International acquisitions and emerging market firms' performance—a structural contingency perspective

• Published date: 01 July 2018
• Author: Arpita Agnihotri,Saurabh Bhattacharya
• DOI: http://doi.org/10.1002/tie.21946
• Date: 01 July 2018

DIMENSIONS OF INTERNATIONAL BUSINESS

International acquisitions and emerging market firms'

performance—a structural contingency perspective

Arpita Agnihotri

1

| Saurabh Bhattacharya

2

1

Penn State, Harrisburg, Middletown,

Pennsylvania

2

Newcastle University, Newcastle, Upon Tyne,

England

Correspondence

Arpita Agnihotri, Penn State, Harrisburg,

777 W. Harrisburg Pike, E356 Olmsted,

Middletown, PA 17057-4898.

Email: axa671@psu.edu

Entry modes have impact on firms' performance in international markets. Using an organiza-

tional structural contingency perspective, we assert that firms with mechanistic structure can

enhance their performance in international markets if they choose acquisitions as an entry

mode. Mechanistic structure limits organizations' learning capability, which can be managed

through acquisitions but not through other entry modes such as joint ventures. For managing

limitations associated with the poor knowledge absorption capability of mechanistically struc-

tured organizations, firms should not follow the standard integration procedures associated

with acquisitions aiming to achieve economies of scale or scope. Rather, they should provide

corporate parenting advantage to the newly acquired unit by (a) granting complete autonomy

and (b) contributing required resources for future growth, thus treating the acquired business

as a strategic business unit. Since mechanistic structures are more common in emerging mar-

kets, we explain our perspective using illustrative caselets from these markets.

KEYWORDS

acquisitions, emerging markets, firm performance, joint ventures, mechanistic structure,

organic structure

1|INTRODUCTION

Entry mode in international markets is an important strategic decision

as it significantly influences firms' performance (K. D. Brouthers,

2002; Hennart & Slangen, 2015). Differences in entry mode perfor-

mance are contingent on several factors, such as firms' competitive

strategy (Merchant, 2014), intangible assets (Chang, Chung, & Moon,

2013), or corporate control (Trąpczy

nski & Gorynia, 2017). Another

important contingent factor is organizational structure, which can

influence entry mode performance due to its ability to affect organi-

zations' learning capability (Lane, Salk, & Lyles, 2001). Not all entry

modes are equally demanding on firms' learning capability. For exam-

ple, knowledge absorption is more vital for joint ventures compared

to acquisitions (Inkpen & Beamish, 1997). Similarly, organic structure

provides better learning and absorptive capability than a mechanistic

structure (Fiedler & Welpe, 2010; Lin, 2014). This implies that the

impact of entry mode on firms' performance is contingent on its con-

gruency with organizational structure.

Relying on the seminal structural contingency theory (Donaldson,

2001), we explain how the fit between organization structure and

entry mode influences firms' performance (refer to Figure 1). We spe-

cifically assert that firms with a mechanistic structure can enhance

their performance if they internationalize through acquisitions. Mech-

anistically structured organizations have poor learning capabilities,

and this effect can be mitigated through acquisitions but not joint

ventures. To diminish the adverse impact of poor learning and absorp-

tive capabilities associated with a mechanistically structured organiza-

tion, the acquiring firm should not intend to integrate operations of

the newly acquired business, which is usually a standard practice for

firms undertaking acquisitions in search of economies of scale or

scope (Garzella & Fiorentino, 2017; Hoskisson, Hitt, Ireland, & Harri-

son, 2012). With limited learning capabilities, knowledge cannot be

transferred easily, and hence any integration efforts are likely to fail.

Thus, strategies should be adopted where technological or

brand-related knowledge assets are owned by the acquiring firm with-

out the need for assimilating them to overcome learning limitations.

This can be done by providing what Campbell, Goold, and Alexander

(1995) call “corporate parenting advantage”to a newly acquired unit.

Parenting advantage refers to the parenting role of top management

in multibusiness firms, which sets only corporate-level strategy and

DOI: 10.1002/tie.21946

Thunderbird Int. Bus. Rev. 2018;60:691–698. wileyonlinelibrary.com/journal/tie © 2017 Wiley Periodicals, Inc. 691