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

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  • J. Myles Shaver

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

Abstract

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.

Suggested Citation

  • J. Myles Shaver, 1998. "Accounting for Endogeneity When Assessing Strategy Performance: Does Entry Mode Choice Affect FDI Survival?," Management Science, INFORMS, vol. 44(4), pages 571-585, April.
  • Handle: RePEc:inm:ormnsc:v:44:y:1998:i:4:p:571-585
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    File URL: http://dx.doi.org/10.1287/mnsc.44.4.571
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    References listed on IDEAS

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