- Cultural context:
Bouthers (2002) states that concentraton on cultural factors regarding the host country too should be studied in choosing the mode of entry. National culture and beliefs however only form a part of the cultural context, other factors such as the attractiveness of the market, the investment risk etc. too should be considered as a part of the cultural context. The mode of entry should ensure minimum risk and maximum potential. However if the investment risk is high, or if the local knowledge is important then it would be better not to use a wholly owned mode of entry.
Osland, Taylor and Zue (2001) state that based on previous research (Maignan and Lukas(1997) Woodcock et al,(1994))the choice of a mode of entry also depends on factors such as:
- Quantity of resource commitment required
Resource commitment refers to the investments required for intangible as well as tangible assets. The choice of mode of entry depends upon the level of investment required in obtaining the necessary intangible assets such as the relevant knowledge and managerial skills, and tangible assets such as machinery, equipment and premises. The choice of mode of entry should depend on the level of investment the company can or is willing to undertake.
‘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))
- 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.
- 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. Level of technological risk will be minimum or zero as technological knowledge shall not be transferred to an external party. The level of control will be high and therefore the level of autonomy will be high. Profits will not have to be shared
However the following risks may be there
- The risk of failure due to the inadequate knowledge regarding the institutional factors as well as the cultural factors is high.
- High levels of resource commitment may be required. Therefore the risk associated too will be higher accordingly.
Merger:
Transaction risk will be high in order to find the most appropriate company to merge with. Further, the required knowledge of institutional factors as well as cultural factors will be available thus reducing the risk factor. The control, the profits, as well as the investment in resources and technology will be shared. However, there may be conflicts regarding corporate culture, management styles, operating methods etc. If such issues are not managed carefully it could lead to the failure of the new venture.
Exporting:
Direct as well as indirect exporting will have to face significant competition from clothing produced in the host country as well as clothing imported to the country. ’(Osland, Taylor and Zue (2001)). This increases the risk specially given the fact that clothing is an easily substitutable product. The knowledge of institutional factors and the cultural factors are not as important as they would be for the other modes of entry. The transaction costs, investments, control, technological risk etc are minimised.
Joint venture:
This would reduce the risks associated with the investment in comparison to the wholly owned subsidiary or acquisition methods. Further the both companies could benefit from the expertise of each other. Argarwal and Ramaswami (1992) state that ‘The joint venture mode involves relatively lower investment and hence provides risk, return, and control commensurate to the extent of equity participation of the investing firm.’
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.
References:
Gregory E Osland; Charles R Taylor; Shaoming Zou, ‘Selecting international modes of entry and expansion’, Marketing Intelligence & Planning journal, 2001 Vol 19 No 3 pp 153 - 161
Keith D. Brouthers ‘ Institutional, cultural and transaction cost influences on entry mode choice and performance.’ Journal of International Business Studies, 2002 vol33, no:2, pp203
David K. Tse; Yigang Pan; Kevin Y. Au. ‘How MNCs choose entry modes and form alliances: the China experience. (multinational corporations)’
Journal of International Business Studies, 1997 vol:28 no:4 pp779
Sanjeev Agarwal; Sridhar N. Ramaswami. ‘Choice of foreign market entry mode: impact of ownership, location and internalization factors.’ Journal of International Business Studies, 1992 vol:23 no:1 pp1