An Inquiry into the Effects of Institutional Quality on Entry Mode Choice in Emerging Markets: A Comparative Study of AMNCs and EMNCs with Evidence from the BRICS

Abstract

This thesis aims to explore the effects of institutional quality on entry mode choice in emerging markets. It further aims to investigate the differences in entry mode choice between emerging market MNCs (EMNCs) and advanced market MNCs (AMNCs) entering such markets. Using a sample of 643 entries into the BRICS countries, made by EMNCs from the BRICS and AMNCs from Western Europe within the pharmaceutical industry, theoretical propositions regarding such relationships are tested empirically. To allow for a comprehensive theoretical understanding of the inquiry, the thesis combines Institutional Theory, Transaction Cost Economics, and a Resource-Based View into an integrated theoretical framework to gain a holistic understanding of the effects of institutional quality on entry mode choice. The thesis further engages with literature on the distinct features of EMNCs, contrasting these to the characteristics and internationalisation behaviour of AMNCs. With departure in the integrated theoretical framework, country-level data on institutional quality is collected along with firm-level data on entries and MNC characteristics. An Institutional Quality Index is constructed using indicators of formal- and informal institutional structures, as well as the presence of market intermediaries. Logistic regression analysis is performed to estimate the effects of institutional quality on entry mode choice as well as to test for moderating effects. Potential differences between EMNCs’ and AMNCs’ entry mode choices are further tested for, as well as the effect of institutional distance (dissimilarity) between MNCs’ home- and host environment, which emerged as a key feature of the relationship in the literature review. The thesis finds higher host country institutional quality to increase the likelihood of an MNC choosing to enter emerging markets through a wholly owned subsidiary, and conversely that joint ventures are more likely when institutional quality is low. It further finds support for a significant difference between EMNCs and AMNCs entering emerging markets - with EMNCs being more likely to opt for wholly owned modes, regardless of the host country institutional quality. The empirical findings further allow for the conclusion that this discrepancy can be partly attributed to the varying institutional distance experienced by these groups of firms in emerging markets. Lastly, the relationship between institutional distance and entry mode is found to be moderated by MNCs’ previous experience in emerging markets – suggesting that the effect of dissimilar home-and host country institutional environments varies for firms with different levels of experience. No other significant moderating effects are found, but a direct effect of firm size on entry mode choice is detected - indicating that large firms are more likely to opt for wholly owned modes in emerging markets.