Performance Shortfall, Executive Social Relations and the Choice Between Shared and Full Control for New Overseas Entries

Abstract

ABSTRACT Integrating the behavioral theory of the firm and social capital theory, this study examines how performance shortfalls and executive social relations jointly affect firms’ trade-offs between the shared-control entry mode and full-control entry mode. This study argues that, for new overseas entries, performance shortfalls cause firms to prefer the shared-control entry mode. This is attributed to the fact that performance shortfalls increase firms’ resource constraints and reduce their information search scope. This, in turn, leads decision-makers to prefer the shared-control entry mode, because that mode requires fewer resources, less information collection, and lower processing capabilities. In addition, guided by social capital theory, this study also finds that the positive effect of performance shortfalls on the shared-control entry mode is weakened when executives have social relations, either overseas or in banks. Further analysis shows that, compared with less-developed economies, firms facing a performance shortfall are more inclined to adopt the shared-control mode to enter developed economies. By clarifying the joint effect of performance shortfalls and executive social relations on firms’ overseas equity entry modes, this study deepens the understanding of firms’ choices of overseas equity entry modes.