DID YOU KNOW SERIES
-SPONSORED BY THE EU CENTRE FOR GLOBAL
AFFAIRS SIGNATURE PROJECT ON GOVERNANCE
How Do Foreign Market Entry Modes Vary Across Asian
Countries: Evidence from Japan and China
Lead Author: Zhengyi Zhao
CONTENTS
Preface
1
Key take-home points
1
Executive Summary
2
1. Introduction
3
2. Automotive and Car Part Manufacturing Industry
4
2.1. Analysis on the Entry Mode of Japanese Firms
4
2.2. Analysis on the Entry Mode of Chinese Firms
6
2.3. Analysis of the Largest Firms in the Industry
8
3. Computer and Electronics Manufacturing Industry
8
3.1. Analysis on the Entry Mode of Japanese Firms
8
3.2. Analysis on the Entry Mode of Chinese Firms
10
3.3. Analysis of the Largest Firms in the Industry
11
4. Analysis of Entry Models Based on the Development Level of Destination Countries
12
4.1. Analysis of Entry Modes Used to Enter Developing Countries
12
4.2. Analysis of Entry Modes Used to Enter Developed Countries
14
5. Analysis of Entry Models Based on the Development Level of Destination Countries
16
Concluding Remarks
17
References
18
Further Reading
18
Appendices
20
Preface
This report has been sponsored by one of the signature projects stemming from the EU
Centre for Global Affairs at the University of Adelaide focusing on providing a comparative
analysis of the business environments among EU, Australian and Asian countries. This report
compliments the interactive database that is available on the EU Centre’s Research in
Governance website.
Key take-home points




Generally, foreign market entry modes are similar between Japanese and Chinese
firms for the period between 2004 and 2014.
All foreign market entry modes of firms stay the same between the automotive and
computer and electronics products manufacturing industries, except for a difference
in entries through equal equity participation.
When entering both developed and developing countries, manufacturing and
computer and electronics firms from Japan and China generally make similar entry
mode choices.
Further research can be done examining how cultural aspects interact with the entry
mode choices of Asian firms and on comparing western and Asian companies.
1
Executive Summary
Previous research has shown that foreign direct investment (FDI) and equity-based foreign
market entry will remain a major force behind world economic development. By the end of
2013, the total number of worldwide FDI inflows reached 1.45 trillion USD1. With the world
economy being characterised by regional economic instabilities and fluctuations, and given
the economic slump in 2012, the current global economic environment is exposed to more
complexities, risks and uncertainties.
In Asia, Japan and China are the biggest developed and developing economies respectively. In
2014, Japan was the fourth largest country undertaking outward FDI, while at the same time,
China was the third largest country undertaking outward FDI and the largest country
accepting inward FDI2. Research3 indicates that entry modes are selected by firms making
international expansions. Entry modes selected by firms are assumed to be those which can
provide the best return on investment and the best operational structure. However, little is
known about Japanese and Chinese firms in terms of foreign market entry modes, despite
the fact that Japan and China are major foreign investors and despite the importance of
these entry mode choices. This report examines the entry mode choices of typical Japanese
and Chinese firms in the automotive and car part, and computer and electronics
manufacturing industries. It also investigates firm entry mode choices and how they differ
between firms entering developed and developing markets. The results suggest that entry
mode choices are generally similar between Japanese and Chinese firms in both industries.
However, there is one difference between the two industries which could be attributed to
differences in their industrial characteristics. In addition, choices around entry mode remain
similar when businesses expand into developing and developed countries.
Developing Asian countries have undertaken the largest amount of foreign direct investment
out of all developing countries as of the end of 20144. It can be reasonably anticipated that
Asian countries will continue to play an influential role in global FDI growth thus enhancing
the development and progress of the world economy. Insights into the direct investment
activities of Asian countries provided by this report could therefore be valuable both
theoretically and practically.
1
UNCTAD, 2014. World Investment Report-Overview. http://unctad.org/en/PublicationsLibrary/wir2014_overview_en.pdf
2
UNCTAD, 2015. World Investment Report. http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf
3
Brouthers, L.E., K.D.Brouthers, & S.Werner. 1999. Is Dunning’s Eclectic Framework Descriptive or Normative?,
Journal of International Business Studies, 30(4):831-844.
4
UNCTAD, 2015. World Investment Report. http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf
2
1. Introduction
According to statistics recently published in an UNCTAD report5, global FDI reached 1.2
trillion US dollars in 2014. The total amount of outward FDI flows in Japan and China reached
113,629 and 116,000 million US dollars respectively, contributing significantly to the amount
of worldwide FDI flows. At the same time, cross-country mergers and acquisitions have
reached 384 billion US dollars, having increased by 19% between 2011 and 20146.
For firms conducting business internationally, including some firms from newly emerging
economies, expansion into foreign markets has several aims including searching for strategic
resources, lower labour costs, advanced technology and the removal of trade barriers. This
report analyses equity foreign market entry modes including those which are attempted
through wholly-owned subsidiaries, majority equity participation, minority equity
participation and 50:50 equity participation. According to theories on internationalization,
these foreign market entry modes are employed when the overseas operating benefits for a
firm supersede the costs of internalization.
Equity entry is a type of foreign market entry mode which is based on ownership. It enables
the entering firm to take a certain level of control over the target firm from the host country
through different degrees of equity participation. Equity entry enables a transfer of capital,
technology, labour and managerial resources. Multinational enterprises that choose this
mode can enjoy the largest degree of involvement through directly participating in the local
market (in contrast to limited access modes related to export-based or contracting methods).
However, the equity entry mode also brings some disadvantages to the entering firm,
including the cost of operating in countries with different cultures, difficulty with being
included in local business linkages and other systematic risks (e.g. political instabilities).
Moreover, the equity entry mode usually requires a significant amount of investment, which
can expose the entering firm to some levels of investment risk.
The choice of entry mode is an important strategic decision faced by multinational
enterprises in the process of internationalization. It can significantly affect firm post entry
performance due to investment spill over effects, adaptation to local business environments
and local profitability. Since each type of equity entry mode relates to the degree of control
over the newly-established or target firm, this in turn implies that equity stakes offer varying
degrees of ownership over a firm’s strategic resources and subsequent levels of risk. The
choice of entry mode and equity stake are therefore a combination of the entrant’s desire for
control over resources, resource commitment and the dissemination risk of industrial
property. This study therefore provides reference to the strategic management decisions
concerned with foreign market entry.
This report is based on an analysis of 200 firms from the automotive manufacturing and
electronics industries in Japan and China. The sample firms are selected according to rankings
of their annual profits between 2004 and 2014. Based on the analysis, the report makes
5
UNCTAD, 2015. World Investment Report. http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf
UNCTAD, 2015. Global Investment Monitor. http://unctad.org/en/PublicationsLibrary/webdiaeia2015d1_en.pdf
6
3
comparisons among the entry modes of firms from the respective countries of origin,
industries and the development level of destination countries. The report analyses why
similarities and differences may exist between these entry modes. The report is organized as
follows: Section 1 describes the equity entry mode choices of Japanese and Chinese firms in
the automotive and car accessories manufacturing industry. Section 2 presents the equity
entry mode choices of Japanese and Chinese firms in the computer and electronics
manufacturing industry. Section 3 is concerned with entry mode comparisons between
Japanese and Chinese firms in both industries with the final section concluding.
2. Automotive and Car Part Manufacturing Industry
2.1. Analysis on the Entry Mode of Japanese Firms
The Japanese automotive industry7 began its massive automobile production in the 1930s,
and plays a leading role in the nation’s manufacturing industry. Japanese automakers have a
significant impact on the global automotive manufacturing industry. According to statistics
provided by Japan’s Automobile Manufacturers Association (JAMA), investments in the
automotive industry reached 621,700 million Japanese Yen, constituting approximately
29.1% of Japan’s total investment in major manufacturing equipment in 20148. Among the
few automotive giants, Toyota remains the world’s largest automaker in 2015, followed by
Volkswagen and General Motors. The Japanese automobile industry began its large scale
international expansion in the 1970s.
Figure 1: Equity Entry Modes of 50 Japanese Automotive
Manufacturing Firms: 2004-2014
7
Industry classification number: NACE Rev.2: 29
Japan Automobile Manufacturers Association, 2015. The Motor Industry of Japan Report. http://www.jamaenglish.jp/publications/MIJ2015.pdf
8
4
Figure 1 shows percentages of each entry mode taken by Japanese firms to enter foreign
markets, in the automotive and car part manufacturing industry. Among the four patterns of
entry mode, majority equity participation accounts for 50% of cases. This is followed by
minority equity participation, which accounts for 26% of cases. 50:50 equity participation
which is also referred to as equal equity participation, accounts for 13% of cases. The whollyowned subsidiary entry mode (WOS) accounts for the lowest proportion among the four
types of entry mode, making up only 11% of cases.
With regards to the changing trends in each type of entry mode, the graph below show how
Japanese car maker entry modes have evolved over the period from 2004 to 2014.
Graph 1: Annual Changes in Equity Entry Modes of 50 Japanese
Automotive Manufacturing Firms: 2004-2014
Graph 1 shows annual changes in the use of each type of entry mode. The vertical axis of the
graph represents the number of firms choosing each entry mode (i.e. majority equity
participation, minority equity participation, 50:50 equity participation or wholly-owned
subsidiary entry mode). The horizontal axis represents the time period between 2004 and
2014. The graph indicates that in the automotive manufacturing industry, the most prevalent
entry mode types selected by Japanese firms between 2004 and 2014 are majority and
minority equity participation. On the one hand, the changing trends show that majority and
minority equity participation account for the largest numbers among the four types of
foreign market entry modes. On the other hand, the changes observed over the period also
demonstrate a clear trend. Between 2004 and 2008, the speed of foreign market expansion
slows down. This is reflected by the dropping numbers in the use of majority and 50:50
equity participation entry modes. Although the amount of minority equity participation and
WOS entries grows, this growth is quite limited. Following this, use of the majority and
minority equity participation entry pathways drops significantly between 2008 and 2010.
After 2010, the number of times that majority and minority equity participation pathways are
used increases dramatically, with these modes playing a dominant role among the four types
of foreign market entry. The general trends observed for the four types of foreign market
entry might coincide with some of the macroeconomic fluctuations experienced during the
5
period, such as the economic recession triggered by the global financial crisis and the
subsequent recovery of the world economy.
2.2. Analysis of the Entry Modes of Chinese Firms
China’s automotive manufacturing industry9 has operated since the 1960s, when the new
Chinese government began to foster and push for the country’s industrial development. The
development of the Chinese automotive manufacturing industry is therefore relatively recent
when compared with that of Japan. After 50 years of development, China’s automotive
production volume is among the top few countries in the world. According to the IBIS world
industry report, the industry revenue totalled 542.4 billion dollars in 2015, which is a 5%
increase on 2014 10 . Despite the industry’s large production volume and revenue,
development in areas such as the core technology of indigenous Chinese automobile
manufacturing firms is still quite limited. A majority of the production as well as sales are
undertaken by joint ventures with partners from Germany, the United States, Japan, Great
Britain and other European countries.
Figure 2 shows the percentage of each entry mode taken by Chinese automotive firms
entering foreign markets. Among the four types of entry mode, majority equity participation
takes a leading role, accounting for 75% of cases. This is followed by the 50:50 or equal
equity participation, which accounts for 25% of cases. There were no cases of WOS or
minority equity participation entry into foreign markets by indigenous Chinese automotive
manufacturing firms between 2004 and 2014.
Figure 2: Equity Entry Modes of 50 Chinese Automotive
Manufacturing Firms: 2004-2014
9
Industry classification number: NACE Rev.2: 29
IBISWorld, 2016. IBISWorld Industry Report-Auto Parts Manufacturing in China.
ld.com/gosa-mple.aspx?cid=86&rtid=1
10
6
https://www.ibiswor-
With regards to the changing trends in each type of entry mode, Graph 2 below shows how
Chinese automobile manufacturing firm entry mode choices have evolved between 2004 and
2014.
Graph 2: Annual Changes in Equity Entry Modes of 50 Chinese
Automotive Manufacturing Firms: 2004-2014
Graph 2 shows annual changes in the use of each entry mode type over the period. The
vertical axis of the graph represents the number of firms choosing each entry mode (i.e.
majority equity participation, minority equity participation, 50:50 equity participation or
wholly-owned subsidiary entry mode). The horizontal axis represents the time period
between 2004 and 2014. The graph indicates that the type of entry mode chosen most often
by Chinese automotive manufacturers during the period from 2004 to 2014 is the majority
equity participation mode (followed by the 50:50 equity participation mode). Foreign market
expansions by Chinese automotive manufacturers were rare between 2004 and 2008. From
2009 to 2014, Chinese use of the majority and 50:50 equity participation entry modes saw a
limited increase. The development path of Chinese automotive manufacturing firms’ foreign
market expansion might coincide with the accumulation of resources, technology and capital
which all prepare firms for independent innovation and the business opportunities provided
by global economic recoveries. During this period some foreign automobile and car part
manufacturing firms were willing to be involved in new firms with Chinese partners at
relatively lower costs. There are no instances of minority equity participation or WOS entry
undertaken by Chinese automotive manufacturing firms between 2004 and 2014. In addition,
there are only eight foreign market entries by Chinese firms in total. This might be related to
the industry’s limited development of innovation capabilities and the overall competency of
Chinese automotive enterprises11.
11
ChinaReport, 2014. The Contemporary Development Situation of Automobile Industry in China.
http;//free.chinabaogao.com/quiche/201407/0GGZH62014.html
7
2.3. Analysis of the Largest Firms in the Industry
This section presents an analysis on the largest Japanese and Chinese automotive
manufacturing firms. Appendix A shows that the largest automotive manufacturing firms in
Japan are all privately owned. The geographical diversification and overseas sales of Japanese
firms are far more significant than those of their Chinese peers. In addition, most Japanese
firms choose to internationalize via the majority and minority equity participation entry
modes, the two most common among the four types of entry mode. In contrast, a feature of
Chinese firms is that 50% of these firms are state owned enterprises (SOEs). Although the
Chinese state owned automobile manufacturers have significant domestic sales, overseas
sales from SOEs are somewhat lower when compared with those of private firms such as BYD.
In addition, the geographical scope and diversification of SOEs appear to be only slightly
more diversified than those of the private firms in the sample (as measured by the number of
foreign countries where firms conduct their business). Together, these results suggest that
private firms do better than SOEs with respect to foreign market expansion. Moreover, with
regard to the choice of entry mode, Chinese firms mainly use majority and equal equity
participation when entering foreign markets. More specifically, SOEs appear to prefer equal
equity participation when entering foreign markets, while private firms more frequently use
majority equity participation as their mode of entry.
3. Computer and Electronics Manufacturing Industry
3.1. Analysis of the Entry Modes of Japanese Firms
Sony was founded in 1946 and represents the beginning of the period when the Japanese
electronics industry began to flourish12. Japan is home to the two largest semiconductor
consumer firms: Sony and Toshiba. It is also the world’s fourth largest exporter of
semiconductor manufacturing equipment. According to recent statistics, total investment in
the electronics industry has reached to 206,100 million Japanese Yen, accounting for 9.7% of
Japan’s total investment in the major manufacturing equipment sector in 201413. The
following chart summarises the foreign market entry modes of Japanese firms for the period.
Figure 3 shows that in the Japanese computer and electronics products manufacturing
industry, majority equity participation plays a leading role among the four types of entry
mode. It accounts for 59% of cases, followed by the minority equity entry mode, which
makes up 35% of cases. By contrast, firms rarely use the WOS or 50:50 entry modes, which
account for 2% and 4% of cases respectively.
With regards to the dynamics of each type of entry mode over the period, the graph below
shows how Japanese electronics manufacturers’ entry mode choices evolved between 2004
and 2014.
12
Industry classification number: NACE Rev.2: 26
Japan Automobile Manufacturers Association, 2015. The Motor Industry of Japan Report. http://www.jamaenglish.jp/publications/MIJ2015.pdf
13
8
Figure 3: Equity Entry Modes of 50 Japanese Electronics
Manufacturing Firms: 2004-2014
Graph 3: Annual Changes in Equity Entry Modes of 50 Japanese
Electronic Manufacturing Firms: 2004-2014
Graph 3 shows annual changes in the use of each entry mode type over the period. The
vertical axis of the graph represents the number of firms choosing each entry mode (i.e.
majority equity participation, minority equity participation, 50:50 equity participation or
wholly-owned subsidiary entry mode). The horizontal axis represents the time period
between 2004 and 2014. The graph indicates that Japanese firms in the electronic
manufacturing industry typically choose majority and minority equity participation entry
modes to enter foreign markets. These are followed by the 50:50 equity participation and
wholly-owned subsidiary entry modes. Between 2004 and 2010, the majority equity
9
participation mode remains stable, growing rapidly between 2011 and 2014. The minority
equity participation mode begins to decline as of 2004, experiencing limited growth as of
2008. In addition, both the 50:50 equity participation and wholly-owned subsidiary entry
modes remain relatively low and flat throughout the period. The observed developments in
each of these paths might relate to decisions over control of firm resources afforded to
Japanese electronics manufacturers by the various entry mode types.
3.2. Analysis of the Entry Modes of Chinese Firms
Following the Opening Up policy which began in the 1980s, China has become the world’s
largest consumer of computer products. After more than 20 years of development, China has
established its own domestic brands, such as Lenovo Corporation, Huawei, Haier and Great
Wall Computer Corporation. These computer and electronic equipment manufacturing giants
are also representative companies in China’s computer and electronics manufacturing
industry. They have gone beyond the domestic market by expanding their business
internationally and have reached international markets. According to the IBIS world industry
report, the industry revenue in China reached 196.2 billion dollars in 2015, with an annual
growth rate of 7.3% between 2010 and 201514. In addition to these industry giants, many
smaller firms have started businesses in foreign markets. The following chart summarises the
entry modes used by Chinese computer and electronics manufacturing firms.
Figure 4: Equity Entry Modes of 50 Chinese Electronics
Manufacturing Firms: 2004-2014
Figure 4 shows that majority equity participation, which makes up 56% of observed cases, is
the primary method undertaken by Chinese firms entering foreign markets. This is followed
14
IBISWorld, 2016. Electronic Component Manufacturing in China: Market Research Report. http:://www.ibisworld.com/industry/ china/electronic-component-manufacturing.html
10
by minority equity participation, which accounts for 38% of cases. The wholly-owned
subsidiary and 50:50 equity participation modes are used less frequently, accounting for 6%
and 0% respectively.
Graph 4: Annual Changes in Equity Entry Modes of 50 Chinese
Electronics Manufacturing Firms: 2004-2014
With regards to the dynamics of each type of entry mode over the period, Graph 4 shows
how Chinese electronics manufacturers’ entry mode choices evolved from 2004 to 2014. It
shows annual changes in the use of each entry mode type over the period. The vertical axis of
the graph represents the number of firms choosing each entry mode (i.e. majority equity
participation, minority equity participation, 50:50 equity participation or wholly-owned
subsidiary entry mode). The horizontal axis represents the time period between 2004 and
2014. From the graph we can see that in the electronics industry, majority and minority
equity participation are the most prevalent types of entry mode chosen by Chinese firms
when entering foreign markets. The majority equity participation mode shows an irregular
development trend. It increases and decreases between 2004 and 2006. To some extent, the
steady growth of majority equity participation between 2006 and 2009 reflects the growth of
Chinese electronics manufacturing firms, which in turn might relate to lower labour and
materials costs as well as the steady economic development of China. Since 2010, majority
equity participation trends to a lower level and fluctuates until 2014. Minority equity
participation rates are generally lower than majority equity participation rates over the
period, fluctuating throughout 2004 to 2014. These two types of entry modes are followed
by the wholly-owned subsidiary mode, which is used relatively infrequently. The 50:50 equity
participation mode is not selected by Chinese firms in the electronics industry.
3.3. Analysis of the Largest Firms in the Industry
This section presents an analysis on the largest Japanese and Chinese electronics
manufacturing firms. Appendix B demonstrates that Japanese firms in the industry are
11
typically privately owned and have much larger sales revenue both domestically and overseas,
when compared with Chinese firms. In addition, with regard to geographical diversification,
the number of countries where Japanese firms operate is remarkably larger than that of
Chinese firms. In contrast, 67% of the key firms in the Chinese electronics industry are state
owned enterprises. The results also show that both the domestic and overseas sales of
private firms exceed those of the state owned enterprises. Specifically, the domestic and
overseas sales of private firms are 26,697.65 million US dollars and 33,252.03 million US
dollars respectively, while the domestic sales and overseas sales of state owned enterprises
are 20,522.48 million US dollars and 17,824.66 million US dollars respectively. Moreover,
based on the number of foreign countries where firms operate, it is also clear that private
firms have greater overseas geographical diversification than state owned enterprises. With
regards to the choice of entry mode, both private and state owned enterprises prefer to
enter foreign markets either by majority or by minority equity participation. Moreover,
Japanese and Chinese firms share a further commonality with respect to the electronics
manufacturing industry. Firms from both countries have a preference for the majority and
minority equity entry mode pathways.
4. Analysis of Entry Models Based on the Development Level of Destination
Countries
This section analyses the choices of entry mode based on the level of development in
destination countries. As Chinese and Japanese firms from both the automotive and
electronics industries grow and develop, they expand into foreign markets in search for an
optimized allocation of resources. The scope of foreign regions where Japanese and Chinese
firms from both industries conduct business covers Asia, Europe, North America and Latin
America. Based on the development level of countries as assessed by the World Bank, this
report classifies destination countries into two categories: developed and developing. The
analysis below demonstrates the entry modes used by firms to enter both developing and
developed countries.
4.1. Analysis of Entry Modes Used to Enter Developing Countries
Developing countries typically have vast geographical areas, large populations and a relatively
lower level of economic development. Despite the lower economic development level,
developing countries usually possess advantages such as access to comparatively lower cost
resources, higher levels of potential consumer consumption and a vast amount of natural
resources. Since the 1990s, such countries have developed rapidly due to domestic economic
reforms and structural economic transformations. Some of the newly-emerging economies
have become places that attract a large amount of foreign direct investment. By conducting
business in developing countries, firms can exploit comparative advantages and explore
potential consumption markets. The following chart shows how the four types of entry mode
are selected by firms that enter the markets of developing countries.
Figure 5 shows that when expanding into developing countries, both Japanese and Chinese
firms prefer majority equity participation as the most appropriate type of entry mode. Among
12
the four types of entry mode, majority equity participation accounts for 50% of cases,
followed by the minority equity participation entry mode which makes up 30% of cases. The
other two types of entry mode, 50:50 equity participation and wholly-owned subsidiaries,
take up smaller proportions, with each accounting for 10% of cases.
Figure 5: Equity Entry Modes into Developing Countries
Note: This figure shows entry modes into developing countries of 200
Japanese and Chinese Firms from the Automotive and Electronics
Manufacturing Industries in the period 2004-2014. Source. Osiris.
Graph 5: Annual Changes in Equity Entry Mode into Developing
Countries
Note: This graph shows the annual change in equity entry mode into
developing countries of 200 Japanese and Chinese firms in the Automotive
and Electronics Manufacturing Industries in the 2004-2014 period.
Source: Osiris.
13
As to the dynamics of each type of entry mode over the period, the graph above shows how
Japanese and Chinese preferences for each of the four types of entry mode have evolved in
developing markets between 2004 and 2014. Graph 5 shows annual changes in the use of
each entry mode type over the period. The vertical axis of the graph represents the number
of firms choosing each entry mode (i.e. majority equity participation, minority equity
participation, 50:50 equity participation or wholly-owned subsidiary entry mode). The
horizontal axis represents the time period between 2004 and 2014. The graph above shows
that the majority and minority equity participation entry modes constitute the largest
numbers among the four types of entry mode. A changing trend is also seen in the graph. All
four types of entry mode generally experienced a decline between 2004 and 2010, and the
decline in the use of majority and minority equity participation entry is especially severe
between 2008 and 2010. After 2010, use of the majority equity participation entry mode
increased dramatically and reached a peak in 2013. Moreover, use of the minority equity
participation entry mode also grew, although not as significantly when compared with the
majority equity participation entry mode. The growing trend of market expansion to
developing countries over this sample period might coincide with the various instabilities and
fluctuations of the world economy observed over the same timeframe.
Figure 6: Equity Entry Modes into Developed Countries
Note: This figure shows the Equity Entry Modes into Developed Countries by
200 Japanese and Chinese Firms from the Automotive and Electronics
Manufacturing Industries in the 2004-2014 period. Source: Osiris.
4.2. Analysis on Entry Modes Used to Enter Developed Countries
The following chart shows the percentage occurrence of each type of entry mode which firms
employ to enter the markets of developed countries. From Figure 6 we can see that the
majority and minority equity participation entry modes still play dominant roles among the
four types of entry modes when firms expand their businesses into developed countries. The
majority and minority equity participation modes constitute 62% and 31% of all cases
respectively, with each of the two making up a larger proportion in comparison to the
14
equivalent figures for developing countries. The 50:50 equity participation and WOS entry
modes share much smaller percentages of all cases, at 5% and 2% each, respectively.
Graph 6: Annual Equity Entry Mode Changes in Developed Countries
Note: This graph shows the annual change in equity entry mode into
developed countries of 200 Japanese and Chinese firms in the Automotive
and Electronics Manufacturing Industries in the 2004-2014 period.
Source: Osiris.
With regards to the dynamics of each type of entry mode over the period, Graph 6 above
shows how Japanese and Chinese preferences for each of the four types of entry mode have
evolved in developed markets between 2004 and 2014.
Graph 6 shows annual changes in the use of each entry mode type over the period. The
vertical axis of the graph represents the number of firms choosing each entry mode (i.e.
majority equity participation, minority equity participation, 50:50 equity participation or
wholly-owned subsidiary entry mode). The horizontal axis represents the time period
between 2004 and 2014. The graph shows that when firms enter foreign markets in
developed countries, majority equity participation entry mode dominates all throughout the
period from 2004 to 2014. Beginning with 2004, and despite some fluctuations, the general
trend in majority equity participation use is increasing, with the number of firm cases being
much larger than for the other three modes. Minority equity participation first goes through
a declining period between 2004 and 2008, then increases but stays at the relatively low level
between 2008 and 2014. The other two types of entry mode, 50:50 equity participation and
wholly-owned subsidiaries, fluctuate more dramatically during the sample period and
constitute smaller proportions of total firm internationalization cases.
15
5. Comparison between Japanese and Chinese Firms
This section discusses comparisons of the different types of entry mode between Japan and
China, as well as between the automotive and electronics industries in each country. On one
hand, the test results show that there are no significant differences between Japanese and
Chinese firms when it comes to the different types of entry mode which they favour15. On the
other hand, the test results show that the 50:50 equity participation entry mode is more
commonly used in the automotive manufacturing industry than it is in the electronics
industry (while the usage rates of majority and minority equity participation and WOSs
between the two industries are not significantly different)16. Further tests also indicate that
there are no significant differences among the four types of foreign market entry mode
between firms entering developing and developed countries17.
(1) Why might foreign market entry modes be similar between Japan and China?
Usage rates of the four types of entry mode are similar between Japanese and Chinese firms,
indicating that firms from the two countries choose similar entry mode strategies when
expanding into international markets. This similarity could be attributed to the fact that
company managers from Japan and China share some common values and beliefs, which are
derived from the common cultural background of the two countries. Both Japan and China
are Asian countries, and Japan is greatly influenced by ancient Chinese culture. This can have
an impact on the cognition of top firm executives, which in turn can result in similarities
between the strategic decision making of Japanese and Chinese firms.
(2) Why might firms from both industries select similar entry modes? Why may they differ in
their use of international joint ventures (50:50 equity participation)?
Firms from the two industries studied here have similar approaches when selecting from the
majority/ minority equity participation and WOS entry modes when entering foreign markets.
In addition to the advantages of majority equity participation, the WOS entry mode enables
firms to enter foreign markets with substantial flexibility for meeting the strategic challenges
of foreign market expansion. In almost all firm cases from each industry, minority equity
participation represents the second most popular mode. This type of entry mode is usually
selected by firms who wish to share resources with foreign firms and who intend to learn
from their partners when expanding their business into foreign markets. Although this type
of entry mode leaves firms with a lower level of control, firms also bear a lower level of risk
as a result.
15
P-values of the mean difference tests: majority equity participation: p=0.8061, minority equity participation:
p=0.2986, 50:50 equity participation: p=0.6055, wholly-owned subsidiary: p=0.2941. Conclusion: Fail to reject
the null hypothesis that the group means are the same.
16
P-values of the mean difference tests: majority equity participation: p=0.3632, minority equity participation:
p=0.8911, wholly-owned subsidiary: p=0.43231. Conclusion: Fail to reject the null hypothesis that the group
means are the same. 50:50 equity participation: p=0.0553. Conclusion: Moderate rejection of the null
hypothesis that the group means are the same.
17
P-values of the mean difference tests: majority equity participation: p=0.8754, minority equity participation:
p=0.2865, 50:50 equity participation: p=0.4348, wholly-owned subsidiary: p=0.1428. Conclusion: Fail to reject
the null hypothesis that the group means are the same.
16
One point of difference is that the 50:50 equity participation entry mode is significantly
different between the two industries. The 50:50 equity participation entry mode is more
frequently used in the automotive manufacturing industry than in the electronics industry.
Many operational departments in the automotive manufacturing industry are more capital
and technology intensive than those in the electronics industry, requiring more capital
investment and having greater R&D expenses. By using the equal equity participation entry
mode, vehicle manufacturing firms can make capital and R&D investments more effectively,
also effectively sharing existing technologies and prior experience with their partners.
(3) Why might foreign market entry modes be similar when comparing entries into developing
and developed host countries?
The results demonstrate that Japanese and Chinese firms from both industries enter the
developing and developed countries by making similar entry mode choices. This result differs
from past studies18 which demonstrate that firms prefer low control modes when entering
competitive markets in developed countries because they prefer (i) to take advantage of their
partners’ effective performance, (ii) to avoid disabling forces and (iii) to utilize economies of
scale. Furthermore, the proportion of majority equity participation is larger in developed
countries than in developing countries. This result is partly consistent with previous studies19
which assert that the option to avoid large control is a natural state for firms operating in
imperfect markets and markets with high uncertainty (such as those commonly found in
developing countries) in order to reduce transaction costs. Any differences from prior
research could be attributed to cultural elements of East Asian countries, which could
influence foreign market entry mode choices relative to firms from Western countries.
Concluding Remarks
The analysis in this report finds that all sample firms from the Japanese and Chinese
automotive and electronics industries preferred the majority equity participation entry mode
when entering foreign markets. The minority equity participation entry mode was the second
most prevalent entry mode selected by these firms. Following the majority and minority
equity participation entry modes, the wholly-owned subsidiary and 50:50 equity participation
entry modes were most popular. Firms choose foreign market entry modes in accordance
with their business environment and specific goals. Decisions around entry mode should also
be consistent with the profit maximization objectives of foreign market operations. Japanese
and Chinese firms from both industries share similarities in terms of the entry modes
employed. This potentially reveals some of the common characteristics shared by these firms.
They did however exhibit differences in their preference for the 50:50 equity participation
mode. This in turn highlights potential differences between industries. The studied firms also
shared similarities in their entry mode decisions when entering developing and developed
countries. Future research into the possible impacts of cultural aspects on the choice of entry
18
Williamson, O.E. 1981. The Modern Corporation: Origins, Evolution, Attributes. Journal of Economic Literature,
1537-1568.
19
Anderson, E., & Coughlan, A.T. 1987. International Marketing Entry and Expansion via Interdependent or
Integrated Channels of Distribution. Journal of Marketing, 71-82.
17
modes for Asian firms and comparisons between Western and Asian firms could yield
valuable insights for theorists and practitioners.
References
Anderson, E., & Coughlan, A.T. 1987. International Marketing Entry and Expansion via
Interdependent or Integrated Channels of Distribution. Journal of Marketing, 71-82.
Brouthers, L.E., Brouthers, K.D., & Werner, S. 1999. Is Dunning’s Eclectic Framework
Descriptive or Normative? Journal of International Business Studies, 30(4):831-844.
ChinaReport, 2014. The Contemporary Development Situation of Automobile Industry in
China. http://free.chinabaogao.com/qiche/201407/0GGZH62014.html
IBISWorld, 2016. Electronic Component Manufacturing in China: Market Research Report.
http://www.ibisworld.com/industry/china/electronic-component-manufacturing.html
IBISWorld, 2016. IBISWorld Industry Report-Auto Parts Manufacturing in China.
https://www.ibisworld.com/gosample.aspx?cid=86&rtid=1.
Japan Automobile Manufacturers Association, 2015. The Motor Industry of Japan Report.
http://www.jama-english.jp/publications/MIJ2015.pdf
UNCTAD, 2015. Global Investment Monitor.
http://unctad.org/en/PublicationsLibrary/webdiaeia2015d1_en.pdf
UNCTAD, 2015. World Investment Report.
http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf
UNCTAD, 2014. World Investment Report-Overview.
http://unctad.org/en/PublicationsLibrary/wir2014_overview_en.pdf
Williamson, O.E. 1981. The Modern Corporation: Origins, Evolution, Attributes. Journal of
Economic Literature, 1537-1568.
Further Reading
Brouthers, K.D. 2013. A retrospective on: Institutional, cultural and transaction cost
influences on entry mode choice and performance. Journal of International Business
Studies, 44(1):14-22.
Japan Automotive Manufacturers Association, 2015. Investing in America, Annual
Contributions Report.
18
http://www.jamaenglish.jp/publications/2015US_Contributions_Report.pdf
Meyer, K., Estrin, S., Bhaumik, S.K., Peng, M.W. 2009. Institutions, Resources, and Entry
Strategies in Emerging Economies. Strategic Management Journal, (30): 61-80.
Williamson, O.E. 1975. Markets and Hierarchies: Analysis and Antitrust Implications, New
York: The Free Press.
19
Appendices
Database Description
All data used for this analysis is from the BvD Osiris and Zephyr databases. The BvD database
is widely used by international business and finance researchers to obtain data on the
financial performance and M&A activities of publicly listed firms. Some of the firm-specific
information used in this analysis was also obtained from the annual reports of the sample
companies and was therefore collected by hand.
Appendix A
The six largest Japanese firms in the automotive manufacturing industry, their sales and
number of foreign countries of operation data is based on 2014 statistics. Entry mode
percentages are based on data from the period between 2004 and 2014.
Company Name
Ownership
Sales: Japan
(million USD)
Sales: Overseas
(million USD)
Foreign Countries of
Operation
TOYOTA MOTOR
CORPORATION
MITSUBISHI MOTORS
CORPORATION
MAZDA MOTOR
CORPORATION
ISUZU MOTORS LTD
DENSO CORPORATION
NISSAN MOTOR CO LTD
Private
108,810.15
123,555.99
34
Private
16,425
11,307
15
Private
22,573
21,093
17
Private
Private
Private
12,045.90
23,785.71
40,321
7,649.51
23,785.71
93,172
23
14
23
Company Name
Majority Equity
Participation (%)
55%
Majority Equity
Participation (%)
9%
50:50 Equity
Participation (%)
27%
WOS
(%)
9%
25%
75%
0%
0%
33%
67%
0%
0%
40%
36%
67%
60%
14%
0%
0%
7%
33%
0%
43%
0%
TOYOTA MOTOR
CORPORATION
MITSUBISHI MOTORS
CORPORATION
MAZDA MOTOR
CORPORATION
ISUZU MOTORS LTD
DENSO CORPORATION
NISSAN MOTOR CO LTD
The six largest Chinese firms in the automotive manufacturing industry, their sales and
number of foreign countries of operation data is based on 2014 statistics. Entry mode
percentages are based on data from the period between 2004 and 2014.
Company
Name
Ownership
Sales: China
(million USD)
Sales: Overseas
(million USD)
Foreign Countries of
Operation
SAIC MOTOR
CORPORATION LIMITED
SOE
97,348
175
4
20
GUANGZHOU
AUTOMOBILE GROUP CO.,
LTD.
NINGBO HUAXIANG
ELECTRONIC CO., LTD.
ANHUI JIANGHUAI
AUTOMOBILE CO, LTD.
CHANGZHOU XINGYU
AUTOMOTIVE LIGHTING
SYSTEMS CO., LTD.
BYD COMPANY LIMITED
SOE
3,452
0.46
1
Private
1,007
265.50
1
SOE
4,375.12
593.75
4
Private
312.08
4.43
3
Private
7,558.72
1,155.39
4
Company Name
Majority Equity
Participation (%)
0%
Majority Equity
Participation (%)
0%
50:50 Equity
Participation (%)
100%
WOS (%)
100%
0%
0%
0%
100%
0%
0%
0%
0%
0%
100%
0%
100%
0%
0%
0%
100%
0%
0%
0%
SAIC MOTOR
CORPORATION LIMITED
GUANGZHOU
AUTOMOBILE GROUP CO.,
LTD.
NINGBO HUAXIANG
ELECTRONIC CO., LTD.
ANHUI JIANGHUAI
AUTOMOBILE CO, LTD.
CHANGZHOU XINGYU
AUTOMOTIVE LIGHTING
SYSTEMS CO., LTD.
BYD COMPANY LIMITED
0%
Appendix B
The six largest Japanese firms in the electronics manufacturing industry, their sales and
number of foreign countries of operation data is based on 2014 statistics. The entry mode
percentages are based on data from the period between 2004 and 2014.
Company
Name
HITACHI LTD
SONY CORPORATION
PANASONIC
CORPORATION
TOSHIBA CORPORATION
FUJITSU LIMITED
NEC CORPORATION
Ownership
Company Name
Majority Equity
Participation (%)
70%
30%
50%
HITACHI LTD
SONY CORPORATION
PANASONIC
Private
Private
Private
Sales: Japan
(million USD)
46,610.26
19,944.43
32,964.45
Sales: Overseas
(million USD)
40,665.9
53,411.64
35,919.81
Foreign Countries
of Operation
15
19
34
Private
Private
Private
24,160.23
25,653.83
20,970.29
35,267.39
16,785.54
5,239.68
13
66
30
Majority Equity
Participation (%)
23%
30%
50%
21
50:50 Equity
Participation (%)
7%
30%
0%
WOS (%)
0%
10%
0%
CORPORATION
TOSHIBA CORPORATION
FUJITSU LIMITED
NEC CORPORATION
53%
56%
44%
43%
44%
50%
4%
0%
6%
0%
0%
0%
The six largest Chinese firms in the electronics manufacturing industry, their sales and
number of foreign countries of operation data is based on statistics from 2014. The entry
mode percentages are based on data from the period between 2004 and 2014.
Company
Name
Ownership
Sales: China
(million USD)
Sales: Overseas
(million USD)
Foreign Countries of
Operation
LENOVO GROUP LIMITED
ZTE CORP
CHINA GREATWALL
COMPUTER SHENZHEN
CO., LTD.
BOE TECHNOLOGY GROUP
CO., LTD
QINGDAO HAIER CO., LTD
SICHUAN CHANGHONG
ELECTRIC CO., LTD
Private
SOE
SOE
14700.27
6282.27
4066.77
31595.323
6329.37
7552.58
27
4
1
SOE
3051.86
2152.41
1
Private
SOE
11997.38
7121.58
1656.71
1790.3
1
6
Company Name
LENOVO GROUP LIMITED
ZTE CORP
CHINA GREATWALL
COMPUTER SHENZHEN
CO., LTD.
BOE TECHNOLOGY
GROUP CO., LTD
QINGDAO HAIER CO., LTD
SICHUAN CHANGHONG
ELECTRIC CO., LTD
Majority Equity
Participation (%)
100%
50%
0%
Majority Equity
Participation (%)
0%
0%
100%
50:50 Equity
Participation (%)
0%
0%
0%
WOS
(%)
0%
50%
0%
0%
100%
0%
0%
100%
100%
0%
0%
0%
0%
0%
0%
22