進入模式與績效之研究﹕以投資印尼為例

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(1)國立台灣師範大學管理學院全球經營與策略研究所碩士論文 Graduate Institute of Global Business and Strategy College of Management National Taiwan Normal University Master Thesis. 進入模式與績效之研究﹕以投資印尼為例 Entry Mode Strategies and Post-Entry Performance: The Cases of Foreign Investment in Indonesia. 研究生﹕陳金蓮 Graduate Student: Margareth Shanty Haryanto. 指導教授﹕康敏平博士 Advisor: Kang, Min-Ping Ph.D.. 中華民國 105 年 6 月 June, 2016.

(2) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Table of Contents List of Tables ..................................................................................................................ii List of Figures .............................................................................................................. iii List of Equations ........................................................................................................... iv Acknowledgement ......................................................................................................... 1 Abstract .......................................................................................................................... 2 1. Introduction ............................................................................................................ 3 1.1. Research Background ................................................................................ 3. 2.. 1.2. Research Framework ................................................................................. 5 1.3. Research Objective .................................................................................... 6 1.4. Contribution of the Research ..................................................................... 6 1.5. Methodology of the Research .................................................................... 7 Literature Review and Hypothesis ......................................................................... 9 2.1. Foreign Direct Investment ....................................................................... 11 2.1.1. Globally........................................................................................ 11 2.1.2. Developing Countries .................................................................. 14 2.1.3. Indonesia ...................................................................................... 16 2.2.. 3.. 4.. Entry Mode Strategies and Shareholder Ownership to Performance ...... 19 2.2.1. Entry Modes ................................................................................. 19 2.2.2. Foreign Shareholder Equity Ownership....................................... 21 Methodology ........................................................................................................ 23 3.1. Data and Sample ...................................................................................... 23 3.2. Variables ................................................................................................... 23 3.2.1. Dependent Variables .................................................................... 23 3.2.2. Independent Variables .................................................................. 24 3.2.3. Moderator ..................................................................................... 24 3.2.4. Control Variables ......................................................................... 25 3.3. Statistical Method .................................................................................... 25 Results and Discussion ........................................................................................ 27 4.1. Measurement ............................................................................................ 27 4.1.1. Control Variable ........................................................................... 27 4.1.2. Dependent Variable ...................................................................... 28 4.1.3. Independent Variable ................................................................... 28 4.1.4. Moderator Variable ...................................................................... 28. 4.2. Results and Discussion ............................................................................ 29 5. Conclusion and Limitation ................................................................................... 36 References .................................................................................................................... 39 i.

(3) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. List of Tables Table 4-1 Foreign Countries Investor percentage in Indonesia ............. 27 Table 4-2 The Descriptive Statistics.......................................................... 30 Table 4-3 Regression Results ..................................................................... 33. ii.

(4) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. List of Figures. Figure 1.1 Research Framework ................................................................ 6 Figure 2.1 Alternative Strategies for Business Innovation ..................... 10 Figure 2.2 FDI Inflows for Global and Group economies (Billions of dollars) ................................................................................................ 13 Figure 2.3 FDI Inflows of top 20 host economies and FDI outflows of top 20 home economies ...................................................................... 14 Figure 2.4 FDI outflows of Developing Economies and their share (Billions of dollars and percent) ........................................................ 15 Figure 2.5 Participation of Asian economies and competing regions in GVCs ................................................................................................... 15 Figure 2.6 GDP Growth in Asian Economies .......................................... 16 Figure 2.7 The annual operating cost comparisons (automotive OEM manufactures) ..................................................................................... 18 Figure 2.8 Foreign Direct Investment Trends in Indonesia.................... 18 Figure 4.1 Interaction of cultural distance with Acquisition and ROE 34 Figure 4.2 Interaction of Cultural Distance with Foreign Minority Shareholder and ROE ....................................................................... 35. iii.

(5) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. List of Equations. Equation 3-1 Average ROE ....................................................................... 23 Equation 3-2 Cultural Distance Formula ................................................ 24 Equation 3-3 Corruption Distance Formula ........................................... 25 Equation 3-4 Multiple Regression ............................................................ 25. iv.

(6) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Acknowledgement. First and foremost, the author would like to thank Professor Kang, Min Ping who, as an advisor, always give directions to make this research idea becomes much better along the way. She always gives a bigger picture in every aspect of this research study. These things inspired and motivated the author to achieve the purpose of this study. Secondly, special thanks to Dr. Doddy Prayogo who provides a lot of help in explaining the concept of stock exchange in Indonesia and in obtaining the required database related to stock information. His help will be highly appreciated for the success of this study. Thirdly, to her parents, sister and best friend, thank you for giving emotional support and for believing in her abilities. The author will always be grateful to have them by her side during writing this thesis. To all of her friends, who support and pray for the success of this study, thank you very much. Last but most importantly, to Him whom she cannot see, yet His soft voice always there inside her heart to keep her for moving forwards. She loves Him.. 1.

(7) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Abstract. This study proposes an interesting approach regarding the implementation of an entry mode strategy into the emerging markets from different points. Although previous studies have been undertaken to explore the influencing factors that affect the entry mode decision, there are a few research studies on the entry mode strategy and foreign shareholder ownership that consider the performance of companies in emerging market. In response to this current issue, the present study develops a new model based on foreign investors’ performance in emerging market for finding the most suitable entry mode strategy and preferable foreign shareholder ownership into emerging market. In order to achieve this goal, the moderator variables, such as cultural distance and corruption effect, were included to assess the correlation between the entry mode and the company’s performance. As one of the developing countries, Indonesia was used as a model country in this study and the 3-year performance of the listed companies were investigated. The obtained results indicate that the cultural distance and corruption have a moderate effect to the company’s entry mode and performance Therefore, when these factors were available, they will have a great impact to the choice of entry mode that will better or aggravate the performance of companies.. Keywords: entry mode, emerging market, performance growth, cultural distance, institutional factor, Indonesia listed company. 2.

(8) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 1. Introduction. 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 3.

(9) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 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 4.

(10) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 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. 5.

(11) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 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 6.

(12) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 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 7.

(13) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 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.. 8.

(14) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 2. Literature Review and Hypothesis. When a firm tries to seek for alternative strategies to expand their business, there are certain ways available (M.Grant, 2008). The strategies could be licensing, outsourcing, strategic alliance, commercialization, and joint ventures. Licensing is an agreement that may be granted by a party (licensor) to another party (licensee) to allow using material or activity that initially is forbidden. This type of method may require paying a fee to keep the authorities informed and give them opportunity to set conditions and limitations. Licensor may grant a license under intellectual property laws to authorize a use (copying software or patented invention) to a licensee (Raysman, 1999-2008). Outsourcing is a practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. Strategic alliance is an agreement for cooperation among two or more independent firms to work together toward common objectives. This type of strategy does not form a new entity to further their aims but to collaborate while the remaining apart and distinct. Commercialization is the process of introducing a new product or production method into commerce and making it available on the market (Jolly, 1997). Larry Page and Sergey Bin establishing Google Inc. to develop and market their internet search technology is an example of commercialization strategy. Joint venture is a business agreement between two different companies to work together to achieve goals. A joint venture does not have to be permanent, and it offers companies the benefits of maintaining their independence and identities as individual companies while offsetting weaknesses with other company strengths. This type of 9.

(15) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. strategy allows companies to pursue larger opportunities than they could alone, it can establish a presence in a foreign country and gain competitive advantage in a particular market. It can also help companies to lower costs, gain access to another company’s technology, increase revenues, increase their customer base, or expand product distribution. Following is the comparison for each strategy in terms of their risk and returns and their resource requirements.. Table 2-1 Alternative Strategies for entering new market. Besides table 2.1 mentioned strategies, there is also an alternative method for companies to choose when they plan to invest in other countries, which is wholly owned strategy. Wholly owned strategy could be divided into greenfield and acquisition where this study will further discuss and focus on this topic. Foreign direct investment trends will be explained more to give clear understanding of the situation globally and specifically in developing countries. 10.

(16) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 2.1. Foreign Direct Investment 2.1.1. Globally Currently in 2014, the global inflows of FDI declined due to the fragility of the global economy, policy uncertainty for investors, and some large divestments. (UNCTAD, 2015). To avoid the declining trends in 2014, some countries’ investment policies have improved their entry conditions and reduced restriction. Countries and regions continued their search for reform of the international investment agreements (IIA). IIA was developed to monitor trends (identify key emerging issues and provide cutting-edge knowledge on IIAs from a sustainable development perspective); to deliver trainings, seminars and workshop and offer ad-hoc advice to strengthen the capacity of beneficiaries in handling the complexities of the IIA regime; and to facilitate the sharing of best practices and experiences with the view to fostering global investment governance. There are five main challenges and actions that should be taken into consideration by IIA. First, safeguarding the right to regulate in the public interest so as to ensure that IIAs’s limits on the sovereignty of States do not unduly constrain public making. Second, the reforming investment dispute settlement to address the legitimacy crisis of the current system. Third, promoting and facilitating investment are needed. Fourth, ensuring responsible investment to maximize the positive impact of foreign investment and minimize its potential negative effects. Fifth, enhancing the systematic consistency of the IIA regime to overcome the gaps, overlaps and inconsistencies of the current system and establish coherence in investment relationship. UNCTAD try to present actions to these challenges, which are: 1. Safeguarding the right to regulate: Options include clarifying or 11.

(17) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. circumscribing provisions such as most favoured-nation (MFN) treatment, fair and equitable treatment (FET), and indirect expropriation, as well as including exceptions, e.g. for public policies or national security. 2. Reforming investment dispute settlement: Options include (i) reforming the existing mechanism of ad hoc arbitration for ISDS while keeping its basic structure and (ii) replacing existing ISDS arbitration systems. The former can be done by fixing the existing mechanism (e.g. improving the arbitral process, limiting investors’ access, using filters, introducing local litigation requirements) and by adding new elements (e.g. building in effective alternative dispute resolution or introducing an appeals facility). Should countries wish to replace the current ISDS system, they can do so by creating a standing international investment court, or by relying on State-State and/or domestic dispute resolution. 3. Promoting and facilitating investment: Options include adding inward and outward investment promotion provisions (i.e. host- and home-country measures), and joint and regional investment promotion provisions, including an ombudsperson for investment facilitation. 4. Ensuring responsible investment: Options include adding not lowering of standards clauses and establishing provisions on investor responsibilities, such as clauses on compliance with domestic laws and on corporate social responsibility. 5. Enhancing systemic consistency of the IIA regime: Options include improving the coherence of the IIA regime, consolidating and streamlining the IIA network, managing the interaction between IIAs and other bodies of international law, and linking IIA reform to the domestic policy agenda. 12.

(18) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Figure 2.1 FDI Inflows for Global and Group economies (Billions of dollars). It is shown from figure 2.1 that the global FDI is declining and so as the developed countries and transition economies (see figure 2.2). However, the FDI inflows in developing countries at the same time are at their highest level thus they began to extend their lead in the future.. 13.

(19) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Figure 2.2 FDI Inflows of top 20 host economies and FDI outflows of top 20 home economies. 2.1.2. Developing Countries In 2014, the number invested by developing economies abroad is $468 billion, increased 23 percent from previous year while their share in global FDI reached a record of 35 percent (UNCTAD, 2015). Among the developing economies, MNEs from Asia increased their investment and for the first time became the world’s largest investing group (figure 2.3).. 14.

(20) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Figure 2.3 FDI outflows of Developing Economies and their share (Billions of dollars and percent). Data from the Organization of Economic Cooperation and Development’s (OECD’s) trade in value added (TiVA) database show that Asian countries have benefitted immensely by being part of global value chains (GVCs), thereby pushing up global trade, investments, and development (figure 2.4).. Figure 2.4 Participation of Asian economies and competing regions in GVCs. In the past, United States demand for oil has been widely known to play a role in global markets, but according to data from the US Energy Information Administration (EIA), the Asia-Oceania is now the world’s leading consumer of petroleum and other liquid fuels (EIA, 2015). The increasing demand from Asia has 15.

(21) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. contributed to growth in non-oil commodity producing nations as well, especially those rich in iron, copper and coal such as Brazil, Chile, and Indonesia (figure 2.5).. Figure 2.5 GDP Growth in Asian Economies. The condition make Asia became the target market and the movements have started impacting major markets in the West more profoundly. According to Euromonitor International, Indonesia, with their growing economies, has become one of five emerging markets that offering a wealth of opportunities for investors and providing exciting growth opportunities for consumer goods manufacturers (EuromonitorInternational, 2015).. 2.1.3. Indonesia In 2010, Indonesia is positioned as the fifth largest economy and shows as the sixth largest economic growth among developing countries in Asia and was also the fifth fastest growing G20 country (Kusrini, 2013). With the rapid economic growth and 240 million people, this country offers not only for a large domestic market but also for foreign investors who plan to expand their business in this emerging country. 16.

(22) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Over 50 percent of Indonesia population is under 29 years old and is adapted to Western lifestyle make them more open-minded. Hence, they are willing to spend their money to have branded products, such as cars or electronic devices. In Indonesia, every level of quality will have potential buyers and these buyers made Indonesia market so attractive. Its healthy GDP growth also proves that Indonesia can provide a good opportunity to gain market share. Fortune magazine stated that Indonesia was voted as one of the seven emerging countries that were worth to start doing business, besides India, Malaysia, Mexico, Colombia, Poland, and Kenya (Bremmer, 2015). Seeing Indonesia’s recent performance could be a great indicator for companies to consider making strategic investment. Indonesia’s new president, Joko Widodo, was named to Fortune inaugural list of “The World 20 Greatest Leaders”, was welcoming the changes for the oil and gas sector with his revolutionized administration. The country is ambitious to develop its infrastructure, public transportation, and gradually improve worker productivity. The changes in the education also can also be seen through how much the minister of education and culture spend to invest in Indonesia’s higher education degree. They devotes 20 percent of government expenditure to education (OECD, 2015). Indonesia has made clear that better governance is necessary to help the country grows. Trend shows that Indonesia ranked as number three manufacturing destination in Asia Pacific based on capital investment in 2014, after China and Vietnam. According to FDI Benchmark data service (figure 2.6), their operating costs of an automotive OEM manufacturing plant are cheaper than Malaysia, Vietnam and Thailand (Fingar, 2015).. 17.

(23) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Figure 2.6 The annual operating cost comparisons (automotive OEM manufactures). The Investment Coordinating Board of Republic of Indonesia (BKPM) has showed that the growth of foreign investment in Indonesia has increased during the past few years (figure 2.7) (BKPM, 2016).. Figure 2.7 Foreign Direct Investment Trends in Indonesia. The objective of this study is to discover foreign investor’s choice of entry mode when they enter Indonesia market based on their post-performance. Furthermore, with the help of some factors, such as culture distance and corruption index, the significance relationship between mode of entry and performance will be further illustrated with the hypothesis. 18.

(24) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 2.2. Entry Mode Strategies and Shareholder Ownership to Performance The entry mode of wholly owned strategy will be further discussed since this study will focus on this area. Some hypothesis will be illustrated to help analyze the results. To help connect all the dots, this research will use culture distance effect and corruption effect on the relationship of entry mode and shareholder ownership to performance.. 2.2.1. Entry Modes Entry mode strategy can be defined as a strategy of firms or companies that allow them to implement their product market strategy in a host country either only through the marketing operations such as exporting, or through both production and marketing operations and building it from scratch or via partnership such as contractual modes, joint ventures or wholly owned operations (Sharma & Erramilli, 2004). Wholly owned operation could be divide to two options:1) greenfield investment means building a new subsidiary from scratch, or 2) acquisition means purchasing part or all of the equity of an existing firm (Barkema & Vermeulen, 1998). Entry modes could also be divided by their level of control. High control entry modes such as wholly owned subsidiary and majority shareholder ownership demand more resource commitment abroad, and the home country firm is exposed to a higher degree of uncertainty. On the other hand, low control entry modes such as the contractual modes or licensing, only require limited resource commitment, thus reducing the uncertainty of exposure of the home company (Anderson & Gatignon, 1986; Erramilli & Rao, 1993). Each of entry mode choices has their owned beneficial effect on the companies’ 19.

(25) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. performances. It is clear that their performances will reflect on how effectively they manage the companies, some of the foreign companies would find that cultural differences should be understood before they enter and the host country market risk would matter a lot for them to get a good performances (Chang et al., 2012). The knowledge of cultural gaps was believed important when they decide to collaborate with local partners or establish a wholly owned subsidiary. This research in international business refers to the differences in norms and values between home country and host country (Tihanyi et al., 2005). Past studies argue that when cultural distance is great, employees will be less familiar and uncomfortable with their job hence making it difficult for the home company to successfully install their practices in host market (Cho & Padmanabhan, 2005). Akanni and Ahammad (2015) argued that the greater the differences in national culture prohibit integration capabilities and resulting in negative effect on the acquisition performance of the firms. They argue that adaptation to management styles, communications and trusts are essential to succeed. And according to Larimo (2003), argues that by choosing greenfield the costs of transferring practices will hardly increase when there is cultural distance because home companies can staff fresh employees who are more willing to work with the home companies. So, based on the abovementioned discussions, we hypothesis that: Hypothesis 1a: Foreign investor will choose acquisition over greenfield wholly owned strategy to get a better performance when the cultural distance between home and host is close. Besides cultural distance, political risk such as the corruption of the host country is also believed to influence the performance of the firms when they enter a new market (Kouneva-Loewenthal & Vojvodic, 2012). However, the evidence of the level 20.

(26) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. of corruption and FDI flow in host countries is equivocal. Research has found that corruption did not deter FDI in absolute terms and some MNEs enjoy high FDI flows despite high corruption image to manage the relationship with host institution (M. Habib & Zurawicki, 2001; Mohsin Habib & Zurawicki, 2002). They further argued that MNE’s exposure to corruption in their own home could provide a learning experience when they want to acquire to handle similar practices in the host country environment and provides a competitive advantage. In contrast Wei (2000) has found that corruption discourages FDI and explaining that unlike tax, corruption is not transparent, not pre-announced and carries a much poorer enforcement on agreement between a briber and a bribee. It introduces additional direct and indirect costs for foreign investor and discourages them to choose greenfield investments. On the basic of this discussion, this study hypothesizes that: Hypothesis 1b: Foreign investor will choose acquisition over greenfield wholly owned strategy to get better performance when the corruption distance between home and host is large.. 2.2.2. Foreign Shareholder Equity Ownership Earlier studies believed that the equity ownership related to the performance, stability and survival of a firm in FDI operations. Demirbag et al. (2007) have found that institutional variables are important in explaining the foreign equity shareholder. They also argued that political risk and cultural distance are particularly important in determining the equity ownership. Cultural distance also creates additional communication costs of internalization, which requires a common ground for encoding and decoding information (Barkema & 21.

(27) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Vermeulen, 1997). By taking a lower equity share in a culturally distant host country, an investing firm can learn to adopt local cultural norms from its partner and can utilize the partner’s social network to minimize cultural frictions (Yiu & Makino, 2002). Therefore, we hypothesize that: Hypothesis 2a: Foreign investor will take a lower ownership of shareholder equity to get better performance when the cultural distance between home and host country is large. And in the idea of corruption effect, the greater the differences of corruption level between home and host country, the lower the likelihood that know how to deal with each other mutually and the less familiar for foreign investors with the environment (Davidson, 1980). Therefore, we hypothesize that: Hypothesis 2b: Foreign investor will take a lower ownership of shareholder equity to get better performance when the corruption distance between home and host is great.. 22.

(28) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 3. Methodology. 3.1. Data and Sample The data of this study was obtained from two sources, which are the database of Indonesia Stock Exchange official website (IDX/BEI) which is based in Jakarta, Indonesia; and home online trading software by KDB Daewoo (HOTS30). Overall, there are 522 listed companies in Indonesia. However, after adjusting with some missing data and excluded state-owned firms, the final sample size was 145 listed companies. The study focuses on 15 foreign countries investments to Indonesia firms whether they were using wholly owned greenfield or acquisition strategy to enter.. 3.2. Variables 3.2.1. Dependent Variables The dependent variable used in this research is the return of equity of firms (ROE). ROE is a ratio that measures how much shareholders earned for their investment in the company. The higher the ratio percentage means the more efficient management is in utilizing its equity base and the better return to its investors. Using ROE as dependent variable, this study will try to determine which entry mode or shareholder equity is preferable to be implemented or chose. This paper will conduct the company’s average three years from 2012 to 2014 performance on ROE.. AverageROE =. ROEt1  ROEt 2  ROEt 3 ...ROEtn n. Equation 3-1 Average ROE. 23.

(29) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 3.2.2. Independent Variables There are two independent variables were used in this study; entry modes and. shareholder. ownership. equity.. Both. variables. will. use. dichotomous. conceptualization. Entry modes will be divided into: (1) wholly owned greenfield and (2) acquisition. Shareholder ownership will be divided to (1) major ownership (>=50%) and (2) minor ownership (<50%). There are several reasons why this paper using dichotomous concept. First, previous entry mode researches (Contractor, 1984; Kwon & Konopa, 1993; Pan & Tse, 2000) tend to classify modes in this way. Pan and Tse (2000) also found that whenever the dichotomous entry mode variable was used, the classification schemes that usually insignificant were found to be significant.. 3.2.3. Moderator A moderator variable commonly denoted as just M, is a third variable that affects the strength of the relationship between a dependent and independent variable. Moderator analysis in the behavioral sciences involves the use of linear multiple regression analysis. In this study, there are two moderator variables will be used which are cultural distance index and corruption index. The gap of cultural distance and corruption index will be calculated using the formula as follow. Kogut and Singh (1988), measure of cultural distance from cultural dimension of Hofstede (1991):. 1 n  Ii d  Ij d  KSij     n d 1  V d . 2. Equation 3-2 Cultural Distance Formula 24.

(30) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Where KSij is the cultural distance between countries i and j, I is the index of a country x in the dimension, V d is the variance of the index for the dimension d, and n is the number of cultural dimension. And using Eichengreen and Irwin (1995) to calculate corruption distance. . CorDistij ,t 1  log Cori ,t 1  Corj ,t 1  2. . Equation 3-3 Corruption Distance Formula. Where CorDistij ,t 1 is the logarithm of the absolute value of the difference between source country i and host country j’s corruption index plus 2.. 3.2.4. Control Variables There are some control variables that are added to this study to help making the decision become more absolute. They are real GDP growth, industry sector, and companies’ ages and companies’ size.. 3.3. Statistical Method Multiple regression analysis will be used to correlate the data. According to (Zikmund, 2003), multiple regression is an analysis of association where the effects of two or more independent variables on a single dependent variable are investigated simultaneously. The multiple regression equation is:. Y  a  b1 X1  b2 X 2  b3 X 3  ...bn X n Equation 3-4 Multiple Regression. 25.

(31) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Where, Y. = Dependent Variable. X. = Independent Variable. b. = Coefficient of partial regression. But, in this study a moderator was added to the variable. So, according to (Aiken et al., 1991) the equation will be as followed.. Y  a  b1 X1  b2 X 2  ...bn X n  bn M  bn X n M Moderator explains when the dependent variable and independent variable are related. Moderation implied an interaction effects, this variable could changes the direction or magnitude of the relationship between two variables. First, the changing could be enhancing, where adding the moderator would increase the effect of the independent variable on the dependent variable. Second, the changing could also be buffering where increasing the moderator would decrease the effect of the independent variable on the dependent variable. Finally, the changing could then also be antagonistic, where increasing the moderator would reverse the effect of the independent variable on the dependent variable.. 26.

(32) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 4. Results and Discussion. There are totally 145 listed Indonesia companies that were used in this research. The study conducted with Multiple Regression Analysis to test the relationship between the entry mode choice and the companies’ post-performances. The three-year performances were used in this study ranged from 2012 to 2014. From the data were found that Singapore investor was rank the most in Indonesia for the wholly owned strategy (greenfield or acquisition). Rank second was United States and Japan is the third. Emerging and non-emerging investment were all included in this study.. Table 4-1 Foreign Countries Investor percentage in Indonesia. 4.1. Measurement 4.1.1. Control Variable There are four control variables were used in this study that are related to the 27.

(33) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. entry mode strategies. The first variable is GDP growth rate of the country in 2015. The second variable is the ages of the companies which this study will divide into up to 15 years old and below 15 years old. The third variable is the size of companies which based on the number of employees. The last variable is industrial aspect which this study will choose the top three sector from the data concluded which are (1) Trade, Services and Investments; (2) Basic Industry and Chemicals and (3) Finance.. 4.1.2. Dependent Variable The Return of Equity (ROE) will be used as dependent variable in this study. 4.1.3. Independent Variable There are two independent variables used in this study. First, entry mode strategy which is the wholly owned strategy that separates to two method; (1) greenfield wholly owned and (2) acquisition. We coded 0 as greenfield wholly owned and 1 as acquisition The second variable is shareholder equity ownership also separates to two ways; (1) Majority shareholder (>=50%) and (2) Minority shareholder (<50%). We coded 0 as majority shareholder and 1 as minority shareholder.. 4.1.4. Moderator Variable There are two variables used as a moderator which are (1) Cultural Distance and (2) Corruption Gap. The measurement of these two variables was calculated using the formula stated at equation III.2 and equation III.3. The data of cultural index was taken from the official Hofstede website and the data of corruption index was taken from the official website of Transparency International.. 28.

(34) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 4.2. Results and Discussion Table IV.2 shown descriptive statistics and the Pearson correlations for all the variables. GDP Growth and acquisition entry mode have shown positively significant effect to performance, which means when the bigger GDP growth of foreign countries, the better their performance. Also, when they choose acquisition strategy, it provides better performance. However, it can be seen that, by taking lower foreign shareholder, their performance is worse. Furthermore, the effect of cultural distance and corruption also brought negative effect to performance.. 29.

(35) 30. 0.17* 0.20**. 0.34** -0.01 0.16*. 0.01 -0.04 -0.05. -0.03 0.06 0.13 -0.08. 0.11 0.13 -0.01 -0.01. 0.13 -0.03 -0.20** -0.34** -0.66**. 0.01 0.06 -0.03 -0.03 0.05 -0.14*. 0.02 -0.23** 0.09 -0.06* 0.15** 0.19. 0.01 -0.06 0.02 0.36** -0.17* -0.48** -0.17*. 0.41 0.38 0.37 0.41 0.5 1.25 0.21. 0.21 0.17 0.17 0.79 0.49 1.48 1.61. Trade Sector. Chemical Sector. Finance Sector. Acquisition mode. Lower Foreign Shareholder. Cultural Distance. Corruption Effect. * **. significant at level p<0.05 significant at level p<0.01. N = 145. 1. 1 0.08. 1 -0.09. -0.23** -0.20**. -0.09. -0.11. -0.05. 0.30**. 1.12. 2.47. GDP Growth. 1. -0.24**. -0.07. 0.05. -0.17*. 0.07. 0.6. 1. 1. 1. 1. 1 0.19*. -0.09. 0.47. 10. 2.71. 9. 0.66. 8. Firm Size. 7. Firm Age. 6. 1. 5. 40.67. 4. 28.39. 3. ROE 3 years. 2. 1. Std Dev. Mean. 1. 11. Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Table 4-2 The Descriptive Statistics.

(36) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. This study uses multiple regressions to analyze the relationship between entry mode strategy and foreign shareholder equity ownership with the performance of firms. Besides, the effect of cultural distance and corruption distance between home and host country will further discuss to check whether their interactions to entry mode and foreign shareholder significantly affecting the performance. The VIF value is less than 6, which proves that there is no multicollinearity problem. To avoid multicollinearity, this study uses mean and centering and generating interaction terms within the variables (Aiken et al., 1991). The regression results can be seen from Table IV.3. Model 1 provides the effect of all control variables to firm’s performance. It can be seen that the GDP Growth of countries who invested in Indonesia shows significant effect to performance. Model 2 provides the main effect of entry mode and foreign shareholder equity. It is shown that the acquisition entry mode shows positively significant effect to firm’s performance, and by taking lower ownership also resulted in negatively significant effect to performance. It means that for investor that have chosen greenfield strategy resulted in poorer performance compare to acquisition strategy, and the majority ownership can have more stable performances compare to taking lower ownership. This results contributes the decision making process for foreign investors to help them when they first enter in the beginning. Of course to keep their performance stable and growing, their management team helps to maintain their good performance. Also, it was shown in Model 2 that cultural distance has negatively significant effect to performance and corruption distance is not significant to performance. So in contrast to the previous study of (Morosini et al., 1998) that argued the cultural distance can enhances the cross-border performance by providing access to the host country, this study provides. 31.

(37) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. contributions that support the study of (Akanni & Ahammad, 2015) that stated the cultural distance brought worse effect of the performance of the firms. The interaction terms between cultural distance and corruption distance effect are shown from Model 3. First, the cultural distance shows negatively significant effect to acquisition strategy. Figure IV.1 gives a clear picture that the culturally distant countries that chosen acquisition perform worse than culturally close countries that also have chosen acquisition (supports hypothesis 1a). Second, the corruption distance interaction to entry modes shows no significant effect at all (failed to support hypothesis 1b) but when the corruption distance was interacted together with the lower foreign ownership shows a change to positively significant (figure IV.3). Third, Model 3 and figure IV.2 show that culturally distant country with lower ownership shows positively significant performance (supports hypothesis 2a). The interaction in figure IV.3 supports hypothesis 2b which show that the countries whose culturally distant to Indonesia shows better performance when they are taking lower foreign ownership. We can conclude that this study offers a significant implication for the companies, especially for the top managers who wanted to invest in other emerging countries which have the similar characteristics to Indonesia. Furthermore, this study can assist the decision-making process whenever the cultural distance effect or corruption effect is considered. Table 4.4 will show the detail comparison to each of the interaction between the cultural distance, corruption distance, entry mode and level of foreign ownership.. 32.

(38) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Table 4-3 Regression Results. Model 1 Model 2 Model 3 Control Variables Firm Age Firm Size GDP Growth Trade Sector Chemical Sector Finance Sector. -0.071 0.078 0.291** 0.017. -0.093 0.111 0.094 0.021. -0.079 0.102 0.108 -0.026. -0.035 -0.045. 0.043 0.013. 0.063 0.019. Independent Variables Acquisition Foreign minority share Cultural Distance Corruption Distance. 0.473** 0.466** -0.282** -0.275** -0.411** -0.35* -0.17 -0.194. Interaction Acquisition x Cultural Distance Acquisition x Corruption Distance F.Minority x Cultural Distance F.Minority x Corruption Distance 0.063 2.625. Adj. R Squared F. *. significant level p < 0.05. **. significant level p < 0.01. -0.466** 0.13 0.515** 0.191*. N= 145. 33. 0.421 11.455. 0.572 14.722.

(39) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Table 4-4 Interaction Comparison Strategy/effect Acquisition Greenfield Lower Ownership Higher Ownership. + -. Culturally close + +. Culturally distant + + -. Corruption Gap close non non +. Corruption Gap distant non non + -. = shows positively significant relationship to performance = shows negatively significant relationship to performance. non = shows no significant relationship to performance. Figure 4.1 Interaction of cultural distance with Acquisition and ROE. 34.

(40) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Figure 4.2 Interaction of Cultural Distance with Foreign Minority Shareholder and ROE. Figure 4.3. Interaction of Corruption Distance with Foreign Minority Shareholder and ROE. 35.

(41) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. 5. Conclusion and Limitation Culture and corruption effect have a great impact in Indonesia economy because their strong culture brought the attractiveness that people from all around the world wanted to witness their selves, and this could be a great opportunity to invest. For example, Indonesia has 34 different provinces that have their own taste in food and have their own culture, which make them not easy to learn. So, when outside investors wanted to enter this country they need to spend a little while to learn their people and the way they work. For example, according to WSJ, one of the biggest cigarettes company in Indonesia, HM Sampoerna, now owned by Philip Morris, they said that before they acquired the company they spent two and a half years to study the industry to participate fully in Indonesia market. Corruption also makes a great deal when it comes to Indonesia, this has been happening for ages that somewhat make the investor become more attracted or in the other hand afraid to enter. Recently, several efforts have been made by government to neglected or reduce corruption, they make a special organization called KPK to deal with this problem, news and reports could be seen through social medias how much the president himself take a serious action to punish the corruptors. Slowly these efforts makes positive respond to people around the world and change their negative point of view and start to realize that doing business or invest in Indonesia could be a great advantage for them in the future. This research concludes that both entry mode strategy and foreign equity shareholder ownership have effect on the performance of Indonesia’ listed firms. This study found that cultural distance successfully moderates the relationship between entry mode strategy and foreign equity ownership shareholder to performance. And corruption effect only successfully moderates the relationship between foreign equity 36.

(42) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. ownership shareholders to performance. In this respect specifically, (1) The study provides that the acquisition strategy is a worth consideration to obtain better performance when it comes to foreign investors who wants to expand to emerging countries like Indonesia whenever their cultural distance is close e.g Singapore or Malaysia (2) Lower foreign shareholder ownership a good alternative to have better performance when there is a cultural distant e.g United States or United Kingdom. This is possibly due to their great culture diversity in Indonesia that makes it very important to be considered for investors when they are attracted to Indonesian market (3) Lower ownership shareholder ownership also a good alternative to get a good performance when there is corruption distant. This study’s implication of entry mode based on post-performance could help foreign investors to: Speed up the decision making process With the clear results from the regression, this paper could help speed up the decision making process for a company to do internationalization to Indonesia market. Since it has been realized how much difficulty to change from one entry mode to another without considerable loss of time and money. By deciding the right entry mode in the first place, it could avoid the damage for later on. Reduce conflicts between countries The difference of cultural and corruption level of countries will lead to a higher risk that will also rise up the conflicts between countries which could affect the company’s performance and growth. This research considers these two factors into the research that could reduce the conflicts of entering a new market with different culture and corruption level. Leads to better communication 37.

(43) Entry Mode Strategies and Post-entry Performance: The Case of Foreign Investment in Indonesia. Obviously, a better communication could be reached if they can avoid conflict in the process that will be resulted in a better performance and good cooperation in management. Even though several efforts have been made to make this research happens, there are still flaws in this study that future research could be look up into. The state-owned companies were excluded in the research sample due to their difficulty for finding private information. Adding foreign shareholder from state-owned company could possibly make a big difference to the results. Besides that, this strategy is limited to the beginning of the strategy when they first plan to enter the Indonesian market, but in order for them to maintain their stable performance is a whole different range outside this study that could be further investigated in the future study. For example, how the companies from different industries managed to treat their human resources, or to have a good corporate image towards the consumers by creating strong brand, how they handle their financial system, and to improve their product or services, and to have global competitiveness.. 38.

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