Overcoming Information Asymmetry in Foreign Entry Strategy: The Impact of Reputation

Traditional transaction cost economics ( TCE ) approaches to foreign entry strategy have assumed that the information asymmetry regarding a local firm's behavioral intent cannot be overcome, thus all potential transaction partners must be treated as potentially opportunistic. However, this ‘assumption of corporate homogeneity’ results in conflicting predictions and has led researchers to question the suitability of TCE for predicting foreign entry mode. We address this controversy by developing theory on how a heterogeneous attribute of transacting firms—their reputations—can provide insights into how foreign entrants can overcome this information asymmetry to reduce transaction costs and select the optimal entry mode. We also specify important boundary conditions affecting reputation's value as a predictor of firms' behavioral intent.