4.1. Institutional, cultural and transaction cost influences on entry mode choice and
- Two ways in which adding both institutional and cultural context variables to
transaction cost theory enhances the understanding of international entry mode
o Institutional context variables provide a valuable extension to transaction
cost theory because they refer to conditions that undermine property rights
and increase risks in exchange.
o Cultural context variables need to be added to transaction cost entry mode
models because they tend to influence managerial cost and uncertainty
evaluations in target markets.
- The objective of this paper is to enhance the understanding of transaction cost,
institutional and cultural context variables on international entry mode choice and
Entry mode choice
- Transaction costs variables are concerned with the costs of integrating an operation
within the firm as compared with the costs of using an external party to act for the
firm in a foreign market.
- Transaction costs: the costs of finding and negotiating with an appropriate partner,
and the costs of monitoring the performance of the partner firm.
- Transaction cost theory: the costs of finding, negotiating and monitoring the actions
of potential partners influence entry mode choice.
- Market-based modes are normally preferred because a firm can benefit from the
scale economies of the market place.
- Three reasons for increased costs in finding or negotiating a market-based
o Difficulties of estimating and including all contingencies in the agreement.
o Inability to receive a fair price due to problems with information asymmetry.
o Monitoring and enforcing market contracts may be difficult due to distance,
communication problems or the lack of measurable outputs.
- When the transaction costs are low, firms tend to rely on the market to deliver
required target market benefits. As transaction costs increase, firms tend to switch
to more hierarchical modes, such as wholly owned subsidiaries.
- H1: firms perceiving high transaction costs (high finding, negotiation and
monitoring costs) in a market tend to use wholly owned modes while firms
perceiving low transaction costs tend to use joint venture modes.
- Asset specificity: assets that lose value in alternative use.
- Asset specificity creates contracting hazards because of the impact of opportunism.
- Opportunism: results when a partner organization takes advantage of the other
firm’s dependency through shirking, freeriding, or technology dissemination.
- To safeguard specific assets from potential opportunism problems, firms may utilize
higher control governance structures.