Determinants of MNEs' Entry Decisions


Author:Yu-Yin Wu




This study tests the factors of transaction costs (TC) and resource-based views (RBV) to explain the MNEs’ entry decisions in China. By using large firm-level data from China, I show in this paper that the joint-venture (JV) entry mode decision and the JV equity share decision are affected by somewhat different sets of factors, and should hence be treated as a two-step procedure. Among the determining factors, transaction costs (TC) and resource-based views (RBV) provide useful information regarding the MNEs’ entry decisions. Some literatures used TC approach and have shown that different types of uncertainties (internal versus external) impact MENs’ offshore governance choices in different ways. I show in this paper that variables related to internal uncertainty (e.g., management) and firm-specific assets tend to affect MNEs’ entry decisions in a way that is consistent with the transaction cost logic; that is, the higher degree of internal uncertainty, the MNEs may require more control over the foreign facilities or the JV. On the other hand, those variables related to external uncertainty (e.g., marketing) and intangible assets tend to conform to the resource-based view, which means higher external uncertainty would cause the MNEs to leverage the resources or local experience of local partners. This suggests that MNEs may need complementary resources from local partners to reduce the external uncertainty and enhance the value of their intangible resources. Moreover, the industrial competition, policy restrictions on equity share, and firm and location characteristics also significantly affect the MNEs’ entry decisions.

Keywords: Entry mode, TC theory, RBV, Uncertainty, ownerships, FDI, China
JEL Classification: F21, F23, L24
ISBN 9789865795290
Publication:Chung-Hua Institution for Economic Research

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Determinants of MNEs' Entry Decisions