4.3. Family firms and the choice between wholly owned subsidiaries and joint ventures: a
transaction costs perspective
Sestu & Majocchi
- An important issue is how much impact family involvement has on foreign entry
- This paper investigates the entry mode decisions of family and nonfamily firms and
explore the role of family involvement on both the MNC side and the local partner
side. It is addressed why and how family involvement affects entry strategy.
- Family firms develop specific assets which are not easily tradable on the market.
- When firms decide to enter a foreign market in order to control such assets owned
by a local firm, the choice between a WOS and a JV depends on family involvement,
both in the MNC and the local firm.
- Transaction cost economy: the specificity of the asset to be traded increases
transaction costs, making market transactions less efficient and integration more
- Family control increases the degree of specificity of firm assets.
- Two reasons for mixed results on the role of family control in entry mode choice:
o Lack of a unifying theory.
o Implicit assumption that entry mode choice is a unilateral decision on the
part of an MNC.
The TCE theory of entry mode
- TCE theory: firms choose entry modes that minimize the transaction costs generated
by the need to negotiate, monitor, and enforce transactions, thereby maximizing
their net benefits.
- Firms prefer entry modes with a higher level of control when transaction costs are
- A comprehensive entry mode theory should consider both the rents of the investing
firm and those of the local firm which owns the complementary assets, as these are
often location bound.
- Therefore, entry mode choice is also determined by the cost of accessing local
inputs, and it is fundamentally a question of defining which assets are difficult to
- Knowledge is an asset difficult to trade, especially when it has an important tacit
- Two cases that lead to FDIs:
o When an asset owned by the MNC is difficult to transact but the local
complementary asset can be efficiently bought in the host market. Classic
FDI: foreign firm transfers the asset it owns internally and sets up a WOS in
the host country, acquiring full ownership of the local asset.
o When both assets are difficult to transact. Assets should be bundled through
a JV, either in a new legal entity or through a partial acquisition of the local
firm. Both parties become residual claimants of the JV.