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Perceptions of institutional environment and entry mode: FDI from an emerging country.


* Multinational companies from emerging and developing economies (EMNCs) are becoming major players in the globalized world economy and are likely to wield growing influence on economic dynamics in OECD, emerging, and developing countries alike. This paper presents data gathered from Turkish firms investing in the transitional economies of the Central Asian Republics.

* Using an integrated risk management framework (Miller 1992) as a platform for investigating executives' perceptions of environmental uncertainty in entry mode decisions, we extend the framework through the addition of variables, such as corruption, which synthesise institutional level factors.

* The findings indicate that greater ethical-societal uncertainties result in a preference for joint venture over wholly owned subsidiary. There is a strong correlation between the perceived risk of intervention and joint venture entry mode. We find only limited support for the Uppsala internationalisation model.

Keywords: FDI * Political risk * Entry mode * Emerging economies * Central Asian Republics


There has been an unprecedented increase, in both number and value, of outward foreign direct investment (OFDI) from emerging economies. FDI from emerging economies reached $133 billion in 2005, representing about 17% of world outward flows. In 1990, only 19 firms in the Fortune 500 List were from emerging economies, but by 2005 this had risen to 47 (UNCTAD 2006). These new contenders hail from seemingly unlikely places, developing nations such as Russia, China, Brazil, and even Egypt and South Africa (Business Week 2006, p. 42). While some of these firms have been working with western MNEs as original equipment manufacturers or strategic alliance partners in their home countries (Bonaglia et al. 2007; Luo and Tung 2007), others have been pushed toward the global market because of their home institutional environment (Khanna and Palepu 2006; Buckley et al. 2007).

There is growing recognition that research on FDI has focused primarily upon developed economies; flows between developed economies, and flows from developed to less developed economies. There has been a dearth of investigation into FDI transfer between less developed economies (Wright et al. 2005; Filatotchev et al. 2007). Yet, important immediate impacts of OFDI from emerging and developing economies are likely to be felt in the developing host countries, where investments from other emerging and developing economies constitute increasingly important complements to investment flows from OECD countries (South-South investments).

Whilst there is a well established literature on internationalization and market entry mode choice of developed country MNEs (see Brouthers and Hennart 2007 for a detailed review), it is argued that extant theoretical perspectives may not explain the behaviour of emergent country firms in the global market place (Child and Rodrigues 2005; Khanna and Palepu 2006; Mathews 2006; Luo and Tung 2007; Yiu et al. 2007). In the past, developing country MNEs (so called third world MNEs) targeted other developing countries and had more resource oriented activities (Lecraw 1977; Heenan and Keegan 1979; Kumar 1982; Lall 1983; Wells 1983). However, recent trends indicate that emerging country MNEs target their operations toward both developed and developing markets, as well as in resource intensive and higher value adding activities (Luo and Tung 2007; OECD 2007). Research on MNEs from emerging countries has so far focused on governance (Filatotchev et al. 2007), determinants of Chinese outward FDI (Buckley et al. 2007; Yiu et al. 2007) and FDI strategies of emerging country MNEs in other emerging countries (Lecraw 1977; Raju and Prahalad 1980; Kumar 1982; Lee and Beamish 1995; Chen 1998; Yeung 1998, 1999). So, although some recent empirical studies have examined emerging country MNEs' strategies (Bonaglia et al. 2007; Buckley et al. 2007; Filatotchev et al. 2007; Yiu et al. 2007), the entry mode choice of these companies with respect to developed and other emerging and developing countries has yet to be studied (Brouthers and Hennart 2007). As Business Week reports, "they are shaking up entire industries, from farm equipment and refrigerators to aircraft and telecom services, and changing rules of global competition" (2006, p. 42). Given the increasing number of MNEs from emerging market economies entering other emerging and developed markets, it becomes imperative to investigate their entry, and equity ownership, strategies.

Effective institutions can play a major role in reducing perceived environmental uncertainty and transaction costs. Consequently, managerial perceptions of uncertainty in the institutional environment can have a significant impact upon FDI decisions. Assessments of institutional turbulence can assume yet greater importance in the face of instability across institutional domains. Such instability is likely to characterize those countries making the transition from centrally planned to market driven economies. Within this context, assessments of environmental uncertainties and corruption are critical factors in entry mode decision making for FDI (Kobrin 1979, 1982; Henisz and Delios 2001) but to date these factors have received little attention.

This paper examines a case study of Turkish MNEs entry mode decisions into transition economies of the Central Asian Republics (CARs), thereby addressing an existing gap in the literature regarding OFDI from emerging economies to emerging economies. Our study enhances an evolving conceptual body of knowledge through adopting, and extending the dimensions of, an integrated risk perspective (utilising Miller's (1992) tested research instrument). We extend Miller's approach through the inclusion of additional variables, such as corruption, in order to provide richer insights into the entry mode decision. This reflects our position that it is not only misleading to isolate certain risk variables at the expense of an overarching perspective (Miller 1992; Brouthers 1995; Werner et al. 1996), but also the value of a non-unitary approach (Delios and Henisz 2003). Critically, this multi-dimensional approach is underpinned by primary data in contrast to the dependence of previous research upon panel data, thereby affording a deeper insight into firm level behaviour. Our multi-dimensional risk approach is of particular merit in the context of the under-researched, turbulent and uncertain environments epitomised by both Turkey and the CARs which are well-suited to integrative transaction cost and institutional perspectives.

The paper is organized as follows. The next section provides background information on Turkey. The third section reviews the previous literature on foreign investors' equity-based entry mode strategies and develops the hypotheses of the study. The fourth section sets out the research methods. Results and discussion are in the fifth section, before conclusions are presented.

Survey Context

According to UNCTAD (UNCTAD 2006) the leading emerging country sources of OFDI are China and Singapore. However, other emerging countries, including India, Malaysia, Mexico, South Korea and Turkey, are becoming important players in outward FDI. Among this group, Turkey possesses important features, such as its geographical location, and associated cultural and linguistic proximities to Central Asian, European and Middle Eastern markets. Consequently, the Turkish context provides an interesting research setting, not least because of its attempts to become a more Western style market economy, but also in light of ongoing membership negotiations with the EU: Turkey is the first Muslim country to bid for EU membership.

Turkey has attracted a significant number of FDI entries in recent years. Since the start of accession negotiations between Turkey and the EU in December 2004, total FDI entries have increased dramatically. Between 2001 and 2004, FDI flows were US $9.72 bn, jumping to a record level of US $20 bn in 2007. A similar trend has also been observed in Turkey's OFDI. Figure 1 shows a breakdown of all outward FDI firms over the 19902005 period. There were nearly 150 outward FDI operations up to 1990, with sharp increases since then, in both number and value of OFDI activity. Drawing on the official statistics of the Turkish Treasury, as of July 2006 the number of outward FDI operations reached 2,397 with the value of cumulative outward FDI totalling nearly $8.6 bn. This surge in OFDI has arisen from economic and political factors (Erdilek 2003). The opening up of new markets in the EU, USA, Balkans, former Soviet Union (FSU) countries (including the Russian Federation, the newly independent Turkic Republics of Central Asia), and Middle Eastern and North African countries has encouraged Turkish investors to engage in FDI operations in these countries. 'Push' factors, such as, domestic political and economic crises and intensifying competition spurred by Turkey's accession to a customs union with the EU in 1996, have all contributed to Turkey's increasing OFDI (Table 1).


Table 1 shows the distribution of Turkish FDI by host country and regions. EU countries (including developed and emerging EU countries) accounted for nearly 57% of the total value of OFDI. Of these EU countries, five; including Germany, the UK, France, the Netherlands and Italy, were the main destinations for FDI. These countries are among the leading trading partners of Turkey and are also the main sources of inward FDI to Turkey (Tatoglu and Glaister 1996; Demirbag et al. 2007). They have well-established political and economic links particularly through the EU. The former Soviet Union (FSU) countries constitute the second most attractive host market, accounting for nearly 34% of all Turkish FDI outflows. With the fall of communism in the FSU, a huge market characterized by a relatively large and consumption-prone population has been opened to Turkish investors. The newly independent Turkish speaking Central Asian Republics have become the major recipients of Turkish FDI due to their geographic and cultural proximity to Turkey (Demirbag et al. 1998).


Broken down by sector, the distribution of Turkish OFDI is 55% manufacturing and 45% services. Of manufacturing, energy accounts for 28%, primary manufacturing industries 21%, telecom 4% and construction 2%. With respect to services, banking and financial services represent 32% of the sector, with trade 12% and tourism and transport 1%.

Success in attracting FDI is vital to the economic development of emerging economies (Garibaldi et al. 2002) with weakness in FDI levels in the countries of the former Commonwealth of Independent States (CIS) leading to concerns over these economies' investment climates (Shiells 2003). Even resource rich countries such as Azerbaijan and Kazakhstan have failed to achieve cumulative net FDI flows per capita comparable to those of the transition economies of Central and Eastern Europe and the Baltic States (CEEB) (Demirbag et al. 2005). Turkey has been striving to promote inward FDI as early as the mid 1980s but there has also been a parallel development of outward FDI from Turkey from the early 1990s. The opening up of the Central Asian and Russian markets, lent an impetus not just for Turkish companies, but also for those foreign MNEs with a Turkish presence, to enter these still turbulent markets (Demirbag et al. 1998). There has been some limited work on Turkish FDI (Demirbag et al. 1998; Culpan and Akcaoglu 2003) and the FDI flows into emerging Central Asian Republics (Clark and Naito 1998; Clark et al. 1998; Kinoshita and Campos 2003). Central Asian Republics represent a highly turbulent geography and therefore Turkish FDI in this region is a good testing ground for examining the impact of environmental uncertainties and corruption on emerging market MNEs market entry strategies. Our research adds to the limited body of knowledge available in this area.

Literature Review and Hypotheses Development

Theoretical perspectives that explain the level and pattern of FDI or MNE activity range from mainstream economic theories (Kindleberger 1969; Caves 1971; Hymer 1976), internalization models (Buckley and Casson 1976) to Dunning's eclectic paradigm (Dunning 1988, 2006), with the most prominent of these being internalization theory and the eclectic paradigm. These perspectives, however, are largely based on the experiences of developed country MNEs. The international business literature provides explanations for internationalization and entry mode decisions of MNEs from developed countries, but there is no single theory that can be used to explain outward FDI from emerging country economies (Buckley et al. 2007; Luo and Tung 2007; Yiu et al. 2007). Earlier works on developing country MNEs or third world MNEs, initially used an adapted transaction cost explanation of internationalization (Kumar 1982; Lee and Beamish 1995). More recently informed observers have noted that the emerging trend is much more complex, therefore it requires insights from a number of perspectives (Mathews 2006; Bonaglia et al. 2007; Luo and Tung 2007).

The ownership/location/internalization (OLI) perspective developed by Dunning, has been extended to examine internationalization of Chinese family enterprises (Erdener and Shapiro 2005), Taiwanese and Singaporean firms (Sim and Pandian 2003), and Korean firms (Lee and Slater 2007). Dunning's eclectic paradigm, as its name suggests, adopts an holistic approach in explaining the level and pattern of international production (Dunning 1988, 2006). Dunning combines several factors that offer a greater explanation of MNE or FDI activity in open markets than any single approach does (Grosse and Behrman 1992, p. 117). Recognizing the importance of both structural and transaction cost imperfections for MNE activity, Dunning adds 'ownership advantages' to the location and internalization advantages previously suggested by internalization theory. Dunning's approach consists of an attempt to analyse the 'who', 'where' and 'why' of FDI activity in terms of ownership, location and internalization advantages (OLI) with each group of factors acting interdependently (Dunning 2006). Ownership advantages are those, specific to a particular firm, which enable it to take advantage of investment opportunities abroad. Locational advantages are those country specific advantages which dictate the choice of production site. Internalization advantages determine whether foreign production will be organised through markets (licensing) or hierarchies (FDI). The eclectic paradigm also posits that the pattern of international economic involvement or FDI activity should vary by three contextual variables or structural variables, i.e. country of origin, industry, and firm-specific circumstances (Dunning 2006).

From the transaction cost perspective, equity ownership preference indicates the firm's desire to minimize transaction costs. Despite some of its weaknesses (Parkhe 1993; Ghoshal and Moran 1996), transaction cost theory has been extensively applied in explaining the ownership preferences of MNEs in their affiliates (see Zhao et al. 2004 for a detailed review). Transaction cost perspectives have tended to argue that firms select the most cost effective entry mode. Consequently, the need to negotiate with partners in order to obtain consent for strategic shifts may propel firms into choosing wholly owned subsidiaries (Williamson 1991; Hennart 1994). However, others have found that joint venture will be a more attractive mode of entry for firms facing high levels of environmental uncertainty (Gatignon and Anderson 1988; Kim and Hwang 1992; Errramili and Rao 1993). A growing body of literature considers strategic decisions from an institutional perspective (Hoskisson et al. 2000; Wright et al. 2005). Institutional theory has emerged as a complementary approach to explain the ownership-based entry mode strategies of foreign investors in host country markets (Delios and Beamish 1999; Davis et al. 2000; Meyer 2001; Lu 2002). Instead of focusing on the technical environments of individual transactions, as suggested by transaction cost theory, institutional theory requires an investigation of different broader institutional contexts across countries and their impact on ownership strategies of MNEs (Meyer 2001). Since institutions provide the structure in which transactions occur, North (1990) suggests institutional theory must be integrated to transaction cost theory. Hence, some scholars have recently begun extending transaction cost-based entry mode theory by incorporating institutional and cultural context variables, as well as transaction cost variables (Delios and Beamish 1999; Brouthers and Brouthers 2000, 2002; Delios and Henisz 2000, 2003; Henisz 2000). This study integrates transaction level attributes as well as host country institutional level attributes on to the market entry mode decisions of foreign investors from an emerging market economy to other transitional economies. Our approach allows us to integrate economic actors' as well as non-economic actors' roles in entry mode decision for Central Asian Republics.

Too often, research into the impact of political risk, or environmental uncertainty has been based upon the conflation of a range of factors such as the political, legal, cultural and economic environment, (Gatignon and Anderson 1988; Brouthers and Brouthers 2003; Iankova and Katz 2003). Whilst not dismissing the value of these studies, this paper adopts a disaggregated framework for providing insights into the firm's response to politically based uncertainties. In order to achieve this, we follow Miller's (1992) integrated risk management framework. This model integrates a range of environmental uncertainties at the general, industry and firm level in order to provide insights into managerial perceptions across a range of dimensions. However, we extend and enhance Miller's framework by adding additional variables drawn from work by Werner et al. (1996), Rodriguez et al. (2005) and Uhlenbmck et al. (2006). This approach reflects the view that managers perceive environmental uncertainty at the level of the general environment, industry and firm (Miller 1993, 1998; Brouthers 1995; Brouthers et al. 2002) and allows us to examine the impact of uncertainty across a range of levels. Uncertainty about the institutional environment is important as it reduces the predictability of organisational performance (Miller 1992). Whilst perceptions of uncertainty have been found to be consistent across industry sectors (Miller 1993), they may lead to sectoral difference in response (Brouthers et al. 2002) and the selection of certain 'generic' strategic responses such as control and/or cooperation, ie, wholly owned subsidiary or joint venture as the preferred entry mode.

Whilst Miller (1993) developed uncertainty/risk perceptions dimensions (i.e., political uncertainties, government policy uncertainties, macro economic uncertainties, social uncertainties and natural uncertainties), these dimensions have not been used in explaining strategic market entry decisions of emerging market MNEs. Further, although these dimensions have been used to explain market entry decisions of developed country MNEs (e.g., Brouthers et al. 2002) it is argued that institutional dimensions should be integrated to this explanation (Luo and Tung 2007; Dunning 2006). Both general environmental uncertainties and institutional theory examine factors related to general political environment of host countries of FDI, but in emerging markets corruption is an important factor in market entry strategies and entry mode decisions (Rodriguez et al. 2005; Uhlenbruck et al. 2006) While Miller's perceived environmental uncertainty framework includes corruption within general environmental uncertainty, it is argued that corruption has different dimensions and these dimensions of corruption can be included into an integrated environmental uncertainty perception model. In this paper we use a simple definition of corruption: the abuse (or misuse) of public power for private benefit (Bhardan 1997; Rodriguez et al. 2005; Uhlenbruck et al. 2006). Rodriguez et al. (2005) distinguish between two dimensions of corruption--arbitrariness and pervasiveness--and argue that both dimensions create different types of uncertainties for MNEs. So, for example, when identical transactions are treated in different ways it is argued that arbitrariness exists. The same authors suggest that the level of uncertainty associated with the arbitrariness of corruption reflects the degree of ambiguity associated with corrupt transactions. However, the pervasiveness of corruption is described as "the average firm's likelihood of encountering corruption in its normal transaction with state officials" (Rodriguez et al. 2005, p. 385). So, the pervasiveness of corruption "reflects the degree to which corruption is dispersed broadly throughout the public sector in a country; arbitrariness reflects the degree of uncertainty and capriciousness associated with public sector corruption" (Uhlenbruck et al. 2006, p. 403). It is argued that when corruption is highly pervasive (i.e., in certain industries) it is a fully institutionalised part of commercial activity.

The following subsections detail the rationale for the hypothesised effects of institution specific influences and firm level variables on emerging country MNEs' market entry strategies.

Institutional Factors


A number studies have examined the relationship between the characteristics and policies of governments, and the level and causes of corruption (Shleifer and Vishny 1993; Frye and Shleifer 1997). Although prior research has generated a wealth of insights about how government regulations impact upon state intervention and the extent of corruption, there is a little evidence on the impact of uncertainties created by the arbitrary behaviour of state agents. A dimension of arbitrariness of corruption raises uncertainty and increases liability of foreignness for MNEs. It is also argued that ethical uncertainties and arbitrariness reduces the firm's ability to comply with the requirements of government regulation (Rodriguez et al. 2005). In an environment where uncertainty is created by arbitrary behaviour on the part of state agents, MNEs are forced to find alternative sources of stability and support. If, as both institutional and transaction costs perspectives suggest, local partners are a good source for providing such stability and support, such local partnerships may reduce uncertainties created by the arbitrariness dimension of corruption. This reflects the position of such partners as members of local networks interacting on a regular basis with state officials.

An alliance with an established firm in the host country may also help the foreign entrant to establish external legitimacy. It is argued that the higher is the external legitimacy; the lower will be the risk of arbitrary practices of corrupt agencies (Uhlenbruck et al. 2006). When the firm is not seen as legitimate, then government officials may face less risk when they behave in an arbitrary fashion. In order to avoid uncertainties due to arbitrary corruption, a foreign MNE may trade-off equity ownership with local legitimacy, thereby reducing the pressures of corruption (Rodriguez et al. 2005; Uhlenbruck et al. 2006). Previous studies on developed country MNEs (from transaction cost perspectives) also suggest that perceived volatility in the environment will lead to joint venture as preferred entry mode to allow the most efficient trade-off between control and cost, as well as greater flexibility (Anderson and Gatignon 1986; Gatignon and Anderson 1988; Kim and Hwang 1992; Erramili and Rao 1993). Consequently, we hypothesise that:

Hypothesis 1: In markets where "ethical uncertainties and arbitrariness" are high, firms will select joint ventures over wholly owned subsidiaries.

There can be an argument, as evidenced by Rigobon and Rodrik's (2004) findings, that democracy improves the rule of law--demonstrating a correlation with ethical-societal uncertainties. Positive feedback between the quality of economic and political institutions tends to result in better economic institutions. Research (Harms and Usrsprung 2002; Busse 2003) on developing and emerging markets, from 1972-1999 and 1989-1997 respectively, indicated that MNEs are predisposed to invest in countries where political rights and civil liberties are protected. The level of economic development of the countries involved can be an important variable in this context.

Macroeconomic determinants have been found to impact significantly upon FDI inflows also, with the country's level of development and balance of payments being amongst the most important factors (Schneider and Frey 1985). Macroeconomic uncertainty in the form of fluctuations in the level of economic activity, inflation, exchange rates and interest rates can impact upon resource and production costs as well as demand (Oxelheim and Wihlborg 1987; Brouthers et al. 2002), with the impact varying between the service and manufacturing sectors. Depreciation of currency relative to the home country will potentially act as a location advantage for the host country, as will relative taxation (Gastanaga et al. 1998). Shared equity ownership allows foreign firms to minimise the risk associated with macroeconomic uncertainties. Thus we hypothesise that:

Hypothesis 2: When the political and economic climate in the host country is perceived negatively, foreign investors will select a joint venture over a wholly owned subsidiary.

It has long been recognised that the political climate in the host country can have a major impact upon managerial decision making with respect to FDI (Kobrin 1976, 1979; Nigh 1985). Policy instruments, at the national and supra-national level, can play an important role determining the attractiveness of a host country to foreign direct investors (Henisz 2000; Henisz and Delios 2001). Kostova and Zaheer (1999) point out that MNEs must comply with the regulatory requirements in order to achieve legitimacy, the more complex or less explicit these are, the more problematic for the firm. At the same time, instability in the political environment does not necessarily mean instability in the policy domain (Brewer 1983) and host countries may provide a myriad of policies which can affect FDI, directly or indirectly (Brewer 1993). As well as creating market imperfections attractive to foreign investors (Brewer 1993), policy towards FDI by the host country can have as its aim the correction of perceived pre-existing distortions in the economy (Berg and Guisinger 2001). This may manifest itself in trade and tax regulatory structures aimed at encouraging location decisions by foreign investors (Root and Ahmed 1978; Dunning 1988, 1998; Czinkota et al. 1995). However, this issue is not without contention. Some research findings, such as Nicholas et al. 1999 study of the impact of Thai policy variables upon Japanese MNE FDI, do not show differentiated decision making based on policy incentives. Others argue that policies which are viewed as 'pro-FDI flow' in nature can act as a key driver in creating positive perceptions of host country attitudes to MNEs (Sethi et al. 2003; UNCTAD 2003; Kobrin 2005). Accordingly, we hypothesise that:

Hypothesis 3: When investors perceive more positive attitudes towards FDI in the host country, they will select a wholly owned subsidiary over a joint venture.

Geographical and cultural proximity between the host and home country has been identified as an important factor in FDI decisions (Dunning 1993; Hofstede 1983; Kogut and Singh 1988). Sethi and his colleagues' (2003) data on American MNEs in Asia concluded that cultural proximity to the USA was a strong determinant with cultural distance negative and highly significant. Similarly, from a service sector perspective, Li and Guisinger (1992) found a negative relationship between foreign investment and the cultural distance between home and host countries. Greater psychic (Johanson and Vahlne 1977) and cultural distance leads to heightened perceived uncertainty and risk reducing internationalisation strategies. So, differences in culture between countries influence the perception of managers regarding the costs and uncertainty of alternative modes of entry into foreign markets (Kogut and Singh 1988).

Moving beyond abstract issues of psychic and cultural distance, more tangible factors such as inter-nation, and intra-nation, conflict and co-operation have been found to impact upon FDI in less developed economies (Nigh 1985). The commercial and diplomatic relationship, together with the perceived quality of the relationship between the home and host country is also an important factor for foreign investors' perceptions of uncertainty, and in this sense, relationships between home and host country governments can be seen within an institutional framework. In effect, the greater the institutional distance between home and host countries, the greater the level of complexity faced by the MNE (Kostova and Zaheer 1999) and, accordingly, the greater the level of uncertainty. Based upon these arguments, we combine these tangible and intangible factors in a novel manner, and thus we hypothesise that:

Hypothesis 4: When the relationship between the home and host countries is perceived as positive, it is more likely for foreign investors to select a wholly owned subsidiary over a joint venture.

The capacity to intervene in the regulation of taxation, pricing, exchange rates, limitation of production, together with the ability to engage in preferential treatment are just some of the ways in which host country governments can impact upon the direct foreign investor. Interference in the MNE's ability to engage in market transfer between its home and host market is a powerful means by which governments can intervene to protect host economy interests. These can be manifest in instruments such as tariffs, quotas, local product content restrictions and revenue expropriation (Makhija 1993; Keillor et al. 2005). Thus the level of risk of intervention perceived by MNEs plays a crucial role in the entry mode decision (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, p. 1180) highlighted that risk propensity variables were significant determinants of both manufacturing and service sector international entry mode decisions. Based upon this argument, we hypothesise that:

Hypothesis 5: When a high risk of intervention is perceived in the host country, foreign investors will select a joint venture over a wholly owned subsidiary.

Intervention can also come from non-governmental actors. Indeed, the development of the Mafia phenomenon has been noted as one of the unexpected surprises emerging from the first ten years of transition (Roland 2001). In certain countries, and particularly in the former CIS, organised crime is endemic, resulting in intimidation, shake-downs, and systematic theft and fraud (Markwick 1998). Consequently, insights into host government objectives (and to a lesser extent into their ideological position) and the activities and behaviour of the locally organised criminal fraternity can be of great benefit to MNEs. International joint ventures with domestic businesses can provide a vehicle for valuable knowledge transmission, and a concomitant lessening of perceived environmental uncertainty and levels of political risk. Equally, local partnerships may be beneficial should the MNE engage in activities such as lobbying, alliances, inducements or political contributions (Baysinger 1984; Ring et al. 1990; Keillor et al. 1997) in order to influence governmental behaviour. This leads us to the hypothesise that:

Hypothesis 6: In markets where "law and order uncertainties" are high, firms will select joint ventures over wholly owned subsidiaries.

In Pfeffermann and Kisunko's (1999) worldwide survey of obstacles to doing business, corruption was seen to be a major obstacle to business, ranking second only to concern over tax. (1) Perceived as a major obstacle in all countries surveyed, corruption was perceived as a 'serious' obstacle in Central Asian Republics, indeed, it ranked as more significant an issue for transition economies than for emerging economies (Hellman et al. 2000; Smarzynska and Wei 2000). This would seem to lend some support to Husted's (1999) findings that the more economically developed the country, the lower the level of corruption. However, Zhao et al. (2003) found that it was not simply a high level of corruption that impeded FDI flows, rather the negative impact upon FDI flows was greater, disproportionately so, when a high level of corruption was combined with a lack of transparency.

In terms of its impact on market entry mode, it is argued that pervasive corruption reduces the benefits of local partners because once an MNE complies with government corruption it may create political access which reduces institutional complexity. Uhlenbruck et al. (2006) argue that when corruption is pervasive, then the playing field is levelled for MNEs. However, a counter argument is equally valid. MNEs' engagement in corruption may create internal institutional inconsistencies, therefore a joint venture partner in pervasive corrupt countries or industries will enable an MNE to create a buffer from potential damages. Further, Uhlenbruck et al. (2006) argue, JV partners may be of limited use to developed country MNEs in countries where pervasive corrupt practices exist--these MNEs may be subject to stipulations by their own governments which hold them accountable for corrupt practices carried out by their JV partners (for a detailed discussion see Uhlenbruck et ai. 2006). It can be seen that the above literature focuses primarily on the cases of MNEs from developed economies. In the case of emerging market MNEs however, a JV with a local partner in countries where corrupt practices are pervasive may reduce the liability of foreignness, not least by providing insights into whom to pay and how much! As regulations in home countries of emerging market MNEs may not keep these firms accountable for corrupt practices of their JV partners, an equity trade-off for local legitimacy may indeed further limit the liability of foreignness for these MNEs. Furthermore, issues of the transparency of local bureaucracy together with arbitrariness and pervasiveness tend to be more pronounced in transition economies (Smarzynska and Wei 2000; Rodriguez et al. 2005) leading to the selection of joint venture over wholly owned subsidiary. However, the contention that a high level of corruption deters FDI (Mauro 1995) is challenged by evidence of FDI flows to countries perceived as having high corruption levels. Others argue that it is the perception of corruption in the host country which can impact upon location choices for FDI (Wilson 1996; Habib and Zurawicki 2001). Thus:

Hypothesis 7: The higher the pervasiveness of corruption (bribery index), the more likely foreign investors will be to choose a joint venture over a wholly owned subsidiary.

Firm Level Influences

The firm specific variable of size has been found to have a significant relationship on the firm's decision to internationalise, or remain at home and further exploit the domestic market (Kimura 1989). At the same time, there is not an overarching consensus about the relationship between size and the form of entry mode (Zhao et al. 2004). Resource considerations combined with lack of information, experience and learning associated with smaller firms can also lead to higher perceived environmental uncertainty and higher levels of risk aversion (Horst 1972; Mutinello and Piscitello 1998). Consequently, smaller firms will seek joint ventures as risk reducing arrangements in FDI (Kogut and Singh 1988; Mutinelli and Piscitello 1998). For larger firms, specialised tangible and intangible assets may make them attractive to potential joint venture partners (Colombo 1995) and enable them to better manage difficulties and costs with respect to partners' opportunism (Mutinelli and Piscitello 1998); it may also make them more sanguine regarding the potential for their exploitation by their host country partner (Doz 1988). Size may also potentially confer greater bargaining power in ownership negotiations. At the same time, size may make larger firms a more attractive credit risk (Horst 1972; Mutinello and Piscitello 1998), however Agarawal and Ramaswami (1992) found that larger firms may be prepared to sacrifice cost-benefit trade-offs for strategic considerations. Larger firm size may also confer the capabilities needed to internalise the internationalisation strategy by means of an integrated entry mode through transaction cost efficiencies. However, the evidence underpinning the mixed arguments above arise primarily from research into developed country MNEs. More recent work on emerging country MNEs suggests that their experience may be different in the key areas of size of investment and equity ownership, reflecting a springboard approach. High risk and high control equity modes such as acquisitions and greenfield investments are used to allow emerging country MNEs to expand quickly internationally and catch up with incumbents (Luo and Tung 2007). Although, somewhat at odds with Johanson and Vahlne's (1977) Uppsala model of internationalisation, this recent research argues that for emerging country MNEs their "initial commitment tends to be large (owing to the use of acquisitions or greenfield investment) and does not necessarily involve many small steps (owing to strategic leapfrog from their latecomer position)". On the basis of more recent empirical and theoretical perspectives on emerging country MNEs' experience, we hypothesise that:

Hypothesis 8: The larger the size of operation, the more likely is the foreign investor to choose wholly owned subsidiary over a joint venture.

In considering direct foreign investment, the form of entry mode has long been recognised as a key decision (Stopford and Wells 1972; Tallman and Yip 2001). More recently, Petrou (2007) found that multinational banks from emerging economies tended to enter foreign markets through wholly owned subsidiary rather than joint venture, perhaps reflecting a lack of experience in strategic partnerships. However, research on entry mode choice has been criticised for characterising entry mode choice as a static decision making process (Hill et al. 1990; Chang and Rosenzweig 2001). Critics argue this perspective fails to recognise that foreign investment is a sequential process in which, frequently, investment decisions are made repeatedly over time (Davidson 1980; Chang and Rosenzweig 2001), and not in isolation (Hill et al. 1990). Such a process facilitates the deepening knowledge of either a particular host country market or enhanced industry-specific skills and international experience (Erramilli 1991) which can lead to a reduction in perceived levels of risk and uncertainty. Some researchers have found that MNEs with greater experience are predisposed towards wholly owned subsidiaries (Gomes-Casseres 1989) whilst others have found support for the Johanson and Vahlne (1977) stages model of internationalisation. When entering developed markets, it has been argued that emerging market MNEs are mainly asset seeking operations and, consequently, these firms seek to expand internationally through high risk and high control equity modes such as acquisitions and greenfield investments (Luo and Tung 2007; Bonaglia et al. 2007). However, Delios and Henisz (2003) found that firms following a sequential process of international expansion are less sensitive to the deterring effect of political risk. Emerging market MNEs are more sensitive to political risk when their investments are motivated by asset exploitation or resource seeking motives and are likely to follow a sequential route culminating in a JV (Makino et al. 2002). While larger firms may have resources to develop capabilities to manage more complex information, smaller firms are likely to follow a sequential route and trade-offequity control to share risk and decrease the liability of foreignness. It is also argued that emerging country MNEs generally lack international experience and hence may face control difficulties in risky and complex host country environments (Demirbag et al. 2009). To compensate for such deficiencies, emerging country MNEs may have a tendency to select those entry modes which enable them to control their operating exposure to host country uncertainties and risks. Consequently, we hypothesise:

Hypothesis 9: When a foreign investor follows a sequential route, it is more likely to select a joint venture over a wholly owned subsidiary.

Methodology and Sample Characteristics

This study is based on the collection of primary data at firm level selected from Turkish companies operating in Central Asian Republics (Azerbaijan, Kazakhstan, Turkmenistan, Uzbekistan and Kyrgyzstan). The list of FDI operations in Central Asian Republics was obtained from the Treasury Under-Secretariat in Ankara. A questionnaire was designed and administered in Turkish (later translated into English and back translated to Turkish to ensure the conceptual equivalence), with all items in a 5-point Likert scale. The final version of the questionnaire was piloted with 3 companies (1 executive from each company) and several questions were further refined in line with pilot results. The questionnaires were sent to the remaining 246 companies operating in Central Asian Republics. Following reminder letters and telephone calls with executives involved in entry decision, a total of 104 companies returned questionnaires. All the 246 companies in the sampling frame were contacted at least once. The final sample of 104 firms (one respondent per firm) represented a 42% response rate. Whilst the sample size is relatively small, it compares favourably with other small studies; for example, the study of entry mode by Malaysian MNEs (Ahmed et al. 2002) which had a sample size of 69, and Child et al. 2003 study which achieved a response rate of 22% in China. The study is cross-sectional and therefore the longitudinal effects of transaction cost variables remain unexplored (similar to Brouthers and Brouthers 2003). The reliability analysis carried out for the scales developed are all high, and a face validity of dimensions also seems in line with the existing literature (Sethi and Luther 1986; Miller 1992; Werner et al. 1996; Howell 2002).

For the sample selection, three main criteria were employed: the size of the operation, the entry mode (wholly owned subsidiary vs joint venture and greenfield vs acquisition), and the countries hosting these operations. For the purpose of this study, foreign operations were defined as wholly owned subsidiaries, and joint ventures (majority, 50% owned, and minority owned). Exporting, subcontracting, and other trade activities of sample firms were also included to establish the entry route of firms. For the full set of sample firms, 52 (50%) are greenfield investments and 52 (50%) are acquisitions. In terms of country of operations of affiliates, about 28.8% of the affiliates were established in Azarbaijan, 26.9% in Kazakhstan, 26% in Turkmenistan, 9.6% in Uzbekistan, and 8.7% in Kyrgyzistan. Table 2 summarises the characteristics of the sample.


The independent variables were measured as follows:

The question relating to political risk included 30 variables which were derived from Demirbag et al. (1998), Miller (1992), and Werner et al. (1996). These items were ex post measures of managers' perceptions of the relative typicality social, political and economical risk dimensions (as recommended by Miller 1992; Sethi and Luther 1986; Werner et al. 1996). Respondents were asked: "How typical were the following.....?" Responses were assessed using five-point scales (i.e., 1 ="not typical at all" to 5 ="very typical").

BRIBEINDX (Transparency International's bribe payers index-2002):

This is an index created by Transparency International. The scores are mean figures from all the responses on a 0 (low) to 10 (high) basis--the higher the score, the lower is the likelihood of public officials demanding or accepting bribes. In total, 17 sectors were covered by Transparency International's sectoral bribery index which covered all sampled companies in this research. The measure has been evaluated for its validity and reliability and found to be a reliable measure of corruption as well as being used extensively by researchers and practitioners (Husted 1999; Habib and Zurawicki 2001, 2002; Lancaster and Montinola 2001). The pervasiveness of corruption is defined as "the average firm's likelihood of encountering corruption in its normal interactions with state officials (Rodriguez et al. 2005), hence we used bribery index as a proxy for the pervasiveness of corruption.

RESOURCE: The natural resource intensity of the target industry (RES) 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.

ENTRY MODE: The entry mode, by which the operation was established, was captured by 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.

ROUTE: The entry route followed to enter the host market was captured by another dummy variable, which was coded 0 if the entry was in a sequential method (export first, than equity based modes), and 1 if the entry was in a direct way (i.e. WOS or a JV).

SIZE: The foreign parent size was measured by the number of employees in an ordinal form, which includes 7 categories as shown in Table 2.

Analysis and Results

Principal components analysis was used in order to explore the underlying dimensions of political risk in Central Asian Republics. The requirements of factor analysis were closely observed. The statistical tests and criteria for factor analysis satisfied the requirement of principal components analysis highly (see Table 3). Principal component analysis generated six underlying dimensions of political risk in Central Asian Republics. The authors have described these factors by trying to capture the overall meaning of their components.

Factor 1. Ethical uncertainties and arbitrariness: This is a dimension which corresponds to the International Country Risk Guide (ICRG's) "democratic accountability" dimension and includes more variables, such as the arbitrariness of corruption (developed by Rodriguez et al. (2005)) underlining this dimension.

Factor 2. Attitude towards FDI: This dimension captures host countries' attitude towards FDI and the private sector in general. Given the transitional nature of the host countries in this research, this dimension is expected to have some impact on individual investment strategies of FDI firms.

Factor 3. Risk of Interventions: This is a dimension which is particularly important for countries in transition. This factor is highly correlated with variables related governmental interventions and also corresponds Miller's (1992) "government policy uncertainties".

Factor 4. Political-Economic Uncertainties: This dimension corresponds to Miller's (1992) "macroeconomic uncertainties" dimension. This factor is highly correlated with variables such as economic crises, political instability and legal uncertainties and also corresponds with the ICRG's "government stability" dimension.

Factor 5. International Relations of the Host Country: This factor captures the dimension that deals with the interdependence of "international, home country, host country government policies" as has been discussed by Sethi and Luther (1986, p. 62). This dimension also corresponds with the ICRG's "international environment" variable.

Factor 6. Law and Order: This dimension captures sensitivities in the local environment, which in some ways overlaps with some of the existing dimensions. It also corresponds with the "law and order" component of ICRG. The factor also covers such bodies as the mafia and other groups which function similarly.

Discriminant validity for the factors was also assessed. Discriminant validity exists if an item correlates more highly with items intended to measure the same factor than with items used to measure a different factor. In short, it refers to the degree to which measures of different dimensions are unique from each other. Discriminant validity is achieved when measures of each dimension converge on their corresponding true scores (which are unique from other dimensions) and the correlations between pairs of dimensions are significantly different from unity (Venkatraman 1989; Anderson and Gerbing 1988). This requires a comparison of a model with this correlation constrained to equal one with the unconstrained model. A significantly lower chi-square value for the model with the unconstrained correlations, when compared with the constrained model, provides support for discriminant validity (Venkatraman 1989). A chi-square difference value with an associated p value less than 0.05 supports the discriminant value criterion. Table 4 reports the results of pairwise tests conducted for discriminant validity. All fifteen tests indicated strong support for the discriminant validity criterion.

We tested hypotheses by conducting binomial logistic regression on the functional relationship between hypothesised variables and foreign investors' entry mode choice for Central Asian Republics. Prior to running binomial regression analysis possible multicollinearity problems were checked. Pairwise correlations were not at the level to warrant any multicollinearity amongst variables. The results of the binomial logistics models for Turkish firms' entry mode for Central Asian Republics are shown in Table 5. The models have a high overall explanatory power, which is judged by correct classification rates (75% to 93%) that are all above the baseline rate. Specificities (their ability to correctly predict joint ventures) are all at an excellent level (all above 82.4%) but the sensitivity of the first three models might be improved further. Psuedo R-square measures confirm that the models have relatively good explanatory power (Table 6). Six of the hypothesised relationships receive consistent and significant support in all four models: four composite variables generated through principal component analysis (Ethical-societal uncertainties, law and order uncertainties, international relations of the host country, and risk of interventions) and a country context related variable (prevalence of bribery in the sector of operation) and a firm related variable (size) provided consistent and statistically significant support to the hypotheses. Entry route related hypotheses received limited support only when controlled by resource intensity of investment.

Four models depicted in Table 5 were created in sequence each time by adding new control variables. Model four is the full model. In all four models ethical and societal uncertainties (FACT1) (p<0.01) "risk of interventions" (FACT3) (p<0.01)"law and order uncertainties" (FACT6) (p<0.05) "international relations of the host country" (FACT5) (p<0.05) "size of operation" (SIZE) (p<0.01) and "sectoral prevalence of bribery" (BRIBNDX) (p<0.05) emerge as highly significant variables.

Hypothesis 1 (ethical and arbitrariness uncertainties) received a relatively high support in all models with a negative sign indicating that, when the foreign investors perceive high ethical and societal uncertainty, there is a greater likelihood of joint venture compared to wholly owned subsidiary. Consistent with previous research findings (Kobrin 1976, 1979), this finding also correlates with other measures of democracy for Central Asian Republics. On a 1 (high) -7 (low) scale, Freedom House gave Azerbaijan, Kazakhstan, Turkmenistan, Uzbekistan and Kyrgyzistan democracy (2) scores 5.29-6.42 for the year 2001, with little improvement four years later (Freedom House 2005).

The second hypothesis (political and economic uncertainties) however, received relatively weaker support in the final model; in all other four models this hypothesis was not supported. This is an interesting finding given the literature on market entry mode of developed country MNEs which emphasises this dimension strongly. Both transaction cost theory and institutional theory highlight the perception that political climate has an important role in subsidiary ownership decisions by MNEs.

Hypothesis 3 (attitude towards FDI) did not receive any meaningful support in any of the models, including the full model. Although the coefficients have positive signs in all five models, these coefficients did not emerge as statistically significant. This is contrary to our expectations and the data does not support the prevailing consensus of the importance of liberalisation as a key driver in creating positive perceptions of host country attitudes as anticipated (Sethi et al. 2003; Kobrin 2005).

Hypothesis 4 (relationship between home and host countries) was supported in all models with a positive sign indicating that the better the relationship between the home and host countries of investors, the more likely are foreign investors to choose a wholly owned subsidiary entry mode over a joint venture strategy. Contrary to the other hypotheses, the expected sign for this hypothesis is positive. Given that Central Asian Republics, like Kazakhstan and Azerbaijan have Turkic ethnic origins, this lends support to previous research on the impact of cultural distance (Kogut and Singh 1988; Li and Guisinger 1992; Sethi et al. 2003).

The fifth hypothesis (risk of intervention) also received a constant significant support in all four models (with and without control variables), with a negative sign indicating that higher the perceived risk of intervention from the host government, the more likely will be the foreign investor to choose a risk sharing strategy of joint venture with a local partner. This is in keeping with perspectives emphasising the importance of a positive and robust institutions (Henisz 2000; Meyer 2001)

Test procedures also offer support for hypothesis 6 (law and order uncertainties) indicating that higher the perceived uncertainties of law and the more likely will be the foreign investor to choose a risk sharing strategy of joint venture with a local partner.

Hypothesis 7 (pervasiveness of corruption) received very significant and consistent support in all models with a negative sign. Although there have been studies on corruption and FDI (Mauro 1995; Husted 1999; Habib and Zurawicki 2001,2002); these studies have been based on a secondary data. Our research, however, utilises the Transparency International's sectoral bribery index within a model based on primary data and tests this hypothesis. This unique finding also allows us to elaborate the nature of investment, corruption perception and equity ownership choice of foreign investors.

There is high support also for hypothesis 8 (size of operation) indicating that the larger is the size of operation the more likely will be the choice of a wholly owned subsidiary. This finding is particularly important because firms entering Central Asian Republics are mainly either very large energy and mineral sector MNEs, or relatively smaller size manufacturing and service sector operators. In a way, this hypothesis interacts with the first control variable (SECTOR). This finding offers a significant support to the transaction cost argument.

Our findings with respect to hypothesis 9 (entry route), which tests the entry on a dichotomous nature (sequential vs direct), did not provide the expected level of support for the widely respected internationalisation model. Whilst, overall, our findings are not highly significant, where it is statistically significant, it is a (+) relationship which does not support the Uppsala model completely. They provide partial support for other recent research which highlights difference in entry route choice for MNEs from emerging countries (Luo and Tung 2007).

Sectoral impact seems to be significant in all models indicating a higher likelihood of wholly owned subsidiaries in the manufacturing and extractive sectors. The resource dependency nature of the operation (RESOURCE) was controlled by a dichotomous variable and this control variable seems to have positive impact in model 2 but not in the full model. A large proportion of affiliates in emerging markets are in resource-intensive industries (i.e., mining, food and beverages, tobacco, textile, petroleum, rubber and primary metals) in which local firms are assumed to have more privileged access to these resources. This is in contrast to other Gomes-Casseres (1989) assertion that the likelihood of multinational enterprises establishing joint ventures with local companies in these industries is high; MNEs entering these industries would have a resource-seeking motive. Although entry date does not have any significant impact in partial models, in the full model the variable has a negative coefficient and a rather weak significance. Entry mode (greenfield vs acquisition), understandably, lends heavy support to wholly owned subsidiary choice, since many of extractive and energy sector affiliates normally start as a greenfield investment.

Our findings also support those of Brouthers et al. (2002) which used the perceived environmental uncertainty concept in explaining MNEs' choice between a wholly owned subsidiary and a joint venture. Brouthers and Brouthers (2003) also highlighted that risk propensity variables were significant determinants of both manufacturing and service sector international entry mode decisions.

Conclusions and Implications

Our findings are significant in both form and substance. In contrast to previous research, our findings are based upon primary data sampling both SME type multinational enterprises and larger firms OFDI from an emerging market to transitional economies. The turbulent environment of Central Asian Republics has provided us with a good testing ground for exploring transactional and institutional related factors on the market entry decision of emerging market firms.

We have shown that greater perceived ethical-societal uncertainties result in a preference for joint venture over wholly owned subsidiary entry mode, consistent with previous research on political risk. Turkish foreign investors do not appear to perceive the regimes of Central Asia as responsive to their peoples, with a concomitant concern over regime stability. More surprisingly, we found only weak support for the impact of political climate on the choice of joint venture. Given the widely acknowledged democratic deficit prevalent in Central Asian Republics, the expectation would be for a much greater correlation with joint venture. This appears to support Nigh's (1985) findings that while MNE executives cite host government stability as a key factor in the FDI decision, econometric investigations do not bear this out. Schneider and Frey's (1985) caveat regarding the complexity of the inter-relationships between political instability and FDI seems accurate----one might speculate that the desire to exploit these resource rich territories might have an impact upon this complex interaction. Further research would enable a fuller picture to emerge. Certainly, our analysis shows that in resource intensive industries, firms prefer wholly owned subsidiaries as the preferred mode of entry. There is also a strong correlation between greenfield site with wholly owned subsidiary. Equally, where acquisition is the mode of entry, our data shows that firms tend to select joint venture as the mechanism for market entry. These findings are consistent with transaction cost theory and political risk theory, supporting the view that when facing high levels of uncertainty in the environment, firms prefer to maintain control levels which facilitate rapid adaptation-it seems credible to suggest that this is likely to be related to the level of asset specificity involved (Brouthers and Brouthers 2002).

The Transparency International Corruption Perception Index (2005) highlighted two factors which impacted significantly upon a host country's preponderance to high levels of corruption; poor economic development and whether or not the country is oil rich. Clearly, Central Asian Republics fall into both categories. Our findings show a strong correlation between greater perceived risk of intervention (and particularly bribery) and the choice of joint venture as entry mode strategy. This preference would seem to support Habib and Zurawicki's (2002) contention that "foreign firms are unwilling to deal with the planning and operational pitfalls related to an environment with a different corruption level." It also supports data gathered in other transition economies (Smarzynska and Wei 2000) and highlights the negative influence of the arbitrariness and pervasiveness of corruption (Rodriguez et al. 2005). Empirical data demonstrates a significant difference in corruption levels between Turkey and its Central Asian neighbours (Transparency International 2004). Consequently, it is credible that selecting a joint venture over a wholly owned subsidiary may allow the investor to avoid at best, or minimise at the least, such risk.

Our findings highlight the fact that even markets displaying the absence of 'adequate institutional underpinnings' (Roland 2001) will remain attractive to other economies who seek to exploit resources and opportunities. It may be that this is particularly true for those economies with less well embedded institutional underpinnings. If this is the case, it raises the issues of benchmarking of levels of perceived uncertainty between developed, less developed and emerging economies. For policy makers in Central Asian Republics keen to attract FDI, this is an important issue. One might suggest that the exercise of violent government repression of dissent in Kazakhstan, Uzbekistan and Kyrgystan and the violent repression of the Andijan protestors by the Uzbek regime in 2005 may have an impact in the competition for FDI in the region. This is particularly pertinent when compared unfavourably with other former CIS countries peaceful 'Rose' and 'Orange' revolutions. However, additional research would be needed to cast additional light on this issue.

Given earlier research which indicated that a significant factor for FDI was the absence of aggressive domestic behaviour within the political system against groups or officeholders (Levis 1979), one might query how this will influence FDI in those states which have recently undergone political turmoil. Interestingly, Levis also found that the legitimacy of the regime was a significant factor, for a lagged period. Following Root and Ahmed (1978) one might credibly suggest that should these regimes prove stable and long-lasting, that shall prove a significant factor in attracting FDI in the coming years. Certainly, comparisons between FDI in India and China would seem to support the necessity of political stability for investors, even in the absence of democratic rights (Yallapragada and Paruchuri 2003).

There has always been a good political and economic relationship between Turkey and the Central Asian Republics. Turkey was among the first group of countries recognising their independence from the Soviet Union. Later, a regional co-operation agreement (ECO) was signed between Central Asian Republics and Turkey. Historical rights arguably played a role in this, as did longstanding relationships around energy resources, exemplified by established oil and gas pipelines. In this context of a positive relationship between the home and host country, it is not surprising to find a preference for wholly owned subsidiary.

One of the most interesting, and novel findings emanating from our research is with respect to entry route to the host country. Our data provided only limited support for the Uppsala intemationalisation model (Johanson and Vahlne 1990, 1977; Johanson and Wiedersheim-Paul 1975). Expectations are that firms will follow a sequential route of entry into the host market, moving from joint venture through to wholly owned subsidiary. However, our data shows a significant level of wholly owned subsidiary as entry mode. This finding is also at odds with research carried out in an Asian emerging economy (Luo 2001) which indicated that a combination of perceived high levels of environmental uncertainty and government intervention together with low host country experience led to a preference for joint venture. This variation in findings may reflect the fact that our data is oriented upon OFDI from a developing economy to emerging economies, rather than OFDI between developed economies which formed the basis for the Uppsala model. Arguably Turkish MNCs are familiar with the kind of institutional challenges presented by the emerging economies that they invest in, simply by virtue of their own home country experience. Whilst we do not seek to overstate the significance of our findings on entry route, they do suggest merit in future research reviewing the Uppsala model.

Only 2 of our sample of firms (n = 104) had been in existence for more than 11 years, with the remainder split nearly evenly between the very new (0-5 years) and less recent (6-10 years). This time frame of formation indicates a clear lack of longevity in host country experience. Within this context, the limited support for wholly owned subsidiaries appears more understandable. Future research in Central Asian Republics could usefully address this issue and seek to determine whether the passage of time results in a detectable shift towards integrated entry mode as part of sequential entry.

One might speculate that in the case of Central Asian Republics, concerns over national factors (namely investment in an emerging economy within the context of an unstable political environment) might lead to elevated perceptions of environmental uncertainty and a concomitant desire for country-specific knowledge. This may have had the effect of mitigating a progression through a non-integrated entry mode (joint venture) to an integrated mode process (wholly owned subsidiary). Future research could usefully address this issue to determine whether this model of internationalisation is supported by the behaviour of FDI in the future.

In recent years, research on international risk and entry strategy has been critiqued for its US bias (Brouthers et al. 2002). Even more recently, Dikova and van Witteloostuijn (2007) recalled, and reiterated, North's (1990) call for research to extend theoretical perspectives such as transaction cost theory and integrate these with a consideration of the institutional environment. Our research has sought to redress these shortcomings and provide new insights into direct foreign investment flows. We have integrated transaction cost and institutional approaches to provide insights into the impact of perceived uncertainty in the political environment within the context of OFDI flows between developing and emerging economies. However, as our findings indicate, much work remains to be done in order to fully understand the dynamics of these relationships.

DOI 10.1007/s11575-010-0028-1

Received: 08.11.2007 / Revised: 30.09.2008 / Accepted: 23.01.2009 / Published online: 19.03.2010


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(1) Tax encompassed tax regulations as well as "high taxes" in the survey.

(2) These democracy scores incorporate ratings for electoral process, civil society, independent media, national democratic governance, local democratic governance and corruption.

Prof. M. Demirbag * Dr. M. McGuinness ([mail])

Management School, The University of Sheffield, Sheffield, UK


Ass. Prof. H. Altay

School of Tourism and Hotel Administration,

Mustafa Kemal University, Hatay, Turkey
Table 1: Distribution of Outward Turkish FDI by Regions

Regions FDI (US$ million) %

Western Europe 4136.2 53.0
Eastern Europe and Balkans 520.7 6.7
Central Asia and Caucasus 2483.2 31.9
Americas (North and South) 203.1 2.6
MENA 205.5 2.6
Offshore centres and others 232.8 3.2
Total 7791.6

Regions Number of companies %

Western Europe 778 32.5
Eastern Europe and Balkans 402 16.8
Central Asia and Caucasus 544 22.7
Americas (North and South) 149 6.2
MENA 429 17.8
Offshore centres and others 94 4.0
Total 2397 100.00

Source: General Directorate of Banking and Exchange (GDBE), Ankara

Table 2: Sample Characteristics

 n %
Industry of JV
Auto, transport and related equipment 3 2.9
Telecommunication 3 2.9
Food/drink manufacturing 22 21.2
Chemicals 4 3.8
Textile, apparel and leather 21 20.2
Electronics, computer and software 2 1.9
Metal, iron and steel 3 2.9
Plastics 4 3.8
Mechanical engineering 4 3.8
Forest products 3 2.9
Mining 4 3.8
Construction 14 13.5
Transportation 3 2.9
Trade 11 10.6
Banking 2 1.9
Insurance 1 1.0

Host countries
Azerbaijan 30 28.8
Kazakhstan 28 26.9
Turkmenistan 27 26.0
Uzbekistan 10 9.6
Kyrgyzistan 9 8.7

Time period of formation
0-5 45 43.3
6-10 47 45.2
11 and more 12 11.5

Market entry mode of FEV
Greenfield 52 50.0
Acquisition 52 50.0

Size of operations (number employees)
Less than 51 21 20.2
51-100 26 25.0
101-250 18 17.3
251-500 12 11.5
501-750 11 10.6
756-1000 9 8.7
Greater than 1000 7 6.7

Resource intensiveness of operations
Resource oriented 57 54.8
Market oriented 47 45.2
Entry route
Sequence 69 66.3
Direct 35 33.7

Single vs multiple operations
Single operation 33 31.7

Table 3: Factors Underlying Political Risk in Central Asian Republics

 Factor Eigen- % Variance
Factors loads value explained

Factor 1: Ethical uncertainties and 6.42 19.3
Level of bribery 0.864
Level of corruption 0.864
Business ethics 0.860
Uncertainties in payments 0.816
Uncertainties in trading conditions 0.707

Factor 2: Attitude towards FDI 2.96 15.3
Attitude towards foreigners 0.870
Attitude towards private sector 0.867
Attitude towards technology transfer 0.788
Attitude towards expatriates 0.753

Factor 3: Risk of interventions 2.52 13.2
Intervention on terms of trade 0.812
Barriers in repatriation of earnings 0.767
Intervention on prices 0.739
Intervention on foreign exchange rates 0.730

Factor 4: Political-economic 2.13 10.8
Economic crises 0.863
Political stability/instability 0.850
License allocations 0.810
Legal uncertainties 0.756

Factor 5: International relations of 1.58 8.7
the host
Relations with its neighbours 0.860
Relations with the home 0.824
Relationship with international bodies 0.593

Factor 6: Law and order 1.04 7.2
Existence of illegal groups (i.e., 0.818
 mafia, quasi mafia etc.)
Role of feodal figures 0.564

 Cum. Cronbach
Factors percent alpha

Factor 1: Ethical uncertainties and 19.3 0.91
Level of bribery
Level of corruption
Business ethics
Uncertainties in payments
Uncertainties in trading conditions

Factor 2: Attitude towards FDI 34.6 0.87
Attitude towards foreigners
Attitude towards private sector
Attitude towards technology transfer
Attitude towards expatriates

Factor 3: Risk of interventions 47.8 0.82
Intervention on terms of trade
Barriers in repatriation of earnings
Intervention on prices
Intervention on foreign exchange rates

Factor 4: Political-economic 58.7 0.82
Economic crises
Political stability/instability
License allocations
Legal uncertainties

Factor 5: International relations of 68.5 0.76
the host
Relations with its neighbours
Relations with the home
Relationship with international bodies

Factor 6: Law and order 75.7 0.70
Existence of illegal groups (i.e.,
 mafia, quasi mafia etc.)
Role of feodal figures

K-M-O Measure of Sampling Adequacy=0.68; Bartlett Test of
Sphericity=1315.8; p<0.0000

Table 4: Assessment of Discriminant Validity

 Chi-squared Chi-squared
 Constrained Unconstrained
Test # Description Model (df) Model (df) Difference

1 Factor 1- Factor 2 83.6 (27) 57.1 (26) 26.5 *
2 Factor 1--Factor 3 83.9 (27) 49.7 (26) 34.2 *
3 Factor 1--Factor 4 86.2 (26) 31.8 (26) 54.4 *
4 Factor 1--Factor 5 62.3 (20) 37.1 (20) 25.2 *
5 Factor 1--Factor 6 51.8 (14) 11.3 (13) 40.5 *
6 Factor 2--Factor 3 80.5 (20) 57.2 (19) 23.3 *
7 Factor 2--Factor 4 88.6 (20) 31.2 (19) 57.4 *
8 Factor 2--Factor 5 69.4 (14) 48.9 (13) 20.5 *
9 Factor 2--Factor 6 59.6 (8) 9.6 (8) 50.0 *
10 Factor 3--Factor 4 105.5 (20) 44.5 (19) 55.5 *
11 Factor 3--Factor 5 54.7 (14) 23.8 (13) 30.9 *
12 Factor 3--Factor 6 69.5 (9) 13.9 (8) 55.6 *
13 Factor 4--Factor 5 81.5 (14) 17.9 (13) 63.6 *
14 Factor 4--Factor 6 38.2 (9) 18.1 (8) 20.1 *
15 Factor 5--Factor 6 29.5 (5) 9.3 (4) 20.2 *

* P < 0.001

Table 5: Correlation Matrix

Variables 1 2 3 4 5 6 7

1. FACT1 1
2. FACT2 0.00 1
3. FACT3 0.00 0.00 1
4. FACT4 0.00 0.00 0.00 1
5. FACT5 0.00 0.00 0.00 0.00 1
6. FACT6 0.00 0.00 0.00 0.00 0.00 1
7. SIZE -0.07 0.10 -0.16 -0.10 0.10 -0.21 1
8. BRIBEINDX -0.04 -0.02 0.04 0.09 0.16 0.02 -0.12
9. ROUTE -0.09 -0.21 0.07 -0.04 -0.18 -0.02 -0.21
10. SECTOR 0.06 0.07 0.32 -0.11 0.08 0.04 -0.04
11. RESOURCE 0.10 -0.09 0.00 0.00 0.11 0.20 -0.17
12. DATE -0.19 -0.08 -0.07 -0.01 0.09 -0.09 0.25

Vari8 9 10 11 12

8. 1
9. 0.20 1
10. 0.31 0.15 1
11. 0.53 -0.10 0.13 1
12. 0.18 0.15 -0.17 0.03 1

Correlations of all or greater are significant at p < 0.05.

FACT1=ethical-societal uncertainties, FACT2=attitude towards FDI,
FACT3=risk of intercvention, FACT4=political & economic uncertainties,
FACT5=international relations of the host, FACT6=law and order,
SIZE=size of operation, BRIBEINDX=sectoral bribery index, ROUTE=entry
route to host country (sequential vs direct), SECTOR= manufacturing
vs services, RESOURCE= resource dependence, DATE=entry date

Table 6: Logistic Regression Results

 Definition and Model 1
Variables expected sign Coefficient Waldstat.

 Intercept -6.67 *** 11.23
FACT1 Arbitrariness (-) -0.86 *** 7.59
FACT2 Attitude towards FDI (+) 0.04 0.02
FACT3 Risk of intervention (-) -1.04 *** 8.78
FACT4 Political & economic -0.18 0.47
 uncertainties (-)
FACT5 International relations 0.60 ** 3.15
 of the host (+)
FACT6 Law and order -0.51 ** 3.55
 uncertainties (-)
SIZE Size of operation (+) 0.70 *** 6.65
BRIBEINDX Corruption -0.60 ** 4.81
 (pervasiveness) (-)
ROUTE Entry route to the host 0.62 1.00
 country (+)
SECTOR Manufacturing/Services (+) 1.26 ** 3.20
RESOURCE Resource dependency (+)
ENTRY DATE Entry date (-)
Model chi- 34.32
Sensitivity 63.6
Specificity 82.4
Correct ratio 75.0
Baseline rate 52.28
Cox & Snell 0.335
R sq.
Nagelkerke 0.454
R sq.

 Definition and Model 2
Variables expected sign Coefficient Waldstats.

 Intercept -5.98 *** 10.12
FACT1 Arbitrariness (-) -0.86 *** 7.26
FACT2 Attitude towards FDI (+) 0.13 0.19
FACT3 Risk of intervention (-) -0.91 *** 7.44
FACT4 Political & economic -0.12 0.22
 uncertainties (-)
FACT5 International relations 0.54 ** 3.02
 of the host (+)
FACT6 Law and order -0.58 ** 4.36
 uncertainties (-)
SIZE Size of operation (+) 0.80 *** 7.74
BRIBEINDX Corruption -0.42 * 1.95
 (pervasiveness) (-)
ROUTE Entry route to the host 1.05 * 2.45
 country (+)
SECTOR Manufacturing/Services (+)
RESOURCE Resource dependency (+) 1.47 ** 4.03
ENTRY DATE Entry date (-)
Model chi- 35.16
Sensitivity 66.7
Specificity 88.2
Correct ratio 79.8
Baseline rate 52.28
Cox & Snell 0.342
R sq.
Nagelkerke 0.463
R sq.

 Definition and Model 3
Variables expected sign Coefficient Waldstats.

 Intercept -6.86 *** 10.61
FACT1 Arbitrariness (-) -0.84 *** 7.13
FACT2 Attitude towards FDI (+) 0.05 0.02
FACT3 Risk of intervention (-) -1.02 *** 8.63
FACT4 Political & economic -0.17 0.43
 uncertainties (-)
FACT5 International relations 0.61 ** 3.31
 of the host (+)
FACT6 Law and order -0.64 ** 4.31
 uncertainties (-)
SIZE Size of operation (+) 0.82 *** 7.45
BRIBEINDX Corruption -0.72 ** 5.10
 (pervasiveness) (-)
ROUTE Entry route to the host 0.71 1.28
 country (+)
SECTOR Manufacturing/Services (+)
RESOURCE Resource dependency (+)
ENTRY DATE Entry date (-) -0.42 1.08
Model chi- 35.43
Sensitivity 63.6
Specificity 82.4
Correct ratio 75.0
Baseline rate 52.28
Cox & Snell 0.344
R sq.
Nagelkerke 0.466
R sq.

 Definition and Model 4
Variables expected sign Coefficient Waldstats.

 Intercept -6.74 *** 10.35
FACT1 Arbitrariness (-) -0.85 *** 2.35
FACT2 Attitude towards FDI (+) 0.12 0.16
FACT3 Risk of intervention (-) -1.03 *** 8.30
FACT4 Political & economic -0.13 0.25
 uncertainties (-)
FACT5 International relations 0.63 ** 3.45
 of the host (+)
FACT6 Law and order -0.74 ** 5.13
 uncertainties (-)
SIZE Size of operation (+) 0.97 *** 8.30
BRIBEINDX Corruption -0.53 *** 2.46
 (pervasiveness) (-)
ROUTE Entry route to the host 1.10 * 2.47
 country (+)
SECTOR Manufacturing/Services (+) 1.14 2.23
RESOURCE Resource dependency (+) 1.26 2.61
ENTRY DATE Entry date (-) -0.49 1.27
Model chi- 38.22
Sensitivity 54.5
Specificity 88.2
Correct ratio 75.0
Baseline rate 52.28
Cox & Snell 0.366
R sq.
Nagelkerke 0.495
R sq.

* p < 0.1; ** p < 0.05; *** p < 0.01 (all one-tailed). N=104
Positive signs indicate a higher likelihood of WOS, negative signs
a higher likelihood of IJVs
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Author:Demirbag, Mehmet; McGuinness, Martina; Altay, Huseyin
Publication:Management International Review
Geographic Code:7TURK
Date:Mar 1, 2010
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