Strategic entry mode selection and underlying financing capabilities: Evidence from the US and EU pharmaceutical industry

Anders Peter Bjorholm

Student thesis: Master thesis

Abstract

This thesis examines whether entry mode strategy is associated with underlying financing capabilities, by an empirical analysis of US and EU pharmaceutical corporations. The theoretical framework applied encompasses; transactions cost economics, capital structure literature, and real options theory. The theoretical insights are applied intuitively to the factors that influence entry mode strategy. The data sample contains 89 pharmaceutical corporations, which are sorted into subgroups on geographical dispersion, and three corporate entry mode strategies; wholly owned mode, joint venture mode, and balanced mode. The theoretical assessment suggests that wholly owned modes, will ensure governance of technological knowhow and strong coordination within the subsidiary. Joint venture mode entails that initial investment and risk is shared with a partner, and that skills can be acquired. In addition, a joint venture incorporates strategic flexibility through the option to expand business activities, if the joint venture is profitable. Balanced mode is an intermediate of wholly owned and joint venture mode. 8 linear regression models were applied in the empirical analysis, where profit margin and return on assets was explained by, cash flow ratio, long term debt to equity ratio, and current ratio. Accounting beta for return on assets was estimated to determine a relative risk measure for the pharmaceutical corporations. It was found that cash flow ratio has a clear positive impact on joint venture modes across the regression results, which supports that there is an evident pattern between strategic flexibility and performance, in an entry mode context. Long term debt to equity ratio reports very mixed performance patterns, across the regression results. This provides some support for the theorized perspective on capital structure, as it is suggest that capital structure should be estimated with respect to corporate context. Current ratio is reported to have a mixed and negative relationship to performance. Hence, entry mode strategy is associated with underlying financing capabilities within the pharmaceutical industry.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2012
Number of pages127