Impact of Institutional Environment on the Choice of Entry Mode: Evidence from Chinese Enterprises

Abstract

This paper studied the influence of institutional environment on selection of entry modes for Chinese enterprises’ regarding overseas investment from three dimensions, i.e. regulation mechanism, normalization mechanism and imitation mechanism. Based on a survey of 243 Chinese enterprises with overseas investment and from the selection of establishment mode and ownership mode, this research investigated on the ways these factors influence and also analysis the degree of influence of the key external and internal institutional factors such as governance quality, cultural distance, integration of parent and subsidiary companies and international experience, etc. According to the results obtained for the Chinese enterprises, the regulation mechanism in institutional environment has significant influence on selection of entry mode of overseas investment. The sounder the policies, laws and other formal institutional factors of the host country the more Chinese enterprises tend to select the entry modes of acquisition and wholly owned subsidiary. In respect of normalization mechanism, Chinese enterprises deal with the influence of informal institutional factors including cultural distance mainly through adjustment of ownership mode; the longer the cultural distance between the host country and China the more the Chinese enterprises tend to choose the entry mode of joint venture. In respect of imitation mechanism, the higher the degree of integration of parent and subsidiary companies, the more the enterprises tend to enter the local market through greenfield investment. Different from the situation of transnational enterprises from many developed countries, international experience has no significant influence on Chinese enterprises’ selection of entry mode of overseas investment.