256 Part 2: Strategic Actions: Strategy Formulation
Interestingly, firms use cross-border acquisitions less frequently to enter markets
where corruption affects business transactions and, hence, the use of international strat-
egies. A firm’s preference is to use joint ventures to enter markets in which corruption is
an issue, rather than using acquisitions. (Discussed fully in Chapter 9, a joint venture is
a type of strategic alliance in which two or more firms create a legally independent com-
pany and share their resources and capabilities to operate it.) However, these ventures fail
more often, although this is less frequently the case for firms experienced with entering
“corrupt” markets. When acquisitions are made in such countries, acquirers commonly
pay smaller premiums to purchase firms.^95
Although increasingly popular, acquisitions as an entry mode are not without costs,
nor are they easy to successfully complete and operate. Cross-border acquisitions have
some of the disadvantages of domestic acquisitions (see Chapter 7). In addition, they
often require debt financing to complete, which carries an extra cost. Another issue for
firms to consider is that negotiations for cross-border acquisitions can be exceedingly
complex and are generally more complicated than are the negotiations associated with
domestic acquisitions. Dealing with the legal and regulatory requirements in the tar-
get firm’s country and obtaining appropriate information to negotiate an agreement are
also frequent problems. Finally, the merging of the new firm into the acquiring firm is
often more complex than is the case with domestic acquisitions. The firm completing
the cross-border acquisition must deal not only with different corporate cultures, but
also with potentially different social cultures and practices.^96 These differences make
integrating the two firms after the acquisition more challenging because it is difficult
to capture the potential synergy when integration is slowed or stymied because of cul-
tural differences.^97 Therefore, while cross-border acquisitions are popular as an entry
mode primarily because they provide rapid access to new markets, firms considering this
option should be fully aware of the costs and risks associated with using it.8-4e New Wholly Owned Subsidiary
A greenfield venture is an entry mode through which a firm invests directly in another
country or market by establishing a new wholly owned subsidiary. The process of creating
a greenfield venture is often complex and potentially costly, but this entry mode affords
maximum control to the firm and has the greatest amount of potential to contribute to
the firm’s strategic competitiveness as it implements international strategies. This poten-
tial is especially true for firms with strong intangible capabilities that might be leveraged
through a greenfield venture.^98 Moreover, having additional control over its operations in
a foreign market is especially advantageous when the firm has proprietary technology.
Research also suggests that “wholly owned subsidiaries and expatriate staff are
preferred” in service industries where “close contacts with end customers” and “high
levels of professional skills, specialized know-how, and customization” are required.^99
Other research suggests that, as investments, greenfield ventures are used more
prominently when the firm’s business relies significantly on the quality of its capital-
intensive manufacturing facilities. In contrast, cross-border acquisitions are more
likely to be used as an entry mode when a firm’s operations are human-capital inten-
sive—for example, if a strong local union and high cultural distance (between the
countries involved) would cause difficulty in transferring knowledge to a host nation
through a greenfield venture.^100
The risks associated with greenfield ventures are significant in that the costs of
establishing a new business operation in a new country or market can be substantial. To
support the operations of a newly established operation in a foreign country, the firm
may have to acquire knowledge and expertise about the new market by hiring either host-
country nationals, possibly from competitors, or through consultants, which can be costly.A greenfield venture is an
entry mode through which
a firm invests directly in
another country or market
by establishing a new wholly
owned subsidiary.