MNEs’ Ownership Structure under Uncertainty: Explanations from TCE and Real Options Logic

Kyeungrae (Kenneth) Oh

doi:10.5539/ijbm.v12n2p67

Abstract

How does an MNE choose its ownership structure when it enters into transition nations where the level of corruption is largely high? This paper examines how uncertainty stemming from corruption affects an MNE’s choice of governance forms using the data of 463 MNEs in 24 transition countries. Drawing on two theoretical perspectives such as TCE and real options logic, this study proposes two sets of competing hypotheses regarding firms’ selection of ownership structure. Results show that TCE predictions have a better explanatory power on the choice of governance forms over those of real options logic as a whole. In particular, this study finds that an MNE is more likely to adopt wholly owned subsidiaries in highly arbitrary environment of corruption whereas they intend to cope with a joint venture form of governance under highly pervasive corruption environment. Consistently, an MNE which has more familiar with corruption tends to adopt a joint venture form of governance.

Highlights

How does the nature of corruption affect multinational firms’ strategic decision on ownership structure when they enter foreign markets in corrupt environments? In the field of international business, economics, and management, substantial attention has been paid to theoretical and empirical investigation on foreign direct investment and sequential decision on entry modes
Drawing upon transaction cost economics and real options logic on the entry strategy of multinational enterprise (MNE), this study examines the appropriate forms of ownership structure under corruption environment by proposing two sets of competing hypotheses predicted by two distinct theories
It implies that the choice between any two ownership structures as alternatives is independent of another choice of alternatives

Summary

Introduction

How does the nature of corruption affect multinational firms’ strategic decision on ownership structure when they enter foreign markets in corrupt environments? In the field of international business, economics, and management, substantial attention has been paid to theoretical and empirical investigation on foreign direct investment and sequential decision on entry modes. Relatively less studies have explored the relationship between corruption and entry modes which firms should subsequently consider once they decide a certain level of foreign direct investment. This study attempts to contribute this line of research by illuminating firms’ heterogeneous features of strategic decision making on their ownership structure under the context of corrupt environments in transition economies where corruption may be conceived to be largely prevalent. By incorporating corruption as a major factor of environmental uncertainty, this study attempts to draw more comprehensive picture for a firm’s decision making on its ownership structure. Drawing from transaction cost economics (TCE) and real option logic, this study sharply contrasts their competing explanations on the notion of uncertainty and its impact on a firm’s choice of entry modes

Methods

Results

Conclusion