Academic journal article International Journal of Business Studies

A Performance Analysis of Wholly Owned Subsidiaries and Joint Ventures: Electrical and Electronic Industry in Thailand

Academic journal article International Journal of Business Studies

A Performance Analysis of Wholly Owned Subsidiaries and Joint Ventures: Electrical and Electronic Industry in Thailand

Article excerpt

This paper documents the performance differences between Wholly-Owned Subsidiaries (WOS) and Joint Ventures (JV) in electrical and electronics industry in Thailand for the period of 2000 to 2004. Unlike other studies, we analyse the performance differences using DuPont analysis. The impact of capital structure on the profitability of WOS and JV is further studied in this paper. We find that WOS have significantly higher sales growth, have more efficient asset management and carry higher debt ratios. On the other hand, JV are more efficient in cost control and thus have better performance in term of ROS. Consistent with managerial overinvestment agency theory, debt ratio is positive and highly significantly related to ROE. In addition, better asset management and higher leverage of WOS lead to higher profitability. On the other hand, JV's better ROS performance helps them enhance their ROE.

Keywords: MNC performance, entry mode, DuPont analysis

(ProQuest: ... denotes formulae omitted.)

I. INTRODUCTION

The factors affecting the decision to expand internationally remain of serious interest especially to managers of multinational firms. Specifically, foreign operations of multinational companies (MNCs) suffer from the limitations of just being foreign. Multinational corporations base their foreign direct investment (FDI) decisions on a wide range of interests and a variety of complex objectives. These decisions are characterised by considerable uncertainty and risk, and by the trade-off among corporate objectives. Before entering foreign market, every MNC has to decide where to invest, how to invest and the best time entering foreign market to ensure a successful international investment expansion.

The ultimate goal of the firm, making any strategic actions and decisions, is to create and add value to the firm. MNCs internationalise their activities through various entry modes. Depending upon the level of control required and level of resource commitment, international business is conducted through international trade (exporting and importing), licensing, franchising, joint venture, acquisition, and wholly owned subsidiary. One of the important factors determining how well an MNC will perform after entering into a foreign market is how well they decide on which entry mode they should use given the goal of maximising the firm's value. The entry mode decision is very important to MNC managers because once any entry decision has been made, it is impossible to make changes without considerable loss of time and money since every entry mode has varying degree of resource commitment (Root 1987).

Previous studies in the area of entry mode and performance suggest that there are performance differences between different entry modes (Chen 1999; Nitsch et al. 1996; Siripaisalpipat and Hoshino 2000; Woodcock et al. 1994). However, the research findings in the area of entry mode and performance are rather mixed. Theingi and Tang (2006) and Woodcock et al. (1994) show that WOS performs better than JV. While the performance of JV is found to be better than that of WOS in Theingi and Tang (2007), Pan and Chi (1999), Pan et al. (1999), and Chan (1995) find that there were no performance differences between two types of entry mode (WOS and JV).

These mixed results are due to differences in the countries of origin of investment, the sample period or the use of different performance measures. For example, Wilhelmsson and Mcqueen (1999), Riahi-Belkaoui (1996), and Woodcock et al. (1994) suggest that the use of different performance measures affects differences in the results. In addition, Yiu and Makino (2002), Busija et al. (1997), Riahi-Belkaoui (1996), Simmonds and Lamont (1996), and Tallman and Li (1996) contend that the time under study could influence research findings, while Theingi and Tang (2006; 2007) posit both sample period and use of performance measures can alter the results.

In addition, instead of barely looking at the financial ratios such as ROE and ROA as performance measures, it will be more interesting if we can further analyse these ratios and find out the causes of good or poor performances. …

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