The Choice Between Joint Venture and Wholly Owned Subsidiary: An Institutional Perspective

TLDR

Foreign entry‑mode choice has largely been studied through transaction‑cost theory, which emphasizes firm‑ and industry‑specific factors while treating country‑specific institutional forces as constant, leaving a gap in understanding how institutional contexts shape mode selection. This study aims to develop a unified theoretical framework that integrates institutional and transaction‑cost perspectives to explain how institutional factors influence foreign entry‑mode choice. The authors synthesize transaction‑cost and institutional theories and apply the combined framework to a sample of 364 Japanese overseas subsidiaries. Results show that institutional theory provides incremental explanatory power, revealing that multinational enterprises align their entry modes with host‑country regulative settings, local normative pressures, and cognitive mindsets shaped by counterpart and firm entry patterns.

Abstract

The study of foreign entry-mode choice has been based almost exclusively on transaction-cost theory. This theory focuses mainly on the impacts of firm- and industry-specific factors on the choice of entry mode, taking the effects of country-specific contextual factors as constant or less important. In contrast, the institutional perspective emphasizes the importance of the influence of both institutional forces embedded in national environments and decision makers' cognitive constraints on the founding conditions of new ventures. Still, this theoretical perspective has yet to provide insights into how institutional factors influence the choice of foreign entry mode. The primary goal of the present study is to provide a unifying theoretical framework to examine this relationship. We synthesize transaction-cost and institutional perspectives to analyze a sample of 364 Japanese overseas subsidiaries. Our results support the notion that institutional theory provides incremental explanatory power of foreign entry-mode choice in addition to transaction-cost theory. In particular, we found that multinational enterprises tend to conform to the regulative settings of the host-country environment, the normative pressures imposed by the local people, and the cognitive mindsets as bounded by counterparts' and multinational enterprises' own entry patterns when making foreign entry-mode choices.