Academic journal article Journal of Managerial Issues

Going Past Entry Mode: Examining Foreign Operation Mode Changes at the Strategic Business Unit Level

Academic journal article Journal of Managerial Issues

Going Past Entry Mode: Examining Foreign Operation Mode Changes at the Strategic Business Unit Level

Article excerpt

Why do firms have different foreign operating modes (FOM) in a particular country? Why and when do they decide to change their FOM? While there are a number of studies that investigated the entry mode decisions of firms, relatively little attention has been given to examining the evolution of FOM after entry (for review, see Ahsan and Musteen, 2011a; Benito et at., 2009; 2011; Datta et al., 2002; Puck et al., 2009). This is surprising given that the initial FOM chosen by a firm is not always sustainable. FOM, which is an institutional arrangement that facilitates the deployment of a company's products and resources in a host market (Welch et at., 2007), is a broader concept than entry mode. FOM in a host country may take a non-equity (e.g., exporting, licensing or distribution agreement), or an equity (joint venture [JV] or wholly-owned subsidiary [WOS]) form (Agarwal and Ramaswani, 1992; Anderson and Gatignon, 1986). While the limited literature on FOM undoubtedly provides valuable insights on FOM evolution (e.g., Benito et al, 2009; Puck et at., 2009), it also constrains understanding of FOM changes by adopting primarily a firm-level perspective in analyzing FOM decisions. The extant literature has failed to recognize that factors at the strategic business unit (SBU) level may also impact FOM decisions. SBUs are autonomous divisions within large firms that generally focus on a particular product/service category. They are typically responsible for strategy formulation, implementation, and consequently profits and losses (Gupta and Govindarajan, 1984).

The aim of this paper is to address the gap in the literature and to develop a better understanding of the reasons a firm retains or converts its FOM by investigating this at the SBU level. Despite gaining knowledge of the host country and experiencing the same internal and external isomorphic pressures, firms may choose different types of FOM in a particular country. This study utilizes insights from institutional theory and internationalization literature to explore the question of why a MNE may have different types of FOM in a particular country. The literature on operation modes, especially entry mode, has chiefly focused on the firm's adaptation to the external environment of the host country (e.g., government regulation, market demand; for review, see Datta et al., 2002). In general, studies focusing on country-level factors have assumed that all MNEs experience the same environment or institutional pressures in a particular host country regardless of the industry in which they operate. This tendency to focus only on host country factors obfuscates the influence of local industry on the choice of FOM that is, the industry institutional environment in the host country. It is argued that different SBUs of a firm are subject to a different external environment based on the industry in which they operate. Accordingly, it is important that researchers examine the characteristics of the industry in which the SBU operates to better understand FOM decisions. Likewise, researchers have done little investigation on the strategic rationale of FOM decisions. This is surprising considering that strategic rationale for internationalization plays a critical role in the selection of entry mode in a foreign market (Dunning, 2000). Therefore, it is important that scholars consider the influence of the SBUs' strategic rationale for internationalization to gain a greater appreciation of FOM decisions.

The next section reviews relevant literature followed by a discussion of research methods, case study evidence, a presentation of theoretical insights and propositions, and a concluding discussion section.

LITERATURE REVIEW

Entry mode, a critical component of foreign operations, has received significant scholarly attention for well over three decades. Recent studies have focused on the dynamics of operation modes and have argued that both internal and external factors influence FOM choice and combinations (Benito et al. …

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