Why to expand into countries which have different institutions? Why take such risk? Assuming it is worthwhile, how to enter these countries?
In a recently published book chapter (Castañer & Genç, 2011), we try to answer these questions; we examine why firms enter institutionally different countries and which entry mode choice they should choose.
We argue that discussions of international expansion should distinguish between country informal (e.g. culture) and formal (e.g. laws) institutions, and should take into account not just the home country of the MNE and its distance to the focal host country, but the MNE’s overall footprint and experience across the world in general, and in countries with an institutional structure that is similar to that in the host country being entered in particular. We further claim that despite the risk it entails, firms might expand into institutionally different countries for exploratory reasons.
Moreover, we argue that firms with experience in countries with different informal institutions will be more likely to enter via acquisitions than firms without such experience, that such experience will not matter as much in the case of formal institutions, and that such firms will exit more quickly when they enter via equity alliances than through full acquisitions. We also distinguish between balanced and unbalanced alliances and argue that balanced alliances will be more enduring, but only when the host country is culturally (not legally) different from the other countries where the MNE has experience. In doing so, we assess the pros and cons of the different entry modes along six dimensions.
Our arguments suggest that entry mode should be conditioned on a firm’s experience in other markets, and that inter-country differences in formal versus informal institutions (should) have distinct influences on entry mode.
We believe this book chapter can be of interest to not only researchers on international business, learning and corporate strategy but also to managers involved in or thinking about international expansion and the choice of entry mode.
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