Added distance, entry mode choice, and the moderating effect of experience: The case of British MNEs in emerging markets

• Author: Georgios Batsakis,Satwinder Singh
• Published date: 01 July 2019
• Date: 01 July 2019
• DOI: http://doi.org/10.1002/tie.22046

VIEW FROM PRACTICE

Added distance, entry mode choice, and the moderating effect

of experience: The case of British MNEs in emerging markets

Georgios Batsakis

1,2

| Satwinder Singh

3

1

ALBA Graduate Business School, The

American College of Greece, Athens, Greece

2

Brunel Business School, Brunel University

London, Uxbridge, UK

3

Dubai Business School, University of Dubai,

Dubai, United Arab Emirates

Correspondence

Georgios Batsakis, ALBA Graduate Business

School, The American College of Greece,

Xenias 6-8, 11 528 Athens, Greece.

Email: gbatsakis@alba.acg.edu

Distance has been viewed as a crucial determinant of the internationalization strategy of firms.

Nonetheless, in recent years, there has been considerable debate with regards to, first, the type

of distance considered most important when it comes to explaining the internationalization

strategy of firms, and, second, how distance should be measured. In our study, we argue that a

developed market multinational enterprise (DMNE)’s decision regarding the mode of entry into

an emerging market (EM) will be affected by the geographic and administrative distance

between the locations in which the MNE has previously held operations. Drawing our argu-

ments on transaction costs economics (TCE) and Internalization Theory, we propose that, for

low and high geographic and administrative distance, DMNEs will opt to enter EMs via a wholly

owned subsidiary, while for moderate levels of distance via a joint venture. Furthermore, we

argue that DMNEs’previous international experience in EMs will have a positive effect on the

suggested U-shaped relationship, alleviating the negative effects associated with the coordina-

tion and knowledge dissipation costs incurred as a result of the level of distance. Our study

contributes to existing literature both theoretically—notably via the examination of under-

researched facets of distance on entry mode choice—and also methodologically—through the

adoption of a novel methodological approach in measuring distance. We test our hypotheses

against a data set comprising 316 entries of FTSE 250 British MNEs in 39 EMs spanning the

period 1971–2010.

KEYWORDS

added administrative distance, added geographic distance, emerging markets, foreign market

entry, international experience

1|INTRODUCTION

The decision as to whether an MNE will enter a foreign market via

joint venture (JV) or as a wholly owned subsidiary (WOS) has been in

the spotlight of International Business (IB) research for a number of

years (e.g., Brouthers, 2002; Chen & Hennart, 2002; Guillén, 2003;

Makino & Neupert, 2000; Yiu & Makino, 2002). Despite the growing

interest and volume of research on this particular study stream, there

remain unexamined or inconclusive research questions, the study of

which may further enhance our knowledge (Hennart & Slangen,

2015). This study extends our understanding of the role of distance in

the entry mode decision of developed market multinational enter-

prises (DMNEs) in the context of emerging markets (EMs). In this

article, taking a cue from advances in IB, we reexamine and

reconceptualize the role of distance in the internationalization process

(Hutzschenreuter, Voll, & Verbeke, 2011).

The traditional view in IB research has examined the role of dis-

tance as a rather monotonic dimension, simply involving a source

(home) and a recipient (host) country. However, more recent develop-

ments have shown that firm internationalization comprises a much

more complex and multidimensional process, notably involving added

levels of distance with regards the steps (investments) to be adopted,

as decided upon by an MNE (Hutzschenreuter & Voll, 2008). As such,

and contrary to the conventional wisdom, we treat the distance of a

single expansion step as the MNE distance to the closest existing sub-

sidiary, as opposed to a direct distance to the MNE headquarters.

DOI: 10.1002/tie.22046

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, which permits use, distribution and reproduction in any

medium, provided the original work is properly cited and is not used for commercial purposes.

© 2019 The Authors. Thunderbird International Business Review published by Wiley Periodicals, Inc.

Thunderbird Int. Bus. Rev. 2019;61:581–594. wileyonlinelibrary.com/journal/tie 581