Choice of entry modes in sequential FDI in an emerging economy

Abstract

Purpose This paper seeks to challenge the traditional wisdom that sheds light upon sequential entry modes in developed countries by exploring the dynamic entry mode choice in sequential foreign direct investment (FDI) in emerging economies. Design/methodology/approach A review of the literature on the entry mode choice is undertaken. Based on analysing two related theories consisting of the knowledge‐based theory of the firm and organizational learning theory, entry mode choices in sequential FDI in emerging economies are investigated using both an internationalisation process model and the capability‐developing perspective, and exclusive propositions are put forward accordingly. Then, these propositions are tested on the context of China with the methodology of paired‐samples t‐tests. Findings Based on macro‐level longitudinal data in China from 1979 to 2005, the choice of entry mode in sequential FDI in emerging economies is inconsistent with the capability‐developing theory of the firm, but is consistent with the international process model. Practical implications This study provides four practical implications. First, managers intending to invest abroad need to consider the cost and return of a specific entry mode. Second, knowledge about host markets has a more important effect on entry mode choice in emerging markets than MNCs' internal organizational capabilities. Third, MNCs adopt sequential investment in emerging economies, in which they adopt joint ventures in earlier entries and then shift to green‐field investment in later entries. Fourth, experiential learning, which consists of learning about host markets and local partners' skills, is emphasized in sequentially entering emerging markets. Originality/value This paper expands the research scope of previous studies that either explore a static choice of entry mode in foreign markets or only examine the entry mode choice in sequential FDI in developed countries. Taking into consideration the dynamic choice of entry modes, the paper studies sequential FDI in emerging economies, which throws light upon theoretical analysis of sequential FDI in China, and which has practical implications for foreign firms that are interested in China and planning to enter China's markets.

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