The Impact of Entry Mode on Subsequent Commitment to Poorly Performing Subsidiaries

Corporate Ownership & Control, Vol. 5, No. 1, 2007

Posted: 5 Jan 2009

See all articles by Jamie D. Collins

Jamie D. Collins

Sam Houston State University

Christopher R. Reutzel

Utah State University

Dan Li

Shanghai Maritime University (SMU) - School of Economics and Management

Abstract

Despite of the extensive research on the choice of how to structure a new foreign subsidiary in the international business literature, few studies have explored how the initial foreign entry mode impacts a multinational's subsequent activities in the host market. Drawing insights from prospect theory, this paper addresses how a multinational's entry mode influences the firm's reaction to negative subsidiary performance. Specifically, we argue that the entry mode (ownership structure of a multinational's subsidiary) affects the firm's potential for escalation of commitment to a poorly performing subsidiary. Further, we argue that the relationship between entry mode and a multinational's escalation of commitment is moderated by three factors - institutional distance between the home and the host country, cost of exiting the host market, and the parent firm's prior performance. This paper contributes to the literature by presenting the case that initial entry mode influences a multinational's post-entry activities.

Keywords: entry mode, escalation of commitment

Suggested Citation

Collins, Jamie D. and Reutzel, Christopher R. and Li, Dan, The Impact of Entry Mode on Subsequent Commitment to Poorly Performing Subsidiaries. Corporate Ownership & Control, Vol. 5, No. 1, 2007, Available at SSRN: https://ssrn.com/abstract=1321825

Jamie D. Collins (Contact Author)

Sam Houston State University ( email )

Box 2056
Huntsville, TX 77341
United States

Christopher R. Reutzel

Utah State University ( email )

Logan, UT 84322-3530
United States

Dan Li

Shanghai Maritime University (SMU) - School of Economics and Management ( email )

No. 1550 Pudong Avenue
Pudong New Area
Shanghai, 200135
China

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