Answer: The entry mode decision is a complex process with numerous trade-offs among alternative entry modes. To handle this complexity, managers need an analytical model that facilitates systematic comparisons among entry modes. For the present, we offer a general view of the external and internal factors that influence the choice of entry mode.
External Factors:
Market, production and environmental factors in both the target and home countries and seldom be affected by management decision. They are external to the company and may be regarded as parameters of the entry mode decision. Such factor can encourage or discourage a particular entry mode.
1. Target country market factors
- Size of market: The present and projected size of the target market is an important influence on the entry mode. Small markets favor entry modes that have low breakeven sales volumes. Conversely, markets with high sales potentials can prefer entry mode with high breakeven sales volumes.
For small markets—indirect and agent/distributor exporting, licensing and some contractual arrangements.
For high sales potential markets—branch/subsidiary exporting and equity investment in local production.
- Competitive structure: Market may be atomistic (perfect competition) to oligopolistic (few firms), to monopolistic (single firm).
Atomistic market—exporting and a little bit equity investment.
Oligopolistic & monopolistic—licensing and contractual modes.
- Marketing infrastructure: Another dimension of the target country market is the availability and quality of the local marketing infrastructure.
When goods agents or distributors are tied with other firms or are simple nonexistent then exporting through branch or subsidiary will be suitable option.
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2. Target country production factors:
Quality, quantity and cost of raw materials, labor, energy and other productive agents in the target country, as well as the cost of economic infrastructure (transportations, communications, port and similar other) have high influence on entry mode decision. Low production costs in the target country encourage local production rather exporting.
- Target country environmental factors:
The political, economic, and socio-cultural character of the target country can have a decisive influence on the choice of entry mode.
- Government policies and regulations: Restrictions, tariffs, quotas and other barriers discourage export entry mode and favor other entry modes.
Some countries discourage sole venture and favor joint venture—china.
Similarly tax holiday incentives encourage foreign investment.
- Geographical distance: When distance of target country is high, it discourages exporting because cost become high against local goods and favor other mode where such costs do not incur. Knockdown shipment can reduce substantially transport cost and encourage assembly operation in target country.
- Economy system: Whether market economy or centrally planned economy. In planned economy firms must rely on non-equity exporting, licensing or other contractual agreements.
- Size and performance of the economy—GNP and GNP per capita.
- Dynamics of the target country’s economy—Rate of investment in target country’s economy, growth rate of GNP and personal income, employments etc.
- Cultural distance: Between home country and target country societies regarding values, language, social structure and way of life. Company should enter first the country which is similar with the home country.
4. Home country factor: Market, production, and environmental factors in the home country also influence a company’s choice of entry mode to operate in a target country.
- Size of market:
Size of market—Big domestic market allows company large production.
Small market countries—are attracted exporting.
- Competitive structure:
Oligopolistic trends to invest in production in foreign market. Whereas.
Atomistic industries are more inclined to enter foreign market as exporters or licensors.
- High cost of production: In home country may encourage local production in target countries such as licensing, contract manufacturing and investment?
- Home government policy: Offers tax and other incentives for exporting and restrict on investment.
Internal factors:
Product factors
- Highly differentiated product: It has significant degree of price discretion. This product can absorb high unit transportation cost and high import duties. So this product can be exported to target market.
While low product differentiation favors local production (manufacture or equity investment)
- Pre or post purchase services: Make Company’s difficult to market at a distance. Thus service incentives products are biased branch/subsidiary exporting and local production entry modes.
- Service firms: It is better to enter through branch and subsidiaries, technical agreements and construction contracts.
- Technologically incentive product: License to use the technology than others.
Resource/commitment factors: The more abundant a company’s resources in management, capital, technology, production skills, and marketing skills the more numerous its entry mode options. Conversely a company with limited resources is constrained to use entry modes that call for a small resource commitment.
