Global Ownership Strategy of Japanese Multinational Enterprises: A Test of Internalization Theory

Abstract * This study examines determinants of the global ownership strategy of 444 Japanese manufacturing firms as of 1999, in a test of internalization theory. * The test results showed the efficiency of internalization determinants, such as R&D intensity, international experience, cultural distance and political risk, thus explaining the global ownership strategy of Japanese multinational enterprises (JMNEs) without the support of control variables. Key Results * Internalization theory clearly showed its explanatory and predictive power regarding the global ownership strategy of JMNEs. * We also found a distinctive ownership strategy of large JMNEs and keiretsu firms, one we labeled 'pseudo-internalization. ' Both large and keiretsu JMNEs preferred to form joint ventures not only with local firms but also with sogo shosha (general trading companies) and with other Japanese firms including the keiretsu members. ********** Many researchers examined the international ownership strategy of Japanese firms, focusing especially on determinants affecting the choice between joint ventures and wholly-owned subsidiaries (Hennart 1991, Padmanabhan/Cho 1996, Delios/Beamish 1999, Lu 2002). They tried to discover transaction-cost determinants in the ownership choices of JMNEs. The findings of these studies, however, were not consistent despite their using similar data, such as that published by Toyo Keizai. For instance, their test results for the effect of R&D intensity on the entry choice between full ownership and joint ventures (JVs) were not coherent. The R&D intensity of a firm drew our attention since it is a core tenet operationalized to denote the knowledge or skill level of a firm that is likely to face imperfect market conditions. Therefore, if the role of R&D intensity in the choice of Japanese entry modes remains vague, the validity of internalization theory, which has been rigorously confirmed using databases consisting of US MNEs (Gatignon/Anderson 1988, Gomes-Casseres 1989), can be questioned. The objectives of this study are to evaluate the relevancy of internalization theory to the global ownership strategy of JMNEs, and to investigate why there are differences in the results among previous studies on the subject. Using the largest number of samples, this paper reviews and tests how well the archetypal internalization theory explains the recent global ownership strategy of JMNEs. In addition, a distinctive global ownership strategy of JMNEs will be revealed through examining the influence of keiretsu membership on the choice of entry mode. We used the year-end data for 1999 which was also published by Toyo Keizai. The following sections briefly review the literature on underlying theories of determinants of global ownership for JMNEs. Following this, hypotheses are presented and developed. The subsequent section explains the research methodology and describes the measurements of the variables. Then the statistical results are presented, which leads to the discussion and conclusion. Transaction Cost Economics and Internalization Theory Coase (1937) has raised and answered the question of why firms exist when factors of production are governed by the price mechanism. He was the first to recognize that "there is a cost of using the price mechanism" (Coase 1937, p. 390). Williamson (1975) traced the causes of transaction costs in contractual relations to the joint conditions of bounded rationality (1) and opportunism (2). He articulated that bounded rationality mattered only under conditions of uncertainty and/or complexity. Moreover, the mere identification of opportunistic inclination in human behavior is not sufficient to assume that all market activities are flawed due to the axiom of perfect competition. Under the conditions of perfect competition, opportunistic posturing proves impossible. Therefore, only when opportunism is joined with a small-numbers condition will serious transactional difficulties arise. …