TITLE

ISOMORPH ISOMORPHIC INFLUENCES AND ASPIRATION: REFERENCE GROUP CHOICE IN ENTRY MODE DECISIONS

AUTHOR(S)
Congcong Zheng
PUB. DATE
June 2012
SOURCE
Journal of International Business Research;Jun2012, Vol. 11 Issue 2, p129
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
Institutional theory and international business scholars have investigated the isomorphic influences on a firm's entry mode decisions. Previous research has shown the prevalence and importance of isomorphic influences from country, industry peers, and MNC parents when managers make entry decisions. Under conditions of uncertainty, firms could model themselves after behaviors of host country entrants, industry norms, or their own past behaviors. However, previous research has not discussed the relative significance of institutional influences exerted from those different reference groups. Our paper develops propositions regarding the firm's appropriate reference group when making entry mode choices into a new country based on the sources of institutional influence and the firm's own aspiration. The addition of the aspiration variable helps us understand the priorities of the reference groups. The paper contributes to institutional theory and international business literature by examining the interaction between institutional environments and the decision makers' preferences, emphasizing their varied options when facing institutional influences. Foreign market entry is an important strategic decision for multinational corporations (MNCs) because of the implications on the firms' market presence, significant resource commitment, as well as risk level that it brings to the MNC system (including parent firm and subsidiary) (Caves, 1974). The process is fraught with ambiguities and uncertainties about market potential, rivalry behavior, country regulations, and customer preferences. Entry mode selection is one essential way through which MNCs could manage the uncertainties during the internationalization process, as they could manage their exposure to risk, and could control their local growth using different entry modes, ranging from exporting and licensing to forming joint ventures, acquiring other companies and setting up wholly owned subsidiaries (Buckley & Casson, 1985; Caves, 1974). Entry mode choice when firms are first entering a new country is of particular importance, as the success of the first foray into a new country could set the stage for capability-building through future entries (Chang, 1995; Chang & Rosenzweig, 2001). Researchers have tried to explain choice of entry mode from economic perspectives that emphasizes efficiency, transaction cost minimization, or utilization of resources/capabilities of MNCs (Aharoni, 1966; Dunning, 1995; Kogut & Zander, 1993; Vernon, 1979). More recently, international researchers have broadened their scope to examine sociological influences in foreign entry, and investigated the isomorphic influences that firms face when choosing their entry mode. Researchers have underlined the importance of isomorphic influences at multiple levels of host country (Yiu & Makino, 2002), industry, and MNC parent firms (Lu, 2002). As compared to economic perspectives, the institutional perspective views firms primarily as social actors who, because of the lack of information on the future implications of their current decisions, look for cues from their environments as to appropriate and legitimate actions (DiMaggio & Powell, 1983; Lieberman & Asaba, 2006). Managers may be unsure of the likelihood of possible outcomes, and they may have fundamental difficulties recognizing causeeffect relationships and the full range of potential consequences. In such environments, managers are particularly likely to be receptive to information implicit in the actions of others (Lieberman & Asaba, 2006). Firms often imitate other actors from their social environment to reduce the risk and uncertainty inherent in their own actions, hence the isomorphism. Different reference groups from host country, industry and MNC parents can provide guidance as to their own appropriate entry location (Guillen, 2002; Henisz & Delios, 2001) and entry mode (Guillen, 2003; Lu, 2002; Yiu & Makino, 2002). However, when a firm is imitating its reference groups, it is unusual for all its reference groups to be engaged in the same practice and processes all the time. The different reference groups therefore might exert pressures in different directions. For instance, when the host country norm of entry might be joint venture, the firm's own industry norm might be entry with a merger and acquisition. In those situations, how could an MNC choose its reference group? This was the case when Walmart entered China in 1996. While Walmart had entered several foreign countries previously, it had employed diverse foreign entry modes. For instance, for its first international entry to Mexico in 1991, it set up a 50-50 joint venture with CIFRA, a local retailer. Walmart Canada began in 1994 with the acquisition of the Woolco Canada chain of 122 stores. In 1995, it entered Argentina through a fully owned subsidiary. In the local Chinese environment, prior to Walmart's entry, Carrefour, the French supermarket chain has entered China in the previous year (1995) through a joint venture. Therefore, Walmart could have either followed the precedents of Carrefour, or chose to imitate its own experience in other countries. Which reference group would yield the most salient and prominent influence on the focal firm? Our paper tackles this question. We build on previous research on aspiration from organizational learning literature (Greve, 1996; 1998) to enrich institutional theory. We propose a framework to discuss the entry mode and reference group choice. We propose that the entry mode choice of a focal firm is under the combined influence of the institutional profile of the host country and the focal firm's own performance level prior to entry (whether it is below or at/above aspiration level) and such combined influences will determine how the focal firm gives preference and confidence to the choices made by its diverse reference groups. This theoretical paper integrates the aspiration research with the isomorphism research and argues that the choice that firms make in relation to their entry mode will not only be anchored on the strength and intensity of the isomorphic influences that they face in their external environment, but also on the risk preferences based on their own performance history. Our contributions lie in putting forward theoretical propositions that predict the entry mode choices of firms based on a country's institutional environment and the firm's own prior performance. By drawing attention to the role of the managers within MNCs and their role in dealing with the complex institutional environments, we extend previous work in two ways. First, we examine the premise that MNCs attempt to conform to institutional pressures by imitating the predominant mode of entry. Previous studies have examined the tendency of MNCs to imitate the prevalent mode of entry (Lu, 2002; Yiu & Makino, 2002), and have focused on the influence of either joint ventures or wholly owned subsidiaries that have been formed by other MNCs on the choice of the same mode of entry. Our paper introduces two additional important reference points: the norm of the country, and the MNC norm. Although we agree that the greater prevalence of a given organizational form in the industry enhances the legitimacy of that form, we argue that countries also hold important institutional power in determining the mode of entry. Second, our paper introduces the level of aspiration into examination of foreign entry mode. Although aspiration level has been shown as a major factor in determining the probability of strategic change and market entry behaviors in organizational learning theory (Greve, 1996; 1998; Baum, Rowley et al., 2005), its influence has yet to be examined in the international business field when examining entry modes. Decision makers in organizations use an aspiration level to evaluate organizational performance along a set of organizational goals, making it the differentiator between the success and failure in their perceptions. Once decision makers are unable to reach their aspiration levels, doubt, conflict, and disagreements might set in organizations, influencing their search, risk taking, and organizational change behaviors (Greve, 2003). Thus, by introducing the influence of aspiration level on the change behavior such as foreign entry, our paper provides one of the first examples of examining the interorganizational and intra-organizational influences in entry mode choice. Our paper proceeds as follows: in the next section, we discuss the isomorphic influences on entry mode choice, and then we introduce the concept of aspiration. Afterwards, we develop our propositions and discuss their implications for future empirical research.
ACCESSION #
77929904

 

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