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

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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). Therefore if the transaction cost that will have to be incurred is  perceived  to be very high in the case of choosing the appropriate partner then the company should consider wholly owned modes such as acquisitions, wholly owned subsidiaries etc.

  1. The institutional context:

        Secondly Boulder argues that the institutional context of the firm should be studied. The institutional context refers to factors such as the socio-political environment of the host country. For example if the host country has legislation regarding the limitations of ownership the company will have to use an external party from the host country.

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  1. 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 ...

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