Foreign Entry Mode and Performance - the Moderating Effects of Environment - Assignment Example

A Critical Review on Foreign Entry Mode and Performance: The Moderating Effects of Environment by Howard S. Rasheed I. Project Rationale (15%) 1.1 Research Problem In the past, many studies had focused on the market entry strategies of multinational corporations. The knowledge body of internationalization lacks the studies of internationalization with focus on the small and medium sized enterprises. Thus this study intends to solve the problem with existing knowledge body and research. The research makes inquires on relationships between choice of entry strategies and the performance outcomes of small and medium enterprise (SMEs) in their efforts in internationalization in a given domestic and foreign environments. It is found that the research excludes the inquiry on what factors influence the choice of market entry mode in internationalization. In addition, the study also excludes the management skills of the SMEs which may contribute to the choice as well as the performance success of internationalization. 1.2 Aims, Objectives, Questions and Hypothesis 1.2.1 Aims: This research aims to examine the relationship between market entry mode and performance outcomes of small and medium sized companies in the United States of America. Based on the theories of market diversification and contingency, the study aims to develop a conceptual relationship between the market entry choice of SME companies and the outcome performance in the internationalization market. The study intends to show the effect of domestic and foreign market environmental factors which moderate the relationship between the performance outcomes and market entry mode selection of SMEs in internationalization in the globalization market. The study aim was clearly stated. However, there is no conceptual framework depicting the aim was exhibited in the research study. 1.2.2 Objectives: The study has three objectives. 1. to examine how performance outcomes vary between equity and non-equity entry modes depending on the effects of domestic and foreign environmental factors. 2. to test and validate the contingency model proposed in the research paper. 3. to discuss the findings of the test on contingency model. It is found that the study clearly states the objectives. However, the study does not clearly sates that it intends to propose a new conceptual model in which the new testing of contingency theory was not mentioned. 1.2.3 Hypothesis: There are three hypotheses proposed to be tested in the research problem. The hypotheses are stated between the dependent variable of outcome performance and entry mode choice. The relationships between the two variables are tested in the context of domestic environmental and foreign environmental factors. A. Domestic Environmental Factors H1: When domestic munificence is high, firms using non-equity modes will have higher rates of international revenue growth. The statement of the hypothesis H1 should use different wording. The wording of “will have” assumes that the association between the non-equity modes and higher rates of international revenue growth as to be certain. The wording should be “it is likely to have” rather than “will have”. The second hypothesis was stated as follows: H2: When domestic volatility is high, firms using non-equity modes will have higher rates of international revenue growth. The suggested re-wording above should be applied to the second hypothesis testing. The second hypothesis testing should be using the “it is likely to have” in stead of “will have”. B. Foreign Environmental Factors H3: When foreign market risk is high, firms using a non-equity mode will have a higher rate of international growth. The last hypothesis proposed is the relationship between the two variables. The relationship is tested given the contingency factor of foreign environmental factor of high risk foreign market. The wording should be “it is likely to have” rather than “will have”. The three hypotheses proposed above test the relationship between the dependent variable of outcome performance and independent variable of entry mode choice. However, the author stated the hypotheses testing independent variables (1) munificence, (2) volatility, (3) risk, and (4) entry mode. In the hypothesis testing, the different types of risks including (1) ownership/contral risk, (2) transfer risk, (3) operation risks, (4) investment and contractual risk are not tested individually as contingency variables. Therefore, there should have been hypotheses proposed for investigation on individual risks contingency factor in the foreign environment. However the author does not explain the omission of the individual level investigation of risk and only the aggregate level risk was mentioned and proposed in the third hypothesis. This lacks the complete investigation on the foreign environment factors and readers are un-informed about the inclusion and exclusion of the risks. 2. Literature Review (20%) 2.1 A critical evaluation of contemporary themes and theoretical frameworks The research conducts a literature review to propose a new conceptual model for hypotheses testing and investigation on the inquiry. First, the choice of entry mode is based on the “transaction theory” (Anderson and Gatignon, 1986). It stated that “Transaction costs theory views each choice of entry mode as an individual transaction that involves a trade-off between control and resource commitment”. However there is no further elaboration and discussion on what the transaction theory is and what the theory explains the choice of market entry mode made by the small and medium sized companies. This leaves the reader lack of full understanding on the theory. Second, the research tries to justify why use of financial performance. In the financial performance indicators of returns on sales and assets are mentioned. His justification of use of revenue growth as performance outcome indicator was not really clear with the assertion that financial performance on assets are in the corporate level whereas revenue growth performance was suitable for market level analysis. Market level analysis is most appropriate for internationalization. However it is contrary to use of equity mode in the testing hypotheses. Therefore use of performance measure as revenue growth will be in appropriate for analyzing for equity mode entry. This is not actually reflected and unjustified in the literature review. The author should have mentioned in the literature review to support his use of performance outcome indicator as revenue growth. In addition, the research based on “contingency theory” and “international market diversification theory”, the new model was proposed. It is said that “Based on extant international market diversification theory and contingency theory, this paper examines how performance outcomes vary between equity and non-equity entry modes depending on the effects of domestic and foreign environmental factors. A review of the literature will establish first a basis for hypothesis development.” However, the study lacked sufficient discussions on “contingency theory” as well as “international market diversification theory” to support the model development. Thus readers are lack of information to fully comprehend the understanding of the grounded theories of “contingency theory” and “international market diversification theory”. Finally, the environmental factors are different between domestic and foreign markets. The research assumed that the perception on the domestic and foreign market is different. In the domestic market environment, the factors considered are (1) environmental munificence, (2) volatility, and (3) environmental complexities whereas the foreign market factors are (1) ownership/control risk, (2) transfer risk, (3) operation risk, and (4) investment and contractual risk. In fact, both domestic and foreign markets should have similar perception and conceptualization of factors. The author of this paper failed to clearly explain why these two markets have different factors. 2.2 Justification of project through identification of Research Gap(s). The research strongly argues that there is a lack of sufficient theoretical framework which explains the relationships among performance outcome and entry mode choice in internationalization of the small and medium sized enterprise companies. The author convinces the readers that “Research on international expansion and foreign market entry is well established within the international market diversification literature but has focused primarily on multinational corporations (Stopford and Wells 1972; Daniels, Pitts, and Tretter 1984; Galbraith and Kazanjian 1986; Ghosal 1987; Kim, Hwang, and Burgers 1989; Habib and Victor 1991). The internationalization trend for small and medium-sized enterprises (SMEs) has prompted increased research interest in explaining the factors that contribute to success, but sufficient theoretical framework is lacking (Lu and Beamish 2001).” However, what theoretical framework focusing on multinational corporations was not sufficiently discussed and where the research gap exists was not informed to the readers. Therefore, the study does not include comprehension on the real knowledge gap in the filed of internationalization. 3. Paradigm & Design (25%) The research paradigm was a new conceptualization of theoretical framework on internationalization of small and medium sized companies. The study employs a deductive approach in which a theoretical framework was conceptualized which, the author asserts filling the knowledge gap in the knowledge body of internationalization. Then the research collects data to validate the theoretical framework. The research design was quantitative research approach in which a theory was applied and testing the theory was conducted with the real data. 4. Methods (25%) 4.1 Data collection methods chosen. The data were collected from archival data of 123 publicly held manufacturing SMEs based in the United States. The following variables were operationalized and their values were calculated based on operational definitions. Domestic Environmental Factors (1) Foreign market entry mode is defined as institutional arrangements that allow firms to use their product or service in a country exchange (Calof 1993) or “an institutional arrangement that makes possible the entry of a company’s products, technology, human skills, management, or other resources into a foreign country” (Root 1987, p. 5). (2) Environmental munificence is defined as the relative abundance of resources in the environment and the capacity to support growth (Dess and Beard 1984). (3) Volatility is defined as the level of turbulence or instability facing an environment and reflects change that is difficult to predict (Keats and Hitt 1988). (4) Environmental complexity is defined as the heterogeneity and concentration of environmental elements (Dess and Beard 1984). Foreign Environmental Factors (5) Ownership/control risk is defined as management’s uncertainty about host government actions affecting the entrant’s ownership position. (6) Operations risk refers to the possibility of sanctions that could constrain an investor’s operations in the host country. (7) Transfer risk is defined as limitations on the entrant’s ability to transfer capital out of the host country (Root 1987). (8) Investment and contractual risk reflects the uncertainty over the continuation of present economic and political conditions and government policies, which are critical to the survival and profitability of a firm’s operations in that country. Dependent Variables Performance. Consequently, this research measures performance (INTPERF) based on the average growth in international revenue over the most recent three-year period, 1992–1994, as reported in Financial Disclosure database. Independent Variables (1) Munificence. This research uses a similar approach, measuring the average growth in industry-wide total revenue (MUNIFICENCE) between 1986 and 1990 for each primary SIC code as reported in Financial Disclosure. (2) Volatile. This research calculates VOLATILE using the standard deviation of the average change in revenue growth during the period 1986–1990. (3) Country risk. This research uses the composite political, financial, and economic risk rating (RISK) from the November 1988 ICRG (International Country Risk Guide) (Krayenbuehl 1988) for each target market. (4) Entry mode. Following Erramilli and Rao (1993), foreign entry mode (MODE) often is measured as a dichotomous variable, with “0” assigned to those foreign market entry decisions for which there was low control (exporting) and with “1” assigned to those foreign market entry decisions for which there was integrated or independent control (joint ventures and wholly owned foreign subsidiaries). Control (Contingency) Variables (1) Firm size. the log of the number of employees (LOGEMP) in the model. (2) Industrial sector. domestic environmental factor scores are calculated separately for each two-digit SIC codes (3) Resources. This research measures financial resources by dividing the firm’s long-term-debt-to-market value of equity ratio by the average industry long-term-debt-to-market value of equity ratio within its two-digit SIC code (DEBT). This average measurement of a firm’s comparative long-term liquidity or debt capacity for a three-year period prior to entry mode choice is an indicator of the availability of internal funds for international expansion (Chatterjee 1990). Dividing by the industry average corrects for industry effects. The log of DEBT was taken to limit the variance in the distribution of the values and thereby to minimize scaling problems among independent variables. 4.2 Data analysis and or interpretation methods chosen Data were analyzed using a Ordinary Least Square method of regression. Where: Yi represents average revenue growth (INTPERF), X1 represents entry mode (MODE), Xn represents three external variables (MUNIFICENCE, VOLATILE, and RISK), and the multiplicative factor represents the interaction between MODE and each of the external variables. The control variables included in the model are size (LOGEMP) and resources (LOGDEBT). It is found that the dummy variables were set for entry mode, “1” for equity entry mode, and “0” for non-equity entry mode. Thus, in the regression analysis, X1 represents only “equity entry mode”. 5. Results & Presentation (15%) It is found that the interpretation of the results for the relationship between the entry mode and the performance outcome represent the equity entry mode and the performance. This equation excludes by the nature of assigned dummy variables, the non-equity mode was not tested in the equation. Therefore, the interpretation of the beta value of the regression results should be the relationship between the equity entry mode and the performance relationships. Thus the value of -0.121 represents that the relationship between the performance outcome and the entry mode of equity mode. In other words, the performance is negatively associated with the equity entry mode. This implies that the non-equity entry mode is associated with the performance outcomes. Read More