Entry Modes to A Firm to Enter in to A Foreign Market - Case Study Example

TABLE OF CONTENTS Introduction ……………………………………………………….. 3 Literature Review ………………………………………………… 4 Entry Modes ………………………………………………… 4 Export Modes ………………………………………………… 5 Contractual Entry Modes……………………………………… 5 Foreign Direct Investment …………………………………… 6 Business Environment within China ……………………… 7 China and Entry Modes……………………………………….. 8 Methodology…………………………………………………………. 9 Data Gathering ……………………………………………… 9 Analysis and Discussion …………………………………………… 10 Hewlett-Packard: An overview ……………………………… 10 HP in China ………………………………………………….. 11 HP’s entry in to China ………………………………………. 12 Factors Affecting Choice of Entry Modes …………………… 13 Entry mode choice and outcome……………………………… 13 Conclusion and Implication ……………………………………….. 14 References …………………………………………………………… 15 Introduction Globalization is perhaps one of the most significant and influential force in today’s business world. The growing importance of global marketing has profoundly affected the people, management, industries and economies worldwide and the outcome is that today’s savvy business people are able to utilize global marketing opportunities for the realization of their companies’ business potential. A customer, no matter he is in Europe or Africa or Asia or any part of the world, would be familiar with a large number of famous brands like HP, Apple, Nokia, Google, McDonald, Nestle, Cadbury and so on. The choice of effective mode of entry has been regarded as a frontier issue in global marketing and it is a significant strategic point of decision making for multinational companies. Large multinational companies are highly concerned not only about which foreign markets to access, but also to create strategic managerial decisions about learning when and how to enter foreign markets (Zhang, Zhang and Liu, 2007) and how to effectively face transnational challenges so as to create sustainable competitive position in the market. Examining the determinants of entry mode choice and factors influencing different entry modes are some of the major investigations to approach the internationalization for companies that plan entering foreign markets. This piece of research paper presents brief discussion on various entry modes that have been adopted by Western firm for entering in to Asian countries and it focuses on how Hewlett Packard could successfully enter in to China and maintain its ongoing business leads. The literature review part examines the general business environment in China outlines various entry mode choices available to a firm in general. Literature Review Entry Modes An entry mode is an institutional or organizational arrangement designed to make possible of a company’s products, human skills, technology, management and other relevant resources in to a foreign country (Wagner, 2009, p. 3). In global business terms, modes of entry have been regarded as closely aligned with varying degrees of resource commitment, risk exposure, business control and profit concerns. Choice of modes of entry normally depends on various factors including firm’s specific factors, industry’s specific factors and country’s specific factors (Pan and Tse, 2000). Even though some scholars are of the view that choice of entry modes do not influence the returns on sales and assets, it is obvious from many researches that the survival and performance of foreign subsidiaries deeply depend on the choice of entry modes (Wagner, 2009). Basically entry mode choices fall in to three categories; they are trade related (export based), contractual and Foreign Direct Investment related. Along with these, the levels of resource commitment, organizational control, expected returns and involved risks also increase (Shenkar and Luo, 2004, p. 274). Fig.1 details various entry mode options for a company to decide on entry modes in to a foreign country. These entry options are detailed below: Export Modes Exporting is a common method of entry that firms are able to gain valuable expertise about international operation and deep knowledge about countries in which it operates. A company may export goods directly to foreign customers, or through buyers or export intermediaries. A department or someone within the firm itself handles direct exporting. Indirect exporting does not require special expertise or large cash spending. There are a number of indirect exporters including 1) manufacturers’ export agent, 2) export commission agent, 3) export merchants and 4) international firm (Ball, McCulloch and Frantz, 2005, p. 431). Contractual Entry Modes Contract manufacturing, international licensing, international franchising and joint venture are major parts of contractual entry modes. Ball, McCulloch and Frantz (2005) described two ways of contract manufacturing. One way is a method of entering in to a foreign country without investing in plant facilities. The firm comes to contract with a local manufacturer to produce products according to the firm’s specifications and instructions. Another way is to subcontract assembly work or the production of parts to independent companies of other countries (p. 438). International licensing is another entry mode in which the foreign licensor grants rights for specified intangible properties to a local licensee for a fixed period of time in exchange of a royalty fee. Patents, trademark, technology and managerial skills are examples of this (Shenkar and Luo, 2004, p. 278). By international licensing mode of entry, the licensee will be rightful to produce and market a product similar to licensor’s products that it already has been marketing in its home market. International leasing is another way of entry in which a foreign company – lessor- leases out its used or new machines to the local company (Shenkar and Luo, 2004, p. 278). This arrangement occurs mainly because firms in a developing country may not have enough financial capability to pay for the equipment and thus they prefer leasing option. Foreign companies often enter in to franchising agreement by which foreign franchisor grants specific intangible property rights to a local franchisee. Franchising involves longer and strong commitment and it offers m Joint venture is another contractual mode of entry in which a corporate entity is formed either by 1) an international company and local owners or 2) two different international companies for the purpose of doing business in a third market or 3) a government agency and an international firm, or 4) two or more firms of a limited duration project. (Ball, McCulloch and Frantz, 2005, p. 434) Foreign Direct Investment Foreign Direct Investments (FDI) are entry modes that are fully internalized by the firm. In this mode of entry options, dissemination risk is relatively low whereas control and resource commitment are high (Wagner, 2009, 4). FDI is the transfer of the organizational knowledge of a firm from one country to another country (Zhang, Zhang and Liu, 2007, p. 752). FDI related entry modes involve ownership of property, assets, projects and businesses invested in a host country. FDI related entry modes enable the firms that adopt FDI to control overseas operations and economic activities. Apart from wholly owned subsidiaries, Ball, McCulloch and Frantz (2005) viewed strategic alliances and management contracts as FDI related entry modes. Wholly owned subsidiary is a company that wishes to own a foreign subsidiary, may be by starting from the ground up by building a new plant, which is called Greenfield investment, or 2) by acquiring a going concern or 3) by purchasing its distributor and thus obtaining distribution network (p. 434). Under strategic alliances or merger and acquisition, a particular firm may form strategic alliance with customers, suppliers or competitors in order to adapt to the market changes and face global competition, growing cost of research and so on. Under management contract entry mode, a firm provides managerial know-how in some or full functional areas to another company for a fee. International companies enter in to such arrangements with firms in which they have no ownership (Ball, McCulloch and Frantz, 2005, p. 438). Business Environment within China The very latest reveals that China has become the second largest economy in the world. After around three decades of continuous and fast growth, China passed Japan in the second quarter of 2010 to become the second largest economy behind the US. China’s economy is valued at $1.33 trillion whereas Japan’s economy was valued at $1.28 trillion in the second quarter of 2010 (The New York Times, 2010). For last four decades, China has widely been attracted by international business people due to the increasing opportunities. Due to the economic reforms in early 1970s and 1980s, China has achieved laudable macroeconomic performances in various areas. Since 1980, China’s growth of nominal income has experienced double digit growth rates- 24% growth between 1984 and 1985, 24.8% by 1988, 30% by 1994 (Steele, 2000, p. 4). In the 1990s, the Chinese government focused on boosting GDP growth. The main though behind it was that high GDP growth would create more job opportunities and they could prove it. Its economic reform and increased GDP rate opened its way to the foreign investment. Industry accounts almost half of the China’s total output today. Around 40 % of the economy represent service sector (Collins and Block, 2007, p. 30). Today, China is a successful host country for thousands of large multinational companies, encouraging the use of more diverse and creative entry modes for international investors. China and Entry Modes China continues to be one of leading host country for foreign investments, through a number of common entry modes. These include equity joint venture, wholly foreign owned subsidiary, contractual joint venture, acquisition, umbrella companies, representative offices, licensing, franchising and build operate transfers (Luo, 2000, p. 67). Wilson and Brennan (2003) found that Foreign Direct Investment played significant role in the growth of Chinese economy. By the end of June 2003, there were 443,073 foreign invested enterprises approved in China. The contractual foreign investment was valued as more than $879 billion and the actual foreign investment was more than $478 billion. Only UK’s investment in China during 2001 was made up of 3084 joint ventures with a contractual investment of $18.49 billion (p. 3). Methodology The general issue being discussed in this paper relates to the choice of entry modes for an international business that seeks to enter in to a foreign market. The paper focuses on Hewlett Packard and its entry, selection of entry mode to and its business operation in China. This research is conducted based purely on secondary data collected from books, scholarly articles and websites. Explanatory research has been used to analyze and evaluate how Hewlett Packard has strategically used a particular mode of entry to enter in to China. Explanatory research is more applicable when the issues is already known and there still can be a detailed analysis or explanations of it. The main reason for this research is to conduct an extensive explanatory research to explore the choice of entry modes and analyzing factors affecting entry modes. As part of explanatory research, this research paper has considered relevant review of literature about various entry modes available to a firm to enter in to a foreign market and business environment china especially in relation to the entry modes that various firms have already used to enter in to China including foreign direct investment. Data Gathering This paper depends mainly on secondary data gathered from different sources. The research includes readily available sources like books, journals and websites like Yahoo Finance. Google search engine has been used to find materials for this research. Various search items like entry mode, modes of entry, entry in to foreign country, joint venture, China, entering China, Foreign direct investment, Hewlett Packard, HP in China, exporting related entry modes, contractual entry modes, factors affecting entry modes and business environment in China have been fed in Google search engine to find relevant sources for this work. For this study, Hewlett Packard and its entry in to China are selected. Among thousands of large multinationals that operate in China, Hewlett Packard is one of the most successful and an illuminating example or using sound rather practically effective mode of entry. The availability of enough literature about HP’s entry to China was another factor behind selecting that firm for the investigation. Analysis and Discussion Hewlett-Packard: An overview Hewlett-Packard, headquartered in California- USA, started to grow as a company in 1950s. In 1957, Hewlett Packard has become a publicly traded company. The efficient management system, HP organizational culture and dedicated team work of its founders Hewlett and Packard helped it become a global company by 1959 and a fortune 500 company by 1962 (House and Price, 2009). The HP has its very own unique culture built with contribution, profitability, fairness and trust. It has respected and always encouraged technology, innovation and its history success stories show that it was always committed to the highest standard of technical excellence (House and Price, 2009). HP provides both desktop and notebook computers and computer accessories to its customers, reliably and through safe distribution channels. HP has more than 150,000 employees dealing with production, assembling and marketing in 170 countries. The major competitors are Acer, Apple, Dell, Lenovo, Sony and Toshiba in both Home and foreign markets. HP has been positioned as 16th in the Fortune 500 list of the largest US corporations. More than 55% of its business is generated outside of the US (Luo, 2007, p. 195). HP remains to be the market leader in US PC market, with 25% market share. In the first quarter of 2010, HP shipped 43,67,000 PCs to worldwide, with a 7% increase from the year ago figure of shipping (Tilmann, 2010). HP in China Hewlett Packard was set up in China in 1985. It was the first Sino-American high tech company in China’s electronic industry. HP in China has around 1000 employees in manufacturing, supporting, marketing, sales and R$D. HP in China is headquartered in Beijing. It has branch offices at Shanghai, Chengdu, Xian, Shenyang and Guangzhou. CHP (China Hewlett Packard) has been proven to be most successful and rated by the Economy Daily one among the top ten joint ventures for six years (Luo, 2007, p. 195). CHP is a subsidiary company that deals with manufacturing, sales, marketing and Research and development and service units. It provides personal computers, servers, printing and imaging products, data storage etc. HP was willing to offer long term partnership with China and its government by providing assistance in the four modernization and technology transfer. CHP has taken various initiatives to develop Guanxi, one of the major dynamic in Chinese society, including its supporting of China’s telecommunication industry (Luo, 2007, p. 195). HP’s entry in to China HP has focused on education and technology literacy in Asia-Pacific region. It has allocated 85% of its total grants for 1997 to educational institutions like Shanghai Jiao Tang University and the Ministry of education of PRC (Luo, 2000, p. 188). HP’s founder Dave Packard has realized the unique business opportunity in China and hence he visited China in 1979 to discuss development of Chinese electronic sector. This has helped it open doors to china. In 1981, the Chinese Electronic Import and Export Corporation (CEIEC) started involving in HP products and service distribution throughout China. HP has come with a strategy of promoting education and develop electronic sector and thus it has helped it form a joint venture relationship between HP and CEIEC. Now, CHP is a joint venture, with 63.75% of the company being owned by HP itself and the rest by CEIEC (Luo, 2000, p. 188). CHP’s major objective in China include the expansion of distribution of HP products and service in China, establishing China based manufacturing for both home and export need and setting up an R&D facility to achieve product development and innovative designs (Luo, 2000, p. 188). Factors Affecting Choice of Entry Modes While analyzing various modes of entry in to China and choosing joint venture mode, HP and its strategic management team might have considered various factors. Factors that affect decision process of entry mode are detailed below:- Host country specific factors have significant impact on entry modes. Government FDI policy, infrastructure conditions, property right system and host country risks associated with social, political and environmental requirements are some of the main factors that were considered while HP has chosen a specific mode of entry in to China. Cultural distance and difference is also to be considered because it can have significant impact on the success of a firm (Shenkar and Luo, 2004, p. 284). Entry barriers, industry uncertainty and market opportunities, availability of labors and supply are some of the significant industry related factors that HP had to consider while choosing a particular entry mode to China. HP’s resource possession, the leakage risk of technologies, strategic goal, and international as well as host country experience are some of the relevant firm-specific factors (Claver and Quer, 2005) that might have affected HP’s decision of choosing an entry mode in to China. Similarly, it also had to consider project-specific factors like project size, potentiality, project orientation and availability of local partner etc. Dave Packard’s first visit to China has helped it find out most appropriate entry mode and thus he found that joint venture relation with CEIEC would be a better option for it (Shenkar and Luo, 2004, p. 285- 286). Entry mode choice and outcome HP has chosen joint venture relation with CEIEC in order to easily access the electronics markets of China, because, CEIEC is one of top authority of electronic business and its exports and imports in China. By choosing this mode, HP was able to acquire resources of the local partner and thus to minimize environmental risks as well (Zhang, Zhang and Liu, 2007, p. 756). The joint venture relation with CEIEC has also helped HP to sign an agreement with Fluke Corp in 1997 to allow Fluke to sell HP’s basic instrument products through Chinese distributors (Luo, 2000, p. 189). Conclusion and Implication The paper has outlined various entry modes commonly available to a firm to enter in to a foreign market. Trade related, contractual and FDI related entry modes are detailed in the literature review of the paper. Based on the secondary research data, the paper highlighted that HP has chosen joint venture relation with Chinese Electronic Import and Export Corporation (CEIEC) in order to enter Chinese electronic market. HP’s strategy to encourage education and electronic development through grants given to Chinese Ministry of Education and Shanghai university were initial steps that helped it gain a cooperative move and attraction in Chinese market. When it started joint venture relation with CEIEC, the HPC has almost become the first and most successful high tech Sino-American Company. The research has highlighted various factors that are to be considered by a firm while choosing a proper mode of entry in to a country. This research is conducted purely based on secondary data available and therefore it provides an explanatory research on how HP entered in to China and what strategic mode has been used by HP. 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