Greenfield or Acquisition Entry? The Roles of Policy Uncertainty and MNE Legitimacy in Host Countries

Abstract

Political constraints shortages in host countries facilitate policy changes and, hence, imply policy uncertainty for multinational enterprises (MNEs). I examine how such uncertainty influences MNEs' choice between wholly owned greenfield and full acquisition entry by combining real options and MNE legitimacy theory. I argue that acquisitions require MNEs to buy the needed external assets immediately upon entry while greenfields allow them to buy these assets sequentially, causing greenfields to temporarily have a real options advantage over acquisitions if policy uncertainty resolves unfavorably after the initiation of an entry. I expect the value of this advantage and, hence, the likelihood of greenfield entry, to increase with the level of policy uncertainty. I also expect this increase to be smaller for subsidiaries with greater expected legitimacy, since greater subsidiary legitimacy reduces the chance of adverse shifts in policy preferences and, therefore, the threat posed by a given political constraints shortage. I find support for most of these expectations in a sample of 172 foreign entries by Dutch MNEs, measuring policy uncertainty by Henisz's reverse‐coded POLCON index and a subsidiary's expected legitimacy by its planned autonomy level, its parent's host country experience, its industry's expected performance, and its parent country's religious closeness. I conclude that the POLCON index is an incomplete indicator of the policy threats faced by MNEs because it does not account for subsidiaries' legitimacy.