Exploring the internalization rationale for international investment: wholly owned subsidiary versus technology licensing in the worldwide chemical industry

Abstract

Globalization has underlined the need for firms to exploit technological capabilities on a global scale. This study attempts to make a comprehensive investigation of various factors influencing the choice between wholly owned subsidiary and technology licensing as a strategy for expansion abroad. To underpin our main research questions, we rely on different theoretical contributions which have variously emphasized the importance of cultural distance, learning, nature of technology and competition. Specifically, this paper addresses the following issues: -Does cultural distance influence the choice between wholly owned subsidiary and technology licensing? - Do firms learn from previous business practices in foreign countries? - How does the presence of other sources of technological competencies affect the entry modal choice? We test our hypotheses using a novel and extremely comprehensive database on worldwide plant level investments in the chemical industry during the 1980s. After controlling, to our best, for the nature of the technology and for firm - and country- specific heterogeneity, we find that cultural distance and multiple sources of technological competencies favor the use of licensing as a strategy for expanding abroad, whereas, prior experience favor the choice of wholly owned subsidiary.