Universidad del Rosario

Tatiana Pardo Pinzón

Gerencia de los negocios internacionales

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After reading "Trade, foreign direct investment or acquisition: Optimal entry modes for

multinationals"we can say that there are 3 modes of entry for multinationals: trade, foreign

direct investment (FDI) and acquisition, where we talk about exports in the first case, of

investment in another country either by greenfield investment or licensing in the second case

and about acquiring another company or business in a foreign country in the third case. For

these three cases, there are certain determinants that allow companies and their managers to

determine which mode of entry (of the 3 mentioned above) is the most suitable for the

company when entering a new foreign market.

Those determinants, as explained in the reading, are indispensable and must be taken into

account by companies to make decisions about where to internationalize and how to do it in a

correct way, so that the company's global expansion process is successful. These optimal

input determinants are: Fixed costs, market size, tariff and transport costs and competition,

these should be evaluated individually according to the country or market in which the

company is trying to incursionate and its characteristics.

In the case of competition, the existing level of competition in the country must be evaluated

and how it works to decide the most appropriate mode of entry, so that, depending on the

level, we classify it as sufficiently high level of competition, level of high competition and

sufficiently weak level of competition, where, in the first type of competition, only one of the

firms (international or local) survives in the market and the multinational has the possibility

of using FDI or trade as an entry mode to compete and maintain competitive advantages. In
the second case, the multinational may or may not drive out the local company from the

market, this depends on the rates or tariffs that are in the country, and for this case a more

aggressive entry behavior is required. Finally, in the third case, both firms or companies have

the possibility of staying in the market, however it depends on fixed costs, transport costs and

market size to choose an entry mode (although all 3 are possible ), for example, if tariffs and

transport costs are low, the most appropriate mode will be trade but if these are high, the most

appropriate will be FDI.

In the case of the size of the market, the type of economy in which the company wants to

enter must be evaluated, if it is in transition or not to determine if the market size is large,

medium or small, depending on this, the company must evaluate which mode of entry is more

suitable, for example, the possibilities of using tade as an option increase as the market size

increases and in small markets, the most common mode of entry is FDI.

With regard to tariffs, the size and the government policies or their interests should be

evaluated, if tariffs are low, competition increases, market demand for domestic products and

their prices decreases. but these tariffs depend largely on the government and its decision to

protect either the industries or companies of the country or the clients and the size of the

market in which the country is located, if it is in a large market the government seeks to

protect local businesses so tariffs are higher, while in an intermediate-sized market the rates

are lower, but still high since the government seeks to protect consumer welfare.

In general, low trade barriers favor international trade over other entry modes, however, if

trade barriers increase trade becomes viable only in intermediate sized market and acquistion

is better than trade as long as FDI fixed costs are not too large and if the market is large,

independent of trade barriers. In the other hand, local firms will always seek high protection

from its government and multinationals will seek free international trade.