Institutional perspective of foreign direct investment strategy: The case of Japanese multinational corporations

Decisions regarding foreign market entry and market entry mode are strategically important to multinational corporations (MNCs). Most previous studies have focused on the economic rationale behind these decisions and assumed that MNCs' decisions are rational and independent of their own and other MNCs' previous decisions.; This thesis develops the neoinstitutional perspective of foreign direct investment strategy. The main proposition is that an MNC's decision regarding foreign market entry and subsidiary ownership level represents its desire to gain external and internal organizational legitimacy, and its decision is influenced by its own previous decisions and the previous decisions of other MNCs from the same home country. In the empirical setting of Japanese MNCs' foreign investments across the world over the period 1987–1999, I find supporting evidence for my main argument. First, other MNCs' entry into a market induces an MNC to enter the same market to gain external organizational legitimacy and an MNC's prior overseas establishments trigger its subsequent market entry to gain operational experience. Second, an MNC selects to trade a portion of its subsidiary ownership level for external and internal organizational legitimacy by forming an equity joint venture with local partners or industry incumbents. Third, in uncertain situations, an MNC mimics the prevalent, legitimate subsidiary ownership level strategy adopted by other MNCs in the same geographical region, and it is more prone to make a mimetic choice when its subsidiary is located in a less-developed country than in a developed country.; In conclusion, the evidence noticeably refutes the claim that there is only an economic explanation for the decisions regarding foreign market entry and market entry mode, and demonstrates that organizational legitimacy, a social consideration, can play a key role in explaining an MNC's decision.