Arjen Slangen

Greenfield or acquisition entry: A review of the empirical foreign establishment mode literature

This paper reviews the empirical literature on the determinants of the choice by multinational enterprises between entering foreign countries through greenfields or acquisitions. We discuss and compare the main theoretical perspectives used, provide a detailed overview of the empirical findings, examine why these findings have often been inconsistent, and offer theoretical and methodological suggestions to guide future research.

Do Foreign Greenfields Outperform Foreign Acquisitions or Vice Versa? An Institutional Perspective

Prior studies of the comparative performance of greenfields and acquisitions have advanced competing arguments, with some arguing that greenfields should outperform acquisitions because acquisitions are costlier to integrate, and others that acquisitions should outperform greenfields because greenfields suffer from a liability of newness. Moreover, while the costs of integration and the liability of newness are at their greatest during a subsidiarys first years, prior studies have tested their competing arguments on samples containing older subsidiaries. We extend these prior studies by (1) developing an institutional theory-based framework that simultaneously considers the costs of integration and the liability of newness, (2) recognizing that both types of costs vary with the level of subsidiary integration, and (3) focusing on the stage of their life during which subsidiaries predominantly incur these costs. To measure subsidiary performance, we ask managers of Dutch multinationals how their ex ante performance expectations compare to the subsidiarys ex post performance during its first two years. Analysing a sample of 191 foreign subsidiaries and controlling for entry mode self-selection and other factors, we find that acquisitions outperform greenfields at low and intermediate levels of subsidiary integration, but that greenfields outperform acquisitions at higher integration levels.

Cultural and Institutional Determinants of Bilateral Trade Flows

This paper studies the intangible costs of international trade by extending the basic gravity equation with measures of cultural and institutional distance, and institutional quality. Analyzing a sample of bilateral trade flows between 92 countries in 1999, we find that institutional distance has a negative effect on bilateral trade, presumably because the transaction costs of trade between partners from dissimilar institutional settings are high. In contrast, we find that cultural distance has a positive effect on bilateral trade. A potential explanation for this finding is that firms prefer trade to host-country production in culturally distant countries. Finally, we find that the institutional quality of both the importer and exporter increases the amount of bilateral trade.

Cultural distance in international business and management: from mean-based to variance-based measures

Extant practice in international management is to measure cultural distance as a nation-to-nation comparison of country means on cultural values, thereby ignoring the cultural variation that exists within countries. We argue that these traditional mean-based measures of cultural distance should take within-country cultural variation into account. Therefore, we propose the use of variance-based measures of cultural distance. To illustrate our argument, we examine total US foreign affiliate sales in more than 40 host countries over the 1983–2008 period, complemented with data from the World Values Survey. We analyze the effects of three cultural distance measures: the Kogut and Singh (1988) mean-based index of cultural distance, the Kogut and Singh (1988) index conditioned by host-country cultural variation and a variance-based measure that takes into account both home- and host-country cultural variation. Our findings indicate that, when within-country cultural variation is taken into account, the explanatory power of the Kogut and Singh (1988) index is substantially decreased. In addition, our variance-based measure of cultural distance outperforms the Kogut and Singh (1988) measure in the explanation of foreign US sales. We therefore suggest to move from mean-based to variance-based measures of cultural distance, thereby taking the cultural variation within countries into account.

FDI stocks are a biased measure of foreign affiliate activity

Researchers often call the value added (VA) in a host country by firms based in another country foreign direct investment (FDI) and use FDI stocks and flows from a country’s balance of payments to measure it. What FDI stocks and flows actually measure, however, is narrower, since they record long term financial transactions by which domestic firms exert control over foreign firms. French FDI stocks in Australia, for example, measure the value of shares and reinvested earnings of Australian firms owned by French firms and the net indebtedness of these Australian firms to their French parents.

The Comparative Effect of Subnational and Nationwide Cultural Variation on Subsidiary Ownership Choices: The Role of Spatial Coordination Challenges and Penrosean Growth Constraints

ABSTRACT To shed more light on the spatial determinants of foreign entry mode decisions, I examine the comparative effect of cultural variation inside target countries and target subnational regions on firms’ choices between joint ventures (JVs) and wholly owned subsidiaries. Based on the notions of spatial coordination challenges and Penrosean growth constraints, I argue that foreign entries tend to have a subnational scope, causing ownership mode choices to be more sensitive to target-region cultural variation than to target-country cultural variation. Accordingly, I hypothesize that target-region cultural varation has a more positive effect on the chance of JV selection than target-country cultural variation. I also hypothesize that this will be especially so for initially relatively large subsidiaries and subsidiaries established through acquisitions. An analysis of 170 entries by Dutch firms into 90 regions in 35 countries lends support to my hypotheses and indicates that the dominant effect of subnational cultural variation is not absolute but is confined to subsidiaries with specific establishment characteristics.