Academic journal article Management International Review

Ownership Strategy for a Foreign Affiliate: An Empirical Investigation of Japanese Firms

Academic journal article Management International Review

Ownership Strategy for a Foreign Affiliate: An Empirical Investigation of Japanese Firms

Article excerpt

As a multinational corporation (MNC) establishes its affiliate in a foreign market, it has two options in determining the affiliate's ownership structure; full ownership (wholly-owned subsidiary) and shared ownership (equity joint venture). Generally, the choice of ownership structure for an affiliate depends on the MNC's strategy and on the costs of alternative ways of implementing the strategy (Gomes-Casseres 1989). Since the choice usually involves a two step process, namely, the determination of the MNC's preference, and the negotiation process with a suitable host government, the realized outcome depends on the interaction between these two factors (Gomes-Casseres 1989, 1990).

Transaction cost arguments have been successfully applied in previous studies investigating the MNC preference for ownership structure for its foreign affiliate (Anderson and Gatignon 1986, Gatignon and Anderson 1988, Hennart 1988, 1991, Kogut and Singh 1988a, 1988b, Kim and Hwang 1992). They posit that the choice between full and shared ownership depends on the relative costs and benefits of the two alternative ownership structures. However, though most transaction cost-based studies recognize the impact of host government restrictions on such choices, they have rarely investigated the impact explicitly in an empirical setting. In reality, such restrictions can induce an MNC to select a shared ownership structure in instance where transaction cost analysis would suggest a full ownership structure. Gomes-Casseres (1989, 1990) has complemented the transaction cost-based studies by empirically investigating the impact of host government restrictions with a model that integrates both the transaction cost and the bargaining power approaches.

The present study builds upon prior research by examining the choice of foreign ownership structure by Japanese manufacturing MNCs in 36 foreign countries over a period of 23 years. This study offers the first large sample study of the factors which affect the choice of foreign ownership structure by non-U.S. MNCs in a global setting, unlike previous studies which have investigated the ownership policies of U.S. MNCs in foreign markets (Gatignon and Anderson 1988, Gomes-Casseres 1989, 1990, Kim and Hwang 1992) or those of foreign (non-U.S.) MNCs in the U.S. (Kogut and Singh 1988a, Hennart 1991).

This study also represents the first attempt to test whether cultural differences influence the choice of foreign ownership structure by MNCs from a single home country. Cultural variables have recently been shown to be important in the foreign establishment mode decisions by firms (Kogut and Singh 1988b, Cho and Padmanabhan 1992).

Finally, this study incorporates both investing firm-related and host country-related factors, for example, host government policy regarding the ownership structures and the degree of cultural similarity between the home and host countries, to determine what influence (if any) these variables have on the choice of ownership structure by MNCs. Conceptually, by attempting to incorporate variations among host countries, but not variations across home countries, we hope to better understand the factors that determine the MNC's choice of ownership structure for foreign affiliates.

The next section reviews the relevant literature on the choice of MNC's foreign ownership structure. This is followed by a presentation of hypotheses to be tested. The data, methodology, and variables used in the study are described in detail, followed by a discussion of the empirical results and concluding remarks.

Full Ownership versus Shared Ownership

The choice between the two alternative ownership structures basically involves trade-offs related to the level of resource commitment (Stopford and Wells 1972), the degree of control (Caves 1982, Davidson 1982, Root 1987), the specification and assumption of risks and returns, and the degree of global rationalization (Franko 1971, Stopford and Wells 1972, Hladik 1985, Kim and Hwang 1992). …

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