Entry mode selection is one of the most strategic aspects of international business. The selection of international market entry strategy is an institutional decision that comprises the choice of target market, entry mode, marketing plan, and control system. The right entry mode decision enables companies all assets to enter the targeted foreign markets. The entry modes can be grouped into three categories; export-based methods, non-equity methods (contractual entry), and equity methods (investment entry). The export-based methods can be either indirect export or direct export. The main forms of non-equity methods (contractual entry) are licensing and franchising, and equity methods (investment entry) are foreign direct investment, joint venture and acquisitions, and mergers. In this chapter, the internal and external factors of the target and home country will be analyzed in detail. The main features of entry mode are discussed in detail, and in the last part, factors that have a strategic importance are mentioned.
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International market entry strategy is an institutional decision that comprises the choice of target market, entry mode, marketing plan and control system. The entry mode decision which enables the entry of a company's products, services, human or other resources into a foreign country has an important effect on the overall performance of the international operations. In international business, the entry modes are closely related to degrees of resource commitment, risk exposure, control level, extent of inter-organizational dependence and profit return. The research on the entry modes mainly includes studies on the ‘‘the predictors of entry mode choices, predictors of international equity ownership levels, and consequences of entry mode decisions’’ (Lin, 2000).
Deciding on the choice of entry mode is a strategic decision and it will have important consequences for the future of the company. The internationalization process requires high amounts of all kinds of company’s assets, therefore the decision of entry mode should be evaluated strategically. The main factors that have an effect on the decision of entry mode choice can be classified as external and internal factors.
Internal factors are the factors that have an effect on a company's entry mode decisions and external factors are not under the control of the company during the entry mode to the international markets. According to Root (1994) “how external factors influence selecting entry mode to market depends on internal factors”. The external factors which are effective on the selection of entry mode are listed by Root (1994) under four group which are listed below;
Target country market factors: The current market and its growth rate is an important factor affecting the entry mode. The market size affects the choice of entry mode as developing markets will attract more investment type of entry modes. If a country has a big population or a growing young population, that country will receive more investment type of entry mode. Competitive market structure is also an important aspect, it can be either complete exclusive or multi exclusive market.
Target country production factors: The production factors of a country covers raw materials, workforce, quality, quantity, economical structure of a country, distribution costs and they have an important effect on the decision taken during the entry mode selection.
Target country environmental factors: Political, economic, social, technological, environmental and legal factors of the target market have an important effect on selecting entry mode to market. The international barriers and regulations which are mainly tariffs and quotas are the most important environmental factors. Economic factors such as national gross production, interest rate, and per capita income are indicators which are closely related with the market size of the target country. Social distance has also significant importance as the companies are more comfortable in selecting investment mode when they are familiar with the culture of the country they want to invest in. If the target market has a different culture which consists of values, beliefs, customs, religion and languages, the companies will probably prefer exporting or contractual mode as an entry strategy. The main reason behind this selection is the low confidence in their abilities to manage the international operation.
Home country factors: Market, product and environmental factors of the home country have an influence on selecting entry mode to international markets. Company’s competitive position and competitive structure of the home market have important effects on the entry mode. If the production costs are too high in the home country, the company will be more selective in the entry mode selection and prefer licensing rather than foreign direct investment.
The internal factors of affecting the entry mode are listed as follows by Root (1994);
Country product factors: The products with competitive advantage are mainly produced in the home country and exported whereas the basic products which have less competitive advantage in the international markets are produced in the target market either by production licensing or investment in the target market.
Company resource-commitments factors: The resources of a company which are management, capital, technology, production and marketing skills affects the decision of selecting entry mode to the target market.