policy, Western Business School, The University of Western Ontario, London, Ontario, Canada.

Paul Beamish, Royal Bank Professor of International Business, Western Business School, The University of Western Ontario, London, Ontario, Canada.

Shige Makino, Assistant Professor of Business Policy, Chinese University of Hong Kong.
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Title Annotation:foreign direct investment
Author:Nitsch, Detlev; Beamish, Paul; Makino, Shige
Publication:Management International Review
Date:Jan 1, 1996
Words:6050
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