Acquisition versus greenfield foreign entry : diversification mode choice in Central and Eastern Europe

Departing from the traditional transaction cost approach in diversification mode literature, this study investigates the influence of experimental organizational learning on the choice between acquisition and a greenfield investment. We provide empirical support that prior experience with acquisitions and/or greenfield investments, firm’s predominant international strategy (global or multidomestic) and the technological intensity of the parent play a crucial role in subsequent diversifications. Furthermore, contrary to extant arguments that foreign ownership decision is independent of a diversification mode choice we demonstrate that the type of ownership (joint venture vs. wholly owned subsidiary) is a significant predictor of firms’ preference for acquisition or a greenfield. Unlike Caves and Mehra (1986) and Larimo (2002) who found a positive relationship between acquisitions and full ownership, we show that acquisitions in Central and Eastern European (CEE) transition economies are unlikely to be wholly owned subsidiaries. In addition, we contribute to extant diversification literature by introducing another neglected predictor of firms’ diversification strategy: We demonstrate the incremental power of hostcountries’ institutional structure on investors’ diversification choice.

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