Absolute and Relative Resources as Determinants of International Acquisitions

Abstract

We analyze the impact of absolute and relative levels of a foreign investing firm's resources on the choice of foreign entry mode. Specifically, we study the relationship between the fungibility of a firm's capabilities and the propensity of foreign investors to acquire domestic firms. On one hand, we argue that technology is fungible across national borders, and the relative technical capabilities of foreign investing firms, as compared to domestic firms, determine the entry mode. On the other hand, we argue that marketing capabilities are less fungible. Hence, the marketing capabilities of host country firms receives greater prominence in the entry mode decision. Our empirical tests, which are based on 2,175 foreign entries made into the US in the 1974-1991 period, largely support our predictions. From the analysis, we derive implications for the study of capabilities and entry mode choice.

Keywords: FDI, Acquisition, Japan, foreign investment, Advertising