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Prelims

Laura Vanoli Parietti (University of Fribourg, Switzerland)

Internationalization of Firms: The Role of Institutional Distance on Location and Entry mode

ISBN: 978-1-78714-135-3, eISBN: 978-1-78714-134-6

Publication date: 14 February 2017

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Parietti, L.V. (2017), "Prelims", Internationalization of Firms: The Role of Institutional Distance on Location and Entry mode, Emerald Publishing Limited, Leeds, pp. i-xxxii. https://doi.org/10.1108/978-1-78714-134-320171009

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Internationalization of Firms: The Role of Institutional Distance on Location and Entry Mode

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Internationalization of Firms: The Role of Institutional Distance on Location and Entry mode

By

Laura Vanoli Parietti

University of Fribourg, Switzerland

United Kingdom – North America – Japan – India – Malaysia – China

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Emerald Publishing Limited

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Dedication

To my husband Simone and my children

Acknowledgments

Immeasurable appreciation and deepest gratitude for the help and support are extended to the following persons who in one way or another have contributed in making this study possible.

Firstly, I would like to express my sincere gratitude to my advisors Prof. Dr. Philippe Gugler and Prof. Dr. Laurent Donzé for their continuous support during my research, for their insightful comments and encouragement, but also for the hard question which incentivised me to widen my research from various perspectives. Their guidance helped me in all the time of research and writing of this book. Their complementarity allowed me to benefit from the recognized background of Prof. Dr. Gugler in International Business theories and from the extended knowledge of Prof. Dr. Donzé in statistical and econometric methods.

Besides my advisors, I would like to thank the president of the thesis jury, Prof. Dr. Sergio Rossi, for the time he spent to read and discuss my study.

My sincere thanks also goes to Dr. Spyros Arvanitis and his assistant Andrin Spescha from the KOF Institute, ETH Zurich, who provided me an opportunity to conduct a survey designed especially for my thesis and who gave access to the research facilities.

I am also indebted to the members of the Board of Trustees of the Foundation for the 25th anniversary of the Swiss Bank Corporation at the Faculty of Economics and Social Sciences of the University of Fribourg, for their award of a grant in 2016.

I also thank my colleagues from the Chair of Economic and Social Politics, Xavier and Michael, for the knowledge sharing and helpful discussions.

A special thanks goes to my family: my parents and my brother for supporting and encouraging me throughout writing this book. Last but not least, I would like to express appreciation to my beloved husband Simone for his unconditional support, for the stimulating discussions and for the sleepless nights we were working together. A special thanks to my children, Emma and Teo, who made my days more beautiful and gave me the strength to persevere, even in moments of uncertainty.

List of Figures

Introduction
Figure 1. REM Model.
Figure 2. Share of Swiss OFDI Stocks
Chapter 1
Figure 1.1. Frequency of Informal ID Measures
Figure 1.2. Cluster Dendrograms of Informal ID between Switzerland and Host Countries
Figure 1.3. Maps of Informal ID between Switzerland and Host Countries
Figure 1.4. Frequency of Formal ID Measures, 2013
Figure 1.5. Cluster Dendrograms of Formal ID between Switzerland and Host Countries, 2013
Figure 1.6. Maps of Formal ID between Switzerland and Host Countries, 2013
Chapter 2
Figure 2.1. Representation of Business Network Embeddedness.
Figure 2.2. Representation of Cluster Embeddedness.
Figure 2.3. Hypotheses on the Relationship ID – Location Choice
Figure 2.4. Hypotheses on the Relationship ID – Entry Mode (in Terms of Establishment and Ownership Choice)
Chapter 4
Figure 4.1. Interaction Effects of International Experience on the Probability to Choose Greenfield as an Establishment Mode
Figure 4.2. Interaction Effects of Host Country-Specific Experience on the Probability to Choose Greenfield as an Establishment Mode
Figure 4.3. Interaction Effects of Acquisition Experience on the Probability to Choose Greenfield as an Establishment Mode
Figure 4.4. Interaction Effects of Greenfield Experience on the Probability to Choose Greenfield as an Establishment Mode
Figure 4.5. Interaction Effects of Embeddedness in Business Networks on the Probability to Choose Greenfield as an Establishment Mode
Figure 4.6. Interaction Effects of Embeddedness in Clusters on the Probability to Choose Greenfield as an Establishment Mode
Figure 4.7. Interaction Effects of International Experience on the Probability to Choose Partial Ownership
Figure 4.8. Interaction Effects of Host Country-Specific Experience on the Probability to Choose Partial Ownership
Figure 4.9. Interaction Effects of Embeddedness in Business Networks on the Probability to Choose Partial Ownership
Figure 4.10. Interaction Effects of Embeddedness in Clusters on the Probability to Choose Partial Ownership

List of Tables

Introduction
Table 1 Literature Review on ID: Research Fields.
Table 2 Top 10 Home Countries by Outward FDI Stocks (2014).
Table 3 Definition of Key Terms.
Chapter 1
Table 1.1 Scott’s Conceptualization of Institutions.
Table 1.2 Descriptive Statistics of Hofstede Dataset (Status: January 2015).
Table 1.3 Correlation Matrix of Hofstede’s Dimensions (Status: January 2015).
Table 1.4 Descriptive Statistics of WGI, 2013
Table 1.5 Correlation Matrix between WGI, 2013.
Table 1.6 Properties of Different Distance Measures.
Table 1.7 PCA/FA results for Hofstede’s Dimensions
Table 1.8 Descriptive Statistics of Different Informal ID Measures.
Table 1.9 Comparison of Hofstede’s Scores between Switzerland, Germany, and France (Status: January 2015).
Table 1.10 PCA/FA Results for WGI, 2013.
Table 1.11 Descriptive Statistics of Different Formal ID Measures, 2013.
Chapter 2
Table 2.1 Domestic Density Index of Selected Swiss Firms, 2014.
Table 2.2 ID, LOF, and Internationalization.
Table 2.3 The Network Approach of Internationalization.
Table 2.4 Pros and Cons of Establishment Modes.
Table 2.5 ID, Host Country Institutional Uncertainty, and Related Firm’s Strategies.
Chapter 3
Table 3.1 Description of Variables.
Table 3.2 Descriptive Statistics of Swiss OFDI Stocks (in MM USD), 2007–2012.
Table 3.3 Percent Share of Swiss OFDI Stocks, Manufacturing, and Services, 2007–2012.
Table 3.4 Percent Share of Swiss OFDI Stocks, by World Region, 2007–2012.
Table 3.5 Results for Swiss OFDI Determinants, Considering Aggregate Measure of ID, RE Estimations.
Table 3.6 Results for Swiss OFDI Determinants, Considering Individual Dimensions of ID, RE Estimations.
Table 3.7 Overview of the Main Results for Swiss OFDI Location Determinants – Aggregate Informal and Formal ID.
Table 3.8 Overview of the Main Results for Swiss OFDI Location Determinants – Individual Informal Distances.
Chapter 4
Table 4.1 KOF Survey 2014 – Respondent Sample by Sector and Firm Size.
Table 4.2 Host Country Where Most of the Projects Are Undertaken over the Period 2010–2014.
Table 4.3 Number of Projects abroad over the Period 2010–2014, by Sector and Firm Size.
Table 4.4 Profitability of Investments over the Period 2010–2014, by Sector and Firm Size.
Table 4.5 Entry Date of the Firm’s Largest Investment, by Sector and Firm Size (% Respondents).
Table 4.6 First Presence abroad, by Sector and Firm Size (% Respondents).
Table 4.7 Host Country Where Largest FDI Is Undertaken.
Table 4.8 Motivations of the Largest FDI, by Sector and Firm Size.
Table 4.9 Level of Experience at the Entry in the Host Country, by Sector and Firm Size.
Table 4.10 Established Business Relations in the Host Country before the Largest FDI.
Table 4.11 Types of Established Business Relations, by Sector and Firm Size.
Table 4.12 Largest FDI Took Place in a Cluster.
Table 4.13 Importance of Motivations to Invest in a Cluster.
Table 4.14 Importance of the Presence of Firms in Related Field on the Location Choice, by Sector and Firm Size.
Table 4.15 Entry Mode of the Largest FDI, by Sector and Firm Size (% Respondents).
Table 4.16 Importance of Similar Practices by Competitors in the Entry Mode Choice, by Sector and Firm Size.
Table 4.17 Description of Variables for Establishment and Ownership Determinants.
Table 4.18 Average Marginal Effects on Establishment Choice.
Table 4.19 Goodness-of-Fit Measures for Establishment Choice.
Table 4.20 Average Marginal Effects on Ownership Choice.
Table 4.21 Goodness-of-Fit Measures for Ownership Choice.
Table 4.22 Overview of the Main Results for Swiss Entry Mode Choice.
Appendix A
Table A.1 Correlation Matrix of Variables.
Table A.2 Results for Swiss OFDI Determinants, Total Sample with Alternative ID Measures, RE Estimations.
Table A.3 Results for Swiss OFDI determinants, Manufacturing sample with alternative ID measures, RE estimations
Table A.4 Results for Swiss OFDI determinants, Services sample with alternative ID measures, RE estimations
Appendix B
Table B.1 Correlation Matrix of Variables for Firm-Level Analysis.
Table B.2 Results for Determinants of Establishment Choice of Swiss Firms.
Table B.3 Results for Determinants of Ownership Choice of Swiss Firms.
Table B.4 Results for Determinants of Interrelated Choice (Ownership and Establishment) of Swiss Firms, Bivariate Probit Estimations.

List of Abbreviations

ED Euclidean Distance
FA Factor Analysis
(O)FDI (Outward) Foreign Direct Investment
FE Fixed Effect model
GCR Global Competitiveness Report
GLOBE Global Leadership and Organizational Behavior Effectiveness
IB International Business
ICRG Institutional Country Risk Guide
ID Institutional Distance
IMF International Monetary Fund
JV Joint Venture
KOF Konjunkturforschungsstelle (attached to ETH Zurich)
K&S Kogut and Singh (1988)
KS Kogut & Singh Distance
LOF Liability of Foreignness
MD Mahalanobis Distance
MNE Multinational Enterprise
OECD Organization for Economic Co-operation and Development
OLI Ownership-Location-Internalization framework developed by Dunning (1981)
PCA Principal Component Analysis
POLS Pooled Ordinary Least Squares
RE Random Effect model
SME Small and Medium Enterprise
SNB Swiss National Bank
UNCTAD United Nations Conference on Trade and Development
WCY World Competitiveness Yearbook
WGI World Governance Indicators
WOS Wholly-owned subsidiary

Introduction

Study Background

As the world becomes more and more globalized, distance separating countries seems to disappear (Cairncross, 1997; Friedman, 2005; O‘Brien, 1992). According to the International Monetary Fund (IMF), globalization can be defined as “the increasing integration of economies around the world, particularly through the movement of goods, services, and capital across borders” (IMF, 2008, p. 2). IMF (2008) to add: “globalization implies that information and knowledge is dispersed and shared” (p. 2). Some scholars consider that globalization has led to the “death of distance” (Cairncross, 1997) or to the “end of geography" (O‘Brien, 1992). Friedman (2005), in his book, uses the expression “the world is flat" that reflects the erasure of national borders and the full integration of world economies. In opposition to this view, some reputed scholars note that foreign direct investments (FDI) are primarily undertaken in host regions geographically and institutionally closer to the home country (Cantwell, 2009; Rugman & Oh, 2013). It follows that countries are more regionally integrated than globally integrated (Rugman & Verbeke, 2007). In his book “World 3.0: Global Prosperity and How to Achieve It,” Ghemawat (2011) considers that the world is “semiglobalized": borders, differences, and distances still matter. Ghemawat suggests that the world can be described neither as not integrated nor as fully integrated. In the DHL Global Connectedness Index 2014, Ghemawat and Altman (2014) affirms that “the levels of globalization are much lower than the levels one would expect to see if borders and distance had ceased to matter. They are also significantly lower than most people’s intuitions” (p. 13). Thence, distances still matter in the internationalization process of firms.

As noted by Nachum and Zaheer (2005), “distance is fundamental in international business (IB) theory, and implicitly or explicitly occupies a central position in all its subfields” (p. 747). Distance between two countries is a multidimensional concept, including not only a geographical dimension but also other dimensions related to the culture, the administrative, political, and economic aspects as shown by Ghemawat (2001) and its “CAGE” framework, as well as by Berry, Guillen, and Zhou (2010) and their nine dimensions of cross-national distance. In the last decade, Van Tulder (2010) notes that the research tends to be oriented toward the institutional and governance distance between countries. Many scholars have emphasized the role of institutions in the internationalization process of firms (Cantwell, Dunning, & Lundan, 2010; Dunning & Lundan, 2008; Van Hoorn, & Maseland, 2016). Recent articles in IB analyze institutions as a factor impacting FDI, especially from emerging countries, 1 whereas others focus on the role of institutions in the foreign entry mode choice. 2 Culture, that can be considered as an informal institution, is also widely analyzed in recent IB papers. 3 As discussed, distance and institutions play an important role in IB. Thus, this book focuses more precisely on an aggregation of these two fundamental concepts, namely institutional distance (ID). A concise literature review on ID highlights different research fields in IB (see Table 1). The main research fields focus on the analysis of the relationship between ID and FDI location choice, as well as ID and entry modes. However, these studies report several weaknesses. The diversity of conceptualization and operationalization of ID leads to mixed results. Additionally, the studies in entry mode primarily focus on the ownership mode. Solely few studies investigate the relationship between institutional distance and establishment mode. A majority of studies investigate the effect of ID on location and entry mode choices for the manufacturing sector, neglecting the effect for the services sector, also noted by Morschett, Schramm-Klein, and Swoboda (2010). Moreover, based on a meta-analysis of 72 studies on entry mode choice, Morschett et al. (2010) suggest to “investigate the combined effect of different variables based on a multi-theoretical framework” (p. 72). For example, in a recent paper, Shaver (2013) suggests to investigate more deeply to what extent past entry mode choices can impact present and future entry mode choices. This study attempts to fill in the gaps found in the literature, notably: to clearly argue the choice of ID measures, to distinguish between determinants of location and entry mode choice in manufacturing and services sectors, to consider the effect of ID on entry mode not only in terms of ownership choice but also in terms of establishment choice, and finally to empirically integrate the effects of variables based on different theoretical streams (especially organizational learning and network/cluster approaches).

Table 1:

Literature Review on ID: Research Fields.
Research fields Period Home Host Sector ID Effect
Informal Formal
Legitimacy
Rottig and Reus (2008) 2000–2005 Various US nd −* −*
Local isomorphism
Salomon and Wu (2012) 1978–2006 Various US Banks +* +*
FDI location choice
Trevino and Mixon (2004) 1988–1999 Various Latin America nd −*
Du (2009) 1980–2003 Japan Various Man-Serv −*
Seyoum (2009) 2002 Various Various nd − −*
Wu (2009) 1956–2006 Various US Banks −* −*
Pogrebnyakov and Maitland (2011) 1995–2007 Various Various Serv −* +
Aleksynska and Havrylchyk (2013) 1996–2007 Various Various nd −*
Cezar and Escobar (2015) 2004–2009 Various Various nd −*
Kuncic and Jaklic (2013) 1990–2010 Various Various nd −*
Choi, Lee, and Shoham (2016) 1981–2008 Various US nd +* Mixed
Entry mode choice
(1) Ownership (partial)
Yiu and Makino (2002) Japan Various Man +* +*
Xu, Pan, and Beamish (2004) 1996 Japan Various nd +* +*
Demirbag, Glaister, and Tatoglu (2007) as of 2003 Various Turkey Man-Serv +*
Kittilaksanawong (2009) 2000–2007 Taiwan Various Man Mixed Mixed
Arslan and Larimo (2010) 1990–2007 Finland Various nd −* +
Ando (2012) 2008 Japan Various Man +* +*
Chang, Kao, Kuo, and Chiu (2012) 1999–2008 Japan Various Man-Serv −* −*
Ilhan Nas (2012) 1995–2003 Various Turkey Man-Serv +* +*
Elango, Lahiri, and Kundu (2013) 2001–2008 Various BRIC nd + +*
Owens, Palmer, and Zueva-Owens (2013) UK Various Man + +
De Beule, Elia, and Piscitello (2014) 2001–2010 Various Italy Man −*
(2) Establishment (Greenfield)
Ionascu, Meyer and Erstin (2004) 1990–2000 Emerging countries Various Man −* +*
Estrin, Baghdasaryan, and Meyer (2009) 1990–2000 Various Emerging countries Man-Serv +* +*
Arslan and Larimo (2011) 1990–2006 Finland Emerging countries Man +* −*
(3) Completion of acquisitions
Dikova, Sahib, and van Witteloostuijn (2010) 1981–2001 Various Various Serv −* −*
Meyer, Ding, Li, and Zhang (2011) 1982–2009 China Various nd −*
Reis, Ferreira, and Santos (2013) Conceptual − −
Results of FDI
(1) Integration
Parkhe (2003) Conceptual − −
Mtar (2010) France UK Man Mixed Mixed
Li, Jiang, and Shen (2016) Survey China Various Man-Serv +* +*
(2) Subsidiary performance
Pattnaik and Choe (2007) Korea Various Man −* −*
(3) R&D / Product innovations
Aguilera-Caracuel, Aragón-Correa, Hurtado-Torres, and Rugman (2012) Various Various Man −*
Anón Higón & Manjón Antolín (2012) 2002–2006 UK Various −* −*
Van Den Waeyenberg and Hens (2012) Case studies Holland Ghana Man − −
Malik (2013) 1994–2005 Various Various Man Mixed Mixed
Wu (2013) China Various Man +* +*

Notes: Sector can be either manufacturing (Man) or services (Serv). “nd” means that no differentiation between sectors has been taken into account. “+” means that the authors find a positive effect of ID, “−” a negative effect and “*” means that the effect is statistically significant at least at 10% level.

The analysis of the location and entry mode choice is not arbitrary. It is based on the REM model developed by Liuhto and Jumpponen (2003) and composed of three elements: R for reason to internationalize, E for environmental choice, and M for modal choice. The three questions underlying these elements are why, where, and how firms internationalize, as shown in Figure 1. As noted by Liuhto and Jumpponen (2003), the REM model is a “simplistic theoretical tool for the analysis of internationalization” (p. 23). In fact, it omits the what firms internationalize. This question refers to the value chain activities (i.e., inbound logistics, operations, outbound logistics, marketing and sales, and service) (Porter, 2008, p. 75). However, this aspect cannot be explained theoretically by institutional distance, the central variable of this study. Thus, this book will focuses on the impact of institutional distance on the two strategic decisions of location and entry mode, as in Xu and Shenkar (2002) – other determinants (e.g., the reasons to invest abroad) are considered as control variables.

Figure 1. REM Model.

Figure 1.

REM Model.

In this context, the case of Switzerland is particularly relevant to analyze. First, Switzerland is listed in the top 20 home economies by outward FDI flows (UNCTAD, 2015b, p. 8). Its outward FDI stocks in 2014 amount to USD 1130614.7 millions (UNCTAD, 2015a), giving it a leading position compared to other world economies (see Table 2). UNCTAD (2004) proposes to introduce the Outward FDI performance index defined as “the world share of a country’s outward FDI as a ratio of its share in world GDP” (p. 16). Over the period 2010–2014, Switzerland reports a mean value of 5.93, listed in the top 20 of the OFDI performance index, just below Singapore (mean value: 6.79). 4 Switzerland exhibits a high OFDI performance compared to other developed countries.

Table 2:

Top 10 Home Countries by Outward FDI Stocks (2014).
Rank Country OFDI Stocks (USDmio)
1. United States 6318640
2. United Kingdom 1584146.64
3. Germany 1583279.407
4. China, Hong Kong SAR 1459947.392
5. France 1279089.348
6. Japan 1193136.605
7. Switzerland 1130614.7
8. Netherlands 985255.6277
9. China 729584.67
10. Canada 714554.703

Source: Author’s calculations based on UNCTADStat database (UNCTAD, 2015a).

Second, As we can see in Figure 2a, its outward FDI position indicates that Switzerland invested and still invests massively within its home region (i.e., European Union; EU). Its OFDI stocks in EU amount to nearly 50% of its overall OFDI stocks. This percentage has not changed significantly over the period 2005–2014. This study aims to understand whether institutional distance can be a significant factor explaining the regionalization of Swiss OFDI. Recent studies on Swiss OFDI focus primarily on OLI determinants (i.e., ownership, location, and internalization) to attempt to explain this trend (Arvanitis, Hollenstein, Ley, & Stucki, 2011; Arvanitis, Hollenstein, & Stucki, 2012).

Figure 2. Share of Swiss OFDI Stocks. (a) By World Region. (b) By Sector. Source: Author’s elaboration based on Swiss National Bank (2016).

Figure 2.

Share of Swiss OFDI Stocks. (a) By World Region. (b) By Sector. Source: Author’s elaboration based on Swiss National Bank (2016).

Finally, Switzerland is also singular compared to other developed economies in terms of sectoral composition. In fact, an extensive part of its activities is services-based. This is also reflected in the sectoral composition of its outward FDI stocks (see Figure 2b). Most of the theories on internationalization focus on the determinants affecting the foreign production (i.e., primarily the industry/manufacturing sector). It would be interesting to analyze to what extent these determinants can explain OFDI in the services sector. Moreover, as reported by the Swiss Statistics Office in 2012, 66.1% of the total number of enterprises are microenterprises (fewer than 2 employees), 32.3% have from 2 to 49 employees, 1.3% have from 50 to 249 employees, and the rest (more or less 0.3%) have more than 250 employees and are considered as big firms. Big firms with a high level of internationalization (e.g., Nestle, ABB) contribute to a large extent to the Swiss OFDI stocks. However, small and medium enterprises (SMEs) are also involved in the internationalization process. Theoretically, the firm size differences can also impact the strategic behavior of internationalization. It would be interesting to test it empirically using the Swiss case.

This book contributes to the controversial debate about globalization and full integration of the world economies, giving evidence that institutional distance is still a new topic and matters in the internationalization process of Swiss firms. The structure of the book will be described in the next section.

Book Structure

The book is divided in four main chapters. In the following, the purpose and the conclusions of each chapter will be discussed to give the reader an overview of the contents. The thread throughout the book is “institutional distance.” The book has as its main objectives to answer the following questions:

  • How can we define and measure “institutional distance”?

  • How can “institutional distance” impact FDI location and entry mode choices? – Set of general theoretical hypotheses

  • Is “institutional distance” relevant in FDI location and entry mode choices of Swiss firms? – Empirical analysis specific to Switzerland

Chapter 1 presents a review of the different conceptualizations and measurements of ID used in previous IB studies. To avoid overlaps, this book will be based on North’s conceptualization between informal and formal ID (North, 1990). It also aims to calculate ID using different methods and compare their statistical properties. Based on these calculations, the institutional distance of Switzerland with others countries is illustrated. With respect to the informal ID, Switzerland is relatively similar to developed countries (i.e., European Union, North America, Australia, New Zealand, Japan) and relatively dissimilar to developing countries (i.e., Russia, China, India), as expected. With respect to the formal ID, Switzerland is very similar to developed countries (i.e., small formal ID) and very dissimilar to developing countries (i.e., large formal ID). Differences on informal and formal ID between Switzerland and other countries can potentially be relevant in FDI location and entry mode choices. 5

Chapter 2 posits the theoretical foundations of the relation between the institutional distance and the internationalization strategies of firms in terms of location and entry mode, primarily based on the concept of “liability of foreignness” (LOF) developed by Zaheer (1995). Due to the costs of entry in a foreign country, firms can be reluctant to undertake FDI in this specific foreign country (Kostova, 1997). ID, considered as one of the major causes of these costs, can impede FDI in particular locations (Eden & Miller, 2004; Gaur, Kumar, & Sarathy, 2011). However, institutional quality of the host country and firm-specific advantages of investing firms can reduce the negative impact of ID on FDI (Globerman & Shapiro, 2002; Ramachandran & Pant, 2010). We consider experience and network/cluster embeddedness as determinant firm-specific advantages that enhance learning in a firm. Based on these theoretical considerations, we posit a set of hypotheses tested in Chapters 3 and 4.

Chapter 3 tests the impact of the institutional distance on Swiss FDI location at a country-level using aggregate data from the Swiss National Bank (SNB) over the period 2007–2012. We consider a log-linear version of a gravity model estimated through fixed effect model (FE), random effect model (RE), and pooled ordinary least squares (OLS). The gravity model is estimated for the total sample and for two sectoral subsamples (i.e., manufacturing and services) to account for possible differences in strategic behaviors between manufacturing and services firms. For the total sample, the results indicate that informal ID impacts negatively and significantly the Swiss FDI location choice, whereas the coefficient for formal ID is negative but not statistically different from zero. For the services sample, informal and formal ID have a negative and significant impact on Swiss FDI location choice, institutional quality offsetting the negative formal ID effect. For the manufacturing sample, neither informal ID nor formal ID seem to have an effect on the Swiss FDI location choice, but institutional quality impacts positively and significantly the location choice. Irrespective to the sample considered, the findings show some significantly determinant control variables in the Swiss FDI location choice: the gross domestic product (GDP) of the home and host countries, the geographical distance, and the host country openness to FDI.

Chapter 4 is based on a survey on internationalization of Swiss firms undertaken at the end of 2014 in collaboration with KOF Institute, Zurich. Questionnaires were sent to 545 firms and 187 filled-out questionnaires were received (response rate: 34.31%). The purpose of this survey was to determine at a firm-level the motivations of location and entry mode choice and assess the role of experience and network/cluster embeddedness. The chapter is divided into two parts. The first part includes a descriptive analysis of the responses illustrating the general trends observed on Swiss firms’ internationalization. The second part deepens the analysis at an econometric level. The responses are transformed into variables and used as independent variables to explain the entry mode choice in terms of establishment and ownership. The equations are estimated through logit and probit models. For establishment choice, the findings indicate that formal ID decreases the probability to invest through greenfields and informal ID has no significant impact. For ownership choice, the results show that formal ID decreases the probability to invest through partial ownership, whereas informal ID increases this probability. The motivations, related to the seeking of specific intangible or tangible assets, increase the probability to invest through acquisitions and partial ownership.

Definition of Key Terms

This section provides a definition of the essential terms necessary to clearly understand the analysis. Table 3 lists these terms and gives a definition based on reliable sources.

Table 3:

Definition of Key Terms.
Key Term Definition
FDI Foreign Direct Investment (FDI) are defined by OECD as: “a category of cross-border investment made by a resident entity in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor” (OECD, 2008b, p. 22). As underlined by the OECD report (2008), the main motivation behind this type of investments is primarily to obtain a significant influence over the direct investment enterprise, particularly over its management. Hence, (OECD, 2008b, p. 23) considers as a “direct investor an entity that owns at least 10% of the voting power of the enterprise, reflecting the investor’s influence over the management of the direct investment enterprise.” However, this threshold is defined arbitrarily and it does not mean that 10% ownership always carries significant influence or, conversely, that less than 10% ownership implies no control in the invested firm.
MNE “A multinational enterprise (MNE) is an enterprise that engages in FDI and owns or, in some way, controls value-added activities in more than one country” (Dunning & Lundan, 2008, p. 3).
ID Institutional distance (ID) is defined as “the similarity or dissimilarity between two countries in terms of institutions” (Kostova, 1996).
LOF Liability of foreignness (LOF) is defined as “the costs of doing business abroad that result in a competitive disadvantage for an MNE subunit”(Zaheer, 1995, p. 342).
Organizational legitimacy Organizational Legitimacy can be defined as “the acceptance of the organization by its environment” (Kostova, 1999, p. 64).
Location choice Location choice reflects the strategic choice of firms: WHERE to undertake FDI?
Entry mode choice Entry mode choice reflects the strategic choice of firms: HOW to enter in a host country? This choice can be divided in two subchoices: establishment (i.e., new firm or acquiring existing firm) and ownership (i.e., the degree of capital participation).
Establishment mode Based on Padmanabhan and Cho (1999) and Brouthers and Hennart (2007)
Greenfield Greenfield investment consists of building a new entity (subsidiary) belonging to the parent firm.
Acquisition Acquisition represents the transfer and absorption of assets of the acquired firm by the acquiring firm, giving it an absolute control of the acquired firm.
Ownership mode Based on Hennart and Larimo (1998)
Full ownership Capital participation: more than 95%.
Partial ownership Capital participation: 10–95%.

Notes

1

See Lu, Liu, Wright, and Filatotchev (2014), Williams and Grégoire (2015), Wu and Chen (2014), Meyer, Ding, Li, and Zhang (2014).

2

See Chang, Kao, and Kuo (2014), Contractor, Lahiri, Elango, and Kundu (2014), De Villa, Rajwani, and Lawton (2015), Du and Boateng (2015).

3

See Stahl and Tung (2015), Caprar, Devinney, Kirkman, & Caligiuri (2015), Avloniti and Filippaios (2014), De Jong and Van Houten (2014).

4

Author’s calculations based on UNCTAD (2015a) with OFDI stocks data.

5

The Mahalanobis distance will be considered as our baseline method of ID calculation, other methods of calculation will be used for the sensitivity analysis.

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