Skip to main content
SpringerLink
Log in

FDI motives, market governance, and ownership choice of MNEs: A study of Malaysia and Thailand from an incomplete contracting perspective

  • Published:
Asia Pacific Journal of Management Aims and scope Submit manuscript

Abstract

The ownership choice between full and shared ownership in MNEs’ foreign affiliates is complex, especially when they confront various institutional conditions. Drawing on the theory of incomplete contracts, we hypothesize and empirically show that the influence of host country institutions on ownership choice arises differentially between market-seeking and resource-seeking affiliates. In particular, we use the relative importance of an MNE’s versus a local partner’s non-contractible investments derived from the theory of incomplete contracts as a primary ownership determinant in explaining these differential effects. Using data from 547 MNE affiliates in Malaysia and Thailand, we demonstrate that MNEs are more likely to choose shared ownership, as compared to full ownership, in both market-seeking and resource-seeking affiliates due to the amplified impact of local idiosyncrasies across all value chain activities. However, we find that in a relatively more institutionally developed environment (i.e., with stronger market governance), this tendency for an MNE to choose shared ownership is reduced in resource-seeking affiliates, whereas the tendency is further strengthened in market-seeking affiliates, consistent with our hypotheses based on the focal theory.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Following previous studies (e.g., Slangen & Beugelsdijk, 2010), we generated the VIFs through OLS regressions, since VIFs are unavailable for logistic regression.

References

  • Agarwal, S., & Ramaswami, S. N. 1992. Choice of foreign market entry mode: Impact of ownership, location and internalization factors. Journal of International Business Studies, 23(1): 1–27.

    Article  Google Scholar 

  • Aghion, P., & Holden, R. 2011. Incomplete contracts and the theory of the firm: What have we learned over the past 25 years?. Journal of Economic Perspectives, 25(2): 181–197.

  • Anand, J., & Delios, A. 1997. Location specificity and the transferability of downstream assets to foreign subsidiaries. Journal of International Business Studies, 28(3): 579–603.

    Article  Google Scholar 

  • Anderson, E., & Gatignon, H. 1986. Modes of foreign entry: A transaction cost analysis and propositions. Journal of International Business Studies, 17(3): 1–26.

  • Ang, J. B. 2008. Determinants of foreign direct investment in malaysia. Journal of Policy Modeling, 30(1): 185–189.

    Article  Google Scholar 

  • Beamish, P. W., & Banks, J. C. 1987. Equity joint ventures and the theory of the multinational enterprise. Journal of International Business Studies, 18(2): 1–16.

    Article  Google Scholar 

  • Biggart, N. W., & Guillén, M. F. 1999. Developing difference: Social organization and the rise of the auto industries of South Korea, Taiwan, Spain, and Argentina. American Sociological Review, 64: 722–747.

    Article  Google Scholar 

  • Brouthers, K. D. 2002. Institutional, cultural and transaction cost influences on entry mode choice and performance. Journal of International Business Studies, 33(2): 203–221.

    Article  Google Scholar 

  • Brouthers, K. D., & Brouthers, L. E. 2003. Why service and manufacturing entry mode choices differ: The influence of transaction cost factors, risk and trust. Journal of Management Studies, 40(5): 1179–1204.

    Article  Google Scholar 

  • Brouthers, K. D., & Hennart, J.-F. 2007. Boundaries of the firm: Insights from international entry mode research. Journal of Management, 33(3): 395–425.

    Article  Google Scholar 

  • Brouthers, L. E., Gao, Y., & McNicol, J. P. 2008. Corruption and market attractiveness influences on different types of FDI. Strategic Management Journal, 29(6): 673–680.

    Article  Google Scholar 

  • Carney, M. 2004. The institutions of industrial restructuring in Southeast Asia. Asia Pacific Journal of Management, 21(1–2): 171–188.

    Article  Google Scholar 

  • Carney, M., & Gedajlovic, E. 2002. The co-evolution of institutional environments and organizational strategies: The rise of family business groups in the ASEAN region. Organization Studies, 23(1): 1–29.

    Article  Google Scholar 

  • Chang, S.-J. 1995. International expansion strategy of Japanese firms: Capability building through sequential entry. Academy of Management Journal, 38(2): 383–407.

  • Chang, S.-J., Van Witteloostuijn, A., & Eden, L. 2010. From the editors: Common method variance in international business research. Journal of International Business Studies, 41(2): 178–184.

    Article  Google Scholar 

  • Chi, T., & Roehl, T. W. 1997. The structuring of interfirm exchanges in business know-how: Evidence from international collaborative ventures. Managerial and Decision Economics, 18(4): 279–294.

    Article  Google Scholar 

  • Cuypers, I. R., & Martin, X. 2010. What makes and what does not make a real option? A study of equity shares in international joint ventures. Journal of International Business Studies, 41(1): 47–69.

    Article  Google Scholar 

  • Delios, A., & Beamish, P. W. 1999. Ownership strategy of japanese firms: Transactional, institutional, and experience influences. Strategic Management Journal, 20(10): 915–933.

    Article  Google Scholar 

  • Delios, A., & Henisz, W. J. 2003. Political hazards, experience, and sequential entry strategies: The international expansion of Japanese firms, 1980–1998. Strategic Management Journal, 24(11): 1153–1164.

    Article  Google Scholar 

  • Deyoung, R., & Nolle, D. E. 1996. Foreign-owned banks in the United States: Earning market share or buying it?. Journal of Money, Credit and Banking, 28(4): 622–636.

    Article  Google Scholar 

  • Dikova, D., & Van Witteloostuijn, A. 2007. Foreign direct investment mode choice: Entry and establishment modes in transition economies. Journal of International Business Studies, 38(6): 1013–1033.

    Article  Google Scholar 

  • Dunning, J. H. 1988. The eclectic paradigm of international production: A restatement and some possible extensions. Journal of International Business Studies, 19(1): 1–31.

    Article  Google Scholar 

  • Dunning, J. H. 1992. Multinational enterprises and the global economy. Wokingham, UK: Addison-Wesley.

  • Dunning, J. H. 1993. Trade, location of economic activity and the multinational enterprise: A search for an eclectic approach. In P. J. Buckley & P. N. Ghauri (Eds.). The internationalization of the firm. Waltham, MA: International Thomson Business Press.

    Google Scholar 

  • Dunning, J. H. 1995. Reappraising the eclectic paradigm in an age of alliance capitalism. Journal of International Business Studies, 26(3): 461–491.

    Article  Google Scholar 

  • Dunning, J. H., & Lundan, S. M. 2008. Multinational enterprises and the global economy. Northamton, MA: Edward Elgar.

  • Eden, L., & Miller, S. R. 2004. Distance matters: Liability of foreignness, institutional distance and ownership strategy. Advances in International Management, 16: 187–221.

    Article  Google Scholar 

  • Erramilli, M. K., & Rao, C. P. 1993. Service firms’ international entry-mode choice: A modified transaction-cost analysis approach. Journal of Marketing, 97(3): 19–38.

    Article  Google Scholar 

  • Estrin, S., Baghdasaryan, D., & Meyer, K. E. 2009. The impact of institutional and human resource distance on international entry strategies. Journal of Management Studies, 46(7): 1171–1196.

    Article  Google Scholar 

  • Flores, R. G., & Aguilera, R. V. 2007. Globalization and location choice: An analysis of us multinational firms in 1980 and 2000. Journal of International Business Studies, 38(7): 1187–1210.

    Article  Google Scholar 

  • Gatignon, H., & Anderson, E. 1988. The multinational corporation’s degree of control over foreign subsidiaries: An empirical test of a transaction cost explanation. Journal of Law, Economics, & Organization, 4(2): 305–336.

    Google Scholar 

  • Gaur, A. S., & Lu, J. W. 2007. Ownership strategies and survival of foreign subsidiaries: Impacts of institutional distance and experience. Journal of Management, 33(1): 84–110.

    Article  Google Scholar 

  • Gersick, C. J. G. 1991. Revolutionary change theories: A multilevel exploration of the punctuated equilibrium paradigm. Academy of Management Review, 16(1): 10–36.

    Google Scholar 

  • Globerman, S., & Shapiro, D. 2003. Governance infrastructure and us foreign direct investment. Journal of International Business Studies, 34(1): 19–39.

    Article  Google Scholar 

  • Gomes-Casseres, B. 1989. Ownership structures of foreign subsidiaries: Theory and evidence. Journal of Economic Behavior & Organization, 11(1): 1–25.

    Article  Google Scholar 

  • Greene, W. H. 2000. Econometric analysis, 4th ed. Upper Saddle River, NJ: Prentice Hall.

    Google Scholar 

  • Grossman, S. J., & Hart, O. D. 1986. The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy, 94(4): 691–719.

    Article  Google Scholar 

  • Hair, J. J. F., Anderson, R. E., Tatham, R. L., & Black, W. C. 1998. Multivariate data analysis. Upper Saddle River, NJ: Prentice Hall.

    Google Scholar 

  • Hart, O., & Moore, J. 1990. Property rights and the nature of the firm. Journal of Political Economy, 98(6): 1119–1158.

    Article  Google Scholar 

  • Henisz, W. J. 2000. The institutional environment for multinational investment. Journal of Law, Economics, and Organization, 16(2): 334–364.

    Article  Google Scholar 

  • Hennart, J.-F. 1991. The transaction costs theory of joint ventures: An empirical study of Japanese subsidiaries in the United States. Management Science, 37(4): 483–497.

    Article  Google Scholar 

  • Hennart, J.-F. 2009. Down with MNE-centric theories! Market entry and expansion as the bundling of MNE and local assets. Journal of International Business Studies, 40(9): 1432–1454.

    Article  Google Scholar 

  • Hill, C. W. L., Hwang, P., & Kim, W. C. 1990. An eclectic theory of the choice of international entry mode. Strategic Management Journal, 11(2): 117–128.

    Article  Google Scholar 

  • Hitt, M. A., Bierman, L., Uhlenbruck, K., & Shimizu, K. 2006. The importance of resources in the internationalization of professional service firms: The good, the bad, and the ugly. Academy of Management Journal, 49(6): 1137–1157.

    Article  Google Scholar 

  • Hoetker, G. 2007. The use of logit and probit models in strategic management research: Critical issues. Strategic Management Journal, 28(4): 331–343.

    Article  Google Scholar 

  • Hymer, S. 1960/1976. The international operations of national firms: A study of direct investment. Boston: MIT Press.

  • Johanson, J., & Vahlne, J.-E. 1977. The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1): 23–32.

    Article  Google Scholar 

  • Johanson, J., & Vahlne, J.-E. 2009. The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. Journal of International Business Studies, 40(9): 1411–1431.

    Article  Google Scholar 

  • Kaufmann, D. 2004. Corruption, governance and security: Challenges for the rich countries and the world. The global competitiveness report. Geneva: World Bank. http://ssrn.com/abstract=605801.

  • Kaufmann, D., Kraay, A., & Mastruzzi, M. 2008. Governance matters VII: Aggregate and individual governance indicators, 1996–2007. World Bank Policy Research Working paper no. 4654, Washington, DC, World Bank.

  • Khanna, T., Palepu, K. G., & Sinha, J. 2005. Strategies that fit emerging markets. Harvard Business Review, 83(6): 63–76.

    Google Scholar 

  • Kim, H., Kim, H., & Hoskisson, R. E. 2010. Does market-oriented institutional change in an emerging economy make business-group-affiliated multinationals perform better? An institution-based view. Journal of International Business Studies, 41(7): 1141–1160.

    Article  Google Scholar 

  • Kostova, T., & Zaheer, S. 1999. Organizational legitimacy under conditions of complexity: The case of the multinational enterprise. Academy of Management Review, 45(1): 215–233.

    Article  Google Scholar 

  • Lafontaine, F., & Slade, M. 2007. Vertical integration and firm boundaries: The evidence. Journal of Economic Literature, 45(3): 629–685.

    Article  Google Scholar 

  • Li, J., Zhou, C., & Zajac, E. J. 2009. Control, collaboration, and productivity in international joint ventures: Theory and evidence. Strategic Management Journal, 30(8): 865–884.

    Article  Google Scholar 

  • Lim, L. Y., & Stern, A. 2002. State power and private profit: The political economy of corruption in southeast asia. Asian-Pacific Economic Literature, 16(2): 18–52.

    Article  Google Scholar 

  • Madhok, A. 1997. Cost, value and foreign market entry mode: The transaction and the firm. Strategic Management Journal, 18(1): 39–61.

    Article  Google Scholar 

  • Makino, S., & Beamish, P. W. 1998. Performance and survival of joint ventures with non-conventional ownership structures. Journal of International Business Studies, 29(4): 797–818.

    Article  Google Scholar 

  • Makino, S., Lau, C.-M., & Yeh, R.-S. 2002. Asset-exploitation versus asset-seeking: Implications for location choice of foreign direct investment from newly industrialized economies. Journal of International Business Studies, 33(3): 403–421.

    Article  Google Scholar 

  • Meyer, K. E. 2001. Institutions, transaction costs, and entry mode choice in Eastern Europe. Journal of International Business Studies, 32(2): 357–367.

    Article  Google Scholar 

  • Meyer, K. E., Estrin, S., Bhaumik, S. K., & Peng, M. W. 2009. Institutions, resources, and entry strategies in emerging economies. Strategic Management Journal, 30(1): 61–80.

    Article  Google Scholar 

  • Nachum, L., & Zaheer, S. 2005. The persistence of distance? The impact of technology on MNE motivations for foreign investment. Strategic Management Journal, 26(8): 747–767.

    Article  Google Scholar 

  • Narula, R., & Dunning, J. H. 2000. Industrial development, globalization and multinational enterprises: New realities for developing countries. Oxford Development Studies, 28(2): 141–167.

    Article  Google Scholar 

  • North, D. C. 1990. Institutions, institutional change and economic performance. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  • Oxley, J. E. 1999. Institutional environment and the mechanisms of governance: The impact of intellectual property protection on the structure of inter-firm alliances. Journal of Economic Behavior and Organization, 38(3): 283–309.

    Article  Google Scholar 

  • Peng, M. W. 2003. Institutional transitions and strategic choices. Academy of Management Review, 28(2): 275–296.

    Google Scholar 

  • Peng, M. W., & Heath, P. S. 1996. The growth of the firm in planned economies in transition: Institutions, organizations, and strategic choice. Academy of Management Review, 21(2): 492–528.

    Google Scholar 

  • Podsakoff, P. M., MacKenzie, S. B., Lee, J.-Y., & Podsakoff, N. P. 2003. Common method biases in behavioral research: A critical review of the literature and recommended remedies. Journal of Applied Psychology, 88(5): 879.

    Article  Google Scholar 

  • Porter, M. E., & Schwab, K. 2008. The global competitiveness report 2008–2009. Geneva: World Economic Forum.

  • Reinhardt, N. 2000. Back to basics in Malaysia and Thailand: The role of resource-based exports in their export-led growth. World Development, 28(1): 57–77.

  • Saliola, F., & Zanfei, A. 2009. Multinational firms, global value chains and the organization of knowledge transfer. Research Policy, 38: 369–381.

    Article  Google Scholar 

  • Schwens, C., Eiche, J., & Kabst, R. 2011. The moderating impact of informal institutional distance and formal institutional risk on SME entry mode choice. Journal of Management Studies, 48(2): 330–351.

    Google Scholar 

  • Scott, W. R. 2001. Institutions and organizations, 2nd ed. Thousand Oaks: Sage.

  • Slangen, A. H. L., & Beugelsdijk, S. 2010. The impact of institutional hazards on foreign multinational activity: A contingency perspective. Journal of International Business Studies, 41(6): 980–995.

    Article  Google Scholar 

  • UNCTAD. 2005. Transnational corporations and the internationalization of R&D. In United Nations. (Ed.). World Investment Report. New York and Geneva: UN.

  • Whinston, M. D. 2001. Assessing the property rights and transaction-cost theories of firm scope. American Economic Review, 91(2): 184–188.

    Article  Google Scholar 

  • Whinston, M. D. 2003. On the transaction cost determinants of vertical integration. Journal of Law, Economics, and Organization, 19(1): 1–23.

    Article  Google Scholar 

  • Wiersema, M. F., & Bowen, H. P. 2009. The use of limited dependent variable techniques in strategy research: Issues and methods. Strategic Management Journal, 30(6): 679–692.

    Article  Google Scholar 

  • Williamson, O. E. 1983. Credible commitments: Using hostages to support exchange. American Economic Review, 73(4): 519–540.

  • Williamson, O. E. 2010. Transaction cost economics: The natural progression. Journal of Retailing, 86(3): 215–226.

    Article  Google Scholar 

  • Woodruff, C. 2002. Non-contractible investments and vertical integration in the mexican footwear industry. International Journal of Industrial Organization, 20(8): 1197–1224.

    Article  Google Scholar 

  • Xu, D., & Shenkar, O. 2002. Institutional distance and the multinational enterprise. Academy of Management Review, 27(4): 608–618.

  • Yiu, D., & Makino, S. 2002. The choice between joint venture and wholly owned subsidiary: An institutional perspective. Organization Science, 13(6): 667–683.

    Article  Google Scholar 

  • Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38(2): 341–363.

    Article  Google Scholar 

  • Zaheer, S. 2002. The liability of foreignness, redux. A commentary. Journal of International Management, 8(3): 351–358.

    Article  Google Scholar 

  • Zaheer, S., & Mosakowski, E. 1997. The dynamics of the liability of foreignness: A global study of survival in financial services. Strategic Management Journal, 18(6): 439–464.

    Article  Google Scholar 

  • Zajac, E. J., & Olsen, C. P. 1993. From transaction cost to transactional value analysis: Implications for the study of interorganizational strategies. Journal of Management Studies, 30(1): 131–145.

    Article  Google Scholar 

  • Zhao, H., Luo, Y., & Suh, T. 2004. Transaction cost determinants and ownership-based entry mode choice: A meta-analytical review. Journal of International Business Studies, 35(6): 524–544.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Management, John Molson School of Business, Concordia University, 1455, de Maisonneuve West, Montréal, Québec, Canada, H3G 1M8

    Jisun Yu

  2. Organizations, Strategy, and International Management, Jindal School of Management, University of Texas at Dallas, P.O. Box 830688, SM43, Richardson, TX, 75080, USA

    Seung-Hyun Lee

  3. Desautels Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montréal, Québec, Canada, H3A 1G5

    Kunsoo Han

Authors
  1. Jisun Yu
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Seung-Hyun Lee
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Kunsoo Han
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Seung-Hyun Lee.

Appendices

Appendix 1

Table 4 The Number of Affiliates with shared ownership by host country
Full size table

Appendix 2

Table 5 Industries included
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Yu, J., Lee, SH. & Han, K. FDI motives, market governance, and ownership choice of MNEs: A study of Malaysia and Thailand from an incomplete contracting perspective. Asia Pac J Manag 32, 335–362 (2015). https://doi.org/10.1007/s10490-015-9412-5

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10490-015-9412-5

Keywords

Search

Navigation