Organization : CERAG-Ecole
Supérieure des Affaires, Grenoble. France.
Type of the proposal : Competitive Paper.
Theme : Foreign Market Entry
and Development.
Key words : Globalization, Foreign market entry, French investors, International strategies
Abstract.
Multinational firms can enter
a foreign market by taking over existing local firms (acquisitions) or by setting
up new ventures (greenfield investments). Surprisingly, there has been limited
empirical work on this topic. This paper examines the determinants of this choice
by looking at French entries into foreign markets. By focusing on firms of one
country, we are able to control a part of the impact of cultural and political
variables linked to the country of the company which invests.
This paper tests simultaneously a number of competing hypotheses. The results suggest that international external growth is used by French investors who implement a global strategy, whereas investors who implement a local strategy use internal growth as an approach to international markets.
The French investors’ previous experience of foreign markets, its financial situation, and its size have no statistically significant impact on the entry mode.
1. Introduction
A firm which expands into foreign markets must choose between keeping or sharing control of its subsidiaries. It must also decide whether to acquire an existing local firm (make an acquisition) or to build a new plant (make a greenfield investment). While some recent empirical research (Gatignon & Anderson, 1988 ; Hennart, 1991) has investigated the choice between full and partial control of subsidiaries, there have been very few large-sample, multivariate studies of the determinants of the choice between greenfield entry and acquisitions (Caves & Mehra, 1986 ; Kogut & Singh, 1988 ; Zejan, 1990 ; Hennart & Park, 1993).
This study is the first to explore the factors which push some French investors to enter foreign markets by internal growth and others by external growth.
A significant contribution of the paper is on one hand, the interest given to the managerial perceptions to study the behaviours of these companies that invest abroad, and on the other hand, the focusing on companies of a sole country (France) that enter a large number of foreign markets. Previous empirical studies have already focused on firms based in a single country (the U.S. for Dubin, 1976 ; Sweden for Zejan, 1990) entering a large number of foreign countries but none of these studies considered France.
Studying entry by firms based in different countries makes it difficult to model parent strategies, since collecting comparable data on firms registered in many different countries is next to impossible due to international differences in regulations, culture, foreign policies, etc.(1). By concentrating on French investors, we can more easily identify the impact of a firm’s strategy on the method it chooses to enter foreign markets.
The next section reviews the main theoretical approaches which will allow us to understand in a world environment the choice between external growth and internal growth. Section 3 describes the methodology and the elaboration of the variables. Section 4 reports the results, while section 5 presents our conclusions.
There is no well-developed theory of the determinants of the choice between domestic expansion through internal growth or acquisitions, and this is also true of the choice between greenfield investment and acquisitions as alternative ways of entering foreign markets.
Three bodies of theory have, however, provided directly or indirectly elements of the answer that are relevant for an understanding of this choice :
(1) transaction cost theory, which explains why firms invest in foreign countries, can be extended to show how the type of advantages exploited by the investor affects the mode of entry ;
(2) organisation theory, by placing the firms resources centrally, can serve to show how the nature of the company itself influences the choice of entry mode;
(3) the dialectic global/local approach allows to apprehend the international pressures with which the company investing abroad can be confronted.
2.1 Transaction Cost Theory
For the transaction cost theory of foreign direct investment (FDI) the essence of FDI is the cross-border expansion of firms. Two conditions must be met for this expansion to take place : (1) locating facilities abroad must be more efficient than exporting to foreign markets from a domestic location ; (2) a firm must find it desirable to own the foreign facilities, i.e., to organise its interdependence with foreigners through hierarchical rather than through market methods. The major reason why firms find it advantageous to organise their cross-border interactions through hierarchy is that the costs of organising interdependence in markets are higher than those of organising them within multinational firms (Hennart, 1982).
There is now an abundant literature which discusses the types of interdependencies that are likely to be more efficiently organised within multinational firms than through international markets, and which therefore lead to FDI (Hennart, 1991).
While there has been much research on why firms invest abroad, much less attention has been focused on the implication of the theory on the choice between greenfield entry and acquisition. Yet it is possible to extend the theory to show how a foreign investor’s choice of mode of entry will depend on the nature of the firm-specific advantages that it brings or seeks to obtain. For this we need a complementary approach that concentrates its research on managerial abilities of the company.
2.2 Organisational abilities approach
The organisational abilities approach finds its theoretical and intellectual roots in organisation theory, and relies on the notions of bounded rationality (Simon, 1957), incrementalism (Lindblom, 1959) and on the primacy of organisational routines (Cyert and March, 1963 ; Nelson and Winter, 1982) when it determines the behaviour of the company. These notions have once again emerged under the rubric " resource-based " in strategy (Barney, 1990 ; Wernerfelt, 1984).
Instead of focusing on traditional factors of capital and work as determinants of output, the centre of interest is here represented by the intangible resources possessed by the company. These resources, if they are rare, inimitable and of value (Barney, 1986), become a potential source of profitability, or a value for the company.
The distinction between resources and abilities is that resources are more static and refer to transferable entrance factors whereas abilities are more dynamic and refer to dynamic interactive processes and are more specific to the company, through which the resources are converted (Amit and Schoemaker, 1990). In other words, the company’s resources are the first source of value, but the organisation ability to manage these resources is the only creator of value.
Thanks to this more dynamic view, the organisational abilities approach goes further than the simple possession of resources by the company and focuses on " the mechanisms by which companies accumulate and disperse new knowledge and abilities, and the forces which limit the speed and direction of this process " (Teece, Pisano and Shuen, 1990). The organisational abilities approach views the company as a production centre endowed with a series of know-how and activities, where the individual pieces of knowledge, the organisation and technology are regarded as forming a whole, inextricably linked, and the coordination is the central factor for arriving at a productive organisational performance (Nelson and Winter, 1982). It is this last element, coordination, that will help us to better understand the mechanisms at work during the choice of entry mode.
Finally, the third body of theory, borrowing at the same time from transaction costs theory and organisation theory, will allow us to seize the pressures with which companies are confronted during foreign market penetration.
2.3 The dialectic global/local approach
This dialectic grid designed by Atamer & Calori (1993) (2).will allow us to understand the forces in action. First, concerning the elaboration of the grid, it is useful to note that the authors diverge on two points :
- the descriptions of industry categories included between the two extremes and the prescriptions that are attached ;
- the variables that determine the two axes of the dialectic grid.
However, we can write that :
- The global integration forces allow reductions of costs in a significant manner, or to counter generic strategic manoeuvres of international competitors, by centralising the management of geographically dispersed activities. In this respect, we can quote the following forces : the level of capitalistic intensity, the scale of economies, the intensity of R&D, pressure on prices, the existence of comparative advantages concerning key posts of products costs price, the presence of a same competitor in the Triad countries, the weight of buying raw materials in cost price, the weight of transport costs in the added value.
- The adaptation forces to local conditions obliges a company to locate the major part of the value chain in the target countries. We find variables to capture them such as : the weight of non customs barriers, the existence of public markets, the degree of specific needs and tastes, the existence of national buyers, the prism effect (transposability of marketing-mix elements from one country to another), the necessity of a close customer service, the degree of concentration of national markets, the degree of difference in the logistics infrastructure and in the distribution channels between countries.
This dialectic grid "global/local" served as a starting point for basing our empirical thoughts, because it represents a solid approach when one wishes to study world strategies.(3). In this respect, it can be equally useful to us to study the strategies of international growth.
The synthesis of these different approaches emphasises three essential points necessary for understanding international growth strategies : the specific advantage of the company and its strategy, the configuration and coordination of activities at a planetary scale and the pressures which influence at the level of each company. It is the interaction of these three points that will allow us to understand company international growth strategies.
2.4 The hypotheses
The logic that underpins our work is the following : we think that the strategic characteristics of the company influence the choice of entry mode in foreign countries. In this way according to the orientations given to the strategy, the company will be led to use one or another growth mode. The choice of entry mode is therefore far from depending only on the criteria of experience, costs and size. The thought goes above external considerations and finds its origin at the very heart of the strategy. Starting from this profound sentiment, we can state our base hypothesis :
H1 : The choice of entry mode in foreign countries depends on the strategic relation that the company envisages with the different units implanted in the world.
In this way, our thoughts lead us to split our first hypothesis into 4 sub-hypotheses. In a global view, the strategy is a must : it is essential to be physically present in the key countries. The company has a choice, it can implant itself either by external growth, or by internal growth.
Concerning the control take-over of a foreign company, it can have two objectives, one being to penetrate a market, the other to obtain abilities. The integration of the acquired company in a global strategy poses problems that are not negligible. The other objective that the purchaser can have is to attain, according to the terminology of Porter,(4). a national "lozenge" particularly favourable. The acquisition of a local firm is sometimes the only method of obtaining the advantages of the targeted country ; if we do not obtain this part of the citizenship, the systematic character of the "lozenge" would make any advantageous penetration into the local market very difficult. The major problem of this type of acquisition remains : the ability of the acquired company must be preserved in order to take advantage of its domestic environment while at the same time integrating the acquired company into the global strategy of the purchaser.
The solution is in general a compromise. In this respect, there are two main ways for the potential purchaser to be successful. The first way is to confer on the acquired company the character of the country of origin of the buying company for the industry or segment, and to subordinate to it all the other units. The second possible way is to identify the products by which the acquired company confided the responsibility of an element of the product range or a production stage, taking into account the particular interest that its national "lozenge" represents in this respect.
The intermediate choice consists of maintaining the acquired company in a relative autonomy while trying to integrate the acquired company into the global strategy of the company ; that is to say to take a risk of failure in the two pictures. Pushing integration of the acquired company into the global strategy risks to compromise its position in the national cluster, by distancing itself from the source of its strategy and by stripping its full capacity in terms of R&D. Integration at this point deprives the acquired company of its finesse and its speed of reaction to the domestic environment. In fact these are the indispensable qualities which would confer an advantage to a national competitor.(5). It seems it would be better to assign a precise role to the acquired company by allowing it, in order to fulfil, a large autonomy. This would not however guarantee that the acquired company would be capable of maintaining its position in the national cluster, nor that it would continue to respond with flexibility to the development of its domestic framework. This is why the creation of an entity seems more appropriate within the framework of a global .
H1a : Companies that follow a global strategy(6). prefer internal growth, i.e. creation ex-nihilo of a company.
By hypothesis, external growth is looked for when it appears a better method of development than internal growth for the company. For that, it must present substantial advantages(7). in comparison with internal growth : for example, external growth would be the method to obtain relative advantages in terms of portfolio of activities and know-how. Answering these questions of advantages supposes a deep analysis of the company and the potential impact of acquisition in terms of synergy.
At first view, external growth appears the most appropriate in the case of local strategy, because by taking possession of a team already organised and with knowledge of its market, we not only save on organisation tasks, but also on the acquisition of know-how and specific local market knowledge. This is precisely what the local company looks to acquire.
H1b : Companies that implement a local strategy prefer external growth as an approach to international markets.
In the framework of our study, we call cooperation or joint growth all structure implantation with a local or foreign partner. However, we make a distinction between the two :
- joint-ventures (in the case where there is an agreement with a local partner) allow a better penetration of the economic, cultural and social contexts of the host country. They will be by consequence, brought closer to the operations that have the objective of "sticking" to the foreign market requirements.
H1c : Joint growth with one or more local partners will be used more by companies developing a local strategy.
-Implantation implemented with support from a foreign partner will be brought closer to operations targeting global integration. In fact, the partners being foreigners in the host country can only take advantage of the economy of scale, knowledge transfer… but do not yet have any affinity with the market.
H1d : Joint growth with one or more foreign partners in the host country will be more used by companies implementing a global strategy.
Some authors (Wilson, 1980 ; Kogut & Singh, 1988) – less and less numerous – teach us that a large size company or who has experience in a country is more susceptible to use creation ex-nihilo to implant itself. Others underline the evolutionist character of entry modes by presenting creation ex-nihilo as the last step in a sequential process of implantation (Kogut, 1989 and Kogut & Zander, 1993). We are not convinced by the deterministic and inescapable character which underlies these propositions and this is why we wanted to test the following hypothesis.
H2 : The choice of entry mode in foreign countries is influenced by the experience of the company in these countries : in this way, internal growth is linked to a long experience in the targeted countries.
3.1 Selection of the companies
To select the companies, we matched up numerous sources of information : restructurations (8).(1994, 1995, 1996), "the top French companies" (classification performed by " L’Expansion ", " Le Nouvel Economiste " and " L’Entreprise ") and the CD Rom Kompass. We sent our questionnaire to the managing director or in case of need to a member of the management team (we supposed that all the members of the board of directors would be familiar with their company strategy) of 500 French companies.
In total, we received 129 responses(9). : only 62 responses(10). were used, the rest not being suitable for analysis due to incomplete responses (4), companies that did not wish to respond (33) or which we realised, after inspection, did not fall within the framework of our investigations (30 companies did not satisfy the criterion of foreign investment). These 62 companies represent 1 468 implantations (886 creations and 582 acquisitions).
3.2 Presentation of the variables (11).
3.21 The active variables
The active variables of our model concern the " pressures perceived by the managers and the strategies implemented " and the "international development of companies ". This section presents the indicators chosen to standardise the gathered information over these dimensions.
The relative variables of managerial pressures of French companies
The measures were performed starting from the perception of the manager interviewed, with the help of an 5-point Likert attitude scale applied to the judgement by using the differential semantic. In total, 13 questions were asked about managerial perceptions. These 13 variables were split in the following manner : 5 variables defining adaptation to local conditions and 8 variables defining global integration (Annex 1).
The rule imposed in the questionnaire was the following : each question is presented in the form of a pair of contradictory statements to which is associated a 5-point scale going from (1) " In complete agreement with the first statement " to (5) " In complete agreement with the second statement ". Additionally, for each question, the interviewee must indicate where the activity is now (1997) and where it is likely to be in the next 3 years (2000).
The international development of companies
It is a matter of knowing generic development manoeuvres of French companies in international markets. These generic manoeuvres were apprehended through two dimensions : modalities of implantation and the factors influencing the mode of entry.
Modalities of implantation : The managers had to indicate to us the growth strategies used abroad (external growth alone or with others, internal growth alone or with others) for each of the stated activities (buying, production, R&D, distribution).
Next, they were asked to indicate, according to geographic zones, the growth modes used, with the goal of apprehending the influence that the countries could have on the choice of entry mode as well as the cultural distances perceived according to the country.
Some precision concerning joint strategies were also asked in order to find out the number of implicated partners, the percentage of company participation in the common subsidiary and, if the participation was less than 50%, we asked if the partner holding the largest part of the social capital was foreign to the host country. We wanted therefore, by this basis, to have complementary information about the objective looked for in the joint venture : was it to better know the market by going with a native ? Was it financial, by dividing the risks ? Or was it imposed by local laws ?
The factors influencing the entry mode : Two types of information were targeted. First of all, we needed to research the factors justifying foreign localisation for the company. In this way, we found, according to the groups, characteristics particular to each during penetration of a new foreign market. Next, in a more general manner, the answers obtained informed us about factors which are, according to the managers, more favourable towards external growth, internal growth or joint growth.
3.22 Context variables
For Khandwalla (12)., the efficiency of structural choices of the company will depend on the coherence existing between these choices and context variables (or "contingency factors") which characterise the company environment. In other terms, the investment strategies implemented by the companies of our sample could only be wholly analysed within the context in place at the time of their elaboration. In the definition of this context, we find not only elements relative to the company environment (external context) but also to its own characteristics (internal context). We are going to present the dimensions chosen for our study to better understand the influence of this company context on the decisions relative to international growth strategies.
Variables marking the " external context " of the company
Since Lawrence and Lorsch (1973), we know that behavioural studies of companies must take into account the context in which they evolve. The contingency principle laid down by the authors states that " (...) the different external conditions can require organisational characteristics and behaviour models different in each efficient organisation " (p. 24). In this view, many dimensions of company environment were favoured.
The company must provide the interface between expressed needs asked for by customers and pressures exerted by suppliers, distributors, competitors… This environment specific to a downstream market and an upstream market was studied as an active variable, as it is at the heart of our research. However, we start to look at here the external context as an environment comprised of the company and its implantation. We proceed therefore in two distinctive parts : the subsidiaries and the configuration of activities .
The subsidiaries : To define the manner in which companies position their subsidiaries abroad, we are interested, first of all, in their number to have an idea of the extension of international activities of the company studied. Then, we focused on the geographical zones and the targeted countries in order to detect eventual interactions between the choice of entry mode and political or cultural influences of countries penetrated. Finally, we brought our attention to the propensity of each company to acquire subsidiaries to find out its experience in this area.
The configuration of activities : We favoured three types of information to characterise the configuration of activities of the company :
* the activity is practised in the implantation country of the company,
* the activity is practised in a sole foreign country,
* the activity is practised in many foreign countries.
For each of the 14 stated activities, the manager had to indicate where the activity is practised. The information gathered in this way, allowed us to better understand the disposition of international activities. Is the company very open internationally, or, the opposite, is it rather closed in on its territory of origin ?
Variables marking the " internal context " of the company
The company internal context was defined over 5 dimensions (13). : the technical system of the company, the identity card of the company, the degree of coordination, the foreign experience of the company, the perceptions of strategy effectiveness.
Such are the comments which imposed themselves to justify questions asked in the direct mailed investigation. The following paragraph indicates the logic of statistics treatment used.
3.3 General data analysis procedures
Two categories of treatment were used in the study : descriptive statistics and descriptive methods.
3.31 Descriptive statistics
Their implementation allowed the treatment of information gathered by the questionnaire and not being destined to be taken into account in the descriptive and explanatory analyses, it is to note :
3.32 The descriptive methods : general scheme of the research
This analysis is composed of two interdependent stages.
In the first, we performed a complete analysis (Principal Components Analysis, realisation of a typology and a discriminant analysis) on two important elements of our research :
- actual managerial perceptions (of environment and strategy)
- future managerial perceptions (of environment and strategy)
A second following stage consisted of combining the results of these partial analyses with other dimensions considered in this research. The general typology so constructed allowed us to characterise the behaviour of the sampled companies in terms of international strategy.
Finally, we met five managers (who had already responded to our questionnaire) belonging to five different companies. Our interviews were performed based on a semi-directive interview. They lasted on average from 120 to 180 minutes.
4. Résults
The description of managerial perceptions of change through experience and the vision of the 62 company managers interviewed was performed starting from a group of 13 variables.
Each step of the analysis (§ 4.1 and § 4.2) was split into two time periods : the actual managerial perceptions and the future managerial perceptions. The synthesis of these two managerial perceptions would give us the perceived gap between the strategies actually implemented and the strategies such as they are perceived for the 3 years to come (§ 4.3). The implications of the implantation strategy faced with implemented international strategies is the object of paragraph 4.4.
4.1 Actual managerial perceptions
A study of communalities of the 13 variables leds us to eliminate 4 variables (V 107, V 110, V 112 and V 113) for the rest of the study. This elimination is due to the weak communalities of each if these variables. All the results which follow come therefore from analyses based on 9 variables.
Study of the eigenvalues curve produced a first point of inflexion at the level of the third factorial axis. In addition, examination of the eigenvalues shows that the three first factors have each a eigenvalue greater than 1 (Kaiser’s rule) while the fourth factor has a eigenvalue less than 1. These are the three factors that were therefore extracted for this analysis.
Resulting from this first phase of treatment, the three extracted factors explain 69.4 % of the total variance(14). (Annex 2). It happens to be heterogeneousness of demand, structural uniformity and decentralisation of decisions.
Table 2: Composition of three factors
Variable number |
Heterogeneousness of demand |
Market structural uniformity |
Decentralisation and autonomy |
|||
V 115 |
0.85 |
-0.01 |
0.16 |
|||
V 114 |
0.83 |
-0.20 |
-0.08 |
|||
V 111 |
- 0.80 |
-0.21 |
-0.08 |
|||
V 109 |
-0.08 |
0.85 |
0.01 |
|||
V 108 |
0.36 |
0.80 |
0.01 |
|||
V 106 |
-0.13 |
0.76 |
-0.05 |
|||
V 116 |
0.14 |
0.26 |
0.77 |
|||
V 117 |
-0.22 |
-0.12 |
0.75 |
|||
V 118 |
0.26 |
-0.13 |
0.75 |
4.2 Future managerial perceptions
The study of variables communality leds us to eliminate three variables (V 110, V 112 and V 118) for the rest of the analysis. Our results are therefore based on 10 variables.
Study of the eigenvalues histogram produced a first point of inflexion at the level of the third factorial axis. We chose therefore to extract three factors for analysis. The three factors extracted account for 66.9 % of the total variance(15). (Annex 3).
Table 3: Composition of three factors
Variable number |
Heterogeneousness of demand |
Market structural uniformity |
Decentralisation and autonomy |
|||
V 115 |
0.71 |
0.03 |
-0.45 |
|||
V 114 |
0.83 |
0.13 |
0.12 |
|||
V 113 |
0.65 |
-0.24 |
0.34 |
|||
V 109 |
0.04 |
0.90 |
0.02 |
|||
V 108 |
-0.03 |
0.86 |
-0.18 |
|||
V 107 |
-0.43 |
0.61 |
-0.13 |
|||
V 106 |
-0.49 |
0.58 |
0.26 |
|||
V 116 |
0.04 |
0.46 |
-0.07 |
|||
V 117 |
0.08 |
0.13 |
0.89 |
|||
V 111 |
-0.34 |
-0.04 |
0.81 |
Note first of all that while the two analyses were done separately, we find, with just three exceptions (V 107, V 113 and V 118), the same variables : in fact, the communality study of the variables leads us to eliminate the same variables (V 110 and V 112). This allows us to form a first conclusion : there exist constants between the actual and future international company strategies of our sample.
Another conclusion that comes to complete our first interpretation. From observation of the results obtained, it is possible to conclude that the " actual and future managerial perceptions " of the directors can be defined according to three main dimensions :
* the " strategic-commercial " dimension
* the " structural " dimension (of the market)
* the " relational " or " dependence " dimension
We rediscover the three points that we brought up during our theoretical approach (strategic, environmental and organisational aspects).
4.3 Managerial perceptions dynamics
The 3-group typologies of actual and future managerial perceptions supplying us with F-ratios(16). lower than for 4-group typology, we have kept the information supplied by a decomposition into 4 groups. We obtain a total of 8 groups, the graphical representation found below.
Nearly half of the companies of our sample (30 out of 62) think that they will keep constant strategies. The distribution of these companies is in the following manner : there are those (11 %) that think the structure of their market will remain global as well as the implemented strategy (quadrant 1) ; there are those (26 %) that think that their strategic business unit will stay in a local environment and that, by consequence, the strategy developed will be local (quadrant 2) ; and finally, there are those (11 %) that, in spite of a local environment, keep their actual global strategy (quadrant 3).
Concerning the rest of the companies (32 out of 62), their actual and future managerial perceptions are different : they are in the process of evolution. However, their evolution over the next 3 years is not radical : either it is the structure of their market that, according to the company, will evolve ; or they adapt their strategy to their new environment. But, in no case, do we have companies which think that change will touch their strategy and environment at the same time.
If we hold to the managers’ perceptions, in the next three years, quadrant 4 " Global structure, local strategy " will be deserted by the companies. So, for our companies, implementing a local strategy when the market structure is global is not in the long term a " strategically " viable situation. In contrast, the opposite is possible (quadrant 3).
The companies prefer to either adapt their strategy to the environment, i.e. pass progressively from a local to global strategy, or change quadrant progressively in order to obtain a good compromise between strategy and environment. The companies do not apparently risk a change of market and strategy at the same time.
The following paragraph will apply itself to realising a general typology taking into account all the dimensions of the study and, in particular, those related to growth strategies. The objective here is to define the profiles of " French companies that invest abroad ". To respect the rules of space in vigour, in this paper we only discuss companies whose vision remains constant.
4.4 Implementation strategy implications compared to implemented international strategies
GROUP 1 : GLOBAL STRUCTURE AND GLOBAL STRATEGY
(7 companies, 80 implantations)
Table 4: International growth strategies of group 1
|
International internal growth |
International external growth |
||
|
Internal growth |
Joint internal growth |
External growth |
Joint external growth |
Buying |
|
|
27 % |
|
Production |
|
|
27 % |
7 % |
R & D |
6.5 % |
|
13 % |
|
Distribution |
6.5 % |
|
13 % |
|
Sub Total |
13 % |
|
80 % |
7 % |
Total (17). |
13 % |
87 % |
Nearly all of the companies of this group use sole acquisition of established units as their approach to international markets. This means a global environment as well as a global strategy pushes a company towards acquisition. Our hypothesis Ha is then invalidated for the companies of our sample. The explanation that we can put forward, in the first instance, is that the global environment pushes companies to such heightened competition, that they hope by buying to eliminate some of their competitors. In addition, it is highly probable, that the competition makes it impossible or very difficult to set up and start new units. This could be the result of market saturation or fierce competition.
On the other hand, as we thought, hypothesis H2 is invalidated. With a foreign experience that is relatively high (twenty years on average), we would have thought that these companies would use, as some write (Stopford & Wells(18)., 1972 ; Dubin, 1975 ; Davidson(19)., 1980) creation as an approach to international markets as they know their markets well, and means of implantation. Thus, the companies of our sample show, in this situation, the opposite. This result agrees with that of Caves & Mehra (1986) who found that companies with a larger foreign experience are more susceptible to chose acquisition. The authors put forward the explanation : the familiarisation of companies faced with the process of foreign implantation by acquisition. Given the contradictory results of these studies, it seems that the reasons influencing the choice of entry mode are others than those of the experience of companies abroad.
GROUP 2 : LOCAL STRUCTURE AND LOCAL STRATEGY
(16 companies, 356 implantations)
Table 5: International growth strategies of group 2
|
International internal growth |
International external growth |
|||
|
Internal growth |
Joint internal growth |
External growth |
Joint external growth |
|
Buying |
11.5 % |
4 % |
|
|
|
Production |
15 % |
6 % |
10 % |
3 % |
|
R & D |
5 % |
12 % |
|
|
|
Distribution |
25.5 |
6 % |
2 % |
|
|
Sub total |
57 % |
28 % |
12 % |
3 % |
|
Total (20). |
85 % |
15 % |
In this group where adaptation is of prime importance and where proximity to the customer is primordial for knowing local tastes, foreign market growth strategies are mainly creation ex-nihilo, and this whatever the activities implanted abroad, with the exception of production. In fact, this activity is implanted practically as much by acquisition as by creation. The acquisition of a production unit would therefore be the means to obtain units already in operation and the staff that know the market and the products demanded by the locals. Our hypothesis Hb is therefore invalidated in part.
Concerning joint growth (28% + 3%), this is achieved by one or more people belonging to the country location. The reason for this choice comes from the necessity of these companies to obtain market information when they arrive, for example, for the first time in the country where the specificity is not yet well known (60% of activities are carried out in at least one foreign country). " Association with locals supplies a group of people knowing the country, having contacts with industrialists and public power and better able to recruit personnel on site ", a supervisor told us.
Group 3 : Local Structure and global stratEgy
(7 companies, 114 implantations)
Table 6: International growth strategies of group 3
|
International internal growth |
International external growth |
||
|
Internal growth |
Joint internal growth |
External growth |
Joint external growth |
Buying |
7 % |
|
|
11 % |
Production |
7 % |
|
6 % |
11 % |
R & D |
23 % |
17 % |
|
|
Distribution |
7 % |
|
|
11 % |
Sub Total |
44 % |
17 % |
6 % |
33 % |
Total (21). |
61 % |
39 % |
The companies of this group find themselves in an environment where the local adaptation forces are high. However, the strategies implemented are global and the degree of coordination between units is high. We could believe, at first glance of the general results, that these companies prefer creation ex-nihilo (61 %). So, as soon as we analyse deeper, we notice that the mode of growth most used for Buying, Production and Distribution is joint external growth. And to be more exact, we must speak of external growth with a foreign partner in the host country (33 %). Note that for R&D, implantation is only performed by internal growth, alone or with many. The explanation of these companies is that in a global strategy, R&D is often protected because it is the hard core of the strategy. In return, production units, buying or distribution are implanted in order to best take advantage of local conditions (implantation by external growth) or the advantages of cost (implantation by internal growth) offered by the country.
5. Conclusions
At the beginning of section 4, we put forward the hypothesis of a strategic relation between the entry mode and the international strategy implemented (H1). This hypothesis was decomposed into four sub-hypotheses. Thanks to a summary table, we are now going to test the validity of these sub-hypotheses.
Table 7: Growth strategies of companies with constant vision
Groups |
Structures |
Strategies |
Entry modes |
n° 1 |
global |
global |
87 % by external growth |
n° 2 |
local |
local |
85 % by internal growth |
n° 3 |
local |
global |
External joint growth for buying, production and distribution. Internal growth for R&D. |
Apart from group n° 3 which prefers Internal Growth for implanting its R&D units and Joint External Growth for buying, production and distribution activities, the two other groups have well marked trends : the companies that followed a global strategy preferred external growth as an approach to international markets, and the companies that implemented a local strategy used international internal growth. Consequently, our hypotheses H1a and H1b are respectively invalidated.
On the other hand, as for H1c and H1d, our results validate our two hypotheses. In fact, joint growth with one or more local partners is unanimously used by companies developing a local strategy. These companies hope, with the help of locals, to rapidly procure knowledge specific to the country (the case of group n° 2). Conversely, joint growth with one or more foreign partners in the host country is used within the framework of global strategies. The partners are chosen with the objective of sharing costs and risks, and not to better know the market or demand (the case of group n° 3).
This paper offers the first empirical study of determinants that influence the choice of French companies between international external growth and international internal growth. We use responses collected from directors (directors’ strategic and environmental perceptions) a notable improvement compared to previous studies based exclusively on industrial ratios. The results reveal that the entry modes used by French investors is the reflection of their strategic choices and perceived environmental pressures.
The French MNs prefer international external growth when their strategies are global and when the forces present push toward global integration. On the other hand, when the pressures felt are local and the strategies implemented are local, the French MNCs use internal growth as an approach to international markets.
As for the question " How companies successfully manage the increasing complexity that often accompanies globalization ? " a strategic answer seems necessary : the " winning " company, in a deconstructed world, distinguishes itself mainly by two characteristics :
- it has a clear vision of its current strategy (global or local) and what it will become (constant strategic vision or in development),
- it adopts an international growth strategy in harmony with its world organisation.
Without these two catalysts, a company cannot grasp the complexity and transform it into opportunities.
This study limited to the two extreme configurations of the integration-responsivness model does not claim to put into question financial and economic theories of entry mode. We hope however to direct the attention of researchers and practitioners towards the interest of a strategic approach towards international growth. On another level, we ascertain the interest of using managerial perceptions to enrich economic and strategic theories.
NOTES
1 Operations conducted in France by foreign companies were not retained. The work on the process of decisions, conducted by Heller and al. (1989), showed differences in operations between Dutch, British and Yugoslavian organisations. Also, our analysis and conclusions that we hold are only valid within the framework of French companies. Transfer of our results to different national cultures can not be envisaged without precaution.
2 This dialectic approach presented by Bartlett & Ghoshal (1989) and Prahalad & Doz (1987) is in fact completed and updated by Atamer & Calori.
3 Thanks to this representation, the pressures of local adaptation and global integration can be analysed at the industry level, at the level of companies in competition in a sector, or even at the level of activities within a company (Bartlett, 1985).
4 Porter M. E., 1990.
5 i.e. linked to the country of implantation.
6 The definitions of the terms " global strategy " and " local strategy " are those commonly used and accepted by Porter, Bartlett & Ghoshal and also by Prahalad & Doz.
7 Remember also that to succeed, the taking over of control must respect a certain number of constraints :
- the buyer and the target must have linked or common activities ;
-the taking over of control implies a careful attention to managerial and organisational characteristics.
8 The restructuring of French companies is an analysis of recognised restructuring operations at the heart of the main French economic publications (dailies and reviews). This analysis is directed by Professor R. Paturel [IEP and ESA - Pierre Mendès France University, Grenoble]. The study on industrial restructuring is based on operations with external visibility, i.e. that materialise as legal traces, realised by French companies. The operations are divided into six different modes : external growth, internal growth, joint growth, the taking of an interest without taking over control, the internal reorganisation operations of a group, agreements with partners. The national and international operations are distinguished. Finally, the strategy followed by a company is checked off : horizontal expansion, integration, diversification, disengagement.
Operation details : we chose only to take into account in our study operations realised by French companies. Also, amongst the growth operations recorded, we conserve only the manoeuvres led by national initiators. The operations susceptible to be considered number 360. We have equally eliminated the operations called " false external growth ", i.e . intra-group operations.
9 Cf ANNEXE 4 : Identification of companies.
10 Thirty-four divisional or international development directors took part in the questionnaires, as well as 28 board of directors members, all directly concerned with the formulation of their company’s international strategy.
11 Details of the questionnaire are available from the author.
12 Quote by Mintzberg H. (1982), p. 207.
13 If certain variables do not pose a problem of " joining " with such or such dimension, others were the object of arbitration based on writings such as : Davidson, 1982 (for the degree of coordination) ; Kalika, 1984 (for the economic efficiency).
14 That is a decomposition into : * 28.1 % for the first factor,
* 23.1 % for the second factor,
* 18.2 % for the third factor.
15 That is a decomposition into: * 31 % for the first factor,
* 19.7 % for the second factor,
* 16.2 % for the third factor.
16 F-ratio = Variance between groups .
Variance inside the groups
17 The binomial and Chi-square tests are highly significant (p < 0.000).
18 According to the study of Stopford & Wells, the trend to acquire diminishes with the size of the company and its experience abroad.
19 One of the results deriving from the study of Davidson expresses that the experience of a company in a country leads to an increase in preference to create units for later entries.
20 The binomial and Chi-square tests are highly significant (p < 0.000).
21 The binomial and Chi-square tests are highly significant (p < 0.000).
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ANNEX 2 : Principal Component Analysis : Actual perceptions
Kaiser-Meyer-Olkin Measure of Sampling Adequacy |
0.561 |
Bartlett Test of Sphericity |
145.070 |
Degrees of Freedom |
36 |
Significance |
0.000 |
Final Statistics :
Variables |
Initial |
Extraction |
|||
V 118 |
1.000 |
0.652 |
|||
V 108 |
1.000 |
0.777 |
|||
V 109 |
1.000 |
0.725 |
|||
V 106 |
1.000 |
0.602 |
|||
V 114 |
1.000 |
0.735 |
|||
V 115 |
1.000 |
0.749 |
|||
V 111 |
1.000 |
0.695 |
|||
V 116 |
1.000 |
0.685 |
|||
V 117 |
1.000 |
0.626 |
|||
Factor |
Eigenvalue |
Pct of Var |
Cum Pct |
||
1 |
2.525 |
28.05 |
28.05 |
||
2 |
2.079 |
23.10 |
51.15 |
||
3 |
1.641 |
18.23 |
69.38 |
||
4 |
0.767 |
8.52 |
77.91 |
||
5 |
0.691 |
7.68 |
85.59 |
||
6 |
0.455 |
5.05 |
90.64 |
||
7 |
0.402 |
4.46 |
95.11 |
||
8 |
0.233 |
2.58 |
97.69 |
||
9 |
0.207 |
2.30 |
100.00 |
ANNEX 3 : Principal Component Analysis : Future Perceptions
Kaiser-Meyer-Olkin Measure of Sampling Adequacy |
0.596 |
Bartlett Test of Sphericity |
187.162 |
Degrees of Freedom |
45 |
Significance |
0.000 |
Final Statistics :
Variables | Initial |
Extraction |
V 107 | 1.000 | 0.585 |
V 108 | 1.000 | 0.783 |
V 109 | 1.000 | 0.811 |
V 106 |
1.000 |
0.650 |
V 116 |
1.000 |
0.222 |
V 114 | 1.000 | 0.721 |
V 115 | 1.000 | 0.706 |
V 113 |
1.000 |
0.601 |
V 117 |
1.000 |
0.821 |
V 111 |
1.000 |
0.787 |
Factor |
Eigenvalue |
Pct of Var |
Cum Pct |
1 |
3.095 |
30.95 |
30.95 |
2 |
1.967 |
19.66 |
50.62 |
3 |
1.624 |
16.24 |
66.86 |
4 |
1.016 |
10.157 |
77.01 |
5 |
0.648 |
6.47 |
83.49 |
6 |
0.561 |
5.61 |
89.10 |
7 |
0.367 |
3.66 |
92.77 |
8 |
0.348 |
3.48 |
96.25 |
9 |
0.233 |
2.32 |
98.58 |
10 |
0.142 |
1.41 |
100.00 |
ANNEX 4 : Identification of Companies
INDUSTRIES |
NAF CODE |
NAF 2 |
nb of C° |
Pourcentage |
Légumes transformés |
153 E |
15 |
8 |
12,90% |
Firme Services Alimentation Animale |
157 |
. |
. |
. |
Produits diététiques |
158 T |
. |
. |
. |
Agroalimentaire |
159 N |
. |
. |
. |
Industrie du tabac |
160 Z |
16 |
2 |
3,23% |
Produits à usage unique, d’hygiène, d’essuyage et de protection pour les collectivités industrielles, médicales et tertiaires. |
21 |
21 |
2 |
3,25% |
Conception, fabrication et commercialisation de lubrifiants |
232 Z |
23 |
2 |
3,25% |
Plastiques |
241 L |
24 |
2 |
3,25% |
Vitrages automobile |
261 C |
26 |
2 |
3,25% |
Tubes en aluminium, plastique destinés à la pharmacie, l’hygiène et le cosmétique |
287 C |
25 |
2 |
3,25% |
Grenaille abrasive |
287 P |
28 |
2 |
3,25% |
Fabricant compresseurs |
291 C |
29 |
8 |
13,00% |
Fabrication matériel aéronautique et climatisation |
292 F |
. |
. |
. |
Fabrication d'équipement de levage et de manutention |
292 D |
. |
. |
. |
Fabrication d'appareils électroménagers |
297 A |
. |
. |
. |
Equipementier aéronautique et automobile |
316 A |
31 |
2 |
3,25% |
Fabrication de cartes à puces et cartes plastiques |
321 B |
32 |
4 |
6,30% |
Composants semi-conducteurs Silicium |
322 A |
. |
. |
. |
Orthopédie et biomatériaux |
331 B |
33 |
2 |
3,25% |
Production et ventes automobiles Citroën et services correspondants |
343 Z |
34 |
8 |
13,00% |
Equipementier automobile |
343 Z |
. |
. |
. |
Verrous, antivols, poignées |
343 Z |
. |
. |
. |
Automobile |
343 Z |
. |
. |
. |
Equipements ferroviaires |
352 Z |
35 |
2 |
3,25% |
*Environnement et équipement du tertiaire [*Outillage à main *Transformation métaux et équipements] |
361 C |
36 |
4 |
6,00% |
Equipements de sport |
364 Z |
. |
. |
. |
B.T.P. |
452 C |
45 |
2 |
3,25% |
Négociant en vins (du Sud de la France) |
513 J |
51 |
6 |
10,00% |
Négoce (professionnel) fourniture industrielles et produits sidérurgiques |
515 C |
. |
. |
. |
Fabricant de mobilier de bureau et aménagement |
516 G |
. |
. |
. |
Service informatique |
721 Z |
72 |
2 |
3,25% |
. |
. |
. |
. |
. |
. |
. |
. |
62 |
100% |