A Decision-making Perspective of the International Entry Mode Choice

Abstract

Previous research considers the entry mode decision as a rational and as a single decision. In this study, we draw upon decision making theory to argue that entry mode choice is the product of a boundedly rational, sequential decision making process. In the first stage of the entry mode decision-making process, firms eliminate alternative entry modes which do not possess certain critical attributes while in the second stage, the firms select an acceptable entry mode which is a tradeoff of multiple attributes. We contend that the elimination criteria depend on the type of dominant owners. Therefore, we examine the entry mode decision making process for firms with high levels of family ownership (i.e., family dominant firms) and those with high levels of institutional ownership (i.e., institutionally dominant firms). Specifically, we propose that family dominant firms and institutional dominant firms have different risk profiles that lead to unique entry mode preferences at each stage. That is, higher family ownership leads to the preference for low control, low financial risk entry modes in the first stage. As such, family dominant firms are more likely to eliminate the wholly owned subsidiary in the first stage of the entry mode decision process. Alternatively, institutional investor dominant firms are risk- neutral, so they are more likely to choose high control, high financial risk entry modes. In addition, the tradeoff between control and financial risks is more likely to be considered in the second stage of entry mode decision making process when the counterpart type of owners are involved.