Added distance, entry mode choice, and the moderating effect of experience: The case of British MNEs in emerging markets

Abstract

We argue that a Developed Market Multinational Enterprise’s (DMNE) decision regarding the mode of entry in an Emerging Market (EM) will be affected by the geographic and administrative distance between the locations in which the MNE has previously held operations. Drawing our arguments on the Transaction Costs Economics (TCE) and Internalization Theory we propose that for low and high geographic and administrative distance, DMNEs will opt to enter EMs via a wholly owned subsidiary (WOS), while for moderate levels of distance via a joint venture (JV). Furthermore, we argue that DMNE’s previous international experience in EMs will have a positive effect on the suggested U-shaped relationship, alleviating the negative effects associated with the coordination and knowledge dissipation costs incurred due to the level of distance. We test our hypotheses against a dataset composed of 316 entries of FTSE 250 British MNEs in 39 EMs over the period 1971 – 2010. The results provide support for the U-shaped relationship, and partial support for the moderating effect of international experience.