1. Internationalization process
(1) Theory of Kotler and Armstrong (2001)
According to Kotler and Armstrong (2001), there are five stages for a firm to go internationally as shown in Figure 2-2. Firstly, a firm should assess the pros and cons for going internationally in order to realize the potential opportunities and risks it might face. In other world, it needs to know if the firm is able to survive and to finally success globally. Second, it has to decide which market to enter according to its comparative advantages and strategies. Then, different entry modes should be considered so as to choose the most appropriate one which meets a firm’s strategy. A firm usually makes entry modes decisions depending on the level of controls, resource commitments and dissemination risks they would like to engage in the new market.
Next, it moves to the question of using either a standardized marketing strategy or creating a new one for adapting to the new market since consumers in different markets might have completely different preference. Finally, it has to decide a global marketing organization which takes care of its international activities. According to Kotler and Armstrong (2001), a firm usually begins with setting up an export department, then an international division is created and finally they grow into a global organization.
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Figure 0-4 Internationalization process Source: Kotler and Armstrong (2001)
(2) Theory of Root (1994)
According to Root (1994), in order to success, the selection of entry mode involves 5 steps as shown in Figure 2-3.
A. Assessing products and foreign market:
Firstly, a firm should choose products and target market they would like to engage in by assessing the risks and potentials.
B. Setting objectives and goals.
Objectives and goals of entering new market should then be set in order to direct employees and its management team.
C. Choosing the entry mode.
After assessing its competitive advantages, a firm should choose the best entry mode and strategies to assure its success.
Decide whether to to go international or not
Decide which markets to enter
Decide how to enter the market
Decide global marketing programs
Decide global marketing organizations
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D. Designing the marketing plan.
Specific marketing plan should be conceived for reaching and communicating potential consumers in new market.
E. Establishing control system.
Operational activities should be closely monitored and controlled in order to assess the result.
Figure 0-5 Elements of the entry strategy Source: Root (1994)
2. Entry mode
Selecting a mode for entering a new market has become one significant strategic decision an international firm needs to make in today’s rapidly growing and internationalizing market as stated Hollensen (1998). Ekeledo and Sivakumar (2004) stated that the foreign market entry selection is highly significant for the company’s future performance and survival on the international markets. Companies have to take into account of different entry strategies for different target markets. According to Deresky (2000), managers should consider the best strategy to enter a specific market
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and evaluate the risks and factors that different entry strategies might bring.
As Root (1994) stated, an international market entry mode creates possibility for a company's products, technology, human skills, management or other resources to enter into a foreign country. That is, according to Bradley (2002), a decision of the level of resource commitment and control in the new market. This decision also relates to the risk of a firm depending on the strategy it takes.
(1) Theory of Root (1994)
Root (1994) suggested 3 market entry modes as shown in Table 2-2. These entry modes are mainly based on two concepts which are exporting its products to the target country from a production base outside the country, or transporting its resources in technology, capital, human skills to the target country and use the local resources to produce products for sale in local markets.
Table 0-3 Entry mode
Entry mode Export entry modes Contractual entry modes Investment entry modes
Strategy
● Construction or turnkey contracts
According to Root (1994), in export entry modes, a firm’s product is produced outside the target country and is transferred to it for the sale. As to contractual entry
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modes, a firm aims to establish long-term non-equity relationship with a company in the target country in order to facilitate its sales and operation. On the contrary, in investment entry modes, it involves a firm’s high level of engagement and ownership in the target market.
(2) Research of C. W. L. Hill et al.(1990)
In the research of C. W. L. Hill et al.(1990), they identified that much of international business literature focuses mainly on three different entry modes as shown below. Each entry mode has different level of control, resource commitment and dissemination risk.
Licensing or franchising: Non-equity contractual mode.
Joint-venture: Equity-based cooperative venture.
Wholly-owned subsidiary: Totally-controlled entry mode
Different entry modes involves a different level of control over the foreign operation (Anderson and Gatignon, 1986; Calvet, 1984; Caves, 1982; Davidson, 1982;
Root,1987). Control includes authority over significant decision-making about operation and strategies. The level of control is lowest for licensing and highest for a wholly owned subsidiary. Besides, according to Vernon (1983), each entry mode requires different resource commitments which lead to costs and assets dedication in the target market. Resource commitments are the lowest for licensing and highest for wholly-owned subsidiary which needs to invest largely in order to be presented in the new market. Finally, dissemination risk implies the risk that a firm’s specific advantages in know-how will be expropriated by a licensing or joint venture partner (Hill and Kim, 1988). Since a firmrce commitments which lead to costs and assets
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dedicaadvantage (Casson, 1982, Caves, 1982), it should be careful when choosing the entry mode for new market so as to protect itself. The risk of dissemination is lowest for wholly-owned subsidiary and highest for licensing. Characteristics of different entry modes can be found in Figure 2-4.
Source: C. W. L. Hill et al.(1990)
Figure 0-6 Characteristics of different entry modes
Source: Anderson and Gatignon (1986), V. Kumar – A contingency framework for the mode of entry decision
(3) Theory of C.Y., Liu (2010)
According to C.Y., Liu (2010), there are mainly two modes for entering new market. These are production in home country and production in target country.
Production in home country implies using a firm’s resource at home country to produce and then export products to the target country. On the contrary, production in
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target country implies transferring a firm’s technology, human resources, equipment and capital in the target country and combining the local resources in order to produce and sale at the target market. In addition, entry mode decisions can be divided into direct and indirect activities. Direct strategy involves high level of risks and complexity while indirect strategy involves lower commitments and risks. Generally, an international firm starts with production in home country and indirect investment in order to avoid the uncertainty and risk it might face when going internationally.
After being more familiar with the target market, it would decide to engage itself more in it in order to increase its control. As indicated in Figure 2-5, production in home country includes indirect and direct exports while production in foreign country includes contractual mode – indirect, and investment mode – direct.
Figure 0-7 Two foreign market entry modes
Source: http://www.slideshare.net/kkjaisawal/ibl-42738813
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2.3 Factors in the entry mode decision