Departing from the traditional transaction cost approach in diversification mode literature, this study investigates the influence of experimental organizational learning on the choice between acquisition and a greenfield investment. We provide empirical support that prior experience with acquisitions and/or greenfield investments, firm’s predominant international strategy (global or multidomestic) and the technological intensity of the parent play a crucial role in subsequent diversifications. Furthermore, contrary to extant arguments that foreign ownership decision is independent of a diversification mode choice we demonstrate that the type of ownership (joint venture vs. wholly owned subsidiary) is a significant predictor of firms’ preference for acquisition or a greenfield. Unlike Caves and Mehra (1986) and Larimo (2002) who found a positive relationship between acquisitions and full ownership, we show that acquisitions in Central and Eastern European (CEE) transition economies are unlikely to be wholly owned subsidiaries. In addition, we contribute to extant diversification literature by introducing another neglected predictor of firms’ diversification strategy: We demonstrate the incremental power of host-countries’ institutional structure on investors’ diversification choice.

When a multinational enterprise (MNE) decides to invest equity in a foreign country, it faces at least two strategically important decisions: firstly, whether to buy an existing foreign entity (launch an acquisition)1 or establish a foreign operation from scratch (invest in a greenfield facility); and, secondly, whether to do it alone (establish a wholly-owned subsidiary) or involve a local partner (create a joint venture). The decision as to whether to opt for a wholly- or jointly-owned acquisition or greenfield investment carries significant strategic importance due to the inherent benefits and risks of each foreign diversification mode. For instance, although acquisitions offer a speedy establishment of a local presence, they can be accompanied by post-acquisition integration failures, which are often rooted in cross-cultural differences and technological mismatches. Reversely, although greenfields offer an opportunity to preserve and replicate valuable corporate cultures abroad, they require a longer establishment period and more time to build business networks locally. In addition, joint ventures enable investors to tap into valuable resources of a local partner and minimize investment risks, but they also are at times challenging to administer due to the partners’ diverging capabilities, interests and goals. In contrast, wholly-owned subsidiaries offer the benefits of managerial autonomy and full control over local operations, yet the process of overcoming the liability of foreignness may be difficult without the legitimacy of a local partner.