1.1. Research Background
Multinational enterprises have actively invested in the emerging economies due to their attractive market potential and growth opportunities (Luo, 2001; Child & Tsai, 2005; UNCTAD, 2015). The development of investment can be seen from the middle of the 1990s until the following two decades where many countries have begun to realize the advantages of Foreign Direct Investment (FDI).
In general, the choice of entry mode strategies is supporting their decision to enter the foreign markets. According to Canabal and White III (2008), entry modes can be divided into non-equity and equity. Non-equity entry mode include export and contractual agreements (e.g. licensing and franchising), where the company obviously wants less investment but the control will also be lower. Meanwhile, if a company chooses equity mode, it allows for a higher control but also requires a big and costly investment. This paper will focus on equity entry modes which can be breakdown further into wholly owned subsidiaries (greenfields and acquisition) and joint ventures.
The wholly owned greenfields approach means building the business from zero point which is suitable to use if there is lack of proper acquisition target. Hence, the wholly owned greenfields approach has an advantage to gain full control of the company (Brouthers & Brouthers, 2000). Hitt et al. (2010) found that acquisition is increasingly favorable due to its easy access. It is believed that this method can be an alternative to get a higher market power with a lower risk than the wholly owned subsidiaries method. According to Erramilli (1990), joint ventures modes happens when two or more firms share their ownership and control over assets. This is
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preferable when both partners expected large mutual gains in the long run because easy to access to partner’s local knowledge.
In recent years, there have been many studies exploring the entry modes, mostly on seeking for the determinants affecting the entry mode strategies. These studies facilitate large multinational enterprises to discover specific characteristics influencing their entry decision in terms of the level commitment, risks and controllability of destined countries (Brouthers & Nakos, 2004). Tihanyi et al. (2005) have focused on the meta-analysis on the effects of cultural distance on entry mode choice, international diversification, and multinational enterprise (MNE) performance.
Factors such as transaction cost / internalization theory, organizational theory, ownership-location-internalization (OLI) theory have also been studied to extend the choices for firms to entry new market.
Some researchers have also analyzed the level of shareholder ownership equity when entering to another country. Lee et al. (2014) argued that higher ownership shares are acquired in target countries with high density of strategic assets and high financial-market capitalization. When MNEs make a new investment, they need to determine their degree of shareholder whether they want to take higher or lower share in the host market.
In this study, Indonesia is used as a host country due to the fact that Indonesia was included in top 20 host economies according to UNCTAD 2015’s review. The opportunity to invest in Indonesia has become greater especially during recent years.
Indonesia, which is located in a strategic location in Southeast Asia between Indian and Pacific Oceans, is rich in natural resources such as coals, minerals like oil & gas, gold, copper etc. It is also well-known with their tropical weather which is ideal for producing palm oil, coffee, rubber and rice. As an emerging economy, its industrial
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growth considered to be attractive market for foreign investor (KPMG-Indonesia, 2015). Mining and manufacturing industries have found to be major pillars for the nation’s economy since 1970s. In 2011, it is shown that the mining sector have contributed around 12 percent to Indonesia’s GDP (Indonesia-Investments, 2014).
According to Otto and Rachman (2016), Indonesia present president’s support has advancing foreign investor to invest in Indonesia. There are 35 business sectors including tourism-related ventures, nontoxic waste management and distribution that would open up to full and partial foreign ownership. These advantages have made Indonesia become so attractive to foreign investors.
However, very few studies have expanded the contribution of firms’ post performance, yet, they are believed to be important in order to make suitable decision for entry mode strategies (Brouthers, 2002). Following his study, the first purpose of present paper will develop new model to study the importance of firms’ performance to obtain the suitable entry mode and how much foreign shareholder ownership is compatible for them. Second, detail explanation in terms of cultural distance and corruption index of countries will be discussed in order to discover the strength of relationships between entry mode and firms’ performance or shareholder ownership.
1.2. Research Framework
Since there are limited studies of entry mode on firms’ performance, the present study would try to identify the effectivity of firm’s strategy breaking down into their entry mode strategy and size of shareholder ownership to firms’ performance.
Considering previous studies, such factors as cultural distance and corruption effects are taking in account to help identify the relationship. The framework of this study illustrated from Figure 1.1.
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Figure 1.1 Research Framework
Cultural distance and corruption effects have been studied before and according to (Demirbag et al., 2007; Lee et al. (2014)), these factors have a significant relationship with ownership shares and entry mode strategies. Therefore, this study would also like to examine whether these factors have positive relationship in order to achieve the purpose of the study.
1.3. Research Objective
1. Discover the most suitable entry mode for foreign investor to entry Indonesian market considering at firms’ post performance experience whenever cultural distance and corruption gap are considered.
2. Discover the preferred ownership share equity for foreign investor to entry Indonesia market looking at firms’ post performance experience when cultural distance and corruption gap are considered.
1.4. Contribution of the Research
This research will provide the decision-making process to assist the foreign
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investor to determine their entry strategy into Indonesian market. Furthermore, this research consider several factors to improve their entry strategy, such as factors before entering new markets as well as firms’ post-performance experience could have an important position.
1.5. Methodology of the Research
As the economy of Indonesia grew stronger, investment outside the country are increasing, their interest to invest was taken warmly by the Investment Coordinating Board of Republic of Indonesia (BKPM). BKPM is an organization and a place where foreign investor or local investor will deal with when they plan to invest in Indonesia.
BKPM will taking care of every matter connected to investment rules, requirement, and how-to-process. Through the information provided by BKPM, the investors will have a better understanding before deciding their investment plans.
Although there are a lot of companies in Indonesia, not all of them are included in Indonesia public listed company. Becoming a public listed company is the next step for firms to get public attention. However, becoming a public listed company is not an easy task. The firms must follow the rules and regulations, e.g. providing their periodic financial reports to the public community, conducting a good corporate government (GCG), and providing investor relation departments for public community. Meanwhile, the company will get several benefits after becoming a public listed company. The company can offer its stock to be listed in the Indonesia Stock Exchange (IDX / BEI) for some financial benefits. BEI is an organization provides an official listed company stock exchange database based in Jakarta, Indonesia.
This study will conduct a qualitative and quantitative approach and try to analyze
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firms’ performance growth to discover which strategies is suited to implement. The historical database is collected from BEI database using the HOTS30 software (home online trading software) from KDB Daewoo Securities. There are overall 522 listed companies in Indonesia, however, this study will only use 145 companies as the data sample.
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