Foreign Market Entry Essay, Research Paper
1.0 Objectives
The author?s objective in this article is to discuss on the effective modes of entry for businesses that is planning to venture into international market. The entry modes methods discussed are aimed to help businesses to formulate an effective international business strategy and to position themselves to be successfully established in the global market.
2.0 Central Theory
The central theory introduced in this article is developed based on a comprehensive framework of the entry modes choices. These modes of choices would determine the success factor of the international business strategy, and to choose these choices there are several important factors to be considered. These factors include situational firm factors, foreign environment review, and moderating factors that would directly influence the firm?s desired mode of choice.
Referring to Appendix A is the mode choice of framework by Driscoll that depicts the whole concept discussed. To briefly illustrate, the firm would need to evaluate the two situational factors that would directly affect its desired level of different modes of characteristics. Subsequent from the selected desired modes, the firm would also need to determine the potential moderating influences, which would affect the desired mode. Thus, reassessment based on the moderators would take place to determine the most effective modes of entry. By selecting the right mode of entry, the firm would incorporate an effective business strategy for its international business plans.
3.0 Arguments
The article written by Driscoll is set to present an argument for the development of a comprehensive framework for understanding the mode of entry choices. In the article, she illustrated about the different modes of entry to international markets, analyzed on the different characteristics of the entry modes, discussed on the number of situational influences and moderating factors, and presented a comprehensive model of understanding with remarks on managerial implications.
Some of her arguments include the three broad grouping of the foreign entry modes that should not have any other classification, unless it has similar meanings such that quoted by some reference; and the five key characteristics of the entry modes that is similarly supported by other authors such as Agarwal and Ramaswami 1992; Anderson and Gatignon 1986; Douglas and Craig 1989; and etc.
4.0 Methods and evidence supporting the author’s viewpoints
Driscoll?s methods and evidence is based on the centralized theory of the framework of entry modes choices. The following are the various methods used and supporting evidence in the framework model.
4.1 Modes of entry to international markets
According to Driscoll, there are 3 main foreign market entry methods; namely
export, contractual and investment modes, which is supported also by other authors like Anderson and Gatignon’s (1986), Root’s (1987) and Young’s (1989).
These three methods encompass a broad area for a firm that is planning to enter into foreign market. As Driscoll explains, export modes can include either a direct export from its local market to the foreign market or an indirect involvement through an appointed trading house.
Then, in a contractual entry mode, a firm can arrange various methods such as licensing, franchising, turnkey projects, non-equity joint ventures and etc. to tap into its international market. In general, this method reduces the level of equity investment and direct participation by the firm. However, some evidence that Driscoll related, such that for franchising, where Burton and Cross (1995) argued that there are possibilities of higher level international involvement and equity investment by the firm.
Then, investment modes are methods used for some form of ownership by the firm in the foreign market. For instance, the investments may involve acquisition, merger or greenfield strategy and joint ventures basis, where Driscoll quoted some reference from Kogut and Singh (1988).
4.2 Characteristics of different entry modes
Driscoll proposed that the key characteristics of the entry modes methods are level of control, dissemination risk, resource commitment, flexibility and ownership. These characteristics are also supported by many authors such as Agarwal and Ramaswami 1992; Anderson and Gatignon 1986; Douglas and Craig 1989; and etc.
As Driscoll argues that control is the key functionality for a firm to maximize its economic efficiency and return of investment in international markets. This was also supported by Hill et al. (1990) where control allows firm to directly manage its operation and decision making which would ensures desired level of achievement in its whole operation and target market.
The next method relates to the risk of disseminating the firm?s knowledge asset to its contractual partner. Driscoll explains that protecting the firm?s know-how asset is critical to avoid unnecessary threats of survival for the firm. She quoted Williamson (1985) where risk can be minimized through comprehensive contingent contracts and continuous improvement of technology in products or services would gain a long term competitive advantage.
The following entry mode method is resource commitment. Driscoll pointed out that there is a high tendency for firms to commit more business resources as the international business progress. This was supported by Johanson and Vahne (1977) in the Uppsala Internationalization Model as a firm needs to increase its resources commitment when it becomes more experienced and knowledgeable about the foreign markets. The commitment involves financial and physical cost, opportunity cost, and unforeseen risks and threats; for instance, threat of employee abduction and hostile occurrence.
Flexibility is another substantial method that has inverse relation to the former method. According to Driscoll, a firm needs to be flexible in changing its entry modes quickly and efficiently, and thus gaining better competitive edge in the market. Her statements was also supported by Porter (1976) on the concept of flexible exits barriers strategy, while Klein (1989) added that firms should have less formalized and centralized organization structures to adapt to its dynamic environment.
The final entry mode is ownership where Driscoll argues that by having full equity ownership, a firm should have greater control as compare to sharing that causes risk dissemination. Gatignon and Anderson (1988) asserted that ownership should have a direct relation to the amount of control, however there are cases where control can be achieved despite the above argument. For example, McDonald?s standardized franchise business.
In relation to the above entry modes, Driscoll summarized a comparison of the entry modes characteristics across the generic foreign entry modes (refer to Appendix B). Some of the significant analysis includes the ideal level of entry modes characteristics through investment modes but has low level of flexibility, then exporting method that gives higher degree of flexibility despite the drawbacks of other modes, and contractual modes that facilitates as intermediate level for all the modes of entry as compare to the former methods.
Some of the evidences supported in the article are by Erramilli and Rao (1993) and Klein (1989) that emphasizes on the needs of firm to weigh the factors (actual environment) that could affect their desired level of characteristic when making entry mode choices.
(Remember to attach the summarized table in appendix B ?. ; )
4.3 Factors moderating mode choice
According to Driscoll, there are several factors that affect the firms ability to achieve the desired level of different mode of characteristics. They are government policies and regulations, firm size and corporate policies.
For government policies, Driscoll discusses on the types of policies such as capital controls, intellectual property laws, monetary and etc. that would restrict the firms desired level of entry modes. Some evidence quoted includes the Poitiers Incident of 1983 by Hood and Truijens (1993) where French authorities boycotted Japanese VCRs market penetration, Kenya?s internal export compensation, and South African two tier currency restriction to foreigners by Economic Intelligence Unit (1993b).
Another moderator factor is firm size restriction that limits the firm to commits on higher resources and ownership, and forced to resort to less desired entry modes. Then, corporate policy or the historical precedence does influence the undertaken mode of entry compare to the desired level.
4.4 Situational influences on mode choices
The other method that Driscoll discussed in the article is on the situational influences that affects the firms desire level of entry mode. The two main category include firm factors that relates to the firms competitive advantage or skills, product or industrial experience, and strategic approach developed; and another factor is environmental that links with demand and competitive conditions, political and economic issues, and social cultural characteristics in the foreign market.
Some of the evidence discussed under firm factors where a company that has firm-specific advantage over others will choose a mode choice that gives more control. Hymer (1960); Kindleberger (1969) quoted that when product differentiation through R&D exists, firms will seek to establish control over these advantages and protect them from dissemination through the use of investment mode of entry.
Then, experience and exposure of a firm in international marketing is another crucial firm factor that influences mode choice. This is in agreement with Buckley and Casson (1985) that states that experience reduces cost and risk in the serving market and increases the resource commitment of the firm.
Driscoll also agrees with Kim and Hwang (1992) that a firm might want to leverage one product against another and to be strategic in its strategies to achieve overall corporate objectives.
Meanwhile, in environment factors the demand of the foreign market plays an essential part of the entry. Driscoll related that the demand and competitive condition influences the cost of serving the market and its commitment. Then, the stability of the host political and economic condition determines the entry modes of its resource commitments and flexibility. The ideal choices for higher risk factors, as Driscoll stated is through exporting options.
Differences and dissimilarities in social cultural issues as quoted by Johanson and Vahlne (1977) would cause uncertainties of level of investments and foreign market penetration, and thus affects the entry mode decision making.
5.0 Values/ Literature
This article provides a comprehensive and feasible framework to help businesses to prepare for international business venture. The concepts of entry modes discussed by Driscoll allows firms to determine their desired mode of entry characteristics, such as more control and low dissemination risk and thus enable companies to consider various choices that fits to their level. As compare to some other models, Driscoll has incorporated more alternatives for companies to assess and analyze their strength. Firms can also look into possibilities of combining various characteristics that best suit their environment, hence, allowing business managers to have a multidimensional task and priority in their mode choices. As a result, they would be more flexible and effective in adapting to the dynamic environment.
The other contribution from the article is the introduction of situational influences, for instance, political and economic factors or firm specific advantage, which allows firms to measure an independent desired mode of characteristics against its independent actual mode chosen. This would provide a more realistic and accurate scenario of the mode chosen for the business. This has been proven by recognized authors, where in many cases the implementation of desired modes are different from the actual modes, as this is due to the influences of various situational factors. Thus, as an advantage the managers would be able to evaluate more effective entry modes base on the various situational factors.
Then, the following main contribution is the moderating factors, which allows firms to better evaluate their entry mode strategy after reassessing the potential moderators factors such as government and corporate policies, and firm size. The impact includes helping managers to understand the influences of moderating factors, instead of relying on the expected desired modes. As a result, this prevents any potential pitfalls of overseeing the influencing moderating factors. The impact would ensure that there is a long-term success factor in its decision made for international business commitments.
6.0 Conclusion
In summary, Driscoll?s presentation on the entry mode framework for international business ventures has provided a very extensive and comprehensive coverage in the strategic business planning for a foreign market. Her three broad foreign market entry methods with a combination of various entry modes characteristics inter-relation has given a great insight and understanding of the practical business approach to an international environment. For instance, Driscoll?s statistic research on firms of different entry modes in relation to different modes of entry characteristics proves an important practical solution in her argument, i.e. more control and low risk dissemination for investment, and etc.
Then, Driscoll also related two very important factors that would affects the choice of entry modes; namely situational and moderator influences. These factors are crucial aspects to be evaluated and considered for every international business as the success factor of the entry mode chosen are largely depended on the accuracy of handling these factors. Her categorization and literature evidence on these factors are also precise and comprehensive which covers many aspects of the dynamic foreign situational analysis.
As compare to one of the research source by a Taiwanese author Aihwa Chang (1998) in Appendix C [Please check the date and put the article in attachment Appendix C], the author related 5 different modes of entry; namely choice according to industry traditions, random choice, pre-determined choice and contingent choice [you may or may not need to add more write-up] which does not covers a board aspect of the whole actual environment. Then, as the author associated several factors such as economic efficiency, financial commitment, control, flexibility and experience, which has some similarity with Driscoll, however the substance discussed does not fully review the success factor of the entry selection.
Finally, Driscoll?s concluding remark recommended that firms should be flexible and adaptable to the situational changes of its entry mode choices from time to time as this would bear a high chances of success and sustainability in the international global business.