Kauppatieteellinen tiedekunta, 2009
Professor Jorma Larimo
The increase in global trade and FDI activity due to globalization in the last two decades has opened many new market opportunities for the firms. However, when a firm decides to go to a new market in a new country, the decision is associated with many risks also, along with the potential benefits. The establishment and ownership mode choices are important strategic decisions for the multinational enterprises (MNEs) expanding to foreign markets through foreign direct investment (FDI). Establishment mode choice (i.e. choice between greenfield investment and acquisition) and ownership mode choice (i.e. choice between wholly owned subsidiary (WOS) or international joint venture (IJV)) by MNEs are extensively topics in the field of international business studies. The previous theoretical and empirical literature mostly concentrated on economic, locational, resource seeking and learning rationales for these strategic decisions and choices. However, MNEs also enter a new institutional environment when they enter new markets, so their strategic decisions like establishment and ownership mode choices are greatly influenced by internal and external institutional pressures for conformity and legitimacy, as well as the difference in institutional environments of home and host countries. The difference between institutional environments of home and host countries has been termed as institutional distance in the literature.
This thesis theoretically examines the impact of institutional distance on establishment and ownership choices of MNEs. A research model is developed on the basis of theoretical discussions and the resultant hypotheses, that suggests that establishment and ownership mode choices of MNEs are impacted by regulative, normative and cultural-cognitive institutional distances along with the level of institutional development in the host country. The thesis enriches the understanding of the phenomenon of institutional distance by providing arguments in favor of more objective conceptualizations and measures rather than the perceptual ones. Moreover, the thesis also contributes to the application of institutional theory in international business studies. Institutional theory has emerged as a useful theoretical base for studying the firms operating in different institutional environments (across countries and industries) because it takes into account environmental influences on organizations. The detailed literature review presented points out that along with the pressures from external environment; MNE also faces pressures from internal environment, which also impact its establishment and ownership strategies. Hence, MNE managers need a delicate strategy to balance the dilemma of this institutional duality. The study is the first one to integrate establishment and ownership mode choices literature together in the context of institutional distance and institutional theory. The key theoretical finding of the thesis is that regulative, normative and cultural-cognitive institutional distances, along with the level of institutional development in the host country, impact establishment and ownership mode choices of MNEs. However international experience of MNEs also needs to be considered carefully as it can moderate the impacts of institutional distance. This thesis aims to be the theoretical framework of the forthcoming doctoral dissertation, where impact of institutional distance on the establishment and ownership choices of FDI made by Finnish firms in Central and Eastern Europe and Asia would be tested.
Institutional distance, Institutional theory, Institutional Environment, Multinational Enterprises, Foreign Direct Investment, Establishment mode choice, Ownership mode choice