Intern. J.

of Research in Marketing 21 (2004) 123 – 136

www.elsevier.com/locate/ijresmar

Japanese investors’ choice of acquisitions vs. startups in the US:

the role of reputation barriers and advertising outlays
Shih-Fen S. Chen a,*, Ming Zeng b
a
International Business School, Brandeis University, Mailstop 032,
Waltham, MA 02454, USA
b
INSEAD, Singapore
Received 8 July 2002; received in revised form 29 June 2003; accepted 1 July 2003

Abstract

Multinational enterprises (MNEs) can either start up new ventures or acquire existing firms to enter foreign markets.
Although many reputable brands have changed hands in international acquisitions, no previous studies have systematically
verified the proposition that MNEs choose acquisitions over startups to overcome reputation barriers abroad. In this study, we
hypothesize that the choice of acquisitions vs. startups also depends on investors’ prior advertising outlays as well as the
reputation barriers they face in the foreign industry entered. We compile a vector of variables that distinguish between firm-
specific advertising investments and industry-specific reputation barriers to analyze Japanese manufacturers’ entry strategies
into the US. Our results show that Japanese investors facing higher reputation barriers in the target industry are more inclined to
acquire existing firms, whereas those spending more on advertising prior to an entry are more likely to start up new ventures.
D 2004 Elsevier B.V. All rights reserved.

Keywords: International acquisitions; Reputation barriers; Japanese investments

1. Introduction MNEs establish greenfield plants to exploit proprie-

Multinational enterprises (MNEs) can either start
up new ventures or acquire existing firms to expand
into foreign nations. According to previous studies
(see, e.g., Caves & Mehra, 1986; Hennart & Park,
1993), the choice of acquisitions vs. startups depends
in part on investors’ competitive capabilities as well
as the entry barriers they face in the foreign industry
entered. It has been confirmed, for instance, that
* Corresponding author. Tel.: +1-781-736-2257; fax: +1-781-
736-2267.
E-mail address: shihfen@brandeis.edu (S.-F.S. Chen).
tary technology abroad, but take over existing firms to
overcome technological barriers into R&D-intensive
industries (Anand & Delios, 2002; Kogut & Singh,
1988).
MNEs, too, can start up greenfield ventures to
exploit brand recognition or acquire existing firms to
overcome reputation barriers in foreign markets. In-
deed, the transfer of reputable brands from local firms
to MNEs is widely seen in international acquisitions.
For instance, Bridgestone expanded into North Amer-
ica by merging with Firestone, Unilever invaded the
US by acquiring Pond’s, and Colgate-Palmolive en-
tered Asia by taking over a toothpaste manufacturer in
Taiwan. Although these cases provide evidence for

0167-8116/$ - see front matter D 2004 Elsevier B.V. All rights reserved.
doi:10.1016/j.ijresmar.2003.06.002
124 S.-F.S. Chen, M. Zeng / Intern. J. of Research in Marketing 21 (2004) 123–136
the number of reputable brands that have changed
hands in international acquisitions, no previous stud-
ies have systematically analyzed the impact of related
marketing factors on MNEs’ entry strategies into
foreign nations.
Foremost, some previous studies do not include
any marketing variables in their models to predict the
choice of acquisitions vs. startups (Wilson, 1980;
Zejan, 1990). Others who have considered marketing
factors instead take a one-sided approach to predict
MNEs’ entry strategies into foreign markets (Anand
& Delios, 2002; Caves & Mehra, 1986). Without
controlling for MNEs’ ability to rebuild brand recog-
nition abroad, such studies posit that investors enter-
ing advertising-intensive industries are more likely to
acquire existing firms endowed with reputable brands.
This one-sided approach leads most researchers to use
a single variable to evaluate the impact of all mar-
keting factors on international acquisitions (Anand &
Delios, 2002; Caves & Mehra, 1986; Hennart & Park,
1993), although some studies do consider home- and
host-country factors in testing the impact of technol-
ogy-related factors on entry mode choices (e.g.,
Kogut & Chang, 1991; Yamawaki, 1991). Yet, a
single variable captures not only the reputation bar-
riers that MNEs face abroad but also their marketing
ability to overcome such barriers. While the former
should encourage them to acquire existing firms, the
latter would lead to startups. The two conflicting
effects may cancel each other out, which may explain
why most previous studies do not confirm the pre-
dicted impact of marketing variables on international
acquisitions.
The former diagnosis suggests a need to reexamine
the entry strategies adopted by MNEs to expand into
foreign nations. In the following sections, we first
argue that MNEs often face reputation barriers abroad
and acquisitions of existing local firms can help them
overcome such entry barriers. We then hypothesize
that the choice of acquisitions vs. startups depends in
part on investors’ prior advertising outlays and the
reputation barriers they face in the target industry.
Next, we compile a vector of marketing variables that
distinguish between industry-specific reputation bar-
riers and firm-specific advertising outlays to test our
hypotheses on a sample of Japanese subsidiaries in the
US. We report the findings and conclude by outlining
implications.
2. Reputation barriers and entry strategies
Branding of products and subsequent investments
in brand-specific advertising serve two purposes in the
marketplace. First, when product quality varies across
manufacturers and cannot be easily verified prior to
purchase, consumers can rely on brand reputation as a
guide to quality in making their choice decision (Firth,
1993; Klein & Leffler, 1981). Second, consumers who
appreciate the symbolic meaning represented by a
brand name can derive extra psychological satisfac-
tion from the consumption of the branded product
(Aaker, 1997; Derbaix & Brée, 1997; Wernerfelt,
1990). In either case, they are willing to pay a
premium for a reputable or snobbish brand because
of the savings on search costs or the symbolic utility
of the product.
No matter if marketers advertise to reduce quality
uncertainty or create symbolic utility for a product,
foreign customers are rarely exposed to domestic
advertising, and consumers who are familiar with
domestic brands are not typically present in foreign
markets. This means that brand names highly reputa-
ble at home can become unknown to foreign consum-
ers. Even though the reputation of a domestic brand
has spilled across borders, its extension to a foreign
market is not always feasible due to various legal,
cultural, and language reasons. Hence, when first
entering a foreign country, most MNEs face a repu-
tation barrier because their brand neither reduces
quality uncertainty nor creates symbolic utility for
local consumers (Demsetz, 1982; Krouse, 1984;
Landes & Posner, 1987).
Two options are available to MNEs for overcom-
ing reputation barriers overseas: building name rec-
ognition from scratch or acquiring reputable brands
from local owners. While MNEs can choose to build
name recognition from scratch, introducing a new
brand to foreign markets is not always easy for
several reasons. For instance, reputation building is
time-consuming and only a few firms can afford the
long payback period. In addition, rebuilding name
recognition abroad requires not only general mana-
gerial resources but also marketing skills that are
specific to local cultures (Kashani, 1989; Onkvisit &
Shaw, 1987). Yet, it takes time as well as money for
MNEs to learn such country-specific marketing
skills.
 S.-F.S. Chen, M. Zeng / Intern. J. of Research in Marketing 21 (2004) 123–136
Even if MNEs are endowed with all necessary
assets to rebuild name recognition abroad, it is some-
times infeasible to do so (Anand & Delios, 2002). The
introduction of new brands by MNEs to foreign
markets leads to brand proliferation, which diminishes
the returns to reputation investments for all players.
Also, the expenditures of introducing new brands will
be a waste of resources if existing local brands can
sufficiently serve the market. More important, the
extra cost of duplicating reputation investments
abroad hurts the competitiveness of MNEs relative
to their local rivals (Bain, 1968; Demsetz, 1982).
Given that brand building is difficult or even
infeasible, acquisitions of existing local firms can help
overcome reputation barriers abroad in two ways. On
the one hand, MNEs can take over a local firm
endowed with all necessary resources (particularly
culture-specific marketing skills) and then use the
acquired capabilities to build name recognition by
themselves (Chi, 1994). On the other hand, they can
acquire the owner of a reputable local brand and use
the acquired reputation to crack a foreign market
(Anand & Delios, 2002; Hennart & Park, 1993).
Regardless of if MNEs choose to rebuild name
recognition from scratch or take over an established
brand, both options can be more forcibly exercised
through acquisitions of existing local firms. To begin
with, acquisitions can help MNEs speed up entry into
reputation-intensive industries. Those who choose to
acquire existing brands also avoid brand proliferation,
which in turn preserves the returns to reputation
investments for all players. Brand acquisitions can
even be efficiency-enhancing because an established
brand can be extended as a public good to cover more
products made by MNEs without diminishing its
value (Chen & Hennart, 2002).
International acquisitions are prone to other prob-
lems, however. First of all, investors making acquis-
itions abroad must inherit the labor force and
management culture of the acquired firms, while those
starting up new ventures can mold their affiliates by
hiring a fresh labor force and creating a new manage-
ment system (Jamison & Sitkin, 1986). Acquisitions
are thus riskier and less effective for MNEs to exert
organizational control over foreign subsidiaries.
Moreover, when entering foreign markets through
acquisitions, MNEs are often forced to also take over
the assets that are indivisible from the strategic
125
resources they desire to acquire. Asset indivisibility
inevitably drives up the cost of international expan-
sions (Hennart & Reddy, 1997). Lastly, firms that are
available for sale could well be lemons and, respec-
tively, those in good shape could be purchased only at
a price higher than their true value (Akerlof, 1970;
Balakrishnan & Koza, 1993; Reuer & Koza, 2000).
MNEs often have to incur an extra cost, sometimes
prohibitive, to screen targets and guard against sellers’
misrepresentations, which further escalates the cost of
international acquisitions (Chen & Hennart, 2004).
Given the aforementioned problems with acquis-
itions, startups should be the default option chosen by
MNEs to expand into foreign markets. Ceteris par-
ibus, they should start up greenfield ventures if they
do not face reputation barriers abroad and/or are well
endowed to overcome them. Conversely, they should
acquire existing firms if the savings on reputation
investments is large enough to justify the extra cost of
negotiating and executing acquisitions.
3. The conceptual model
In this section, we hypothesize that MNEs’ choice
of acquisitions vs. startups in foreign nations depends
on their prior advertising outlays and the reputation
barriers that they face in the target industry, with
relevant non-marketing factors being kept constant
(see Fig. 1). To control for other country-level factors
that also affect the choice of entry strategies (e.g.,
cultural distance; see Kogut & Singh, 1988), we chose
to test our hypotheses on a sample of Japanese invest-
ments in the US, knowing that a single-home/single-
host-nation sample may limit the generalizability of
our results.
3.1. Industry-specific reputation barriers
The reputation barriers that Japanese investors face
in the US vary across industries. They tend to face
higher entry barriers in industries where incumbent
firms spend more on advertising, command a higher
reputation premium over foreign entrants, or sell a
larger portion of output to individual end-users (vs.
business customers). In all these cases, Japanese
investors should be more inclined to choose acquis-
itions over startups to enter the US.
126 S.-F.S. Chen, M. Zeng / Intern. J. of Research in Marketing 21 (2004) 123–136
Fig. 1. The conceptual model.
3.1.1. Industry advertising intensity
When first entering a US industry where incum-
bents have accumulated a significant amount of ad-
vertising, Japanese entrants cannot immediately
compete for consumers due to their short market
history and the absence of prior advertising invest-
ment. Without compensating efforts to persuade and
communicate with potential buyers, they will fail to
sell equal quantities at equal prices vis-à-vis incum-
bent firms that enjoy name recognition and customer
loyalty. The extra advertising expenditures that Japa-
nese investors make to crack the US market thus harm
their competitiveness relative to local rivals (Bain,
1968; Demsetz, 1982).
Yet, the propensity for marketers to advertise varies
across industries. Indeed, advertising matters to mar-
ket competition only when it reduces quality uncer-
tainty or creates symbolic utility for consumers
(Demsetz, 1982). In industries where consumers rely
more on advertising as a guide to quality that is
difficult to verify before purchase, advertised brands
can command a higher premium and thus sellers have
stronger incentives to invest in brand reputation (Nel-
son, 1974, 1978). Likewise, when buyers can poten-
tially derive a larger amount of symbolic utility from
the consumption of a product, image-making will be
more profitable and marketers should be more in-
clined to invest in brand images (Wernerfelt, 1990). In
both cases, Japanese investors should face higher
reputation barriers in the US. Hence:
H1. Japanese investors entering a US industry marked
by higher advertising intensity should be more likely
to choose acquisitions over startups.
3.1.2. Industry brand equity
Owners of reputable brands can take advantage of
customer loyalty by setting prices above marginal
costs (Demsetz, 1982). In industries where incumbent
firms command a reputation premium over unknown
entrants, Japanese investors bear a competitive disad-
vantage relative to local counterparts. Since trademark
privileges are tightly protected by the legal system,
they cannot neutralize this price gap by imitating the
name, contents, or packaging of local brands. Due to
this reputation barrier, above-normal profits enjoyed
by incumbent firms do not necessarily induce foreign
entrants (Bain, 1968; Ferguson, 1974).
The value of a brand name (i.e., brand equity) can
be estimated by calculating the present value of the
premium that consumers are willing to pay for a
branded product over the same product sold unbrand-
ed (Aaker, 1991; Barwise, 1993; Farquhar, 1989).
According to Simon and Sullivan (1993), the size of
this reputation premium varies across products. In
industries where incumbent firms enjoy a larger
 S.-F.S. Chen, M. Zeng / Intern. J. of Research in Marketing 21 (2004) 123–136 127

reputation premium (i.e., industry brand equity is face lower reputation barriers and/or are better
higher), Japanese investors should face higher repu- endowed to overcome them.
tation barriers and be more inclined to choose acquis-
itions over greenfield investments to enter the US. 3.2.1. Parents’ US advertising spending
In their overseas expansions, Japanese investors
H2. Industry brand equity should encourage Japanese
often follow a sequential process in which exports
investors to choose acquisitions over startups to enter
precede local production (Chang, 1995). By the time
the US.
they set up production in the US, they might have
been serving the market through exports for many
3.1.3. Consumer goods vs. industrial products
years. Given their prior advertising outlays in the host
A product can be sold to either individual end-
market, they should have built a certain level of
users for final consumption or business customers for
brand recognition among consumers or acquired
further processing or resale. While most products can
some culture-specific marketing expertise. Such
be sold to consumers and businesses, the portion of
parents should be less inclined to choose acquisitions
output that manufacturers ship to either market seg-
over startups to enter the US because they face lower
ment varies across industries. For instance, even if
reputation barriers and/or are better equipped to
apparel makers serve mostly individual end-users,
overcome them.
they also ship a small portion of their output to
institutional buyers requiring employees to wear uni-
H4. Japanese investors who have spent more on
forms. Likewise, while vegetable oil is shipped mostly
advertising in the US prior to an entry should be less
to food processors as an ingredient, it is also sold to
likely to choose acquisitions over startups.
individual end-users for household consumption.
For two reasons Japanese investors should face
3.2.2. Parents’ home advertising spending
higher reputation barriers in a US industry where
As pointed out earlier, marketing assets (e.g., brand
manufacturers sell a larger portion of output to end-
reputation and advertising expertise) are often culture-
users. Relative to business buyers, individual con-
specific and cannot be easily transferred abroad for
sumers are less knowledgeable about product qual-
exploitation (Kashani, 1989; Onkvisit & Shaw, 1987).
ity and thus rely more on brand reputation as a
In cases where the cultural barriers between two
quality guide in making their choice decision. End-
nations are insurmountable, Japanese investors cannot
users are also more willing to pay a premium for
use their marketing resources accumulated at home to
a brand name representing an attractive symbolic
overcome reputation barriers in the US. Accordingly,
meaning. Selling products under an unknown brand,
home-market advertising should not affect the choice
therefore, should be more of a problem to those
of acquisitions vs. startups.
Japanese investors entering a US industry that
However, brand reputation does travel across bor-
serves mostly individual consumers rather than
ders sometimes (Dunning & McQueen, 1981). Gen-
business customers.
erally speaking, Japanese investors who spent more
H3. Japanese investors should be more inclined to on advertising at home should be more likely to enjoy
choose acquisitions over startups to enter a US reputation spillovers overseas. Even if reputation
industry serving mostly individual consumers rather spillovers do not occur, they still can use at least part,
than industrial buyers. if not all, of their marketing expertise learned from
running an advertising-intensive business at home to
3.2. Firm-specific advertising outlays rebuild brand recognition in the US. Such investors
should face lower reputation barriers and/or be better
The ability of Japanese investors to overcome endowed to overcome them. Provided that marketing
reputation barriers in the US varies across firms. resources are transferable across borders, home-mar-
Those who have spent more on advertising at home ket advertising should discourage Japanese investors
or in the host market prior to an entry should be less from choosing acquisitions over startups to enter the
motivated to enter through acquisitions because they US.
128 S.-F.S. Chen, M. Zeng / Intern. J. of Research in Marketing 21 (2004) 123–136
H5. Home advertising outlays might or might not
discourage Japanese investors from choosing acquis-
itions over startups to enter the US, depending on the
transferability of marketing assets across nations.
3.3. Control factors
Access to reputable brands or culture-specific mar-
keting expertise is not the only motive for interna-
tional acquisitions. Other reasons for Japanese
investors to acquire US firms include access to tech-
nological or industry knowledge, consolidation of
market power, speedy entry into fast-growing sectors,
or capacity control in mature industries. To test the
above hypotheses, we must control for those non-
marketing factors that also affect Japanese investors’
entry strategy.
3.3.1. Industry R&D intensity
Japanese investors can outsource advanced tech-
nology from US firms to overcome technological
barriers into R&D-intensive industries (Teece, 1992;
Yip, 1982). One way for them to do so is to take over
the local business in which the target technology is
embedded. When entering a US industry where
incumbents spend more on R&D, Japanese investors
should face higher technological barriers and be more
likely to acquire local firms endowed with proprietary
technology. Industry R&D intensity should therefore
encourage them to choose acquisitions over startups.
3.3.2. Parents’ R&D intensity
Japanese investors who spend more on R&D at
home tend to set up greenfield plants to exploit
technological advantages in the US. In addition, they
should face lower technological barriers in the target
industry and be better able to overcome them. It has
been found that such investors are less inclined to
choose acquisitions over startups to enter the US
(Anand & Delios, 2002; Hennart & Park, 1993).
3.3.3. Relatedness of US affiliates
Competitive resources are sometimes product-spe-
cific and thus cannot easily be transferred across
industries for exploitation. When entering unrelated
US industries (i.e., setting up diversified affiliates),
Japanese investors can create industry-specific assets
internally or acquire them externally. One way for
them to outsource such capabilities is to take over
incumbent firms in the target industry. It has been
confirmed that foreign investors are less likely to enter
related industries through acquisitions (Wilson, 1980;
Zejan, 1990).
3.3.4. Industry concentration
To prevent a concentrated industry from being
monopolized by a small number of manufacturers,
the US government may prohibit acquisitions that
would confer substantial market power on foreign
buyers (Oster, 1990). The difficulties of identifying
targets and negotiating contracts in such industries
also discourage Japanese investors from taking over
existing US firms. Industry concentration, therefore,
should reduce the probability that Japanese investors
will choose acquisitions over startups to enter the US.
3.3.5. Industry growth
Starting up new ventures takes more time than
acquiring existing ones. The opportunity cost of
delaying entry is higher in industries where market
demands grow more rapidly. In cases where market
demands grow slowly, on the other hand, setting up
greenfield plants heightens rivalry among competitors
due to the added capacities. The combined impacts
suggest a V-shaped relationship between industry
growth and the probability of acquisition (Caves &
Mehra, 1986; Hennart & Park, 1993). Thus, Japanese
investors will be more likely to enter the US through
acquisitions if the target industry grows rapidly or
slowly, but through startups if moderately.
4. Methods
4.1. Sample and model
A sample of Japanese investments in the US was
taken from separate censuses: Toyo Keizai in 1987,
1991 and the Japan Economic Institute from 1981 to
1989. The sample consists of 558 manufacturing
subsidiaries in which the Japanese parents owned at
least 5% equity. Due to the lack of parent data, the
sample size was reduced to 269, of which 114 (42.2%)
were acquisitions and 155 (57.8%) were startups.
The entry strategy of Japanese investors was cap-
tured by a dummy variable that equals one if an
 S.-F.S. Chen, M. Zeng / Intern. J. of Research in Marketing 21 (2004) 123–136
acquisition was made, and zero if a new venture was
started. The nature of the dependent variable requires
the use of a binomial logistic model to predict the
choice of acquisitions vs. startups. The model is
specified as:
PðYi ¼ 1Þ ¼ 1=½1 þ expða  X1i b1  X2i b2  X3i b3 Þ;
where P( Yi = 1) estimates the probability of acquisi-
tion for the ith observation; X1 is the vector of
independent variables that capture industry-specific
reputation barriers; X2 is the vector of variables that
measure firm-specific advertising outlays; X3 is the
vector of control variables; a is the intercept; and b1,
b2, and b3 are estimated parameters (Maddala, 1983).
4.2. Independent variables
4.2.1. Industry advertising intensity
We used the total media expenditures that all
manufacturers incur to advertise a product to capture
industry advertising intensity. The data were collected
from the Ad$ Summaries published by the Leading
National Advertisers. When entering a US industry
where local firms spend more on advertising, accord-
ing to H1, Japanese investors should face higher
reputation barriers and be more likely to choose
acquisitions over startups.1 We, therefore, expected
industry advertising intensity to carry a positive
coefficient.
4.2.2. Industry brand equity
Based on published financial data, Simon and
Sullivan (1993) calculated the percentage of brand
equity in the replacement value of all firms at the two-
digit Standard Industry Classification (SIC) level.2 We
1
In cases where a subsidiary made more than one product, we
kept only the highest figure, assuming that Japanese investors
should face no reputation barriers after they had overcome the
highest one. The same rule applies to other barrier variables.
2
To maximize the returns on previous reputation investment
and minimize the costs of future product introduction, firms often
extend a reputable brand to cover multiple lines (see e.g., Aaker &
Keller, 1990; Broniarczyk & Alba, 1994). For example, General
Electric has extended its brand to cover several three-digit SIC
products, ranging from power tools, light bulbs, home appliances,
medical equipment to jet engines. Brand extensions have prevented
Simon and Sullivan (1993) from calculating industry brand equity at
a level higher than two-digit SIC.
129
used this percentage to measure industry brand equity.
In industries where incumbent brands command a
larger premium over foreign entrants, Japanese invest-
ors should face higher reputation barriers and be more
motivated to enter through acquisitions (H2). We
predicted that industry brand equity should carry a
positive coefficient.
4.2.3. Consumer goods vs. industrial products
To capture the consumer-goods/industrial-products
distinction, we collected the percentage of output that
a four-digit SIC industry ships to end-users from the
US Commerce Department’s Census of Manufactures.
According to H3, the larger the portion of industry
shipment sent to consumers, the higher the reputation
barriers Japanese investors face in the US and the
higher the probability that they will choose acquis-
itions over startups. Industry shipment to consumers
was expected to carry a positive coefficient.
4.2.4. Parents’ US advertising spending
From the Ad$ Summaries, we also collected the
total advertising expenditures devoted by each inves-
tor to the host market in a 5-year period prior to an
entry (in fixed dollars). Those who had spent more on
advertising in the US should face lower reputation
barriers and/or be better endowed to overcome them
(H4). Hence, we expected parents’ US advertising
spending to carry a negative coefficient.
4.2.5. Parents’ home advertising spending
Based on the information provided by the parents
to Japan’s Ministry of Finance, we calculated the
average advertising expenditures that Japanese invest-
ors incurred at home during the 5-year period before
an entry (in fixed yen). When data were not available
from this source, information from the Japan Com-
pany Handbook was used instead. As suggested by
H5, home advertising outlays might or might not
reduce the probability of acquisition, depending on
the transferability of marketing assets from Japan to
the US. Thus, whether parents’ home advertising
spending affects the choice of acquisitions vs. startups
is an empirical question.
4.2.6. Industry R&D intensity
To measure industry R&D intensity, we calculated
the R&D expenditures of each four-digit SIC industry
130 S.-F.S. Chen, M. Zeng / Intern. J. of Research in Marketing 21 (2004) 123–136

by multiplying its total shipment with its R&D
expenditures-to-sales ratio (sources: Federal Trade
Commission’s Line of Business Report and US Com-
merce Department’s Census of Manufactures). Indus-
try R&D intensity was expected to carry a positive
coefficient.
4.2.7. Parents’ R&D intensity
We used the average R&D expenditures that the
parents made in the 5-year period before an entry to
capture Japanese investors’ R&D intensity (in fixed
yen). The data were available from Japan’s Ministry
of Finance and the Japan Company Handbook. We
expected parents’ R&D intensity to discourage Jap-
anese investors from entering the US through
acquisitions.
ference between the growth rate of each four-digit SIC
industry and the sample mean, and expected industry
growth deviation to carry a positive coefficient. To
take into account growth fluctuations over time, the
rates used in this calculation are average annual
growth rates over the 5 years before an entry (see
U.S. Industrial Outlook).
Statistics of all independent variables and the
correlation matrix are given in Table 1. We can see
that parents’ R&D intensity is highly correlated with
parents’ home advertising spending (0.58); industry
growth deviation also has a high correlation with
industry R&D intensity (0.51).
5. Results

4.2.8. Industry concentration 5.1. Full-sample models

We used the Herfindahl-Hirschman index for the
50 largest firms to measure industry concentration at
four-digit SIC level. We expected this variable to have
a negative impact on the probability of acquisition.
4.2.9. Relatedness of US affiliates
Whether or not a subsidiary made the same product
as the parent was captured by a dummy variable that
took the value ‘‘one’’ if entry was made in a related
industry, and ‘‘zero’’ if in an unrelated one. Japanese
investors should be less likely to enter the US through
acquisitions if the parents and the subsidiaries both
manufacture the same product.
4.2.10. Industry growth deviation
Following the method used by Caves and Mehra
(1986), we calculated the absolute value of the dif-
The results of the regression analysis are reported
in Table 2 (Eq. (1)). As predicted, the coefficient of
industry advertising intensity is positive and signifi-
cant at the 0.1 level, indicating that Japanese investors
are more inclined to choose acquisitions over startups
to enter advertising-intensive US industries (H1).
Industry brand equity, however, carries the wrong
sign (negative) and is statistically insignificant, failing
to confirm H2 that Japanese investors should be more
likely to enter the US through acquisitions when
incumbent brands in the target industry enjoy a larger
premium over unknown foreign entrants. The coeffi-
cient of industry shipment to consumers carries a
positive sign and is significant at the 0.1 level,
suggesting that Japanese investors are more motivated
to take over existing US firms in industries where

Table 1
Statistics and correlation matrix
Variable names Mean STD (1) (2) (3) (4) (5) (6) (7) (8) (9)
(1) Industry advertising intensity 88,483 148,840
(2) Industry brand equity 20.90 12.00 0.18
(3) Industry shipment to consumers 16.39 23.24 0.22 0.34
(4) Parents’ US advertising spending 16,824 63,503  0.05 0.01 0.07
(5) Parents’ home advertising spending 20,441 33,872 0.16 0.12 0.10 0.33
(6) Industry R&D intensity 36,016 68,410 0.34 0.05  0.13 0.12 0.10
(7) Parents’ R&D intensity 520.7 1366.9 0.02  0.03  0.09 0.25 0.58 0.18
(8) Industry concentration 681.72 580.10 0.02  0.06 0.03 0.17 0.06 0.12 0.04
(9) Relatedness of US affiliates 0.90 0.31 0.06  0.12 0.06 0.07  0.02  0.09 0.02 0.01
(10) Industry frowth 7.07 7.51 0.28  0.08  0.11 0.00  0.01 0.51 0.01  0.03  0.05
 S.-F.S. Chen, M. Zeng / Intern. J. of Research in Marketing 21 (2004) 123–136 131

Table 2 because they face lower reputation barriers and/or are

Parameter estimate for binomial logit model (1 = acquisitions) better endowed to overcome them (H4). Parents’
Variables Eq. (1) Eq. (2) Eq. (3) home advertising spending, on the other hand, does
(Expected sign)
not have a significant impact on the probability of
Industry 0.16e  05 0.18e  05 0.18e  05 acquisition, implying that Japanese investors cannot
advertising (1.48)a (1.64)a (1.69)b
easily transfer their marketing assets created at home
intensity (+)
Industry brand  0.65e  02  0.82e  01 – to the US for exploitation (H5).
equity (  ) (  0.57) (  2.75)c Except for industry R&D intensity, all control
Industry brand – 0.19e  02 – variables have the predicted impact on the choice of
equity square (2.64)c acquisitions vs. startups. Parents’ R&D intensity, for
(+)
example, carries a negative coefficient that is signif-
Industry brand – – 0.61e  01
equity deviation (3.55)c icant at the 0.1 level, indicating that Japanese invest-
(+) ors spending more on R&D are less likely to enter
Industry shipment 0.12 – 03 0.13 – 03 0.13 – 03 through acquisitions. The coefficient of industry con-
to consumers (1.30)a (1.40)a (1.45)a centration is negative and significant at the 0.1 level,
(+)
implying that acquisitions are more difficult to nego-
Parents’ US  0.97e  05  0.85e  05  0.78e  05
advertising (  1.51)a (  1.45)a (  1.44)a tiate and execute in concentrated industries. The
spending (  ) dummy variable that captures relatedness of US
Parents’ home 0.74e  06 0.79e  06 0.76e  06 affiliates also carries a negative coefficient that is
advertising (0.14) (0.14) (0.14) significant at the 0.01 level, confirming that Japanese
spending (  )
investors entering related industries are less likely to
Industry R&D  0.56e  06 0.29e  06  0.39e  06
intensity (+) (  0.22) (0.11) (  0.15) choose acquisitions over startups. Industry growth
Parents’ R&D  0.35e  03  0.36e  03  0.36e  03 deviation carries a positive coefficient that is signifi-
intensity (  ) (  1.59)a (  1.56)a (  1.55)a cant at the 0.05 level, which supports the V-shaped
Industry  0.42e  03  0.40e  03  0.38e  03 relationship between industry growth and the proba-
concentration (  1.63)a (  1.59)a (  1.48)a
bility of acquisition.
()
Relatedness of US  1.36  1.33  1.28 The negative coefficient of industry brand equity
affiliates (  ) (  2.87)c (  2.79)c (  2.69)c contradicts not only H2 but also the fact that reputable
Industry growth 0.04 (1.87)b 0.02 (2.11)b 0.05 (2.31)b brands are often involved in international acquisitions.
deviation (+) To find out why industry brand equity lacks a signif-
Intercept 1.13 (1.93)b 1.50 (2.47)c 0.22 (0.41)
icant impact on the probability of acquisition, we used
Pseudo R-Square 0.13 0.16 0.17
Model Chi-Square 37.15c 45.47c 50.10c a bar chart to plot the relationship between the two
% of Correct 63% (51%) 67% (51%) 70% (51%) variables. As illustrated in Fig. 2, Japanese investors
Prediction are more inclined to acquire existing US firms in
(Base industries where incumbent brands command either a
Percentage)
negligible or a significant premium over unknown
Parentheses: t-statistics. foreign entrants, but are less likely to choose acquis-
a
p < 0.1 (one-tailed).
b
p < 0.05 (one tailed).
c
p < 0.01 (one-tailed).

manufacturers sell a larger portion of output to indi-

vidual end-users (H3).
As predicted, parents’ US advertising spending
carries a negative sign and is significant at the 0.1
level. This result indicates that Japanese investors who
spent more on advertising in the US prior to an entry
are less inclined to choose acquisitions over startups Fig. 2. Industry brand equity and the probability of acquisition.
132 S.-F.S. Chen, M. Zeng / Intern. J. of Research in Marketing 21 (2004) 123–136
itions in industries where this reputation premium is
moderate. The plotting suggests that industry brand
equity has a U- or V-shaped relationship with the
probability of acquisition.
We used two methods to verify this nonlinear
relationship. First, we added the square of industry
brand equity to the model and expected industry
brand equity to carry a negative coefficient but the
square term to carry a positive one. As reported in
Eq. (2), both variables carry a predicted sign and are
significant at the 0.01 level, confirming that industry
brand equity does have a U-shaped impact on the
choice of acquisitions vs. startups. Second, we
replaced industry brand equity with a new variable,
namely, the absolute value of the difference between
industry brand equity and its sample mean (similar
to industry growth deviation). As reported in Eq.
(3), industry brand equity deviation carries a posi-
tive coefficient that is significant at the 0.01 level,
which again supports that industry brand equity has
a V-shaped relationship with the probability of
acquisition. All other findings are largely unchanged
in the two modified models, although the model fit
has been improved substantially. For instance, the
percentage of correct prediction has increased from
63% to 67% and 70%, and the model Chi-square
has been raised from 37.15 to 45.47 and 50.1,
respectively.
There is one possible reason for why industry
brand equity has a nonlinear impact on the choice
of acquisitions vs. startups. Often acquisitions are
motivated by non-marketing reasons, e.g., access to
technological know-how or speedy entry into fast-
growing industries. In such cases, Japanese investors
should be more inclined to take over a US firm that
enjoys zero or low brand equity, since the absence of
brand goodwill in the target has made it easier to
negotiate and enforce the acquisition contract (Balak-
rishnan & Koza, 1993; Chi, 1994). In industries where
incumbent firms command a moderate reputation
premium, Japanese investors will have to incur an
extra cost to estimate the size of brand equity embed-
ded in target firms. Yet, the moderate premium may
not provide enough benefits to justify the increase in
contracting costs, which means that Japanese invest-
ors should be less likely to choose acquisitions over
startups. In industries where incumbent firms enjoy a
significant reputation premium, Japanese investors
still need to incur an extra cost to determine the value
of the trademark owned by the target firm. The benefit
of brand acquisitions, however, would be large
enough to justify the extra cost of drawing and
enforcing the contract, which means that Japanese
investors should be more motivated to acquire a US
firm endowed with a highly reputable brand.
5.2. Split-sample models
The above analyses, however, do not consider
possible interactions among the independent variables
in determining the choice of acquisitions vs. startups.3
Foreign brands, for example, would have more room
to survive in fragmented sectors, meaning that brand
acquisitions should serve Japanese investors better in
industries where market shares are concentrated on a
smaller number of players. Likewise, Japanese invest-
ors should be more motivated to take over existing
brands in mature industries where brand proliferation
is more likely to worsen rivalry among competitors.
To examine such interaction effects, we reran Eq. (3)
(the one that has the best model fit) on sub-regimes
split along the sample mean of industry growth as
well as industry concentration.
On the one hand, in the high-growth sub-sample
(see Table 3), industry brand equity is the only
marketing variable that has a significant impact on
Japanese investors’ entry strategies, indicating that
marketing variables are less influential over the choice
of acquisitions vs. startups in rapidly growing indus-
tries. In the low-growth model, however, industry
advertising intensity, industry brand equity, and
parents’ US advertising spending all carry a predicted
coefficient that is statistically significant. Thus, when
market demands grow more slowly in the target
industry, Japanese investors’ choice of acquisitions
vs. startups can be better explained through the
reputation barriers that they face in the US and their
marketing ability to overcome such barriers.
In the high-concentration sub-regime, industry
brand equity has a significant impact on the proba-
bility of acquisition and its effect size is the biggest
across all split-sample models. This result suggests
that acquisitions made in concentrated industries are
3
We thank an anonymous reviewer for bringing this issue to
our attention.
 S.-F.S. Chen, M. Zeng / Intern. J. of Research in Marketing 21 (2004) 123–136 133

Table 3
Parameter estimate for split models (1 = acquisitions)
Variables (Expected sign) High-Grow Low-Grow High-Con Low-Con
Industry advertising intensity (+)  0.15e  05 (  0.79) 0.63e  05 (2.50)a  0.14e  05 (  0.63) 0.26e  05 (1.70)b
Industry brand equity deviation (+) 0.49e  01 (1.70)b 0.66e  01 (2.77)a 0.97e  01 (2.81)a 0.50e  01 (2.20)b
Industry shipment to consumers (+) 0.84e  03 (0.87)  0.18e  03 (  0.26) 0.33e  03 (0.39)  0.10e  03 (  1.09)
Parents’ US advertising  0.46e  05 (  0.82)  0.70e  04 (  1.79)b  0.84e  05 (  1.67)b  0.48e  04 (  1.57)c
spending (  )
Parents’ home advertising 0.80e  06 (0.08) 0.85e  06 (0.10) 0.16e  04 (1.17) 0.88e  05 (1.03)
spending (  )
Industry R&D intensity (+) 0.81e  05 (2.04)b 0.68e  06 (0.15) 0.76e  05 (1.75)b  0.72e  05 (  1.10)
Parents’ R&D intensity (  )  0.45e  03 (  1.25)  0.83e  04 (  0.22)  0.15e  02 (  1.83)b  0.22e  03 (  0.83)
Industry concentration (  ) 0.49e  04 (0.12)  0.11e  02 (  2.58)a  0.36e  03 (  0.73) 0.10e  02 (0.97)
Relatedness of US affiliates (  )  0.97 (  1.25)  1.08 (  1.67)b  0.03 (  0.03)  1.68 (  2.67)a
Industry growth deviation (+) 0.54e  02 (0.25) 0.23e  01 (0.53) 0.03 (0.81) 0.03 (1.11)
Intercept 0.28 (0.30) 0.36 (0.51)  1.18 (  0.87) 0.46 (0.62)
Pseudo R-Square 0.14 0.28 0.25 0.21
Model Chi-Square 15.87c 53.92a 26.78a 40.57a
% of Correct Prediction 62% (50%) 70% (52%) 77% (56%) 67% (50%)
(Base Percentage)
No. of observations (acquisitions) 106 (49) 163 (65) 93 (31) 176 (83)
Parentheses: t-statistics.
a
p < 0.1 (one-tailed).
b
p < 0.05 (one-tailed).
c
p < 0.01 (one-tailed).

most likely to be motivated by access to reputable
brands. In the low-concentration sub-sample, both
industry advertising intensity and industry brand
equity carry a significant coefficient, which implies
that acquisitions made in fragmented industries can be
motivated by access to reputable brands as well as
culture-specific advertising expertise. Regardless of
industry concentration, parents’ US advertising
spending reduces the probability of acquisition in
both sub-regimes, although its effect size is bigger
in concentrated than in fragmented sectors.
Such interaction effects are also observable among
other control variables. For example, while industry
R&D intensity does not affect the choice of acquis-
itions vs. startups in the full-sample models, it carries
a significant coefficient in high-growth and high-
concentration sub-regimes. This means that acquisi-
tions made in concentrated and fast-growing indus-
tries are also motivated by access to proprietary
technology controlled by the target firms. While
parents’ R&D intensity carries a significant coefficient
in all full-sample models, it reduces the probability of
acquisition only in the high-concentration model. In
other words, Japanese investors start up new ventures
to exploit technological advantages only in concen-
trated industries. Furthermore, industry concentration
carries a significant coefficient only in the low-growth
sub-regime, which suggests that market power con-
centration is more of a regulatory concern in mature
industries. Last, relatedness of US affiliates discour-
ages Japanese investors from acquiring US firms in
mature and fragmented sectors, implying that acquis-
itions made in fast-growing and concentrated indus-
tries are not motivated by access to industry
knowledge.
6. Conclusion
Previous studies either overlook the impact of
marketing factors on MNEs’ entry strategies into
foreign markets or take a one-sided approach to
predict the choice of acquisitions vs. startups. A
one-sided approach does not distinguish between
industry-specific reputation barriers and firm-specific
marketing ability, which in turn leads to the use of a
single variable to capture the impact of all marketing
factors on international acquisitions. As a result,
extant findings do not provide conclusive evidence
to support the postulation that MNEs choose acquis-
134 S.-F.S. Chen, M. Zeng / Intern. J. of Research in Marketing 21 (2004) 123–136
itions over greenfield investments to overcome repu-
tation barriers abroad.
This study addresses these conceptual and meth-
odological limitations. We argue that the strategy
adopted by MNEs to enter a foreign market depends
in part on the reputation barriers that they face in the
target industry and their ability to overcome such
entry barriers. We compile a vector of marketing
variables that distinguish between industry-specific
reputation barriers and firm-specific advertising out-
lays to analyze Japanese investors’ choice of acquis-
itions vs. startups in the US. Our results show that
Japanese investors facing higher reputation barriers in
the US industry entered are more inclined to take over
existing firms, whereas those spending more on ad-
vertising prior to an entry are more likely to start up
new ventures. These findings, however, vary across
sub-samples that represent low- vs. high-growth in-
dustries and fragmented vs. concentrated sectors.
We also classify Japanese investors’ advertising
spending into two categories, namely, their advertis-
ing outlays at home and the advertising investments
they made in the US. Our results reveal that Japanese
investors who spent more on advertising in the host
market prior to an entry are less likely to choose
acquisitions over startups, but those who spent more
on advertising at home do not show a weaker pro-
pensity to enter through acquisitions. These findings
suggest that Japanese investors have difficulties trans-
ferring their marketing assets created from operating
an advertising-intensive business at home to the US
for exploitation, a finding that is consistent with the
traditional argument that marketing capabilities are
culture-specific and thus cannot easily be transferred
across borders (Kale, 1991; Mueller, 1991).
While the impacts of our control variables on the
probability of acquisitions are consistent with previ-
ous results, the full-sample models do not confirm
previous findings that Japanese investors are more
likely to acquire existing US firms to enter R&D-
intensive industries (Hennart & Park, 1993; Kogut &
Chang, 1991). This study differs from former ones in
that it has included a vector of marketing variables to
predict the choice of acquisitions vs. startups. It is
possible that earlier studies might have attributed the
choice of acquisitions to technological factors, where-
as the real motives are access to reputable brands and/
or culture-specific marketing capabilities.
Incorporating a new dimension into the studies of
entry mode choices (i.e., reputation barriers across
national borders), the study also calls for more re-
search to analyze international acquisitions. Indeed,
the choice of acquisitions vs. startups can be driven by
a wide variety of economic and strategic reasons, and
some of them are still missing in this study (e.g.,
parents’ financial strengths or their previous experi-
ence with certain entry mode). As shown in this study,
the inclusion of marketing variables in our analysis
has negated previous findings that MNEs are more
likely to enter R&D-intensive foreign industries
through acquisitions. By the same token, the inclusion
of other variables might nullify our findings as to the
impact of marketing variables on the probability of
acquisition. Our results thus suggest that more work is
needed to fully understand the complexity of interna-
tional acquisitions.
Acknowledgements
We are indebted to Jean-Francois Hennart for
access to the data on Japanese investments. We also
thank seminar participants at Kansas State University,
National Taiwan University, St. Louis University, and
the Academy of International Business Meeting for
useful comments, and Hubert Gatignon and two IJRM
reviewers for valuable suggestions.
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