Bachelor Thesis Organization and Strategy 2012 International Entry Modes and Boundaries of the Firm
The influence on the Decision Making Process of International Market Entry when Comparing Family Owned Businesses and Regular Firms
ANR: 913182 Name: Boy van der Velden E-mail: B.vdrVelden@uvt.nl Topic: International entry modes and boundaries of the firm Sub topic: Is the market entry mode decision process influenced by the organizational nature Of the firm when dealing with family owned businesses (FOBs)? Study Program: Pre-master International Management Word-count: 7937
Tilburg School of Management Tilburg University
Inhoud Management Summary .......................................................................................................................... 3 Chapter 1: Introduction .......................................................................................................................... 4 1.1 Problem Indication ....................................................................................................................... 4 1.2 Problem Statement ....................................................................................................................... 4 1.3 Research Questions ...................................................................................................................... 4 1.4 Research Design and Data Collection .......................................................................................... 5 Chapter 2: What are the determinants for a firm when deciding on an Entry Mode Choice? ................. 6 2.1 What is Market Entry? ................................................................................................................. 6 2.2 Market Entry Modes .................................................................................................................... 6 2.3 Level of Ownership ...................................................................................................................... 8 2.4 Determinants of Market Entry ...................................................................................................... 9 2.4.1 Country-Specific-Factors .......................................................................................................... 9 2.4.2 Industry-Specific Factors ........................................................................................................ 11 2.4.3 Firm Specific Factors .............................................................................................................. 12 2.4.4 Project-Specific Factors .......................................................................................................... 13 Chapter 3: What are the family owned business aspects that distinguish FOBs from regular firms? ... 15 3.1 What are Family Owned Businesses? ........................................................................................ 15 3.2 The Difference between Family Owned Businesses and Regular Firms .................................... 15 3.3 Factors that Drive Family Owned Businesses ............................................................................ 16 Chapter 4: How do the FOB aspects influence the entry mode decision and what is the effect of an FOB when deciding on international expansion? ................................................................................. 18 4.2 Family Owned Business Determinants on Market Entry Mode Determinants ........................... 18 4.3 Harmony & Democracy in Decision Making ............................................................................. 18 4.4 Family Owned BusinessesÂ´ Focus on Stewardship and Continuity of the Firm ......................... 20 4.5 Family Owned BusinessesÂ´ High Level of Management Commitment and Transparency ......... 21 Chapter 5: Conclusion and Academic Recommendations .................................................................... 24 References........................................................................................................................................ 25 Footnotes ......................................................................................................................................... 27 Appendices ...................................................................................................................................... 27
Management Summary Entry mode strategy as a part of internationalization by firms is a subject widely discussed in various past and recent studies. Also the influence of Family Owned Businesses (FOBs), and the differences between FOBs and regular firms are a known topic. However, there does not seem to be a research focused on the influences of these FOBs when pursuing internationalization and the influence of these companies on the entry mode strategy. The following problem statement arises; What are the determinants of international entry modes for Family Owned Businesses (FOBs) and what are the boundaries of FOBs regarding international expansion?
This literature review identifies the determinants of international market entry and the decision process as being country-specific, firm-specific, industry-specific and project-specific. These are the main factors that influence the decision for a particular mode of market entry together with the desired amount of control of the firm. The FOBs distinguish themselves from regular firms by the harmony and democracy in decision making, their focus on stewardship and continuity of the firm and their high level of management commitment and transparency.
These differences, when analyzed against the determinants of market entry do not seem to influence project-specific factors. The influence on the industry components seems barely marginal. Influence is expected in the country-specific determinant. Due to their commitment and transparency in combination with other strenghts of FOBs this leads to long-term commitment and potential higher investments. The most importance different is found in the firm-specific factors as can be expected when analyzing firms internally. The transparency of management operations is expected to increase efficiency and legitimacy and eases the access into global markets. Therefore FOBs are expected to favor wholly owned subsidiaries higher over alternative market entry modes when pursuing international expansion in comparison with regular firms.
Chapter 1: Introduction 1.1 Problem Indication When a firm decides to expand internationally it has to consider various elements surrounding this decision. The choice of a mode of market entry is a critical component of the internationalization Strategy (Morschett, Schramm-Klein and Swoboda, 2010). Influencing this market entry decision are factors that are classified into host country-specific variables, home country-specific variables, company-specific variables, and venture-specific variables (also known as transaction-specific or subsidiary-specific variables) (e.g., Hillet al., 1990; Sarkar and Cavusgil, 1996; Malhotra et al., 2004; Tsang, 2005). But what are the company-specific variables that have to be taken into account when analysing entry mode decisions for family owned businesses (FOBs1)? After all, there is growing recognition of the importance of family business in most economies (Astrachan & Shankar, 2003; Fletcher, 2002) For instance; FOBs contributes 45-70% of GDP and employment in many countries around the world (Astrachan & Shankar, 2003). Furthermore, FOBs are known to be important factors in the growth and internationalization of emerging economies, as explained by Barton and Wong in 2006. What are the most suitable entry modes for FOBs when taking into account the boundaries that a family owned business possesses? 1.2 Problem Statement Deciding on a suitable entry mode for international expansion is a widely discussed topic in various papers over the years. Also the successes and pitfalls or family owned businesses are a prevalent topic in various top journals. But what if family owned businesses expand internationally? Does the nature of the firm as an FOB affect this entry mode decision? By asking this question, the following problem statement arises; what are the determinants of international entry modes for family owned businesses (FOBs) and what are the boundaries of FOBs regarding international expansion? 1.3 Research Questions In order to answer the problem statement three research questions have been defined; Q1: What are the determinants for a firm when deciding on an entry mode choice? The first research question will be discussed in chapter 2.
Q2: What are the FOB aspects that distinguish FOBs from regular firms? The second research question will be discussed in chapter 3. Q3: How do the FOB aspects influence the entry mode decision determinants and what is the effect of an FOB when deciding on international expansion? The third research question will be discussed in chapter 4. 1
Family owned businesses or family owned business will from here on be referred to as “FOB” or “FOBs”.
1.4 Research Design and Data Collection The research will be exploratory, based on literature review from secondary sources in the form of academic papers on the matter and subjects discussed. Only top journals are used in this research due to the stressed importance of the sources available. The source for the data is the database of the Tilburg University Library covering journals such as but not limited to Strategic Management Journal, Academy of Management Journal, Academy of Management Review, Journal of International Business Studies and Management Science. The strategy selected for this research is the following; Circumstances (FOB nature of firms) Strategy (Market Entry Mode Decision) The framework of the research is constructed as following; the dependent variable is; “suitable entry mode” or “entry mode choice”. The independent variable is; “Determinants of International Expansion”. This connection is moderated by; “Family Owned Business (FOB)”, meaning the FOB nature of the firm is expected to be an influencing factor on the entry mode choice for a firm when expanding internationally.
Figure 1.1 the framework
Chapter 2: What are the determinants for a firm when deciding on an Entry Mode Choice? 2.1 What is Market Entry? When sufficiently serving the home market or when looking for expansion, a firm’s desire may arise to pursue internationalization in order to meet strategic goals or to achieve further development of the company. This internationalization is then, a logically on-going strategy process of most firms (Melin, 1992). Entry-mode choice is a strategic issue since selection of the right market entry channel is the key to successful internationalization (Keegan, 1984; Root, 1987). This stresses the importance of this decision for the firm. The choice for a mode of market entry is a critical component of the internationalization
Strategy (Morschett, Schramm-Klein & Swoboda, 2010). Entry mode choice is the decision that has to be made after a firm decides that it will expand internationally. Luo (1999) defines international expansion as: “The process by which a multinational enterprise (MNE) enters and invests in a target foreign country in pursuit of the MNE’s strategic objectives ” (Luo 1999, pp. 3-4). In other words; when a firm decides to
expand internationally by entering a foreign market it has to make certain market entry decisions in order to meet its strategic goals. The choice of entry mode is an important characteristic of internationalisation for both a firm (micro) and from policy (macro) perspectives (McNaughton, 1999). 2.2 Market Entry Modes Throughout the years there are several entry modes identified. First, a firm has to decide whether it expands into branch offices, international franchising, international licensing, build-to-operatetransfers, contractual joint ventures, equity joint ventures, wholly owned subsidiaries, umbrella investment companies or through entry modes such as export, sub-contracts, international leases, countertrade greenfield investments or acquisitions, In order to narrow down the entry modes and focus on the determinants of market entry modes, this paper will limit the wide entry mode selection to four selected basic entry modes. These selected entry modes are common forms such as; export, joint venturing, greenfield investment and acquisition. This selection is necessary for this review in order to constrain the research within limited boundaries. The first entry mode is export, which can be defined as the quickest, simplest way of entering a foreign market where the level of risk and commitment are being kept at a minimum as well as the financial resource commitment and investment. Export is often implemented by small- and medium firms that lack resources to pursuit joint-venturing or other market entry that requires larger financial resources. Reasons for firms to export are seeking for geographic expansion and increasing the volume of sales (Bradley, 2005 pp. 225-228). Another reason is that by diversifying into various foreign markets, a firm lowers risk and increases exploitation opportunities better than when in pursuit of a concentrated strategy (Dalli, 1994).
Second, there is market entry through strategic alliances. Strategic alliances allow firms to acquire assets, and capabilities that are not yet available for the company within foreign markets. Joint venturing is a good example of these strategic alliances. By entering into a joint venture a firm gains access to complex technology, product development tacit knowledge or intangible assets, such as reputations and brands (Oliver, 1997). A joint venture is formed when two or more firms form a new firm in order to create a more productive economic entity. Where domestic joint ventures may seek technological know-how according to Valdés and García (1998), international joint ventures are mostly motivated by international expansion into difficult accessible foreign markets. The main benefits of joint ventures are costs reduction by creating economies of scale, due to the combination of common transport, marketing expenses, administration, production and distribution, increased speed of implementation of technological changes and avoidance of transaction and negotiation costs (Williamson, 1995, Bradley, 2005). The third selected market entry mode is market entry through capital investment by acquisition. This entry mode represents the greatest degree of commitment and control and will also require the highest capital input from the firm. Acquisition is the process of acquiring an existing firm abroad with its assets, brands, network and management. With this acquisition the firm enhances the original expanding firm or increases sales due to an increase in the geographical scope (Bradley, 2005). This strategy can be used to increase the speed of the foreign market entry and/or for requiring an instantly dominant market position through the acquired company’s network, brands and distribution channels. This provides the firm with an established network of customers, intermediaries and suppliers, knowledge of the local economics, social environment, cultural differences, and knowledge about government laws. Although this is a capital intensive decision, it is an attractive option if market potential is proven to exist. Most acquisitions are focussed on the acquisition of established brands and acquiring a large customer base (Bradley, 2005). The last entry mode that is selected is Greenfield investment. This the process of initiating an entire new company in the host market, the constructing of tangible assets such as plants and buildings, developing new distribution channels, personnel, buildings and company culture (often a copy of the original firm). This entry mode has the highest degree of control and therefore also the highest financial risk (Luo, 1999). This entry mode is often chosen when the market is very similar to the home country environment and no direct partnerships and inside information and networks are required. Hereby the firm also acquires the highest possible amount of control over the firm and the firm can create a similar atmosphere and work environment within the new firm matching the original company culture. Classical investment theory states that the main reason for Greenfield investment or foreign direct investment (FDI) is maximizing a firm’s profit. FDI is motivated by the access to technology, raw materials, intermediate goods and final products (Luo, 1999).
A basic structure of this model is developed using literature provided by Luo (1999) and visualised in figure 2.1.
Figure 2.1: Basic Entry Mode Structure used in this paper based on the description of Luo Y. (1999).
2.3 Level of Ownership When a firm decides on one of these market entry modes it has to select the most suitable strategy for its firm. An import factor within this decision making process is the required level of ownership the firm desires. Choosing this ownership level is an important additional factor in foreign market entry due to its impact on the firm e.g. the overall control of the firm, the required investment, the risk of this investment and the transfer of tacit assets.
Figure 2.2 the control level based on the control, risk, resource commitment and return as discussed by (Erramilli, 1991; Gatignon & Anderson, 1988 & Inkpen, 2001)
Entry modes can be classified and range from complete ownership modes such as fully owned acquisitions and wholly owned start-up companies in the form of Greenfield Investments, to partial or shared ownership modes, such as joint ventures, to non-ownership modes such as export (Erramilli, 1991; Gatignon & Anderson, 1988 & Inkpen, 2001). The optimal level of ownership for a firm is analysed in terms of operation costs and advantages across the ownership levels.
Complete ownership allows complete control over the entire operations including the complete risk. Whereas sharing ownership focuses mainly on attaining complementary resources and the opportunity of sharing this risk and investment (Anderson & Gatignon, 1986; Inkpen, 2001). When looking at investments required for the desired ownership the fully owned entry modes have greater risk and liability exposure. Shared ownership modes on their hand, lack the hierarchical control over the firm, risks the costs of its partners’ opportunism, possible difficulties in the transfer of tacit assets and the possibility of not being able to integrate the operations of the venture completely (Anderson & Gatignon, 1986; Kogut & Zander, 1993). Non-ownership modes, such as export experience the lowest exposure to market risks at the cost of limited prospects for profits and growth (Anderson & Gatignon, 1986). 2.4 Determinants of Market Entry O’Farrell (1995) states that the research for international entry-modes for firms needs to grow past the theoretical construct and analyse what the actual factors are, from which managers select their entry strategy by. These are called market-entry determinants, also known as transaction-specific variables or subsidiary-specific variables (Hillet, 1990; Sarkar & Cavusgil, 1996; Malhotra, 2004; Tsang, 2005) Determinants of market entry are several identified factors that influence the entry mode decision for firms in a host market. The choice between different entry-modes are mostly trade-offs in choosing on entry mode over another. The contingencies are classified into country, industry, firm and project specific factors (Luo, 1999). In another journal Pan and Tsé (2000) describes the determinants for market entry as being; host country factors, which can be identified as country -specific factors, home country factors, which can be explained as firm-specific factors, host and home country factors focussing on political and trade influences which is similar to the industry-specific factors and the last determinants the industry factors which cover the rest of the industry-specific factors by Luo (1999). Since the determinants are rather similar and the model by Luo (1999) has an additional feature; project-specific factors the model by Luo (1999) will be analysed. 2.4.1 Country-Specific-Factors These are several exogenous host country specific factors that influence the choice of entry mode. The influencing factors are stated in order of importance of influence.
Host Country Risk The managers of firms have to deal with various country specific risks such as political risks (instable economies), ownership- and control risks (e.g. pricing), and transfer risks (e.g. convertibility of currency). When these risks are considered “high” then the firm has to evaluate the ease of evacuation of the market without a significant amount of capital loss. The choice of entry modes depends on the host country its level of risk (Contractor, 1990). In this case the risk is higher with acquisitions and
Greenfield investment as for, for example joint venturing, since the host country partners often have the ability to influence for example government policies. Anderson and Gatignon (1986) state in their journal, when a firm enters into a high risk country would benefit from a shared control mode due to the increase in flexibility.
Government FDI Policies These policies can have a direct or indirect influence on the entry mode decision. For example the laws in upcoming economies such as China and India used to state that you must enter through a joint venture. This form of protectionism used to be vital for the economic development of these countries. In other countries entry modes are treated differently in terms of taxation and local financing of the firm or by limiting infrastructure access and resource procurement by the local government. Joint ventures are often preferred by the host economy in order to protect and develop the host country and are therefore preferentially taxed in developing countries. In this way the developing countries are more likely to gain tacit and technological knowledge and the host country benefits from the entry of foreign companies as well. The reality in this case between joint ventures and wholly owned subsidiaries is that greenfield investment enables a firm to maintain better control over the operations but the joint venture mode enables the firm better to counteract country specific risks in a often hostile, uncertain and complex setting (Luo, 1999)
Property Right Systems Other important determinants considering country-specific factors are the property right systems in a country along with various other legal frameworks. This is due to the technical competences and tacit knowledge of a firm as emerging determinants in the global marketplace. Without adequate legal protection on property rights, brands and copyrights, the firm will be exposed to local infringement and piracy. (Luo, 1999) This legal protection is easier to implement when using wholly owned subsidiaries and dominant equity joint ventures. Dominant equity joint ventures are joint ventures where the largest amount of control of the joint venture lies within the firm that is entering the host market.
Cultural Distance The cultural distance is a perceived distance between the host- and the home economy. Oâ€™Farrell (1995) describes cultural distance as one of the most influential factor of channel choice. The higher this perceived distance the more likely the entry mode decision will be a lower risk and control option such as export and licensing. When this perceived distance decreases the firm is likely to favour joint venture, acquisition or Greenfield Investment. Furthermore, cultural difference encourages shared control modes due to the increase in the congregation of information (Gatignon and Anderson, 1988).
Host Country Expected Net Return and Growth The host country expected net return and growth during international expansion affects the strategic orientation, the resource commitment and eventually the entry mode decision. When the expected return and growth is low the firm is likely to be unwilling to invest substantially within this host country. In this case the firm is more likely to prefer low resource commitment modes such as export and licensing (Luo, 1999). 2.4.2 Industry-Specific Factors These are factors regarding the industry the firm enters in the host country market. These factors include for example competition, entry barriers, government policies and structural uncertainty and the availability of distributors.
Degree of Competition This degree of competition from both local and foreign competitors can cause the difference between low risk- and high risk entry modes. When competitive pressure in the host market is high the firm is more likely to commit in low resource market entry since the amount of risk is significantly higher and therefore a low risk entry mode will be favoured until the firm is entirely sure it can compete within the new market (Luo, 1999). Entry Barriers The entry barriers within a new market are important determinant for entry mode selection. When entry barriers are high, the firm simply has limited freedom to choose between entry modes and often have no choice but to accept what are the host government-instituted modes for particular industries. Examples of these industry entry barriers are high capital requirements, high exit costs and supply and distribution monopolies. These are known to influence the mode of entry that the firm chooses, again as a result of financial commitment and risk (Luo, 1999).
Structural Uncertainty Structural uncertainty concerns factors within the host industry environment such as hostility between firms and complexity of the industry the firm enters into. This may lead to either a higher- or lower control commitment in entry modes. When entering into a possible hostile environment this is likely to increase the risk and therefore lowers the financial commitment to the international expansion and therefore increases the likelihood of choice for a low-resource- or no market entry (Luo, 1999).
The Availability of Supply and Distribution Channels The availability of supply and distribution channels within the industry is also known to influence the entry mode decision. A lack of these channels will lower the favourability of strategic alliances and increase the likelihood of fully owned subsidiaries since if influences the competitive power, product quality and in-time delivery (Luo, 1999).
The Relationship with Buyers When a firm has established buyer relations in the host country it is expected that the firm uses high resource committed modes like a wholly owned subsidiary. Due to the established relationship within the host industry the firm is more likely to be familiar with the industry and has an established network and possibly a developed distribution channel. When this is not the case and the firm has no established relationship with buyers in the host country a low resource commitment is more likely to be used at the start of the market entry and slowly develop relationships within the industry in order to use higher control entry modes at a later point in time (Luo, 1999). 2.4.3 Firm Specific Factors These are important for entry mode selection due to the firmâ€™s resource generosity in internationalization because it influences the ability for a firm to explore market potential and thereby create a competitive advantage. It affects entry mode because it impacts control mechanisms, partner selection, resource commitment and knowledge transfer. When a firm lacks these resources it is often compelled to enter a market through a joint venture (Luo, 1999).
The Firmâ€™s Strategic Goals for International Expansion These are the very most important determinant regarding entry mode selection. Foreign success is entirely influenced by the way a firm enters the market. When a firm wants to expand within a foreign with the highest level of involvement and the most ambitious strategic goals, often the best way is to use wholly owned subsidiaries because they enable the firm to have more involvement within the market and in that way developing more opportunities to gather culture-specific experience. This is the case when the new market is similar to the home market of the firm. When considering totally different markets this is not necessarily true and joint venturing or low-resource entry might be more suitable. This when focussing on increasing the level of control over the coming periods. When the firm is a manufacturing firm, then wholly owned subsidiaries are often the best option, although again, this relies on the market that is being entered (Luo, 1999).
Knowledge and Strategic Assets Firms with less knowledge tend to lower risk and enter through licensing or export. A firm will tend to favour acquisition of Greenfield investment if it cannot find a suitable partner due to the risk of their
exposure. A wholly owned subsidiary will increase the firmâ€™s ability to use this knowledge. Therefore tacitness is positively related with the degree of control of the operations (Luo, 1999). Since the risk of knowledge exposure is high the choice for a joint venture is lower when the firm has more technical know-how over managerial know-how because of the risk of losing the control and the competitiveness over this technology. In this case the wholly owned subsidiary mode is a better choice. When the firm concludes that the gain of knowledge is higher than the risk of exposure a joint venture could increase potential and allow this firm to gain from the joint venture (Luo, 1999).
The International Strategy of the Firm This can vary between a multi-domestic-, transnational- or global strategy. Multi-domestic strategies believe that markets differ widely worldwide regarding taste and preferences. Therefore firms assign key-operations to national subsidiaries and they will have their own marketing functions and manufacturing facilities. These multi-domestic firms favour joint ventures and licensing as mode of entry as is implemented by Walt Disney 2. All operations of Walt Disney within the United States are fully owned, the parks in Asia and Europe are all joint ventures. This allows them to have full control over its own domestic operations and gain from the benefits of a high geographic scope due to the creation of economies of scope and leave the control over the over sea operations to the joint venture partners (Grant, 1991). In the case of a global strategy for standardised products it will require a high degree of control over operations of different national partner firms. Therefore, firms pursuing a global strategy are more likely to favour high control and therefore wholly owned subsidiaries (Luo, 1999).
International and Host Country Experience This is known to reduce the uncertainty of evaluating the true economic value of foreign market entry. Firms with no experience in the foreign market are less likely to take risks and therefore use low investment entry modes such as export. In contrast, firms with a lot of experience in the foreign market are more likely to choose a more risky and high resource committed entry mode (Luo, 1999). 2.4.4 Project-Specific Factors These are factors influencing the project or foreign expansion itself. These aspects are associated with transaction costs, strategic orientation and commitment to resources (Luo, 1999).
The Size of the Project This influences the amount of control that is sought by the firm. A large project tends to prefer wholly owned subsidiary entry modes and smaller projects tend to prefer low resource entry mode such as export. A large investment involves higher start-, switching- and exit costs and involves higher financial risks (Luo, 1999). 2
The Project Orientation If the project is locally oriented, then joint venture would be the most suitable entry mode. When the project is technically advanced the risk of losing competitiveness increasing and a wholly owned subsidiary might be preferred (Luo, 1999).
Contractual Risks and Project Costs When the contractual risks are high and the project costs are high then the firm is more likely to decide in favour of a wholly owned subsidiary (Luo, 1999).
The Availability of Partners for a Project When proper local partners are available within the host industry the firm is more likely to conduct within a joint venture. In absence of these partners the firm is almost automatically forced into wholly owned subsidiaries (Luo 1999).
In conclusion, the decision on the most suitable entry mode for the firm is dependent on the amount of organizational control and strategic flexibility the firm demands. This is linear to the amount of risk the firm is willing to take, the return that is required and the resource commitment to the project. Determinants of this market entry mode decision are identified as being country-specific factors, industry-specific factors, firm-specific factors and project-specific factors. Later in this literature review these determinants of market entry mode decision will be used to analyse the relationship of these determinants with the FOB aspects of firms.
Chapter 3: What are the family owned business aspects that distinguish FOBs from regular firms?
3.1 What are Family Owned Businesses? The industrial revolution converted small family centred manufacturers into mass production facilities. As a result, the available economies of scale and scope enabled national firms to become large multinational corporations by exploring cross border- and global economies (Kleindorfer, Kunreuther & Schoemaker 1993). But a very tangible amount of these companies haven´t totally transformed into independent mass production activities. Instead they remained family owned, the modern day family owned businesses. These companies will from here on be referred to as Family Owned Businesses or FOBs. The definition of a family owned business is a business or firm that is managed or owned by a single or more family members, and of which at least 20 percent of the shares are owned by the managing family (Heck and Trent1999; Hollander and Elman 1988; Tàpiesand Barberó 2005) There has been a growing recognition for the importance and role of family businesses in most economies (Astrachan & Shankar, 2003; Fletcher, 2002). For instance, FOBs contribution to the economy is 4570% of GDP and employment in various countries worldwide ((Astrachan & Shankar, 2003). Especially emerging countries rely on the FOBs as important factors in the growth and internationalization as explained by Barton and Wong in 2006.
3.2 The Difference between Family Owned Businesses and Regular Firms But what are the factors that distinguish them from regular owned firms? This question will be answered by dividing the FOBs and regular firms on the basis of factors that vary them. In their research, Alpay, Bodur and Yılmaz propose two qualities of FOBs over regular firms; harmony amongst members and democracy in decision making which influences organizational performance by facilitating institutionalization of the firm. An organisation can create orderly, stable and socially integrated cultures through harmony among the family members. Preserving this harmony will lead to satisfaction in both business- and family objectives. Denison (1996, 2004) stated that internal organizational traits, involvement and consistency are significant drivers of performance within FOBs. This, institutionalization is impacts the institutional environment through institutional rules that organizations incorporate in order to increase legitimacy, access resources, and create stability, and thus will enhance their survival prospects (Meyer & Rowan, 1977). The study between FOBs and nonFOBs proved that transparency has a strong effect on both the qualitative and quantitative measures as a well as adaptability. This increases efficiency and legitimacy and eases the access to global markets (Alpay, Bodur & Yilmaz 2008). In their research on FOBs, Fama and Jensen (1983) state that family presence within firms overall is an efficient way of reducing agency problems. The resource based view of FOBs may explain why family interaction possibly creates a unique, intangible and dynamic
set of resources (Cabrera-Suárez, De Saá-Pérez, and Garcia-Almeida 1996; Habbershon and Williams 1999).
The other influencing factors described besides harmony and democracy in decision making are: organisational institutionalisation; such as objectivity, transparency, fairness, formalization and professionalism and adaptability; such as flexibility, customer orientation and learning orientation. These factors drive performance in both qualitative as quantitative manner. The influencing factors for the FOBs are environmental uncertainty, the firm’s age and the firm’s size. In the context of FOBs, the leadership role for the decisions that develop the distinctive character of the organization is played by the founder families (Scott, 1987, 1992). Another aspect of FOBs is that it has unique characteristics of stewardship (Miller, Le Breton-Miller & Scholnick, 2008). This means that the management of these firms care about the long-term success of the firm because the firm and family its future and reputation are at stake and therefore also the family fortune. According to Miller, Le Breton-Miller and Scholnick (2008) this leads to a devotion to the continuity of the firm, an increased community feeling amongst employees and by seeking closer connections with customers, buyers and suppliers. On the opposite, FOBs are subject to stagnation since they often embrace into conservative, risk-avert strategies (Miller, Le Breton-Miller & Scholnick, 2008). Of course this is more likely to refer to small family businesses and not to large FOBs such as Mars Inc. which is known to be a FOB and currently is one of the largest firms in the chocolate- and pet care market3.
3.3 Factors that Drive Family Owned Businesses Literature review proofs that there are several factors that drive FOBs and that positively diverges them from regular companies. This is also identified by other authors such as Anderson & Reeb (2003). They state that family businesses have performance advantages over non-FOBs. Due to the fact that top management in these FOBs, family members, have a long term orientation in decisions and a high level of commitment, higher then resembling management in non-FOBs. In addition, FOBs have fewer corporate governance problems that surface late due to the transparency within the operation. These studies show that there is a significant difference in management and strategy which leads to believe that there is an increased likelihood that this influences the entry mode decision.
In conclusion, the main aspects that cause the mayor differences between family owned businesses and regular companies are identified as being; the harmony within the firm and democracy of decision making in higher management with the focus on the continuity of the firm, stewardship and focus on continuity of the firm, and FOBs its high level of commitment, professionalism and transparency. These three identified alterations will be used to identify potential variance in the market entry mode decision process.
Chapter 4: How do the FOB aspects influence the entry mode decision and what is the effect of an FOB when deciding on international expansion? In chapter two the determinants of entry mode decisions are discussed focussing on the four main market entry modes used and selected for this thesis being; export, joint venturing, acquisition and greenfield investment regarding the determinants of market entry; country-specific factors, industryspecific factors, firm-specific factors and project-specific factors. In chapter three the FOBs and the determinants are discussed that cause variation between FOBs and regular firms. In chapter four the influence of these factors on the selected entry modes is discussed using the determinants of market entry. 4.2 Family Owned Business Determinants on Market Entry Mode Determinants The identified FOB determinants in the second research question are harmony & democracy in management decision making, focus on continuity and stewardship, a high level of management commitment and transparency. In order to answer the third research question these three determinants must be analysed against the identified determinants of market entry. Comparing the outcomes and the identifying the variance between the variables would mean that the FOB aspects might have influence on the entry mode decision of firms. 4.3 Harmony & Democracy in Decision Making Harmony and democracy in decision making within the firm is an important determinant of FOBs. The harmony and democracy in decision making within the firm leads to steady relations and a balanced atmosphere within the firm. This again, may lead to higher productivity within the firm and the minimization of conflicts. Furthermore, according to Denison (1996), the FOBs gain a competitive advantage due to the harmony democracy in management decision making in favor of the firm.
Harmony & Democracy in Decision Making vs. Firm-Specific Factors Firm-specific factors, probably the most important factor when comparing FOBs and regular companies. This factor concerns the firmâ€™s potential to create a competitive advantage and to explore market potential. The most important factor is the firmâ€™s strategic goals for international expansion (Luo, 1999). This market potential relies on the firmsâ€™ and competitive uncertainty (Bradley, 1991). Since the boundary for international expansion is higher for FOBs due to the risk-avert approach of the firm. The FOBs are more determined to create competitive advantages in the new market in comparison to regular owned companies. Therefore FOBs are more likely to use wholly owned subsidiaries to enter a foreign market instead of using low-resource entry modes. Also the international strategy of the firm may differ since FOBs are more likely to place family members in a cross-border expansion and therefore more likely to use wholly owned subsidiaries instead of joint
ventures. For the knowledge and strategic assets and the international and host country experience the aspects of FOBs vs. regular companies seem irrelevant.
Harmony & Democracy in Decision Making vs. Country-Specific Factors Host country risk, government FDI policies and property right systems are country-specific factors that have equal influence on regular firms as on FOBs. Political-, ownership- and control risks are factors that will not affect these different firms any differently (Contractor, 1990) Cultural distance might be a different factor for both of these firms. Since cultural distance is perceived as such by the company there might be a large difference in the perceived distance by regular profit seeking firms as for stable and harmony seeking FOB firms. Especially in emerging markets the countries where family businesses are the most common form of firms the market entry of FOBs might be closer to the host country regarding perceived cultural difference looking at the company culture itself. This might increase the success of FOBs in these countries. The last factor is the host country expected net return and growth. Since FOBs tend to focus on long-term prospective and not the short-run profit seeking this factor might influence the entry mode for FOBs. Since FOBs focus on the continuity of the firm (Miller, Le Breton-Miller & Scholnick, 2008) the short term net return and growth are less important for FOBs and might alter the entry mode decision from a low-resource entry mode for regular companies to a higher-resource entry mode such as joint venturing or wholly owned subsidiaries.
Harmony & Democracy in Decision Making vs. Industry-Specific Factors When analyzing both the aspects of FOBs and determinants for market entry, the degree of competition, entry barriers and the availability of supply and distribution channels (Luo, 1999) are not likely to cause a different in entry mode strategies for FOBs and regular firms. A difference that does occur is the structural uncertainty of the industry. Since FOBs are less risk seeking (Miller, Le BretonMiller & Scholnick, 2008) the chance that FOBs will enter an industry with high hostility and complexity is less likely than for regular firms. Where regular firms avert the risk by using lowresource market entry FOBs are more likely to not enter the market entirely. Harmony & Democracy in Decision Making vs. Project-Specific Factors Project-specific factors are not likely to alter the entry mode decision for FOBs. The size of the project influences the entry mode for this decision where large investments with high start-, switch-, and exit costs involve higher risks and therefore the choice of entry mode. But this is expected to be the same for both FOBs and regular companies. Also the project orientation, the contractual risks and project are most likely not influenced by the nature of the firm. The availability of partners for a project might alter the entry mode decision but this is expected to be equal for both the FOBs and the regular companies.
4.4 Family Owned BusinessesÂ´ Focus on Stewardship and Continuity of the Firm Another factor that alters FOBs from regular firms is the focus on continuity of the firm and stewardship (Miller, Le Breton-Miller & Scholnick, 2008). Stewardship consists of three factors, of which continuity is the main factor. The other factors are community and relationship with buyers. This characteristic focusses mainly on the focus of the continuity of the firm rather than short term profit.
FOBs Focus on Stewardship and Continuity of the Firm vs. Firm-Specific Factors With the focus on stewardship and continuity the strategic goals for international expansion are expected to be different for FOBs and regular firms. Especially when looking at the relationship between FOBs and buyers, and the community of personnel within the enterprise, FOBs are more likely to enter through wholly owned subsidiaries instead of joint ventures. Even in a more difficult market. Regular companies are more likely to enter a market initially through joint venturing (Luo, 1999). Also the international strategy of the firm might vary between these companies. The aspect of stewardship focusses on community within FOBs. This is expected to manifest itself also in foreign subsidiaries in order to create a similar company culture. Therefore the FOBs are more likely to use wholly owned subsidiaries, instead of joint ventures as being implemented in the example of Walt Disney that used joint venture to reduce risk due to uncertainty. For the knowledge and strategic assets and the international and host country experience the aspects of FOBs vs. regular companies seem irrelevant.
FOBs Focus on Stewardship and Continuity of the Firm vs. Country-Specific Factors The host country risk is an important factor when looking at the stewardship and especially the continuity of the firm (Meyer & Rowan, 1977). Since the goal is long-term continuity, and FOBs are trying to avert risk the risk is very likely to influence the entry mode decision. Although, when looking at regular companies the host country risk is also an important factor and also these companies are more likely to avert risk and choose a low-resource entry mode. The risk of the host country doesnâ€™t seem to have more effect on FOBs then on regular companies. Also the government FDI policies and the property right systems (Luo, 1999) are not expected to influence the difference. The cultural difference factor that influences market entry does is not directly influenced by the continuity and stewardship of the firm and is therefore not likely to have any influence as well. The host country expected net return and growth is expected to indicate a difference between FOBs and regular firms within country specific factors. This is because regular firms tend to look at short-term profits and growth within the new industry and FOBs tend to focus on the long-term continuity and the net returns over a longer period of time (Miller, Le Breton-Miller & Scholnick, 2008). This means that in a new market where the short-term return is low and the long-term return high, the FOBs are more likely to use wholly owned subsidiaries or joint ventures, and regular firms are expected to export or license.
FOBs Focus on Stewardship and Continuity of the Firm vs. Industry-Specific Factors As well as in the harmony and democracy in decision making aspect of FOBs, the degree of competition, entry barriers and the availability of supply and distribution channels are not likely to cause any difference or variance. Also the structural uncertainty is not expected to be influenced by continuity or stewardship. A factor that might be influenced is the relationship with buyers as part of the stewardship of FOBs is the relationship with buyers. FOBs tend to maintain a closer contact with suppliers and buyers (Miller, Le Breton-Miller & Scholnick, 2008) then regular companies, the FOBs are more likely to use a wholly owned subsidiary as entry mode due to the increased confidence and the established network in the market, where regular firms tend to enter with a low-resource market entry such as export.
FOBs Focus on Stewardship and Continuity of the Firm vs. Project-Specific Factors The project-specific factors are, as in harmony and democracy in decision making, expected to be irrelevant when looking at stewardship and continuity of the firm for FOBs and regular firms. 4.5 Family Owned BusinessesÂ´ High Level of Management Commitment and Transparency The FOBs high level of management commitment and transparency compared to regular companies is also expected to influence the entry mode decision. As mentioned before, regular firm management often has short- personal goals instead of long-term goals that are beneficial for the future and ongoing of the firm itself. This creates an atmosphere where the management is personally involved and responsible for the company as it directly influences the situation of the family, the reputation and future generations (Miller, Le Breton-Miller & Scholnick, 2008). Therefore the firm relies on total transparency within the management. But does this change the way FOBs enter a market? This will be analysed according to the determinants of market entry.
High Level of Management Commitment and Professionalism vs. Firm-Specific Factors As stated in chapter three, the study between FOBs and non-FOBs proved that transparency has the strongest effect on both the qualitative and quantitative measures as a well as adaptability. This increases efficiency and legitimacy and eases the access to global markets (Alpay, Bodur & Yilmaz 2008). This means that the transparency is expected to influence the entry mode decision and increase the expectation and international strategy of the firm. Due to this transparency FOBs are more likely to use wholly owned subsidiaries for their international expansion than regular firms.
High Level of Management Commitment and Professionalism vs. Country-Specific Factors When considering the management commitment and professionalism, the host country risk, government FDI policies and property right systems vs. country-specific factors it is expected to have
equal influence on regular firms as on FOBs. For this FOB aspect the cultural difference is also not expected to be any different. The last factor is the host country expected net return and growth. Since FOBs tend to focus on long-term prospective and not the short-run profit seeking (Miller, Le BretonMiller & Scholnick, 2008), this factor might influence the entry mode for FOBs as stated in the previous sections.
High Level of Management Commitment and Professionalism vs. Industry-Specific Factors As well as in the former sections of chapter four, the degree of competition, entry barriers and the availability of supply and distribution channels are not likely to cause any difference or variance. Also the structural uncertainty and the relationship with buyers are not expected to be influenced by the management commitment or transparency of the FOBs.
High Level of Management Commitment and Professionalism vs. Project-Specific Factors The project-specific factors are, as in harmony and democracy in decision making and stewardship and continuity, expected to be irrelevant when looking at the management commitment and transparency of the firm for FOBs and regular firms. In conclusion, the influence of project-specific factors for market entry for FOBs, does not seem to be very different from regular firms. Not for the harmony and decision making-, the stewardship and continuity, nor the management commitment and transparency component. Also for the industryspecific factors the influence is barely marginal. Only the structural uncertainty might alter the market entry mode due to the reduced risk seeking of FOBs as a result of the democracy in decision making and the close contact with buyers due to stewardship. This might indicate that due to the industry specific factors, FOBs are more likely to, when decided to actually enter the host country, use wholly owned subsidiaries rather than low-resource entry modes that regular firms tend to use in an early stage. The second most influential features are the country-specific factors of the market. Due to the management commitment and transparency component focusing on long-term goal of FOBs compared to the short-term profit seeking of regular firms the host countryâ€™s expected net return and growth is an altering variable between the two types of firms. Also for the stewardship and continuity component and the harmony and democracy in decision making component, the host country its expected return and growth is expected to influence the market entry mode decision. Expected is, that FOBs are more likely to commit for a longer period and therefore rather use wholly owned subsidiaries in the form of Greenfield investment or acquisition instead of joint venturing or export. The most important determinants recognized are the firm-specific factors. This might not come as a surprise since the internal management component is the variable is most likely to cause the variation between FOBs and regular firms. Since FOBs are often more determined to create competitive advantages in the new market and often tend to copy home country company culture, the choice for a wholly owned subsidiary is expected to increase. The transparency of management operations of FOBs lead to an
increased efficiency and legitimacy component and eases the access to global markets (Alpay, Bodur & Yilmaz, 2008) These variables increase the expectation of the international strategy for FOBs and are expected to cause the firm to prefer wholly owned subsidiaries over alternative entry modes.
Chapter 5: Conclusion and Academic Recommendations Based on the analysis of determinants of market entry against the three components that alter FOBs from regular firms an answer on the problem statement is expected. The problem is stated; what are the determinants of international entry modes for family owned businesses (FOBs) and what are the boundaries of FOBs regarding international expansion? The significant determinants of international entry modes for family owned businesses are expected to be firm-specific- and country-specific factors that influence international market entry. The industry-specific factors are slightly significant as well. The boundaries for international expansion for FOBs are the decision of international expansion is longer and long-term focussed in comparison with non-FOBs. When the decision is made for international expansion, due to the harmony and democracy in decision making, the stewardship and focus on continuity of the firm and the management commitment and transparency of the firm the firm is more likely to use wholly owned subsidiaries when entering foreign markets rather than joint ventures and low-resource market entry modes such as export, which are expected, in the initial stage of international market, to be preferred entry modes for regular companies in most industries.
When defining the problem statement there was the expectation that there was, indeed variance between the entry mode decisions for FOBs and regular firms. This expectation was created by previous knowledge of FOBs, cases like Mars Inc. and several journals on this matter. The contribution of this literature review is that after the analysis of several top-journals, subject related journals, the identification of the determinants of market entry, the identification of the differences between FOBs and regular companies and the analysis of these components combined that can concluded that there is expected to be a difference between the international market-entry for FOBs in comparison to regular companies. The limitation of this research is that this link between entry modes and FOBs has not been researched earlier. Additional to this there appears to be missing a general family business definition and the lack of a conceptual framework for this topic. Therefore the conclusions drawn are mere expectations based on the connections made between identified factors. Future research is necessary to investigate a proven validity of this hypothesis. Recommended is to research a number of large FOBs in their previous international market entry strategy compared to this process for regular companies over several years based on the proposed factors. This way the actual difference in the decision making process of both firms can be analysed over time and the hypothesis can either be rejected or proven with a required significance level.
Boy van der Velden (2012)
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2: http://cdn.media.ir.thewaltdisneycompany.com/2011/annual/2011-fact-book.pdf. This is the link to the corporate website of the Walt Disney Company. It identifies Walt Disney its operations abroad as joint ventures.
3: www.mars.com/global/about-mars/principles-in-action-summary.aspx. This is a link to the website of Mars Inc. used to identify Mars. Inc. as a family owned business.
Figure 1.1 The framework of the proposed hypothesis which identifies the Determinants of International Expansion as the independent variable, the Entry Mode Choice as the dependent variable and the Family Owned Business aspect as the moderator.
Appendix 2 Figure 2.1: Basic Entry Mode Structure used in this paper based on the description of Luo, Y., 1999, Entry and Cooperative Strategies in International Business Expansion, Quorum Books, Westport, Connecticut.
Appendix 3 Figure 2.2: Model based on the control, risk, resource commitment and return as discussed by Erramilli, M. K., 1991, The experience factor in foreign market entry behaviour of service firms, Journal of International Business Studies, 27(2), pp. 225-248. Gatignon, H., Anderson, E. 1988, The multinational corporationâ€™s degree of control over foreign subsidiaries: An empirical test of a transaction cost explanation, Journal of Law, Economics, and Organization, 4 (2), pp. 305-336. Inkpen, A.C., 2001, Strategic alliances, The Oxford handbook of International Business, Oxford: Oxford University Press, pp. 402-427.
Published on May 14, 2012
The influence on the Decision Making Process of International Market Entry when Comparing Family Owned Businesses and Regular Firms