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Selecting international modes of entry and expansion

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Selecting international modes of entry and expansion The rapid globalization of business in the last two decades has prompted an increasing number of firms to develop strategies to enter and expand into markets outside their home locations. Dynamic, emerging markets in Asia and Latin America, as well as large, stable markets in North America, Europe, and Japan now attract both small and large companies from around the world. But once a firm has decided to enter or expand in a foreign market, it must determine the structural nature of its operations in that nation. Recognizing the huge potential market size, a US firm in the pharmaceutical industry recently decided to make a major new thrust into China. A manager from the company stated: We wanted to export several lines of pharmaceuticals into China. However, their government wanted us to manufacture within the country in some kind of cooperative arrangement with a local firm ... Technology transfer for market share is the name of the game. So we decided to set up a joint venture with a local firm. Selecting an institutional arrangement - a mode for entering or expanding in a foreign market - is one of the most crucial strategic decisions that an international firm has to make (Root, 1994). A well-chosen mode can enable a firm to gain competitive advantage. However, inappropriate modal decisions are difficult to change when long-term contracts and/or large resource commitments are made. Poor modal choices can lead to "sinking the boat" or "missing the boat" (Dickson and Giglierano, 1986). For example, a firm's core technology can be unwillingly lost to competitors in certain "cooperative" modes. At the same time, some contractual modes of entry can prevent a company from taking full advantage of large market growth. Careful assessment of these trade-offs is essential in today's global economy. The USA and Japan are the two largest national players in international business. In many markets, such as the European Union, companies from these two nations are primary competitors. ...read more.


Japanese companies also use exporting in highly competitive markets, but for different reasons than Americans. Company strategy plays a major role. Japanese managers in our study stated that an important factor in the choice of exporting is that this mode is the quickest means to enter a new market. For strategic reasons, Japanese firms use exporting to prevent competitors from gaining first-mover advantages in new markets and to not be left behind. Previous studies have also shown that the Japanese have a preoccupation with competition, especially with other Japanese firms (Anand and Delios, 1996; Genestre et al., 1995). Many Japanese managers prefer exporting as a mode of entry. When the host government does not require locally-produced content in goods sold in the nation, or make other restrictions on exporting, Japanese executives noted that this condition is an important factor in their choice of exporting. Licensing US companies often use licensing reluctantly. The three important factors in US managers' use of licensing all involve pressures from the host government. One factor associated with the use of licensing is that the host government can easily find alternative companies to do business with. When many foreign competitors attempt to enter a market, the host government has more bargaining power than an individual MNC. Thus, when the host government expects new businesses to be managed by nationals and when the government prefers the use of cooperative arrangements, an MNC who wants to enter the foreign market must comply with the government's modal preferences. A manager from a large US chemical company doing business in China explained his experience: We really wanted to develop a manufacturing facility in China. But [a government ministry official] told us that that would take too long. They wanted us to do a licensing agreement with a manufacturer in Beijing. But we're not good at licensing. We did not want to do it. But we went along with them in order to create better relationships with the government. It definitely wasn't to make profit. ...read more.


This study reveals an important insight that joint ventures, rather than WOS, may be more appropriate for internationally-experienced US firms than for novice companies. Because of the difficulty in selecting appropriate partners and managing complex JV relationships, new firms should be cautious about selecting JVs as a mode of entry. Firms that know the local situation, and that have experience from elsewhere in managing JVs, may be best suited to use this cooperative arrangement. Another factor important in Americans' use of joint ventures is technology. When it is not crucial to protect technology, JVs are more likely to be used. However, with core technologies, wholly-owned subsidiaries are a superior mode of entry, due to the high control offered by this mode. Other strategic factors uniquely important to Americans include situations when synergies are important among global operations, and when the firm would be at a competitive disadvantage if it did not set up a venture in a foreign nation. Managers from both nations are attuned to their competitors and to the relative bargaining power that results when negotiating modal choices in foreign markets. Both sets also recognize that the role of governments is a major factor in international business decisions. Even in so-called "open markets," governments provide incentives or encouragement for foreign corporations to use certain modes. In every nation where they want to do business, MNCs must know the "local rules" regarding local content requirements, market access requirements, etc., and play according to those rules. Wholly-owned subsidiaries are used by both the Japanese and Americans when the regulations do not prevent full foreign ownership of corporations. Furthermore, when a firm can acquire capital and local market knowledge on its own, firms from both nations prefer wholly-owned subsidiaries over joint ventures. Although modal decisions are complex, this article provides guidance to international managers and researchers, enabling managers from around the world to learn from US and Japanese companies that are involved in today's dynamic global business environment. Managers may also improve their ability to predict which modes of entry their competitors may select. ...read more.

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