CIS-Middle Europe Centre Discussion Paper Series Number 57 ENTRY MODE CHOICE IN EMERGING MARKETS: GREENFIELD, ACQUISITON AND BROWNFIELD

Multinational firms expanding into emerging markets can choose between entry through a greenfield project and via an acquisition. This paper analyzes this strategic decision. Among the options for entry mode, brownfield is delineated as a special case of acquisition, in which the resources transferred by the investor dominate over those provided by the acquired firm. Our analytical framework draws upon both resource-based and transaction-cost theories. The resource requirements have to be matched with resources available to the investor through an acquired firm, or otherwise. Beyond this, the decision has to account for the costs of acquiring and integrating the resources. The model presented complements the literature with insights gained through our case research on foreign investment into Eastern Europe. On this basis, we discuss the hybrid form of brownfield entry. Two distinct situations lead to brownfield investment: external growth strategies that are inhibited by poor quality of local firms, and internal growth strategies that depend on specific local resources. Brownfield entry can also become a key strategy for firms that possess strong core competences which need to be complemented with specific resources controlled by local firms. Correspondence: Klaus Meyer, Center for East European Studies, Copenhagen Business School Dalgas Have 15, DK-2000 Frederiksberg F, Denmark Tel.: +45 3815 3033, Fax: +45 3815 3037, e-mail: [email protected] http:\\www.econ.cbs.dk\institutes\cees\staff\meyer.html Most of this work focuses on the choice of ownership, between a joint-venture (JV) and a wholly2 owned affiliate, from a theoretical [e.g. Anderson and Gatignon 1986, Beamish and Banks 1987, Hennart 1988, Hill et al. 1990] or an empirical perspective [e.g. Gatignon and Anderson 1988, Gomes-Casseres 1991, Hennart 1991]. JVs are a hybrid form between market and intra-firm coordination, which reduces market transaction costs at the expense of higher coordination costs between the parents. Empirical studies have focused on firm-specific characteristics that foster the ability to manage either 3 mode, or to enhance the benefits investors obtain from it. Propositions consider e.g. cultural distance, international experience, firm size, and R&D expenditures [Caves and Mehra 1986, Forsgren 1989, Zejan 1990, Hennart and Park 1993, Andersson and Svensson 1994, Hennart et al. 1995, Svensson 1996, Chen and Zeng 1996, Barkema and Vermeulen 1998]. While most studies consider a two-way choice between acquisitions and greenfield, Kogut and Singh [1988] consider a three-way choice that includes JV as a separate mode. 1