The influence of plant characteristics on the entry mode choice of overseas firms

Abstract

Abstract One of the most important strategic decisions a manufacturing firm makes while expanding overseas is making the choice between setting up greenfield operations or acquiring a local firm. Using a knowledge‐based framework, I propose that the ability to transfer knowledge and competencies across national boundaries is much easier in plants characterized by physical capital investment. Hence, during overseas entry, manufacturing firms are likely to use greenfield operations. On the other hand, in plants characterized by human capital investment, the difficulty in transferring knowledge and the need to learn and adapt to host nation requirements will make a local acquisition the preferred mode of entry by manufacturing firms. Using 682 entry decisions made by manufacturing firms during entry into the U.S., I investigate this notion while controlling for size of the industry, research intensity of the industry, degree of unionization, cultural distance, and the value of investment. Study findings indicate that in plants characterized by human capital intensity, the preferred entry mode is acquisitions over greenfield operations. However, foreign entrants with physical capital‐intensive plants prefer greenfield operations over acquisitions.

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