How does corruption distance affect MNCs' entry ownership strategies and entry performance? A combined lens of transaction cost economics and institutional theory

Abstract

Purpose — Government determines the rules of the game that influence the strategies and actions of a firm. Government corruption increases the transaction costs and generates institutional pressures for MNCs. Corrupt countries are often economically attractive emerging markets, which are strategically important for foreign entrants. However, little research has been carried out as to discussing the role of market entry strategies in MNCs entering corrupt host markets. In this thesis, we focus on how firms strategically respond to corrupt environments, as well as how they succeed in the corrupt foreign markets.

Theory/Framework — We first scrutinized two fundamental theoretical underpinnings that are pertinent to this research, namely, transaction cost economics (TCE) and the institutional view. Specifically, not only does corruption pervasiveness affect MNCs’ entry decisions, corruption arbitrariness and institutional forces also has important implications. Through a TCE lens, we decomposed the “arbitrary corruption” and focus on country-level arbitrariness, i.e., a “lack of political constraint” and “political instability” in a host country. From an institutional view, we analysed the influence of both external and internal institutional forces, that is, the legitimacy pressure from a host government, as well as the internal pressure driven by the ethical identity of a parent firm (based on the organizational identity theory) in the context of corruption. Drawing on the blended perspectives, we filled in the research gaps by constructing a conceptual model that connects corruption distance with entry ownership strategies, and the subsequent entry performance.

Methodology — We manually extracted data regarding foreign market entry behaviours of US listed MNCs from periodical databases using the Event History Analysis (EHA). We ran empirical analysis to demonstrate how corruption and related factors affect MNCs’ entry strategies, and how these strategies produce different entry performance.

By using logistic models, the first study examined the impact of corruption distance on MNCs’ strategic ownership choices between joint ventures (JVs) and wholly owned subsidiaries (WOSs), and how corruption arbitrariness and institutional forces respectively moderate the corruption-strategy relationship.

The second study employed Heckman two-stage models to examine how corruption distance, selected moderators and entry strategy fit enhance entry performance.

Key findings — Empirical findings in Study 1 suggest that as corruption distance increases, MNCs are more likely to choose the JV mode. They tend to choose strategic alliances when entering a host country with fewer political constraints. The results also indicate that both “lack of political constraint” and “political instability” negatively moderate the positive relationship between corruption distance and MNCs’ strategic preference for a JV entry. From an institutional view, the findings indicate that regulatory pressure driven by political intervention, as well as internal constraints in the form of corporate identity, affect firms’ entry decisions. As corruption distance becomes greater, international firms with less salient ethical identities show a greater inclination for local adaptation, whereas their ethically conscious counterparts show little conformity in their strategic response to host-country corruption.

Study 2 advances the understanding of how corruption distance and entry strategies affect a foreign subsidiary’s entry performance and answers the subsequent “so-what” question. Employing an EHA-based measure of entry performance, we have found that 1) As corruption distance increases, foreign subunits are less likely to be successful. 2) In relation to the WOS entry, local partnership overcomes competitive disadvantages induced by corruption distance and generates more successful host-market entries. 3) As opposed to wholly controlled investment, local partnering would be more successful where a host country is more politically unconstrained. 4) We confirmed a positive effect of corporate ethical identity on entry success.

Contributions/Originalities — Both studies contribute to the marketing strategy research in international markets by linking government corruption and relevant factors with firm strategy and firm performance through dual lenses from TCEs and the institutional theory.

The research does not only have theoretical value in demonstrating the implications of corruption distance, but also sheds light on strategic decisions and foreign entry outcomes for international practitioners entering host countries under various transactional costs and institutional conditions.