Entry Motives, Institutions, and Acquisition Strategies

This section establishes how the motives of market entry interact with host coun-try institutional environment in predicting MNE choice for partial, staged and full acquisition. Thus, institutional theory and motives of FDIs (Dunning 1993; 1998) will be integrated into this section.

The motives of entering a foreign market should play a fundamental role in the strategic entry mode choice chosen by the MNEs. Several studies have advanced our knowledge on the specific role of entry motives in the entry mode choice of MNEs in foreign market (e.g. Sanchez-Peinado et al. 2007; Chen 2008; Tahir &

Larimo 2006; Buckley et al. 2007). However, they have assumed that institutional factors exert same pressures on all entry motives of MNEs in foreign markets.

Institutional factors do not exert equal amount of pressures on all market entry motives. By integrating OLI paradigm and institutional theory, it is shown that certain forms of acquisition strategies are preferable in a particular institutional environment at the time of market entry.

Dunning and Lundan (2008) provide a perspective on how to integrate OLI para-digm with the institutional environment. However, their perspective focuses on certain home country advantages (Oa-Ownership-asset advantage and Oi-Ownership-institutional advantage) MNEs develop due to how they are embedded in their home country. It also focuses on how national level institutions are shaped by the activities of both indigenous firms and foreign-owned MNEs. This is also similar to the argument of comparative institutionalism that MNEs innovations are hinged on their embeddedness in home country systems of economic

coordi-nation, education systems, financial systems and market relations (Hotho &

Pedersen 2012: 247).

In this section, the focus is on how host country institutions impact the strategic motives and corresponding acquisition strategies of parent MNE in host countries.

While comparative differences in institutions will give rise to differences in MNEs capabilities and responses leading to variation in entry mode choices used by different countries when entering foreign market (Hotho & Pedersen 2012:

247). However, such studies will require evolutionary studies linking how organi-zations internally generated and externally imposed incentives such as regulations and norms, affect all areas of managerial decision-making. Furthermore, data for such studies are rarely available. For this reason, macro-level institutional envi-ronment (the institutional-based view of international business) is sought for in exploring the relationships between entry motives, institutional environment and the acquisition choice of MNEs in foreign markets.

Section 2.2 discussed the formal and informal aspects of the institutional envi-ronment. Section 2.1.2 discussed the motives of FDIs. This section integrates Sec-tions 2.2 and 2.2.1. However, the impact of entry motives on the formal regulato-ry environment will be neglected, because regulatoregulato-ry pressures are coercive and irrespective of the motives, MNEs will have to conform to the regulatory re-strictions. Additionally, failure to comply with regulatory restriction would lead to denial of acquisition entry. Thus, this section will focus on how regulatory transparency, failure in formal institutions and informal institutional constraints interacts with entry motives in influencing the acquisition strategies.

As discussed in Section 2.1.2, Dunning (1993; 1998) proposes four different mo-tives for foreign market entry (market-seeking, efficiency-seeking, resource-seeking, and strategic asset-seeking motives). In this section, it is argued that the various motives of foreign market entry respond differently to the host country institutional environment (i.e. regulatory transparency, failure in formal institu-tions and informal institutional constraints).

Acquisition aimed at market-seeking motives entails that the acquired firm is in-volved in major value chain activities such as procurement, production, marketing and sales (Dunning 1993; 1998). Market-seeking motives aim at entering and serving the local markets, improve market position in the domestic market, ac-quire marketing skills and marketing management expertise and gain access to adjacent markets (Marinova, Marinov & Yaprak 2004). Such acquired firms will require local responsiveness by adapting their goods to the needs and tastes of the local customers (Dunning 1993). To achieve local responsiveness, the acquired firms are required to strongly adapt within their local environment by maintaining

stakeholder relationships such as close ties with their customers, participate in local networks to obtain local market knowledge and access to distribution net-works (Slangen & Beugelsdijk 2010). Furthermore, such acquired firms will need access to institutions required for firm survival and legitimacy (Meyer & Rowan 1977).

Multinationals from developed economies entering host countries characterized by non-transparent regulatory institutions, political risks and institutionalized cor-ruption are expected to need local ownership in the form of equity stake in mar-ket-seeking acquisitions in order to survive and gain legitimacy. Allowing for local ownership would provide the MNEs powerful access to governmental insti-tutions and an ability to have people within the organization to deal with regulato-ry institutions and political risks of host countries. Local ownership also provides the firm with access to complex institutional networks needed for firm survival.

Thus, firms with market-seeking motives entering host countries with non-transparent regulatory institutions, political risks, and institutionalized corruption will prefer partial and staged acquisition than full acquisition.

Resource-seeking acquisitions are aimed at gaining access to/or to acquire specif-ic resources in the host country at relatively lower cost levels compared to their home countries (Dunning 1993; Filippov 2010: 314). It includes access to raw materials and agricultural products, access to cheap and semi-skilled labor, and access to technological capacity, management or marketing expertise and organi-zational skills in more advantageous conditions (Dunning 1993). Recently, ac-cess to management and marketing expertise, organizational skills, and techno-logical capacity are considered specifically as strategic asset-seeking motives and will be considered as such in this study. The latter are resources that are embed-ded in the local environment and would require greater interaction with the host countries for MNEs to exploit these resources effectively. For example, natural resources are controlled by state-owned firms in most countries. Most acquisi-tions aimed at exploiting natural resources are acquired via privatization of the state-owned firms.

According to Uhlenbruck and Castro (1998: 627), host governments do not give up their ownership entirely in resource-seeking acquisitions; rather they want to retain control of these resources. Both when they give up their ownership partially or fully, the terms of the purchasing agreement may go far beyond the sales price.

For example, it may come with political clauses such as protection of employ-ment of nationals, regional developemploy-ment, limitation on liquidating the business, insisting that the management team be staffed with nationals, and limitations on the number of lay-offs. (ibid) Governments also provide direct means for the

survival of these acquisitions through securing financing, guaranteeing govern-ment procuregovern-ment, allowing tax breaks, restricting imports and limiting new entry (ibid).

Thus far, it is pertinent to argue that host country institutions interact strongly in resource-seeking acquisitions. On one hand, governments have a strong interest in resource-seeking FDIs. On the other hand, governments provide the necessary policy, network and protection for such acquisition to survive. Consequently, the government can provide the needed knowledge and assistance in dealing with political risks and institutionalized corruption in the host countries. MNEs enter-ing such market will prefer partial and staged acquisition rather than full acquisi-tion because giving host government a stake will serve as a powerful resource to MNEs in dealing with regulatory institutions and political risks of host countries.

Acquisitions aimed at efficiency-seeking motives aims at increasing a firm’s effi-ciency by exploiting the benefits of economies of scale and scope, or common ownership (Dunning 1993). Efficiency-seeking FDIs have been suggested to take place sequentially after firms have undergone market-seeking and resource-seeking FDIs (Dunning 1993). Efficiency-resource-seeking acquisitions are also aimed at diversifying activities between two countries or regions with contrasting factor endowment. For example, when multinationals locate information and value add-ing activities in developed locations while labor intensive and natural resource operations are located in developing locations to take advantage of the difference in factor endowments. Efficiency-seeking acquisitions could be in the form of market-seeking or resource-seeking acquisition but the holistic motivation under-lying such acquisition is to increase a firm’s efficiency by exploiting the benefits of economies of scale and scope, or common ownership. (ibid) Such acquisitions require tight integration to achieve the sole aim of the economies of scale and scope. The aim of tightly integrating such subsidiaries is to ensure extensive shar-ing of all type of resources and the adoption of parent firm organizational pro-cesses while increasing synergistic benefits (Pablo 1994). Most efficiency-seeking FDIs take place in host countries that are open and have well-developed infrastructures and are located in regionally integrated markets (Dunning 1993:

59).

The institutional environment should have greater interactions with efficiency-seeking acquisitions. The need to integrate such subsidiary tightly to achieve economies of scale and scope drives such acquisitions to take place in developed country institutions. Tightly integrating acquired subsidiaries is more feasible for fully acquired subsidiaries than partially acquired subsidiaries. Developed country institutions have well-developed infrastructures and stable political and

transpar-ent institutions. In summary, efficiency-seeking acquisitions are more likely to be full acquisitions in countries characterize with non-failure in formal institutions and transparent regulatory institutions.

Strategic asset-seeking motives are aimed at protecting or increasing a firm’s core competence (Dunning 2001). Strategic asset-seeking motives is the most signifi-cant changes in the motives of FDI’s over the last two decades (Dunning 1998) as firms are seeking ways to procure capabilities needed for competitive advantage.

Examples of strategic asset-seeking acquisitions are acquisitions aimed at acquir-ing specific technologies, marketacquir-ing, and management expertise. Strategic asset-seeking acquisitions also include acquisitions aimed at intra-firm sourcing, i.e., an acquisition aimed at sourcing and procuring major components and products.

Most strategic asset-seeking FDIs take place in developed economies (Makino, Lau & Yeh 2002) because advanced strategic assets and sophisticated customer segments tend to be spatially concentrated in developed economies (Dunning 1998). Developed economies have established transparent regulatory institutions;

stable political environment and supporting institutions that govern the rules of business thus reduce the bottlenecks and need for a local stake in foreign acquisi-tions. Developed economies also have less intervention in multinational opera-tions compared to the level of intervention in less developed and developing economies (Poynter 1985). Consequently, it is likely that strategic asset-seeking acquisitions should have less institutional interaction with host country formal institutions and firms seeking for such acquisition will have a greater preference for a full acquisition than partial and staged acquisition.

Based on the above discussion, the following summary can be drawn from the interaction of entry motives on non-transparent regulatory institutions, high polit-ical risks and institutionalized corruption in predicting acquisition entry. Multina-tionals from developed economies entering host countries characterize by non-transparent regulatory institutions, high political risks, and institutionalized cor-ruption will prefer partial acquisition and staged acquisition than full acquisition for market-seeking and resource-seeking motives. More so, multinationals from developed economies entering host countries characterize by transparent regulato-ry institutions, stable political environment, and less corruption will have prefer-ence for full acquisition than partial and staged acquisition for Strategic asset-seeking and Efficiency-asset-seeking motives.

Contractual difficulties are one way in which informal institutional environment of host countries manifests themselves in decisions regarding acquisition strate-gies at the time of entry (Jakobsen 2008; McDevitt 2006). Consumer ethnocen-trism (Mummendey, Klink & Brown 2001; Ayub & Jehn 2006) is another form in

which informal institutional environment manifest especially with regards to market-seeking and resource-seeking motives.

Market-seeking and resource-seeking acquisitions are independent of their parent MNEs and thus require less integration because they are embedded in their local environment (Slangen & Beugelsdijk 2010). The need to avoid consumer ethno-centrism will prompt MNEs to retain local partner to enhance local responsive-ness. This will lead to a preference for partial acquisition rather than staged or full acquisition for market-seeking acquisitions in a highly informal institutional envi-ronment. Resource-seeking acquisitions are mostly aimed at securing raw materi-als. Such raw materials are embedded in host countries and have interactions with the host country institutions. Consumers could also exercise ethnocentrism due to fear of foreign country resource exploitation (Moeller, Harvey, Griffith & Richey 2013). To gain legitimacy and survival, it is expected that parent MNE will opt for partial acquisition in an informal institutional distance environment just to enable the efficient flow of raw materials to the parent MNE. Thus, firms invest-ing in resource-seekinvest-ing acquisition will more likely opt for partial acquisition rather than staged or full acquisition.

Unlike market-seeking and resource-seeking acquisitions, strategic asset-seeking and efficiency-seeking will require tight integration to gain access to knowledge and competencies as well as to achieve economies of scale and scope. Most effi-ciency-seeking investment takes place in developed countries, and such countries share close informal institutional environment. Also, strategic asset-seeking in-vestment is not strongly embedded in the local institutions, firms entering with such motives will opt for full acquisition rather than partial or staged acquisition.

Based on the discussion above, it can be summarized that multinationals from developed economies entering informal institutional distance countries would prefer full acquisition over partial and staged acquisition for Strategic asset-seeking and Efficiency-asset-seeking acquisitions. Multinationals from developed economies entering informal institutional distant countries would prefer partial acquisition over staged and full acquisition for resource-seeking and market-seeking FDIs.