15. What are the major forms of internationalizing? How do firms choose the market entry modes?

Major Forms of International Business:

􀁼 Exporting

􀁼 Licensing

􀁼 Joint Venture

􀁼 Direct Investment

To choose between the optimal levels of the aforementioned factors the firm has to consider all the elements of the external environment that it will encounter once it enters the foreign market, in combination with the internal environment that characterizes the firms’ operations, skills, and competencies.

Most past studies on the foreign market entry strategies of multinational firms have mainly concentrated on the factors and the conditions behind the use of each entry mode and four main schools of thought have been formulated to explain the choice of entry mode. Some studies have adopted one of two theoretical approaches. One is the transaction cost analysis (TCA) approach, which prescribes international activities according to the economic rationale that firms will minimize all costs associated with the entire value-added chain (from production to consumption of goods), thereby considering the entire foreign market entry as one transaction. This approach stresses the importance of firm-specific variables and has been used to explain how firms enter and operate in foreign markets. According to this school of thought, organizations will internalize those activities that can be performed at a lower cost but will subcontract all other activities to external providers. A similar approach was proposed by Dunning5 who with his eclectic framework (or location-specific factors or contingency theory) proposes that three types of factors affect international business activities: host country-specific factors, ownership-specific factors, and (most importantly) internalization factors. The host country-specific factors include country risks and location familiarity, while ownership and internalization factors focus on the industry-specific and firm-specific variables. The agency or bargaining power theory6 views entry mode choice as an outcome of negotiations between the firm and the government or local firms of the host country. In the agency theory the principles (new entrants) are highly motivated to collect data about their agents (entry modes in foreign markets) in the target market. The relationship between the two parties is described as if a contract is to be made between them, in which one party delegates work to another. The Scandinavian “stages” model of entry suggests a gradual involvement pattern of entry into successive foreign markets, coupled with a progressive deepening of commitment to each market. Increasing commitment is particularly important for some other researchers who closely associate the stages models with the notion of “psychic distance,” which attempts to conceptualize and, to some degree, measure the cultural distance between countries and markets 2003.7 Resource commitment and the level of risk to be accepted are the central explanatory factors in this theory. Therefore, the higher the risk in the target market, the fewer the resource commitment related entry modes that would be deployed in that market. Also, the more experience the organization has, the higher the tendency to use resource commitment-related entry modes.