Brief 440142 Modes Of Entry For Internationalisation

Modes Of Entry For Internationalisation

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MODES OF ENTRY FOR INTERNATIONALISATION 2

Introduction

International tweaking can be considered as one of the strategic mechanisms that are available to

firms for the growth of its operations. In this case, numerous modes of international entry are

always available for the firm at disposal. Further, these methods present serious challenges to

adoption, as well as advantages. The merits and demerits of these modes are based upon the level

of control, enhanced access to markets, and transaction savings among others. It is the firm to

critically analyze the option, which can suit its transactions. This paper seeks to contextualize

several entry modes by digging into their authenticity to ascertain the preference of any mode to

others.

Several reasons have been attributed to the decision of internationalizing a firm. These

reasons are driven by internal and external synergies of the enterprise. External synergies may

include free trade associations with other countries, the expulsion of trade barriers, and low

taxation in foreign countries, cheap labour, and the creation of foreign policies that favour the

firm. Internal factors include the need to increase profits, expansion of market share, and

globalizing the company’s brand. However, companies will consider numerous ideas to arrive at

a particular alternative.

Exporting

In the modern economy, the most popular mechanism of the producing plants for

internationalisation is exporting. Exporting encompasses the trade of locally produced goods at

cross-border (Cheng et al., 2009, p. 67). Although there has aroused a debate on whether

consigning can be considered as internationalising, sending goods to diaspora market for sale

seems to be of high preference to other entry modes. Direct exporting, cooperative exporting and

MODES OF ENTRY FOR INTERNATIONALISATION 3

direct dumping constitute the various types of exporting. Direct exporting encompasses cross-

border exchange of services and goods without using agents as intermediaries (Cheng et al.,

2009, p. 69). It can be termed as the most general mode that many small enterprises venture into

because it does not involve bureaucracies of the agency that elevate the cost of doing business.

Direct export assists the firm in avoiding the risks that are associated with other commodity

types.

Indirect shipping incorporates the use of agents in remitting services or goods to a foreign

market. After conducting a market survey, a firm calculates advantages embedded in the use of

agency in export chain. In this case, the agent acts as a broker who markets the services of goods

on behalf of the organisation (Donaldson & O'toole, 2007, p. 78). This option can be considered

as of paramount importance as it presents little risks, which are evident when a new structure

ventures into a virgin market. The mode requires little commitment and offers heterogeneous

market exposure to the services and goods offered by the firm. Checking the response of the

external market is one of the reasons as to why businesses choose the indirect export mechanism

(Donaldson & O'toole, 2007, p. 89). The good foreign market response is succeeded by a high

ingrained presence of the firm in the market by exhibiting high-risk mode strategies,

commitment, and presence. Indirect exporting has taken roots because of cheap transport and the

expulsion of trade barriers, which limited secure business before.

Cooperative exporting involves partnering with a foreign firm whose services or goods

complement those of a domestic firm. Organisations choose this mode of entry by making a

formal agreement with the foreign company on how the transactions will be done (Ghosh, 2011,

p. 88). This mechanism is of paramount importance to both companies provided that the goods

under export do not present serious challenges on the sale of the domestic products in the foreign

MODES OF ENTRY FOR INTERNATIONALISATION 4

country. In this regard, no competition should emanate from the goods entering into cooperative

exporting. Further, the foreign organisation ought to demonstrate excellent networking

capabilities to reduce the risks and commitments that are associated with the other exporting

options (Ghosh, 2011, p. 89).

According to Dowling et al., 2008, exporting can be termed as the simplest mode of

internationalisation. Since the mode is favourable to the firms that do not have the capital to

establish branches in foreign countries (Dowling et al., 2008, p. 77). It also offers convenience

marketing strategy for small and medium-sized enterprises that wish to internationalize their

brands. However, there are several values that are associated with exporting. These include tariff

and trade barriers and high transaction costs. Further, the firms may also enjoy economies of

experience and location as some of the benefits.

Joint Venture

A company may decide to utilize joint venture as the entry mode to a foreign market. Joint

venture incorporates partnership of two or more entities with supplimenting or complimenting

aspirations in an international market (Johansson & Pallmar, 2014, p.90). By doing so, the

parties in a joint venture reduce the risk associated with a sole proprietorship and leverages the

strengths of each other. The success of joint venture parties is determined by the objectives

formulated during the entry period. These goals may include the sharing of emerging technology,

the levels of acceptable risks, market entry, and compliance with the local government laws.

Therefore, a joint venture mode of internationalisation thrives when the firms have converging

goals, can utilize their intellectual property rights without reducing their competitive edges, and

can occupy a smaller market share than the market leader (Johansson & Pallmar, 2014, p.99).

MODES OF ENTRY FOR INTERNATIONALISATION 5

A joint venture orchestrates several advantages, which otherwise could not have been

experienced by a firm internationalizing singly. This is due to the fact that several competing

strategies elevate the force of venturing to a new market. The parties also reduce the cost of

development and that of cushioning risks by sharing them with the collaborative partner. The

firms also take advantage of the knowledge possessed by the partner to further the marketing and

production of services or goods (Mellahi 2009, p. 76). However, the local government can act as

an impediment to the manner of trading. The local government in the foreign country can impose

serious challenges to the importation of goods to cushion the domestic companies from external

competition. The parties also lose control over technology and quality. This is because the

partnering firm may not be interested in their utility (Mellahi 2009, p. 78). The external firms

demonstrate a threat to the environment, the local players, and the continuity of the local

industries. The joint venture also challenges the parties to exhibit maximum flexibility, exposure,

potential rewards, and maximum commitment. For instance, the Indian Government has imposed

restrictions on the entry of foreign airlines into her market. This forced Singapore Airlines to

partner with the Tata Group so as to fulfill the requirement of the local government.

Franchising or Licensing

Franchising or licensing constitutes one of the modes of international market entry. It

encompasses the utilization of intellectual property rights of a local firm to sell foreign services

or goods, which include trademarks, trade names, production techniques, and patents among

others. This calls for a mutual agreement whereby the party seeking to use local intellectual

property rights pays a specified amount for the same. The licensee can be given equipment, staff

training, location approval, and operations and management support (Olejnik, 2014, p.80).

Licensing r franchising is of paramount importance as it provides a high return on investment,

MODES OF ENTRY FOR INTERNATIONALISATION 6

little exposure to political or economic conditions, low risk, and is preferred by the local

governments (Olejnik, 2014, p.80). Franchising takes credit on an already existing successful

strategy because the franchisor has general local knowledge. The entry mode has little risk on

equities compared to other entry modes.

There are several serious challenges that can be associated with licensing or franchising.

The shortcomings include reduced control over technology and growth because the franchisee

only uses the strategies employed by the franchisor, lowered returns as the franchisor earns

royalty fee, but not the maximum profit, and diminished competition among others. Licensing

also limits the chances of nurturing a future competitor as the foreign firm operates within the

provision of the franchisor (Schrott, 2011, p. 88). Limited rule over service quality and overseas

products and detrimental capacity coordination of international strategies also constitute some of

the challenges associated with franchising (Oortwijn 2011, p. 56). Although these shortcomings

are prejudicial to an organisation, the benefits of licensing or franchising outweighs the

challenges; hence, the mechanism can be considered as a leeway to foreign markets.

Horizontal Acquisition

The acquisition is the process of entering into a foreign market by possessing 100% shares of

ownership. Greenfield operations and acquisition constitute the two ways through which a firm

wholly owns subsidiaries come about. The acquisition means that the company buys off an

existing entity and uses its brand name and other intellectual property rights to market the

products (Sachse 2012, p. 100). This means that internationalizing through acquisition helps in

reducing the risks of entering into a virgin market as the acquiring firm uses the already existing

infrastructure, staff, marketing strategies, operation and management base, and brand names

MODES OF ENTRY FOR INTERNATIONALISATION 7

among others. Many organisations would want to Greenfield operation can be termed as the

creation of a legal new business in a diaspora market. The group’s strategies, goals, objectives,

and circumstances dictate the mode of entry because neither greenfield operations nor acquisition

mechanism is more superior to the other (Verbeke et al., 2011, p. 70).

Greenfield operations incur more risks than acquired entities. This is due to the fact that

acquired entities enjoy a ride on already established markets. A wholly owned subsidiary

demonstrates high-risks and reward, commitment, control, and high presence. This means that a

correctly implemented branch in the right environment yields high returns (Verbeke et al., 2011,

p. 70). Discovering new markets, geographic regions, and different industries encompass some

of the merits presented by a wholly owned subsidiary. Good management and entry of correct

foreign markets form the fulcrum of success against the market, legal, and political changes. The

ability to coordinate international marketing strategies and the realization of economies of

location and experience also adds some salt to the attachment of horizontal acquisition merits

(John et al, 2009, p. 101).

Turnkey Contracts

Some government rules hinder foreign direct investments to a growing economy. This calls for

the utilization of a turnkey contract whereby the home firm does the production activities while

the international one provides the needed technology and marketing strategies for the services or

goods to reach the customers. These production facilities orchestrate stiff competition in the

foreign market (Welch et al, 200, p. 49). The turnkey contracts are generally set up when the

home firm has an attachment on accurate knowledge on the production of a particular product,

but does not possess the marketing venture and the technological aspect required, which is

MODES OF ENTRY FOR INTERNATIONALISATION 8

provided by the collaborating partner. The internationalizing firm bypasses the barriers put on

trade and also enjoys the benefits of expertise of the host party.

Conclusion

In summary, no mode of entry can be considered to be more superior that the others. When

making the decision to internationalize a firm, an organisation ought to put various issues into

consideration. These items are based on the levels of commitment, control, flexibility, risk,

return on investment, and the capital required. The entry mode should also be based upon the

capabilities of the organisation and the market entry. By carrying out market research, the firm

seeking to internationalize will get vital information on the appropriate mode of entry. In this

regard, an integration of PESTLE analysis in internationalizing decision will be of paramount

importance. PESTLE analysis will assist the organisation to assess the political, technological,

social, environmental, and economic situation of the country of interest. Reports on SWOT

analysis, global stock market assessment, and technical evaluation reports can add some salt to

the factor of internationalisation.

Although there are a myriad of recourses available for internationalisation of a firm, there is no

single mode, which is preferred to others. This is due to the fact that all entry modes have both

merits and drawbacks attached to them. However, decisions on the entry modes cannot be made

in a vacuum. Further, theories have been advanced to help in determining the best

internationalisation mechanism. For instance, John Dunning developed a method based on

internationalisation benefits, location benefits, and ownership benefits. Internationalizing firms

ought to consider various alternatives by integrating them with the John Dunning’s theory.

Businesses that have a low capability of transferring whole ownership to a foreign country can

MODES OF ENTRY FOR INTERNATIONALISATION 9

opt for a joint venture rather than acquisition or greenfield operation strategy. As well,

investments with little merits on locating overseas should choose distal strategies like licensing

or exporting.

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Bibliography

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Ghosh, A. (2011). Strategies for growth: help your business move up the ladder.

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MODES OF ENTRY FOR INTERNATIONALISATION 11

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firm and manager experience impact the entrance decision and entry mode choice

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