The Effect of the Target Country's Legal Environment on the Choice of Entry Mode

Abstract

When firms wish to enter a foreign country, they can set up joint ventures (JVs) abroad or acquire foreign companies. This study shows that legal environments of target markets and cultural distance determine entry mode decisions. Furthermore, this study presents a new approach to dealing with target markets by focusing on the legal environments of target markets. Friendly local government business attitudes, favorable local law enforcement and good local accounting standards in target markets make acquisitions more likely than JVs. The impact of target legal environments and cultural distance is analyzed using matched sample and binomial logistic techniques based on a sample of international JV and acquisition transactions between 1990 and 2002 from 48 countries. The national variety of expanding and target firms enables us to gain new insights with regard to the 'cultural distance paradox'. The evidence suggests that the effect of cultural distance on entry modes varies among regions. In transactions, where both firms are either Asian or non-Asian, culturally distant firms tend toward JVs. In contrast, when Asian firms invest abroad, culturally distant firms tend toward acquisitions. When non-Asian firms enter the Asian market, cultural distance does not seem to matter. This study also confirms that firms from different industries are more likely to form JVs, while firms from similar industries are more likely to be fully integrated.