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

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.Endogenous Strategy Choice, Foreign Direct Investment, Survival, Entry Mode

Diversification and market entry choices in the context of foreign direct investment

“…For a technical treatment of the problem of selectivity bias and its effect on estimation, see Greene (1993). Shaver (1998) provides a detailed description of the problem in the context of the relationship between FDI modal choice and firm survival.…”

Determinants of Equity-Based and Co-Operative Foreign R&D and Impact on the Parent Firm’s Performance

“…This problem is hardly ever accounted for in entry mode research although it is relevant also in empirical terms. 16 16 Shaver (1998), to our knowledge the only study in entry mode research which adequately dealt with this problem, found that performance differences of M&A and greenfield entry disappeared as soon as model estimation accounted for the endogeneity of the mode variable.…”

“…This problem is hardly ever accounted for in entry mode research although it is relevant also in empirical terms. 16 16 Shaver (1998), to our knowledge the only study in entry mode research which adequately dealt with this problem, found that performance differences of M&A and greenfield entry disappeared as soon as model estimation accounted for the endogeneity of the mode variable.Although we control in all performance equations (Model B) for a potential endogeneity of foreign R&D (RDFOR) and its governance mode (RDFOR_EQ) we also cannot evade the (general) endogeneity problem which is inherent in a cross-sectional analysis. Therefore, rather than making causal claims, we interpret the estimated coefficients as partial correlations.…”

Causation, counterfactuals, and competitive advantage

“…1 Second, positivist research relies on statistical methods and tests. Nevertheless, observational biases, measurement errors, model misspecification, and the ambiguity of findings compromise the ascertainment of causation (Bergh and Holbein, 1997;Boyd et al, 2005b;Denrell, 2003;Shaver, 1998). For instance, a direct empirical association of resources with superior financial performance does not preclude omission or misspecification of links in the complex causal chain, such as industrial conditions, resource properties, competitive advantage, or superior performance (Cockburn et al, 2000; see also Tsang, 2006 about assumption-omitted testing).…”

“…A properly applied conditioning strategy for a minimal number of variables-the ones that block back-door causal paths-is more effective at revealing causal relationships. Strategy scholars have already used this strategy in producing estimates with treatment-effect methods (Hamilton and Nickerson, 2003;Shaver, 1998). For instance, when we observe the performance of firms that actually possess a certain resource, we do not examine what their performance might have been had they not had this resource at their disposal.…”