-SPONSORED BY THE EU CENTRE FOR GLOBAL AFFAIRS SIGNATURE PROJECT ON GOVERNANCE

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1 DID YOU KNOW SERIES -SPONSORED BY THE EU CENTRE FOR GLOBAL AFFAIRS SIGNATURE PROJECT ON GOVERNANCE How Do Foreign Market Entry Modes Vary Across Asian Countries: Evidence from Japan and China Lead Author: Zhengyi Zhao

2 CONTENTS Preface 1 Key take-home points 1 Executive Summary 2 1. Introduction 3 2. Automotive and Car Part Manufacturing Industry Analysis on the Entry Mode of Japanese Firms Analysis on the Entry Mode of Chinese Firms Analysis of the Largest Firms in the Industry 8 3. Computer and Electronics Manufacturing Industry Analysis on the Entry Mode of Japanese Firms Analysis on the Entry Mode of Chinese Firms Analysis of the Largest Firms in the Industry Analysis of Entry Models Based on the Development Level of Destination Countries Analysis of Entry Modes Used to Enter Developing Countries Analysis of Entry Modes Used to Enter Developed Countries Analysis of Entry Models Based on the Development Level of Destination Countries 16 Concluding Remarks 17 References 18 Further Reading 18 Appendices 20

3 Preface This report has been sponsored by one of the signature projects stemming from the EU Centre for Global Affairs at the University of Adelaide focusing on providing a comparative analysis of the business environments among EU, Australian and Asian countries. This report compliments the interactive database that is available on the EU Centre s Research in Governance website. Key take-home points Generally, foreign market entry modes are similar between Japanese and Chinese firms for the period between 2004 and All foreign market entry modes of firms stay the same between the automotive and computer and electronics products manufacturing industries, except for a difference in entries through equal equity participation. When entering both developed and developing countries, manufacturing and computer and electronics firms from Japan and China generally make similar entry mode choices. Further research can be done examining how cultural aspects interact with the entry mode choices of Asian firms and on comparing western and Asian companies. 1

4 Executive Summary Previous research has shown that foreign direct investment (FDI) and equity-based foreign market entry will remain a major force behind world economic development. By the end of 2013, the total number of worldwide FDI inflows reached 1.45 trillion USD 1. With the world economy being characterised by regional economic instabilities and fluctuations, and given the economic slump in 2012, the current global economic environment is exposed to more complexities, risks and uncertainties. In Asia, Japan and China are the biggest developed and developing economies respectively. In 2014, Japan was the fourth largest country undertaking outward FDI, while at the same time, China was the third largest country undertaking outward FDI and the largest country accepting inward FDI 2. Research 3 indicates that entry modes are selected by firms making international expansions. Entry modes selected by firms are assumed to be those which can provide the best return on investment and the best operational structure. However, little is known about Japanese and Chinese firms in terms of foreign market entry modes, despite the fact that Japan and China are major foreign investors and despite the importance of these entry mode choices. This report examines the entry mode choices of typical Japanese and Chinese firms in the automotive and car part, and computer and electronics manufacturing industries. It also investigates firm entry mode choices and how they differ between firms entering developed and developing markets. The results suggest that entry mode choices are generally similar between Japanese and Chinese firms in both industries. However, there is one difference between the two industries which could be attributed to differences in their industrial characteristics. In addition, choices around entry mode remain similar when businesses expand into developing and developed countries. Developing Asian countries have undertaken the largest amount of foreign direct investment out of all developing countries as of the end of It can be reasonably anticipated that Asian countries will continue to play an influential role in global FDI growth thus enhancing the development and progress of the world economy. Insights into the direct investment activities of Asian countries provided by this report could therefore be valuable both theoretically and practically. 1 UNCTAD, World Investment Report-Overview. _overview_en.pdf 2 UNCTAD, World Investment Report. 3 Brouthers, L.E., K.D.Brouthers, & S.Werner Is Dunning s Eclectic Framework Descriptive or Normative?, Journal of International Business Studies, 30(4): UNCTAD, World Investment Report. 2

5 1. Introduction According to statistics recently published in an UNCTAD report 5, global FDI reached 1.2 trillion US dollars in The total amount of outward FDI flows in Japan and China reached 113,629 and 116,000 million US dollars respectively, contributing significantly to the amount of worldwide FDI flows. At the same time, cross-country mergers and acquisitions have reached 384 billion US dollars, having increased by 19% between 2011 and For firms conducting business internationally, including some firms from newly emerging economies, expansion into foreign markets has several aims including searching for strategic resources, lower labour costs, advanced technology and the removal of trade barriers. This report analyses equity foreign market entry modes including those which are attempted through wholly-owned subsidiaries, majority equity participation, minority equity participation and 50:50 equity participation. According to theories on internationalization, these foreign market entry modes are employed when the overseas operating benefits for a firm supersede the costs of internalization. Equity entry is a type of foreign market entry mode which is based on ownership. It enables the entering firm to take a certain level of control over the target firm from the host country through different degrees of equity participation. Equity entry enables a transfer of capital, technology, labour and managerial resources. Multinational enterprises that choose this mode can enjoy the largest degree of involvement through directly participating in the local market (in contrast to limited access modes related to export-based or contracting methods). However, the equity entry mode also brings some disadvantages to the entering firm, including the cost of operating in countries with different cultures, difficulty with being included in local business linkages and other systematic risks (e.g. political instabilities). Moreover, the equity entry mode usually requires a significant amount of investment, which can expose the entering firm to some levels of investment risk. The choice of entry mode is an important strategic decision faced by multinational enterprises in the process of internationalization. It can significantly affect firm post entry performance due to investment spill over effects, adaptation to local business environments and local profitability. Since each type of equity entry mode relates to the degree of control over the newly-established or target firm, this in turn implies that equity stakes offer varying degrees of ownership over a firm s strategic resources and subsequent levels of risk. The choice of entry mode and equity stake are therefore a combination of the entrant s desire for control over resources, resource commitment and the dissemination risk of industrial property. This study therefore provides reference to the strategic management decisions concerned with foreign market entry. This report is based on an analysis of 200 firms from the automotive manufacturing and electronics industries in Japan and China. The sample firms are selected according to rankings of their annual profits between 2004 and Based on the analysis, the report makes 5 UNCTAD, World Investment Report. 6 UNCTAD, Global Investment Monitor. 3

6 comparisons among the entry modes of firms from the respective countries of origin, industries and the development level of destination countries. The report analyses why similarities and differences may exist between these entry modes. The report is organized as follows: Section 1 describes the equity entry mode choices of Japanese and Chinese firms in the automotive and car accessories manufacturing industry. Section 2 presents the equity entry mode choices of Japanese and Chinese firms in the computer and electronics manufacturing industry. Section 3 is concerned with entry mode comparisons between Japanese and Chinese firms in both industries with the final section concluding. 2. Automotive and Car Part Manufacturing Industry 2.1. Analysis on the Entry Mode of Japanese Firms The Japanese automotive industry 7 began its massive automobile production in the 1930s, and plays a leading role in the nation s manufacturing industry. Japanese automakers have a significant impact on the global automotive manufacturing industry. According to statistics provided by Japan s Automobile Manufacturers Association (JAMA), investments in the automotive industry reached 621,700 million Japanese Yen, constituting approximately 29.1% of Japan s total investment in major manufacturing equipment in Among the few automotive giants, Toyota remains the world s largest automaker in 2015, followed by Volkswagen and General Motors. The Japanese automobile industry began its large scale international expansion in the 1970s. Figure 1: Equity Entry Modes of 50 Japanese Automotive Manufacturing Firms: Industry classification number: NACE Rev.2: 29 8 Japan Automobile Manufacturers Association, The Motor Industry of Japan Report. 4

7 Figure 1 shows percentages of each entry mode taken by Japanese firms to enter foreign markets, in the automotive and car part manufacturing industry. Among the four patterns of entry mode, majority equity participation accounts for 50% of cases. This is followed by minority equity participation, which accounts for 26% of cases. 50:50 equity participation which is also referred to as equal equity participation, accounts for 13% of cases. The whollyowned subsidiary entry mode (WOS) accounts for the lowest proportion among the four types of entry mode, making up only 11% of cases. With regards to the changing trends in each type of entry mode, the graph below show how Japanese car maker entry modes have evolved over the period from 2004 to Graph 1: Annual Changes in Equity Entry Modes of 50 Japanese Automotive Manufacturing Firms: Graph 1 shows annual changes in the use of each type of entry mode. The vertical axis of the graph represents the number of firms choosing each entry mode (i.e. majority equity participation, minority equity participation, 50:50 equity participation or wholly-owned subsidiary entry mode). The horizontal axis represents the time period between 2004 and The graph indicates that in the automotive manufacturing industry, the most prevalent entry mode types selected by Japanese firms between 2004 and 2014 are majority and minority equity participation. On the one hand, the changing trends show that majority and minority equity participation account for the largest numbers among the four types of foreign market entry modes. On the other hand, the changes observed over the period also demonstrate a clear trend. Between 2004 and 2008, the speed of foreign market expansion slows down. This is reflected by the dropping numbers in the use of majority and 50:50 equity participation entry modes. Although the amount of minority equity participation and WOS entries grows, this growth is quite limited. Following this, use of the majority and minority equity participation entry pathways drops significantly between 2008 and After 2010, the number of times that majority and minority equity participation pathways are used increases dramatically, with these modes playing a dominant role among the four types of foreign market entry. The general trends observed for the four types of foreign market entry might coincide with some of the macroeconomic fluctuations experienced during the 5

8 period, such as the economic recession triggered by the global financial crisis and the subsequent recovery of the world economy Analysis of the Entry Modes of Chinese Firms China s automotive manufacturing industry 9 has operated since the 1960s, when the new Chinese government began to foster and push for the country s industrial development. The development of the Chinese automotive manufacturing industry is therefore relatively recent when compared with that of Japan. After 50 years of development, China s automotive production volume is among the top few countries in the world. According to the IBIS world industry report, the industry revenue totalled billion dollars in 2015, which is a 5% increase on Despite the industry s large production volume and revenue, development in areas such as the core technology of indigenous Chinese automobile manufacturing firms is still quite limited. A majority of the production as well as sales are undertaken by joint ventures with partners from Germany, the United States, Japan, Great Britain and other European countries. Figure 2 shows the percentage of each entry mode taken by Chinese automotive firms entering foreign markets. Among the four types of entry mode, majority equity participation takes a leading role, accounting for 75% of cases. This is followed by the 50:50 or equal equity participation, which accounts for 25% of cases. There were no cases of WOS or minority equity participation entry into foreign markets by indigenous Chinese automotive manufacturing firms between 2004 and Figure 2: Equity Entry Modes of 50 Chinese Automotive Manufacturing Firms: Industry classification number: NACE Rev.2: IBISWorld, IBISWorld Industry Report-Auto Parts Manufacturing in China. 6

9 With regards to the changing trends in each type of entry mode, Graph 2 below shows how Chinese automobile manufacturing firm entry mode choices have evolved between 2004 and Graph 2: Annual Changes in Equity Entry Modes of 50 Chinese Automotive Manufacturing Firms: Graph 2 shows annual changes in the use of each entry mode type over the period. The vertical axis of the graph represents the number of firms choosing each entry mode (i.e. majority equity participation, minority equity participation, 50:50 equity participation or wholly-owned subsidiary entry mode). The horizontal axis represents the time period between 2004 and The graph indicates that the type of entry mode chosen most often by Chinese automotive manufacturers during the period from 2004 to 2014 is the majority equity participation mode (followed by the 50:50 equity participation mode). Foreign market expansions by Chinese automotive manufacturers were rare between 2004 and From 2009 to 2014, Chinese use of the majority and 50:50 equity participation entry modes saw a limited increase. The development path of Chinese automotive manufacturing firms foreign market expansion might coincide with the accumulation of resources, technology and capital which all prepare firms for independent innovation and the business opportunities provided by global economic recoveries. During this period some foreign automobile and car part manufacturing firms were willing to be involved in new firms with Chinese partners at relatively lower costs. There are no instances of minority equity participation or WOS entry undertaken by Chinese automotive manufacturing firms between 2004 and In addition, there are only eight foreign market entries by Chinese firms in total. This might be related to the industry s limited development of innovation capabilities and the overall competency of Chinese automotive enterprises ChinaReport, The Contemporary Development Situation of Automobile Industry in China. http;//free.chinabaogao.com/quiche/201407/0ggzh62014.html 7

10 2.3. Analysis of the Largest Firms in the Industry This section presents an analysis on the largest Japanese and Chinese automotive manufacturing firms. Appendix A shows that the largest automotive manufacturing firms in Japan are all privately owned. The geographical diversification and overseas sales of Japanese firms are far more significant than those of their Chinese peers. In addition, most Japanese firms choose to internationalize via the majority and minority equity participation entry modes, the two most common among the four types of entry mode. In contrast, a feature of Chinese firms is that 50% of these firms are state owned enterprises (SOEs). Although the Chinese state owned automobile manufacturers have significant domestic sales, overseas sales from SOEs are somewhat lower when compared with those of private firms such as BYD. In addition, the geographical scope and diversification of SOEs appear to be only slightly more diversified than those of the private firms in the sample (as measured by the number of foreign countries where firms conduct their business). Together, these results suggest that private firms do better than SOEs with respect to foreign market expansion. Moreover, with regard to the choice of entry mode, Chinese firms mainly use majority and equal equity participation when entering foreign markets. More specifically, SOEs appear to prefer equal equity participation when entering foreign markets, while private firms more frequently use majority equity participation as their mode of entry. 3. Computer and Electronics Manufacturing Industry 3.1. Analysis of the Entry Modes of Japanese Firms Sony was founded in 1946 and represents the beginning of the period when the Japanese electronics industry began to flourish 12. Japan is home to the two largest semiconductor consumer firms: Sony and Toshiba. It is also the world s fourth largest exporter of semiconductor manufacturing equipment. According to recent statistics, total investment in the electronics industry has reached to 206,100 million Japanese Yen, accounting for 9.7% of Japan s total investment in the major manufacturing equipment sector in The following chart summarises the foreign market entry modes of Japanese firms for the period. Figure 3 shows that in the Japanese computer and electronics products manufacturing industry, majority equity participation plays a leading role among the four types of entry mode. It accounts for 59% of cases, followed by the minority equity entry mode, which makes up 35% of cases. By contrast, firms rarely use the WOS or 50:50 entry modes, which account for 2% and 4% of cases respectively. With regards to the dynamics of each type of entry mode over the period, the graph below shows how Japanese electronics manufacturers entry mode choices evolved between 2004 and Industry classification number: NACE Rev.2: Japan Automobile Manufacturers Association, The Motor Industry of Japan Report. 8

11 Figure 3: Equity Entry Modes of 50 Japanese Electronics Manufacturing Firms: Graph 3: Annual Changes in Equity Entry Modes of 50 Japanese Electronic Manufacturing Firms: Graph 3 shows annual changes in the use of each entry mode type over the period. The vertical axis of the graph represents the number of firms choosing each entry mode (i.e. majority equity participation, minority equity participation, 50:50 equity participation or wholly-owned subsidiary entry mode). The horizontal axis represents the time period between 2004 and The graph indicates that Japanese firms in the electronic manufacturing industry typically choose majority and minority equity participation entry modes to enter foreign markets. These are followed by the 50:50 equity participation and wholly-owned subsidiary entry modes. Between 2004 and 2010, the majority equity 9

12 participation mode remains stable, growing rapidly between 2011 and The minority equity participation mode begins to decline as of 2004, experiencing limited growth as of In addition, both the 50:50 equity participation and wholly-owned subsidiary entry modes remain relatively low and flat throughout the period. The observed developments in each of these paths might relate to decisions over control of firm resources afforded to Japanese electronics manufacturers by the various entry mode types Analysis of the Entry Modes of Chinese Firms Following the Opening Up policy which began in the 1980s, China has become the world s largest consumer of computer products. After more than 20 years of development, China has established its own domestic brands, such as Lenovo Corporation, Huawei, Haier and Great Wall Computer Corporation. These computer and electronic equipment manufacturing giants are also representative companies in China s computer and electronics manufacturing industry. They have gone beyond the domestic market by expanding their business internationally and have reached international markets. According to the IBIS world industry report, the industry revenue in China reached billion dollars in 2015, with an annual growth rate of 7.3% between 2010 and In addition to these industry giants, many smaller firms have started businesses in foreign markets. The following chart summarises the entry modes used by Chinese computer and electronics manufacturing firms. Figure 4: Equity Entry Modes of 50 Chinese Electronics Manufacturing Firms: Figure 4 shows that majority equity participation, which makes up 56% of observed cases, is the primary method undertaken by Chinese firms entering foreign markets. This is followed 14 IBISWorld, Electronic Component Manufacturing in China: Market Research Report. china/electronic-component-manufacturing.html 10

13 by minority equity participation, which accounts for 38% of cases. The wholly-owned subsidiary and 50:50 equity participation modes are used less frequently, accounting for 6% and 0% respectively. Graph 4: Annual Changes in Equity Entry Modes of 50 Chinese Electronics Manufacturing Firms: With regards to the dynamics of each type of entry mode over the period, Graph 4 shows how Chinese electronics manufacturers entry mode choices evolved from 2004 to It shows annual changes in the use of each entry mode type over the period. The vertical axis of the graph represents the number of firms choosing each entry mode (i.e. majority equity participation, minority equity participation, 50:50 equity participation or wholly-owned subsidiary entry mode). The horizontal axis represents the time period between 2004 and From the graph we can see that in the electronics industry, majority and minority equity participation are the most prevalent types of entry mode chosen by Chinese firms when entering foreign markets. The majority equity participation mode shows an irregular development trend. It increases and decreases between 2004 and To some extent, the steady growth of majority equity participation between 2006 and 2009 reflects the growth of Chinese electronics manufacturing firms, which in turn might relate to lower labour and materials costs as well as the steady economic development of China. Since 2010, majority equity participation trends to a lower level and fluctuates until Minority equity participation rates are generally lower than majority equity participation rates over the period, fluctuating throughout 2004 to These two types of entry modes are followed by the wholly-owned subsidiary mode, which is used relatively infrequently. The 50:50 equity participation mode is not selected by Chinese firms in the electronics industry Analysis of the Largest Firms in the Industry This section presents an analysis on the largest Japanese and Chinese electronics manufacturing firms. Appendix B demonstrates that Japanese firms in the industry are 11

14 typically privately owned and have much larger sales revenue both domestically and overseas, when compared with Chinese firms. In addition, with regard to geographical diversification, the number of countries where Japanese firms operate is remarkably larger than that of Chinese firms. In contrast, 67% of the key firms in the Chinese electronics industry are state owned enterprises. The results also show that both the domestic and overseas sales of private firms exceed those of the state owned enterprises. Specifically, the domestic and overseas sales of private firms are 26, million US dollars and 33, million US dollars respectively, while the domestic sales and overseas sales of state owned enterprises are 20, million US dollars and 17, million US dollars respectively. Moreover, based on the number of foreign countries where firms operate, it is also clear that private firms have greater overseas geographical diversification than state owned enterprises. With regards to the choice of entry mode, both private and state owned enterprises prefer to enter foreign markets either by majority or by minority equity participation. Moreover, Japanese and Chinese firms share a further commonality with respect to the electronics manufacturing industry. Firms from both countries have a preference for the majority and minority equity entry mode pathways. 4. Analysis of Entry Models Based on the Development Level of Destination Countries This section analyses the choices of entry mode based on the level of development in destination countries. As Chinese and Japanese firms from both the automotive and electronics industries grow and develop, they expand into foreign markets in search for an optimized allocation of resources. The scope of foreign regions where Japanese and Chinese firms from both industries conduct business covers Asia, Europe, North America and Latin America. Based on the development level of countries as assessed by the World Bank, this report classifies destination countries into two categories: developed and developing. The analysis below demonstrates the entry modes used by firms to enter both developing and developed countries Analysis of Entry Modes Used to Enter Developing Countries Developing countries typically have vast geographical areas, large populations and a relatively lower level of economic development. Despite the lower economic development level, developing countries usually possess advantages such as access to comparatively lower cost resources, higher levels of potential consumer consumption and a vast amount of natural resources. Since the 1990s, such countries have developed rapidly due to domestic economic reforms and structural economic transformations. Some of the newly-emerging economies have become places that attract a large amount of foreign direct investment. By conducting business in developing countries, firms can exploit comparative advantages and explore potential consumption markets. The following chart shows how the four types of entry mode are selected by firms that enter the markets of developing countries. Figure 5 shows that when expanding into developing countries, both Japanese and Chinese firms prefer majority equity participation as the most appropriate type of entry mode. Among 12

15 the four types of entry mode, majority equity participation accounts for 50% of cases, followed by the minority equity participation entry mode which makes up 30% of cases. The other two types of entry mode, 50:50 equity participation and wholly-owned subsidiaries, take up smaller proportions, with each accounting for 10% of cases. Figure 5: Equity Entry Modes into Developing Countries Note: This figure shows entry modes into developing countries of 200 Japanese and Chinese Firms from the Automotive and Electronics Manufacturing Industries in the period Source. Osiris. Graph 5: Annual Changes in Equity Entry Mode into Developing Countries Note: This graph shows the annual change in equity entry mode into developing countries of 200 Japanese and Chinese firms in the Automotive and Electronics Manufacturing Industries in the period. Source: Osiris. 13

16 As to the dynamics of each type of entry mode over the period, the graph above shows how Japanese and Chinese preferences for each of the four types of entry mode have evolved in developing markets between 2004 and Graph 5 shows annual changes in the use of each entry mode type over the period. The vertical axis of the graph represents the number of firms choosing each entry mode (i.e. majority equity participation, minority equity participation, 50:50 equity participation or wholly-owned subsidiary entry mode). The horizontal axis represents the time period between 2004 and The graph above shows that the majority and minority equity participation entry modes constitute the largest numbers among the four types of entry mode. A changing trend is also seen in the graph. All four types of entry mode generally experienced a decline between 2004 and 2010, and the decline in the use of majority and minority equity participation entry is especially severe between 2008 and After 2010, use of the majority equity participation entry mode increased dramatically and reached a peak in Moreover, use of the minority equity participation entry mode also grew, although not as significantly when compared with the majority equity participation entry mode. The growing trend of market expansion to developing countries over this sample period might coincide with the various instabilities and fluctuations of the world economy observed over the same timeframe. Figure 6: Equity Entry Modes into Developed Countries Note: This figure shows the Equity Entry Modes into Developed Countries by 200 Japanese and Chinese Firms from the Automotive and Electronics Manufacturing Industries in the period. Source: Osiris Analysis on Entry Modes Used to Enter Developed Countries The following chart shows the percentage occurrence of each type of entry mode which firms employ to enter the markets of developed countries. From Figure 6 we can see that the majority and minority equity participation entry modes still play dominant roles among the four types of entry modes when firms expand their businesses into developed countries. The majority and minority equity participation modes constitute 62% and 31% of all cases respectively, with each of the two making up a larger proportion in comparison to the 14

17 equivalent figures for developing countries. The 50:50 equity participation and WOS entry modes share much smaller percentages of all cases, at 5% and 2% each, respectively. Graph 6: Annual Equity Entry Mode Changes in Developed Countries Note: This graph shows the annual change in equity entry mode into developed countries of 200 Japanese and Chinese firms in the Automotive and Electronics Manufacturing Industries in the period. Source: Osiris. With regards to the dynamics of each type of entry mode over the period, Graph 6 above shows how Japanese and Chinese preferences for each of the four types of entry mode have evolved in developed markets between 2004 and Graph 6 shows annual changes in the use of each entry mode type over the period. The vertical axis of the graph represents the number of firms choosing each entry mode (i.e. majority equity participation, minority equity participation, 50:50 equity participation or wholly-owned subsidiary entry mode). The horizontal axis represents the time period between 2004 and The graph shows that when firms enter foreign markets in developed countries, majority equity participation entry mode dominates all throughout the period from 2004 to Beginning with 2004, and despite some fluctuations, the general trend in majority equity participation use is increasing, with the number of firm cases being much larger than for the other three modes. Minority equity participation first goes through a declining period between 2004 and 2008, then increases but stays at the relatively low level between 2008 and The other two types of entry mode, 50:50 equity participation and wholly-owned subsidiaries, fluctuate more dramatically during the sample period and constitute smaller proportions of total firm internationalization cases. 15

18 5. Comparison between Japanese and Chinese Firms This section discusses comparisons of the different types of entry mode between Japan and China, as well as between the automotive and electronics industries in each country. On one hand, the test results show that there are no significant differences between Japanese and Chinese firms when it comes to the different types of entry mode which they favour 15. On the other hand, the test results show that the 50:50 equity participation entry mode is more commonly used in the automotive manufacturing industry than it is in the electronics industry (while the usage rates of majority and minority equity participation and WOSs between the two industries are not significantly different) 16. Further tests also indicate that there are no significant differences among the four types of foreign market entry mode between firms entering developing and developed countries 17. (1) Why might foreign market entry modes be similar between Japan and China? Usage rates of the four types of entry mode are similar between Japanese and Chinese firms, indicating that firms from the two countries choose similar entry mode strategies when expanding into international markets. This similarity could be attributed to the fact that company managers from Japan and China share some common values and beliefs, which are derived from the common cultural background of the two countries. Both Japan and China are Asian countries, and Japan is greatly influenced by ancient Chinese culture. This can have an impact on the cognition of top firm executives, which in turn can result in similarities between the strategic decision making of Japanese and Chinese firms. (2) Why might firms from both industries select similar entry modes? Why may they differ in their use of international joint ventures (50:50 equity participation)? Firms from the two industries studied here have similar approaches when selecting from the majority/ minority equity participation and WOS entry modes when entering foreign markets. In addition to the advantages of majority equity participation, the WOS entry mode enables firms to enter foreign markets with substantial flexibility for meeting the strategic challenges of foreign market expansion. In almost all firm cases from each industry, minority equity participation represents the second most popular mode. This type of entry mode is usually selected by firms who wish to share resources with foreign firms and who intend to learn from their partners when expanding their business into foreign markets. Although this type of entry mode leaves firms with a lower level of control, firms also bear a lower level of risk as a result. 15 P-values of the mean difference tests: majority equity participation: p=0.8061, minority equity participation: p=0.2986, 50:50 equity participation: p=0.6055, wholly-owned subsidiary: p= Conclusion: Fail to reject the null hypothesis that the group means are the same. 16 P-values of the mean difference tests: majority equity participation: p=0.3632, minority equity participation: p=0.8911, wholly-owned subsidiary: p= Conclusion: Fail to reject the null hypothesis that the group means are the same. 50:50 equity participation: p= Conclusion: Moderate rejection of the null hypothesis that the group means are the same. 17 P-values of the mean difference tests: majority equity participation: p=0.8754, minority equity participation: p=0.2865, 50:50 equity participation: p=0.4348, wholly-owned subsidiary: p= Conclusion: Fail to reject the null hypothesis that the group means are the same. 16

19 One point of difference is that the 50:50 equity participation entry mode is significantly different between the two industries. The 50:50 equity participation entry mode is more frequently used in the automotive manufacturing industry than in the electronics industry. Many operational departments in the automotive manufacturing industry are more capital and technology intensive than those in the electronics industry, requiring more capital investment and having greater R&D expenses. By using the equal equity participation entry mode, vehicle manufacturing firms can make capital and R&D investments more effectively, also effectively sharing existing technologies and prior experience with their partners. (3) Why might foreign market entry modes be similar when comparing entries into developing and developed host countries? The results demonstrate that Japanese and Chinese firms from both industries enter the developing and developed countries by making similar entry mode choices. This result differs from past studies 18 which demonstrate that firms prefer low control modes when entering competitive markets in developed countries because they prefer (i) to take advantage of their partners effective performance, (ii) to avoid disabling forces and (iii) to utilize economies of scale. Furthermore, the proportion of majority equity participation is larger in developed countries than in developing countries. This result is partly consistent with previous studies 19 which assert that the option to avoid large control is a natural state for firms operating in imperfect markets and markets with high uncertainty (such as those commonly found in developing countries) in order to reduce transaction costs. Any differences from prior research could be attributed to cultural elements of East Asian countries, which could influence foreign market entry mode choices relative to firms from Western countries. Concluding Remarks The analysis in this report finds that all sample firms from the Japanese and Chinese automotive and electronics industries preferred the majority equity participation entry mode when entering foreign markets. The minority equity participation entry mode was the second most prevalent entry mode selected by these firms. Following the majority and minority equity participation entry modes, the wholly-owned subsidiary and 50:50 equity participation entry modes were most popular. Firms choose foreign market entry modes in accordance with their business environment and specific goals. Decisions around entry mode should also be consistent with the profit maximization objectives of foreign market operations. Japanese and Chinese firms from both industries share similarities in terms of the entry modes employed. This potentially reveals some of the common characteristics shared by these firms. They did however exhibit differences in their preference for the 50:50 equity participation mode. This in turn highlights potential differences between industries. The studied firms also shared similarities in their entry mode decisions when entering developing and developed countries. Future research into the possible impacts of cultural aspects on the choice of entry 18 Williamson, O.E The Modern Corporation: Origins, Evolution, Attributes. Journal of Economic Literature, Anderson, E., & Coughlan, A.T International Marketing Entry and Expansion via Interdependent or Integrated Channels of Distribution. Journal of Marketing,

20 modes for Asian firms and comparisons between Western and Asian firms could yield valuable insights for theorists and practitioners. References Anderson, E., & Coughlan, A.T International Marketing Entry and Expansion via Interdependent or Integrated Channels of Distribution. Journal of Marketing, Brouthers, L.E., Brouthers, K.D., & Werner, S Is Dunning s Eclectic Framework Descriptive or Normative? Journal of International Business Studies, 30(4): ChinaReport, The Contemporary Development Situation of Automobile Industry in China. IBISWorld, Electronic Component Manufacturing in China: Market Research Report. IBISWorld, IBISWorld Industry Report-Auto Parts Manufacturing in China. Japan Automobile Manufacturers Association, The Motor Industry of Japan Report. UNCTAD, Global Investment Monitor. UNCTAD, World Investment Report. UNCTAD, World Investment Report-Overview. Williamson, O.E The Modern Corporation: Origins, Evolution, Attributes. Journal of Economic Literature, Further Reading Brouthers, K.D A retrospective on: Institutional, cultural and transaction cost influences on entry mode choice and performance. Journal of International Business Studies, 44(1): Japan Automotive Manufacturers Association, Investing in America, Annual Contributions Report. 18

21 Meyer, K., Estrin, S., Bhaumik, S.K., Peng, M.W Institutions, Resources, and Entry Strategies in Emerging Economies. Strategic Management Journal, (30): Williamson, O.E Markets and Hierarchies: Analysis and Antitrust Implications, New York: The Free Press. 19

22 Appendices Database Description All data used for this analysis is from the BvD Osiris and Zephyr databases. The BvD database is widely used by international business and finance researchers to obtain data on the financial performance and M&A activities of publicly listed firms. Some of the firm-specific information used in this analysis was also obtained from the annual reports of the sample companies and was therefore collected by hand. Appendix A The six largest Japanese firms in the automotive manufacturing industry, their sales and number of foreign countries of operation data is based on 2014 statistics. Entry mode percentages are based on data from the period between 2004 and Company Name Ownership Sales: Japan (million USD) Sales: Overseas (million USD) TOYOTA MOTOR Private 108, , CORPORATION MITSUBISHI MOTORS Private 16,425 11, CORPORATION MAZDA MOTOR Private 22,573 21, CORPORATION ISUZU MOTORS LTD Private 12, , DENSO CORPORATION Private 23, , NISSAN MOTOR CO LTD Private 40,321 93, Foreign Countries of Operation Company Name Majority Equity Participation (%) Majority Equity Participation (%) 50:50 Equity Participation (%) WOS (%) TOYOTA MOTOR 55% 9% 27% 9% CORPORATION MITSUBISHI MOTORS 25% 75% 0% 0% CORPORATION MAZDA MOTOR 33% 67% 0% 0% CORPORATION ISUZU MOTORS LTD 40% 60% 0% 0% DENSO CORPORATION 36% 14% 7% 43% NISSAN MOTOR CO LTD 67% 0% 33% 0% The six largest Chinese firms in the automotive manufacturing industry, their sales and number of foreign countries of operation data is based on 2014 statistics. Entry mode percentages are based on data from the period between 2004 and Company Name SAIC MOTOR CORPORATION LIMITED Ownership Sales: China (million USD) Sales: Overseas (million USD) SOE 97, Foreign Countries of Operation 20

23 GUANGZHOU SOE 3, AUTOMOBILE GROUP CO., LTD. NINGBO HUAXIANG Private 1, ELECTRONIC CO., LTD. ANHUI JIANGHUAI SOE 4, AUTOMOBILE CO, LTD. CHANGZHOU XINGYU Private AUTOMOTIVE LIGHTING SYSTEMS CO., LTD. BYD COMPANY LIMITED Private 7, , Company Name Majority Equity Majority Equity 50:50 Equity WOS (%) Participation (%) Participation (%) Participation (%) SAIC MOTOR 0% 0% 100% 0% CORPORATION LIMITED GUANGZHOU 100% 0% 0% 0% AUTOMOBILE GROUP CO., LTD. NINGBO HUAXIANG 100% 0% 0% 0% ELECTRONIC CO., LTD. ANHUI JIANGHUAI 0% 0% 100% 0% AUTOMOBILE CO, LTD. CHANGZHOU XINGYU 100% 0% 0% 0% AUTOMOTIVE LIGHTING SYSTEMS CO., LTD. BYD COMPANY LIMITED 100% 0% 0% 0% Appendix B The six largest Japanese firms in the electronics manufacturing industry, their sales and number of foreign countries of operation data is based on 2014 statistics. The entry mode percentages are based on data from the period between 2004 and Company Name Ownership Sales: Japan (million USD) Sales: Overseas (million USD) Foreign Countries of Operation HITACHI LTD Private 46, , SONY CORPORATION Private 19, , PANASONIC Private 32, , CORPORATION TOSHIBA CORPORATION Private 24, , FUJITSU LIMITED Private 25, , NEC CORPORATION Private 20, , Company Name Majority Equity Majority Equity 50:50 Equity WOS (%) Participation (%) Participation (%) Participation (%) HITACHI LTD 70% 23% 7% 0% SONY CORPORATION 30% 30% 30% 10% PANASONIC 50% 50% 0% 0% 21

24 CORPORATION TOSHIBA CORPORATION 53% 43% 4% 0% FUJITSU LIMITED 56% 44% 0% 0% NEC CORPORATION 44% 50% 6% 0% The six largest Chinese firms in the electronics manufacturing industry, their sales and number of foreign countries of operation data is based on statistics from The entry mode percentages are based on data from the period between 2004 and Company Name Ownership Sales: China (million USD) Sales: Overseas (million USD) LENOVO GROUP LIMITED Private ZTE CORP SOE CHINA GREATWALL SOE COMPUTER SHENZHEN CO., LTD. BOE TECHNOLOGY GROUP SOE CO., LTD QINGDAO HAIER CO., LTD Private SICHUAN CHANGHONG ELECTRIC CO., LTD SOE Foreign Countries of Operation Company Name Majority Equity Participation (%) Majority Equity Participation (%) 50:50 Equity Participation (%) WOS (%) LENOVO GROUP LIMITED 100% 0% 0% 0% ZTE CORP 50% 0% 0% 50% CHINA GREATWALL 0% 100% 0% 0% COMPUTER SHENZHEN CO., LTD. BOE TECHNOLOGY 0% 100% 0% 0% GROUP CO., LTD QINGDAO HAIER CO., LTD 100% 0% 0% 0% SICHUAN CHANGHONG ELECTRIC CO., LTD 100% 0% 0% 0% 22