Acquisition or greenfield entry into Africa? Responding to institutional dynamics in an emerging continent

Abstract

Research Summary Foreign direct investment establishment mode literature has focused on the impact of unidimensional measures of institutional status, despite that institutional environments in emerging economies undergo substantial and continuous changes in multiple dimensions. This study integrates the dynamic institution‐based view with the theoretical construct of institutional competitive advantages to examine the heterogeneous strategic responses of investing firms to host country institutional dynamics. Empirical results from 2,245 FDIs into Africa during the period 2008–2013 show that multinational enterprises MNEs are more likely to adopt: (1) a greenfield mode in countries with rapid development of formal institutions; and (2) an acquisition mode in countries with rapid development of factor markets. Moreover, the regional experience of MNEs strengthens the first effect, while the institutional ties strengthen both effects. Managerial summary The dynamic development of a host country's institutional and factor market conditions is a critical consideration for multinational enterprises when entering emerging countries. By studying 2,245 foreign direct investments into Africa during the period 2008–2013, we find that MNEs are more likely to enter African countries that have formal institutions that are rapidly improving via greenfield investments. This is especially true for those MNEs with prior investment experience in Africa or with local government connections. We also find that acquisition modes are more likely to be adopted in African countries with rapidly improving factor market conditions, especially by MNEs with local government connections. We promote a dynamic perspective for MNEs for assessing business opportunities and entry modes in Africa. Copyright © 2016 Strategic Management Society.

Corporate political connections in global strategy

“…Deficiencies in formal institutional development create uncertainties regarding these incentives and constraints, which motive businesses to develop CPC to absorb the uncertainties (White III et al, ). The voids‐bridging function of CPC in foreign markets, either through political strategies or by partnering with host country state‐owned firms, can influence MNEs' entry strategies (Chen et al, ) as well as their performance (Brockman et al, ). However, strategies of deploying CPC in host countries can backfire and turn into liabilities when the political regime changes (Bucheli & Salvaj, ; Siegel, ).…”

Institutions and the location strategies of South African firms in Africa

“…In other words, environments that ensure predictability and transparency are more likely to attract high‐commitment modes of entry (Meyer et al, ). Chen, Cui, Li, and Rolfe () echo these findings; in a study of 2,245 FDIs into Africa during the period 2008–2013, they found that MNEs opt for greenfield investments in African contexts with rapidly improving formal institutions.…”

Establishment mode choice by Chinese firms in Latin America: The role of host country‐specific experience and government official visits

“…This is a dummy variable that equals to one if the Chinese MNE acquired a local company, and zero if it established a greenfield subsidiary (R. Chen, Cui, Li, & Rolfe, ; Hennart & Park, ; Larimo, ; Meyer et al, ; Quer, Rienda, & Andreu, ; Rienda et al, ). Following prior studies on establishment mode choice, joint ventures have been included in the greenfield investment category (Barkema & Vermeulen, ; Brouthers & Hennart, ).…”