Understanding establishment mode choice of foreign manufacturing firms in Ghana

Abstract

Purpose – The purpose of this paper is to analyse the foreign direct investment (FDI) strategies of manufacturing firms in Ghana using the eclectic model in order to understand how ownership, location and internalization factors impact FDI to developing countries like Ghana. Design/methodology/approach – The authors use a quantitative methodology in order to statistically explore the relationships between dependent and independent variables. The data comes from a sample of 75 multinational enterprises that invested in the manufacturing sector between 1994 and 2008. Findings – The results reveal that large firm size, extensive international experience and large market size lead to the choice of acquisition mode of entry, while high cultural distance, high country risk, high proprietary assets and incentives lead to the choice of greenfield mode in the context of Ghana. Research limitations/implications – The results imply that the different economic, business and legal (locational) conditions of developing countries create different FDI strategies and paths of companies compared to developed markets. Practical implications – Policy makers in developing countries should make efforts to improve market size, the institutional and regulatory environment, as well as the availability of human capital in order to attract FDI. Originality/value – FDI studies have mainly analysed establishment mode strategies of firms in advanced markets. There is an increasing amount of research on FDI in emerging markets but very little on developing countries and African markets. Therefore, this study enables the authors to develop implications for existing theory and generate practical implications for firms and policy makers related to African and developing country markets.