MODULE TWO

DR. Manisha
ENTRY MODES- MODULE II
• The choice of entry modes (internationalization methods, forms,
instruments or ways) depends on both endogenous factors (mainly
business potential) as well as exogenous factors (describing the
business position in the target market or the industry in which the
firm operates).
• It seems that the most common taxonomy distinguishes three
fundamental groups, namely: exporting modes/trade related mode;
contractual modes; investment modes.
International business expansion
modes
Contractual Investment
Trade Related
related related
• Exports( Direct n • Strategic alliance • Overseas assembly or
Indirect ) • Contract Manufacturing mixing
• Piggy Backing • Management contracts • Joint ventures
• Counter trade • Turnkey projects • Wholly owned
• E- channels • Leasing subsidiaries. ( greenfield
• Licensing operations or Mergers and
• acquisitions. )
Franchising
[Link] related mode: indirect
export mode
• There are the following types of indirect export intermediaries (Hollensen, 2007;
• Cullen and Parboteeah, 2010):
• the export commission house (ECH) that is a representative of foreign buyers who is located in the
• exporter’s home country, offering services to the foreign buyers such as identifying potential sellers
• and negotiating prices,
• the export/import broker as a specialist in performing the contractual function, and does not actually
• handle the products sold or bought, bringing a buyer and a seller together,
• the export management company (EMC) that is an intermediary specializing in particular types of
• products or particular countries or regions,
• the export trading company (ETC) that is an intermediary similar to EMC, but it usually takes the
• claim to the product before exporting.
Trade related mode: direct export
mode
• While implementing direct exporting, exporters take on the duties of
intermediaries and make direct contact with customers in the foreign market.
• Direct exporting can be performed in several ways, most commonly by (Hirsch,
2010; Stone and McCall, 2004):
• an own representative office operating on a transfer of rights and obligations of
the parent company, since its function is reduced to a mere marketing activities,
• a foreign agent acting on behalf of the exporter and its name,
• a foreign distributor acting on its own account and on its own behalf,
• its own distribution network abroad, where exporting is combined with foreign
direct investment,mostly in the form of a trading or commercial subsidiary.
FIGURE

Direct
Advantages and Disadvantages of
Different Modes of
Internationalization
• Cooperative exporting is recommended entry mode especially for small and
medium-sized firms, due to their resource constraints (mainly financial and
human). They are two basic modes of cooperative exporting, namely export
grouping (export consortium) and piggybacking. Export consortia tend to
be most often defined as the voluntary alliances companies tied to foreign
joint promotion of products and services of its members (Green, Russo and
Papi, 2003).
• Piggybacking (Hollensen, 2007; Terpstra and Chwo-Ming, 1990) is the entry
mode where the contract parties are two entities, known as a rider and a
carrier. The first one is usually a small entrepreneur, and the other one is of
large size. A carrier carries out business in foreign markets offering to a
rider its own distribution network.
2. Contractual Modes
• The second group of entry modes relates to cooperative relations
implemented through contacts with foreign partners, mostly manufacturers.
• Management contracting is a type of a knowledge-based service of
management (know-how). A foreign firm acquires operational management
services from a domestic firm, that after the execution of the contract usually
does not plan to be present in the market, although it may turn out that
gained experience will result in permanent presence in foreign markets.
• Turnkey operations contain an element of co-operation, however they are
carried out as de facto export of services, but their main feature is
contractility.
• Contract manufacturing, also known as international subcontracting, is used by firms that hire part of its
production outside the country, mainly in order to lower the cost of labor or raw materials.
• Assembly operations rely on a specific form of cooperation between firms, where a foreign firm contracts
to a domestic firm broadly and strictly defined assembly performance in accordance with its instructions.
The modes can be divided into several specific variations,
such as:
• part fit-up and shimming operations during which a semi-product which is sent abroad to continue
to undergo various stages of the manufacturing process or treatment, and then returned to their
• country of origin,
• drilling operations as well as fastener installations, in which reputable companies outsource their
products in accordance with the specifications, based on supplied designs, projects, and sometimes
providing materials,
• repair and overhaul operations, where goods are sent abroad to have it repaired and then return to
their country of origin.
• International licensing is a contractual agreement between a domestic
licensor and a foreign licensee(licensor usually has a valuable patent,
technological know-how, trademark, or company name that it provides to
the foreign licensee) (Cullen and Parboteeah, 2010).
• International franchising by its nature acts similarly as licensing, however,
concerns the sphere oftrade and distribution in the wider services sector.
Due to such activities' much lower start-up costs,this form is particularly
popular among SMEs, especially among self-employed or micro-
enterprises, especially in the European Union (Stone and McCall, 2004).
3. Investment Modes
• A common typical feature of investment modes is the physical and constant
presence of international businesses in foreign markets by investing in the form of
setting up their foreign branches or foreign subsidiaries. They provide lower
production costs and a direct presence in a foreign market.
• Foreign investment can be created in two ways, as:
• brownfield investment that is the mergers and acquisitions (M&A) of local firms,
• greenfield investment that is by investing from the beginning (Figure 7.2).
• As for the organization term, the investment modes are usually divided into two
basic types (Czinkota and Ronkainen, 2007):
• a foreign branch,
• a subsidiary.
• Subsidiary firm : it refers to a company in which the parent company holds
a majority of shares or other resources that are controlled. In the case
where the subsidiary is 100% owned by the parent company is called a
wholly-owned subsidiary, otherwise we talk about a joint venture
subsidiary (minority interests, joint control, majority interests).
• A foreign branch is entirety owned by the parent company. It does not have
a separate legal status,because it is an integral part of the parent company,
and thus subject to both the laws of the countryof origin and the host. The
division operates under the management of the parent company, and its
commitment is entirely consistent with the parent company.
Entry Mode Choice
FDI: Strategic Tripod Model

Resources

Industry

Institutional Resources
• International entry modes through foreign direct investment (FDI) have proved to be relevant: first,
because of the relatively irreversible feature of FDI as a strategy of internationalization; second, because
of the multiple variables that influence the decision choice of the Multinationals to serve foreign
markets
• Discussed entry modes (exporting, contractual and investment forms) differ
in many ways
• The most important of them, which may be the criteria for their selection
are (Baorakis, Katsioloudes, and Hadjidakis, 2007):
• scope of capital commitment,
• scope of management commitment,
• scope of control,
• scope of risk,
• scope of potential profits,
• scope of input costs.
The factors which have a strategic importance on the decision of entry mode choice
can belisted as follows:

• Selection of partners for cooperation: Finding the right partner is a crucial decision for selecting
the entry mode and the entry mode can change according to the partners commitment to the
business. If the company can find the right partner to operate with, strategic alliances will be the
choice of entry mode. In some countries like Saudi Arabia, the companies are obliged to invest
with a local partner and therefore they will not have a chance of selecting “wholly owned
subsidiaries as an entry mode (Shen et al., 2017)
• .Cultural environment: If the target market has a different culture which consists of values, beliefs,
customs, religion, and languages, the companies will probably prefer exporting or contractual
mode as an entry strategy. The main reason behind this selection is the low confidence in their
abilities to manage the international operation. The companies are more comfortable in selecting
investment mode when they are familiar with the culture of the country they want to invest
in(Shen et al., 2017).
• Political and Legal Environment :If the politics is not stable, the companies will prefer exporting or contractual mode
rather than investment mode as they will not be interested in investment mode. The legal environment such as high
tariffs and quotas will also affect the entry mode selection. As high tariffs may decrease export mode and increase
investment mode.
• .Market Size: The market size also affects the choice of entry mode as developing markets will attract more
investment type of entry modes. If a country has a big population or a growing young population, that country will
receive more investment types of entry mode.
•
Production and Shipping Costs: If the target market has very low production costs compared to the home country of
a company, the company will prefer investment or contractual mode. Low shipping costs make companies prefer
export as an entry mode whereas high transport costs make companies to prefer contractual or investment entry as
entry mode .
• International Experiences: For most of the companies for internationalization is the export entry. The companies
mainly prefer using other entry modes after they can gain experience in the market. Mainly after export, they
continue with contractual and lastly with investment entry mode as those modes require higher investment levels of
all resources.
Hollensen distinguishes 16 different determinants, which have bipolar impact on the process
of internationalization, that is increasing (+) or decreasing (–) the intensity of internationalization (the
latter increase the externalization at the same time).
Conclusion
• So, above are the methods of entry into foreign markets. Before
entering the global market, the company must make a critical decision
regarding its operational business plan. The best international
business model should be selected based on the company's
expansion and diversification requirements. The company's ability and
willingness to devote resources, the desired level of control, the level
of risk the company is willing to accept, the level of competition, the
caliber of the infrastructure, and other factors must all be considered.