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Do multinationals really prefer to enter culturally distant countries through greenfields rather than through acquisitions? The role of parent experience and subsidiary autonomy

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Abstract

Prior research has argued that multinational enterprises (MNEs) prefer to enter culturally distant countries through greenfields rather than through acquisitions, since acquisitions in such countries are costlier to manage. This argument contains two hidden assumptions: (1) the additional costs of acquisitions in culturally distant countries are the same for all MNEs; and (2) such acquisitions have no benefits over their greenfield counterparts. In this paper we relax these two assumptions by arguing that an MNE's preference for greenfields in culturally distant countries depends on its international and host-country experience, and on the level of autonomy it plans to grant the focal subsidiary. Analyzing 171 wholly owned greenfield investments and full acquisitions made by Dutch MNEs in 35 countries, we find that these MNEs prefer to enter culturally distant countries through greenfields, but that this preference is lower when they have little international experience, or plan to grant the focal subsidiary considerable autonomy in marketing.

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Notes

  1. In our sample, 35.4% of all investments in culturally distant countries (i.e., countries with a cultural distance score above the sample median) are acquisitions. These acquisitions in culturally distant countries comprise 44.3% of all acquisitions in our sample.

  2. All firms registered in the Netherlands are legally required to file data with the Chamber of Commerce.

  3. Most of these firms were MNE parents. However, a few parents allowed their Dutch-based divisions to make foreign investments independently. We therefore also sent the questionnaire to the directors of these divisions.

  4. Although some respondents worked for the same firm, they usually provided data on different investments. In the very few cases where they did provide data on the same investment, we followed Very et al. (1997) and averaged their responses into a single observation.

  5. It should be noted that we were unable to obtain sales and employee data for some of the MNEs to which we sent the questionnaire.

  6. We think there are two reasons why the responding MNEs were on average larger than the non-responders. First, large MNEs are more likely to have established or acquired foreign subsidiaries in recent years, and are therefore more likely to qualify for participation in the study, as we explicitly asked for data on recent foreign investments. Second, because large MNEs, on average, invest abroad more often, their management is likely to be more interested in participating in our study, as we gave respondents the option to receive a free overview of its main findings.

  7. When we assigned equal weights to all experience types, we obtained results similar to those reported in Table 4, although the main effect of the unweighted host-country experience measure was somewhat weaker than that of the weighted one.

  8. These low correlations are caused by the fact that subsidiaries generally had very little autonomy with respect to raising capital. In 148 of the 171 cases respondents assigned a score of 1 to this item.

  9. We did not always have autonomy scores on all items, either because the desired level of autonomy for particular activities had not been decided ex ante, or because subsidiaries did not perform certain activities. We therefore averaged the scores of those items for which scores were available.

  10. The BIK code is the Dutch equivalent of the American SIC code. It has been developed by the Dutch Chamber of Commerce.

  11. The chance rate is calculated as a2+(1−a)2, where a is the proportion of greenfields in the sample.

  12. These results are available from the authors upon request.

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Acknowledgements

We thank departmental editor Brian Silverman and two anonymous reviewers for their valuable comments and suggestions.

Author information

Authors and Affiliations

  1. Department of Business-Society Management, RSM Erasmus University, Rotterdam, The Netherlands

    Arjen H L Slangen

  2. Department of Organisation and Strategy, CentER, Tilburg University, Tilburg, The Netherlands

    Jean-François Hennart

Authors
  1. Arjen H L Slangen
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  2. Jean-François Hennart
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Corresponding author

Correspondence to Arjen H L Slangen.

Additional information

Accepted by Brian Silverman, Departmental Editor, 2 August 2007. This paper has been with the authors for two revisions.

APPENDIX

APPENDIX

SELECTED QUESTIONNAIRE ITEMS

MNE's international greenfield experience: How much experience with setting up new foreign subsidiaries (i.e., foreign greenfield investments) does your entity have?

(seven-point Likert-type scale ranging from “none” to “very much”)

MNE's international acquisition experience: How much experience with acquiring foreign firms does your entity have?

(seven-point Likert-type scale ranging from “none” to “very much”)

MNE's host-country experience: In which way(s) has your entity been active in country X before greenfield A [venture B] was established [acquired]? Please tick all forms of involvement that apply.

___ by means of licensing agreements

___ by means of one or more sales agents

___ by means of one or more sales subsidiaries

___ by means of one or more manufacturing or service subsidiaries

___ otherwise, viz._________

Subsidiary autonomy: The degree of subsidiary autonomy is the extent to which a subsidiary's management team is free to run the venture at its own discretion. How much autonomy did your management team intend to give greenfield A [venture B] at the time it was established [acquired]? Please answer this question for each of the following functions that apply:

  • procurement

  • product/service design

  • R&D

  • production/service process

  • the use of brand names

  • packaging

  • pricing

  • advertising and sales promotion

  • the design of reward systems

  • job design

  • selection and training of employees

  • raising capital

(five-point Likert-type scales ranging from “very little autonomy intended” to “very much autonomy intended”. For each item we also provided a separate category “no intentions in advance”.)

Amount of technological knowledge transferred: How much proprietary technological knowledge did your entity intend to transfer to greenfield A [venture B] at the time of the decision to establish [acquire] the venture?

(seven-point Likert-type scale ranging from “none” to “very much”)

Investment size: What was the [planned] relative size (in terms of the number of employees) of venture B [greenfield A] compared with the size of your entity at the time of the acquisition [at the time greenfield A was established]?

(seven-point Likert-type scale ranging from “very small” to “very large”)

Demand growth: At the time of the decision to establish greenfield A [acquire venture B], how large did your management team expect the growth rate of the demand for greenfield A's [venture B's] products/services would be?

(seven-point Likert-type scale ranging from “strongly negative” to “strongly positive”)

Lack of acquisition targets:

For greenfields: To what extent was the decision to undertake a greenfield investment in country X influenced by a lack of suitable acquisition candidates in country X?

For acquisitions: To what extent was your entity confronted with a lack of suitable acquisition candidates in country X?

(seven-point Likert-type scales ranging from “not at all” to “to a very large extent”)

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Slangen, A., Hennart, JF. Do multinationals really prefer to enter culturally distant countries through greenfields rather than through acquisitions? The role of parent experience and subsidiary autonomy. J Int Bus Stud 39, 472–490 (2008). https://doi.org/10.1057/palgrave.jibs.8400356

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