Summary - the Effect of National Culture on the Choice Between Licensing and Direct Foreign Investment

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The paper “The Effect of National Culture on the Choice between Licensing and Direct Foreign Investment” explores the relationship between national differences in levels of trust and the choice of foreign market entry mode. It tests its ideas on US-based manufacturing multinational entities in 1977 and 1982 and finds that differences in trust stemming from the specific culture do impact perceptions of transaction costs and the choice of foreign direct investment. Different countries have different cultural values and these affect the entry mode strategy along with the economic factors. A main focus of this analysis is the opportunistic behavior across different cultures and nations. For example in cultures with strong social values, people’s sense of obligation and duty to others prevent them from acting in a way that may harm others, in other words opportunistically. Therefore, one can conclude that across different cultures and nations, different levels of monitoring and hierarchy structures are necessary. In this sense, countries that have higher trust cultures and less necessity for control, licensing might be preferable instead of direct foreign investments. Furthermore, when more trust is present, the need for wholly owned subsidiaries decreases, which also leads to more franchising. The focus of the study is not on the tendency of US firms to license their products to companies located in countries with different levels of willingness to trust, but on the willingness of local entrepreneurs in the host country to accept licensing agreements from US companies. The authors note that when ‘’technology recipients are in countries which are not trusting, direct foreign investment is a more common strategy for American firms because the lack of trust on the part of the local entrepreneurs keeps them from licensing American products”. The paper

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