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Accounting for Endogeneity When Assessing Strategy Performance: Does Entry Mode Choice Affect FDI Survival?

  • J. Myles Shaver

    (Stern School of Business, New York University, 44 West Fourth Street, Suite 7-74, New York, New York 10012-1126)

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    Firms choose strategies based on their attributes and industry conditions; therefore, strategy choice is endogenous and self-selected. Empirical models that do not account for this and regress performance measures on strategy choice variables are potentially misspecified and their conclusions incorrect. I highlight how self-selection on hard-to-measure or unobservable characteristics can bias strategy performance estimates and recommend an econometric technique that has been developed to account for this effect. Although this concern applies to a wide range of strategy questions, to demonstrate its effect I empirically examine if entry mode choice (acquisition versus greenfield) influences foreign direct investment survival. In specifications that do not account for self-selection, I find that greenfield entries have survival advantages compared to acquisitions. This confirms previous findings. However, the significance of this effect disappears once I account for self-selection of entry mode in the empirical estimates. The results confirm that estimates from models that do not account for self-selection of strategy choice can lead to incorrect or misleading conclusions.

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    File URL: http://dx.doi.org/10.1287/mnsc.44.4.571
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 44 (1998)
    Issue (Month): 4 (April)
    Pages: 571-585

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    Handle: RePEc:inm:ormnsc:v:44:y:1998:i:4:p:571-585
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    1. Wagner, Joachim, 1994. "The Post-entry Performance of New Small Firms in German Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 141-54, June.
    2. McGillivray, Robert G, 1970. "Estimating the Linear Probability Function," Econometrica, Econometric Society, vol. 38(5), pages 775-76, September.
    3. Audretsch, David B, 1991. "New-Firm Survival and the Technological Regime," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 441-50, August.
    4. Zejan, Mario C, 1990. "New Ventures of Acquisitions. The Choice of Swedish Multinational Enterprises," Journal of Industrial Economics, Wiley Blackwell, vol. 38(3), pages 349-55, March.
    5. C Patrick Woodcook & Paul W Beamish & Shige Makino, 1994. "Ownership-Based Entry mode Strategies and International Performance," Journal of International Business Studies, Palgrave Macmillan, vol. 25(2), pages 253-273, June.
    6. Jean-Fran├žois Hennart & Young-Ryeol Park, 1993. "Greenfield vs. Acquisition: The Strategy of Japanese Investors in the United States," Management Science, INFORMS, vol. 39(9), pages 1054-1070, September.
    7. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    8. Jiatao Li & Stephen Guisinger, 1991. "Comparative Business Failures of Foreign-Controlled Firms in the United States," Journal of International Business Studies, Palgrave Macmillan, vol. 22(2), pages 209-224, June.
    9. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
    10. Bruce Kogut & Harbir Singh, 1988. "The Effect of National Culture on the Choice of Entry Mode," Journal of International Business Studies, Palgrave Macmillan, vol. 19(3), pages 411-432, September.
    11. Morck, Randall & Yeung, Bernard, 1992. "Internalization : An event study test," Journal of International Economics, Elsevier, vol. 33(1-2), pages 41-56, August.
    12. Van de Ven, Wynand P. M. M. & Van Praag, Bernard M. S., 1981. "The demand for deductibles in private health insurance : A probit model with sample selection," Journal of Econometrics, Elsevier, vol. 17(2), pages 229-252, November.
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