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Choice of mode of entry (into the new market).

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Introduction

Choice of mode of entry: The success or failure in the new market would extensively depend upon the choice of the mode of entry. Globalisation has resulted in the availability of many deferent options for the mode of entry to a new market. These options range from acquisitions and mergers to joint ventures, direct exports, indirect exports, licensing, franchising and alliances. However at the same time globalisation has resulted in intense competition. Therefore, given the intensity of competition the choice is one that should be made carefully taking into consideration as many relevant factors as possible. Keith D. Brouthers (2002) highlights transaction cost, institutional context and cultural context to be the most important factors affecting the decision of the mode of entry. 1. Transactional cost theory: This is one of the most common grounds used to decide the mode of entry into a new market. 'Transaction cost variables are concerned with the costs of integrating an operation within the firm as compared with the costs of using an external party to act for the firm in a foreign market (Williamson, 1985). 'Transaction costs are the costs of finding and negotiating with an appropriate partner, and the costs of monitoring the performance of the partner firm' Bouthers(2002). ...read more.

Middle

'amount of required resources varies dramatically with the entry mode, ranging from almost none with indirect exporting, to minimal training costs in licensing, to extensive investments in facilities and human resources in wholly-owned subsidiaries.'(Osland, Taylor and Zue (2001)) 2. Level of control Level of control refers to the degree to which the company wishes to influence the decision making process, management in the foreign market. For example if the mode entry is acquisition the entire control will be with the company itself however in a joint venture the level of control may be shared. 3. Level of technology risk The technological knowledge of the organisation may be transferred to a local firm unintentionally if the mode of entry is not wholly owned. This could result in a loss of competitive advantage in the long run. As such the level of technological risk too should be considered. Exporting is a mode of entry where technological risk is not available. Evaluation of various suitable modes of entry based on the factors highlighted above: Acquisitions and wholly owned subsidiaries: Acquisition of a local company, operating in the same industry, in the host country as well as opening a wholly owned subsidiary will minimise the transaction costs. ...read more.

Conclusion

Strategic alliances: David K. Tse; Yigang Pan; Kevin Y. Au.(1997)state that 'Faced with rapid technological advances, changing market structures, and increasing global competition, firms are motivated to form alliances with other firms to reduce investment risks, share technology, improve efficiency, enhance global mobility, and strengthen global competitiveness [Auster 1987; Harrigan 1988]'. Although there may be room for problems associated with the level of control, sharing of profits, and technological risk a strategic alliance with a local company in the host country too provides a valuable mode of entry . Having evaluated different options for the choice of mode of entry based on the main factors highlighted above since ........ is an organisation which has firmly established itself in the local market and is attempting to take its first step towards entry to the Europian Union the risks associated with capital investment, institutional factors, cultural factors, and transaction cost would be relatively very high if the company uses a wholly owned method of market entry. On the other hand exporting is an extremely low risk option, it does not give the company the opportunity to establish itself well within the international market. Therefore the options would have to be narrowed down to either Joint Venture or a strategic alliance. ...read more.

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