United States and Japanese foreign direct investment in a rapidly developing country in south-east Asia: Test of the I-R framework and transaction cost theory

The dissertation tries to explain the choice between the wholly owned subsidiary (WOS) versus the equity joint venture (EJV) of choice of foreign direct investment (FDI) choice in a developing country. The literature has customarily divided industries into the dichotomous global/non-global categories. Recently, researchers have shown that "globalness" is a matter of degree. The "globalness" of firms have typically been captured by Prahalad and Doz's (1987) integration-responsiveness (I-R) framework. This framework classifies firms into three groups, based on managerial perception of the position of their business along the integration-responsiveness continuum. Firms in these groups pursue distinct competitive strategies. This thesis makes a contribution by using the I-R framework, together with the distinct competitive strategies that firms pursue, as well as transaction cost theory, to predict the foreign direct investment mode of entry. Further, an evaluation is made of the fit between the three industry groups (globally integrated, multifocal and locally responsive), competitive strategies and transaction cost factors. The impact of fit on subsidiary performance is also investigated.;The study focuses on multinational enterprises (MNEs) located in a rapidly developing country with a population of about 20 million, located in South-East Asia. (The country is not disclosed because of confidentiality promised to the MNEs participating in the survey). The total sample size of 79 comprised of 24 U.S. and 55 Japanese MNEs. The mail survey method was used to obtain responses. Binomial logistic regression analysis (LRA), multiple discriminant analysis (MDA) and Q-statistics were employed to evaluate the proposed hypotheses.;The sample contained only two groups (globally integrated and multifocal) in the I-R framework. As predicted, the multifocal firms pursuing high marketing differentiation and innovation strategies favored EJVs. The power distance index, which captured managerial perception of transaction costs, was negatively correlated with the WOS mode, contradicting the proposed hypothesis. Overall, the fit between the variables in the proposed model, containing perception of multifocal industry, marketing differentiation strategy and power distance index turned out to be excellent predictors of the WOS-EJV choice. Further, the fit between these variables significantly explained the performance of subsidiaries on the return on investment (ROI) and profitability measures.