Institutional Influence on Mode of Entry

Topics: Economics, Cost, Transaction cost Pages: 29 (9098 words) Published: September 9, 2013
Journal of International Business Studies (2013) 44, 1–13

& 2013 Academy of International Business All rights reserved 0047-2506


Institutional, cultural and transaction cost influences on entry mode choice and performance

Keith D Brouthers
University of East London, London, UK Correspondence: KD Brouthers, King’s College London, 150 Stamford Street, London SE1 9NH, UK. email:

Abstract In this study, we examine foreign market entry mode choice and firm performance for a sample of European Union firms. Examining both financial and non-financial performance measures, we attempt to determine if firms that select their entry mode based on transaction cost, institutional context, and cultural context variables perform better than firms that make other mode choices. We found that mode choice did matter. Firms whose mode choice could be predicted by the extended transaction cost model performed significantly better, on both financial and non-financial measures, than did firms whose mode choice could not be predicted by the extended transaction cost model. Implications for future research are discussed. Journal of International Business Studies (2013) 44, 1–13. doi:10.1057/jibs.2012.22

INTRODUCTION Research efforts in the area of international entry mode selection have tended to concentrate on transaction cost explanations (Anderson & Gatignon, 1986; Cleeve, 1997; Erramilli & Rao, 1993; Gatignon & Anderson, 1988; Hennart, 1991; Makino & Neupert, 2000; Padmanabhan & Cho, 1996; Taylor, Zou, & Osland, 1998). However, recently scholars such as Brouthers & Brouthers (2000) and Delios and Beamish (1999) have begun extending transaction cost entry mode theory by including cultural context and institutional context variables, as well as transaction cost variables. Researchers (Kogut & Singh, 1988; North, 1990) have suggested that adding both institutional and cultural context variables to transaction cost theory enhances our understanding of international entry mode choice in two ways. First, according to Delios and Beamish (1999: 917), institutional context variables provide a valuable extension to transaction cost theory because they “refer to conditions that undermine property rights and increase risks in exchange”. Second, Brouthers and Brouthers (2000) suggest that cultural context variables need to be added to transaction cost entry mode models because they tend to influence managerial cost and uncertainty evaluations in target markets. Despite advances in entry mode theory, little consideration has been given to the performance implications of foreign market entry

Entry mode choice and performance

Keith D Brouthers


mode choices (Brouthers, Brouthers, & Werner, 1999; Woodcock, Beamish, & Makino, 1994). Several studies have examined performance differences between wholly owned modes (acquisitions or greenfield startups), and joint ventures (e.g., Nitsch, Beamish, & Makino, 1996; Pan & Chi, 1999; Pan, Li, & Tse, 1999; Shrader, 2001; Simmonds, 1990; Woodcock et al., 1994). However, Shaver (1998) suggests that studies like these typically suffer from an endogeneity problem, i.e., mode performance is compared without regard to the characteristics of the particular investment decision. Two recent studies attempted to control for endogeneity when examining entry mode performance. Shaver (1998) examined the performance implications of firm diversification mode choice (wholly owned acquisitions or greenfield startups) based on variables included in previous research. He found that firms whose diversification mode choice corresponded to the variables’ predictions performed better than firms whose diversification mode choice did not conform. Brouthers et al. (1999) examined the performance implications of firms selecting entry modes (wholly owned, joint ventures, licensing and exporting) based on Dunning’s Eclectic Framework. They found...
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