Informal Institutions 15 - Research Design

Chapter 3 Research Design

3.2 Hypotheses

3.2.3 Informal Institutions 15

transactions are subject to policy interventions, foreign enterprises are facing high institutional risks. As Dwyer and Welsh (1985) argued, an organization characterized by agility and flexibility is most effective in coping with environmental uncertainty. This kind of organization tends to be heterogeneous in its affiliations, decentralized in decision making, and informal in terms of organizational structure. All these suggest a low-control entry mode when operating in a uncertain institutional environment. We hence have the following hypothesis:

H2: The higher the regulative risk, the lower the control level that will be chosen by foreign enterprises in their entry mode.

3.2.3 Informal Institutions

There are various types of informal institutions. In this paper, we will discuss the following: professional norms, network relations, mimetic behavior, cognitive pressure, and cultural distance, which have been identified to be important in the literature (e.g. DiMaggio &

Powell 1983; Scott 1995; Grewal & Dharwadkar 2002).

Professional Norms

Norms are multi-dimensional. They may be location based, industry based, or exchange based. Heide and John (1992), for example, studied the relational exchange norms that govern buyer-supplier relationships. These norms are based on the expectation of mutuality of interest designed to enhance the collective interests of the relationship as a whole. Relational exchange norms reduce transaction costs by limiting deviant behaviors of the partners, and enhancing

their willingness to commit to the partnership.

In this paper, we are concerned with group-based norms. There are many organized bodies existing in society for the purpose of promoting the interests of their members.

Although they lack coercive power, these organizations can influence the conduct and behavior of their members by means of peer pressures (Grewal & Dharwadkar 2002). Nee (1998:87) pointed out that a closely-knit group will obey the rules set by its members, and will cooperate willingly through these norms, to solve their problems, to promote their common interests and preferences, and to increase the opportunity of success. Such norms may not originate from efficiency considerations, but they can increase the organization’s procedural legitimacy and make transactions more efficient because of common expectations (Grewal &

Dharwadkar 2002).

Because norms are institutionalized through internalization, there is no motive for external actors to conform to them (Zucker 1977), and therefore new entrants will select a lower-control mode of entry if the local organizations have already established a comprehensive set of norms. Through their local partners, foreign enterprises may resort to the help of professional associations to safeguard their interests and preferences (Meyer &

Rowan 1977). Professional norms refer to expectations about the behaviors that are shared by practitioners in the same professions (DiMaggio & Powell 1983). We hence hypothesize:

H3: The stronger the professional norms in the local economy, the lower the level of

control in the entry mode that will be chosen by foreign investors.

Network Relations

Network relations, known as “guanxi” in China, refer to personal and business connections which have been proven to be critical to business operations in China (Xin &

Pearce 1996). Network relations result from a firm’s efforts to establish long-term relationships with other firms in order to sustain its competitive advantage (Thorelli 1986;

Oliver 1990; Peng & Heath 1996). Common backgrounds, such as similar ethnic, geographic, ideological, professional, or historical origins, are the most common grounds for establishing network relations (Marsden 1981; Powell 1990; Styles & Ambler 2003). Bonds connecting members of the network will be routinized and stabilized if long-term transactions have been developed among them (Marsden 1981).

Many empirical studies have shown that Chinese people were good at establishing and operating through personal networks, known as “guanxi”, when they were still in planned economic times (Peng & Heath 1996). During the transition from a planned economy to a market economy, formal institutions have not been firmly established, quanxi becomes a substitute for formal institutions. Guanxi serves two major functions in China: protection against environmental hazards and access to resources (Xin & Pearce 1996). Both functions are very important for foreign enterprises which are new to the China market. In China, even when laws are there to protect foreign investors, still guanxi is essential to get these laws

enforced (Ahlstrom et al. 2003). Networking also provided flexibility of resource allocation in an environment in which factor mobility was restrained and laws were subject to political manipulations (Davies et al. 1995). In China, laws are often confusing or conflicting and information flows may be impeded, and thus information obtained from the guanxi network is more reliable and more valuable. In a matured society, this kind of “particularistic”

information is less valuable because people need only to assume that others are following the known rules (Coleman 1993; Zucker 1986).

Through network linkages, firms may also achieve the goal of growth by mobilizing external resources without direct ownership, saving them substantial administrative costs of owning and managing resources. Therefore, the tighter the local distributors’ structured network, the more likely it is that foreign investors will abandon hierarchical control and opt for a collaborative arrangements to take advantage of the network resources for protection against threats and for obtaining resources needed for growth. We hence have the following hypothesis:

H4: The stronger the network ties in local marketing channels, the lower the control mode that will be chosen by foreign investors when entering the market.

Mimetic Behavior

Mimetic behaviors refer to a tendency to follow the market leaders, the successful peers, or the predecessors originated from the same country (Haunschild & Miner 1997). When

entering a new institutional environment, foreign enterprises may seek guidance from their predecessors to cope with uncertainty. Foreign enterprises tend to adopt structures and processes similar to those of the organizations that have been successful, particularly if the successful organizations also share similar origins. Mimetic behaviors are mainly based on legitimacy as opposed to efficiency considerations (Grewal & Dharwadkar 2002). Foreign investors may choose the same entry mode as its predecessors from the same industry or the same country (Yiu & Makino 2002)

In an empirical study of Japanese investors in 12 developed countries, Lu (2002) found that new entrants tended to mimic the entry mode adopted by their successful predecessors. A successful organizational structure will be duplicated and institutionalized after being repeatedly adopted by its followers (Roberts & Greenwood 1997).

In a transitional economy like China, where commercial norms have not been established, the tendency to “follow the leader” is very strong as market participants are groping for a winning formula. For example, in the case of the electronic appliances industry, the leading distributor, Guomei, invented a business model whereby entry fees rather than “mark-ups”

become the major source of revenue for distributors. The model that made Guomei rich was followed by late-comers (Wu 2005). Through imitation, the market leaders produce a network-learning effect, resulting in the erection of barriers to new entrants. The network so established will also have an external benefit on the followers if they adopt the same business

practices. We hence have the following hypothesis:

H5: In a transitional economy, newly-entered foreign firms will follow the entry mode choice of their successful predecessors.

Cognitive Pressure

The cognitive domain of the institutions refers to the widely shared cognitive structures by which actors of a given organizational field make sense of their world (Scott 1995).

Simply put, it is the common belief system that is taken for granted and used for judgments.

The similarity of cognitive institutions makes it easier for organizations to transact with each other, and to be acknowledged as legitimate and reputable (DiMaggio & Powell 1983).

Cognitive pressure refers to the isomorphic pressure on foreign enterprises to conform to organizational practices that are believed to be the right way of doing things. It may also be extended to the expectation that organizations fulfill certain social responsibilities (Campbell 2006). If cognitive institutions of the host country significantly differ from those of the source country, it will be difficult for MNCs to transfer routines or practices to the subsidiary because the subsidiary employees will interpret and judge them in different ways (Kostova 1999; Ferner et al. 2005).

Entry mode is relevant here because it offers a compromise between external legitimacy and internal consistency (Yiu & Makino 2002). While conforming to local cognitive institutions is important for obtaining external legitimacy, its adverse impact on internal

consistency can be minimized by a proper choice of entry mode. For example, if some prevailing local practices are conflicting with the internal accounting procedures of the MNC, then a joint venture or non-equity arrangement with local partners may be preferable to wholly-owned subsidiary.

H6: The more easily the ways of doing business on the part of a foreign firm can be accepted by the local society, the higher the control level that will be adopted in the entry mode choice of the foreign firm.

Cultural Distance

Cultural distance affects entry mode choice through a few channels. First, cultural distance generates additional costs related to information collection and communications, making internalization difficult (Randoy & Dibrell 2002). Second, cultural distance induces foreign enterprises to seek local support with the aim of facilitating product adaptation, risk sharing and mistake avoidance (Palenzuela & Bobillo 1999). Third, cultural distance hinders the transfer of firm-specific routines, making collaboration more attractive than hierarchy (Madhok 1997). In sum, all these arguments lead to the conclusion that cultural distance deters resource commitments and encourages a lower-control entry mode. Empirical studies along this line of arguments have shown that joint venture is preferable to wholly-owned subsidiary when cultural distance is large (Anderson & Coughlan 1987; Kim & Hwang 1992;

Brouthers & Brouthers 2000). However, cultural distance also increases the costs of

management integration, which implies the difficulty of acquisition and joint venture as well if the management tasks are not properly designed (Kogut & Singh 1988). A recent study by Quer et al. (2007) substantiates the argument that greater cultural distance leads to lower-commitment entry strategies.

When confronted with disparate sales philosophies, languages, customs and lifestyles, foreign investors will tend to choose a lower control entry mode to avoid conflicts with local actors and to increase the flexibility of business arrangements, particularly if they consider the contingency of withdrawal from the area when the business fails (Kim & Hwang 1992). That is, when a large cultural distance exists between the host and the home country, a wholly-owned subsidiary will give way to a contractual mode of market entry in order to mitigate the cultural disparities. We hence have the following hypothesis:

H7: The larger the cultural distance between the home and local markets, the lower the control level that will be chosen by foreign investors in relation to entry mode selection.

3.3 Measures of Variables

3.3.1 Dependent Valuable

The entry mode in each sales district was taken as the dependent variable, which was categorized in accordance with the degree of control into 3 types: wholly-owned subsidiary (WOS), exclusive dealership (ED), and non-exclusive dealership (NED). The dependent

variable was an ordinal variable and in the ordered probit regression model used for empirical study, WOS was taken to be 2, ED to be 1, and NED zero. The larger the number, the higher the control level. Since the entry mode might change over time, the respondents were asked to indicate their entry mode when the distributor was first established in the sales district and recall the conditions existing at the time when entry occurred.

3.3.2 Independent Valuables

The independent variables were divided into three categories: transaction cost related variables, institutional variables, and control variables. Institutional variables, the focus of this study, were further divided into six groups: regulative (formal) institutions, professional norms, network relations, mimetic behaviors, cognitive pressure, and cultural distance.

Unless specifically stated, all institutional and transaction-cost variables used in this study were measured using a 7-point Likert scale, ranging from 1 (e.g., strongly agree) to 7 (e.g., strongly disagree). Transaction cost variable (TSA) was derived from a set of three constructs which measure the costs of opportunism (TSA1), the difficulty of contract enforcement (TSA2), and the importance of transaction-specific assets (TSA3). Regulative institution variable (REG) was a composite variable derived from four constructs covering entry mode restrictions (REG1), market liberalization (REG2), tax treatment (REG3), and financial institutions (REG4). Each construct is measured by a 7-point Likert scale which takes a higher value when the dimension carries a lower institutional risk. For example,

REG1 takes the value of 7 when the government imposes absolutely no restrictions on organizational forms of foreign enterprises.

Mimetic behaviors (MIMIC) were measured using a dichotomous choice which was given a value of 1 for dealership and 2 for WOS. The remaining independent variables were assessed using a single Likert-type question such as professional norms (PN), network relations (NET), cognitive pressure (COG), and cultural distance (CD). Understandably, there are multiple dimensions to each of these institutional factors and it would be ideal if multiple constructs can be designed for each variable. However, in the pretest interviews, we found that Chinese respondents often confused with sophisticated questions, resulting in inconsistent answers. To obtain more reliable answers from the survey through our representatives, we have simplified the measurement of these variables to single-construct ones. To avoid confusions, strait-forward questions were posed. The measurement of these variables is explained in Appendix A. It should be noted that our measurement of cultural distance is an indication rather than a cause of the cultural distance. We measured the

“difficulty of communication” as a result of cultural distance. This can be easily understood by the respondents. Hofstede’s (1980) seminal work suggests four major constructs of the cultural distance: power distance, risk avoidance, individualism and masculinity, and Kogut and Singh (1988) have devised a measure to incorporate these constructs. However, this elegant measure is mainly designed for distance in national cultures. Our simple

measurement captures the most important consequence of cultural distance in the distribution business. Correlations between independent variables are listed in Table 2.

Although there are some indications of correlation between variables, the degrees of correlation are not large enough to cause a concern.

Table 2

Correlation Matrix of Independent Variables

TSA REG PN WET COG CD AGE

1.Transaction cost (TSA) 1.000

2.Regulative institution (REG) 0.140* 1.000

3.professional norms (PN) 0.191** 0.366** 1.00

4.Network relations (NET) 0.138* 0.008 0.087 1.000

5.Cognitive pressure (COG) 0.154** 0.098 0.062 0.069 1.000

6.Cultural distance(CD) -0.011 0.225** 0.157** -0.135* 0.108 1.000

7.Age (AGE) -0.062 0.047 0.063 0.010 -0.059 0.039 1.000

Note: *p<0.05; **p<0.01

3.3.3 Control Valuable

One control variable, time of entry, was included in the model. Time of entry was measured by the number of years that a distributor had been in operation since the date of entry at the time of the survey. Foreign firms might have hesitated to establish WOS in the early stages of China’s reforms due to uncertainty regarding the local environment.

Nevertheless, after they gained experience over time through interactions with various locations, they could more precisely evaluate the risks and potential returns on investment and were thus more willing to bear risks and hence increase the control level in entry mode choice (Gomes-Casseres 1989; Delios & Beamish 1999; Chang & Rosenzweig 2001). We postulate that, the later the time of entry, the greater the control level in terms of the entry mode that will be sought by foreign investors.

3.4 Research Setting

3.4.1 Questionnaire Design and Pretest

All measures on institutions and transaction costs were constructed based on the existing

literature, and interviews with executives of PFC in China were conducted prior to the survey.

A pretest was performed with 5 questionnaires drawn from each region to check whether there is any misunderstanding of the survey’s literal meanings. The result of the pretest showed that the respondents tended to confuse with the meanings of questions related to institution

variables. Their answers were often conflicting when multi-dimensional questions are posed for a single institutional variable. We therefore simplified the questionnaire by posing a single question for each institutional variable, except for regulative institution, which seems more comprehensible.

3.4.2 Subjects

President Food Corporation (PFC) is Taiwan’s largest food manufacturer with intensive sales networks and diversified product lines. Ranked as the third largest Taiwanese investor in China, PFC’s total investment had accumulated to US$350 million by the end of 2005. Since its entry to China in 1990, PFC has established several factories around China and has focused its business lines on instant noodles and beverages. PFC recorded sales revenue of US$3 billion in China in 2005, rivaling its Taiwan operations. Instant noodles constitute one of the most important business lines for food companies in China, with total market volume amounting to RMB$30 billion (US$3.4 billion) in 2005. PFC’s products accounted for an 18% share of the instant noodles market in China and were rated as the No. 2 brand there, just behind the market leader, Master Kong, which is also a Taiwan-invested company. Like other large food companies in China, PFC divided the entire China market into about 1,200 sales districts which fall under the supervision of six regional headquarters. We will use the sales district as the unit of analysis when studying PFC’s entry mode choices.

The significance of the PFC case can be explained in several respects. It is one of

Taiwan’s largest investors in China with a long history of operations. Its distribution networks cover most major cities in China. Moreover, the entry mode differs from one sales district to another. Geographical heterogeneity in formal and informal institutions is apparent (Yang 2002). Informal institutions related to normative, cognitive, and cultural domains vary across districts. For example, some districts are dominated by state-owned firms, some by collectively-owned firms, and some by private firms. Regional diversity in ethnics, languages, and tastes is also apparent. Exposures to international cultures differ as a result of different degrees of openness to foreign trade and investment. Even formal institutions are differentiated due to an uneven pace of reforms and discretionary policy environments adopted by the local government. This diversity ensures that foreign investors view different regions in China as distinctive market territories (Wei et al. 2005). Our case study provides a perfect sample to investigate the influence of institutions rooted at the regional level.

3.4.3 Methodology

The data used in this study were collected from a questionnaire survey on PFC’s distributors in China. Questions related to institutional theory as well as to transaction cost theory were directed toward PFC distributors, who were asked to answer the questions based on the data pertinent to their district. Questionnaire was designed by the authors and all questions were posed in simple Chinese language to avoid misunderstanding. The reason for making the sales district the unit of analysis was that the entry mode varies according to the

sales district as opposed to the product. As a huge country, China’s institutional environment also differs greatly across districts. The observed entry modes for distributors include wholly-owned subsidiaries and contractual arrangements with local firms. Joint venture is not observed in any district, indicating that it is inferior to either wholly-owned or contractual mode. Contractual arrangements can be further divided into exclusive dealings and non-exclusive dealings. Exclusive dealings refer to the cases where the contracted local agents are prohibited from handling the products of PFC’s rivals, such as Master Kong, while agents under non-exclusive dealings are allowed to do so. Because joint venture is ruled out, the entry mode choice between wholly-owned and contractual modes is a matter of control rather than ownership percentage. Although it is the PFC managers, and not the distributors, that made the decisions regarding the entry mode, we asked the owners of local agents, as well as the top managers of wholly-owned subsidiaries, who had a good understanding of the local institutional environment, to fill out the questionnaires. The distributors should have the best

在文檔中中國地區經銷商進入模式之選擇—以制度及交易成本的觀點 (頁 25-0)