International Business Review 7 (1998) 203–230

An analysis of motives for western FDI inTurkey

Ekrem Tatoglua,b, Keith W. Glaisterb,*

aUniversity of Adnan Menderes, Aydin, TurkeybLeeds University Business School, University of Leeds, 11 Bleinheim Terrace, Leeds LS2 9JT, UK

Abstract

The factors which motivate Western MNEs to engage in FDI in Turkey by means of bothwholly-owned subsidiaries and joint ventures are investigated for a sample of 98 firms. Thehighest ranked motives for FDI in Turkey are principally concerned with gaining a presencein new markets and enabling faster market entry. A parsimonious set of motives for the samplestudied is provided by means of factor analysis. Hypotheses are tested on the relationshipbetween the relative importance of motives and a number of characteristics of the sample.The relative importance of the motives is found not to vary with ownership pattern (wholly-owned subsidiary or joint venture), to vary to a moderate extent with the country of origin ofthe investment and the mode of entry (acquisition or greenfield), and to vary most with sizeof the investment and industry of the investment. 1998 Elsevier Science Ltd. All rightsreserved.

Keywords:Turkey; Western MNEs; Foreign direct investment; Motives

1. Introduction

One of the most notable developments of the 1990s has been observed in thenumber of emerging opportunities and challenges for cross-border direct investmentsand cooperative ventures (Dunning, 1993a). FDI has been of growing importance tothe economies of both developed and developing countries. According to the World

* Corresponding author. Keith W. Glaister Tel.: 0113-2332633; fax: 0113-2332640;e-mail: kwg@lubs.ac.uk

0969-5931/98/$19.00 1998 Elsevier Science Ltd. All rights reserved.PII: S0969 -5931(98)00006-7

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Investment Report prepared by the UNCTAD in 1995, the estimated outward FDIstock reached $2.6 trillion in 1995 with its growth rate substantially exceeding thatof world output (GDP) and world exports (UNCTAD, 1995). The value of FDIinflows to developing countries, however, has been increasing at a much higher ratethan FDI inflows to developed countries. This widening imbalance appears to bean indication of the increasing attractiveness of developing countries as investmentlocations. In 1994, FDI inflows to developing countries reached a total of $84 billioncomprising around 40 per cent of all FDI inflows (UNCTAD, 1995). This is thecontinuation of a trend that began in 1990 and has driven developing countries tobecome a major force in world FDI. The success of the developing countries inattracting FDI is likely to be associated with an investment climate characterised bygrowing markets and increasingly liberal policy frameworks (Jun & Singh, 1996).

These global trends have also been observed at the country level in Turkey.Government policies in Turkey, particularly those implemented since the early 1980s,have been targeted at developing a free market economy in Turkey, and haveinvolved adopting a more outward-oriented export-led development strategy. Sig-nificant progress has been recorded in the liberalisation of trade and investment poli-cies and the pursuit of macro-economic stability and economic growth. This policyapproach has undoubtedly contributed to a substantial increase in FDI. Table 1 showsboth authorised and actual inflows of FDI to Turkey, together with the number offoreign equity ventures (FEVs) established during the period 1980–95. The numberof FEV formations reached a total of 2900, with the amount of cumulative FDI

Table 1Foreign direct investment (FDI) in Turkey, 1980–1995

Year Authorised FDI (US $ Number of firms Actual inflows of FDImillion) (cumulative) (million $)

1980 97.00 78 351981 337.51 109 1411982 167.00 147 1031983 102.74 166 871984 271.36 235 1621985 234.49 408 1581986 364.00 619 1701987 655.24 836 2391988 820.52 1172 4881989 1511.94 1525 8551990 1861.16 1856 10051991 1967.26 2123 10411992 1819.96 2330 12421993 2271.30 2554 10161994 1484.66 2830 8301995a 563.81 2900 –Total 14,529.95 2900 7572

Source: GDFI (1995).a As of 31 March 1995.

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totalling $7572 million as of the first quarter of 1995 (GDFI, 1995). The authoris-ations during this period accumulated to $14,529 million.

Turkey’s share of global FDI inflows compared with those of the newly emergingmarkets of the Far East and Latin America is relatively low, and constitutes about2 per cent of all FDI inflows to developing countries (OECD, 1995; Financial Times,1994). However, when Turkey’s efforts are evaluated from the perspectives of differ-ent time periods, its success in attracting FDI is quite remarkable. Prior to 1980,there were about 70 firms operating with foreign capital ownership. During the per-iods 1980–86 and 1987–95, however, the number of foreign equity venturesamounted to 529 and 2888, respectively, which reveals the success of measures toattract foreign investment.

Table 2 presents the distribution of FDI by country of origin. As is clear fromTable 2, foreign investments in Turkey are dominated by European countries, whichaccount for about 64 per cent of the total value of FDI. Among the European coun-tries, five EU countries, France, Germany, the Netherlands, the UK and Italyaccounted for about 82 per cent of the total European investments in Turkey. TheUSA (about 14 per cent) and Far Eastern countries (8.4 per cent) constitute thesecond and third largest. The Middle Eastern countries, however, comprise only3.6 per cent of the total FDI. With regard to sectoral breakdown of the actual inflowof FDI, the manufacturing sector accounts for about 57 per cent of the total withservices comprising nearly 41 per cent of the total.

Table 2Distribution of cumulative authorised FDI by country of origin as of 31 March 1995 ($ million)

Country Total %

European countries 9192.27 63.26France 2201.51 15.15Germany 1529.27 10.52Netherlands 1362.66 9.38Switzerland 1333.24 9.18UK 1246.45 8.58Italy 1120.25 7.71Other European 398.89 2.74

USA 2025.33 13.94Far Eastern countries 1219.78 8.40Japan 998.43 6.87South Korea 125.65 0.86Singapore 95.70 0.67

Middle Eastern countries 515.92 3.60Saudi Arabia 234.61 1.63Bahrain 110.81 0.78Iran 83.35 0.58Other Middle Eastern 87.15 0.61

Others 1576.59 10.80Grand total 14,529.89 100.00

Source: GDFI (1995).

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Despite the increasing importance of Western firms engaging in FDI, to date therehas been relatively little empirical work dealing specifically with the motives ofWestern MNEs that have invested in Turkey. In his study of 46 FDI firms in Turkey,Erdilek (1982) investigated the microeconomic causes and effects of FDI in Turkishmanufacturing in the early 1980s. He found that the most basic objective of foreigninvestors at that time was to meet domestic demand as they were guaranteed oligo-polistic, closed, sellers’ markets by the government, with no real concern forefficiency (Erdilek, 1982, p. 231). Using Turkey as a low cost export-base was theleast important motive for the firms in Erdilek’s study. In a more recent study Demir-bag, Mirza & Weir (1995) analysed the dynamics of manufacturing joint venturesin Turkey based on a survey of 47 multinational parent firms with particular attentionpaid to motivations for joint ventures. Demirbag, Mirza & Weir (1995, p. 40) foundthat some of the most frequently cited motives by the foreign investors were “toacquire a direct share in the local market”, “to establish a local identity”, and “toensure good quality production”. The basic purpose of this paper is to build on therelatively few studies of FDI in Turkey and present new data and new empiricalinsights into the factors which motivate Western multinationals to engage in equityventure formation in Turkey. The paper considers investment both in wholly-ownedsubsidiaries (WOS) and joint ventures (JVs).

The rest of the paper is set out as follows. The next section reviews the literaturerelating to the theories of FDI which seek to explain the underlying motives ofmultinational investors, and sets out the research hypotheses of the study. Followingthat is the methodology for the study and the characteristics of the sample reported.The fourth section presents the results and discussion. A summary and implicationsare in the last section.

2. Theoretical background and hypotheses development

Recent reviews of general taxonomies and perspectives on the extant theoreticalliterature to explain the level and pattern of FDI or MNE activity can be found inDunning (1993b), Buckley & Casson (1985), Cantwell (1991) and Grosse andBehrman (1992). These theoretical perspectives range from the mainstream economictheories (Hymer, 1960, 1976; Kindleberger, 1969; Vernon, 1966; Caves, 1971),internalisation models (Buckley & Casson, 1976, 1985; Rugman, 1981) to Dunning’seclectic paradigm (Dunning, 1988a, b, 1993b).

Hymer (1960, 1976) was the first to develop a fully coherent approach and theoryin the field of foreign direct investment (Calvet, 1981). Hymer’s basic argument wasrooted in industrial organisation theory focusing on a firm’s behaviour vis-a´-vis itscompetitors. Drawing heavily on the work of Bain (1956), Hymer (1960, 1976) chal-lenged the assumption of the model of perfect competition and focused on a firm’sability to hinder competition in a market. His views then formed the basis of Kindleb-erger’s (1969) ‘market imperfections model’ which postulates that for direct invest-ment to thrive, two conditions must be fulfilled: (1) the MNE must possess firm-specific advantages that outweigh the disadvantages of being a foreign firm, and (2)

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the market for these advantages must be imperfect. Some of these market imperfec-tions that always lead to the development of MNEs include knowledge advantages,distribution networks, economies of scale, and product differentiation.

In the mid-1970s there were some attempts by economists to offer generalisedexplanations of international production with the most prominent of these beinginternalisation theory and the eclectic paradigm (Dunning, 1993a). The genesis ofinternalisation theory dates back to Coase (1937), whose work was later extendedby Williamson (1975, 1985). The internalisation model is based on transactionalmarket imperfections and delineates an extension internationally of transaction costeconomics explanations of the boundaries of the firm (Buckley & Casson, 1976;Rugman, 1981; Hennart, 1982). The central theme of internalisation theory is con-cerned with explaining why the cross-border transactions of intermediate productsare organised by hierarchies rather than determined by market forces. According tointernalisation researchers market failures, stemming from the existence of trans-action costs, are the main reason for the MNE’s decision to internalise its foreignmarkets by means of FDI compared with market contracts such as licensing. AnMNE internalises its foreign markets up to the point where the benefits of furtherinternalisation are outweighed by the costs (Buckley, 1988).

Dunning’s eclectic paradigm also sets out a holistic approach to explain the leveland pattern of international production (Dunning, 1988a, b). By recognising theimportance of both structural and transaction cost imperfections for MNE activityhe adds ‘ownership advantages’ to the location and internalisation advantages thatwere already suggested by internalisation theory. Dunning’s approach consists of anattempt to analyse the ‘who’, ‘where’ and ‘why’ of FDI activity in terms of owner-ship, location and internalisation advantages (OLI). Ownership advantages are thosethat are specific to a particular firm and that enable it to take advantage of investmentopportunities abroad. Locational advantages are those advantages specific to a coun-try which dictate the choice of production site. Internalisation advantages determinewhether foreign production will be organised through markets (licensing) or hier-archies (FDI). Dunning (1993b, p. 76), however, stresses that the eclectic paradigmis not a theory of MNE or FDI per se, but rather an organisational framework forexamining the activities of enterprises engaging in cross-border activities.

This paper is concerned with the motives of Western MNEs for engaging in FDIoperations in Turkey. Although the theories on FDI present a much broader set ofmotives for FDI ranging mainly from location-specific motives, firm-related factorsto transaction-related motives, this study specifically deals with a rather narrowersegment of overall FDI motives focusing mainly on transaction-related and firm-specific motives.1 The detailed analysis of location-specific factors that providemotivation for Western MNEs engaging in FDI in Turkey have been examined else-where (Tatoglu & Glaister, 1998). For the purposes of this study the identified

1 An extensive review of the literature relating to recent field surveys conducted on the motives anddeterminants of outbound and inbound FDI/MNE activity can be found in Dunning (1993b, Ch. 6).

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motives principally deal with factors concerning transaction costs and strategy-related aspects of the investment.

The literature gives little indication a priori of what to expect in terms of therelative importance of a set of motivating factors for FDI activity. It may be conjec-tured, however, that the relative importance of the motives would vary with theunderlying key characteristics of the sample. For the purposes of this study thesecharacteristics have been identified as ownership pattern of the investment, the modeof market entry, the country of origin, the sector of the investment, and the size ofthe investment.

2.1. Ownership pattern

The MNE’s choice of an entry mode into a foreign market has become a frontierissue in the area of international business (Wind & Perlmutter, 1977; Anderson &Gatignon, 1986; Hill, Hwang & Kim, 1990) and an immense body of literature hasemerged on international entry mode research (Davidson & McFetridge, 1985; And-erson & Gatignon, 1986; Kogut & Singh, 1988; Gatignon & Anderson, 1988, Agar-wal & Ramaswami, 1992; Kim & Hwang, 1992; Erramilli & Rao, 1993; Brouthers,Brouthers & Werner, 1996). While modes of foreign market entry include severalforms, the four most common modes are exporting, licensing, equity joint venture(EJV) and wholly-owned subsidiary (WOS). Each of these modes are characterisedby varying levels of resource commitments and control. This study focuses on thechoice between EJVs and WOSs, which can be considered as the modes involvinghigher resource commitment and higher control (Hill et al., 1990). What determinesan MNE’s choice between EJVs and WOSs is central to any FDI/MNE theory andas such has elicited several empirical tests mainly based on internalisation modelsusing transaction cost logic (Gatignon & Anderson, 1988; Kogut & Singh, 1988;Gomes-Casseres, 1989; Hennart, 1991; Larimo, 1993; Agarwal, 1994; Bell, 1996).Although previous studies have identified a number of factors that influence theMNEs’ choice of ownership structure of their foreign subsidiaries, Dunning (1988a,b, 1993a), by integrating the existing theoretical perspectives on MNE/FDI activity,proposed a framework which deals with the firm’s choice of various ownership pat-terns and non-equity market entry modes. Dunning’s eclectic paradigm stipulatesthat firms will choose the most appropriate form of entry into international marketsby considering their ownership advantages, the location advantages of the host coun-try, and the internalisation advantages of integrating transactions within the firm. Onthe basis of this discussion we expect that:

H1: The relative importance of motives will vary with the ownership pattern ofthe equity venture (i.e. WOS or JV).

2.2. Mode of market entry

A firm, which decides to enter a foreign market either by full or shared ownershipof its venture, must also determine whether to acquire an existing local firm

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(acquisition) or to set up a new venture (greenfield investment). Compared withresearch on the MNEs’ choice of ownership of foreign ventures, there has beenlimited empirical work on the determinants of the choice between acquisitions andgreenfield investments (Caves & Mehra, 1986; Kogut & Singh, 1988; Hennart &Park, 1993; Padmanabhan & Cho, 1995; Hennart & Reddy, 1997). The prior litera-ture has identified a number of significant variables which discriminate betweenacquisitions and greenfield investments, in particular the size of the parent firm(Caves & Mehra, 1986; Kogut & Singh, 1988), multinational experience of the parentfirm (Kogut & Singh, 1988; Hennart & Park, 1993; Hennart & Reddy, 1997),research and development intensity of the parent firm (Kogut & Singh, 1988; Hen-nart & Park, 1993; Padmanabhan & Cho, 1995), relative size of the investment(Caves & Mehra, 1986; Hennart & Park, 1993; Padmanabhan & Cho, 1995), andcultural distance (Kogut & Singh, 1988). Thus, it would be expected that motiveswould vary with the market entry mode, which is reflected in the second hypothesis:

H2: The relative importance of motives will vary with the market entry mode(i.e. acquisition or greenfield).

2.3. Country of origin

Dunning’s eclectic paradigm (Dunning, 1988a, b, 1993a) posits that the patternof foreign direct investment may vary with the country of origin of the investingfirm. As firms in a particular country may possess some specific advantages emanat-ing from the nature of their domestic market, they will exploit foreign marketsactively using these ownership advantages. These firms may then utilise these advan-tages in conjuction with location-specific endowments present in the host country.In their empirical study Schroath, Hu and Chen (1993) investigated the existence ofcountry of origin effects on foreign investment activities in China using Dunning’seclectic paradigm. They identified two areas, location and industry factors, wherethey thought the effect of country of origin might manifest itself. Empirical findingsof their study largely supported their hypotheses about the presence of country oforigin effects for FDI activity in China. This leads to the study’s third hypothesis:

H3: The relative importance of motives will vary with the country of origin.

2.4. Sector of the investment

Although the theories of foreign direct investment and the multinational enterprisewere originally developed to explain foreign production, the applicability of MNEdefinitions, measurements and extant FDI theories to international services is receiv-ing growing research attention. Dunning (1989) reviews the conceptual and theoreti-cal issues in applying the eclectic paradigm of international production to explainthe MNE activity in service industries. Boddewyn, Halbrich & Perry (1986) arguethat while there is no need to develop special FDI-MNE theories for internationalservice firms, particular attention must be paid to their application due to the idiosyn-

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cratic characteristics of service industries. In fact, efforts have recently been madeto apply extant theories of international production to several international serviceindustries, including banking (Gray & Gray, 1981; Sabi, 1988), the hotel industry(Dunning & McQuenn, 1982; Dunning & Kundu, 1995), the advertising industry(Terpstra & Yu, 1988), the leasing industry (Agarwal & Ramaswami, 1992) and arange of business services (Li & Guisinger, 1992). This paper attempts to identifyand compare the relative importance of the motives for equity investments in both themanufacturing and service sectors. In particular the study seeks to identify whether ornot there are distinctive motivational characteristics of service-producing WesternMNEs compared with goods-producing Western MNEs in their decision to formequity ventures in Turkey. This leads to the fourth hypothesis:

H4: The relative importance of motives will vary with the industry of the equ-ity venture.

2.5. Size of the investment

Launching a sizable operation abroad demands a high resource commitment thatoccurs in the form of substantial infusions of capital and managerial resources. Priorto embarking on a large scale resource commitment, MNEs must carefully considerthe potential costs and returns of such investment. The size of the investment maybe expected to be influenced by the motives of MNEs that engage in FDI. Thisreasoning leads to the last hypothesis:

H5: The relative importance of motives will vary with the size of the equityventure investment.

3. Research methods and sample characteristics

The data were gathered via a cross-sectional mail survey using a questionnaire.The questionnaire presented a list of 13 motives which were derived from the priorliterature and discussions based on semi-structured interviews with the senior man-agers from three UK firms involved in equity venture operations in Turkey. The 13motives in the order they appeared on the questionnaire are shown in Table 3.

The questions relating to motives were ex post measures of foreign parent man-agers’ perceptions of the relative importance of the motives at the time of the FDIdecision. Respondents were asked: ‘Howimportant were the following motives inyour decision to establish an equity venture in Turkey?’ Responses were assessedusing five-point scales (i.e. 1= of no importance, 5= of major importance).

This study involves European and USA foreign multinational parent firms thathave shared or wholly-owned equity ventures in Turkey. All foreign equity venturesoperating in Turkey are recorded by a government agency, the General Directorateof Foreign Investment (GDFI).2 The sampling frame, the GDFI database, represents

2 The GDFI acts as a one-stop agency for implementing the regulations concerning foreign investment.It advises and assists foreign investors, receives and processes investment applications, and reviews andapproves license, royalty and management contracts.

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Table 3Motivation for FEV formation in Turkey: motives listed by order of appearance on the questionnaire

(1) Economies of scale: increased volume lowers unit cost(2) Better resource and capacity usage(3) Exclusive or favoured access to inputs(4) To gain presence in new markets(5) Enabling faster entry to market(6) Enabling faster payback on the investment(7) To conform to Turkish Government policy(8) Cost of making and enforcing contracts(9) Avoiding the risk of dissipation of knowledge(10) Maintaining an adequate quality control(11) Lack of patent and license protection laws(12) Non-transferrability of technology by licensing and patents(13) Potential difficulties and problems with agents or licensees

the overall population of FDI and provides information about the sector of operation,the name of the foreign parent, country of origin, the formation type of the company,total paid-in capital, proportion of foreign equity shareholding, location of the invest-ment and entry date.

A purposive sample of foreign equity ventures for the study was drawn from theoverall population of 2888 FEVs operating as of 22 March 1995 on the basis of thefollowing selection criteria: (1) having partners from Europe and the USA; (2) pro-portion of foreign equity shareholding of more than 10 per cent; (3) having only oneforeign parent firm; (4) capital value of more than one billion Turkish lira. Some ofthe identified ventures were owned by a single foreign firm. While data on each ofthese equity ventures would have enriched the survey, it was not considered feasibleto administer a questionnaire for each FEV recorded for multi-venture foreign parentfirms. Hence, it was decided to investigate only one equity-venture for each of themulti-venture foreign investors. For these firms the equity-venture was the one mostrecently established. Omitting those FEVs that did not meet the above requirementsleft a sample frame of 316 FEVs. The names and contact addresses ofCEOs/Presidents of each foreign partner were compiled from a number of businessdirectories (Dun and Bradstreet Europa, 1996; Dun and Bradstreet, Million DollarDirectory, America’s Leading Public and Private Companies: Top 50,000, 1994; CBIUK Kompass, 1995). To ensure good quality responses, a ‘warm-up’ letter was sentto 316 CEOs/Presidents of the foreign multinational companies prior to the mailingof the survey questionnaire. This letter identified the researcher, explained theresearch purpose and assured confidentiality. It also requested the name of the execu-tive in charge of the company’s Turkish operations. Of the 316 companies mailed,22 refused to participate in the survey stating the confidential nature of information;13 indicated that they had already either terminated or liquidated the equity ventureoperation; 7 stated that they had no subsidiaries or shared-equity investments inTurkey; 5 were returned as address unknown. In June 1996, a total of 269 mailquestionnaires with return envelopes were mailed to the senior executives indicated

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as being in charge of Turkish operations. After one reminder and subsequent follow-up phone calls and faxes, 98 usable questionnaires were returned, a response rate of36.4 per cent.

The sample is composed of 98 foreign equity ventures. The FEVs with foreignequity shareholding of more than 90 per cent were considered as wholly-owned sub-sidiaries (WOSs) with the remainder as joint ventures (JVs). Of this sample, 59 areWOSs and 39 are JVs. Regarding the mode of market entry adopted by the foreignfirm in the formation stage of FEV, 76 (76.3 per cent) of the total FEVs were estab-lished by setting up new ventures (greenfield investments) and the remaining 22(23.7 per cent) were formed by full or partial take-over of existing local firms. Thetime dimension of the study runs from 1954 to 1994 with just about 67 per cent ofthe ventures established in the period 1987–94, 13 per cent formed in the period1980–86, and the remaining 20 per cent formed prior to 1980.3 The characteristicsof the sample are summarised in Table 4.4

The overall sample of FEVs was partitioned into two groups with regard to thecountry of origin of the investment. The first group consisted of FEVs establishedby firms from the USA and the UK (51.2 per cent of the total), the second groupincluded FEVs established by continental European firms (48.8 per cent). The samplewas partitioned, therefore, according to the geographical proximity of the foreignfirms to the Turkish market and the relatively similar business orientations of thefirms in each group of countries stemming mainly from political, institutional andcultural factors. In this sense the UK-based firms are considered as adhering moreto Anglo-American business practices than are other Western European firms despitethe fact that the UK is an important member of European Union (EU) with its econ-omy being closely tied to the EU.

The GDFI database provides data concerning the amount of total paid-in capitalof the FEVs. Since the capital value of the FEV is stated in Turkish lira, it may besubject to the criticism of the under-valuation of the firm resulting from the use ofhistoric cost accounting principles in Turkey. The country has experienced a highrate of inflation since the 1970s, and company statements in general do not reflectthe real financial status of the firms. Hence, the data on the size of the FEV wasobtained by asking the respondents the approximate value of their ventures’ sales inUS dollars. Since there is no commonly accepted standard measure of sales valueto describe the firm size as small, medium or large, this has been made rather tenta-tively by classifying the FEVs with respect to their annual sales figures. The follow-ing classification of the annual sales values was assigned for practical reasons: (1)FEVs whose annual sales are equal to or less than 10 million dollars (34.7 per centof the total); (2) sales value equal to or less than 50 million dollars and greater than

3 To test whether there exist significant differences in the relative importance of the motives by thetime period of FEV formation, FEVs are grouped into three categories: prior to 1980, 1980–86, and 1987–94. One-way ANOVA results show that there were no significant differences in the relative importanceof the motives across the distinct time periods.

4 Categorisation figures for nationality of foreign partner and industry of FEV, as shown in Table 4,conform to the figures of actual FDI provided by the GDFI database.

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Table 4Characteristics of the sample

n % n %

Ownership pattern of FEV: Market entry mode of FEV:WOS 59 39.8 Greenfield 76 76.3JV 39 60.2 Acquisition 22 23.7

Time period of formation: Annual sales of FEV ($):Prior to 1980 19 19.4 0–10 million 34 34.71980–86 13 13.3 10.1–50 million 36 36.71987–94 66 67.3 Above 50 million 28 28.6

Industry of FEV: Country of origin:Auto, transport and related equip. 13 13.3 USA 32 32.7Electronics and electrical 9 9.2 UK 18 18.4machineryFood/drink manufacturing 5 5.1 Germany 16 16.3Chemicals 15 15.3 France 6 6.1Textile, apparel and leather 3 3.1 Netherlands 5 5.1Computer and software 5 5.1 Italy 5 5.1Metal, iron and steel 6 6.1 Switzerland 5 5.1Other manufacturing 11 11.2 Sweden 4 4.1Export–import trading 11 11.2 Belgium 2 2.0Tourism 2 2.0 Denmark 2 2.0Financial services 7 7.1 Norway 1 1.0Construction services 2 2.0 Finland 1 1.0Transport 3 3.1 Austria 1 1.0Consultancy 3 3.1Other services 3 3.1

Total 98 100 98 100

10 million dollars (36.7 per cent); (3) FEVs whose sales are more than 50 milliondollars (28.6 per cent).

3.1. Statistical analysis

The hypotheses were tested by considering differences in means of the importanceof the motives to multinational parent firms. Given the relatively large sample sizeand the reasonable assumption that the sample is from a normal distribution, it wasappropriate to use parametric tests. The hypotheses H1 to H5, investigating the rela-tive importance of the motives by the characteristics of the sample, were thereforetested by implementing two samplet-tests or ANOVA as appropriate. The non-parametric equivalent of the above tests (Mann–Whitney U and the Kruskal–WallisTest) were also conducted to remove any doubts that may stem from the nature ofthe data. The non-parametric tests (not reported here) confirmed the findings of theparametric tests.

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4. Results and discussion

4.1. Motivation

The rank order of the motivations for foreign equity venture formation based onthe mean measure of the importance of the 13 motives is shown in Table 5. Scoresare significantly different on the Friedman two-way ANOVA test (p , 0.001). Forthe full set of FEVs, the median measure is exceeded by four motives: ‘to gainpresence in new markets’ (4.09), ‘enabling faster market entry’ (4.00), ‘maintainingan adequate quality control’ (3.30), and ‘enabling faster payback on the investment’(3.01). It is clear from Table 4 that the highest ranked motives for FDI in Turkey areprincipally concerned with market development and relative competitive positions innew markets which can be clearly associated with a market-seeking type of FDIactivity (Dunning, 1993b, p. 144).

The second group of motives (those ranked 5–8) are concerned with endeavoursto reduce costs and risks: ‘economies of scale’ (2.76), ‘better resource and capacityusage’ (2.66), ‘potential difficulties and problems with agents or licensees’ (2.56),and ‘avoiding the risk of dissipation of knowledge’ (2.53), with the latter two motivesbeing particularly associated with reducing the transaction costs of engaging in theTurkish market.

The third and lowest ranked group (9–13) consist of a number of distinct motives.The motive to form an equity venture ‘to conform to Turkish Government policy’(2.48) is not seen an important driving force. Similarly the motive of ‘exclusive orfavoured access to inputs’ (2.49) does not feature as being important. Transaction

Table 5Relative importance of motives for FEV formation in Turkey

Motivation Rank Mean SD

To gain presence in new markets 1 4.09 1.16Enabling faster market entry 2 4.00 1.13Maintaining an adequate quality control 3 3.30 1.23Enabling faster payback on the investment 4 3.01 1.07Economies of scale: increased volume lowers unit cost 5 2.76 1.25Better resource and capacity usage 6 2.66 1.21Potential difficulties and problems with agents or licensees 7 2.56 1.26Avoiding the risk of dissipation of knowledge 8 2.53 1.12Exclusive or favoured access to inputs 9 2.49 1.21To conform to Turkish Government policy 10 2.48 1.28Cost of making and enforcing contracts 11 2.42 1.27Lack of patent and license protection laws 12 2.11 1.06Non-transferrability of technology by licensing and patents 13 2.06 0.97

N = 98The mean is the average on a scale of 1 (= of no importance) to 5 (= of major importance).SD = standard deviation.Scores are significantly different on the Friedman two-way ANOVA test (p , 0.001).

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cost-related motives of ‘cost of making and enforcing contracts’ (2.42), ‘lack ofpatent and license protection laws’ (2.11), and ‘non-transferrability of technology bylicensing and patents’ (2.06) are the lowest ranked motivating factors for this sampleof FEVs.

4.2. Factor analysis of FDI motivation

The correlation matrix of 13 FDI motives revealed a number of low to moderateintercorrelations between motives. Due to potential conceptual and statistical overlap,an attempt was made to identify a parsimonious set of variables to determine theunderlying primary dimensions governing the full set of 13 investment motives.Exploratory factor analysis using varimax rotation was used to extract the underlyingfactors. The motives with factor loadings greater than 0.4 were grouped for eachfactor derived. The factor analysis produced four underlying factors which makegood conceptual sense and explained a total of 69.3 per cent of the observed variance,as shown in Table 6. The four factors may be summarised as:transaction-specificcosts, production efficiency, market development, andquality control and financialviability.

Table 6Factors of motivation

Factors Factor loads Eigenvalue % Variance Cumulative %explained

Factor 1: Transaction-specific costs 4.72 36.3 36.3Non-transferrability of technology by 0.83licensing and patentsLack of patent and license protection laws 0.77Potential difficulties and problems with 0.70agents or licenseesAvoiding the risk of dissipation of knowledge 0.66Cost of making and enforcing contracts 0.64To conform to Turkish Government policy 0.49Factor 2: Production efficiency 1.96 15.1 51.3Economies of scale: increased volume lowers 0.89unit costBetter resource and capacity usage 0.86Exclusive or favoured access to inputs 0.77Factor 3: Market development 1.33 10.2 61.6To gain presence in new markets 0.90Enabling faster entry to market 0.88Factor 4: Quality control and financial 1.01 7.7 69.3viabilityMaintaining an adequate quality control 0.71Enabling faster payback on the investment 0.61

Principal components factor analysis with varimax rotation.K-M-O Measure of Sampling Adequacy= 0.7588.Bartlett Test of Sphericity= 571.282;p , 0.0000.

216 E. Tatoglu, K.W. Glaister / International Business Review 7 (1998) 203–230T

able

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otiv

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217E. Tatoglu, K.W. Glaister / International Business Review 7 (1998) 203–230T

able

7(C

ontin

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ners

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cqui

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mea

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rth

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fact

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ean

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the

indi

vidu

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aver

age

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218 E. Tatoglu, K.W. Glaister / International Business Review 7 (1998) 203–230

To further investigate the underlying nature and pattern of the investment motivesfor this sample of foreign equity ventures, the analysis was developed by consideringthe motives in terms of the characteristics of the sample. For each of the relevantcharacteristics of the sample under consideration, Table 7 Table 8 Table 9 show themeans and standard deviations of the four factors and the individual motives consti-tuting each factor and the appropriate test statistic for comparing differences inmean scores.

4.3. Motivation and ownership pattern of FEV

Table 7 shows that there is no support for H1 in that the relative importance ofthe investment motives hardly varies between the ownership patterns (WOS or JV)of FEVs. First, testing H1 for each of the four factors, Table 7 shows that the hypoth-esis can be rejected; the relative importance of the factors do not vary with theownership pattern of equity ventures. Second, testing H1 for each of the individualmotives shows that the hypothesis can be rejected except for the motives of avoidingthe risk of dissipation of knowledge (p , 0.1), cost of making and enforcing contracts(p , 0.05), maintaining an adequate quality control (p , 0.1), and enabling fasterpayback on the investment (p , 0.1), where the relative importance of all four itemsis found to vary between ownership pattern of FEVs and the mean score of impor-tance is higher and significantly different for WOSs compared to JVs.

It is clear that the relative importance of identified factors and the majority of theindividual motives do not vary with ownership pattern. It would appear reasonableto argue, therefore, that the choice of organisation form of WOS or JV is independentof the FDI-specific motives in the case of Western MNEs investing in Turkey. It ishowever possible to comment on why the investment motives of avoiding the riskof dissipation of knowledge, cost of making and enforcing contracts and maintainingan adequate quality control do appear to vary with ownership pattern. A firm’s choicebetween a wholly-owned subsidiary and an equity joint venture depends partly onthe costs and benefits of each form of ownership mode. Although joint ventures havea number of potential advantages and are considered as alternatives to sole ownershipof foreign affiliates (Hennart, 1991; Contractor & Lorange, 1988), these benefits aresometimes outweighed due to existence of high transaction and organisation costsof joint ventures (Gomes-Casseres, 1989). Western MNEs appear to find that main-taining quality and firm-specific advantages such as proprietary knowledge, productsand processes are better internalised and thereby protected by having the full owner-ship of assets (Gatignon & Anderson, 1988). Moreover, the costs of negotiating,monitoring and enforcing contracts may be less than the costs of managing a jointventure when conflicts occur between the partners. A significant and relatively highermean value of the relative importance of the motive of enabling faster payback onthe investment for WOSs compared to JVs can be partially explained by greaterfinancial and management commitment and associated risks with establishing aWOS.

219E. Tatoglu, K.W. Glaister / International Business Review 7 (1998) 203–230

4.4. Motivation and mode of entry

Table 7 shows that there is relatively weak support for H2, in that for only oneof the four factors—market development(p , 0.1)—is there a significant differencein the mean of the factor score, being significantly higher for acquisition mode com-pared with greenfield mode. One of the two individual motives comprising themarketdevelopmentfactor, i.e. enabling faster entry to market, has a mean score which issignificantly different (p , 0.1) with the motive being more important for foreigninvestors who prefered acquisition mode of market entry over greenfield equityinvestment. Table 7 also shows that while the individual motive of cost of makingand enforcing contracts is significantly (p , 0.1) more important for the multinationalfirms favouring the greenfield mode than for those favouring the acquisition mode,the mean score of the individual motive of exclusive or favoured access to inputsis significantly (p , 0.1) higher for the multinational firms favouring the acquisitionmode compared with those favouring the greenfield mode.

The finding that themarket developmentfactor and one of this factor’s constituentitems, together with the individual item of exclusive or favoured access to inputsare more important for acquisitions than for greenfield investments provides supportfor some of the advantages of acquisition mode (Buckley, 1987) which inter aliainclude a more rapid market entry and a potentially more favoured access to inputsthan a new start-up venture. The significantly higher importance of the cost of makingand enforcing contracts for greenfield mode could be partly explained by the inherentrisks and problems that may stem from the acquisition of an existing business or aplant. Hennart and Park (1993, p. 1056) argue that for foreign investors that havesome firm-specific advantages, greenfield investments are considered as the mostefficient way to transfer these advantages to foreign countries by making it possibleto install the firm’s managerial practices from the outset. In this respect greenfieldentry mode offers less risk in terms of organisational costs than acquisitions, sincea firm making an acquisition inherits the acquired firm’s personnel and companyculture (Jemison & Sitkin, 1986) rather than building its own workforce and com-pany-specific culture which can be achieved easily by a greenfield entry.

4.5. Motivation and country of origin of FEV

The strategic motivation for FEV formation by broad category of nationality offoreign firm is shown in Table 8. There is moderate support for H3, with the meanof the factor scores being significantly different for two of the four factors:pro-duction efficiency(p , 0.01) andquality control and financial viability(p , 0.1).While the mean score for the factor ofproduction efficiencyis higher for FEVsestablished by European firms, the mean score for the factor ofquality control andfinancial viability is higher for FEVs formed by the USA/UK firms. All three individ-ual motives constituting theproduction efficiencyfactor, i.e. economies of scale (p, 0.05), better resource and capacity usage (p , 0.05), and exclusive or favouredaccess to inputs (p , 0.1), have means significantly higher for FEVs formed byEuropean multinationals compared with FEVs formed by the USA/UK-based multi-

220 E. Tatoglu, K.W. Glaister / International Business Review 7 (1998) 203–230T

able

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221E. Tatoglu, K.W. Glaister / International Business Review 7 (1998) 203–230T

able

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mea

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sis

the

mea

nof

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fact

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em

ean

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indi

vidu

alm

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esis

the

aver

age

ona

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eof

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noim

port

ance

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5(

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orim

port

ance

).*p

,0.

1;**

p,

0.05

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*p,

0.01

.

222 E. Tatoglu, K.W. Glaister / International Business Review 7 (1998) 203–230

nationals. One of the two individual motives comprising thequality control andfinancial viability factor, i.e. maintaining an adequate quality control (p , 0.05), hasa mean significantly higher for FEVs established by the USA/UK firms comparedwith FEVs established by European firms.

The finding that theproduction efficiencyfactor and all three of this factor’s con-stituent items are more important for European multinationals than for the USA/UKmultinationals is not particularly surprising. Turkey has well-established political andeconomic links particularly through the EU of which it is an associate member. TheEU is Turkey’s largest export market and source of supply representing about 50 percent of Turkey’s exports and imports as of 1995 (OECD, 1996). In this respect theEU officials project that Turkey will be the EU’s seventh largest trading partner in1996, ahead of Poland and just behind Russia (Financial Times, 1996). As lured byTurkey’s growing market (5 per cent average growth rate between 1980 and 1995)with its consumption-prone population of more than 62 million, European companiesare quickly broadening their foothold in Turkey. Following Turkey’s accession tothe customs union with Europe in January 1996 a huge increase is expected in inwardFDI to Turkey by European MNEs (Tatoglu & Glaister, 1996). The union bringsTurkey into the Single European Market and will stimulate the structural transform-ation of the Turkish economy by strengthening competitive forces in the economyand modernising the country’s legal framework (e.g. intellectual property and compe-tition rules) through harmonisation with EU legislation (OECD, 1996). Turkey’s for-merly heavily protected markets are now virtually open following the abolition oftariffs and levies against goods from the EU. The larger European-based MNEs suchas AEG, Bosch and Electrolux currently prefer to supply the Turkish market fromtheir local manufacturing facilities by either expanding their production capacitiesor acquiring existing businesses (Financial Times, 1996). The existence of a largeTurkish population in continental Europe, for example, Germany, may also act as adriving force for European-based MNEs to invest in Turkey due to their long marketexperience with Turkish consumers living in Europe. In addition, there has been agrowing interest among Turkish companies to develop closer links usually with Euro-pean multinationals. They have already started establishing joint ventures with largeEuropean MNEs to obtain the necessary technology and know-how required foreffective competition with their Western counterparts. The finding of this study thatEuropean multinationals now consider the country as an attractive production baseis, therefore, unsurprising. This growing interest in local production appears to havemade European MNEs give more importance to the factors concerning the efficiencyof their production facilities in Turkey.

The finding that the factor ofquality control and financial viabilityis relativelymore important for the USA/UK firms compared to European firms may be a reflec-tion of the former group of firms being relatively less familiar with the economicand political conditions of the business environment in Turkey than their Europeancounterparts. The shareholder value orientation of Anglo-American firms may alsoexplain the USA/UK firms’ concern for the financial viability of their ventures.

223E. Tatoglu, K.W. Glaister / International Business Review 7 (1998) 203–230

4.6. Motivation and industry of the FEV

To facilitate the statistical testing of the motives, the industry of the FEVs wascategorised in the conventional way by distinguishing between the manufacturingand the service sectors in the following manner:

Manufacturing: auto, transport and related equipment; electronics and electricalmachinery; food/drink manufacturing; chemicals; textile, apparel and leather;computer and software; metal, iron and steel; other manufacturing.

Service: export–import trading; tourism; financial services; construction services;transport; consultancy; other services.

Table 8 shows that there is relatively moderate support for H4, in that for two ofthe four factors—transaction-specific costs(p , 0.05) andproduction efficiency(p, 0.1)—there is a significant difference in the mean of the factor scores, with themean scores of both factors being significantly higher for FEVs in the manufacturingsector compared with FEVs in the service sector. Three of the motives comprisingthe transaction-specific costsfactor, i.e. non-transferrability of technology by licens-ing and patents (p , 0.01), lack of patent and license protection laws (p , 0.01),and avoiding the risk of dissipation of knowledge (p , 0.05), have means signifi-cantly higher for FEVs in the manufacturing sector compared with FEVs in theservice sector. Two of the motives constituting theproduction efficiencyfactor, i.e.economies of scale (p , 0.01) and better resource and capacity usage (p , 0.05),have means significantly higher for FEVs in the manufacturing sector than for FEVsin the service sector. The mean for the motive of enabling faster payback on theinvestment is also significantly higher (p , 0.1) for FEVs in the manufacturingsector compared with FEVs in the service sector.

As noted above, for each of the motives that vary in importance with the industryof the FEV the motive is relatively more important for ventures in the manufacturingsector than for service sector ventures. For a majority of the motives this is notparticularly surprising. Thetransaction-specific costsand theproduction efficiencyfactors appear in principle to be a set of factors more pertinent to the manufacturingsector than to the service sector. While the concept of internalisation can be extendedto explain FDI activity in services (Boddewyn, Halbrich & Perry, 1986) the manufac-turing sector is more prone to market imperfections that generate transaction costsdue to its relatively high technology and R&D intensive nature. Moreover, the capitalintensive feature of most manufacturing industries tends to pose higher financial risksand may also entail foreign investors giving relatively more importance to theefficiency of production activities in terms of spreading high fixed costs (economiesof scale) and better resource and capacity usage.

4.7. Motivation and size of FEV

The motivation for FEV formation by size of FEV is shown in Table 9. As dis-cussed earlier, FEVs are judgementally classified into three different size groups withregard to their annual sales volumes stated in US dollars.

224 E. Tatoglu, K.W. Glaister / International Business Review 7 (1998) 203–230T

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226 E. Tatoglu, K.W. Glaister / International Business Review 7 (1998) 203–230

Table 9 shows there is reasonable support for H5, with the mean of the factorscores being significantly different for two of the four factors—transaction-specificcosts(p , 0.05) andquality control and financial viability(p , 0.1), with the meanscore for each factor being higher where the size of FEV is the largest in terms ofannual sales. Four of the six motives comprising thetransaction-specific costsfactor,i.e. non-transferrability of technology by licensing and patents (p , 0.01), lack ofpatent and license protection laws (p , 0.05), avoiding the risk of dissipation ofknowledge (p , 0.05) and to conform to Turkish government policy (p , 0.05),have means significantly different between size groups, with all motives being moreimportant for large size FEVs compared to small size FEVs. There are also significantdifferences in means for one of the motives constituting thequality control andfinancial viability factor—maintaining an adequate quality control (p , 0.05) andtwo individual motives, i.e. economies of scale (p , 0.05) and better resource andcapacity usage (p , 0.05), with all three of these motives being more important forlarge size FEVs than for small size FEVs.

It is clear that for each of the motives that vary in importance with the size ofthe FEV, the motive is relatively more important for large size FEVs than small sizeFEVs. In most cases this is not particularly surprising. In fact potential risks andtransaction costs such as protection of proprietary technology, management know-how and trade marks, which largely stem from imperfections in intangible assets,are likely to increase commensurate with the size of the equity investment.

5. Summary and implications

This paper is the first attempt to identify, classify and explain the key motives forFDI by Western MNEs in Turkey over a substantial period of time. Its use of arelatively large sample size strengthens the findings.

The paper identifies the main factors which motivate Western multinationals toengage in FDI in Turkey. Due to potential for conceptual and statistic overlap amongthe 13 identified motives, factor analysis was conducted to produce a parsimoniousset of distinct, non-overlapping factors which explained 69.3 per cent of the observedvariance in the sample data. To investigate the underlying nature and pattern of theinvestment motives for this sample of FEVs, the paper examined the motives acrossa range of sample characteristics: ownership pattern of the FEV, market entry mode,the country of origin of the FEV, the broad industry group of the FEV and the sizeof the FEV.

The study finds that the relative importance of the motives vary most with thesize and industry of the FEV, to a moderate extent with the country of origin of theFEV and also to a modest extent with the mode of entry (acquisition or greenfield).These findings provide some support for the major premises of the eclectic theorythat the pattern of foreign investment should vary by contextual or structural vari-ables as set out in the study’s hypotheses. However, the study found no significantdifference in the relative importance of the motives by the ownership pattern (WOSor JV) of FEV, a result that is at odds with the findings of earlier studies. While

227E. Tatoglu, K.W. Glaister / International Business Review 7 (1998) 203–230

the variation in importance of several of the motives appears to be readily justifiablethe reason for the variation in importance is not always clear. Further investigationof the relative importance of the FDI-specific factors across industries, in the contextof modes of market entry and various ownership patterns of equity ventures, and interms of the size of these ventures is called for.

This research has implications for both foreign investors and public policy makers.From the foreign investor’s perspective, Turkey has a large and growing populationof mainly young people, with substantially increasing income levels (over $3000 perhead as of 1996). Although the economy has a degree of instability, with the currentannual rate of inflation around the 60–70 per cent level, Turkey began freeing up itsonce autarkic inward-oriented economy over 15 years ago and now has one of theregion’s most liberal investment regimes. Turkey has many sophisticated, well-man-aged companies and also has a growing number of succesful second-tier companies(Financial Times, 1997). With the establishment of a customs union with the EU,Turkish industries will be exposed to competition to a greater extent than has beenthe case to date. This is expected to have a favourable effect on the level of EuropeanFDI in Turkey. The results of this study indicate that an increase in the volume ofjoint ventures and in the number of acquisitions is likely due to their suitability forenabling a faster entry of foreign investors to the Turkish market. The intention oflocal firms to cope with growing domestic competition may also foster joint ventureactivity with European-based MNEs. The rapid growth of some sectors such asenergy, transportation, financial services, telecommunication, tourism and retailingwill yield greater opportunities for multinational investors to invest in these sectors.Finally, being at the cross-roads of Europe and Asia, Turkey is a conduit for invest-ment into mainly Turkish-speaking Central Asia. This may present fruitful opport-unities for Western MNEs that intend to serve these markets by establishing collabor-ative ventures or strategic alliances with Turkish firms.

From a public policy perspective, this research signifies the desirability of takingnecessary steps to attract further foreign investments. Delaying public sector reformswill stifle foreign participation in privatisations and infrastructure projects—whichare considered as the principal motors of foreign investment in emerging economies.The Turkish Government should accelerate the privatisation programme and thedevelopment of infrastructure projects by removing major obstacles that slow downthe process. Although it is designated as one of the world’s ten big emerging markets(BEMs) by the US Government, Turkey is not promoting itself very well. In thisrespect both public and private organisations as well as various trade and industrialassociations should play a more active role in informing potential foreign investorsof prevalent business practices in the country. Local firms should also be encouragedto form alliances with foreign firms to obtain the required resources that they lack(e.g. proprietary technology and managerial know-how) and thus enable them toeffectively cope with intensifying competition stemming from Turkey’s accession tothe customs union with the EU.

228 E. Tatoglu, K.W. Glaister / International Business Review 7 (1998) 203–230

Acknowledgements

The authors would like to thank this journal’s anonymous referees for helpfulcomments on an earlier draft of this paper.

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