The Choice Between Joint Venture and Wholly Owned Subsidiary: An Institutional Perspective

Abstract

The study of foreign entry-mode choice has been based almost exclusively on transaction-cost theory. This theory focuses mainly on the impacts of firm- and industry-specific factors on the choice of entry mode, taking the effects of country-specific contextual factors as constant or less important. In contrast, the institutional perspective emphasizes the importance of the influence of both institutional forces embedded in national environments and decision makers' cognitive constraints on the founding conditions of new ventures. Still, this theoretical perspective has yet to provide insights into how institutional factors influence the choice of foreign entry mode. The primary goal of the present study is to provide a unifying theoretical framework to examine this relationship. We synthesize transaction-cost and institutional perspectives to analyze a sample of 364 Japanese overseas subsidiaries. Our results support the notion that institutional theory provides incremental explanatory power of foreign entry-mode choice in addition to transaction-cost theory. In particular, we found that multinational enterprises tend to conform to the regulative settings of the host-country environment, the normative pressures imposed by the local people, and the cognitive mindsets as bounded by counterparts' and multinational enterprises' own entry patterns when making foreign entry-mode choices.