The Effect of National Culture on the Choice of Entry Mode
Foreign direct investment has increased dramatically over the last couple of decades and this trend has been studied. However, it is argued that the entry model form many of these investments has not been studied with the same rigor. It is commonly thought the composition of national cultures on Hofstede’s scale and the distance between the two cultures influences the model of entry that is chosen. The study proposes that the cultural distance between two cultures as well as the uncertainty avoidance principles will guide the selection and compares data on 228 entries into the U.S. market through acquisition, wholly owned greenfield, and joint venture. The study finds several correlations in the data and concludes that the entry mode is influenced by cultural factors.
Position of the Author
The position of the author is that there is a gap in the literature that examines the influence that culture can have on direct foreign investment with the entry model as the vehicle for this relationship. The multiple regression tests that were run on the cultural variables showed significant correlations. The author believed that this was an indirect method for validating the usefulness of Hofstede’s cultural factors and their scales. The author also seemed surprised at the strength of the relationships that appeared in the data even though the data set was collected for other purposes. The author also suggests that more research could be conducted to provide more insights into foreign investment methods.
Analysis of the Issue
When companies wish to expand into foreign markets they have a few available choices for entry. The primary entry models are through a greenfield investment, joint venture, or through an acquisition. In the greenfield model, a firm will enter the market directly with their products or services. This requires them to basically start from scratch in a new market but they have the advantage of sole ownership. Of the three different models, this one has the potential to be the most profitable. When firms are comfortable with the new market and have the capital to build market share then this is often the model for entry that is chosen.
The next two modes are comparatively less profitable but allow the firm to mitigate some of the uncertainty that could be posed through a new market entrance. When a firm acquires an international firm for the purpose of entering a new market then they are often able to acquire their employees, processes, and intangible benefits of the established business. However, to acquire such a company often requires that a premium price be paid for the acquisition. The final model is to enter with a joint-partnership in which two companies from different nationalities can coordinate each other’s efforts with the purpose of entering the new market.
The purpose of the study was determining what effects that cultural differences play in the selection of entrance models. The study used factors that were related to Hofstede’s cultural dimension model. Differences in national cultures have been shown to result in different organizational and administrative practices that grow as the two cultures are farther apart. The farther the cultures are apart the more likely it would be for a firm to enter through acquisition or through a joint-partnership. If the two cultures are similar then the firm might chose a greenfield strategy to command the highest potential for profitability. The hypothesis for the study has two parts:
1. The greater the cultural distance between the country of the investing firm and the country of entry, the more likely a firm will choose a joint venture or wholly owned greenfield over an acquisition.
2. The greater the culture of the investing firm is characterized by uncertainty avoidance regarding organizational practices, the more likely that firm will choose a joint venture or wholly owned greenfield over an acquisition.
I think the hypothesis is good however it could be more specific. It seems fairly obvious that a firm would chose a joint venture or acquisition over a greenfield investment if there was greater cultural differences. This seems like it could be almost known by the definitions of the entry methods. However, the author posits that this literature has not officially deduced this yet and this work is a contribution to that end.
Relation to Class Material
This article is definitely related to the class material. Many firms expand internationally to tap into new markets and international expansion is common in the business world. Therefore this article expands on the types of business models that can be used for international expansion.
Key Contribution to International Business
The contributions for international business are to better understand how culture can impact international expansion from different levels. There has been work produced that covers the role of culture in different transaction or administrative costs that a firm can expect in overseas markets. For example, if the two firms or markets have significantly different cultures then one could expect to have more difficulties with administering the business. This work adds to understanding the entry methods and how they are influenced by culture. If the two cultures are starkly different then a greenfield entry method is mostly likely not the right choice. Although joint ventures and acquisitions can also be problematic in such a circumstance, they also offer many advantages in regard to overcoming cultural differences.
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