Regional Integration, Multinational Enterprise Strategy and the Impact of Country‐level Risk: The Case of the EMU
| DOI | http://doi.org/10.1111/1467-8551.12326 |
| Author | Won‐Yong Oh,Jenny Hillemann,Alain Verbeke |
| Published date | 01 October 2019 |
| Date | 01 October 2019 |
British Journal of Management, Vol. 30, 908–925 (2019)
DOI: 10.1111/1467-8551.12326
Regional Integration, Multinational
Enterprise Strategy and the Impact of
Country-level Risk: The Case of the EMU
Jenny Hillemann,1,2 Alain Verbeke3,4,5 and Won-Yong Oh6
1Solvay Business School, VrijeUniversiteit Brussel, Pleinlaan 2, 1050, Brussels, Belgium, 2Henley Business
School, University of Reading, Reading,RG6 6UD, UK, 3Haskayne School of Business, University of Calgary,
Calgary, Alberta, T2N 1N4, Canada, 4Henley Business School, University of Reading, Reading,RG6 6UD,
UK, 5Solvay Business School, VrijeUniversiteit Brussel, Pleinlaan 2, 1050, Brussels, Belgium, and 6Lee Business
School, University of Nevada, Las Vegas, NV, 89154, USA
Corresponding author email: jenny.hillemann@vub.be
The European Monetary Union (EMU) provides a new macro-level, institutional setting
for multinational enterprises (MNEs). The authors investigate the impact of regional
integration on MNE strategy by analysing Belgian firms’ entry-mode choices in foreign
markets, both EMU and non-EMU ones, with a focuson what impact remains of country-
level risk. They demonstrate that regional integrationhas altered the impact of country-
level institutional risk on MNE entry-mode choices inside the EMU. The conventional
predictions of international business theory have been reversed,with higher country-level
risk inside the EMU driving a preference for wholly owned subsidiaries. Within the inte-
grated region, insider firms now view higher country-levelrisk as the equivalent of higher,
micro-level contracting risk. Such risk can bestbe mitigated through full internalization,
combined with arm’s length contracts, rather than through equity joint ventures.
Introduction
Global foreign direct investment (FDI) stocks
have grown strongly throughout the past decades.
In parallel with this empirical phenomenon,
the scholarly literature has devoted substantial
attention to the determinants of multinational
enterprise (MNE) internationalization patterns.
This has included attention to the impacts of bilat-
eral investment treaties (BIT) (Oh and Fratianni,
2017) and regional integration (Kolk, Lindeque
and Buuse, 2014; Oh and Contractor, 2014; Oh
and Li, 2015; Rugman and Verbeke, 2004, 2005;
Verbeke and Asmussen, 2016; Verbeke and Kano,
2016). Regional elements appear important, in
addition to country-level variables, to explain
various dimensions of MNE strategy (Arr`
egle
et al., 2013; Blevins et al., 2016; Kim and Aguilera,
2015; Oh and Rugman, 2012; Rugman and Oh,
2013). Regions should therefore be considered
systematically when MNE international ex-
pansion patterns are investigated. The present
study focuses on the impact of a particularly
far-reaching case of regional integration, namely
that of the European Monetary Union (EMU),
on insider MNEs’ entry-mode choices.
Regional integration arrangements such as the
EMU – with the euro as its common currency and
with a common monetary policy – aim to facilitate
the free flow of goods, services, capital and labour,
and are supposedly instrumental in establishing
more ecient markets. Firms from one EMU
member can expect to enjoy free(er) economic
access to all other member states and to the
various benefits from this far-reaching European
integration. Such benefits result from the common
European framework driving an institutional-
level playing field, in this case including monetary
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Impact of Country-level Risk 909
policy (Oxelheim and Ghauri, 2004). However,
little is known about whether – and how – insider
MNEs consider regional integration in their entry-
mode choices, an issue we address in this study.
A large numberof prior entry-mode studies have
usefully focused on transaction cost economics
(TCE) and related internalization theory-based
explanations to explain MNE entries. Here,
firm-level parameters in the ‘contracting sphere’
(broadly considered) are the most critical in pro-
viding guidance to entry-mode selection. However,
it has also been argued that micro-level analyses
‘must be qualified by factors stemming from the
institutional and cultural context’ (Kogut and
Singh, 1988, p. 412; North, 1990). Here, several
studies have focused on the potentially important
impact of foreign legal and regulatory frameworks
on MNE decision-making (Coeurderoy and
Murray, 2008; Demirbag, Glaister and Tatoglu,
2007; Holmes et al., 2013).1The bulk of past
empirical work has focused on host-country-
level characteristics, which raises the question
of whether the impact of these country-level
variables would remain ‘as expected’ in an era
of increased regional integration (Verbeke and
Asmussen, 2016).
In the present paper, we assess how MNEs from
one specific economy might adapt their entry-
mode strategies as a function of regional integra-
tion, in this case exemplified by the presence of a
‘Single Market’ and the sharing of a common cur-
rency. Regional integration, by definition, entails
a change in a set of macro-level, institutional shift
parameters and the related requirements for re-
source bundling by MNEs (Rugman and Verbeke,
2004). Our study thereby extends the literature on
the implications of regional integration for inter-
national business (Banalieva, Jiang and Santoro,
2010; Benito, Grøgaard and Narula, 2003; Rug-
man and Oh, 2013; Rugman and Verbeke, 2004).
Several prior studies did analyse the eect of
European integration on a variety of entry-related
phenomena within Europe, such as cross-border
mergers and acquisitions (Moschieri, Ragozzino
and Campa, 2014), and the number of research
1The institutional environment can be decomposed into
formal and informal institutions, with the latter some-
times including ‘culture’ (Holmes et al., 2013). In our pa-
per,however, we adopt the conventionaldistinction made
between the impact of institutions, referring to formalin-
stitutions only, and the impact of culture.
and development (R&D) partnerships being
established (Ramsay, Kay and Hennart, 2001).
However, these studies did not investigateformally
the dierential impact on entry-mode choices trig-
gered by regional integration, when expanding
within vs. outside the region.
In contrast, the present article oers novel
insight into the impact of operating within the
EMU core vs. operating outside the EMU. We
do consider traditional explanatory variables for
entry-mode strategies from TCE/internalization
theory, and from studies on institutional context
and cultural distance, but we combine these
with variables measuring the impact of regional
integration between the home and host countries.
Specifically, we test the eects of conventional,
national institutional risk and cultural distance
on entry-mode strategies for expansion within vs.
outside the home region.
The next section highlights the most commonly
studied variables aecting entry-mode strategies.
In the third and fourth sections, we develop
our hypotheses and describe the methodology.
The fifth section discusses our results, as well as
the research and management implications, the
limitations and future research directions. The
final section concludes.
Theoretical background
Conventional internalization theory suggests that
the interplay between firm-specific advantages
(FSAs) and country-specific advantages (CSAs)
will determine MNE location and entry-mode
choices (Rugman and Verbeke, 1992). Firm-
specific advantages represent the MNE’s unique
resource combinations that allow the additional
costs of doing business abroad vis-`
a-vis relevant
rivals operating in host environments to be over-
come. Firm-specific advantages can include as-
sets protected by property rights (such as patented
knowledge), but also managerial capabilities al-
lowing ecient resource orchestration.
Country-specific advantages determine location
choices. Here, performing particular value-added
activities in particular host countries allows im-
perfect markets to be overcome and may thus re-
duce the MNE’s spatial transaction costs com-
pared with operating out of the home market
only (Rugman, 1990). Most importantly, locating
value-added activities abroad can be instrumental
C2019 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf of British
Academy of Management.
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