The Interplay of Top-down Institutional Pressures and Bottom-up Responses of Transition Economy Firms on FDI Entry Mode Choices

Abstract

This study examines the role of institutions in explaining the FDI entry mode choices of transition economy firms. Advancing an institution-based view of international business strategy, the paper proposes a model of interactive institutional processes that incorporates both top-down institutional pressures and the bottom-up heterogeneous responses of individual firms to such pressures. The findings are based on a sample of 594 outward FDI entries made by Chinese firms. The results indicate that institutional pressures exerted by the home country government have a significant effect on outward FDI ownership decisions, such that firms facing greater institutional pressures are more inclined to choose outward international joint ventures (OIJVs) over wholly owned foreign subsidiaries. However, the effect of institutional government pressures on FDI entry mode choices is weaker for firms which are less dependent on the Chinese government for resources and thus enjoy more institutional freedom. Specifically, the ownership structures of Chinese firms moderate the positive effect of home country government pressures on the choice of OIJVs, such that the positive effect is weaker for modernized firms (i.e., newly created private and reformed incorporated firms) than conventional firms (i.e., state-owned enterprises (SOEs) and collectives). The positive effect is weaker for collectives than SOEs, while the positive effect is weaker for private firms than reformed firms (i.e., private firms < reformed firms < collectives < SOEs).