This paper examines the links between entry mode and performance of Japanese direct investment in Western Europe, adding to the body of international business research in two areas. The first of these is Japanese-European foreign direct investment (FDI), which has received sparse attention in the literature. The United States has been a frequent subject of research, both as home country of parent firms and host country to foreign investment. In recent years, Japan has attracted considerable scholarly attention as an outward-investing country. In contrast, Europe has not been as frequent a subject of research, not even as Japanse and other foreign investment were becoming increasingly prevalent in the region. We report recent data on the entry mode characteristics of Japanese investment in Europe.
The second area investigated is the effect of entry mode choice on subsidiary performance. This paper adopts the transaction coast approach in analyzing the relative performance of ownership-based foreign entry modes. This approach has a long and rich history in international research, and has been recently employed by Anderson and Gatignon (1986), Gatignon and Anderson (1988), Erramilli and Rao (1993), among others. Subsequent sections of the paper will review the literature on entry mode research, outline a theoretical argument for why entry mode is an important determinant of performance, and present the results of the analysis of two sets of data on Japanese subsidiaries in Europe. Preliminary findings and areas for future research form the conclusion.
Entry Mode Research
Selection of entry mode by multinational firms has been widely studied, and a number of contingency variables have been empirically linked to the entry mode choice. Some of the earliest research in the area proposed an incremental, to some extent time-based, model of internationalization, in which a firm moved through ever-increasing levels of international resource commitment as its size, product diversity, and foreign experience grew. Stopford and Wells (1972) observed a link between entry mode (defined by parent company structure) and international experience and level of product diversification.
Johanson and Vahlne (1977) made the incremental process more explicit, adding the theoretical rationale that mangers' growing understanding of foreign markets over time and exposure leads to a higher comfort level with succeedingly more "psychically distant" locations. Increasing familiarity would tend to reduce managers' perceived uncertainty about internationalizing, and lead to an increasing willingness to commit their firms' resources in foreign countries.
More recent research has focused on country and firm-specific contingencies as discriminating variables among entry mode decisions. Kogut and Singh (1988) found that home-country cultural attributes influenced the mode preferences of firms investing in the U.S. In addition, several industry- and firm-specific variables were found to be linked to wholly-owned and joint venture modes. Kogut and Zander (1993) differentiated between licensing or joint ventures and wholly owned subsidiaries in their study of the impact of knowledge transfer on mode choice. Noting that knowledge-transfer is most efficient (least costly) in wholly owned subsidiaries, they showed that the more tacit, less "teachable", and more complex firm-specific knowledge is, the more likely it will be transferred abroad via a wholly owned subsidiary. This suggests that marketing- and technology-intensive companies with greater reliance on difficult-to-transfer knowledge will prefer the wholly owned mode to others, a conclusion supported by Anderson and Gatignon (1986) and Kim and Hwang (1992).
In a partial departure from the incremental models adopted by earlier researchers, Caves and Mehra (1986) argued that previous investments in a country were irrelevant, and that the selection between greenfield and acquisition modes was fully explained (while controlling for joint ventures) by the degree of multinationality, the product diversity, and the size of the parent firm. …