Jean-François Hennart

Boundaries of the Firm: Insights From International Entry Mode Research

Deciding on the boundaries of a firm as it expands abroad is a critical decision for managers. Despite the rapid growth in research addressing this issue, many questions remain unanswered. In this article, the authors review the international entry mode choice literature, identify weaknesses and shortcomings, and provide suggestions on how researchers can add to the knowledge of mode choice and help managers make better international boundary decisions.

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.

Control in Multinational Firms: the Role of Price and Hierarchy

How do firms manage to perform their functions efficiently? How do they constrain individual behavior to make it compatible with the overall goals of the firm? These age-old questions take on new significance in the context of the MNC (see, for example, Brooke and Remmers 1970; Doz and Prahalad 1981; Hedlund 1981, 1986; Prahalad and Doz 1981; Baliga and Jaeger 1984; Gates and Egelhoff 1986; Bartlett 1986; Welge 1987; Egelhoff 1988; Bartlett and Ghoshal 1989). In MNCs the problem of control is particularly acute. Geographical and cultural distance increase the cost of establishing control, and make it difficult for MNCs to secure the cooperation of their foreign affiliates. Overcentralization of decisions leads to paralysis, while excessive decentralization results in chaos (Doz and Prahalad 1981).

A hostage theory of joint ventures: why do Japanese investors choose partial over full acquisitions to enter the United States?

Abstract Focusing on a subset of international joint ventures formed through partial acquisitions of existing firms (vs. those started through split ownership of new entities), this study proposes a hostage theory to explain why foreign investors take over partial equity of an existing local firm and thereby enter a joint-venture relationship with its current owner. The starting point is that investors making acquisitions abroad must incur a cost to inspect the targets and enforce the contracts. Partial acquisitions can create a hostage effect that facilitates ex ante screening of targets and ex post enforcement of contracts. Accordingly, foreign investors will be more likely to take a partial stake in existing local firms when acquisitions are costlier to negotiate and contract, and will be more inclined to make full acquisitions when they are better equipped to execute them. Empirical findings obtained from a sample of Japanese acquisitions in the United States support the theory.

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.

Digestibility and asymmetric information in the choice between acquisitions and joint ventures: where’s the beef?

<In response to our empirical findings that, contrary to the predictions of the information asymmetry hypothesis, joint ventures are not more, but instead less likely when parents belong to different industries, Balakrishnan and Reurer argue that (1) the information asymmetry and the indigestibility hypotheses are theoretically complementary and (2) our results may be affected by the characteristics of our sample. In fact, the goal of our study was not to deny the theoretical validity of alternative theories of joint ventures, but only to ascertain their relative explanatory power. We therefore agree that both theories are complementary, but show that our findings are not explained by our sample, but instead by the way we test the information asymmetry hypothesis. Copyright

Do exits proxy a liability of foreignness?: The case of Japanese exits from the US

Progress in understanding the liability of foreignness requires accurate measurement of this concept. This paper investigates whether exits of foreign affiliates from a given host market provide a reliable measure. We tackle this question by investigating 32 exits of Japanese manufacturing affiliates from the US. Our goal is to assess the extent to which exits are driven by a liability of foreignness and thus whether exits can serve as a reliable measurement of this liability. We find that less than half of our exits are attributable to a liability of foreignness. We conclude that while the data confirm a liability of foreignness for Japanese early entrants into the US, the presence of many other motives for exit suggests caution when inferring such a liability from exits, especially when exit costs are low.

Alliance Research: Less is More

Bell et al. (2006) express dissatisfaction with academic research on alliances and suggest ways in which it could be improved. While much of the literature has delved on alliance structure, they think it should analyse processes by which alliances evolve, what they call the dynamics of cooperation. Unfortunately, they find that this literature lacks coherence and is useless to managers. I agree with them that the present dynamics of cooperation literature leaves much to be desired, but I am pessimistic as to its chances of ever providing parsimonious and managerially useful theories. Re-visiting four cases of alliance evolution that have been featured in the dynamics of cooperation literature, I show that focusing instead on alliance structure, in the broad sense of the term, is likely to yield strong testable propositions and useful managerial prescriptions.

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.

Linguistic Distance and Bridge Language Effects on Equity Ownership in Cross-Border Acquisitions

We study the effects of language distance and bridge language proficiency on the level of equity taken by acquirers from 67 countries in 59,092 acquisition targets in 69 host countries. We theorize and find that both language distance and bridge language proficiency affect the level of equity an acquirer takes in a target. In addition to its direct effect, language distance also moderates the effect of bridge language on the level of equity taken. Our results clearly demonstrate that governance research and international business studies can benefit from incorporating language into their explanatory models.