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There is considerable interest in alternatives to or extensions of the multinomial logit model for situations where the IIA (independence from Irrelevant Alternatives) assumption is unpalatable. The IIA-assumption implies that the odds-ratio between two alternatives does not change by the inclusion (or exclusion) of any other alternative. If we assume that the IIA assumption holds, and the four entry modes as we defined them, are equally substitutable to the investor, this means that MacFadden’s conditional logit estimator can be used and the multinomial logit model can be used for the joint choice of ownership and establishment mode.

V.3.1.2. The dependent variable – entry mode

We considered entry mode decisions as a combination of two discrete choices, ownership choices and establishment mode choices. In fact, we have six categories in the questionnaire that were reduced to these four, as has been explained in chapter IV. Most of the literature either explains establishment mode choices or ownership choices. Part of it distinguishes only three of them: joint ventures, (wholly owned) acquisitions and green-field investments, dropping joint venture green-field investments, assuming that green-field investments are mainly wholly owned, e.g. Kogut, Singh (1988). In practice, joint venture green-field investments are also possible. In the sample used in this chapter 14.87 percent of the entry modes are joint venture green-field investments and this is the smallest fraction out of the four entry modes. Our research adds to the scant literature explaining the four modes of entry (Barkema, Vermeulen, 1998) or Chen, Hennart (2004).

Especially with establishment modes in economies in transition, a clear-cut distinction between acquisition and green-field can be put into question. Meyer, Estrin (2001) suggest that between green-field and acquisition there is also a hybrid ‘brownfield’88mode, typical of the emerging economies. The investor that acquires a firm in the years 1990-1997 in Eastern Europe in some cases almost completely replaces plant and equipment, labour and product line, because the acquired firm does not possess sufficient resources. Such an acquisition may in that case yield a local brand name or market share, and perhaps valuable supply or customer relationships, but the production processes and organizational structures are effectively reconstructed from scratch. So, although such a type of investment is categorised as an acquisition, it becomes more similar to a green-field investment. Meyer, Estrin (id.) argue that the opposite shift can also occur and did occur in Eastern Europe. An initial green-field investment can depend on critical resources that are not freely available89. Such an investment will be categorised as a green-field investment but, as a matter of fact, the acquisition of these resources make it look like an acquisition of a firm. It is not clear whether this option is a form of planned ex ante behaviour or rather a decision taken after the acquisition (Estrin, Meyer (1999)). It might be worth exploring this further and giving this further theoretical weight.

As far as ownership is concerned, the choice is between joint ventures and wholly owned subsidiaries. Cooperative alliances are an alternative form of ownership-based entry modes the particularities of which are not taken into account here (Zhao, Luo, Suh, 2004). Beside, instead of distinguishing between joint and single venturing, a finer distinction among joint ventures between 88_{The terminology of brownfield investment is used in a slightly other meaning than its common meaning. It is commonly}

used for a piece of industrial or commercial property that is abandoned or underused and often environmentally contaminated, especially one considered as a potential site for redevelopment.

89_{Hennart argues that if those resources are not freely available, a green-field investment is simply not possible, as this is a}

minority and majority or dominant joint ventures could have been made (Hill, Kim, 1988), Madhok (1997). For simplicity, this distinction is not made here, since the focus of interest is the industrial organization of activities from the point of view of the instrument itself and not from the point of view of the balance of influences between both companies. This could be an extension.

V.3.1.3. Omitted determinants of entry mode and caveats

In this section we briefly discuss other factors that are likely to influence entry mode and that were, for particular reasons, not taken into account. The dependent variable is the preferred entry mode. Institutional determinants such as changes in the legal restrictions of ownership per industry over time influence ownership decisions, but are only indirectly, through the construct of ‘contractual uncertainty’, taken into account. Besides, entry mode choices are also determined by availability constraints, such as the presence or lack of adequate acquisition candidates or targets, which we were unable to measure. Neither are investment promotion effects and tariff jumping behaviour studied.

The shifts due to institutional reasons are, as a matter of fact, filtered out. For the analysis of the entry mode choice we looked into the investor’s private profit optimising choice and did not consider the policies of and bargaining with the host government that can, clearly, force firms to share equity in a joint venture (Vannini, 1995). If the entry mode had to be changed as a result of this bargaining process with the host government, this was, hence, not taken into account and the original preferred mode was taken as the entry mode. It is important to avoid mixing up results of the firm’s private decisions with those of bargaining with host governments (Caves (1997), p.73). We think the sample of host countries90 is too homogeneous, with Russia being a bit different from the other host countries, to provide valuable results on the effect of institutional obstacles to entry mode choice. Finally, the effect of local government interference is also seen in the form of competition in investment promotion that shapes the entry mode (Brossard, H. (1998)), but this is outside the scope of the decision studied.

Another shortcoming of our research design is that non-investors are not included. Apart from the non-response bias for this group from which the sample suffers, it makes sense to state that the starting point of the choice for the deciding firm/manager is the way of foreign direct investment and the choice of an appropriate investment entry mode. If no real investment will be undertaken, but contractual (export) agreements are made, the time pattern chosen for that particular company to get involved in activities abroad is most probably different in the sense that the trade-off between exports and FDI is made at an earlier stage (Pan, Tse (2000), the Uppsala school, Buckley, A. (1998)). It is necessary to bear in mind that the determinants of the entry mode decision for investors only must be interpreted as conditional on the firm having already decided to undertake foreign direct investment. This is also the case in the analyses of entry modes by Caves, Mehra (1986), Kogut, Singh (1988), Zejan (1990), Hennart, Park (1994), Barkema, Vermeulen (1998). It is, based on the present model, not possible to find out whether the attractiveness of determinants of entry mode alternatives stimulates firms to invest or not. The trade-off between non-investment (exports, as contractual agreements, for instance) and FDI is studied more elaborately in other earlier studies (Horst, 1971, Johansson, Vahlne (1977)) and we felt there was no gap to fill in that literature.

Only the investment mode of the investor’s initial investment in Eastern Europe is studied. This does not reflect the distribution of entry modes of all investments in Eastern Europe. An extension for further research is the study of subsequent investments by the same investor (e.g. Chang, Rosenzweig, 2001). Our analysis of foreign investment entry mode decision is not complete, since the

90_{The number of host countries (9) is also too high compared to the sample of 558 investors. The results would not be}

first entry mode cannot be made dependent on previous entry mode choices by the same firm in the same region. Operational experience is mainly non-investment experience before transition. The effect of one entry on subsequent entries in the future is also important. Decision specific experience is an additional factor to understand entry mode choices. Similar ownership structures and establishment modes beside general international experience and host country experience influence Japanese manufacturing investments (Padmanabhan, P., Cho, K.R. (1999). The attribute ‘decision specific experience’ can be measured by a count-years measure. In general, firms seem to be able to generate value from past experiences with similar entry modes ((Kogut, Zander (1995), Padmanabhan, Cho (1999)). The decreasing impact of host country and international experience on the parent’s stock of knowledge and experience (measurement in logarithms) over time is not confirmed (Padmanabhan, Cho, 1999). As there is no consensus in the literature (Gomes, Casseres (1990), Padmanabhan, Cho, 1999) about the impact of experience on establishment mode choices, there might be moderating effects explaining the relationship between decision specific experience and entry mode choice. It is worth exploring why ‘decision specific experience’ does lead to replication of earlier entry mode decisions in some cases, while in other cases it does not.

Finally, as far as the dependent variable entry order is concerned, which is derived from the exact timing of entry as explained in IV.3.1.2. is debatable. The moment of investment is seen as the moment of first capital expenditure. This is common practice in this literature. A more process- oriented approach that investigates how managers/owners weight the advantages and disadvantages of different entry modes and ponder them to make an eventual entry mode decisions is needed. The distinction between owners and managers is not made. There is evidence that managers have a more valuable option to wait than owners in decentralized firms, in general (Grenadier, Wang, 2004). An extension for further research is the inclusion of decision maker specific factors in the explanation of the entry mode choice.