Academic journal article Management International Review

Influence of Managerial Ownership and Compensation Structure on Establishment Mode Choice: The Moderating Role of Host Country Political Risk

Academic journal article Management International Review

Influence of Managerial Ownership and Compensation Structure on Establishment Mode Choice: The Moderating Role of Host Country Political Risk

Article excerpt

Abstract Our study draws on arguments advanced in behavioral decision theory to examine the effects of managerial equity ownership and compensation structures on establishment mode choice (the choice between greenfield start-ups and cross-border acquisitions). It is based on a sample of 396 establishment mode choice decisions comprising of 291 cross-border acquisitions and 105 greenfield start-ups by non-diversified US manufacturing firms. Findings indicate that both managerial equity ownership and the proportion of contingent pay in key managers' compensation structures are associated with the preference for cross-border acquisitions over greenfield ventures. Our analysis also indicates that there is a greater propensity on the part of managers with significant equity ownership to select acquisitions when entry involves host countries characterized by high political risk.

Keywords Establishment mode * Governance quality * Political risk * Compensation structure * Equity ownership

1 Introduction

The selection of entry modes by firms seeking to enter foreign markets typically follows a "hierarchical" pattern (Kumar and Subramanian 1997; Pan and Tse 2000). The first step involves a decision on whether to pursue an equity or a non-equity mode of entry. Firms opting for an equity mode then decide between a shared ownership mode (e.g., a joint venture) and a wholly-owned subsidiary (WOS). If they opt for the latter, they have the option of choosing either a greenfield start-up or a cross-border acquisition. The selection between these two approaches has traditionally been referred to as establishment mode choice and has featured quite extensively in the international business literature (Dikova and Brouthers 2009; Slangen 2013; Slangen and Hennart 2007, 2008). Dow and Larimo (2011) highlight the significance of establishment mode choice identifying it as "arguably one of the more critical international business decisions ... one that can have a substantial impact on the overall performance of the foreign investment" (p. 322). While both establishment mode options entail full ownership and control, they are fundamentally different. A cross-border acquisition involves the purchase of a going concern in the foreign country, with much of the resources and knowledge (e.g., local market knowledge) needed to compete in the host country coming from the acquired firm. In contrast, a greenfield venture entails the creation of a new organization from scratch in the host country with initial investments being followed by subsequent build-up of resources with the foreign firm buying or contracting for such resources from local sources (Slangen and Hennart 2008).

Reviews of the empirical literature on establishment mode choice (Dikova and Brouthers 2009; Slangen and Hennart 2007) reveal that most studies are grounded in either transaction cost theory (the dominant theoretical perspective in the study of establishment mode choice) or the knowledge-based view of the firm. They also highlight that while the influence of corporate governance on strategic choice has been studied in international business (e.g., Musteen et al. 2009; Datta et al. 2009; Sanders and Carpenter 1998; Strange et al. 2009), it has not been so in the context of establishment mode choice. In this study, we sought to address this important gap in the literature by exploring how managerial equity ownership and compensation structures influence the choice of establishment modes.

In our study we posit that greenfield ventures and cross-border acquisitions are characterized by differences in outcome uncertainty and payoff horizons and these differences have important implications for managers with significant firm equity ownership and contingent pay based compensation structures. A key difference between our study and much of the literature on establishment mode choice relates to our use of behavioral decision theory (Wiseman and Gomez-Mejia 1998) in arguing for the relationships between equity ownership, compensation structures and choice of establishment mode. …

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