Wholly-Owned Subsidiaries and Joint Ventures

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GLOBAL JOURNAL OF BUSINESS RESEARCH ♦ VOLUME 3 ♦ NUMBER 2 ♦ 2009

AN EMPIRICAL STUDY OF WHOLLY-OWNED SUBSIDIARIES AND JOINT VENTURES FOR ENTRY INTO CHINA MARKETS Yung-Heng Lee, Northwestern Polytechnic University, USA Yann-Haur Huang, Northwestern Polytechnic University, USA Mei-Jane Chan, Northwestern Polytechnic University, USA ABSTRACT The aim of this study is to empirically investigate the effectiveness of The Eclectic Theory in explaining the entry mode choices of Taiwanese Electronic Components firms in China markets during the time period from 2003 to 2005. The annual data includes as many as 267, 324, and 283 firms respectively. This study explores how the ownership, location, and internalization advantages( OLI advantages) influence the entry mode choices between wholly-owned subsidiaries (WOS) and joint ventures (JV) of Taiwanese Electronic Components firms. It also identifies those factors that have an important impact on the choices of entry mode and provides meaningful suggestions for the new firms that wish to invest in the China market. JEL: M16 KEYWORDS: Eclectic Theory, joint ventures, wholly-owned subsidiaries, china markets INTRODUCTION he Eclectic Theory, also called OLI theory, is one of the main frameworks used to explain and examine foreign direct investment (FDI) decisions of multinational firms over the past two decades (Xuemin Zhao and Reinhold Decker, 2004, pp 7-8). Dunning (1977) first introduced the OLI theory. Later the theory was developed by Dunning himself (1980, 1988, 1995, 1998, 2000) and other scholars such as Goodnow (1985), Hill, Hwang, Kim (1990), Macharzina & Engelhard (1991), Agawal & Ramasvisami, (1992), Woodcock, Beamish & Makino, (1994), Brouthers, Brouthers & Werner (1999), Brouthers, K.& L. Brouthers (2000) and Cantwell & Narula (2003). The Eclectic Theory is an attempt to integrate various FDI theories into a general framework to examine the choice of entry mode. This theory proposed that the choice of market entry mode is determined by three sets of advantages: ownership advantage, location advantage, and internalization advantage. (Dunning, 1980, pp 9-31) Dunning (1988) stated that firms will choose the most appropriate entry modes to enter the foreign markets based on how much OLI advantages a firm possesses. (Ikechi Ekeledo, K Sivakumar, 2004, pp 71-72). He concluded that the more OLI advantages a firm possesses, the greater the probability it will adopt an entry mode with a high control level such as wholly owned venture (Zhao, X.; R. Decker, 2004, pp 8). Tables 1 and 2 summarize some of the more important works in the OLI arena. The OLI approach is utilized as the framework of this study to empirically identify if the ownership, location, and internalization advantages influence ownership. We empirically test the model using by examining Taiwanese Electronic Components firms operating in China in year 2003, 2004 and 2005. We also provide helpful for firms that wish to invest in the China market. The remainder of this paper is organized as the following sections. First, we briefly reviewed the relevant literature on the entry mode determinants of the OLI Theory. Next we described the data used in this empirical study, the methodology applied, the proposed model and hypothesis. Third, we summarize the results of the hypotheses testing of our model. Finally, we closed with some concluding comments and a discussion of the limitations of this research.

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Y. H. Lee, Y. H. Huang, M. J. Chan  Global Journal of Business Research ♦ Vol. 3 ♦ No. 2 ♦ 2009

Table 1: Important Entry Mode Determinant Factors from Previous Studies Factor 1 .firm size 2. multinational experience 3. the ability to develop differentiated products 4. Market potential 5. investment risk 6. contractual risk Lance Eliot Brouthers, Keith D 1. firm size Brouthers, Steve Werner.(1999) 2. multinational experience 3. contract risk, 4. investment risk, 5. market potential, and 6. product...
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