Foreign Market Entry Strategy - Essay Example

 Foreign Market Entry Strategy Introduction With the liberalization of trade markets and emerged opportunities for international business development, many companies have faced with a challenge of deciding the best foreign market entry strategy for a host country/countries/region(s). Foreign market entry strategy is a comprehensive theme, which is influenced by three major groups of factors: home country environment; host country environment; industry environment; and firm-specific environment. It would be logical to suggest that all these groups of factors should be thoroughly analysed before making any strategic decision, however it might be useful to identify some trends and patterns. This paper provides an overview and critical analysis of five peer-reviewed research articles that examine different theories and practices of foreign market entry strategy. Different opinions, approaches and methodologies discussed below allow readers to gain a more comprehensive understanding of foreign market entry theory. This paper will focus on several key issues related to the theme of foreign market entry strategy, including the following: the role of strategic capabilities and strategic orientation in the process of selection foreign market entry mode; timing choice of foreign market entry and factors influencing this decision; and key theories and approaches in foreign market entry strategy planning. Article Review section is followed by a concluding part of the essay, which summarizes the above discussed articles and explains the relevance for companies planning to expand their operations in foreign markets. Article Review In today’s highly competitive and complex environment, the firms pursuing a strategy of international market expansion face with a necessity to make a key strategic decision of the choice of market entry mode. Liang et al. (2009) provides a brief overview of the key types of foreign market entry strategies including the following: export, licensing and franchising, acquisitions, greenfield investments, or joint ventures. These market entry strategies very in terms of key variables, including: the share of capital ownership, organizational control level, resource requirements, risk exposure and expected future returns (Liang et al. (2009). Liang et al. (2009) explain that foreign market entry strategy depends heavily on the company’s strategic orientation and strategic capabilities. In order to get empirical data, the researchers have carried out a study evaluating a sample of 332 foreign market entries of 62 U.S. companies over a period of 6 years (Liang et al., 2009). The results of the study have shown that the firms that competed primarily in terms of innovation (prospectors) preferred to select equity-based foreign market entry mode and compared to the firms that focused on brand positioning as their competitive advantage (defenders). Prospectors also made a choice in favour of full-ownership entry modes such as full acquisition and greenfield investment (Liang et al., 2009). This empirical study indicates that the firms which make innovation and know-how their strategic capability are ready to face with a risk of information leak and therefore, prefer to maintain full control over their business in foreign market. While Liang et al. (2009) determined that full acquisition and greenfield investment were two more preferred strategic options of firms focused on innovation and new product development, Raff et al (2012) carried out empirical study aiming to analyse which entry strategy allows the firm to achieve greater productivity, acquisition or greenfield investment. The researchers explain that the companies placing focus on total factor productivity are more likely to choose greenfield investment to M&A. For the empirical study, Raff et al (2012) used a sample of Japanese firms that entered 21 developed countries during 1985-2000 through FDI (foreign direct investment) market entry strategy. The study has shown that manufacturing firms that preferred wholly-owned subsidiaries made up 44% of the total sample, followed by M&As (33%) and Joint ventures (24%) (Raff et al, 2012). Further analysis and investigation of Raff et al (2012) has shown that in addition to industry- and country-specific factors, firm-specific characteristics play a critical role in firm’s strategic choice regarding the foreign market entry strategy. Thus, the article of Raff et al (2012) fits with the ideas of firm’s strategic orientation and capabilities outlined by Liang et al. (2009). Stevens and Dykes (2013) explain in their article that companies make a strategic decision of which entry strategy to use based on the evaluation of risks and benefits of each strategy. However, in contrast to the previous researches, Stevens and Dykes adopted alternative approach making focus of their research not on market entry modes as part of the overall international expansion strategy but on the timing issue of foreign market entry. They evaluate the role, which the culture plays in timing decisions of entering foreign markets. Stevens and Dykes (2013) found that there is one important aspect that impacts on the decisions of firms to expand overseas either earlier or later. This aspect relates to cultural dimensions and cultural attributes of home country in which the company operates. Stevens and Dykes (2013) explain that the firms operating in cultures with high power distance and high performance orientation are more likely to decide to enter foreign market earlier that the firms operating in cultural environment where power distance and performance orientation are low or moderate. Moreover, the research indicates that political environment of the host country also impacts on firms’ decision to enter the foreign market earlier or later. The countries where political freedom and stability are weak, firms are more reluctant with their market entry strategy because of political uncertainty in host country. The firms operating in high uncertainty avoidance cultures will more likely prefer to enter the market later compared to the cultures with low uncertainty avoidance cultures (Stevens and Dykes, 2013). It is interesting to note that Canabal & White (2008) who have carried out a literature review of empirical studies in international entry mode research during the period from 1980 and 2006 have identified culture as the third most commonly applied in foreign market entry mode studies. While the researchers commented that the studies related to cultural impact on entry more rather than in timing of entry, but it also highlights the importance of cultural distance influences on market entry strategy (Canabal & White, 2008). Furthermore, Canabal & White (2008) provided an extensive review of entry mode study contributions, splitting it into several categories. One of the most often cited in the literature on foreign market entry strategy was identified to be transaction cost theory, which implies that the firms need to create structures that would reduce inefficiencies or minimize costs incurred by entry and operating in a foreign market (Canabal & White, 2008). The next frequently used theory identified by Canabal & White (2008) was the eclectic theory according to which companies make their choice of entry mode based on three factors: ownership, location, and internationalization. The next important aspect was control, which has been also identified by Liang et al. (2009) as an important factor in decision making. The other aspects identified by Canabal & White (2008) were risk, institutional context (rules, values, and norms), resource-based view, foreign direct investment, organizational capabilities, knowledge-based view, and uncertainty. While these aspects are briefly outlined it is obvious that the same aspects were somehow covered by other researchers. For example, institutional context and uncertainty was also discussed by Stevens and Dykes (2013); knowledge-based view and organizational capabilities were discussed by (Liang et al., 2009). Musso and Francioni (2014) believe that while analysing foreign market entry strategies it is important to take into consideration not only the strategic orientation and competencies of the firm but also its size. The above discussed articles related mainly to large corporations with greater access to resources. However, there are also many small and medium enterprises that seek for international expansion through different market entry strategies (Musso and Francioni, 2014). The research has shown that small and medium enterprises do not adopt entry market strategy analysis in systemic way. As small and medium enterprises have limited resource, lack of market information, expertise and knowledge in international development they tend to adopt “test and learn” models in foreign market entry mode strategy (Musso and Francioni, 2014). Thus, the article written by Musso and Francioni addresses a significant point in foreign market entry planning, indicating that some firms with limited financial and information resource are more likely to make irrational decisions in terms of how to enter the foreign market. While this theory does not directly support the findings of Stevens and Dykes (2013) in terms of the impact of cultural patterns of market entry timing strategy it does illustrate the presence of some irrationality and the impact of human factor. Conclusion There was provided an overview and analysis of five peer-reviewed research articles that examined different theories and practices of foreign market entry strategy. Different opinions, approaches and methodologies were discussed. Thus, for example, Liang et al. (2009) focused on the importance of the company’s strategic orientation and capabilities while making a decision of which entry mode strategy to choose. Raff et al (2012) also carried out empirical study focusing more on productivity issue and how its impacts on the firm’s decision to choose between acquisition and greenfield investment. The authors also have stressed the importance of firm-specific characteristics and capabilities, providing thus support to the research article written by Liang et al (2009). Musso and Francioni (2014) focused in their research on small and medium enterprises and their approach to foreign market entry strategic planning. The research has shown that they do not adopt entry market strategy analysis in systemic way because they have limited resources, are in lack of market information, expertise and knowledge in international development. This article also supports the impacts of firms’ strategic capabilities in selecting market entry mode. Stevens and Dykes (2013) in contrast to the previous researches focused in their article not on market entry modes as part of the overall international expansion strategy but on the timing issue of foreign market entry. The results of their study have shown that cultural dimension impact on management’s decision to enter foreign market earlier or later. The study of Stevens and Dykes was further supported with the findings published in the article by Canabal & White (2008) who also have stressed the influence of culture on entry mode strategy and its choice. In addition to culture, Canabal and White identified several key theories and approaches used in entry market strategy planning that were often mentioned in literature. It is interesting to note that all these approaches are somehow interrelated and linked with the other four above discussed articles. This research provides some useful information for managers/business owners planning to expand business to foreign market entry strategy. Out of general theories there can be outlined at least one recommendation. Innovative companies or those who have know-how, unique technology, or R&D should maintain total control over the business and thus should consider FDI or full acquisition. References: Canabal, A., & White, G. O. (2008). Entry mode research: Past and future. International Business Review, 17(3), 267-284. Liang, X., Musteen, M., & Datta, D. K. (2009). Strategic orientation and the choice of foreign market entry mode: An empirical examination. MIR: Management International Review, 49(3), 269-290. Musso, F., & Francioni, B. (2014). International strategy for SMEs: Criteria for foreign markets and entry modes selection. Journal of Small Business and Enterprise Development, 21(2), 301-312. Raff, H., Ryan, M., & Stähler, F. (2012). Firm productivity and the Foreign‐Market entry decision. Journal of Economics & Management Strategy, 21(3), 849-871. Stevens, C. E., & Dykes, B. J. (2013). The home country cultural determinants of firms' foreign market entry timing strategies. Long Range Planning, 46(4-5), 387. Read More