Litereture Review

Running head: LITERATURE REVIEW 1

Oversea Market Entry Mode Selection of China Companies

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LITERATURE REVIEW 2

CHAPTER TWO

LITERETURE REVIEW

2.1 Introduction

This chapter mainly focuses on examining various literature of the research problem.

The first section will deal with the definition of the definition of firm internationalization. The

second part of this chapter is the theoretical framework. The third part is an overview of the

internationalization of the Chinese firms. The fourth is a summary based on review of previous

literature and the last section is the conceptual framework.

2.2 Definitions of Firm Internationalization

Due to the rapid developing economy across the globe many firms are no longer

operating only in their country of origin but have sought foreign markets. Such firms have been

given various names including global companies, multinational corporations and transnational

companies. There are two main perspectives with which researchers have defined the term

‘internationalization’.

Some researchers have defined the term from a result point of view. The criterion used by

Gaba et al (2002) is that the foreign sales are viewed as a percentage of the overall sales. The

measure of internationalization here relies on five features of the firm: Presences of

manufacturing operations in different countries, global integration of resource, being the lead in

product quality, having a well-known brand globally and a world-class R & D measure.

The other perspective is the process perspective in which internationalization is defined

as ‘the outward movement of a firm’s international operation’ (Johanson and Vahlne, 1997).

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Under this perspective, internationalization is considered a sequential process that occurs

gradually from exporting of products to a foreign direct investment.

For the purpose of this research internationalization will simply be defined as the process

in which firms have increased involvement in foreign operations. The definition can be specified

to the Chinese firms.

2.3 Theoretical Frame Work

Koch proposed a theory of internationalization based on the internal, external and

internal/external (mixed) factors. The internal factors that may influence market entry mode

include enterprise resources, product resources and international factors in the enterprise. The

internal factors can easily be manipulated by the company. They are mostly reflecting the

competitive advantage of the firm. Firms with a high level of competitive advantage have a

wider variety of market entry mode to select from.

The external factors are above the firms control and can be factors either in the home

country or in the foreign country that the firm wishes to internationalize. The home factors

affecting the market and market entry mode may include cultural aspects, economic factors, and

institutional factors, political and legal factors. The external factors are those in the foreign

country that may complicate or favor a firm from internationalizing in such countries.

Each of this factors influence market and market entry. This factors at times usually

influences the others making decision making process to be more complicated.

2.3.1 Internal Factors

There are various internal factors proposed by Koch (2001) that may affect the market

and the entry mode. The difference between the internal and external factors is that the company

can control the internal factors. These factors include: the size of company or the resources, the

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management locus of control, attitude of the management towards risk, target for market share,

the applied calculation methods, profit targets and previous experience in using a market entry

mode.

Size/ Resource of the Firm

Koch (2001) proposed that smaller companies are bound to have fewer options when it

comes to market servicing. This is because small firms usually have very few resources which

may not allow some of the market entry mode. Small markets are also likely to have a limited

managerial potential and skills for entering a foreign market through establishment of

international joint venture or a fully-owned subsidiary in a foreign country. The influence of the

size of a company in selection of an entry mode usually relies on the firm-specific resource

demands for the individual entry mode.

Management Locus of Control

The loci of control have a great influence on the decision to internationalize though

usually it is ignored (Koch, 2001). A strong external or internal locus of control can affect the

perception of the firm’s manager regarding the way in which the firm operates hence influencing

the decision towards a specific market entry mode. If the firm has more than one manager then a

discord regarding the entry mode may occur. The firm may choose to disregard the loci of

control which differs from that of the decision maker of the firm or make a decision based on a

consensus of the managerial team. It is however important to note that the individual locus of

control is likely to change as one gains experience or as a result of a critical incident that affects

the firm.

Attitude of the Management towards Risk

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Internationalization of a firm usually has many potential risks which firms must consider

before making the final decision to internationalize. There are five contexts that a firm evaluates

its risk. This include the firms current financial position, the strategic options that the company

has, the company’s level of experience and the level of competition in its competitive

environment. Usually there are ways of estimating the total risk but it is the perception that the

firm has towards risk that eventually determines their decision to internationalize. If the

management is optimistic despite the risk estimates then it is likely to enter a foreign country that

shows a favorable long-term prospect.

Target for Market Share

If it the most important thing for the firm following internationalization is sales or market

share maximization it is likely that the firm selects a market entry mode that is perceived as

being most likely to give the desirable rewards within a specified period of time.

The Applied Calculation Methods

There are various tools and formulas used for calculation when considering

internationalization. The two main categories of calculation include the risk or benefit

calculation and the cost or control calculation (Koch, 2001). The calculation that a company uses

eventually affects the decision to go global.

Profit Targets

The kind of market entry mode selected determines the eventual level of profit obtained

by a firm. The dynamics of the profit generated are also never similar. An entry mode may have

very high returns at start but after sometime the profit levels decreases. Another entry mode may

not have immediate reward but in the long run it may start generating more profit (Welch &

Luostarinen, 1997). Firms which have a long decision making horizon may opt for the later

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market entry mode whereas firms which have a short decision horizon may use the former entry

mode.

Experience in Using a Market Entry Mode

The decision to use a specific entry mode is determined by the number of times, the

circumstances under which a firm or its competitors have used a given entry mode and the time

frame since the last internationalization. Hollensen (2001) states that these experiences

influences the firm mode of entry through perceived effect of a given entry mode. An entry mode

that a firm has ever used successfully is more likely to be embraced.

2.3.2 External Factors

Koch also proposes various external factors that affect a firm’s decision to internationalize. Each

of the factors is discussed below.

Feasibility of the Firm

There are certain entry modes that are forbidden by law in some countries mainly due to

its strategic significance to the state. On the other hand entry modes such as licensing may

require a lot of know-how dissemination risk especially if the country that the firm is entering is

not a member of the regional convention similar to that of the country of origin (Hollensen,

2001). Other barriers towards the choice of an entry mode include cost of labor, insufficient

skills and knowledge, very strict labor regulations may discourage a firm from entering a foreign

market through either subsidiary or joint venture. If a firm invests in foreign subsidiary they may

gain a nice taxation treatment example, tax holidays and save the company the burden of paying

custom duties (Koch, 2001).

Features of the Foreign Country Business Environment

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For a firm to venture into a foreign market there has to be certain factors that are

attractive about that country. It is usually easy to know the overall market characteristic of a

given country even through the internet. However, Yung-Heng (2002) asserts that finding out

important information about firm in particular may be difficult to gain and at times only

available at a price. Some of the features that firms usually look at in the foreign market include

volatility and similarity of business regulations, favorable infrastructure and climate, few

aggressive competitors, perceived customer availability among others (Koch, 2001). If the

country has a very competitive environment it is likely for a firm to enter through few resource

entry modes so as to minimize risk (Hollensen, 2001).

Market Growth Rate

The current market growth rate and the perceived future growth rate is also important

when making a decision to enter a foreign country. For instance, if the current growth rate of the

foreign market is fast and this is estimated to slow down in future then it may be necessary for

the firm to consider entering the market immediately.

Image Support Requirements

This concerns the preferred image outlook that the company that is internationalizing

wishes to have. A firm may be pursing an image of leading global supplier. Marinov et al (2012)

states that other firms may choose to license their inventions so as to gain the leading image of

newest technology and influence industrial standards.

Requirements for Global Management Efficiency

When a company internationalizes and increasingly become involved in foreign markets

it becomes conscious of its resources (Koch, 2001). This awareness eventually forces the firm to

redefine its global strategy. The company may decide to select a diversified mode of operating in

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foreign markets; others may go for a standardized global approach. The choice of strategy ab=nd

structure that a company adopts depends on the success factors of the company and its

capabilities.

Popularity of Individual MEMs in the Foreign Market

There are countries which give preferences to certain entry modes hence showing high

level of popularity for the specific market entry mode (Koch, 2001). The mode of entrants for the

firm will automatically be influenced by the mode of entrants of other firms into the country of

interest and their success. It is also possible for a firm which had previously used a given entry

mode to enter another country successfully to be tempted to use the same mode even if it is not

popular in the current country of interest with the hope of improving strategic match.

Market Barriers

There are certain barriers that make entry into a foreign country more challenging. The

most significant barriers according to Koch (2001) include governmental regulations, tariff

barriers, distribution access, natural access, exit barriers and advanced versus developing

countries.

2.4 Internationalization of Chinese Firms

In 1950s there was the formation of New China which favored and led to the

development of large industries. By this time the firms were only operational in China and there

were certain conditions that did not favor development of Firms. In the 1970s the Open-door

policy was passed and this favored the large industries and the official reopening of its market to

international markets (Gaba et al, 2002). In 1999 the government of China launched the ‘go

global’ strategy with an aim investing in more overseas market (Marinov et al, 2012). China has

since witnessed a rapid economic growth according to China’s FDI- led export strategy. The

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economic development in China has cut across agricultural sector, industrial revolution, labor

intensive industry, import substitution and internationalization.

Gradually the Chinese companies started to form ventures with international markets so

as to explore new technologies. By 2004 approximately 465000 international projects were

operating in China with investment of up to 500 billion US dollar (MOFTEC. 2004). The rapid

development of the Chinese economy also resulted to rapid saturation of the Chinese local

market. When the local market had been saturated the option available was venturing into

foreign market.

In 1983 only 61 Chinese firms had ventured into foreign markets and in only 31

countries. This figure had significantly increased by 1994 when there were more than 900

Chinese firms which had established 4,600 firms in 130 international markets. (Cai, 1999). The

Chinese firms continued to internationalize at very high speed such that currently it is among the

top countries with many internationalized firms.

In the past internationalization was usually understood only in terms of FDI inflows in

which multinational firms entered foreign markets in forms of subsidiaries (Zheng, 2009). In

recent years however various companies mostly the Chinese firms started to use M&As and

strategic alliances as a strategic tool for internationalization. This strategy has contributed to the

rapid internationalization of the Chinese firms.

The rapid development and entry of Chinese firms into foreign markets has attracted

researchers. Most of these researchers have tried to view the role of inward activities in the

globalization of the Chinese firms (Welch & Lostarinen, 1997). This is because

internationalization is perceived to be influenced by either the inward activities or by up-stream

internationalization. Most of the Chines firms have been known to internationalize through first

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becoming joint venture partners or customers of multinational corporations. Such strategy has

made it possible for the Chinese firms to form good environment before internationalizing.

2.5 Review of Previous Research

There are very many researches that have been conducted in on internationalization of

Chinese firms. Consequently, a lot of effort has been made to determine the best approaches for

firms that wish to internationalize. This section will review some of the existing research with an

aim of gaining a clearer view and evaluate different perspectives on this subject. The schools of

internationalization can be categorized in to two broad groups- the traditional school of thought

and the modern/new school of thought. The traditional school emphasized on gradual process of

internationalization whereas the new school emphasizes rapid entrance in to the international

market.

Xiaoyan MA (2007) did a study to determine the function of inward activities in the

internationalization of firms in China. The study proposed a theoretical framework for

globalization using contingent resource theory. The results of the study indicate that firms may

gain internationalization and outward activities through engaging in inward activities in the same

way that most Chinese firms internationalized. The findings also revealed that resource

acquisition plays a significant role in internationalization of firms. Management was indicated as

being of significant role in the process of internationalization and in the eventual success of the

firm in a foreign firm.

Gao (2008) did a study on Internationalization and entry strategy of enterprises: A case

study of Chinese firm: Huawei. The result of the study indicated that Huawei has been able to

successful internationalize due to its amazing industrial features. The industrial feature is also the

most influential determinant of Huawei’s entry into the foreign markets. The mode of market

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entry for Huawei is often dissimilar since it uses different entry modes for different foreign

market. For example, when entering Russian market it uses joint venture mode, in Soouthern

America it uses export method in Europe and Northern America it use either contractual method

or Joint venture. The study finally concluded that despite the fact that Huawei seem to be very

successful in entering various foreign markets it will not be wise for their strategy to be

generalized. This is because business is dynamic and the entry modes only function to assist

firms in adapting to various changes and competitive conditions.

Loustarinen & Hellman (1993) did a research of Finland’s small family firms proposed

a holistic approach for internationalization. They embraced the traditional approach with a notion

of inward internationalization. This model implies purchasing of raw materials, technologies or

goods to be sold again as a means of attaining globalization. They also proposed different paths

and four stages of internationalization. The initial stage is referred to as the domestic stage; this

is the stage where the firm has no any international operations. The second is inward stage and

there is a limited contact with foreign markets mostly limited to importation of raw materials and

technological transfer. The third is outward stage, as the name suggests this stage involves

outward or cooperation activities. Lastly there is the cooperation stage, under this stage it is

possible for the firm to have agreement of cooperation in manufacturing, research and

development or purchasing.

Yung-Heng (2002) also performed a study to investigate empirically the effectiveness of

the Eclectic Theory in explaining choice of market entry used by Taiwanese Electronic

Components firms in China markets between 2003 and 2005. The theoretical framework used in

this study includes the OLI theory. The study explored ownership advantage, location advantage

and internationalization advantage influences on the entry mode. The result of the research

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indicated that eclectic theory offered a comprehensive explanation to the choice of entry mode

adapted by Taiwanese Electronic Components between 2003 and 2005. There were three basic

variables which were of statistical significance to the study. These variables are inclusive of the

ownership advantage, location advantage, and internationalization advantage.

Yung-Heng, L. (2009) table on determinants of Entry Modes in Previous Studies

Reference

studies

Firm size ( number of

employees)

Leung et al. (2003), Nakos and Brouthers

(2002),Evans( 2002)

Positive

International experience

Reuber and Fisher (2003), Evans( 2002); King and

Tucci (2002), Nakos and Brouthers (2002)

Positive

Firm –specific assets

Hill et al., (1990), Hennart, (1991), Erramilli and Rao,

(1993) ,Madhok, (1998)

Positive

Market potential

Nakos and Brouthers 2002; Eicher and Kang 2002;

Chung and Enderwick(2001)

Positve

Cultural distance

Leung et al. (2003); Evans (2002); Cristina and

Esteban( 2002)

Negative

Production Cost

Jiang and Fuming ( 2002);Cui, Jiang,and Stening

(2007)

Positive

Host Government

regulations

Brouthers( 2002 ); Mutinelli and Piscitello( 1998);Cui,

Jiang and Stening (2007)

Positive

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Country Risk and

environmental

uncertainty

Cristina and Esteban (2002);Brouthers and Brouthers,(

2000); Tahir and Larimo(2006)

Negative

R & D intensity

Larimo( 2000); Tahir and Larimo(2006); Brouthers and

Brouthers,( 2000)

Postive

Scale economies

1. Hwang & Kim, (1992) 2. Phatak et al. (1996) 3.

Tahir and Larimo (2006)

Positive

Positive implies increase in selecting WOS mode of entry; negative implies decrease in selectin WOS

mode of entry

2.6 Conceptual Framework

Conceptual framework is simply an explanation of the most significant elements studied

in a thesis. Conceptual framework can either be explained in form of a narrative or in a graphical

representation.

There are three main factors that influences the mode of entry into a foreign market- the

internal factors, the home external factors and the foreign external factors. The internal factors

can be changed by the company but it the external factors may not necessarily be influenced by

the company. When a market internationalizes it aims to gain control, good market, competitive

advantage and increased flexibility. This is demonstrated in the diagram below.

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Internal Factors

Resource enterprise

Experience

Products

Management

External Factors

Competition

Legal/Political

Social/Cultural

Economic

Aims of

Internationalization

Flexibility

Control

Market

Technology

Profit

Selected Entry

Mode

LITERATURE REVIEW 15

References

Cai, K. G. (1999). Outward foreign direct investment: A novel Dimension of China’s

integrationinto the regional and global economy. The China Quarterly, 160: 856-880)

Gaba, V., Pan, Y. G., and Ungson, G. R. (2002). Timing of entry in international market: an

empirical study of U.S Fortune 500 Firms in China. Journal of International Business, 33(1): 39-

54.

Gao Dawei (2008). Internationalization and entry strategy of enterprises: a case study of Chinese

firm: Huawei. Dissertation in International Marketing, Credit point level 30, 1-53.

Hollensen, H. (2001). Global marketing: A market responsive approach (2

edn). Financial

Times Prentice Hall, Harlow, UK. 667 pages.

Johanson, J. and Vahlne, J. E. (1997).The internationalization process of the firms – a model of

knowledge development and increasing foreign market commitment. Journal of International

Business Studies, 8(1):23-32.

Koch, A. J. (2001). Factors influencing market and entry mode selection: Developing the MEMS

model. Marketing Intelligence & Planning.

MA Xiaoyan (2007) Internationalization of Chinese firms: a contingent resource perspective

MOFTEC. (2004). Summary of Utilization of Foreign Investment in China: January- December

2003.

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Welch, L. S and Luostarinen, R. K. (1997). Inward-Outward connections in internationalization.

Journal of International Marketing, 1 (1): 44-56.

Yung-Heng, L. (2009). Entry mode Choices between Wholly-Owned and Joint Ventures of

Taiwanese Firms in China–An Eclectic Theory Perspective. The Journal of International

Management Studies, 4 (1) 75- 85.

Marinov, M., Marinova, S. T., & Palgrave Connect (Online service). (2012).Internationalization

of emerging economies and firms. New York: Palgrave Macmillan.

Zheng, N., & University of York,. (2013). The internationalization of Chinese firms.

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