An analysis of the theory of the market entry modes

An analysis of
the Theory Of
the Market Entry
Modes

by

Mrinal Singh

For a corporation to survive in the global economy internationalization

is a process that they have to take to operate in a better manner

(Bartlett, Ghosal). The oft quoted process of Internationalization takes

place through the process of An Entity which is first national but then

due to trying to have a broader market reach it ventures into the

international arena by the medium of exporting moving towards the

mode of joint venture and then having a wholly owned subsidiary.

This process of internationalization of a firm has been defined in
literature as a market entry mode. Market Entry modes are defined as
the forms of capital participation in International Enterprise.
(Calantone&Yushan 2001
Firms enter a new market because of many reasons, but prominent
reason being
a) Spreading the risk- When a firm is operating in a single

country it has access to a small closed market where it has to

consider the cyclical nature of the nature of the business in

which the firm has to consider the constant fluctuation in

demand while making production schedules as well as other

activities that have to take place ion the firm.

To overcome this cyclical nature of the business a firm has to diversify

its operations in a number of countries.

b) Maintaining Oligopolistic Competition (Roy Trond, Dibrell,

C. Clay 2002)-A Corporation has to observe the way its

competitors are moving and act accordingly. If we observe the

trend in any of the global corporation we can see a movement

in a common direction for nearly all the corporations that are

operating in a global arena.

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c) International Scale Advantage-Many Researchers like

C.K.Prahlad have propounded the advantages of International

scale. This global capacity advantage has an implicit

assumption and that is that as the capacity is increased

exponentially the fixed and the variable cost do not do so at

the same rate thus leading to a cost advantage for the

operators of this venture.

Corporations entering a new market have to take into considerations

many market entry modes that are available from exporting to

opening up a wholly owned subsidiary The course that is taken by the

corporation is affected by some factors like: (Gorg, Holen, 2000).

Degree of control that the corporation wants to have over its

operation.

a) The level of risk that it is accepting to take for example indirect

exporting will be a less risk involved venture than a wholly

owned subsidiary.

b) Skill required-The type of competency required in running an

operation is a factor that affects the corporation in the type of

venture that it runs. For example when Japanese corporations

venture abroad instead of tying up with new operators in that

country they take along with them there partners from home

country as the type of competency that is required is found in

there home partners only.

c) Dissemination Risk-If the venture to be formed is

technologically advanced where the key source of

differentiation is because of the technology involved the

corporation may not want to opt for a joint venture as the

processes involved may be duplicated and the technology may

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be copied elsewhere. So we may observe in case of many high

technology industries the preference for exporting or the

setting up of a wholly owned subsidiary.

d) Flexibility.

e) Ownership.

Based on these parameters a corporation has many options to start its

operations in a foreign location the options as referred earlier range

from

1. Exporting

2. Foreign Manufacturing.

3. Joint Venture Formation

4. Wholly owned subsidiaries.

1.EXPORTING

There are various options available to a corporation and Exporting is

one of them. Even exporting can be divided in two parts

1.1Indirect Exporting (Mutlec, Esin Can 2002)-This is one of the

types of exporting options that is available to the firm.

In this strategy the products of the form are carried over to the other

country by a third firm and then sold there. This in classic business

theory was considered one of the earliest stages of the firm going

international with a very little resource involved in the selling of the

products. (Anderson, 1997)

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1.2 Direct exporting (Mutlec, Esin Can 2002)-In this strategy the

level of involvement becomes a bit higher and all the work of exporting

is done in-house.

In this all the work that is to be done is to be done in-house. An

exporting department is created that looks after all the exporting deals

that come to the corporation. Also all the international affairs are dealt

with within the corporation.

2.FOREIGN MANUFACTUR ING (MUTLEC, ESIN CAN

2002)

Another strategy that is available to the corporation is that of foreign

manufacturing.

In this one strategy the firm can adopt various strategies

2.1 The first strategy that it could adopt is that of manufacturing in

the home country and then assembling all the components in the

market where it has to sell its products.

2.2 The other option that is available to the firm is that of contract

manufacturing in this the product is made in the foreign market by a

third firm

2.3 Another option that is available to the firm is that of Licensing, in

this the corporation passes some technical know how to a third firm

who in turn manufactures the product for it.

Licensing in involves a longer term of commitment than the other

options. As in this the from that is the licenser gives the licensee

something of value that can be Patent rights, Trademark Rights,

copyrights, or know how.

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3.JOINT VENTURE FORM ATION

It is another type of entry option that is available to the corporation.

Then ties between the partner firms are strongest in the case of the

joint ventures amongst all the cases that have been described till now.

Joint Ventures are gaining increasing relevance in the market entry

strategy as corporation realize there importance in being able to gain

to gain market know how before going in for a further commitment of

resources.

Joint ventures benefit the foreign partner by giving it the market
characteristic of the market that it is entering which otherwise it would
have found difficult to understand. Also in many cases like China Joint
ventures are necessary because of the government regulation.
(Calantone Roger. J. Sam; Yushan 2001)

5. WHOLLY OWNED SUBSIDI ARIES

Corporation can also chose wholly owned subsidiaries as their market
entry modes. A firm can choose from three options (GorgHolen, 2000)

5.1 Acquisition of an existing low technology firm

5.2 Acquisition of an existing high technology firm

5.3 Setting up an entirely new Greenfield venture.

5.1 Acquisition of an existing low technology firm- In this option the

firm presumably has an advantage as it being a global corporation it is

assumed that its level of technology would be higher thus bringing the

foreign corporation some advantages and more so as the existing

players profitability lowers in the market.

5.2 Acquisition of an existing high technology firm- In this scenario the
market characteristic remains nearly unchanged as with the acquisition

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of the high technology firm the overall market characteristic remains
unchanged. But the effect on the lower technology firm is apparent, as
the consequence of a presence of a big player emerging is that of
reduced profitability of the lower technology firm. (Gorg, Holen, 2000)
In this final scenario due to new capacity being added up it leads to an
increase in the level of competition.

6. A further elaboration on the market entry modes

6.1 Exporting- often referred to as the first step in the

internationalization process.

As discussed earlier Exporting can be divided in two parts

Indirect Exporting - This in most cases reduces costs and

risks involved with market entry. The reason behind this is that

the firm is able to utilize the marketing channel of an existing

player so the firm is assured of an assured market and as a

result the revenues start flowing in a short span of time.

A drawback of this strategy is that by adapting this strategy the

corporation is tied to a channel that may have an inadequate

marketing network or there may be an incompatibility between the

two partners.

Direct Exporting - In this strategy the level of control is much

higher this involves a higher level of investment on the part of

the firm and. In this strategy the level of risk for the firm is also

higher.

The benefit that the corporation entails by following this strategy is

that it provides an opportunity for the firm to understand in a better

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manner the market characteristic of the firm; also it provides an

access to the market information.

6.2 Strategic Alliances (Calantone Roger. J. Sam; Yushan 2001)-
These are formed between two or more firms’ and is usually in the
form of licensing/Franchising or joint venture.
Licensing does not require a heavy investment of resources and is less

risk prone but he licensor of the technology has to consider the fact

that licensing also involves a lesser control over the process.

Licensing is very prevalent in manufacturing industries, an equivalent

of licensing in service industry is franchising.

a) Unlike Licensing and franchising joint ventures are a more risk

prone options. There are a number of opinions about why joint

ventures are formed. (Calantone, Roger. J; Zhao, Yutan Sam 2001)

Firms form joint ventures to gain knowledge for increasing their global

competitiveness. Learning in this case should not be construed only as

the smaller firms learning from there bigger counterparts but it also

happens that when a bigger firm enters a country and forms a joint

venture to learn about the country that it is entering. This also

ultimately increases the global competitiveness of the firm.(Calantone,

Roger. J; Zhao, Yutan Sam 2001)

b) Firms are likely to form joint ventures when they have a highly

complementary resource base (Calantone, Roger. J; Zhao, Yutan Sam

2001)

In many of the cases firms opt for joint venture because they have a

highly complementary resource base.

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d) In many countries formation of the joint ventures takes place

due to a requirement of the host country, which says that

there should be a equity participation in the venture that a firm

is forming

For the formation and successful running of a joint venture

communication plays an important role. As stated there may be a

difference in the objective of the partners in a joint venture for

example one partner of the firm may have the objective of profit

maximization while the other may have the objective of market share

so for the successful and smooth running of the venture effective

communication is a necessity.

6.3 Wholly owned Subsidiaries

Establishing a wholly owned subsidiary is the most risky way of

entering a market. Many firms utilize this mode of entry as it gives

them the ability of controlling the operation, as they want.

Increasingly acquisitions are becoming a common way of having a

wholly owned subsidiary. With the cost of capital being low and also

due to its easy availability it is easy for corporation to go in for

acquisition.

Also when acquiring the asset of an existing company the multinational

is able to get an established network in the host country along with an

option of being able to control the enterprise.

In many of the cases the corporation that is acquired can be the one

that is the market follower in the category that it is operating in, when

this corporation is acquired by the multinational it can develop on itself

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the ability to market its product effectively. This happens because the

resources that are available to this corporation have increased.

All these entry strategies have been interpreted in various ways by the

various theories.

For Example the Eclectic theory of market entry tries to analyse the
firm’s decision to invest in a market by the Ownership, Location and
Internalisation factor. (Dunning, John .H, 1970)
Whereas the Bargaining power theory suggests that there is a struggle

that is going on between the firm and the host government over the

issue of control of the enterprise and various factors affect this.

This theory is in some ways the extension of the Internalisation theory

of Eclectic framework. Transaction cost theory suggests that tasks

could be outsourced or that it could be internalized.

In the case of the Behavioral theory approach the hypothesis is based

on that a firm takes the decision to invest in a market based on the

knowledge that it has of that market.

6.4 AIM OF THE REPOR T

The aim of the report is to study the theories of the market entry

mode.

OBJECTIVE OF THE REPORT

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There exists a lack of the comparison of the theories that are there in

the market entry modes. All the studies that have been done have

been done on the basis of one or two theories never trying to

encompass all the major theories extensively in there report the

objective of my study will be to

1.Study the Eclectic theory of market Entry mode (Dunning, John .H,

1970)

2. Study the Bargaining power theory of market Entry mode
(Fagre; Nathan, Wells; T, 1983)

3. Study the Transaction Cost theory of market Entry mode

(Ghosal, Sumantra1996)

4. Study the Behavioral Theory of market Entry mode (Erramillii.

M.Krishna, Rao C.P. 1990)

5. Interpret the various finding and draw suitable conclusion

LITERATURE REVIEW

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ECLECTIC THEORY OF MARKET ENTRY MODE-

John. H. Dunning propounded this theory on market entry mode

(Dunning, 1980).

This theory analyses the market entry of the firm on the basis of three
factors. (Tse et al, 1997)

These three factors are referred to as (Roy & Dibrell, 2002)

1.Location

2.Ownership

3.Internalisation.

An aspect of Eclectic theory that needs to be observed is that not

only it encapsulates the functioning of a firm but that it this theory

has also been extended by John. H. Dunning to nation

as well. (Dunning, 1985)

Eclectic Theory theorizes that for a firm to internationalize it ought

to have certain advantages for it to be able to compete effectively

with the home country firms. (Roy & Dibrell, 2002)

Now we discuss the three factors of Eclectic framework

a) Ownership- Rugman and Gestrin have described this as

the factor which provides the company the ability to

compete effectively in the market place. They further

elaborate that the advantages can be either production

based or marketing based. (Moore, & Lewis, 1998)

Country specific advantage is a part of ownership (Moore, &

Lewis, 1998).

Dunning describes these country specific advantages as

those variables in the production function like input cost,

labor, productivity, market size etc. (Moore, & Lewis, 1998)

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Ownership specific advantage was distinguished by three

factors

a) Privileged access to assets.

b) Advantages enjoyed by a branch rather than a new

plant.

c) Because of location or it being a multinational.

These advantages arise from unique ownership of specific assets in

comparison with a corporation which functions is a single country. For

example the ability of a corporation to provide products that are

unique in nature is a unique ownership advantage (Pang, 1996).

In a joint venture when one of the parties is foreign the losses that can

accrue to the foreign partner could be much more than the local

partner that is why we observe the tendency of foreign partners who

try to have effective control over the joint venture that they have

formed. When assets are being deployed it is inevitable for a firm to

deploy fixed assets. The higher the commitment to the foreign market

the higher is the investment in the fixed assets. (Pang, 1996) As a

result we can observe that the corporation always usesthe higher

involvement decision-making process.

Dunning eclectic theory propounds that a firm will choose a strategy

that effectively differentiates its products. That is an entry strategy

where the resources required are quite high. (Roy & Dibrell, 2002)

According to Madhok while extrapolating on the Dunning’s Eclectic

Theory model said that a firm will collaborate if market knowledge is

high. (Andersen, 1997)

An important issue related to Eclectic paradigm is that when a

corporation opts for multinational production they must try to hand

over their ownership within organization.

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A point to be observed here is that ownership advantage is not solely

the prerogative of a multinational corporation or of an international

organization, but these advantages can be enjoyed can be enjoyed by

a company that is operating in a domestic environment also.

(Dunning, 1980)

THE ADDED ADVANTAGE THAT IS ENJOYED BY THE
ENJOYED BY THE FORMER TWO ARE BECAUSE THEY ARE
INTERNATIONAL TRANSACTIONS THAT GIVE THEM ADDED
BENEFIT LIKE TRANSFER PRICING. ALSO WHEN A
CORPORATION HAS MULTINATIONAL ACTIVITIES IT CAN
HEDGE ITS RISKS. FOR EXAMPLE IF PRODUCTION IN ONE
UNIT SUFFERS BECAUSE OF SOME REASONS THE
SUBSIDIARY CAN GET ITS GOODS FROM SOME OTHER
UNIT.
Certain type of skills an entity acquires within itself or through
acquisition.
When one corporation acquires another it is not only acquiring the
ownership but along with it some proprietary information.
On the type of firms that go on to internalize processes Dunning’s
Hypothesis that the higher the internationalization of a firm the more
the resources will that firm invest in foreign sources. (Roy & Dibrell,
2002) Firms that are having lesser international experience will tend to
be cautious in there approach as most of the managers in these
corporations will not be having international exposure and so will be
lacking the ability to take decision which are international in nature.
(Roy & Dibrell, 2002)
Within an organization also where assets are equally deployed a
division that is having more international exposure will favor a higher
international market entry exposure. For example within an
organization the marketing division which has had a greater
international market exposure will have a greater enthusiasm for
foreign market entry than that organization’s relatively lesser
internationalized finance counterpart

2. Location- Location is used to describe the where of production.

(Dunning, 1985)

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The business functions on the traditional hypothesis of value

addition. A corporation has to add value in the process for it to be

able to run the business successfully and to be profitable. This

value addition that occurs by the way of transformation of inputs.

In this transformation some variable are available to all corporation

whatever their size or nationality, but these variable as such are

fixed to a particular area and so can be utilized only in that area.

(Dunning, 1980)

These variables are not only the traditional variable like labor,

market & Natural resources. Hut also comparison of factors like

legal framework, and Government regulation. But it also comprises

factors like legal framework and government legislation.

The decision to locate the corporation in a particular country is

taken after much consideration. Corporation will opt for production

only in the case where they feel at there is some value that is

being added in the host country that otherwise they would not be

having in the home country. (Dunning, 1985)

Entry in a new market may not be solely based on the basis of the

value that is being added. In a foreign location. Entry is also made

on the basis of the changing government policy, many developing

countries it is a regulatory for the Foreign Corporation to invest in

a joint venture than a wholly owned subsidiary. (Pang, 1996)For

example in the case of China even the premier may not be able to

change regulation for me. (Pang, 1996)

But this is not the only reason why a corporation would opt for

investing in a foreign location. There may be other facts or

endowments that may affect a corporation to invest in a country.

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The advantages that a corporation has when it invests in another

country are

The ability to distribute the risk to many nations. (Dunning,

1985)

If a corporation is solely dependent on one single country then

any negative movement that that economy may have will lead

to problems for the corporation. (Dunning, 1985)

Today transfer pricing has emerged as a major tool in the

hands of the multinational corporations. Through a complex

web of cross holdings a corporation is able to accrue all its

profit at a location where the tax rates are lowest resulting in

big savings for the corporation.

Location preferences

It is dependent on many factors but some prominent reasons for

selecting a location are location familiarity and market

Attractiveness.

a) Location familiarity-This is judged by the familiarity of the

managers of the managers of a corporation to the location

where the investment is being made. If we observe the

behavior of many American corporations we will observe that

these corporations invest much easily in the economies of

Canada and Australia or Europe the reason behind this is the

managers familiarity with the cultures of these countries. (Roy

& Dibrell, 2002)

b) Market Attractiveness-The corporation decision to invest in

an economy will also be defined by the market size of the

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corporation that it is investing in. When we refer to market size

we not only are referring to the buying power of that nation but

also we are referring to the population which tells us more

about the market is its Gross national product.

Internalisation

This factor in Eclectic theory refers to a situation in a company

where it has to take the decision on corporation’s decision to sell or

lease its assets to its competitor. This asset has been gained or can

be gained by the corporation on favorable terms.

The reason for internalization is based on the hypothesis that

multinational corporation thrive by capitalizing in a lacunae in the

market by creating a market where no market exists. (Moore, &

Lewis, 1998)

One of the major reasons behind firm’s internalization is to

capitalize a market imperfection. (Dunning, 1980)

Market Imperfection being the inability of a firm to form a

symbiotic relationship with another firm, the reason being that the

Negotiation or Transaction is too steep, or where there is no

economy of scale when a corporation goes in for outsourcing of an

activity that is if a corporation goes in for outsourcing of an activity

it will not be able to build global capacities. (Dunning, 1980)

Internalising can be observed from two perspectives, that of a

seller and then that of a buyer. (Dunning, 1980)From a buyers

perspective the uncertainty is in terms of timely delivery of goods

and little control over pricing.

In the case of transaction it has been observed that some value is

lost when a tacit nature of resource is being transferred. Secondly

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if there is no perfect understanding between the two partners the

relationship has to have checks and balances to it.

An observation that has been made regarding internalization and

that is that some activities are more easily internalized than

others. (Dunning, 1985)For example the distance between

resources and the cost involved in the transportation is key reason

behind internalization of a factor is that the ability to create a

particular asset is present everywhere and there is no cost involved

its being transferred. (Dunning, 1985)

BARGAINING POWER THEORY
This theory hypothesizes that there is a struggle for ownership or
control of the enterprise between the multinational corporation and the
host nation. (Nathan & Wells, 1982)In this theory it has been observed

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that the host nation capitalizes on its control over the market while the
multinational uses its ownership as a source of bargaining power. This
theory also assumes that typically the struggle is based on the
struggle for ownership. (Deng, 2003)

This theory further observes that the vehicle used for entering a new
market is based on the relative bargaining power of the involved
parties. (Taylor et al, 2000)

There are many variables that affect the bargaining power of the firms
and the nations with each other. They are as follows
a) Capital-Capital can be a source of bargaining power for a
corporation especially if the hoist nation is from a developing
nation and promoted investments by multinational
corporations. (Lecraw , 1984) A corporation if it is investing a
large sum will have a higher bargaining power. Another effect
that can be observed is that of the size of the corporation if a
corporation is very large it has a more bargaining power in
comparison with a smaller firm, some authors have commented
that large corporations have even more bargaining power than
nations as a result o the increased bargaining power that these
firms have the probability of there equity being diluted will be
minimum.
Capital Intensity is not an end in itself fro many nations especially
the developing ones the creation of new jobs is also a deciding
factor so not only if a corporation is investing in a venture that is
capital, intensive it will be having an upper hand while bargaining
but if there is a corporation which is investing in a country which is
going to create jobs in that economy it will have a bargaining
power that will be equal to that of the firm that is bringing in more
capital than this corporation.

c) Market Accessibility-Some multinationals will only invest in
manufacturing in a country if they know that they can build
global capacities that will help them compete on a global scale.
(Nathan & Wells, 1982)Another case may be that a corporation

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invests in a market on the basis of the host countries buying
power.
In both the cases we can infer that the bargaining power will be in the
hands of radically different parties. Where the firm is exporting a
significant part of the produce the host country will have to part with a
significant part of control to the firm especially if the firm is operating
in a developing nation. (Nathan & Wells, 1982)But if the firm wants to
access more of the local market it will have to concede more control to
the host nation, as in this case the bargaining power will be more in
the hand of the host nation.

d) Management Expertise- It is one of the factors that affect the
bargaining power of the firm. (Lecraw , 1984)The management
expertise that is provided to the corporation’s subsidiary gives
the firm an upper hand in its ability to bargain with the host
country. But if the host country wants to develop this potential
within itself then it may insist on its own managers being given
the opportunity to handle the operation.
e) Technology-Technology plays an important role in bargaining
power theory. A firm with a high degree of proprietary
knowledge will strive for a high control entry mode. The higher
the proprietary knowledge a firm has the more influence it can
exert on a nation. This assumption is more relevant in case of a
developing nation. As if a developing country wants to enter a
particular high technology industry segment it cannot do so
without the help of a developed nation corporation. (Nathan &
Wells, 1982)The reverse is also as much relevant in this theory
if a certain product category is more mature the amount of
control that a firm will want will be much less.
f) Product differentiation-When marketing skills are important
for an industry the firm is in an advantageous position as it will
be having more bargaining power in comparison to the country.
(Nathan & Wells, 1982)These firms especially those that have
high advertising power will tend to have a high equity stake in
there venture as they understand that launching a new product
in the market and establishing it involves high advertising cost

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which a local partner may not be comfortable with or it may not
be able to afford.
The multinational corporations consider that if the host nation firms
become joint venture partners in the venture they will not have a
comfortable relationship, as there will be a lot of disagreement
over the strategy that should be adopted and the action that
should be taken. The multinational corporation also assumes that if
a high capital is utilized in the marketing of the venture an equal
relationship cannot exist with the host country firm.
g) Product Range- As referred to in chapter one many
corporations have to opt for a joint venture because of the
restrictive government policies being practiced by the host
country. (Deng, 2003)
For example during 1980’s China was practicing restrictive trade
policies due to which the corporations that wanted to enter this
country had to opt for joint venture with the state owned
corporation. (Deng, 2003)
There can be a wide degree of variance in the government’s policy
amongst nations; in fact even within a nation the government
policies can be different
h) Familiarity-How much the managers of a corporation are
familiar with the culture of a nation will affect the ownership
level of the firm, a corporation if it is familiar with the culture of
a country will be requiring less level of control so the bargaining
will be less. This familiarity does not diminish or increase the
bargaining power instead what it does is that the corporation
becomes comfortable with diluting its equity if the corporation
observes that the managers of the host country act in
accordance with the culture of the multinational corporation.
i) Country Risk-This factor considers variables like political
stability, economic fluctuation and currency strength. (Deng,
2003)Wherever the country risk is high the corporation should
try to minimise the level of commitment for that country. As if
the level of commitment is too high the corporation’s ability to
switch location is reduced.

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TRANSACTION COST ANALYSIS

THIS THEORY PROPOUNDS THAT ENTRY STRATEG Y IS
BASED ON THE ISSUE OF CONTROL (DENG, 200 3).
ACCORDING TO THIS THEORY ALL THE CORPORATIONS
THAT WANT TO ENTER A FOREIGN MARKET HAVE TO
KEEP THIS IN CONSIDE RATION. THE DEGREE OF
CONTROL CAN VARY FROM A HIGH LEVEL OF CO NTROL
TO A LOW LEVEL.

ALSO THERE ARE TWO B ASIC ASSUMPTIONS THAT ARE
MADE. ONE IS THAT PEOPLE ACT RATIONALLY BUT THAT
THEY ARE CONSTRAINED, AS THEY DO NOT HAVE
ACCESS TO ALL THE INFORMATION THAT IS TH ERE
ALONG WITH THIS ACCESS TO INFORMATION TH EY ARE
ALSO BOUNDED BY THE FACT THAT THEY DO NOT HAVE
THE ABILITY TO LOGICALLY ANALYZE ALL THE
INFORMATION.(SHRADER , 2001)

The second assumption that is made is that people are opportunistic
that is they will always be motivated by there own selfish self-interest.
(Shrader, 2001)

The factor to be considered while formulating the entry strategy in a
foreign market in terms of control is how much control a corporation
wants, for a high degree of control a high investment is required which
also increases the risks of the corporation while though the second
option gives a lower level of control it also requires a lower level of
investment. As already propounded in the first chapter the lower level
of control can be utilized for entry modes where the level of control
can be less that is it does not require a high level of involvement of
proprietary technology. The Benefit of higher control is not only that it
gives a corporation a higher level of say in strategy formulation but
that it also entails a higher level of returns. (Deng, 2003)
Transaction cost plays an important role as it can directly have an
impact on the bottom line of the firm, for example if a firm opts for
internalization it has to incur certain costs (administrative costs), on
the other side suppose a firm opts for collaboration it has to ensure

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proper checks and balances so that it is able to fully gain the benefit of
the collaboration these checks and balances in the form of contract
and legally enforcing those contracts. (Shrader, 2001) Transaction
cost also emphasizes the benefit of low control (It starts with the basic
assumption that corporation should opt for low control entry mode). If
a corporation forgoes this option when it had an opportunity to do so it
is unnecessarily increasing its costs also it would be forgoing the
benefit that accrues to a corporation when it takes the route of a joint
venture while it is entering a foreign country in terms of increased
market knowledge and also higher internalization costs related to
integration. Vice versa if a firm opts for collaboration when the
strategy that it should have adopted was of internalizing the also it is
increasing its costs as suppose the technology that it is marketing is
an arcane one then it is very difficult for the firm to communicate the
processes involved in the manufacturing the products. (Shrader, 2001)

When a firm opts for a high control entry mode it has to observe
whether the cost of gaining this control is equivalent to the returns
that it is supposed to get. If a high rate of return is not there then
there is no need for the corporation to venture for a high control
mode. (Deng, 2003)

Transaction cost analysis starts with an assumption that is it
hypothesizes that a low level of control is preferable until proven
otherwise (Deng, 2003). The reason behind this is if that in a market
there are a large number of suppliers then it is easy for the
manufacturers to get the goods at very competitive rates so there is
no reason for a corporation to integrate. By not integrating the firm
saves on costs. The inverse may also be suitable for the organization
this case would arise when it becomes an oligopoly for the supplier
that is only few suppliers are having control over all the supply base.

Following factors effect the decision of a corporation in making the
decision for the corporation about the kind of control that it wants for
a corporation

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1. Asset Specificity- The greater the degree the asset specificity
in an enterprise the greater will be the propensity of the
corporation to have a high level of stake in the venture. (Deng,
2003)
2. Technology- If there is proprietary information involved in the
manufacturing process there is a propensity of the corporation
to do the manufacturing themselves as it becomes difficult for
the parent corporation to evaluate the value of the technology
especially if the technology involved is a new one. (Roy &
Dibrell, 2002)
An aspect that can be observed in this relation with this is those
corporation which have a higher expenditure on R&D will in more
cases opt for wholly owned subsidiaries. Also in case of esoteric
technologies and processes the level of control that is required for the
corporation is high as the corporation will find it difficult to transfer the
process know how and technology across boundaries. When the
technology that is required to manufacture a product is well developed
then as the preliminary assumptions suggests there is no need of the
corporation to integrate the process within itself
When a new technology is developed it is necessary for the corporation
to have control on the handling of the operations as it has to ensure
that the technology being a new one the market and also the process
controllers have knowledge of the technology involved, with the
passage of time as this technology is diffused and this technology
starts to diversify the corporation can also let the control to be diluted.
(Deng, 2003)
With high technology being involved the multinational has also to
ensure that the proprietary nature of the information is not lost and so
also it has to maintain control as once it has shared the knowledge
about its product it can easily be utlised. (Roy & Dibrell, 2002)

3.Product- A product that requires a high degree of customization will
require a high degree of control in the venture by the multinational, as
where a high degree of customization is required in the product it will
be necessary for the corporation to be in constant touch with its
customer. (Deng, 2003)

23

4.Complementary Assets- As stated in the assumption that the
strategy of the corporation should be to opt for low level of control.
From this can be derived the point that corporation can have low level
of control if it opts for a joint venture. For a corporation to form a joint
venture it ahs to ensure that there are complementary assets involved
between the partners. The foreign partner is in an advantageous
position if it has the opportunity to enter the market where there are a
large number of corporations that it can form this partnership with.
(Deng, 2003)
5.Risk- The theory has put forward the hypothesis that the higher the
level of risk in a country the lower should be the degree of control.
(Andersen &Gatignon, 1985) as we can observe this is the assumption
on which Transaction cost theory operates. This theory elaborates that
for a corporation to lower its risk it has to opt for a venture where it
has lower ownership. That is it has to opt for a joint venture. As
already mentioned in the first chapter formation of a joint venture is
an advantage that both corporations can enjoy the benefit of
collaboration.

6. Brand- If we observe the market entry timing of multinationals we
can observe that any major players in an industry are not far behind
each other when they enter the market and increasingly in case of
multinationals it is important for the firm that is entering the market to
have awareness about the consumers that are there in the market.
With the increasing role of bodies like WTO it is becoming easy for
multinational to have collaboration with partners as they are now
much more certain of there rights being protected by these
institutions.
Even otherwise free riders can try to take advantage of the situation
by taking advantage of the situation and using the brand name and
selling inferior products and services but even they cannot enjoy the
benefit for long. (Shrader, 2001)

7. Government Policy- Government rules and regulation play an
important role in the market entry of a multinational, for example if we
observe the case of China since 1980’s it has considerably liberalized
the policy of multinational market entry as a result there is an

24

increasing number of corporations that are entering China.2 But in the
same aspect we have to observe that for entering China in many of
the instances the firm has to utilize the mode of entry of a joint
venture because of the government policy. In a similar manner a
corporation will make its decision about entering a market based on
the government policies. The higher the restriction that is imposed on
foreign participation the lesser will be the equity that will be invested
in the venture. By the foreign firm. (Deng, 2003)

8. Experience- a corporation will invest more in a country where it
has more market knowledge about the factors that govern the market.
(Deng, 2003) for example if we observe the investment that is being
made in China quite a substantial sum is being invested by Non
resident Chinese, the reason being already stated that the firms invest
more comfortably in those market where they have more market know
how.

25

BEHAVIORAL THEORY APPROACH-
One of the last theory of this discussion on market entry mode this
theory in unique in the manner in which it analyses the market entry
theories. This theory states that market entry commitment of a firm
are based on the corporations knowledge of the market, it further
states there is a proportional positive relationship between the
resources that are committed and the knowledge of the firm about the
market that it is entering. (Erramillii&Rao, 1990)

The amount of market commitment that a corporation has for a given
market is assumed to be composed of two factors
1. The amount of resource that have been committed
2. The degree of commitment.
The degree of resource that has been committed can be judged by the
amount of integration that that facility has with the other facilities of
that corporation and also how much is the facility vertically integrated.
The commitment of resources is not dependent on the fact that that
facility has to be based in the market that it is supposed to sell its
product but the resource commitment can also be a facility that
though is operating in the home country but that has committed its
resources for another country is also resource commitment, though
the hypothesis behind resource committed states that the resource
that has been committed should not be easily transferable and it can
be assumed that if the manufacturing is taking place in the home

26

state the resource committed may be less but this is not so as even
though the resource have been committed at the home state level
separate allocation has been made for the facility. (Johanson&Vahlne,
1977)

The amount of the resource that has been committed can be easy to
grasp it is dependent on the value of investment that is being made
for a particular market. (Johanson&Vahlne, 1977)

Having discussed the commitment, the factor that controls the amount
of commitment has to be studied.

This theory states that there are two types of knowledge that a
corporation can have about a market
1. Objective- This is the knowledge that a corporation can have by
it being told about the market factors that it will face by experts
from the industry. (Erramillii&Rao, 1990)
2. Experiential- This is the knowledge that is gained by the
corporation only through actually entering the market,
(Erramillii&Rao, 1990) that is why we observe the process of
many of the corporation that enter into a market in a sequential
manner. Some corporation keeping this experiential learning in
mind start there market commitments in a sequential manner,
that is when they plan to enter a market they do it by first
exporting to that market and then opening up a trading
subsidiary, going in for a joint venture formation and ultimately
moving towards a manufacturing unit.

When a corporation plans to invest in an economy it will have the
greatest if the returns are thought to be constant the corporation will
invest in that economy which it thinks will cost it the minimum to
operate in that country. And as culture play an important role in
governing the cost structure, the lesser the culture distance the more
comfortable the corporation will be in investing in that country.
(Kogut& Singh, 1998)

27

When corporations are investing in a foreign market will opt for a joint
venture due to the reason that the local partner will be able to
understand the culture of the country that it is investing in, the local
partner will resolve many of the problems that a OK

CHAPTER 3
An Empirical evaluation: of the theories.

In the previous chapter prominent theories were discussed of the
market entry modes. Putting forward many hypothesis that in this
chapter will be discussed in an empirically.
The first theory that is to be tested and discussed is the Eclectic theory
of market entry mode

1. Eclectic theory of market entry mode- J.Dunning was one
of the main propagators of this theory, this theory based its
hypothesis of investment on three factors that is. (Dunning,
1980)
a) Ownership.
b) Location Advantage.
c) Internalisation.

Ownership - various studies have been conducted on the Dunning’s
eclectic theory it being one of the oldest theories that were put
forward. One of the studies that have tested Dunning’s eclectic
Theory’s ownership advantage is that of Yigang Pan, This study was
conducted in China on 4223 international joint ventures that at the
time of study were 16.4% of all the joint venture population. (Pang,
1996)

28

The study studied many effects of ownership, for example this study
observed that higher the advertising expenditure the more likely would
be the tendency of the multinational corporation to opt for either an
equal equity stake or a majority stake. (Pang, 1996)

Another hypothesis states that the investment in a country is
dependent on the risk that a corporation observes in that country. The
hypothesis when tested in this study proved this hypothesis, in this
study it was observed that as risk situation in China improved the
multinational corporation was more comfortable investing up to 50%
of the equity. But this study had an added observation and that was
that5 in a country like China a corporation will increase its investment
till 50% of the equity on the changing of the investment climate for
the better but this does not portray that a corporation will increase its
investment from more than 50%, this observation has been made and
corroborated to a limited extent. (Pang, 1996)
Location- Dunning described location advantage hypothesis as that a
corporation will choose a location as its production location that
provides this corporation with all the variables that it requires for
fulfilling its objectives. The factors that Dunning was concerned about
was
a) The size and character of the market (Dunning, 1980)
b) Production and transfer cost.(Dunning, 1980)
Dunning carried out his research on American multinational across
fourteen manufacturing industries in seven countries. The corporations
were studied on the basis of their exports to a particular nation in
conjunction with the production that is taking place in the country. The
hypothesis compared the ratio of local production to exports from
America, the higher the ratio the higher is the commitment of that
corporation to that country.(Dunning, 1980)
The study revealed that the main advantage of the U.S firms lay in one
location specific variable and that is the relative market size and one
ownership specific variable that is the skilled employment ratio .In his
study Dunning observed that both the factors were significant at 99%
level of significance.(Dunning, 1980)

29

Internalisation- This is the third factor that is studied in theEclectic
theory. A study was conducted on the process of internalization on
Upjohn Corporation a pharmaceutical company. (Fina&Dugman, 1996)
The case study considered Upjohn’s operation in 61 countries. This
study observed the market entry in nine stages in terms of the
commitment to that country. (Fina&Dugman, 1996)
This study observed that market entry in a foreign normally took the
route of
1) Exports
2) F.D.I
3) Licensing

This study observed that this is the route that was taken by Upjohn
Corporation in most of the nations that it invested in.
The reason this study gave for this movement was that internalisation
moves on the assumption that the information that is passed to a
licensee is secure which is not possible in the early stages of the
market entry.
The study observed that in 61 countries where the company was
observed in 38 of them Upjohn operated initially by exporting, in 16 or
other cases the entry was through host country representatives who
also were initiated usually after there being coming to an agreement
with the local distributor. In two cases that is of China and Hong Kong
the investment was made directly in sales office. In case of Germany
the investment was made directly in a subsidiary but that was because
of regulatory country specific reasons.
In Turkey, Spain and Ex-Czechoslovakia the investment was made in
licensing, a point to be observed here is that though all the entry
modes have been made the preponderance is that of the first
investment is being made in indirect exporting. Also in none of the
cases is the investment being made in a wholly owned subsidiary.

30

2) Bargaining Power Theory-
This theory propagates that a corporation propensity would be to have
control on the venture that it is investing in. (Nathan & Wells, 1982)
One of the most important studies done on this theory was by Fagre
and Wells. They conducted a research on United States multinationals
operation in Latin America. (Nathan & Wells, 1982)
The research had several hypotheses.
a) The bargaining power of the corporation was affected by the
technological factor The result tat were observed were
consistent with the hypothesis that is the percentage of sales
that is spent on the R&D is positively related to bargaining
success. (Nathan & Wells, 1982)

R&D EXPENDITURE AS A % OF SALES AND THREE
MEASURE OF PARENT’S OWNERSHIP

% Of sale spent Average ownership level
on R&D
Actual Firm-Corrected Country-
Corrected
0-.75 88 18 -1

.75-2.5 86 15 -1
b) T
h
5 & Over 99 20 10
e

second factor that was affecting the bargaining factor was

31

product differentiation. The study proved that the corporations
that spend more than 7% of there sales on advertisement had
greater bargaining power. Some 202 corporations that were
among the highest spending corporations were from
pharmaceutical or cosmetic industry; this study observed that
this bargaining power was not only for some particular industry
but also for all the sectors.(Nathan & Wells, 1982)

LEVEL OF ADVERTISING AND THREE MEASURE OF PARENT’S
OWNERSHIP

% Of sale spent on Average ownership level
c) M
advertising
a
r
Corrected
k
0-1 85 14 3
e
1-7 89 17 0
t
Over 7 98 21 9
Access-This theory hypothesized that a corporations ability to
export 50% or more of there products gave it a bargaining
power, the corporation that were studied exported to both
within themselves and also outside. (Nathan & Wells, 1982)

THE % OF OUTPUT TRANSFERRED WITHIN THE PARENT
SYSTEM AND THREE MEASURE OF PARENT’S OWN ERSHIP

advertising
Corrected
0-10 80 15 -1
d) C
10-50 91 21 2
a
p50-100 95 23 8
ital-The hypothesis brought forward in this theory was that the
amount of capital that is being invested in a firm is also a
source of bargaining power for that firm.(Nathan & Wells,
1982)
The observations that were made were not too conclusive for
example it was observed that for investment up to dollars 100

32

million the corporation was able to gain no significant bargaining
power. Another observation that was made was when an
investment of more than Dollar 100 million was being made, that
corporations invested in those countries that were more liberal in
allowing that investment to be made and were willing to give the
controlling stake to the corporation. (Nathan & Wells, 1982)

THE FINANCIAL SIZE O F THE AFFILIATE AND THREE MEASURE
OF PARENT’S OWNERSHIP

advertising
Anot
her
Corrected
stud
0-10 80 15 -1
y
10-50 91 21 2
that
teste 50-100 95 23 8
d some of the hypothesis of the bargaining power was one by
Bobillo&Palenzuela this study was conducted on 60 Spanish
corporations, an observation that was made that was made contrary to
the traditional bargaining theory was regarding asset specificity, in the
bargaining power theory it was observed that corporations with high
asset specificity will invest in higher control mode, in case of Spanish it
was observed that corporations on increasing there asset specificity
opted for shared control mode. (Palenzuela&Bobillo, 1999)

3) Transaction cost Theory- Transaction cost theory is an important
theory in terms of explaining the market entry mode of a corporation.

This theory hypothesizes that a corporation will make its investment
decision on the basis of the most efficient market structure. (Deng,
2003)

33

Anderson&Gatignon(Andersen &Gatignon, 1985) put several
hypotheses forward that were not tested empirically by them but an
empirical study conducted by Beamish and Delios(Deng, 2003)did do
this. This study was conducted in Asia the corporations that were
studied were based in Japan; this was so done as in the past nearly all
the corporations that were studied were based in America. That data
was obtained from 1,043 firms (Deng, 2003)

As hypothesized by Anderson and Gatignon that there exists a positive
relationship between asset specificity and level of ownership. This
study observed ht same. This study was conducted on both firm level
and industry there was a discrepancy in the results, on observing on
the level of the firms it was observed that either there is no
relationship between asset specificity and ownership or that there is an
inverse relationship, this result should give the followers of this theory
a word of caution.(Deng, 2003)

Another observation that was made by Beamish and Delioswas that
the Japanese firms did not try to reduce transaction costs as
hypothesized by the transaction cost theory. The reason observed in
the study did not question the observation in the theory instead the
observation that was made by the authors that the reason behind this
is the fact that the Japanese corporations did not spend such a large
sum on either R&D or on advertising, However an observation that was
made for the corporation that invested in a country after 1984 was
that R & D investment was significantly related to the level of
ownership, but this observation was limited to those investment that
were made after 1984 and not prior to that.(Deng, 2003)

It may be interpreted as that this study was studying the behavior of
only the Swedish Corporations but this also was refuted by
JohansonandsVahlne, when they quoted the study conducted by
several researchers in there study.

Another study that has been conducted and which has further
strengthened this behavior model is that by Bruce Kogut and Harbir
Singh, The study was conducted on 228 entries in the market in the
form of joint venture, acquisition and Greenfield investment, The

34

research proved the hypothesis that had already been stated by the
previous study and that was that the effect of cultural distance is to
increase the probability of choosing a joint venture instead of acquiring
a firm

4) Behavioral Theory Approach- This is the last theorythat was
observed in this study. This study hypothesized that a
corporation makes its investment decision on the basis of the
market knowledge that it has about a market that it is entering.
This theory observed that the more the market knowledge of a
firm the more it will be comfortable in making the investment in
that country. There have been two major studies that have
contributed to the literature of Behavioral theory, these two
studies I have also referred in my study. (Johanson&Vahlne,
1977)

The first study being that of Jan Johanson and Jan-Erik Vahlne
conducted by them in University of Uppsala on Swedish firms, in
this study it was observed that the Swedish firms take there
investment decision in small incremental steps.(Johanson&Vahlne,
1977)

In another study that was done by Johanson and Vahlne they
observed that the firms that want to make an investment follow
the route of no regular export, sales through an independent
agent, export through a subsidiary finally moving on to production
seems to be the move that these firms seem to follow.
(Johanson&Vahlne, 1977)

In the study it was observed that of the 63 sales subsidiaries the
agents preceded (Andersen &Gatignon, 1985)

This observation was there for all the firms. When these
researchers observed the production subsidiaries they found a
difference between Sandvik and Atlas Copco on one side and Facit
and Volvo on the other, in the former twenty-two of the twenty
seven were preceded by sales subsidiaries, whereas in the latter it
was observed that five out of seven occurred without the firm

35

having establishing any sales subsidiary of any
kind.(Johanson&Vahlne, 1977)

Conclusion.
All the four theories that have been observed are major theories that
discuss the major factors that affect the market entry mode in an
international market, but these theories are not complete in
themselves as they all have some limitation inbuilt as all the aspect

36

have not been studied in a single study. The first limitation that is
observed in the eclectic theory
a) The factors that decide on a firm’s decision and the factors that
affects a country decision to promote foreign investment can be
diabolically opposite, they are not related to each other, for
example a firm that decides to invests in an economy may be
doing so because of the corporations internal policies instead of
the market attractiveness of that economy, therefore the
factors that correlate these two are missing and it is difficult to
relate these two. (Macharzina& Engelhard 1991)
b) The variables that have been selected have not been properly
tested, so though the variables seem to be very relevant they
may not be so as they have not been tested empirically, so the
factors that are used to study the various factors in the Eclectic
theory investment have themselves to be studied, leading to
invalidating so many results that have been made through the
use of this study.(Macharzina& Engelhard 1991)
c) The third aspect that the Eclectic model lacks is that there is no
consideration for the behavior of the managers of the
corporations of the world towards there strategy of decision
making, so we observe is a generalization in the factors that
affect the market entry mode across.(Macharzina& Engelhard
1991)
d) The motive of the different firms that make there decision
regarding the investment in different countries will be different
when considering the Organisation, Location and Internalisation
factors, so a generalization is not an effective tool to be used
while using eclectic paradigm as the sole decision making toll in
an investment decision.
e) The three factors of Organisation, Localisation and
Internalisation have been considered from a macro perspective
though the corporation while taking their investment decision
face factors at a much more micro level.

The other major theory that has been studied and where some
shortcoming of the theory has been pointed out by authors like

37

SumantraGhosal and Peter Moran has been Transaction Cost
Framework. Ghosal and Moran have criticized this theory oft used
by many researchers as a foundation for studying decision making
of corporations and also widely used in many socio-economic
issues for the following issues.
1. GhosalAnd Moran commented that Transaction cost
Framework does not take into consideration the human
aspect of the functioning of an organization and only
consider the technological aspect, whereas in many
organizations assets are its people. (Kogut& Singh,
1998)

2. Ghosal and Moran have criticized Transaction cost
theory because they comment that opportunism is not
only the tendency of human’s but also of corporations,
this aspect of corporations also being opportunistic has
not been discussed by the Williamson in his Transaction
cost framework. (Kogut& Singh, 1998)

The areas of study in Bargaining power and behavior theory is quite
new in relation to the other two theories that have been discussed and
so there is relatively lesser literature that was available for this study,
the major drawback that these theories face are

a) These theories are complementary that is that they are not
independent theories that can on there own discuss the
strategy that is utlised by corporations for entering the market,
for example the behavior theory hypothesizes that a
corporation invests comfortably in a market when it has got
knowledge about that market. But market knowledge is no the
singular factor that affects a corporations market entry other
factors like market size and market Attractiveness’ play an
important role in the decision making process.

IMPLICATION OF THE STUDY

38

An area of further study and with much more detail and also more
resources would be to hypothesize and prove a theory that is able to
amalgamate the basic assumptions of all the four major theories that
is why we observe that some researchers are moving in the area of
trying to study the entry modes on the basis of more than one theories
like Palenzuela&Bobillo who have tried to study the entry mode using
both Transaction cost and Bargaining power theory

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43

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