Determining mode of entry of multinationals - an analytical framework

Abstract

In recent years, several developing economies have seen a burst in growth, partly fuelled by Foreign Direct Investment or FDI flows. Post liberalization, several MNCs have been entering India. An MNC may enter through one of several modes of entry available to them, including Joint Ventures, Acquisitions, Wholly Owned Subsidiaries, Licensing route, etc. The decision of entry mode is governed by several factors. This paper looks at several strategic theories governing entry modes and a few models developed in the past. Based on these, the paper attempts to develop a statistical model for predicting the entry mode of an MNC into India. A unique set of variables is identified on the basis of these, including a new variable, namely the country of origin (USA/Europe/Japan-Asia). These have been used in further statistical analysis. Factor analysis using Principal Component Analysis has been done to reduce the variable set and combine certain relevant variables. This was then used to prediction models using Multinomial Logistic regression. Another statistical model, using Discriminant analysis, to classify a particular entry as one of the entry modes, has also been developed. This approach has not been attempted before in previous literature. The model was found to have a good predictive power compared to random selection. The model was also validated by applying it to a holdout sample. The prediction of the holdout sample was also found to be significant. The results of the discriminant analysis, have been used to develop a 2-by-2 framework, which captures the entry mode decision of a multinational based on 2 fundamental factors. These have been identified to be the Risk-Return balance and the amount of Local Resources needed (alternately, the amount of resources needed to be brought in by the MNC). Though these two factors have never been combined before in previous literature, it matches with earlier findings well.