Justifying a chosen entry mode for a company expanding into a new international market
requires a careful analysis using theoretical frameworks and market insights. Here’s a structured
approach:
1. Theoretical Frameworks for Entry Mode Selection:
Several theoretical models provide insights into how firms should select their entry mode,
considering factors like resource commitment, risk, control, and market characteristics.
a) Uppsala Internationalization Model:
The Uppsala model suggests that firms tend to expand gradually, starting with low-commitment
modes (such as exporting) and moving towards more resource-intensive modes (such as joint
ventures or wholly owned subsidiaries) as they gain experience in the foreign market. The model
argues that firms prefer modes with less risk and control early on, gradually increasing
involvement as they understand the market better.
• Justification: If a company is entering a market with little prior experience or
knowledge, they may opt for low-risk entry modes (like exporting or licensing). As the
company builds market knowledge and resources, they may shift to higher control entry
modes (e.g., joint ventures or wholly owned subsidiaries) to secure more competitive
advantages.
b) Transaction Cost Theory:
This theory focuses on minimizing the costs associated with market transactions, including
searching for suppliers, negotiating contracts, and monitoring performance. The choice of entry
mode depends on the costs of managing these transactions in the foreign market.
• Justification: If the market has high transaction costs (e.g., high regulatory barriers or
instability), a firm may prefer direct investment (e.g., joint venture or wholly owned
subsidiary) to have more control over operations and reduce reliance on intermediaries.
Conversely, in a market with low transaction costs, exporting or licensing may be
preferable.
c) Dunning’s Eclectic Paradigm (OLI Model):
This model suggests that the choice of entry mode depends on three factors:
• Ownership Advantage: The firm's competitive advantage in terms of unique products,
technologies, or brand equity.
• Location Advantage: Factors like the foreign market's size, growth potential, and cost
efficiency.
• Internalization Advantage: The benefit of controlling operations rather than relying on
external parties.
• Justification: If the company has strong ownership advantages (e.g., proprietary
technology or a strong brand), they might opt for modes that allow full control, such as a
wholly owned subsidiary. If the location offers cost advantages (e.g., low labor costs),
they might opt for joint ventures or franchising. In a high-risk market with strong local
competition, the company may choose internalization for more control over operations.
2. Market Analysis Insights:
Market insights, such as the target market’s economic conditions, political climate, and cultural
factors, play a critical role in determining the appropriate entry mode.
a) Market Size and Growth Potential:
Larger, fast-growing markets often present opportunities for high returns but come with higher
competition and risks. In these markets, firms may choose entry modes that allow them to
capture a significant market share, like joint ventures, mergers, or wholly owned subsidiaries, to
maintain control and competitive advantage.
• Justification: If the target market is large and growing, the company might opt for higher
involvement modes (e.g., direct investment) to capitalize on the growth potential and
ensure quick market penetration.
b) Political and Legal Environment:
Countries with stable political systems, favorable trade policies, and strong legal protections for
foreign businesses may encourage firms to engage in high-commitment modes, such as wholly
owned subsidiaries or joint ventures, because the risk is lower.
• Justification: In countries with a stable political environment and low regulatory hurdles,
firms may prefer direct investment or partnerships, as they offer higher control over
operations and strategic decisions. However, in countries with high political risks,
companies may prefer exporting or franchising to limit their exposure to local
uncertainties.
c) Cultural Distance:
Cultural differences can influence the mode of entry. Markets with significant cultural
differences from the home country may require more localized strategies, which could lead firms
to choose modes that allow for greater control, such as joint ventures, franchises, or wholly
owned subsidiaries.
• Justification: If cultural distance is significant, joint ventures or franchising may allow
the firm to tap into local knowledge and networks, reducing cultural barriers. A wholly
owned subsidiary could be used if the firm feels it can successfully transfer its business
model to the foreign market.
d) Competitive Environment:
If the target market is highly competitive, companies may opt for entry modes that allow them to
establish a strong competitive position quickly. In such cases, forming alliances (joint ventures)
or acquiring local firms can provide strategic benefits.
• Justification: In highly competitive markets, firms might seek to enter through joint
ventures to share the risk and leverage the local partner’s market knowledge. If
competition is not too intense, they might prefer an acquisition or direct investment to
maintain full control.
3. Example of Application:
Consider a company from the US entering the Chinese market. Using the OLI model, the
company may decide to enter through a joint venture. The reasoning might include:
• Ownership Advantage: The company has proprietary technology that it wants to protect
but also wants to benefit from the local partner's knowledge of the Chinese market.
• Location Advantage: China’s large consumer market and lower production costs are key
factors.
• Internalization Advantage: The company wants control over quality and branding but is
not yet familiar enough with the local environment to go fully alone.
Additionally, if political and legal barriers in China are moderate, and there are significant
cultural differences, a joint venture can offer the firm a way to mitigate risks by sharing
resources and knowledge with a local partner.
Conclusion:
The choice of entry mode should align with both theoretical frameworks (such as Uppsala,
Transaction Cost Theory, and the OLI Model) and the unique market characteristics of the target
country. Each entry mode has its advantages and limitations, and understanding the interplay
between these factors is key to making an informed decision.
