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Institutional and Transaction Cost Influences on Partnership Structure of Foreign Affiliates

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Abstract

  • This paper considers the determinants of foreign affiliate structure in the context of foreign equity ventures in Turkey. Institutional variables and transaction costs variables are examined as determinants of choice between wholly owned subsidiary, dyadic joint venture and multi-partner joint venture.

  • The findings support the majority of the hypotheses. We find that research and development (R&D) intensity, cultural distance, location of affiliate, affiliate size, political risk and corruption perception distances are particularly important in determining the choice of affiliate structure. Some partial support has also been found for the impact of foreign direct investment (FDI) concentration and linguistic distance on partnership structure of foreign affiliates. No support, however, has been noted for the effect of advertising intensity of the target industry. Both transaction cost specific and institution specific variables were found to be significant in explaining affiliate formation decisions.

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Notes

  1. We have adopted Turkish figures for the advertising intensity of industries. The reason for comparing with the UK advertising intensity figures was to examine whether there were any significant differences between an emerging market and a mature economy industry advertising intensity. The highest advertising intensity in both countries were in cosmetics, personal care, finance, publication and media sectors, the least advertising intensity industries were mining, basic metals, iron and steel industries. A bivariate correlation analysis revealed 85 percent correlation between R&D intensity figures between the UK and Turkish data.

  2. It is important to acknowledge the limitation of Hofstede’s national level cultural scores for the Turkish context. As the original four dimensions are not updated for Turkey, we were unable to use the fifth dimension in calculating cultural distance between Turkey and host countries. Further, despite recent improvements in Hofstede’s old dataset, his cultural scores may still have some bias in interpreting corporate level cultural differences between investing parties.

  3. The linguistic distance measure has been used in sociology (sociology of migration) (van Tubergen 2005) and biology (genetics research) (Chen et al. 1995). We argue that linguistic distance is an important measure, which can be adapted in future research on joint ventures.

  4. For the linguistically close countries of the Central Asian republics, the distances between these nations and Turkey are very small. However, the linguistic distance measure in general is not just about individual countries or languages. The measure is an important element of psychic distance, but it does not fully overlap with cultural distance and displays a different pattern as an explanatory variable.

  5. The logic behind the multiplication of the bribery index and transparency distance is to capture two dimensions of corruption: Arbitrariness (transparency distance) and pervasiveness in one variable. By multiplying these two indices we have created a composite index as suggested by Habib and Zurawicki (2001, 2002) and Uhlenbruck et al. (2006).

  6. The industry classification is based on factors that determine competitiveness and is generally divided into: Resource intensive, scale intensive, labor intensive, specialized supplier and science-based. An industry is defined as resource intensive if the foreign equity venture’s main product was in one of the following 2-digit SIC groups: Food and beverage (SIC 20), tobacco (SIC 21), textile mills (SIC 22), apparel (SIC 23), wood except furniture (SIC 24), pulp and paper (SIC 26), petroleum (SIC 29), rubber (SIC 30), leather (SIC 31), stone and glass (SIC 32), and primary metals (SIC 33). This definition is also in line with Gomes-Casseres (1990).

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Authors and Affiliations

  1. Department of International Business, University of Sheffield, Management School, Sheffield, UK

    Mehmet Demirbag

  2. Faculty of Economics and Administrative Sciences, Department of International Trade and Business, Bahcesehir University, Istanbul, Turkey

    Ekrem Tatoglu

  3. Department of International Strategic Management, University of Sheffield, Management School, Sheffield, UK

    Keith W. Glaister

Authors
  1. Mehmet Demirbag
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  2. Ekrem Tatoglu
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  3. Keith W. Glaister
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Correspondence to Mehmet Demirbag.

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Demirbag, M., Tatoglu, E. & Glaister, K. Institutional and Transaction Cost Influences on Partnership Structure of Foreign Affiliates. Manag Int Rev 50, 709–745 (2010). https://doi.org/10.1007/s11575-010-0055-y

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  • DOI: https://doi.org/10.1007/s11575-010-0055-y

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