An Internalization Approach to Joint Ventures: The Case of Coca-Cola in China

An Internalization Approach to Joint Ventures: The Case of Coca-Cola in China

VINCENT MOK, XIUDIAN DAI AND GODFREY YEUNG

ABSTRACT

In the presence of high transaction costs due to market imperfections, it is normally less expensive for multinational corporations (MNCs) to conduct their business activities in new markets through their internal corporate structures rather than by relying on the markets. Based on a case study of Coca-Cola's entry into the Chinese market, this paper tests the applicability of internalization theory to explaining the entry mode choices of MNCs in developing countries. Internalization theory reveals the economic rationale that was behind the changes in Coca-Cola's modes of entry as it moved from franchising to joint ventures (JVs) with selected local partners, and more recently to the combination of JVs and franchising.

Key words: internalization, joint ventures, market imperfections, Coca-Cola, China.

INTRODUCTION

When a multinational corporation (MNC) enters into new markets, it is rather costly for it to conduct business activities in imperfect markets due to high transaction costs. These costs include those accruing from the problems of opportunism, small numbers of market agents, uncertainty, and bounded rationality, as outlined by Williamson (1975). He argued that the transaction costs of writing, executing, and enforcing contracts via the market are greater than the costs of internalizing the market. The situation is further

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worsened when the business transactions involve complex contractual contingencies. As such, it appears that an MNC will prefer to establish wholly owned subsidiaries (WOSs) to deal with market imperfections. Apart from the choice of WOSs, there are also other commonly used modes, such as joint ventures (JVs). Based on a case study of Coca-Cola in China, this paper tests the applicability of the internalization theory to explain the entry mode choice of MNCs in developing countries.

Coca-Cola in China has been chosen as a case study for a number of reasons. First, Coca-Cola is the world's largest cola producer and one of the biggest MNCs. Second, Coca-Cola has a relatively long history of investment in China since 1979, when economic reform was implemented under the de facto leadership of Deng Xiaoping.1 Third, faced with keen competition from its close competitor, Pepsi-Cola, and an unfamiliar and highly versatile local market environment, Coca-Cola's ability, experience and success in capturing a large market share in China seem to constitute an interesting case, upon which implications may be drawn for the understanding of MNCs' market entry into developing countries via establishing equity joint ventures (EJVs). Fourth, there are