The effect of institutions and failure-based learning on entry mode choice

Abstract

This study investigates the role of learning from failures and how learning from failure of others shapes the entry mode choice of subsequent entrants – a choice between joint venture (JV) and wholly owned subsidiary (WOS). A review of the entry modes and institutional perspective literature has revealed that research to date has focused on the effect of successes rather than failures. While it recognises the effect of other firms’ entry mode on the entry mode decisions of subsequent entrants, it has overlooked the influence of failures’ on entry mode. It is important to investigate the effect of failure of other firms since it has been recognised by organisational learning scholars as a valuable source of information for firms to improve their performance, decrease their uncertainty and consequently influences their actions.

Therefore, the present research applies institutional and organisational learning perspectives as the underpinning theories to examine how the failure of others determines the entry mode choice of a firm. Further investigation was carried out on how a firm’s entry mode decision in response to regulative and normative institutions might be asymmetric. Additionally, firms’ responses to institutional dimensions were analysed further by investigating how they would change with experience in the host country and in other foreign countries.

This study applied a quantitative approach to answer these questions in the context of China. The data for this study consists of 1021 observations invested by 622 foreign firms from 2003 to 2012. Through a logistic regression analysis, this study found that the failure of prior entrants with JV structure increases a new entrant’s tendency to choose JV over WOS. Moreover, regulative distance negatively influences the choice of JV whereas the effect of normative distance was found to be positive. Regarding the effect of experience, host country experience was found to be an influential factor that mitigates the effect of regulative and normative distance on the entry mode choice.

The findings of the present research contribute to both institutional and entry mode literature by demonstrating that firms make their entry mode decisions based on information inferred from prior entrants’ failures. This research also contributes to organisational learning literature by showing that responses to failures are not merely avoidance-based, but rather based on the firm’s evaluation of the cause of failure.