Академический Документы
Профессиональный Документы
Культура Документы
Market
entry modes
for international
businesses
Learning objectives
After studying this chapter you should be able to:
1. Understand differences between exporting, contractual and investment modes.
7
----------------------------------------------------------------------------------------------------------------------------------
2. Distinguish between direct and indirect exporting modes.
----------------------------------------------------------------------------------------------------------------------------------
3. Describe and understand four main entry modes of indirect exporting, four main forms of
direct exporting, and two main modes of cooperative exporting and main contractual and
investment modes of entry.
----------------------------------------------------------------------------------------------------------------------------------
4. Discuss the advantages and disadvantages of the main entry modes.
----------------------------------------------------------------------------------------------------------------------------------
Similarity of cultural environment in Visegrad countries enables to consider markets of Visegrad countries
as a whole and supply with Christmas chocolate specialties all of them using direct export. Multi language
Visegrad version is the best example how to create standardized product that fits the needs of regional
(Visegrad) market. Photo: tefan Horsk, 2013 135
Market entry modes for international businesses
Introduction
This book takes a very broad understanding of business internationalization by Welch and Loustarinem
(1988), who define internationalization as the process of increasing involvement in international
business activities. 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). The
maturity for internationalization of activities plays a crucial role while considering the entry mode. In
the literature, there are different models explaining the internationalization of the firm and the entry
modes. The different forms of entry into foreign markets have different efficiency, but also a variety
of input costs. It seems that the most common taxonomy distinguishes three fundamental groups,
namely: exporting modes; contractual modes; investment modes (Figure 7.1 and Table 7.1).
While implementing While implementing direct exporting, exporters take on the duties of
direct exporting, intermediaries and make direct contact with customers in the foreign market. Direct
exporters take on the exporting can be performed in several ways, most commonly by (Hirsch, 2010; Stone
duties of intermediaries and McCall, 2004):
and make direct contact an own representative office operating on a transfer of rights and obligations of
with customers in
the foreign market
the parent company, since its function is reduced to a mere marketing activities,
136
Market entry modes for international businesses
Trading subsidiary:
marketing satelite
Production subsidiary:
Setting ways:
rationalised manufacturer
brownfield investments
product specialist
greenfield investments
Mixed subsidiary:
miniature replicate
strategic independent
The representative office can act as a salesman for foreign trade contracts (negotiating the terms
of delivery and conducts market research, which is necessary for direct exporting). A national sales
representative can be formed in three ways as:
an own employee of a business delegated abroad for a given period (working abroad only
temporarily),
an own local employee of a business (employed directly by the parent company abroad),
a local business partner (representing only the interests of its principal, which is the parent
business).
137
Market entry modes for international businesses
B. Contractual modes
low capital commitment relatively low profitability
An exporter provides low risk
Management management services gaining experience on the foreign
contracts for a company that is market(s) by domestic managers
owned by the importer can be regarded as a substitute
form of foreign market entry
potential higher profits require high costs
chance of a permanent presence a form difficult to implement
Any complete on the foreign market(s) after the high financial risks
Turn-key
construction of any completion of the investment
operations
industrial plant abroad ability to earn returns from
technologies in countries
where FDI is restricted
138
Market entry modes for international businesses
139
Market entry modes for international businesses
Such a representative office can take many forms, while traditional agencies (foreign agents) are
the most popular, however there are also marketing offices, technical offices, information offices and
consultation offices. Agents and distributors generally obtain territorial exclusivity to sell the goods,
usually limited to one foreign market (exclusive importer). A foreign agent can also work on an exclusive
basis (exclusive agent), but there are also semi-exclusive agents, who serve at the same time some
exporters, but offering uncompetitive goods (Hollensen, 2007).
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). They can be
formalized or based on a loose cooperation between enterprises, especially of micro, small and medium
size. Their largest advantage is spreading the cost of export activity for members of the consortium, which
allows SMEs to overcome one of the main barriers to internationalization, which is their limited financial
resources.
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. For the access it charges a commission from the firm planning to start export
activities. The products offered by the cooperating firms should be complementary. This form of export
is beneficial to both parties, but carries certain risks. A carrier can thus complement its product line,
but also lower maintenance costs borne by its own distribution network abroad by sharing them with
a rider. Risk of low quality products of his co-operator, which may jeopardize his reputation, but also
timely delivery, may be potential drawbacks to a carrier. The largest advantage for a rider is the access to
the foreign distribution network, and the disadvantage is the loss of control over the distribution of its
products. This mode is particularly recommended for micro and small businesses who are not able to
make their own foreign investment.
140
Market entry modes for international businesses
seeking motives. Small and medium-sized enterprises are usually and mostly international contractors.
Subcontracting may deal with components or semi-finished elements and in this case it takes the form
of exporting. Whereas for complete products, it is done as means of production outsourcing, and the
parent firm only takes control, marketing and trading, as well as research and development functions
(Hollensen, 2007).
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 (Onkvist and Shaw, 2004). The modes can be divided into a number of 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 of
trade and distribution in the wider services sector. Due to the much lower start-up costs of such activities,
this form is particularly popular among SMEs, especially among self-employed or micro-enterprises,
especially in the European Union (Stone and McCall, 2004).
141
Market entry modes for international businesses
commitment is entirely consistent with the parent company. The scope of activities of the branch can not
be greater than this of the parent company, although in practice it is frequently narrower. Branches are
early modes of hierarchical forms of internationalization, which as a result of their success very often lead
to the transformation into subsidiaries (Hollensen, 2007).
Figure 7.2 As a part of VUSG project International Marketing: A Visegrad Perspective, Nr. 61100001
students visited Business Park in Znojmo, Czech Republic as an example of greenfield
investment due to good location, and qualified and relatively cheap labor source
Photo: Johana Paluchov, Znojmo 2013
A subsidiary has a separate legal status and is a separate entity operating under the laws of its country
of legal foreign location. However, in legal terms, subsidiaries are created in one of the legal forms of
economic activities occurring in the law of the host country.
Due to the range of activities and the degree of freedom, Poynter and White (1984) distinguish five
fundamental activities of affiliated entities:
a miniature replicate, when all or most of the activities of the parent company are covered by
asubsidiary,
a marketing satellite, when the subsidiary sells in the local market to foreign products produced
centrally (trading or commercial subsidiary),
a rationalized manufacturer, when a subsidiary produces a specific set of parts or products for use in
the international markets,
a product specialist, when a subsidiary produces a limited range of products for the global market
(production specialization),
a strategic independent (an independent subsidiary), when a subsidiary has a strategic independence
of its operations from the parent company.
142
Market entry modes for international businesses
V4 V4 Marketing insights
Comarch S.A. (plc.) was established soon the company gained three major customers,
in Krakw in 1991. The internationalization process namely Terra Telecommunications Corp. (alarge
began in 1999 as a result of the establishment of telecommunications company in the U.S.), Enitel
the first subsidiary of Comarch Global Inc. based Nicaragua (the largest national operator), DTMS
in Washington, DC, in which Comarch S.A. had AG (the German market leader in business phone
90% of shares. In 2000, a group of foreign troops, services). The presence on the French market
joined an affiliate Comarch Software AG, located was initiated by taking co-operation with Steria.
in Frankfurt am Main. One year later, following the However, in the eastern markets a foreign branch
acquisition of all shares by Comarch S.A., changed was established in Moscow in 2003. This resulted
the legal nature of the related party, resulted in in the creation of representative offices in Kiev,
becoming a wholly-owned subsidiary. Meanwhile Bratislava, Dubai and Panama, and two years later
Comarch S.A. contracted a number of significant in Vilnius. In the following years the company
cooperation contracts. The first consisted of noted very dynamic growth on German and
co-operation with Nokia Networks, in joint research French markets. Comarch, as a Krakw based
and software development. The second and third holding, registered two companies in the Far East,
one were carried out in the United Arab Emirates specifically in China and Vietnam, not planning
in a consortium with local partners to provide deeper greater investment. The main reason
a billing system for Dubai Internet City. Very for this decision is the difficulty caused by the
143
Market entry modes for international businesses
Hollensen (2007) suggests a more complex model of entry mode choice taking into account four
determinant droups of decision-making, namely (Figure 7.3):
internal factors associated with the firm, including the product and its advantage as a subgroup of
these factors,
external factors dealing with the environment of the host country, as well as the home country (Figure
7.4),
specific characteristics of different modes that has been discussed above (Figure 7.5 and Table 7.2),
transaction-specific factors.
In total, 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).
Figure 7.4 While discussing the opportunities and barriers of exporting biscuits products to Central
Europe the large distance and its impact on price increase was identified as the basic obstacle
for more intensive mutual business relations with Maltese companies. In Consolidated Biscuit,
Co. Ltd. Birkirkara, Malta
Photo: tefan Horsk, 2010
144
FIgure 7.5 Factors affecting market entry choice
Source: adapted from (Hollensen 2007, p. 298) with the modified layout.
Market entry modes for international businesses
145
Market entry modes for international businesses
Summary
The chapter is devoted to entry modes into foreign markets, as well as determinants affecting the choice
of a particular entry mode. The modes are discussed in three main groups, namely exporting modes,
contractual modes (also known as non-equity modes, cooperation modes or intermediate modes)
and investment modes (also known as hierarchical modes or equity modes). The direct and indirect
exporting, as the most popular modes, are focused in the chapter. However cooperative exporting
like export consortium and piggybacking is also described. As for the contractual modes, the chapter
elaborates the following ones: managerial contracting, turnkey operations, contract manufacturing,
as well as assembly operations. Finally the investment modes as a foreign branch, a joint venture
subsidiary and a wholly-owned subsidiary are discussed.
Key terms: Entry mode, indirect export, direct export, export grouping, piggybacking, agent,
distributor, licensing, franchising, assembly operations, contract manufacturing, branch,
subsidiary, joint venture, brownfield investment, greenfield investment
146
Market entry modes for international businesses
Literature
Baorakis, G. Katsioloudes, M. I. Hadjidakis, S. 2007. Entering the International Market (chapter
8) [w:] M.I. Katsioloudes, S. Hadjidakis, International Business. A Global Perspective, Elsevier, Burlington MA.
Cullen, J. B. Parboteeah, K. P. 2010. International Business. Strategy and the Multinational Company,
Routledge, New York.
Czinkota, M. R. Ronkainen, I. A. 2007. International Marketing. 8th edition, Thomas South-Western,
Mason, OH.
Green-Clowes, M. et al. 2000. Transforming Europe: Europeanization and Domestic Change. red. M. Green-
Cowles, J. Caporaso, T. Risse, Cornell University Press, Ithaca London.
Hisrich, R. D. 2010. International Entrepreneurship. Starting, Developing and managing a Global Venture.
Sage, Los Angeles London.
Hollensen, S. 2007. Global Marketing: A Decision-Oriented Approach. 4th Edition, Pearson Education,
Harlow.
Onkvist, S. Shaw, J. J. 2004. International Marketing. Analysis and Strategy. 4th edition, Routledge, New
York London.
Poynter, T. A. White, R. E. 1984. The Strategies of Foreign Subsidiaries: Responses to Organisational Slack.
International Studies of Management and Organisations, vol. 14, no. 4, pp. 91106.
Stone, A. McCall, J. B. 2004. International Strategic Marketing. A European Perspective. Routledge, London.
Terpstra, V. Cho-Ming, Y. 1990. Piggybacking: A Quick Road to Internationalisation. In International
Marketing Review, vol. 7, no. 4, s. 5263.
Wach, K. 2012. Europeizacja maych i rednich przedsibiorstw. Rozwj przez umidzynarodowienie
[=Europeanization of small and medium-sized enterprises. International growth]. Warszawa : PWN.
Welch, L.S. Loustarinen, R. 1988. Internationalization: Evolution of a Concept. In Journal of General
Management, vol. 14, no. 2, pp. 3664.
147