Beyond entry mode choice: Explaining the conversion of joint ventures into wholly owned subsidiaries in the People's Republic of China

While there is a vast amount of research on firms’ choice of ownership form when entering a foreign market, little attention has been paid to changes in ownership forms of operation abroad after initial entry. Using transaction cost economics and institutional theory we identify a number of factors that may help to explain the likelihood of foreign firms’ converting their joint venture with a local firm into a wholly owned subsidiary. We formulate a number of hypotheses and test them against data collected through a questionnaire survey of managers representing foreign subsidiaries in the People's Republic of China (PRC) that are run either as international joint ventures (IJVs) or as wholly owned foreign subsidiaries (WFOEs) that have recently been converted from IJVs into a WFOE. The paper contributes to research by showing that transaction-cost-based thinking is useful for explaining not only the initial choice of ownership mode when entering a new market, but also the potential subsequent changes of this ownership mode. By combining transaction cost theory with arguments from institutional theory, the study identifies a number of factors that contribute to explaining post-entry changes of foreign firms’ ownership forms in the PRC, and provides empirical evidence of this phenomenon. Journal of International Business Studies (2009) 40, 388–404. doi:10.1057/jibs.2008.56