joint venture provide progressively increasing degree of control for the firm till we reach the other end of the spectrum with highest control: ownership based entries such as wholly owned subsidiaries.
Two opposing theories suggest alternate outcomes for as control increases: the resource based view and the transactions cost view. The resource based view holds that as the degree of control increases, the firm's chances of success increases because the firm is able to deploy key resources essential to success (Isobe, Makino & Montgomery 2000; Gatignon & Anderson 1988). These resources could be intangible properties such as brand equity and marketing knowledge (Arnold, 2004) or tangible properties such as a patent or a process blueprint. Control over such properties allows a firm freedom to deploy resources flexibly thus enhancing its chances of success. In the context of emerging markets control provides two key benefits. First, it safeguards key resources from leakage, such as patent theft. Second, it allows internal operational control essential to a firm's success in emerging markets (Luo, 2001). In addition a firm could control key complementary resources such as access to local distribution channels which can be important to its success in any country.
In contrast, the transaction cost view holds that transaction costs increase with increasing control of the mode of entry. Control and commitment are inextricably linked factors in mode of entry (Luo, 2001). High control in entry strategies entails high commitment. Transaction cost theory suggests that the higher the resource commitment and desired control of an entry mode, the higher the cost. Wholly owned subsidiaries and joint ventures are high-cost entry modes because of the level of resource commitment needed to set up operations (Pan & Chi, 1999). These higher costs imply higher levels of investments needed to break-even and make a profit.
2.2 Country Risk:
According to Erb, Harvey & Viskanta (1995) define country risk as uncertainty about the environment which has three sources: political, financial, and economic. Political risk is the risk that laws and regulations in the host nation are changed adversely against a foreign firm. These could be of a regulatory nature such as the imposition of tariffs or political in nature such as unrest caused by pressure groups (Spar, 1997). At its severest, political risks may cause confiscation of assets without adequate compensation (Hawkins, Mintz & Provissiero 1976).
Financial and economic risks manifest themselves in several ways. They could take the form of: a) recessions or market downturns, b) currency crises or c) sudden bursts of inflation. Most of these factors arise from imbalances in the underlying economic fundamentals of the host nation such as a balance of payment crisis. Recessions result from business cycles inherent in any economy (Lucas, 1987). The origins of currency crises could be a progressively deteriorating trade imbalance (e.g., India in the late 1980s) or loss of faith by the international financial system on the nation's ability to meet its international debt obligations (e.g., Argentina in 2001). Whatever the source of the problem, a fall in the currency rate leads to a fall in revenues and profits (Shapiro, 1985). Differential inflationary pressures between the home and host nation could also pose a risk. Inflation directly affect
