Brazilian multinationals' ownership mode: the influence of institutional factors and firm characteristics.
| Autor | de Azevedo Avila, Henrique |
| Cargo | Report |
Introduction
The appearance of emerging multinational enterprises (EMNEs) has aroused great interest among academics, leading to the development of theoretical work and empirical studies aimed at verifying whether there are differences in motivations, pathways, processes and performance of these companies, compared to traditional multinationals from developed countries (Ramamurti, 2012; Sauvant, 2008). In spite of this, there are still important questions concerning whether differences are theoretically relevant, and, if so, whether they are adequately captured by the frameworks developed for multinationals from developed countries (Hennart, 2012). Therefore, new studies may help to revise or extend theories and models, by incorporating specific aspects of EMNEs (Cuervo-Cazurra, 2012).
This study adopts the institutional approach to analyze the choice of ownership mode by EMNEs. Dunning and Lundan (2008) suggested that the institutional approach offers a promising path to move forward our understanding of the different forms of contemporary multinational firms. Most theories that seek to explain the determinants of FDI emphasize economic variables. The research on entry modes is often based on transaction cost theory (Brouthers, 2013; Hennart, 1982; Rugman, 1981), which focuses primarily on the firm-specific and industry factors; institutional aspects are often treated as control or moderating variables (Agarwal, 1994; Barkema & Vermeulen, 1998; Dikova & Witteloostuijn, 2007). Nevertheless, since the beginning of the past decade, empirical studies have been conducted to assess the impact of host country institutional factors on FDI decisions.
This work investigates whether host countries' institutional factors and firm characteristics can help the understanding of Brazilian EMNEs' choices of ownership mode for their foreign direct investments (FDI). The following research question thus inspired the study: Is the choice of ownership mode by EMNEs related to certain host-country institutional factors and firm characteristics?
The paper contributes to the understanding of the phenomenon in several ways. First, the choice of ownership modes by EMNEs is examined using the theoretical lenses of institutionalism. Second, the study looks at the relationship between state support and choice of ownership mode, a new issue in the area of international business. Third, differences between the ownership-mode decisions taken by manufacturing and service EMNEs are also examined. Fourth, the study focuses on an emerging country. Brazil is a privileged locus for research on EMNEs, given its growing stock of FDI (although the annual flow of investments is still quite erratic). According to United Nations Conference on Trade and Development (UNCTAD, 2014), the country's stock of FDI abroad reached the figure of US$293.3 billion at the end of 2013.
Hypotheses Development
Institutional distance
The term institution includes a heterogeneous set of factors, such as customs and beliefs, religion, judicial system, governance structures, and market mechanisms. Scott (2001) identifies three pillars in the institutional environment--regulative, normative and cognitive--which affect firm activities. Peng (2009) associated the regulatory pillar with the coercive power of government, expressed by formal institutions such as laws, regulations and rules; and the cognitive and normative pillars with informal institutions, such as culture and ethics.
The understanding that not only physical distance, but especially the perception of differences between countries of origin and destination influence internationalization decisions has already been discussed for several decades in international business literature. The construct of cultural distance, based on Hofstede's (1980) studies and operationalized by Kogut and Singh (1988), has been recurrently used to understand several aspects of firm internationalization, such as location (e.g. Grosse & Trevino, 2005) and entry mode (e.g. Chen & Hu, 2002; Hennart & Larimo, 1998). In addition, the concept of psychic distance, applied by researchers at Uppsala School to the firm internationalization process (Johanson & Vahlne, 1977), has also been extensively used in IB research. However, these constructs and their operationalizations have been criticized in relation to their conceptual weaknesses and measurement flaws (e.g. Shenkar, 2001).
The construct of institutional distance, developed and refined by Kostova and associates (Kostova, 1999; Kostova & Roth, 2002; Kostova & Zaheer, 1999), is believed to have greater explanatory power than the constructs of psychic distance or cultural distance, comprising not only sociocultural variables, but also institutional variables that may significantly influence business decisions (Lopez-Duarte & Vidal-Suarez, 2013; Tung & Verbeke, 2010). Because the construct incorporates aspects of regulative, normative and cognitive distance, it is considered more suitable to explain the strategies adopted by multinationals. When multinationals face institutional environments very different from their country of origin, it is more difficult to establish and maintain their legitimacy (Kostova & Zaheer, 1999), as well as to transfer headquarters' practices to the subsidiary (Kostova 1999; Kostova & Roth, 2002). Host country institutional environment can impact multinational firms' decisions in two ways. In absolute terms, the level of institutional quality reflects the effectiveness, transparency and stability of institutions in the country, resulting in greater or lesser uncertainty; in relative terms, the differences between the levels of institutional quality of the country of origin and country of destination mean potential difficulties to gaining legitimacy in the new environment (Chan, Isobe, & Makino, 2008; Phillips, Tracey, & Karra, 2009).
Several authors have identified the influence institutional factors have on the choice of ownership mode, though not using the institutional perspective. For example, Goodnow and Hansz (1972) found empirical evidence that firms tend to adopt higher-control ownership modes in countries with favorable environments. In turn, studies based on transaction cost theory provide varying interpretations of the impact of cultural distance on the degree of control of the subsidiary (e.g. Anderson & Gatignon, 1986). Even so, transaction cost theorists often see institutional factors as associated with the choice of ownership mode.
Although empirical studies have consistently shown that the higher the uncertainty associated with the institutional environment, the greater the preference for joint ventures, there is some discussion as to how the three pillars of institutional distance--regulative, normative and cognitive may impact FDI decisions. For example, when studying subsidiaries of Japanese multinationals, Xu, Pan and Beamish (2004) found a negative association of regulative and normative distances with levels of participation in subsidiary capital. The authors did not test cognitive distance because they consider it a separate construct, which impacts multinationals' strategies through different mechanisms. This position is shared by Estrin, Baghdasaryan, and Meyer (2009).
Eden and Miller (2004) show that the establishment of joint ventures is advisable in host countries with large normative distance from the country of origin. However, the impact of cognitive distance on the choice of ownership mode is more complex, since different aspects of local firms' and consumers' behaviors can interfere in the decision. Trevino, Thomas and Cullen (2008) contend that the non-inclusion of normative and cognitive factors leaves the understanding of the impact institutions have on FDI decisions incomplete. There are also empirical studies in the literature whose results support the hypothesis of a negative association between the uncertainty of the institutional environment and the choice of joint ventures (e.g. Arslan & Larimo, 2010).
Thus, in general the literature assumes that the greater the differences between the regulatory environments of the country of origin and of the host country, the greater the uncertainty and, therefore, the greater the probability of choosing a joint venture. However, this hypothesis carries a bias, probably due to the fact that most studies examined multinationals from developed countries, which enjoy high quality domestic regulatory environments and, as a result, are expected to find it more difficult to operate in low-quality regulatory environments. However, when considering the case of EMNEs typically coming from countries with poor regulatory environments, one should not assume that these companies prefer low-quality regulatory environments in the host countries simply because they are used to them in their countries of origin. In fact, what matters is the uncertainty generated by a regulatory environment of poor quality, regardless of the country of origin of the firm. Although it is possible that a company from a poor regulatory environment is better able to deal with the uncertainty arising from a similar environment in another country, it does not mean that the company prefers, or that it is easy for the company to operate in such environment. Thus, in the case of EMNEs, the impact of the regulatory environment in the ownership mode decision should not be evaluated by the difference (or distance) between the country of origin and country of destination, but by the quality (absolute) of the regulatory environment. Therefore, we advance the following hypothesis:
H1: The higher the quality of the regulatory environment of the host country, the less likely the firm will be to choose a joint venture, preferring to establish a wholly-owned subsidiary.
As to normative and cognitive distance, differences indeed matter, since they generate uncertainty. Therefore, we advance the following hypotheses:
H2: The...
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