International Entry Mode Strategy - Dissertation Example

?THE IMPACT OF FIRM RESOURCES AND HOST COUNTRY SPECIFIC FACTORS ON INTERNATIONAL ENTRY MODE STRATEGY Introduction Research Aim This study aims to determine the factors that influence the choice of entry modes that U.K firms may explore in their effort to establish a presence in a foreign market. Such factors shall pertain to either firm specific or country specific resources and attributes which exert an influence over the eventual choice of a mode of entry of a multinational firm into the host country. During the third quarter of the twentieth century, globalisation was considered a largely political issue, with implications concerning foreign dominance and power wielded by rich, developed nations over the developing and underdeveloped Third World countries. As a consequence, the globalisation commitment entered into by countries in multilateral agreements was met with slow progress and considerable suspicion by political and civic groups. Businessmen were quick to see the advantages, however, of gaining access to new markets opening up across borders. In deciding upon entering a foreign market, a firm takes on considerable risks, but foresees that there is an opportunity to earn considerable returns as well. It will therefore base its decision on whether or not there is a favourable trade-off between risks and returns – that is, whether the chances of earning returns significantly higher than it would in the local market would exceed the risks that it may be facing. This is the crux of the normative decision theory. On the other hand, behavioural theory suggests that a firm may also consider entry into foreign markets depending on the trade-off between the relative availability of resources in the targeted site compared with the home site, as against the degree of control that may be exercised, which is seen to diminish the more distant the host site (Agarwal & Ramaswami, 1992). In the course of this study, the purpose is to gain possible insight into the evolving dynamics involving the entry of UK firms into foreign markets, particularly (though not exclusively) emerging markets. It expects to develop new insights into stakeholders’ perceptions about those considerations that would tend to favour one mode of expansion of foreign direct investment over another, the implications on control and risk, and the nature of the target market in relation to the home economy. 2. Objectives This dissertation aims to accomplish the following objectives” 2.1 To determine the impact of firm-specific factors on the choice of entry mode into a foreign market; 2.2 To determine the impact of host country factors on the choice of entry mode into a foreign market; 2.3 To determine the impact of home country factors on the choice of entry mode into a foreign market. 2.4 To determine whether or not the location of the firm within an industrial district has any bearing upon the choice of entry mode. 3. Research questions In order to accomplish the objectives set forth in the preceding section, the dissertation shall seek to provide answers to the following research questions: 3.1 What are the effects of the following firm-specific factors on the choice of entry mode of a UK firm into a foreign market, namely: 3.1.1 Firm size; 3.1.2 International business experience; 3.1.3 Organizational culture? 3.2 What are the effects of the following host country factors on the choice of entry mode of a UK firm into a foreign market, namely: 3.2.1 Cultural distance; 3.2.2 Country risk; 3.2.3 Market attractiveness? 4. Critical Review of Literature 4.1 International marketing strategy The various modes of entry into a market include exporting, joint venture, sole venture, licensing and franchising, and more conventionally, the internet and international agencies (Wind, Douglas & Perlmutter, 1973; Hisrich, 2009; Pride &Ferrell, 2010). It is generally acknowledged in studies on entry modes that these modes vary more prominently with respect to level of control exercised by the firm over its offshore subsidiary, either whole or partial, its licensee or franchisee (Anderson & Gatignon, 1986; Erramilli & Rao, 1993; Lopez-Duarte & Garcia-Canal, 2002; Ekelado & Jayachandran, 2009; Musso & Francioni, 2009). Control is defined as “the authority over operational and strategic decision making” (Hill, Hwang & Kim, 1990), in the sense it is used with respect to entry modes. Entry modes are also variably referred to in terms of degree of involvement (Kellor, Davila & Hult, 2001; Bhaumik& Gelb, 2003) and in terms of equity (Youssef, 2007), which are perceived corollaries to control, in that a higher degree of involvement in the management of offshore operation, or in its ownership, reflects a higher level of control over the primary business. Thus in this study, to give continuity to the essence of the mode of entry, the modes shall be signified in terms of numerical levels commensurate to control, adapting the manner employed by Kellor, Davila and Hult (2001), and Musso and Francioni (2009). 4.2 Resource-Based View (RBV) Paradigm The resource-based view is a favoured paradigm in the study of entry modes into foreign markets by home-based corporations. The RBV theoretical framework is employed in Youssef (2007), Ekelado and Jayachandran (2009), and Musso & Francioni (2009). Essentially, it is a paradigm that is inward looking, and thus counters Porter’s outward looking, market-driven paradigm of a firm’s competitive strategy. RBV states that “the central forces of competitive advantage are factor-driven” (Hax & Wilde, 2001, p. 254). In brief, this means that a firm strategizes on the basis of those factors of production it possesses or may acquire. It is attributed to several authors, but primarily to Penrose (1959), who put forward the proposition that “resources that are valuable, rare and difficult to imitate are the source of the competitive advantages of the firm” (Dunning & Lundan, 2008, p. 120). This paradigm shall form the theoretical framework for this study, in light of the earlier studies, as the topic of this dissertation seeks to create a strategic view of an organization from the conservative point of view of potential cross-border expansion – an essentially inward looking viewpoint. 4.3 International marketing orientations During the early years of contemporary globalization, various theories on the conceptualization of international marketing strategies emerged, one of which is the E.P.R.G. framework. “E.P.R.G.” refers to ethnocentrism, polycentrism, regiocentrism, and geocentrism, and each of these refers to attitudes or orientations towards aspects of internationalisation. They are also linked to the phases of development of international operations: ethnocentrism referred to the home country orientations phase, polycentrism to the host country orientation, regiocentrism to a regional orientation, and geocentrism to a world orientation (Wind, Douglas and Perlmutter, 1973). The tenets suggested by international market orientations shall advise upon the factors pertaining to the host country attributes which shall be investigated in this dissertation. 4.4 Constructs for mode of entry studies The predominance of studies that concentrate on the attributes discussed here have shaped the way academics and practitioners view the strategic cross-border options available to multinationals firms. On this basis, the study of Lim, et al. (2006) suggests that a multinational firm would greatly benefit from the greater efficiencies and more robust performance brought about by a holistic and integrated approach to marketing strategy. International marketing strategy is characterised in different ways, but theoretical discourses tended to revolve around three fundamental paradigms: standardization-adaptation, concentration-dispersion, and integration-independence (Lim, Acito & Rusetski, 2006). The standardization-adaptation perspective refers to the degree to which uniformity is imposed in the choice of marketing mix elements (i.e. product design, pricing scheme, promotional campaign, and distribution channel) among all the different markets where the firm has a presence. The concentration-dispersion dimension is founded on the premise that multinational firms ought to seek to optimize the geographic distribution of their value-chain activities in order to explore synergistic relationships and comparative advantages that may exist in the different locations and host communities. The degree of dispersion or concentration of value chain activities therefore impacts upon the differentiation of marketing strategies that the multinational may successfully employ. Finally, the integration-independence approach concerns itself with the orchestration of competitive marketing activities across the various locations. The distinction to be made is whether the subsidiaries in the different host countries are considered as stand-alone profit centers, or are part of a system of units that perform according to an integrated design. The implication on market strategy is that in an integrated system, tactics will be differentiated pursuant to the level of consultation among units, and the performance of certain markets may be briefly sacrificed for the competitive bids of other markets to be enhanced (Lim, et al., 2006). One of the principal issues encountered in international marketing is the degree of standardization and the effect it has on performance in the host market. The level of standardisation that the firm imposes on the subsidiary influences and is influenced by the organisational structure and the marketing strategy employed in the locality. Long-term locality studies have tended to suggest that marketing structure follows marketing strategy, and that the degree to which the structure is centralized qualifies the link between the marketing strategy and the performance of the local subsidiary. Empirical studies showed that the more centralized the structure, the less effective the market strategy in terms of subsidiary performance. Findings tended towards the decentralization and adaptation of marketing strategy to local markets in order to enhance performance (Ozsomer & Prussia, 2000). Certain approaches to standardization distinguish between two sub-components: standardization of resource allocation across the variables pertaining to the marketing mix that comprises the focus of the firm’s marketing strategy; and standardization of the strategic content that pertain to the individual marketing mix variables. With regard to the first type, which is more tangible to study and discern in an academic inquiry, studies have found that market structure variables provide certain advantages when integrated together with competitive strategy, across the firm’s markets, where the markets share strong similarities (e.g. Western economies of the US, the UK, Canada and Western Europe (Szymanski, Bharadwaj & Varadarajan, 1993). These constructs pertaining to the balance struck between product standardization and adaptation, organizational independence and integration, and market concentration and dispersion, combined with the target and hosts economies’ cultural dispositions towards ethnocentrism, polycentrism, regiocentrism, and geocentrism, shall form the substantial considerations in the construction of the survey questionnaires that shall embody the RBV theoretical paradigm as shown in the conceptual framework depicted in the research design. 4.5 Adaptation of components of marketing strategy in foreign markets with those of domestic markets. A firm adapts varying international marketing strategies in the course of its cross-border expansion. Its initial market strategy is at the point of market entry, after which it employs and adaptation strategy that brings its internal processes into the decision process (Albaum &Tse, 2001). Many studies have concentrated on market entry strategies in overseas markets, however, few if any have investigated the changes and adjustments in strategy a firm undertakes after it has established its presence. For one, executives have confirmed that increased familiarity and knowledge of a foreign market provides the firm a motivation to develop products better suited to the needs of that locality. Therefore, the marketing strategy of the firm adapts to its new market, and the firm is faced with new strategic options. Further development of the marketing and distribution infrastructure subsequently engages a broader incorporation of this strategic input into the corporate decision making process (Albaum & Tse, 2001). The institutional impact of entry modes thus gains in significance the higher the level of control exerted by the parent firm in relation to the subsidiary. The changes are not only evident in the manner the subsidiary is run, but also in the adjustments undertaken by the parent firm that supports its extension into a new business environment. The higher the equity, the involvement, and thus the control exerted over the subsidiary, the more widespread and profound the changes the parent firm must undergo to keep its domestic and international operations strategically coherent. 5. Research design 5.1 Conceptual framework The dissertation will make use of quantitative research data and analytical methods in the course of answering the research questions. Data gathering shall be comprised principally by survey questionnaire and interviews, supported by information about the companies to be investigated contained in annual reports and company disclosures. The research design of this dissertation is embodied in the following diagram which is adapted from Musso and Francioni (2009). Adapted from Source: Musso & Francioni, 2009, p. 9 The paradigm depicted in the foregoing figure encapsulizes the RBV viewpoint from the vantage of three perspectives, namely firm specific factors, home country factors, and host country factors, to which it appends the effect of firm location as a further explanatory variable. In each category of factors, three principal indicators are presented which are the more salient determinants of a firm’s eventual choice of entry mode in foreign market. 5.2 Research variables The indicators that comprised the independent variables are briefly defined as follows (Erramilli, 1991 as cited in Musso & Francioni, 2009): (1) Firm size: This refers to the size of a firm in terms of its total assets. It is recognized as a principal source of strategic advantage, and allows a firm to take on greater levels of risk than those firms which are smaller. (2) International business experience: This refers to the extent to which a firm has been involved in operating internationally. (3) Organizational culture: This refers to the quality of sustainabile competitiveness in a business organization. Firms with a culture that may be described as a sustainable competitive advantage to the firm’s business would tend to exert a higher level of control. (4) Cultural distance: Refers to the degree to which the home and host countries are different in terms of practices, business philosophy, and other socio-cultural factors. (5) Country risk: This refers to the extent to which a firm anticipates the unpredictability of the social, political, and economic environment in the host destination. (6) Market attractiveness: This is often indicated by the size of the target market and the country’s economic development and performance. Musso & Francioni’s framework called for examination of the variables market size, competition and institutional export support. These are the characteristics possessed by the host country which would tend to influence the decision to enter a market, and in what form. Since this dissertation shall deal exclusively with UK companies in a single industry, however, these factors are held constant for the quantitative study and would be irrelevant for testing. Furthermore, location in an industrial district is a dummy variable in the framework, which indicates whether or not the firm is located in an industrial district. This factor shall not be relevant for the firms which are all in the retail industry, thus they are not expected to be benefitted by store locations close to industrial, rather than consumer, environments. The list of independent variables is summarized as follows, with their hypothesized impact upon entry mode selection. Summary of the independent variables (Source: Musso & Francioni, 2009, p. 17) Hypothesized relationship with entry mode Firm-specific resources: Firm size + International business experience + Organizational cultures + Host country factors: Cultural distance - Country risk - Market attractiveness + The positive sign indicates that an increase in the value of the variable is expected to influence the choice of entry mode towards a higher level or control, the highest of which is the wholly owned subsidiary. On the other hand, the negative sign indicates that and increase in the value of the corresponding variable is expected to influence the choice of entry mode towards a lower level of control, the lowest of which is licensing. For the purpose of representing the different entry modes in quantitative form, in order to facilitate the regression analysis in which entry mode control level is the dependent variable, weights shall be given each of the four principal entry modes used in this study. The weighted values assigned for each entry mode, in terms of level of control associated with it, is presented in the following list. Values per level of the entry mode, as the dependent variable Choices of Entry Mode Level of control Licensing 1 Franchising 4 Joint Venture 7 Wholly owned subsidiary 10 The values assigned per level were set by this researcher, as an adaptation of the system used by Musso and Francioni (2009). In that study, the highest level of control was assigned a value of 1 and the lowest level of control was assigned a value of 0. This researcher elected to use a range of 1 to 10 in order to facilitate the manipulation of the numerals in the regression process to be undertaken as described below. 5.3 Target industry and companies The industry identified for this study is the retail clothing industry, and the companies are UK retail clothing firms which are listed in the FTSE100 and which have a strong international presence. The three firms to be included are Burberry, Marks & Spencer, and Next plc. The requirement that they be publicly listed firms is to ensure that they are held to the highest level of public disclosure as a matter of legal compliance, so that published reports and compliance requirements may be availed of as a source of primary data, because of their nature as public documents and declarations under compulsion of law. The companies were chosen because they were UK firms, which is pursuant to the intention of this research to fix the home country and reduce the study’s variables by eliminating home country as a variable. All the companies are likewise in the apparel industry, therefore providing a common ground for comparison purposes. The firms have operations and subsidiaries in Asia, Europe, and North America, which would be compared against each other to discover effects of host country culture and related factors in determining the entry mode into these countries. 6. Data Analysis Plan The data mentioned in the preceding section shall be gathered through survey questionnaire. The survey questionnaire is used because this is the most efficient tool for gathering quantitative data among a large number of respondents over a wide location (Lamanna & Riedmann, 2011, p. 45). Quantitative data is necessary to implement a quantitative method of analysis. During the course of the survey administration, the corresponding indicator shall be assigned a rating in a ten-point Likert scale, in order to increase the sensitivity of the measure and to match its range with that of the level of control, which also encompasses a range of 10. Target responses shall be managers, shareholders, employees, customers, and other stakeholders of a firm which has already or will very soon be expanding into foreign markets. The Likert scale shall capture and quantify the perception data gathered from the respondents, and so that they will be in a form that may be tested by statistical methods. The tests to be employed will firstly be a correlational test, in order to test for multi-collinearity among the various variables. Where low collinearity exists, the independent variables shall be regressed against the dependent variable, which is the level of control associated with the particular entry mode. The hypotheses to be tested by means of regression analysis in this dissertation are adapted, with modifications, from the framework introduced by Musso & Francioni, (2009). The original 10 hypotheses had been reduced to only six, eliminating those references to the home country factors (market size, competition and institutional export support) since these shall be held constant, the three companies all being UK companies and all in the retail clothing industry. Reference to the industrial location as a factor has been eliminated since the companies to be investigated as retail rather than industrial wholesale. The hypotheses statements are as follows: H1: The firm size is positively related to the control level of the entry mode. H2: The length of international experience is positively related to the control level of the entry mode. H3: The probability that the organizational culture provides a sustainable advantage is positively related to the control level of the entry mode. H4: Cultural distance between the home and host countries is negatively related to the control level of the entry mode. H5: Country risk is negatively related to the control level of the entry mode. H6: Market attractiveness is positively related to the control level of the entry mode. The regression analysis shall be done through the use of SPSS statistical software. The regression coefficients to be derived would suggest the magnitude of the reaction of the dependent variable per change in the independent variable, and the significance probability shall indicate the strength of the relationship between the variables. As may be deduced from the literature scan in the tables appended to this proposal, there are other methods of analysis which may be used, such as the qualitative study using case study methodology that focused on three particular firms and undertaken by qualitative observation (Wang, 2011). Another study that relied on qualitative data was that of Ekeledo and Jayachandran (2009), which sought to qualify the data gathered through interview. While these studies may have been appropriate for the respective research objectives they pursued, for this study the qualitative method is not appropriate because the study seeks to test the strength of relationships between the dependent and independent variables. This will provide a chance for students of international business to verify the theories that have been 7. Conclusions The findings that the study is intended to arrive at shall pertain to the factors that determine the mode of entry of UK firms in other countries where it hopes to create a presence. The conclusions that may be drawn from the study are supposed to help businessmen and managers decide on matters that influence the choice of entry mode into foreign markets. The magnitude and direction of the relationship between the factors and the strength of this relationship shall provide important principles that may guide company shareholders and executives in the best decision to maximize profits and minimize costs, in the course of cross border expansions. Bibliography Agarwal, S & Ramaswami, S N 1992 “Choice of Foreign Market Entry Mode: Impact of Ownership, Location and Internalization Factors.” Journal of International Business Studies, First Quarter, pp. 1-27 Albaum, G & Tse, D K 2001 “Adaptation of International Marketing Strategy Components, Competitive Advantage, and Firm Performance: A Study of Hong Kong Exporters.” Journal of International Marketing, Vol. 9 Issue 4, p59 Anderson, E & Gatignon, H 1986 “Modes of Foreign Entry: a Transaction Cost Analysis and Propositions,” Journal of International Business Studies(Fall), pp. 1-26. 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Solomon, D 2009 “International Marketing: Identifying Allies, Competitors.” Franchising World, Oct 2009, Vol. 41 Issue 10, p11-12 Sousa, C M P; & Lengler, J 2009 “Psychic distance, marketing strategy and performance in export ventures of Brazilian firms.” Journal of Marketing Management, Jul 2009, Vol. 25 Issue 5/6, p591-610 Szymanski, D M; Bharadwaj, S G; & Varadarajan, P R 1993 “Standardization versus adaptation of international marketing strategy: An empirical investigation.” Journal of Marketing, Oct 93, Vol. 57 Issue 4, p1 Thomas, E G 2008 “Internet Marketing in the International Arena: A Cross-Cultural Comparison.” Journal of International Business Strategy, 10/20/2008, Vol. 8 Issue 3, p84-98 Wind, Y; Douglas, S P; & Perlmutter, H V 1973 “Guidelines for Developing International Marketing Strategies.” Journal of Marketing, Apr 73, Vol. 37 Issue 2, p14-23 Wu, W-Y; Cheng, C-F 2009 “The optimal internal marketing strategy in services under open economy.” Applied Economics Letters, 6/20/2009, Vol. 16 Issue 8, p841-845; DOI: 10.1080/13504850701221964 Appendices Tabulated Survey of Entry Mode Studies Table A: Factor categories Study Host country specific variables Home country specific variables Subsidiary firm specific variables Parent firm specific variables Agarwal & Ramaswami, 1991 Location advantages Location advantages Internalization advantages Ownership advantage Keillor, Davila & Hult 2001 Government policies Market characteristics Government policies Market characteristics Firm’s market orientation Product Type of investment Size of investment Knowledge/ experience Corporate strengths Competitive position Corporate policies Lopez-Duarte & Garcia-Canal 2002 Regional affiliation Regional affiliation Industry group Year (when FDI was made) R&D Intensity & Advertising Intensity Size & multinationality Bhaumik & Gelb, 2003 Potential size of rent from operations in the host country Importance of local sources to production Institutional environment in the host country Growth rate of local industry Importance of local intangible resources to the operations of the local affiliate. Cultural distance Degree of diversification of industry In-country & emerging market experience Supply of professionals Supply of acquirable firms Perceived quality of local executive management Quality of proprietary technology Timing of entry Youssef, 2007 Forex rate GDP Purchasing power of currency Resource-intensive industry Relative size to size of parent firm Nationality or culture of manager (to home firm) Size Multinational experience Ekeledo & Jayachandran, 2009 Market size (demand potential), competitive structure, laws and regulations Factors of production, demand conditions, related and supporting industries, structure and rivalry Tacit Know-how firm strategy, Proprietary Technology Company Reputation Specialized Assets Musso & Francioni 2009 Cultural distance Country risk Market attractiveness Market size Competition Institutional export support Firm size International business experience, Organizational Culture Wang 2011 Market potential Institutional factor Firm specific know-how Firm’s size and multinational experience Table B: Research methods profiles Study Theoretical framework Independent Variables Statistical test Entry modes Agarwal & Ramaswami, 1991 OLI framework: 1. ownership advantages of the firm 2. location advantages of a market 3. internalization advantages of integrating transactions. Ownership: Firm size & Multinational experience Ability to develop differentiated products Location: Market potential Investment risk Internalization Contractual risk Multivariate Regression Exporting Licensing Joint venture Sole venture Keillor, Davila & Hult 2001 Three constructs: knowledge/experience, market/ firm characteristics, and government policy/ market imperfections Years in operation Years in international operations Number of international markets Estimated market share Similarity of international markets Number of employees Total ave. intl. sales rev Corporate priority on international markets Import restrictions Revenue restrictions Product content restrictions Home export regulations Ownership/control restrictions Correlation analysis and multiple regression analysis Level of involvement (continuous range) Lopez-Duarte & Garcia-Canal 2002 Institutional theory R&D Intensity & Advertising Intensity Size & multinationality Regional affiliation Industry group Year (when FDI was made) Multinomial logit models Greenfield Wholly owned subsidiary Greenfield Joint venture Full acquisition Partial acquisition Bhaumik & Gelb, 2003 OLI Paradigm Quality of proprietary technology Potential size of rent from operations in the host country Importance of local sources to production Institutional environment in the host country In-country & emerging market experience Perceived quality of local executive management Cultural distance Time of entry in the host country Supply of professionals Supply of acquirable firms Degree of diversification of industry Growth rate of local industry Importance of local intangible resources to the operations of the local affiliate. Multivariate Regression Greenfield vs Acquisition With or without local partner Youssef, 2007 Transaction cost theory Resource based theory Psychic distance factors Mergers and acquisitions theory Eclectic paradigm (OLI) theory Product similarity Multivariate Regression Equity international joint ventures (EIJV) & Greenfield (high equity based) entry Non-conventional forms Variable – equity share Ekeledo & Jayachandran, 2009 Transaction cost and eclectic model, Resources based view and Institutional theory Qualitative Wholly owned subsidiary (Acquisition or Greehfield) Joint venture Franchising Licensing Musso & Francioni 2009 Resource-based theory Firm size International business experience Organizational culture Cultural distance Country risk Market attractiveness Domestic market size Domestic competition Institutional export promotion Regression analysis Degree of control (0 for low, 1 for high) Wang 2011 Transaction cost theory OLI framework Institutional theory Firm specific know-how Firm size and multinational experience Market potential Institutional factor Qualitative method – Case study method Licensing Joint venture Wholly owned subsidiaries Read More