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Disentangling the Roles of International Experience and Distance in Establishment Mode Choice

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Abstract

 

  • The empirical results concerning the role of international experience in establishment mode choice decisions have, until now, been ambiguous and mixed. In an attempt to resolve this dilemma, experiential knowledge in an international setting is decomposed into two distinct dimensions and a more comprehensive set of distance measures are incorporated into the models predicting the establishment modes of Nordic FDI.

  • The empirical results indicate that the two forms of experiential knowledge (cluster-specific experiential knowledge and general internationalization knowledge) are both significantly related to establishment mode choice, but in opposite directions.

  • The results for this data set also show that when used to predict establishment mode choice, the broader range of distance measures explain 2.6 times as much variance as the Hofstede-based Kogut and Singh index.

  • Moreover, the results demonstrate that not fully controlling for this broader range of distance measures significantly distorts the relationship between cluster-specific experiential knowledge and establishment mode. It appears there may be a similar type of distortion with respect to general internationalization knowledge but the effect size is much weaker and non-significant within this sample.

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Notes

  1. Throughout this paper, the term “distance” does not refer to the geographic distance between countries, but rather, to differences between countries which may cause a potential host country to be perceived as distant by a manager making an investment decision. This issue is discussed further in the development of the third hypothesis.

  2. Note that we only encountered one study (Meyer and Estrin 1997) that employed a measure of regional experience.

  3. From here on, we shall use the Dow and Karunaratna (2006) term “psychic distance stimuli” to refer specifically to national level differences which arguably influence a manager’s perceptions of distance. This is in deference to the many researchers who argue that the term “psychic distance” refers to the perceptions of an individual.

  4. “Experience in countries similar to the host market” may be negatively correlated with psychic distance; however, hypothesis 3 also predicts psychic distance will have a negative relationship with establishment by acquisition. As a result, not properly controlling for psychic distance will bias the experience—establishment mode choice relationship in a positive direction.

  5. One manual adjustment was made to the 24 cluster solution. The country of Malta consistently clustered with the Nordic countries; however, further investigation indicated that the main similarity was that both Malta’s primary language and the primary languages of the Scandinavian countries are all quite distant from the 12 main languages included in the analyses. As a result, Malta was manual separated into a single country cluster.

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Acknowledgements

The authors want to thank the Wihuri Foundation (Finland) for the research grant to the project “Strategic Foreign Direct Investment Decisions, Cultural and Physical Distance, and Investment Performance” and Mrs. Helena Olsbo for her help in the data collection and coding.

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Authors and Affiliations

  1. Melbourne Business School, The University of Melbourne, Melbourne, Australia

    Douglas Dow

  2. Department of Marketing, University of Vaasa, Vaasa, Finland

    Jorma Larimo

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Correspondence to Douglas Dow.

Appendices

Appendix A

Parent firm descriptive statistics by home country*

Table 8
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Appendix B

Establishment modes and home countries by host country (n = 1473)

Table 9
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Appendix C

Country clusters

Table 10
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Dow, D., Larimo, J. Disentangling the Roles of International Experience and Distance in Establishment Mode Choice. Manag Int Rev 51, 321–355 (2011). https://doi.org/10.1007/s11575-011-0080-5

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