Ownership Strategy of Japanese Firms: Transactional, Institutional and Experience Influences

Abstract

This study analyzed data on manufacturing investments of Japanese firms made in nine countries in East and South East Asia to determine how transactional, experience and institutional factors influenced the ownership strategy of these firms. The principal finding in this study is that experience and institutional factors were the most important determinants of the ownership strategy. The results show that the institutional environment affected ownership levels both at a regulatory level and at a risk level. Foreign investors responded to the increased risk of unwanted dissemination of proprietary assets in countries in which intellectual property rights were less secure by taking a higher ownership position. Japanese firms also secured higher ownership levels when they had more experience in international markets and more experience in the host country market.

Transactional factors were a less important influence than experience and institutional factors. While firms that operated in technologically and marketing intensive industries tended to take higher ownership positions when making foreign investments, this effect was relatively weaker than institutional and experience related effects. Further, within industry variance and across firm differences in the proprietary content of firms' technological and marketing assets had an ambiguous relationship with the degree of ownership taken in the foreign investment. One of the main tenets of the internalization approach and transaction cost theory concerns the positive relationship between the proprietary content of a firm's assets and the level of ownership. While the results were consistent with past research when we used industry-level indicators, no evidence was found in support of this relationship using absolute and relative firm-level indicators of asset specificity. A remaining empirical question is to identify if the null effect of transactional variables is unique to Japanese firms, perhaps because of the attenuated relationship between ownership and control that can exist in these firms, or if transactional variables, when operationalized as in this study, also have a weak effect for the foreign investments of firms based in other nations. Hence, future research should continue to examine the relative importance of transactional, institutional and experience factors on the ownership and entry mode strategies of firms across a variety of host and home country settings.

Note: This is a description of the paper and not the actual abstract.

Keywords: FDI, Political risk, Transaction cost, Experience, Learning, Japan, foreign investment