Acquisition Versus Greenfield Essay Example

national boundaries. The first aim of this paper will be to explore how international corporate strategy influences the entry mode choice of the MNC, focusing on the distinction between global and multidomestic strategies. As discussed above, a substantial number of studies have been published on both types of entry mode decisions.

Recently a number of studies (Gannon, 1993; Sarkar and Cavusgil, 1996; Andersen, 1997, Harlandand Wheeler, 2000) have reviewed the progress in the field and the theoretical and conceptual frameworks that are used to explain the entry mode decision. Somewhat surprisingly, however, none of the earlier studies or the review studies has posed the question: what happens after the choice of entry mode has been made. Are greenfields and acquisitions managed in the same way or do headquarters-subsidiary relationships differ between the two entry modes?

And does the way in these two distinct entry modes are managed remain similar or does it change over time? To our best knowledge there is not a single previous study that has investigated these questions. The fact that most previous entry mode studies have used secondary data has made this type of analysis very difficult. Our study combines secondary and primary data on greenfields and acquisitions and can provide both sides of the picture, using MNC strategy as the link between the choice for a particular entry mode and the subsequent managementof the acquisition or greenfield.

The second aim of this paper will be to analyze whether greenfields and acquisitions are managed in different ways; i. e. , whether the two types of entry modes are characterized by different headquarters-subsidiary relationships. The remainder of this paper is structuredas follows. In the following

section, we will introduce a new variable-international strategy-that might have an impact on the choice between acquisition and greenfield entry mode. The introduction of Copyright ? 2002 John Wiley & Sons, Ltd.

Literature Review and Hypotheses

International strategy and the choice between greenfields and acquisitions Previous studies have identified and tested a substantial list of variables that might have an impact on the choice between greenfields and acquisitions. In Appendix 1 we have summarized the results for six of the most commonly distinguished variables: R intensity, the degree of diversification, the level of foreign experience, cultural distance, the size of the foreign direct investment in comparison to the size of the investing company, and the time of entry. These six variables will be included as control variables in our study.

A variable that has received very little attention in previous entry mode studies, but one that might have a big impact on a firm's choice of entry mode is the firm's international strategy. Typologies of international strategy have received a lot of attention in the international management literature (for an overview see Harzing, 2000). Nearly all studies distinguish two different types of international strategies: "global" and "multidomestic/multinational", while many include a third hybrid strategy often called "transnational" and some include an "international" strategy.

In this article we choose to focus on global and multidomestic strategies only, because these two strategies are the most commonly accepted and clearly defined. Global strategies are characterized by a high level of globalization of competition with national product markets being interconnected and a focus on capturing economies of scope and scale. The dominant strategic requirement is efficiency, Strat. Mgnlt. J. , 23: 211-227 (2002)

Acquisitions vs. Greenfield Investments and as a result these companies integrate and rationalize their production to produce standardized products in a very cost-efficient manner.

Subsidiaries typically fulfill a role as "pipeline" for headquartersand they are not supposed to respond actively to local market demands. Multidomestic companies experience a lower level of global competition and compete predominantly on a domestic level, while adapting products and policies to various local markets. The company can be characterized as a decentralized network. Subsidiaries are relatively autonomous and are allowed to be very responsive to the local market (Bartlett and Ghoshal, 1992; Harzing, 2000).

The impact of the MNC's international strategy on the choice between greenfields and acquisitions can be argued from two theoretical perspectives: the different firm-specific advantages associated with the two strategies and the different levels of internal (parent) versus external isomorphism that are portrayed by subsidiaries in companies following the two strategies. Global and multidomestic strategies are associated with different types of firm-specific advantages. Rugman and Verbeke (1992) link the owntheory of interership-location-interalization national production to different types of international strategy.

Their analysis takes as a starting point that foreign direct investment has been chosen as the most efficient mode of entry, hence internationalization advantages are assumed to be present. They distinguish two types of ownership advantages, which they call firm-specific advantages (FSAs). The first are location-bound FSAs whose benefits depend on their being used in one particular location (or a set of locations). They cannot easily be transferred and cannot be used in other locations without significant adaptation. Nonlocation-bound FSAs do not depend on their being used in one specific location.

They can be used on a global scale, because

transferring them to other locations can be done at low cost and without substantial adaptation. With regard to location advantages they distinguish two sources: home and host country. Linking these two concepts to the two international strategies we have distinguished, global companies tend to focus on the exploitation of non-location bound home-based FSAs, such as for instance a proprietary technology. They do exploit location advantages in host countries, but this is usually limited to the exploitation of low cost locations which allows global Copyright ? 002 John Wiley & Sons, Ltd. 213 companies to pursue their strategy based on cost efficiency (Bartlett and Ghoshal, 1989). Building up a low-cost production site is easier when the site can be set up from scratch, so that it can incorporate the latest production technologies and can be built to match the company's exact production requirements rather than having to accept existing-possibly too large or inefficient-operations in an acquired subsidiary. The core capabilities of multidomestic companies lie in the exploitation of location bound FSAs using host country specific advantages.

These companies have to deal with markets that require tailoring products and policies to local circumstances. In order to be able to do so companies need to be well aware of local circumstances and well-integrated into the local market. This will be easier to achieve by acquiring an existing company with a knowledgeable work-force and good connections in the local market, than by setting up a new subsidiary from scratch. Recently, several studies have recommended taking an institutional perspective to look at entry modes (Rosenzweig and Singh, 1991; Haveman, 1993; Davis et al. , 2000).

Institutional theorists focus on the impact of

external institutions on organizations to try to provide an explanation for the high degree of homogeneity in organizational forms, behaviors and practices for different firms (DiMaggio and Powell, 1983). The process of homogenization is coined isomorphism and the external institutions can include the state, professions, interest groups, but also other organizations within the firm's industry. In an international setting this means that subsidiaries are confronted with an external environment that could include parent and host government, local interest groups and ther organizations which may be subsidiaries of other MNCs. However, subsidiaries of MNCs are also subject to institutional pressures from within the organization to become isomorphic to the parent organization's norms (Kostova and Zaheer, 1999). Recent publications have therefore suggested that subsidiaries of MNCs have to conform to both internal (the parent organization) and external (the host country institutional environment) sources of isomorphism (Rosenzweig and Singh, 1991; Kostava and Zaheer, 1999; Davis et al. , 2000).

Although all larger companies with different business units will experience this tension between internal and external isomorphism, it is particularly important for Strat. Mgmt. J. , 23: 211-227 (2002) 214 A. -W. Harzing relationships in Headquarters-subsidiary and acquisitions greenfields We have argued above that the international strategy of the MNC will have an impact on the choice of entry mode. Subsequently, we would also expect this choice to have an influence on the way subsidiaries are managed after they have been set up/acquired.

We would hence expect headquarters-subsidiary relationships to differ between greenfields and acquisitions. The headquarters-subsidiary relationship can be seen as a classic control problem, whose attributes are similar to principal-agent relationships (Nohria and Ghoshal, 1994). Headquarters, the principal, cannot

make all decisions because it does not possess all the necessary knowledge or resources, but it cannot leave all decisions to subsidiaries because the interests of subsidiaries might be different from that of headquarters or the MNC as a whole.

Therefore, the key aspect of the headquarters-subsidiary relationship is the way in which headquarters ensures that subsidiaries are working towards common organizational goals. The different types of control mechanisms are the tool that headquarters has to achieve this alignment. Hence, the level of control exercised by headquarters by means of the different types of control mechanisms is the first element of the headquarters-subsidiary relationship that we will investigate. As we will see below, there is a range of control mechanisms available that goes beyond the level of autonomy granted to subsidiaries.

The second element that we will look at is the level of expatriate presence in subsidiaries. Expatriatescan perform many roles in the headquarters-subsidiary relationship, among them control and knowledge transfer. The final element that we will study is the level of local terms of local production, responsiveness-in local R and adaptation of products and marketing to local conditions-that headquarters allows to the subsidiary. We will now discuss how we would expect these three elements of the headquarters-subsidiary relationship to differ between greenfields and acquisitions.

With regard to the FSA perspective, we argued that companies following a global strategy prefer greenfield subsidiaries to exploit their non-location bound home-based FSAs. Transfer of these FSAs is difficult when subsidiaries are allowed to operate independently, so we would expect headquartersto Strat. Mgmt. J. , 23: 211-227 (2002) MNCs. Porter (1986) and Bartlett (1986) have developed these ideas in the internationalbusiness strategy

literature as the tension between forces for global integration and national responsiveness (Rosenzweig and Singh, 1991).

The resultant integration/responsiveness framework (Prahalad and Doz, 1987) has become one of the cornerstones of the internationalbusiness strategy literature. Using this framework, companies following global strategies strive for a high level of integration and a low level of local responsiveness, while the reverse is true for multidomestic strategies. In terms of isomorphism, global strategies will focus on internal isomorphism, while multidomestic strategies will focus on external isomorphism.

Linking this with the choice of entry mode, we argue that particular modes of entry facilitate either internal or external isomorphism. Establishing foreign subsidiaries as a mirror image of headquarters or at least making sure that key structures, policies and procedures are similar is much easier to realize for greenfields than it is for acquisitions. With the former, headquarterscan mold structuresand policies to their specific preferences, while the latter come with established structures and policies that might be much more difficult to change.

Alignment with host country conditions (external isomorphism) is much easier for acquisitions than it is for greenfields, since the former are local firms with an established local network. Other things being equal, companies following a global strategy would, therefore, prefer greenfields, while companies following multidomestic strategies would prefer acquisitions. In sum, both the FSA perspective and the isomorphism perspective would lead us to expect companies following a global strategy to prefer greenfields over acquisitions, while companies following a multidomestic strategy would prefer acquisitions over greenfields.

Hence, in terms of the actual distribution of entry modes in our empirical study we can put forward the following hypothesis: Hypothesis 1: Relative to companies following a

multidomestic strategy, companies following a global strategy will have a higher proportion of greenfield subsidiaries, while companies following a multidomestic strategy will have a higher proportion of acquisitions relative to companies following a global strategy. Copyright ? 2002 John Wiley & Sons, Ltd. Acquisitions vs.

Greenfield Investments exercise a rather high level of control over these greenfield subsidiaries. A high level of expatriate presence might complement this high level of control, while expatriates can also serve as the embodiment of the FSAs to be transferred. Therefore, a relatively high level of expatriate presence is to be expected in greenfields. Since the main role of these greenfields is to serve as a "pipeline" for HQ-based FSAs, it is unlikely that headquarters would grant them a lot of opportunity to be locally responsive.

Companies following a multidomestic strategy were predicted to prefer acquisitions to exploit location-bound FSAs using host country specific advantages. In order to be able to do so, these acquisitions will need a certain level of independence, so they are unlikely to be strongly controlled by headquarters. Continued employment of local managers rather than their replacement with expatriates will be preferred in order to tap into local knowledge, so the level of expatriate presence is likely to be low in acquisitions.

Finally, since FSAs are host country-based, it is likely that headquarterswill expect these acquisitions to continue any local production/R that existed before the take-over and/or will allow them to adapt products/marketing to local circumstances. With respect to the isomorphic perspective, we argued that companies following a global strategy would choose greenfields to facilitate internal isomorphism. Exercising a high level of control, either through the control mechanisms we

identified or through sending out expatriates, can facilitate this internal isomorphism.

So the isomorphic perspective joins the FSA perspective in predicting a relatively high level of control and a relatively high level of expatriates for greenfield subsidiaries. An attempt to realize internal isomorphism will not be helped by allowing subsidiaries a high level of local responsiveness, so just like the FSA perspective, the isomorphic perspective predicts a relatively low level of local responsiveness for greenfield.

Companies following a multidomestic strategy were argued to prefer acquisitions that would facilitate achieving the external isomorphism that is importantfor this strategy. Alignment with host country conditions is more difficult, however, if the acquisition is strongly controlled or is not allowed to be locally responsive. It is easier if the management of the acquisition is left to local managers rather than to expatriates. In concordance with the FSA perspective, we expect a relatively low level of control and expatriate Copyright ? 002 John Wiley & Sons, Ltd. 215 presence in acquisitions and a relatively high level of local responsiveness.

• Hence: Hypothesis 2: Headquarters' control over their greenfield subsidiaries will be higher than their control over acquisition subsidiaries.
• Hypothesis 3: Headquarters will assign more expatriates to top positions in their greenfield subsidiaries than in their acquisition subsidiaries.
• Hypothesis 4: Headquarters will permit their acquisition subsidiaries a higher level of local responsiveness than their greenfield subsidiaries.

Development of the headquarters-subsidiary relationship over time As we have argued above, companies following a multidomestic strategy will prefer acquisitions, while companies following a global strategy will prefer greenfields. However, companies might be "forced" to accept a non-preferred entry mode, i. e. , a greenfield for multidomestic companies and

an acquisition for global companies. A reason for a company following a multidomestic strategy to decide to set up a greenfield could be that no suitable take-over candidates are available in the country in question.

A reason for a company following a global strategy to acquire an existing company might for instance be a (temporary) lack of managerial resources or government regulations in particularcountries preventing new entries. However, if companies are forced to enter a market via a non-preferred entry mode, we would expect that over time they would try to change the headquarters-subsidiary relationship of this subsidiary to make it resemble the headquarters-subsidiary relationship of subsidiaries with their preferred entry mode.

In this way, headquarters might be able to overcome part of the disadvantage of entering a market through a nonpreferred entry mode. For example, if a company following a global strategy was forced to acquire an existing company in a particularcountry rather than set up a greenfield, it might try to increase its level of control over this subsidiary over time and limit its local responsiveness by cutting back the level of local production. Hence: Strat. Mgmt. J. , 23: 211-227 (2002) 16 A. -W. Harzing and March 1996. This mail survey was conducted as part of a study that focused on control mechanisms in multinational companies.

Questionnaires were mailed to CEOs and Human Resource Managers at the headquartersof 122 multinationals and to the managing directors of 1650 subsidiaries of these multinationals in 22 different countries. This article only uses the data collected at subsidiary level. The overall response rate at subsidiary level was 20%, varying from 7. % in Hong Kong to 42. 1% in

Denmark. Table 1 summarizes the number of respondents by industry, country of headquarters and subsidiary country. The total number of 287 subsidiary responses represents 104 different headquarters(85% of our population) and the number of responses per headquartersvaries from one to eleven. Measures To ascertain the entry mode-acquisition vs. greenfield investment-respondents were asked whether the subsidiary had been acquired by another owner after its foundation.

Our overall sample included 97 acquisitions and 190 greenfields. Respondents were also asked to state the subsidiary's year of foundation and-where Hypothesis 5: Over time the characteristics of the headquarters-subsidiary relationship in subsidiaries will converge towards the characteristics of the "preferred"entry mode. Hypothesis 5a: In multidomestic companies the characteristics of the headquarters-subsidiary relationship of greenfields will come to resemble those of acquisitions.

Hypothesis 5b: In multidomestic companies the, characteristics of the headquarters-subsidiary relationship of acquisitions will not change. Hypothesis 5c: In global companies the characteristics of the headquarters-subsidiary relationship of greenfields will not change. Hypothesis 5d: In global companies the characteristics of the headquarters-subsidiary relationship of acquisitions will come to resemble those of greenfields.