National Culture and Foreign Market Entry Mode Selection

Introduction

Foreign direct investment has increased dramatically over the last few decades, and this trend has been widely studied. However, it is argued that the entry mode for many of these investments has not been examined with the same rigor. It is commonly thought that the composition of national cultures on Hofstede's cultural dimensions scale and the distance between two cultures influences the entry mode chosen by investing firms. This study proposes that cultural distance, as well as uncertainty avoidance principles, will guide entry mode selection. It compares data on 228 entries into the U.S. market through acquisition, wholly owned greenfield investment, and joint venture. The study finds several correlations in the data and concludes that entry mode is meaningfully influenced by cultural factors.

Author's Position

The author's position is that a gap exists in the literature examining the influence culture can have on foreign direct investment, with entry mode serving as the vehicle for this relationship. The multiple regression tests run on cultural variables showed significant correlations. The author viewed this as an indirect method of validating the usefulness of Hofstede's cultural factors and their scales. The author also expressed surprise at the strength of the relationships that appeared in the data, even though the data set had originally been collected for other purposes. The author further suggests that additional research could provide deeper insights into foreign investment methods.

Analysis of Entry Modes and Cultural Distance

When companies wish to expand into foreign markets, they have several available entry choices. The primary entry modes are the greenfield investment, the joint venture, and acquisition. In the greenfield model, a firm enters the market directly with its own products or services. This requires the firm to essentially start from scratch in a new market, but it carries the advantage of sole ownership. Of the three models, the greenfield approach has the highest potential for profitability. When firms are comfortable with the new market and have the capital to build market share, this is often the entry mode they select.

The remaining two modes are comparatively less profitable but allow firms to reduce some of the uncertainty that can accompany entrance into a new market. When a firm acquires an established international company for the purpose of entering a new market, it often gains access to that company's employees, operational processes, and intangible assets. However, acquiring such a company typically requires paying a premium price. The third model is the joint venture, in which two companies from different home countries coordinate their efforts with the shared purpose of entering a new market.

The purpose of the study was to determine what role cultural differences play in the selection of entry modes. The study used factors related to Hofstede's cultural dimension model. Differences in national cultures have been shown to produce different organizational and administrative practices, and these differences grow more pronounced as two cultures become more distant from one another. The farther apart two cultures are, the more likely it is that a firm will enter through acquisition or joint venture. If the two cultures are similar, the firm may choose a greenfield strategy in order to maximize its potential profitability.