Mimetic entry and bandwagon effect: the rise and decline of international equity joint venture in China

Strategic Management JournalStrat. Mgmt. J., 29: 195–217 (2008)

Published online 4 October 2007 in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.648

Received 28 November 2005; Final revision received 25 July 2007

MIMETIC ENTRY AND BANDWAGON EFFECT: THERISE AND DECLINE OF INTERNATIONAL EQUITYJOINT VENTURE IN CHINA

JUN XIA,1 JUSTIN TAN,2* and DAVID TAN3

1 Montclair State University, Montclair, New Jersey, U.S.A.2 Schulich School of Business, York University, Toronto, Ontario, Canada3 Goizueta Business School, Emory University, Atlanta, Georgia, U.S.A.

The rise and decline of foreign entry strategies in transition economies is an important yet largelyoverlooked issue in the literature. This study is a step toward filling this gap by examining howmimetic entry within reference groups and the emergence of a competing strategy affect thebandwagon phenomenon of a dominant strategy in the context of China, where internationalequity joint ventures (EJVs) used to be a dominant entry strategy among foreign firms in the1990s. Findings from a sample of 1,123 EJVs formed in China’s non-restricted industries from1990 to 2003 show that the impact of home and host-country industry effects are not symmetricbetween the EJV rise and decline periods. Cross-border merger and acquisition (M&A) as acompeting strategy has an important impact during the EJV decline period but not the riseperiod. The interactive effects between EJV and M&A strategies occur only in the host-countryindustries. We discuss such results and offer suggestions for future research. Copyright 2007John Wiley & Sons, Ltd.

INTRODUCTION

Scholars in the strategy field have observedthat rapid institutional transitions in emergingeconomies drive strategic change in firms (e.g.,Hoskisson et al., 2000; Wright et al., 2005).Thus far, however, the rise and decline ofdominant foreign entry strategies have receivedlittle attention in this stream of research. Ingeneral, the process of rise and decline refersto a population-level change in the mix oforganizational strategies (Miner and Haunschild,1995). Our study focuses on the process in whicha mode of entry into a foreign market comes tobe the most widely adopted mode among earlyentrants, but is rejected among late entrants in

Keywords: mimetic entry; bandwagon effect; entry mode*Correspondence to: Justin Tan, Schulich School of Business,N305D, York University, 4700 Keele Street, Toronto, Ontario,Canada M3J 1P3. E-mail: [email protected]

favor of other modes of entry. The distinctivemechanisms that drive the bandwagon diffusion offoreign entry strategies during the rise and declineperiods still remain unclear in the literature.We argue that mimetic entry through differentreference groups and the emergence of competingentry strategies play important roles in explainingthe change of the dominant entry strategy.

International entry strategy is a complex eco-nomic and social phenomenon that has receivedattention from several different streams of research.Institutional theory, transaction cost economics,and the resource-based view of the firm haveemerged as three leading theoretical perspectivesexplaining the strategic change of firms in emerg-ing economies (Hoskisson et al., 2000). A varietyof factors that affect the choice of entry decisionshave also been identified in the foreign entry lit-erature (for extensive reviews, see Buckley andCasson, 1998; Wright et al., 2005). While much

Copyright 2007 John Wiley & Sons, Ltd.

196 J. Xia, J. Tan, and D. Tan

existing research has focused on the impact of spe-cific factors at firm, industry, and country levels,much less research has explored the influence offactors such as mimesis and competing strategiesat the interorganizational level. Even fewer studieshave attempted to model the complete process ofboth rise and decline of a particular strategy.

Institutional theory has proved very useful inthe interpretation of firm strategies in emergingeconomies (Hoskisson et al., 2000; Peng, 2003).Particularly, research on ‘mimetic entry’ (Have-man, 1993) has become an important stream ofstudy in the foreign entry literature (Guillen, 2001;Henisz and Delios, 2001; Gimeno et al., 2005).Following this line of study and the model of band-wagon diffusion (Abrahamson and Rosenkopf,1993), we further explore the mimetic mechanismthat may drive the rise and decline of strategies inemerging economies where institutional constraintor support may be industry- and time-specific.

To meet this end, our study is set in the con-text of China. Previous studies (e.g., Guillen, 2001;Henisz and Delios, 2001; Gimeno et al., 2005)have shown that mimetic foreign entry takes placein the home-country industry. In the context of anemerging economy, we suggest that the mimeticentry may also take place in the host-countryindustry, leading to the bandwagon diffusion of adominant strategy. Simultaneously, changes in thedominant strategy are conditioned upon the emer-gence and spread of competing entry strategieswhen alternative modes of entry become possi-ble. It is well known that the Chinese governmenthad long encouraged foreign entry in the formof equity joint ventures (EJVs), resulting in EJVsbeing the dominant foreign entry strategy before1997, and discouraged foreign entry in the formof mergers and acquisitions (M&As) before 2004.However, it is less well known how M&As, as afringe entry strategy, came to challenge the domi-nant EJV entry strategy in China.

As a step toward filling these gaps, we attemptto shed fresh insights on the bandwagon diffusionof the dominant EJV strategy with respect to tworeference groups: foreign firms from the samehome-country industry and foreign firms enteringthe same host-country industry. Foreign entry byM&A operates as a competing strategy. Giventheir competing nature, we predict that the twotypes of entry strategies may have some interactiveeffects during the EJV rise and decline periods. Inthe discussion that follows, we review the research

in this stream of literature and develop a set oftestable hypotheses.

THEORETICAL BACKGROUND

A bandwagon effect: the rise and decline of adominant strategy

The unique trajectory of a dominant organizationalstrategy evolves with environmental changes overtime, which can be divided into different periods.In each period, organizations tend to have a ‘domi-nant logic’ (Prahalad and Bettis, 1986) or ‘strategicfocus’ as reflected in shared beliefs about suc-cess across these organizations (Glynn, Barr, andDacin, 2000). Strategic change itself is difficultbecause strategic focus or dominant strategy mayprevent or delay changes in organizational strat-egy unless environmental pressures for the changebecome overwhelming (Barr, Stimpert, and Huff,1992; Huff, Huff, and Thomas, 1992).

The bandwagon effect is particularly useful forexplaining the rise and decline of a dominant strat-egy when large numbers of firms adopt a newstructure or practice in rapid succession. Abraham-son and Rosenkopf (1993) noted that as increasingnumbers of firms jump on the bandwagon of aninnovation, the pressure to adopt may overpowera firm’s individual (possibly negative) judgmentof the innovation’s technical merits. The feed-back loop that generates cycles of adoption mayalso operate in the opposite direction. When thenumber of firms rejecting the innovation duringa cycle is sufficiently high, a ‘bandwagon cycleof rejections’ (Abrahamson and Rosenkopf, 1993)or ‘negative bandwagon’ (Sandell, 1999) may betriggered, resulting in more newcomers rejectingthe dominant strategy during its decline period.Although less frequently studied than diffusion,rejection can be identified through the process inwhich past instances of firms abandoning a strat-egy increases the likelihood that current adoptersalso reject the strategy (Greve, 1995; Rao, Greve,and Davis, 2001).

In the context of emerging economies, sinceinstitutional transitions put a stop to the ‘self-reliance’ policy promoted by the communistregime in the past, many foreign firms have rushedinto these economies through various entry modes.Changes in these entry strategies driven by insti-tutional transitions have been widely observed byscholars in this area (Hoskisson et al., 2000; Peng,

Copyright 2007 John Wiley & Sons, Ltd. Strat. Mgmt. J., 29: 195–217 (2008)DOI: 10.1002/smj

Rise and Decline of Equity Joint Venture in China 197

2003; Wright et al., 2005). Because institutionalfactors change at different times and rates in anemerging economy, Hoskisson et al. (2000) urgelongitudinal studies on monotonic changes in firmstrategies at different times and rates.

While various entry strategies coexist and com-pete with one another, a primary strategy can onlybe dominant within a particular period of time.The rise period shows a ‘bandwagon effect’ (Abra-hamson and Rosenkopf, 1993) in which the rate ofadoption accelerates with the number of adoptions.Over time new entry strategies emerge, leading tothe decline in previously dominant ones. Duringthe decline period, we may see a ‘negative band-wagon’ (Sandell, 1999) in which new entrants shiftaway from the previously dominant mode of entry.

Mimetic mechanism: an imitation perspectiveof strategic change

Interorganizational imitation is a useful mecha-nism for understanding organizational actions thatresult in the rise and decline of a dominantstrategy. Firms facing uncertainty over the effi-cacy of strategic alternatives rely on social com-parison to develop strategy (Abrahamson, 1991;Greve, 1995). The institutional approach focuseson the relationship between early adopters andlate adopters (e.g., Tolbert and Zucker, 1983) andhow changes in organizational strategy tend towardisomorphism (Greenwood, Suddaby, and Hinings,2002). Studies based on developed countries haveshown that strategy adoption and rejection areinseparably related to interorganizational imita-tion (e.g., Burns and Wholey, 1993; Greve, 1995;Haunschild and Miner, 1997; Rao et al., 2001).The cycles of adoption and rejection suggest thatboth mimesis and diffusion processes are impor-tant because emulation generates not only con-vergence but also fad-like cascades of adoptionand rejection (Abrahamson and Rosenkopf, 1993;Macy and Strang, 2001; Strang and Macy, 2001).Since bandwagons are diffusion processes in whichorganizations increasingly adopt an innovation asa result of a growing number of organizationsthat have already adopted this innovation (Tolbertand Zucker, 1983; Abrahamson and Rosenkopf,1993; Haunschild and Miner, 1997), the declineof the strategy can be defined as a rejection pro-cess in which newcomers reduce their use of astrategy that has been rejected by a number of

early entrants. It is not surprising that abandon-ment by previous adopters or the rejection bynewly established firms may occur among popu-larly used practices or strategies such as the widelyadopted quality circle (Abrahamson and Fairchild,1999; Rao et al., 2001; Strang and Macy, 2001).These studies have suggested that a longitudinalapproach is useful for understanding the cycles ofthe imitation-driven adoption and rejection of firmstrategies.

It is important to note that foreign entry strate-gies in emerging economies are usually ‘con-strained choice’ (Hoskisson et al., 2000), ratherthan ‘free choice’ as most studies based on firmsin free-market economies would suggest. Thus,regulatory conditions (e.g., industry restrictionson entry mode) in emerging economies mustbe taken into account because it is impossiblefor interorganizational imitation to take place inrestricted industries. Meanwhile, the rejection pro-cess and the diffusion process may not be sym-metric because emergent competing strategies mayhave different impacts during the rise and declineperiods. As a result, we emphasize the rejectionprocess in non-restricted industries because it isrelatively understudied.

Reference group and competing strategy

Adopting or rejecting a strategy may be influ-enced by an organization’s social reference groups(Greve, 1995). The frequency of a practice amongother firms in a reference group represents animportant source of social influence (Haunschildand Miner, 1997). The basis for categorizing peersin a reference group may be similarity in geo-graphic location, industry, or strategy (Porac andThomas, 1990; Lee and Pennings, 2002). Refer-ence groups may consist of the set of industrypeers that firm managers see as rivals (Porac et al.,1995) or generally the set of peers pursuing sim-ilar strategies (Fiegenbaum and Thomas, 1995).Faced with uncertainty over the efficacy of alter-native strategies, firms rely on social comparisonto decide whether to adopt or reject a course ofaction.

When a peer is sufficiently similar in attributesand context, information about its choices hasdiagnostic value for the imitator (Fiegenbaumand Thomas, 1995; Baum, Li, and Usher, 2000).Monitoring the behavior of peers in their ref-erence groups therefore provides an aid to help



firms interpret ambiguous environmental informa-tion and make sense of strategic choices (Porac andThomas, 1990; Peteraf and Shanley, 1997; Lee andPennings, 2002). For instance, reference groupsbased on common ownership structure shape man-agers’ cognitions and strategic orientation (Peng,Tan, and Tong, 2004). Studies based on developedcountries have found evidence that firms mimicfirms with similar attributes, for instance, commonindustry among automobile firms (Garcia-Pont andNohria, 2002), common products and technologyamong Scottish knitwear firms (Porac et al., 1995),and common location among multiunit chain orga-nizations (Baum et al., 2000). Greve (1995) hasshown that radio stations imitate one another in thesame reference group, leading to the abandonmentof the easy-listening format.

Regarding competing strategies, firms may aban-don one strategy when they adopt another strat-egy that has emerged within a given referencegroup. The emergence of a competing strategyat the periphery may challenge the dominantstrategy during periods of transformation in aninterorganizational field in which fringe practicesbecome legitimated (Leblebici et al., 1991). Study-ing the decision to abandon a strategy becomesmost meaningful when alternative strategies areavailable (Greve, 1995). The competing nature ofdifferent strategies usually results from resourcescarcity within an organization (e.g., Cyert andMarch, 1963; Greve, 1995). Because competingstrategies battle one another for the same orga-nizational resources to achieve better control andperformance, the choice arises when the scarceresources of an organization are used for one strat-egy instead of another. As a consequence, one mayexpect that the increasing adoption of one type ofstrategy may reduce the adoption of another typeof strategy.

In the case of foreign entry, we suggest that bothgeographic location and industry cluster need tobe taken into account as relevant reference groups.International expansion reflects interdependence inlegitimacy among firms belonging to the sameclasses, such as those from the same home countryor industry (Kostova and Zaheer, 1999). However,the answer to the question of who to imitate isimportant but not clear in the cross-border activityliterature (Zaheer, 1995). In this study, we examinethe relative importance of two reference groups:(1) a firm’s industry peers in its home country; and(2) industry peers in the host country a firm intends

to enter (cf. Porter, 1990). Previous studies havelargely focused on the first rather than the secondreference group.

In the context of emerging economies, we arguethat the second reference group could be moreimportant. Corporate strategy can be expected tochange at different times and rates across industriesbecause economic, institutional, and legal environ-ments in these industries are changing at differenttimes and rates (Hoskisson et al., 2000). Whencompeting entry strategies emerge as an alternativechoice in an industry due to regulatory changes, wemay see strategic change among firms. The com-peting nature of coexisting strategies has been doc-umented in the literature on emerging economies.Guillen (2003) argues that the evolution of variousforeign entry strategies in China is a staged pro-cess involving different entry strategies over dif-ferent periods of time. The ‘staged view’ of foreignentry is supported by evidence in the expansion ofSouth Korean firms into China between 1987 and1995 implying that the most popular early entrystrategy (i.e., joint venture) may be rejected bylater entrants. Peng (2003) conceptually proposedthat foreign entrants choosing lower control modes(e.g., joint ventures) are likely to outnumber for-eign entrants choosing higher control modes (e.g.,acquisitions) in the earlier phase of institutionaltransition in emerging economies. Following peri-ods of adoption and rejection, the relationship maybe reversed in the later phase of transition.

However, the competing nature of differentstrategies has not been clearly identified in previ-ous studies in terms of the rise and decline periodsof a dominant strategy. Therefore, it is necessary toexamine how competing strategies affect the adop-tion and rejection processes of a dominant strategyin two different reference groups.

HYPOTHESES

Mimetic entry through the two referencegroups

Mimetic entry is likely to take place within aninterorganizational field. Common backgroundplays an important role in determining a firm’sstrategic choices. Firms in the same home-countryindustry have been viewed as belonging to thesame field (e.g., Guillen, 2001; Henisz and Delios,2001), and organizations in the same field tendto imitate one another’s practices (DiMaggio and



Powell, 1983). To abandon a strategy, firms tendto examine the actions of other firms in the sameindustry for clues (Greve, 1995). Geographic prox-imity also plays a critical role in the diffusionprocess of an organizational practice (Baum et al.,2000; Lee and Pennings, 2002). Firms based in thesame home country represent a distinct organiza-tional population or strategic group with respect tothe host location. Organizations that expand from agiven home country share the same language, cul-ture, social opinion, regulation, and institutionalbackground (Johanson and Vahlne, 1977). Thesefirms develop organizational forms influenced byroutines that are specific to the location (Martin,Swaminathan, and Mitchell, 1998).

We argue that the mimetic mechanism drivesfirms in the same home-country industry to adoptsimilar strategies within a given period of time.Several studies show that a firm making inter-national expansion decisions tends to imitate thepast decisions made by other firms in the samehome-country industry (e.g., Guillen, 2001; Heniszand Delios, 2001; Gimeno et al., 2005). One mayexpect that the entry strategy adoption or rejec-tion among other firms in the same home-countryindustry entering into a particular foreign marketsuch as China may also affect the focal firm’s deci-sion making. Under this circumstance, we proposethat:

Hypothesis 1a: In the EJV rise period, prior EJVadoption by industry peers in the same home-country increases the likelihood that focal firmsadopt the EJV.Hypothesis 1b: In the EJV decline period, priorEJV rejection by industry peers in the samehome-country increases the likelihood that focalfirms reject the EJV.

We further argue that mimetic entry based onhost-country industry peers also plays a deter-mining role. When a firm joins a new referencegroup in the host country, the social context willbring new ideas, options, and social cues. Sinceinterorganizational imitation can only take placein non-restricted (i.e., encouraged or permitted)industries, we limit our discussion to non-restrictedChinese industries in this study. The strategic iso-morphism among rivals in non-restricted industriesmay occur because competitors in the same host-country industry also tend to monitor one another,given the fact that they share a high degree of

similarity, such as in products, services, technolo-gies, and markets in the same geographic location.Foreign investors allying with local firms in thesame industry in a host country frequently face thesame or similar regulatory constraints and support.Late entrants may observe other firms’ adoptionand rejection decisions, which, in turn, affect theirown strategic choices.

Hypothesis 2a: In the EJV rise period, priorEJV adoption by industry peers in the same hostcountry increases the likelihood that focal firmsadopt the EJV.Hypothesis 2b: In the EJV decline period, priorEJV rejection by industry peers in the same hostcountry increases the likelihood that focal firmsreject the EJV.

The emergence and development of acompeting entry strategy

In an interorganizational context, such as withina reference group, we argue that the decisionagainst the dominant strategy in China is influ-enced by the emergence and development of com-peting strategies. Among a variety of possiblecompeting entry strategies, we choose to examinethe impact of cross-border merger and acquisi-tion (M&A) on the rise and decline of the EJVstrategy for several reasons. First, the theoreticaland empirical difference between the two entrymodes has been well documented in the foreignentry strategy literature (e.g., Kogut and Singh,1988; Hennart and Reddy, 1997; Newburry andZeira, 1997; Peng, 2003). Moreover, researchersfocusing on transitional China have also exten-sively contrasted M&As with EJVs (e.g., Dongand Hu, 1995; Capener, 1998; Norton and Chao,2001; Lauffs, Lee, and Cheung, 2003; Teng, 2004).In addition, a foreign acquisition requires the localfirm to transfer its property rights, at least partially,to the foreign investor, leading to privatization. Atthis point, a JV and a partial acquisition duringthe pre-entry period are sharply different in termsof the government approval processes. In Chineseterms, hezi (JV) and binggou (M&A) are clearlydefined and the approval processes are governedby different regulations (Lauffs et al., 2003). How-ever, little research has been done on the influenceof M&As on the rise and decline of EJVs. There-fore, it is necessary to explore the linkage betweenEJV and M&A to bridge this gap.



It is well known that Chinese authorities didnot wholeheartedly support foreign M&As (Dongand Hu, 1995). However, it has been less noticedthat in 2003 China issued the Provisional Regula-tions on M&A of Domestic Enterprises by ForeignInvestors, reflecting the change in foreign directinvestment (FDI) policies and government atti-tudes to encouraging foreign firms to make M&As(Law, 2003; Peng, 2006). Recently, cross-borderM&A practices in China became similar to those inthe United States and in Europe (Davies, 2003). In2004, M&As became a ‘primary mode’ of foreignentry with the majority of FDI carried out in thisform (Xinhua Financial Network News, 2005) andChina became Asia’s second-largest M&A marketafter Japan (Deutsche Presse-Agentur, 2005).

From an evolutionary perspective (Nelson andWinter, 1982), the accumulated knowledge, skills,and capabilities in a firm over time will exertinfluence on the firm’s choice of growth strate-gies. This theoretical view has been extended toexplain the change of foreign entry mode strategiesin China (Cui, 1998; Luo and O’Connor, 1998).EJVs are more effective for coping with exter-nal uncertainty, capacity building, and knowledgelearning among earlier entrants. Over time, foreigninvestors may take more proactive and risk-takingstrategies by increasing their resource and finan-cial commitments to the local operations (Luo andO’Connor, 1998).

In many cases, an acquisition becomes more costeffective than setting up an EJV. Since the early1990s, foreign investors have increasingly adoptedM&A strategies (UNCTAD, 2004) to resolve theproblems inherent to EJVs in non-restricted indus-tries where a foreign M&A strategy becomesviable, even without full support from the govern-ment in the approval process. Given increasing dis-satisfaction with the EJV, new entrants may seekan alternative entry strategy such as an M&A in anon-restricted industry to reduce its internal uncer-tainty. Consequently, the new entrants may followthe early cases of approved M&As within the refer-ence group, which, in turn, affects the internationaljoint venture (IJV) adoption or rejection in thatindustry.

Hypothesis 3a: In the EJV rise period, theemergence of M&A entry strategy reduces EJVadoption among foreign firms (1) in the samehome-country industry and (2) in the same host-country industry.

Hypothesis 3b: In the EJV decline period, thedevelopment of M&A entry strategy reduces EJVadoption among foreign firms (1) in the samehome-country industry and (2) in the same host-country industry.

Moderating effect of the competing strategy

Strategy abandonment or rejection usually involvesreplacement, in which a new strategy is brought into replace the old; the abandonment and adoptionprocesses are usually interrelated (Greve, 1995).Ahmadjian and Robinson (2001) have demon-strated that the adoption of a new practice is con-ditioned upon the rejection of the existing practice.In China’s non-restricted industries, M&A strategyhas been more frequently adopted in some indus-tries and less frequently adopted in others for manyreasons, such as firm strategic orientations (e.g.,the preference of cooperative entry), industry char-acteristics (e.g., low profit margins), or nationalorigins (e.g., cultural barriers). Using an interac-tion approach, we suggest that the speed of riseand decline of a dominant strategy depends on thelevel of challenge from the competing strategy.

Among various entry strategies, firms generallyprefer an acquisition so that they have exclusivecontrol and property rights over their investments(Peng, 2003). Acquisition helps foreign firms seekgreater integration of acquired assets. For example,if a foreign partner has contributed technologyto an EJV and a local partner has contributedland-use rights, the foreign partner tends to buyout the equity interest of the local partner toobtain control (Chang, Kelly, and Hampton, 2002;Davies, 2003). In some non-restricted industries,M&As are more attractive and new entrants aremore willing to reject the dominant EJV rationaleand adopt a different rationale, leading to a morerapid shift away from EJV than in other non-restricted industries.

Because of similarities within the same referencegroups, a firm’s opinions about EJV and M&Astrategies and its decision to adopt one or the otherare likely to be shaped by the practices of its peers.Given the variation in rates of M&A adoptionacross industries, we expect that the competingnature of the M&A strategy and EJV strategyhas significant interactive effects on the rise anddecline of EJV in China through firms’ referencegroups. Following this line of reasoning, we derivethe following set of hypotheses:



Hypothesis 4a: In both the EJV rise and declineperiods, the emergence and development ofM&A entry strategy negatively moderates therelationship of interorganizational imitation offirms in the same home-country industry.Hypothesis 4b: In both the EJV rise and declineperiods, the emergence and development ofM&A entry strategy negatively moderates therelationship of interorganizational imitation offirms in the same host-country industry.

In the discussion that follows, we introduce ourmethodological approach, including researchdesign, data collection procedure, model specifi-cation, and operationalization.

RESEARCH DESIGN AND DATACOLLECTION

A persistent challenge for China scholars has beento extend mainstream, discipline-based theories tothe Chinese context. Since strategic choices suchas entering international markets are inherentlyaffected by the particular institutional environmentin which the firm is embedded (North, 1990), it is

important to describe the transitional environmentin China as a context for our study.

Research setting: the rise and decline of EJVin China

Since 1979, the open-door policy has led Chinato be one of the world’s largest FDI recipients.Dominant foreign entry strategies have systemat-ically shifted from one to another. According tothe official classification of the National Bureauof Statistics of China, there are three main modesof foreign entry into the Chinese market: contrac-tual joint venture, equity joint venture, and whollyforeign-owned enterprise (WFOE). The EJV is oneof the most important entry modes for firms enter-ing China. Figure 1 shows that after a period of ini-tial development during the 1980s, the EJV beganto spread rapidly in the early 1990s, during whichtime most foreign entrants jumped onto the EJVbandwagon (1992–95). Research in institutionaltheory (DiMaggio and Powell, 1983; Haveman,1993) suggests that the rapid spread of the EJVentry strategy may be rooted in mimicry, and thusnot all instances are efficiency driven. The band-wagon diffusion stopped in 1993, however, fol-lowed by a rejection process by later entrants.

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Figure 1. Shift in dominant foreign entry modes in China (1979–2004). This figure is available in color online atwww.interscience.wiley.com/journal/smj



Such a reversal is understandable since the EJVis inherently unstable (Yan, 1998) and, unlikeM&A, was often a ‘forced’ mode of foreign entry(Beamish, 1993; Tse, Pan, and Au, 1997; Isobe,Makino, and Montgomery, 2000). As a result, therehave been small but growing numbers of foreignacquisitions in China since the early 1990s (Dongand Hu, 1995; Capener, 1998; UNCTAD, 2004).WFOE became a predominant entry mode in 1997,accounting for more than half of all FDI in terms ofboth number and value (Deng, 2001; Zhang et al.,2004). Many WFOEs were set up through M&Aswhen foreign firms acquired more than 95 percentequity of a local company. M&A has become anew dominant entry strategy since 2004 (XinhuaFinancial Network News, 2005; Peng, 2006). Sofar, relatively little is known in the internationalbusiness literature about how M&A challenged theEJV and came to be the dominant entry strategy.

Data collection

A research endeavor such as ours that exam-ines the rise and decline of dominant strategiesover time requires a longitudinal design since thetiming of entry is important (Isobe et al., 2000;Gimeno et al., 2005). Accordingly, we collected adata sample consisting of 2,340 international EJVsestablished in China between 1985 and 2003 fromthe Securities Data Corporation (SDC) database.Each EJV includes one Chinese and one foreignpartner. Because these EJVs were established ina variety of industries, the influence of industryrestrictions on entry mode choices and left trunca-tion for each industry must be taken into account.

Before 2003, foreign M&As were governed bythe Guiding Catalogues for Foreign Investment inIndustry (the Catalogue), and a few other admin-istrative regulations. Since the early 1990s, the1995, 1997, and 2002 Catalogues have been usedto classify FDI in certain industries as encouraged,restricted, or prohibited; and these classificationsguide authorities in deciding whether to authorizean M&A or an EJV. WFOEs became lawful in1986. Unless otherwise restricted by the Catalogue,foreign firms have been allowed to acquire whollyowned forms or take minority stakes in Chinesefirms (Norton and Chao, 2001; Davies, 2003). Theintent was to guide FDI into manufacturing indus-tries. EJV is required in most restricted industriessuch as banking, insurance, real estate, publish-ing, trade, and advertising, and foreign firms are

barred in prohibited industries such as legal ser-vices, telecommunications, and mining industriesin our observation period.

In restricted industries, onerous documentationrequirements make the mimicry of M&A entriesimpracticable. After examining each selectedindustry and segment in our sample with theCatalogue, we excluded those EJVs establishedin restricted industries (cf. Luo, 2001), leavingus with 1,428 observations in 12 manufacturingand two service industries (Appendix). In the 14selected industries, 18 business segments (122observations) were also excluded, including pro-duction of wine, spirits, soda beverage, chemicalfibers, bearings, lacquerware and enamel products,processing of fat or oil, as well as wool or cottonspinning. These segments are either listed in therestricted section or specified as ‘EJV only.’

We have argued that foreign acquisition is acompeting strategy with respect to EJV. Therefore,left truncation arises when EJV formations comeunder observation only when M&A is known as aviable entry strategy in each industry under study.Although government restrictions on entry modeare fewer in our sample, the starting points of for-eign acquisitions still vary across these industries.Left truncation thus must be incorporated into theanalysis by identifying the first foreign acquisitionthat occurred in each industry. We identified thedate of the first foreign acquisition in each selectedindustry from the SDC database (Appendix). Mostof these acquisitions were confirmed in the Lex-isNexis database. The first acquisition signals thelegitimacy of foreign M&A in a given industry,serving as the left truncation time for each indus-try. Thus 182 EJVs formed before the first foreignacquisition dates were also excluded.

Our final sample includes 1,123 EJVs in 14 non-restricted industries, which were established from1990 to 2003 with partners from 40 countries.To examine the reliability of the collected data,we constructed Figure 2 to contrast EJVs withM&As. To illustrate the reliability of the M&Asample, we add the number of M&As publishedby the World Investment Report (UNCTAD, 2004,Table 7.1). Note that the cross-border M&A statis-tics shown in both the World Investment Reportand the SDC database are primarily based oninformation reported by Thomson Financial (UNC-TAD, 2003: 348). We included both partial and fullacquisitions in our sample for two reasons. First,we realize that a partial acquisition and a JV are



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Equity Joint Venture (SDC)Merger & Acquisition (SDC)Merger & Acquisition (WIR, 2004)Source: SDC database, World Investment Report, 2004

Figure 2. The rise and decline of EJV in China (selected sample). This figure is available in color online atwww.interscience.wiley.com/journal/smj

analogous in some post-entry operations. Accord-ing to our conceptualization, partial acquisitionscan also establish models for newcomers to follow,leading to the rejection of JV strategy. It is criticalto avoid comparing strategies that are so differentthat internal firm factors strongly determine whichone is economically feasible, and therefore whichone a firm is likely to consider to the exclusionof rather than in comparison to the other (Greve,1995). This approach makes the displacement ofone by the other a fascinating and appropriatecontext for examining population-level shifts instrategy through interorganizational mimesis. Sec-ond, a foreign acquisition requires the local firmto transfer its property rights, at least partially, tothe foreign investor, leading to privatization. Atthis point, a JV and a partial acquisition duringthe pre-entry period are sharply different in termsof the government approval processes. In Chineseterms, hezi (JV) and binggou (M&A) are clearlydefined and the approval processes are governedby different regulations (Lauffs et al., 2003).

We collected annual time-varying country-leveldata from the World Investment Report (UNC-TAD, 2004), World Economic Outlook published

by the International Monetary Fund, China Statis-tical Yearbook published by the National StatisticalBureau of China, and Institutional Investor maga-zine.

Model specifications and dependent variable

Previous studies have employed the Cox propor-tional hazard model (Cox, 1972) for the longitu-dinal study of foreign entry timing and ventureformation rates (Mitra and Golder, 2002; Gimenoet al., 2005). The semiparametric event historymodel accounts for both discrete events and contin-uous timescale data, accommodates left truncationand right censoring simultaneously, allows time-dependent explanatory variables, performs strati-fied analyses to adjust for subset differences in asample, and identifies both cross-sectional and lon-gitudinal effects (Allison, 1995). These propertiesare particularly useful to our data for investigatingrates of EJV formation over time.

Because non-Chinese firms in our sample werefrom 40 countries, the adoption or rejection of anEJV strategy by those firms based in the same



home country could be correlated across multi-ple years because of their similar cognitive pat-terns and processes. It is important to controlfor country-specific effects, such as cultural, insti-tutional, social, economic, and geographic dif-ferences between countries. Following the studyof Gimeno et al. (2005), we used a stratifiedCox model expressed as: hic(t) = h0(t) exp{βxic},where the hazard of EJV i formed by a foreign firmand a local firm based in a given home country c

is modeled by the product of a country-specificbaseline hazard function h0(t) for all EJV obser-vations in our sample and a vector of covariates xic

that is updated yearly for time-varying explanatoryvariables. This estimation is also called the fixed-effects partial likelihood (FEPL) method (Allison,1995), with a fixed-effect for firms based in thesame home country in the vector.

Since the Cox method assumes that time iscontinuous, our dependent variable is measured bythe time difference in number of days between thedate of a focal EJV formation and the date of thefirst acquisition in the industry. The rise period(1990–93) and the decline period (1993–2003)are tested separately using the censoring techniquein Cox models (Allison, 1995). The peak year(1993) was incorporated in both periods, whichwas identified by the population number of EJVsestablished in China (Figure 1). The informationis published annually by the Ministry of ForeignTrade and Economic Cooperation (MOFTEC) ofChina.

Because our left truncation time was decided bythe first known foreign M&A in a given industry,the risk of EJV formation is conditional on thetruncation. There were nine industries in which thefirst foreign M&A occurred before 1994 and fiveindustries in which the first M&A occurred after1993 (Appendix). Therefore, we had 174 obser-vations in the nine industries for the rise periodanalysis with an EJV established after 1993 treatedas a right-censored case. EJV observations in theother five industries were excluded because M&Ahad not appeared as a competing entry strategy inthese industries during the EJV rise period. For theEJV decline period analysis, 1,083 observations inall selected industries were included with EJVsestablished after 2003 treated as right-censored.The left truncation time was decided either by theyear 2003 for the nine industries or by the date ofthe first foreign acquisition in the other five indus-tries.

Stratified Cox regression analyses were per-formed using the SAS PHREG procedure with theexact method, because we assume that EJV forma-tions are continuous events in a country. In addi-tion to the model-based variance estimate, a robustsandwich variance estimate for the covariancematrix was conducted (Lin and Wei, 1989; Hos-mer and Lemeshow, 1999) in which the parameterestimates were based on a robust standard error.Although both results were similar, we reportedthe results with the robust estimations because theyare more conservative.

Independent variables

The foreign entry event is our level of analysis.It is conceptually possible that the frequency ofadoptions or rejections one year prior would affectthe subsequent rise or decline of EJV entries. Weused the one-year lagged independent variablesas we predict the rise or decline of EJVs usingthe frequency-based imitation approach (Abraham-son and Rosenkopf, 1993; Haunschild and Miner,1997). The number of EJVs and the number ofM&As (home country) were measured by the num-ber of equity joint venture adoptions and the num-ber of merger and acquisition adoptions by foreignfirms based in the same home-country industry,respectively. The number of EJVs and the num-ber of M&As (host country) were measured bythe number of equity joint venture adoptions andthe number of merger and acquisition adoptionsby foreign firms based in the same host-countryindustry, respectively. The four time-varying inde-pendent variables were collected from the SDCdatabase, which indicated changes for each year.The primary industry for each firm was identifiedaccording to its two-digit SIC code.

Control variables

We controlled for some important variables otherthan our independent variables, which may affectthe bandwagon diffusion of the EJV in China.Most EJVs in our sample engaged in manufac-turing and/or marketing activities. The differentactivities reflect the motivation of firms estab-lishing the joint venture. We therefore controlledfor marketing activity. International EJV involvesboth foreign and local partners sharing owner-ship for the joint development. Foreign firms pre-fer majority equity ownership in order to control



and to deter opportunistic behavior among venturepartners (Gomes-Casseres, 1990), for instance, byforming EJVs in China (Pan, 1996; Pan and Li,2000). China relaxed its foreign ownership restric-tions gradually from 35 percent in the early 1980sto 49 percent in 1985. A majority of foreign own-ership in non-restricted sectors has been allowedsince 1988 (Tan, 1997). Removing the foreignownership restriction would encourage the rise ofEJVs in China. Therefore, we controlled for for-eign equity share (percent) in a joint venture.

The foreign entry literature has documented thatthe host-country experiences facilitate learning,reduce risks (Gupta and Misra, 2000; Henisz andDelios, 2001), and enhance performance (Makinoand Delios, 1996; Child and Yan, 2003). Experi-enced firms are likely to be involved in the sametype of strategy as they were in the past (Amburgeyand Miner, 1992). We controlled for both EJVexperience of foreign partner and EJV experienceof local partner. The experience was measured asthe number of previous EJVs a firm had formed bythe time of a current EJV’s founding. We includedthe public status of the local and foreign partnersto control for the propensity of different types offirms to make certain strategic choices. Foreignpartners in our sample consisted of both publicand private companies. The control for public firmindicates whether an entity was traded publicly ona stock exchange. Local partners in our sampleincluded state-owned enterprises and private firms(cf. Peng et al., 2004). The control for state-ownedenterprise indicates whether the entity was at least50 percent or more owned by the state.

The rise and decline of EJV may be cou-pled with another competing entry strategy: non-equity strategic alliance. Strategic alliance pro-vides investors with a more flexible organizationalform than joint venture. Although strategic alliancehas occupied a relatively small portion of the totalFDI in China, it remains an important alternativestrategy for speedy entry (Davies, 2003). We con-trolled for the number of alliances (home country)and the number of alliances (host country) mea-sured by the number of strategic alliance adoptionsby foreign firms based in the same home-countryindustry and based in the same host-country indus-try, respectively. These two variables were alsolagged by one year. Industry may have an effecton EJV formation because of differences in marketcharacteristics between service and manufacturing

industries. We controlled for whether a firm is ina service industry.

At the country level, we controlled for threetime-varying variables. First, we controlled for theannual government expenditure as percent of GDP(gross domestic product) of China. This variablecaptures the level of state intervention in economicactivities (Beach and O’Driscoll, 2003). Althoughwe restricted our sample to non-restricted indus-tries, this does not rule out the possibility ofgeneral state intervention in EJV formations. Sec-ond, we controlled for annual GDP growth. Duringour observation period (1990–2003), China expe-rienced rapid economic growth that provided mar-ket potential attracting FDI inflows through variousentry modes. Third, we controlled for the annualinflation rate. Inflation rate reflects the rise in theretail price index or the costs of consumer goods.Consistent low inflation rate also reflects the gov-ernment’s fiscal policy and overall economic sta-bility that may affect foreign entry mode choice.

Country risk, reflecting the stability of a coun-try’s business environment, may affect the changein choice of foreign entry modes over time. Wetherefore controlled for relative country riskbetween the home and host country. The time-varying variable for the corresponding years of1990–2003 was measured by the biannual creditratings published by Institutional Investor mag-azine (Cosset and Roy, 1991). The InstitutionalInvestor indicator for each country is on a scaleof 0 to 100, with 100 representing least countryrisk. The relative country risk variable was cre-ated using the formula: (100 − Rct )/(100 − Rit ),where Rct is the risk score of China at time t andRit is the risk score of a given foreign country i attime t .

RESULTS AND ANALYSES

Tables 1 and 2 show correlations and descriptivestatistics for the variables during the rise periodand the decline period, respectively. Variance infla-tion factor (VIF) scores were also calculated forthe main effects, indicating that multicollinearitywas not a serious problem for regression analysisbecause all VIF scores were below 3.2.

Estimates from stratified Cox regressions forthe hazard of rise and decline of EJV adoptions



Tabl

e1.

Des

crip

tive

stat

istic

san

dco

rrel

atio

ns(t

heri

sepe

riod

,N

=17

4)

Var

iabl

eM

ean

S.D

.1

23

45

67

89

1011

1213

1415

16

1N

umbe

rof

EJV

s(h

ome

coun

try)

1.66

11.

895

2N

umbe

rof

EJV

s(h

ost

coun

try)

9.49

46.

205

0.31

7∗∗∗

3N

umbe

rof

M&

As

(hom

eco

untr

y)0.

075

0.26

40.

039

−0.0

76

4N

umbe

rof

M&

As

(hos

tco

untr

y)0.

787

0.41

00.

219∗∗

0.52

5∗∗∗

0.04

1

5E

JVM

arke

ting

activ

ity0.

351

0.47

90.

049

−0.0

080.

112

0.11

7

6Fo

reig

neq

uity

shar

e0.

538

0.14

7−0

.005

0.05

10.

195∗

0.03

50.

091

7E

xper

ienc

eof

fore

ign

part

ner

0.31

00.

742

0.19

0∗0.

228∗∗

−0.0

900.

104

−0.0

15−0

.057

8E

xper

ienc

eof

loca

lpa

rtne

r0.

052

0.24

7−0

.061

0.05

10.

118

−0.0

050.

139

−0.0

09−0

.025

9Pu

blic

fore

ign

com

pany

0.85

60.

352

0.18

7∗0.

062

0.05

40.

067

0.02

60.

059

0.17

2∗−.

047

10St

ate-

owne

dlo

cal

ente

rpri

ses

0.48

30.

501

−0.0

03−0

.122

0.11

9−0

.060

0.08

60.

046

0.06

1.1

240.

068

11N

umbe

rof

allia

nces

(hom

eco

untr

y)

0.23

00.

563

0.34

5∗∗∗

0.00

70.

351∗∗

∗0.

088

0.06

40.

118

−0.1

30−.

003

0.10

90.

055

12N

umbe

rof

allia

nces

(hos

tco

untr

y)

1.19

01.

432

0.03

70.

337∗∗

∗−0

.114

0.32

5∗∗∗

0.06

30.

111

−0.0

07−.

044

0.06

6−0

.008

0.12

5

13Se

rvic

ein

dust

ry0.

063

0.24

4−0

.153

∗−0

.280

∗∗∗

−0.0

74−0

.154

∗−0

.092

−0.0

37−0

.077

.041

−0.0

960.

080

−0.0

64−0

.216

∗∗

14G

over

nmen

tex

pend

iture

inpe

rcen

tof

GD

P

14.0

882.

700

0.11

40.

022

0.09

8−0

.012

0.19

6∗∗0.

068

−0.0

03.0

72−0

.003

−0.0

67−0

.031

0.03

6−0

.203

∗∗

15G

DP

grow

th12

.651

3.08

90.

204∗∗

0.49

5∗∗∗

−0.0

730.

297∗∗

∗−0

.106

−0.0

150.

083

−.08

7−0

.071

−0.2

19∗∗

0.17

3∗0.

275∗∗

∗−0

.224

∗∗0.

051

16In

flatio

nra

te5.

837

1.82

00.

027

0.17

7∗−0

.095

0.13

2−0

.180

∗−0

.049

0.01

6−.

092

−0.0

08−0

.033

0.08

20.

095

0.06

4−0

.560

∗∗∗

0.38

5∗∗∗

17R

elat

ive

coun

try

risk

4.41

31.

998

0.25

9∗∗∗

0.16

2∗−0

.182

∗0.

259∗∗

∗0.

070

−0.0

700.

239∗∗

−.12

70.

169∗

−0.1

92∗

0.09

90.

125

0.04

6−0

.261

∗∗∗

0.00

9.2

25∗∗

∗ p<

0.05

;∗∗

p<

0.01

;∗∗

∗p

<0.

001



Tabl

e2.

Des

crip

tive

stat

istic

san

dco

rrel

atio

ns(d

eclin

epe

riod

,N

=1,

083)

Var

iabl

eM

ean

S.D

.1

23

45

67

89

1011

1213

1415

16

1N

umbe

rof

EJV

s(h

ome

coun

try)

3.64

94.

892

2N

umbe

rof

EJV

s(h

ost

coun

try)

25.8

6521

.250

0.41

6∗∗∗

3N

umbe

rof

M&

As

(hom

eco

untr

y)0.

349

0.81

50.

241∗∗

∗−0

.032

4N

umbe

rof

M&

As

(hos

tco

untr

y)3.

651

4.13

3−0

.006

0.12

2∗∗∗

0.24

7∗∗∗

5E

JVM

arke

ting

activ

ity0.

211

0.40

80.

076∗

0.07

8∗−0

.027

−0.1

04∗∗

∗

6F

orei

gneq

uity

shar

e0.

548

0.12

5−0

.013

−0.0

10−0

.075

∗0.

022

−0.0

07

7E

xper

ienc

eof

fore

ign

part

ner

1.27

53.

418

.311

∗∗∗

.147

∗∗∗

0.04

40.

059

−0.0

04−0

.099

∗∗

8E

xper

ienc

eof

loca

lpa

rtne

r0.

307

1.12

6−0

.023

−0.0

070.

014

0.08

7∗∗0.

006

−0.0

260.

182∗∗

∗

9P

ubli

cfo

reig

nco

mpa

ny0.

766

0.42

30.

200∗∗

∗0.

097∗∗

0.07

6∗−0

.022

0.09

2∗∗0.

067∗

0.18

4∗∗∗

.036

10St

ate-

owne

dlo

cal

ente

rpri

ses

0.21

30.

410

−0.0

40−0

.013

−0.0

270.

000

0.02

40.

052

−0.0

10.1

39∗∗

∗0.

048

11N

umbe

rof

allia

nces

(hom

eco

untr

y)0.

761

1.60

80.

356∗∗

∗0.

046

0.33

8∗∗∗

0.13

8∗∗∗

−0.0

09−0

.045

0.02

2.0

230.

101∗∗

∗−0

.009

12N

umbe

rof

allia

nces

(hos

tco

untr

y)5.

065

6.11

30.

131∗∗

∗0.

336∗∗

∗0.

179∗∗

∗0.

203∗∗

∗0.

028

−0.0

400.

028

−.03

10.

080∗∗

0.02

50.

394∗∗

∗

13Se

rvic

ein

dust

ry0.

094

0.29

2−0

.093

∗∗−0

.298

∗∗∗

0.19

2∗∗∗

0.12

6∗∗∗

0.00

4−0

.055

−0.0

53.0

36−0

.083

∗∗0.

064∗

0.15

2∗∗∗

0.19

8∗∗∗

14G

over

nmen

tex

pend

itur

ein

perc

ent

ofG

DP

8.93

52.

711

−0.1

18∗∗

∗−0

.184

∗∗∗

−0.0

68∗

−0.0

580.

042

−0.0

47−0

.131

∗∗∗

−.11

3∗∗∗

0.01

80.

150∗∗

∗0.

041

0.05

7−0

.023

15G

DP

grow

th11

.531

2.30

70.

194∗∗

∗0.

300∗∗

∗−0

.238

∗∗∗

−0.3

57∗∗

∗0.

168∗∗

∗−0

.014

−0.0

38−.

131∗∗

∗0.

115∗∗

∗0.

163∗∗

∗−0

.040

0.08

1∗∗−0

.217

∗∗∗

0.35

4∗∗∗

16In

flati

onra

te12

.289

8.45

00.

343∗∗

∗0.

633∗∗

∗−0

.142

∗∗∗

−0.0

94∗∗

0.10

1∗∗∗

0.02

40.

098∗∗

−.03

70.

062∗

0.01

40.

004

0.08

9∗∗−0

.178

∗∗∗

−0.2

07∗∗

∗0.

582∗∗

∗

17R

elat

ive

coun

try

risk

4.89

32.

111

0.33

4∗∗∗

0.06

8∗0.

048

0.06

2∗0.

050

−0.0

270.

154∗∗

∗.0

490.

124∗∗

∗−0

.087

∗∗0.

276∗∗

∗0.

058

0.01

4−0

.041

−0.1

18∗∗

∗−.

033

∗p

<0.

05;

∗∗p

<0.

01;

∗∗∗p

<0.

001



are shown in Tables 3 and 4, respectively. Thecoefficients (log hazard) are interpreted in termsof the hazard ratio (eβ) (Allison, 1995), whichgives the estimated change in relative risk of EJVformation for each one-unit increase or decrease inthe covariate. Model 1 in Table 3 and Model 6 inTable 4 present the baseline models that includeonly control variables. Models 2 and 7 presentthe home-country industry effect; Models 3 and8 present the host-country industry effect; Models4 and 9 present all direct effect; and Models 5and 10 present the results of all hypothesizedrelationships.

Hypotheses 1a and 2a predict that the effectof home- and host-country industry-based imita-tion increases the probability of EJV adoptionsin the host country during the rise period. Bothhypotheses were supported by Model 4 in Table 3,explaining, at least partially, the EJV bandwagonphenomenon during its rise period. Hypothesis 3apredicts that the rise of EJV in China is nega-tively associated with the prior M&A adoptionsby foreign firms in both home- and host-countryindustries. However, Hypothesis 3a was not sup-ported (Model 4), indicating that although therewere some foreign M&A activities conducted inChina before 1994, they did not significantly chal-lenge the dominant EJV strategy even in the non-restricted industries.

Hypotheses 1b and 2b predict that the declineof EJV in China is due to the increasing numberof EJV rejections by foreign firms based in thesame home-country industry and entering into thesame home-country industry. The home-countryindustry effect is positive and significant in Model7 (Table 4), but weakened when the host-countryindustry variable is added into Model 9, suggest-ing that the firm entry decision depended more onthe host-country situation than on home-countryinformation during the late period. Only Hypoth-esis 2b was supported. In contrast to those in therise period, the positive signs in the decline periodmean an increased number of EJV rejections, ascompared to the largest number of EJV adoptionsin the peak year. Hypothesis 3b predicts that thedecline of EJV in China is due to the increasingnumber of M&A adoptions by foreign firms basedin the same home-country industry and enteringinto the same host-country industry. It is partiallysupported as only the effect of host-country indus-try was significant.

Hypotheses 4a and 4b posit a moderating effectin which the imitation-based EJV adoptions arenegatively affected by the emergence of the com-peting entry strategies (M&As) in home- andhost-country industries. Only Hypothesis 4b wasstrongly supported by Models 8, 9, and 10, sug-gesting that the host-country effect became moreimportant than the home-country influence. In boththe EJV rise and decline periods, the interactiveeffects in the home-country industry were not sup-ported by Model 5 and Model 10, respectively. Wethus focus on the interactive effects in the host-country industries. Notice that the sign of the fre-quency of prior EJV adoptions has been changedfrom positive in Model 4 to negative in Model 5.To interpret the counterintuitive results, we plottedthe results using one standard deviation below andabove the mean of prior M&A frequency values(Figure 3).

In order to interpret the interactions correctly,it is necessary to note that the baseline hazardfunction specifies the probability that no entryoccurred up to time t , because the survival functionS(t) = Pr(T > t) defines a ‘survival firm’ as noentry. So, in Figure 3, the higher the value on theY -axis, the lower the likelihood of establishing anEJV at a given time t . Figure 3 suggests that ina host-country industry where M&As were lessfrequently adopted in time t − 1, firms were morelikely to adopt a EJV strategy in time t . However,in an industry where M&As were more frequentlyadopted in time t − 1, firms were less likely toadopt an EJV strategy. Because the main effect ofM&A variable was not significant, however, weexpect that the explanatory power of the interactionis limited in the rise period.

Prior EJV frequency

Log

surv

ival

func

tion

Low prior M&A frequencyHigh prior M&A frequency

Figure 3. Interaction in the EJV rise period (hostcountry). This figure is available in color online at

www.interscience.wiley.com/journal/smj



Tabl

e3.

Res

ults

ofst

ratifi

edC

oxre

gres

sion

anal

yses

(ris

epe

riod

,N

=17

4)

Var

iabl

eM

odel

1M

odel

2M

odel

3M

odel

4M

odel

5

Num

ber

ofE

JVs

(hom

eco

untr

y)0.

341∗∗

∗(0

.079

)0.

233∗∗

(0.0

75)

0.20

1∗(0

.079

)N

umbe

rof

EJV

s(h

ost

coun

try)

0.20

6∗∗∗

(0.0

34)

0.19

2∗∗∗

(0.0

36)

−1.0

56∗

(0.4

61)

Num

ber

ofM

&A

s(h

ome

coun

try)

0.62

6†(0

.354

)0.

458

(0.3

10)

0.14

4(0

.697

)N

umbe

rof

M&

As

(hos

tco

untr

y)0.

263

(0.5

26)

0.04

9(0

.519

)−4

.964

∗∗(1

.568

)N

umbe

rof

EJV

s×

Num

ber

ofM

&A

s(h

ome

coun

try)

0.16

4(0

.299

)N

umbe

rof

EJV

s×

Num

ber

ofM

&A

s(h

ost

coun

try)

1.30

7∗∗(0

.488

)E

JVM

arke

ting

activ

ity0.

179

(0.1

81)

0.18

1(0

.179

)0.

116

(0.1

87)

0.13

1(0

.186

)0.

084

(0.1

78)

Fore

ign

equi

tysh

are

0.36

9(0

.513

)0.

314

(0.5

46)

−0.2

85(0

.680

)−0

.394

(0.6

85)

−0.3

96(0

.605

)E

xper

ienc

eof

fore

ign

part

ner

0.27

7∗(0

.108

)0.

177†

(0.1

07)

0.14

0(0

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)0.

123

(0.0

96)

0.16

6(0

.112

)E

xper

ienc

eof

loca

lpa

rtne

r0.

398

(0.2

46)

0.45

9(0

.299

)0.

104

(0.2

38)

0.17

8(0

.242

)0.

077

(0.2

30)

Publ

icfo

reig

nco

mpa

ny0.

464

(0.2

89)

0.28

6(0

.293

)0.

449

(0.3

09)

0.30

8(0

.312

)0.

255

(0.3

27)

Stat

e-ow

ned

loca

len

terp

rise

s0.

061

(0.1

95)

−0.0

49(0

.194

)−0

.001

(0.2

01)

−0.0

90(0

.199

)−0

.276

(0.2

05)

Num

ber

ofal

lianc

es(h

ome

coun

try)

−0.1

49(0

.191

)−0

.598

∗(0

.243

)0.

287

(0.2

23)

−0.0

54(0

.261

)−0

.003

(0.2

78)

Num

ber

ofal

lianc

es(h

ost

coun

try)

−0.0

53(0

.044

)−0

.034

(0.0

54)

−0.2

35∗∗

∗(0

.051

)−0

.204

∗∗∗

(0.0

57)

−0.2

76∗∗

∗(0

.067

)Se

rvic

ein

dust

ry−2

.619

∗∗∗

(0.5

40)

−2.4

99∗∗

∗(0

.523

)−2

.771

∗∗∗

(0.5

74)

−2.7

47∗∗

∗(0

.585

)−5

.365

∗∗∗

(1.5

72)

Gov

ernm

ent

expe

nditu

reas

perc

ent

ofG

DP

0.05

5(0

.040

)0.

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(0.0

41)

0.14

0∗(0

.061

)0.

123∗

(0.0

62)

0.24

3∗∗∗

(0.0

57)

GD

Pgr

owth

−0.0

79∗

(0.0

36)

−0.1

13∗∗

(0.0

37)

−0.2

97∗∗

∗(0

.072

)−0

.304

∗∗∗

(0.0

72)

−0.3

29∗∗

∗(0

.092

)In

flatio

nra

te0.

121∗

(0.0

57)

0.11

6∗(0

.057

)0.

202∗∗

(0.0

71)

0.19

1∗∗(0

.072

)0.

113

(0.0

94)

Rel

ativ

eco

untr

yri

sk−0

.396

(0.2

42)

−0.3

79(0

.247

)−0

.642

∗(0

.283

)−0

.629

∗(0

.295

)−0

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(0.5

90)

−2lo

g-lik

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ood

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664

1.7

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559

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556.

6W

ald

chi-

squa

re52

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∗83

.6∗∗

∗85

.5∗∗

∗93

.8∗∗

∗98

.6∗∗

∗

Chi

-squ

are

ratio

test

22.9

∗∗∗

63.1

∗∗∗

71.6

∗∗∗

108.

0∗∗∗

d.f.

1315

1517

19

Stan

dard

erro

rsar

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nthe

ses.

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0.10

,∗

p<

0.05

,∗∗

p<

0.01

,∗∗

∗p

<0.

001



Tabl

e4.

Res

ults

ofst

ratifi

edC

oxre

gres

sion

anal

yses

(dec

line

peri

od,N

=1,

083)

Var

iabl

eM

odel

6M

odel

7M

odel

8M

odel

9M

odel

10

Num

ber

ofE

JVs

(hom

eco

untr

y)0.

030∗∗

∗(0

.009

)0.

011

(0.0

09)

0.00

6(0

.011

)N

umbe

rof

EJV

s(h

ost

coun

try)

0.00

7∗(0

.003

)0.

006∗

(0.0

03)

−0.0

09∗

(0.0

04)

Num

ber

ofM

&A

s(h

ome

coun

try)

−0.0

37(0

.050

)0.

069

(0.0

53)

0.09

9(0

.075

)N

umbe

rof

M&

As

(hos

tco

untr

y)−0

.185

∗∗∗

(0.0

16)

−0.1

86∗∗

∗(0

.016

)−0

.344

∗∗∗

(0.0

35)

Num

ber

ofE

JVs

×N

umbe

rof

M&

As

(hom

eco

untr

y)−0

.001

(0.0

08)

Num

ber

ofE

JVs

×N

umbe

rof

M&

As

(hos

tco

untr

y)0.

005∗∗

∗(0

.001

)

EJV

Mar

ketin

gac

tivity

0.14

4†(0

.086

)0.

140†

(0.0

84)

0.12

0(0

.078

)0.

114

(0.0

78)

0.11

6(0

.075

)Fo

reig

neq

uity

shar

e−0

.106

(0.2

98)

−0.1

78(0

.300

)0.

286

(0.2

67)

0.29

5(0

.269

)0.

395

(0.2

57)

Exp

erie

nce

offo

reig

npa

rtne

r0.

002

(0.0

09)

−0.0

05(0

.009

)0.

000

(0.0

11)

−0.0

03(0

.011

)−0

.006

(0.0

10)

Exp

erie

nce

oflo

cal

part

ner

−0.0

05(0

.024

)0.

005

(0.0

23)

−0.0

03(0

.027

)0.

002

(0.0

27)

−0.0

16(0

.030

)Pu

blic

fore

ign

com

pany

0.19

1∗(0

.091

)0.

169†

(0.0

90)

0.11

1(0

.088

)0.

096

(0.0

89)

0.10

9(0

.091

)St

ate-

owne

dlo

cal

ente

rpri

ses

0.02

3(0

.088

)0.

019

(0.0

87)

0.09

8(0

.085

)0.

093

(0.0

86)

0.05

9(0

.086

)N

umbe

rof

allia

nces

(hom

eco

untr

y)−0

.042

(0.0

29)

−0.0

67∗

(0.0

31)

−0.0

21(0

.029

)−0

.035

(0.0

31)

−0.0

16(0

.030

)N

umbe

rof

allia

nces

(hos

tco

untr

y)−0

.019

∗∗(0

.007

)−0

.018

∗∗(0

.007

)−0

.046

∗∗∗

(0.0

08)

−0.0

44∗∗

∗(0

.008

)−0

.033

∗∗∗

(0.0

09)

Serv

ice

indu

stry

−1.5

73∗∗

∗(0

.135

)−1

.580

∗∗∗

(0.1

36)

−2.1

88∗∗

∗(0

.202

)−2

.200

∗∗∗

(0.2

01)

−2.5

07∗∗

∗(0

.234

)G

over

nmen

tex

pend

iture

aspe

rcen

tof

GD

P−0

.056

∗∗∗

(0.0

17)

−0.0

53∗∗

(0.0

16)

−0.0

43∗

(0.0

18)

−0.0

40∗

(0.0

18)

−0.0

62∗∗

(0.0

19)

GD

Pgr

owth

0.62

3∗∗∗

(0.0

33)

0.62

5∗∗∗

(0.0

33)

0.58

0∗∗∗

(0.0

40)

0.58

4∗∗∗

(0.0

40)

0.58

5∗∗∗

(0.0

43)

Infla

tion

rate

−0.0

13†

(0.0

07)

−0.0

17∗

(0.0

07)

0.01

1(0

.009

)0.

011

(0.0

09)

0.00

6(0

.009

)R

elat

ive

coun

try

risk

−0.1

69∗∗

(0.0

53)

−0.1

75∗∗

∗(0

.052

)−0

.173

∗∗(0

.065

)−0

.171

∗∗(0

.065

)−0

.185

∗(0

.072

)−2

log-

likel

ihoo

d64

63.6

6453

.162

27.5

6223

.661

52.6

Wal

dch

i-sq

uare

592.

5∗∗∗

679.

4∗∗∗

656.

2∗∗∗

665.

3∗∗∗

608.

5∗∗∗

Chi

-squ

are

ratio

test

10.5

∗∗23

6.1∗∗

∗24

0.0∗∗

∗31

1.0∗∗

∗

d.f.

1315

1517

19

Stan

dard

erro

rsar

ein

pare

nthe

ses.

†p<

0.10

;∗p

<0.

05;

∗∗p

<0.

01;

∗∗∗p

<0.

001



Prior EJV frequency

Log

surv

ival

func

tion

Low prior M&A frequencyHigh prior M&A frequency

Figure 4. Interaction in the EJV decline period (hostcountry). This figure is available in color online at

www.interscience.wiley.com/journal/smj

In the decline period, Model 10 simultaneouslyshows that both the increased number of EJVrejections and the number of M&A adoptions,as well as their interaction in the host-countryindustry, have significant impacts on the declineof EJV. We also depict the results graphicallyin Figure 4 using a log survival function, basedon Model 10. Figure 4 shows that the increasednumber of M&A adoptions at time t − 1 was morelikely to accelerate the EJV rejections at time t

during the decline period. Both Figures 3 and 4show similar trends between the rise and declineperiod. The interaction approach strongly supportsour argument that the rise and decline of EJV areconditional upon its competing strategy in the host-country organizational field.

The overall result shows that the rise and declineof EJV are not symmetric because of the differ-ent levels of influence from the competing strat-egy between the rise and decline periods. Whenforeign acquisition becomes an option, it pro-vides an opportunity for foreign investors to gainaccess to the Chinese market without the expenseand bureaucratic complexities generally associatedwith JVs (Chang et al., 2002). We note that theasymmetric rise and decline are due to M&A entrystrategies during the EJV decline period graduallymoving from the periphery to the center of foreignentry strategy.

These results were obtained after we controlledfor other factors that may also affect the riseand decline of EJV in China. We did not findevidence that the joint venture- and partner-levelvariables affect the rise or decline of EJV in China.However, most interorganizational, industry- andcountry-level variables were significant. Strategic

alliance remained an alternative choice in the host-country field, especially when the adoption of EJVstrategy was substantially reduced. The rise of EJVwas more likely to take place in manufacturingindustries than in service industries. Interestingly,the increase in government intervention in theeconomy led to the EJV rise in the early 1990s butalso resulted in the EJV decline in the later 1990s.The rise of EJV seemed not to be attributableto faster economic growth, but faster economicgrowth was still attractive for the EJV formation inthe decline period. Finally, we found that increasein relative country risk significantly reduced theprobability of forming EJVs in China.

DISCUSSION AND FUTURE STUDIES

In the international entry strategy literature, thedistinct mechanisms of the rise and decline of adominant entry strategy in emerging economies arestill much less commonly understood phenomenain terms of the collective actions of firms withinrespective reference groups of comparable organi-zations. We were motivated by the expectation thatthe bandwagon phenomenon of a dominant entrystrategy does not consist of a series of discrete andindependent organizational decisions, but a socialphenomenon determined by mimetic mechanismsat the interorganizational level. The emergence anddevelopment of peripheral entry strategy are alsocritical, especially in the decline period of thedominant strategy. Our findings based on foreignentries in non-restricted industries are logicallyconsistent with the previous imitation approachesbased on free-market economies.

This study offers a theoretically fresh insightinto the bandwagon phenomenon of a dominantstrategy in emerging economies, a topic signif-icant to both research and practice. First, themimetic mechanisms that drive the bandwagonphenomenon demonstrate that both the rise andthe decline of a dominant strategy are asymmetricat the interorganizational level. Existing researchof mimetic entry has mainly focused on the strat-egy diffusion process, not the rejection process.The bandwagon approach allows us to resolve theambiguity over the rejection process. The decline,compared to the rise of a dominant strategy, isalso a longitudinal process in which later entrants



cease to adopt the most popular mode used by ear-lier entrants. Such new insights suggest that dom-inant strategy in emerging economies may evolveover time with changing institutional environment,and future research following a co-evolutionaryapproach is likely to offer improved understanding(Tan and Tan, 2005).

Second, foreign firms may identify referencegroups either from their home country or hostcountry. Previous studies have exclusively focusedon home-country industry. Our results show thatmerely considering one of the reference groups isinsufficient, because specific local industry condi-tions also shape the interfirm action of firms. In thecase of foreign entry in emerging economies, wefind that host-country industry is the more influ-ential reference group since the Chinese govern-ments tend to guide FDI to non-restricted indus-tries through administrative regulations.

Third, another theoretical contribution is high-lighting the impact of an emergent entry strategyon a dominant strategy. Our results show thatforeign M&As have gradually moved from theperiphery to the center of foreign strategy, lead-ing to the decline of EJV adoptions. Researchershave widely noticed that EJVs were the most fre-quently adopted entry strategy of firms enteringChina (e.g., Beamish, 1993; Child and Yan, 2003).Consequently, there is a ‘bandwagon’ effect in aca-demic studies on IJVs. While existing researchhas overwhelmingly focused on IJVs in China,less research has examined the impact of foreignM&As. However, conditions of reference groupsin the host country also provide a platform tounderstand the interactive relationship between thedominant and the emergent entry strategy, whichcannot be ignored. Our findings on the decline inEJVs suggest that the rise of M&As merits greaterattention in future research. We note that a use-ful strategy (e.g., EJV) is usually not completelyabandoned by firms at the macro level, but it canbe rejected to some degree and largely replaced byalternative strategies.

Finally, we have predicted the interactive rela-tionship between an emergent competing strategy(M&A) and a dominant strategy (EJV). The neg-ative moderating effects of foreign M&A adop-tions show that regulatory changes allowing for-eign M&A activities in non-restricted industriescreated a necessary but not sufficient condition.Lifting M&A restrictions may trigger the imita-tion cycle of M&As. Whether firms are willing

to choose an M&A strategy over an EJV strat-egy may be dependent upon some non-regulatoryfactors, resulting in M&A being more frequentlyadopted in some industries than others. Our find-ings show that in a non-restricted industry whereM&A is less frequently adopted by other firms,the focal firm is more likely to adopt an EJV entrystrategy. Conversely, in a non-restricted industrywhere M&A is more frequently adopted, the focalfirm is less likely to adopt an EJV entry strategy.

The most important practical implication ofthis study for international managers is that firmsentering transition economies must be attuned topopulation-level changes and trends in the differententry strategies since each entry mode has its ownset of benefits and risks. Jumping on a bandwagonof a specific entry mode may help a firm gar-ner legitimacy and governmental approval. At thesame time, the popular strategy in the host countrymay ultimately prove to be less efficient in meet-ing the strategic and technical needs for foreigninvestors in the various home countries. Our studyshows that even the most popular strategy (i.e.,EJV in China) can fall out of favor soon after therise of alternative strategies. Choosing a peripheralentry strategy may not garner as much legitimacyearly on even if it may be more technically effi-cient. However, with the rapid pace of regulatorychange in transition economies, such pioneeringstrategies may in time come to be favored by reg-ulatory bodies.

Moreover, choosing a proper reference group asa clue for foreign market entry is a critical butusually ignored issue among international man-agers. Most firms watch the international movesof their rivals in the home country because ofthe accessibility of information and common back-ground. However, the reference group in the hostcountry may be more important. Since regula-tory changes in transition economies are not evenacross all industries, a peripheral entry strategy insome industries can gain legitimacy and govern-mental support sooner than in others. Thus, absorb-ing information from host country industry peersmay help international managers identify pioneer-ing entry modes that fit their strategic needs.

In addition, this study may help internationalmanagers understand the connections betweenmode and timing of entry. Scholars have demon-strated that foreign entry mode choice (Kogut andSingh, 1988; Hennart and Reddy, 1997; Davis,



Desai, and Francis, 2000) and entry timing strat-egy (Isobe et al., 2000; Chang and Rosenzweig,2001; Mitra and Golder, 2002) are important tothe study of international business. An integrationof these areas is useful because mode and timingof entry are closely intertwined in the foreign mar-ket, and the two lines of study can be connected(e.g., Malhotra, Agarwal, and Ulgado, 2003). Thisstudy advances our understanding by integratingforeign entry mode choice and entry timing deci-sion and by focusing on the strategy diffusion andrejection in a foreign market from a longitudinalperspective. Our findings suggest that entry timinghas important implications for the choice of dif-ferent strategies, including the rejection of an oldstrategy and adoption of a new one.

It is important to acknowledge several limita-tions in this paper. Although public opinion is nota main concern of this study, it may add somenew insights to the understanding of the rise anddecline of a dominant strategy. Greve (1995) sug-gests that social judgment about a strategy mayshift over time from positive to negative after aperiod of diffusion, and that a strategy is evalu-ated less positively the more other organizationsreject it, leading to contagion of abandonment.Negative evaluations usually increase after a wavein the spread of a strategy. Deng (2001) showedevidence that foreign investors are more likely toform a negative opinion of the popularly used EJVstrategy over time. The negative evaluation can bedisseminated broadly and result in later entrantsrejecting the strategy.

A dominant logic and opinion among businessconsultants, lawyers, and associations, as well aspublic opinion, business media, and organizationalnetworks, may also lead firms to adopt or reject aspecific strategy. Particularly, a firm is more sus-ceptible to negative feedback if other firms in itsreference group have already rejected a given strat-egy. Since opinions and actions of followers orimitators tend to evolve toward those in their ref-erence group (Baum et al., 2000), we invite futureefforts to further explore how early foreign entrantssocially affect late entrants in the respective refer-ence groups, resulting in increase or reduction ofthe given strategy. We also hope future studies willexamine the effects of other entry strategies on therise and decline of EJV strategy, notably whollyforeign-owned enterprises (WFOE). Although for-eign M&As are an important way to establishWFOEs, greenfield investments are another way.

Because of the limitation of our data, we cannotexamine the influences.

In conclusion, our contributions lie in integratingthe concepts of competing strategies and referencegroups to better understand how mimetic mech-anism operate in an emerging market. Our studyoffers a new perspective through which changes instrategy among organizations can be explored froma longitudinal perspective. It provides a rationalefor explaining the competing nature of differentstrategies at different periods in terms of the riseand decline of a dominant strategy. Studies onthe trajectory of strategic change in an emergingenvironment are still limited and have attracted rel-atively little attention. Our study has theoreticallyexplored the change in a dominant entry strategyamong foreign firms in the context of China, andprovided useful empirical results for future studiesthat may further broaden our knowledge in the for-eign entry field. We believe such additional effortsare much needed to draw more definitive implica-tions for research and practice.

ACKNOWLEDGEMENTS

This paper was completed while the second authorwas the American Fulbright Distinguished Profes-sor (China Program) from 2005 to 2006. Sup-port from the Fulbright Foundation, the U.S.State Department and the U.S. Embassy in Chinais gratefully acknowledged. Institutional supportfrom the Guanghua School of Management at thePeking University and Nankai Business School atNankai University are also much appreciated. Allviews and opinions are entirely our own. We thankthe SMJ anonymous reviewers and editor RichardBettis for valuable comments and suggestions.

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Documents

Mimetic entry and bandwagon effect: the rise and decline of international equity joint venture in China