International Business (Intl Biz) 101: Introduction to International Business - Modes of Entry, Exporting Licensing Franchising Joint Ventures Wholly-Owned Subsidiaries Strategic Alliances Turnkey Projects Management Contracts

What This Is

Modes of entry refer to the various ways a firm can enter a foreign market. This is crucial for international business as it determines the level of control, risk, and investment required. For instance, IKEA's entry into the US market involved building a wholly-owned subsidiary, allowing the company to maintain control over its operations and brand image.

Key Theories & Frameworks

• Comparative Advantage (Ricardo): Countries specialize where they have the lowest opportunity cost, which explains why China exports electronics and Saudi Arabia exports oil. This theory helps firms identify areas of specialization and trade.
• Hofstede's Power Distance: The degree to which less powerful members accept unequal power influences management style. For example, Mexico has a high power distance index, while Denmark has a low one, which affects how managers interact with employees.
• Transaction Cost Economics (Williamson): The cost of transacting with external parties, such as suppliers or partners, affects the choice of entry mode. Firms may prefer to internalize transactions to reduce costs and increase efficiency.
• Resource-Based View (RBV): Firms' unique resources and capabilities influence their entry mode choice. Companies with valuable resources may prefer to establish wholly-owned subsidiaries to protect their assets.
• Hymer's Ownership Advantage: Firms' ownership advantages, such as technology or brand recognition, influence their entry mode choice. Companies with strong ownership advantages may prefer to establish wholly-owned subsidiaries to maintain control.
• Dunning's Eclectic Paradigm: The ownership, location, and internalization (OLI) advantages of firms influence their entry mode choice. Firms with strong OLI advantages may prefer to establish wholly-owned subsidiaries.
• Porter's Diamond: The diamond model explains the competitive advantage of nations. Firms may choose entry modes that leverage the strengths of the host country, such as its skilled workforce or favorable business environment.
• Kogut and Singh's Country Capabilities: The capabilities of the host country, such as its institutional environment or infrastructure, influence the choice of entry mode. Firms may prefer to establish joint ventures or partnerships to leverage local capabilities.
• Contract Theory: The terms of contracts between firms and their partners influence the choice of entry mode. Firms may prefer to establish joint ventures or partnerships to negotiate favorable contract terms.

Step-by-Step Application

1. Conduct a country risk analysis: Assess the political, economic, and cultural risks of the host country to determine the most suitable entry mode.
2. Evaluate the firm's resources and capabilities: Identify the firm's unique resources and capabilities to determine the most suitable entry mode.
3. Assess the host country's capabilities: Evaluate the host country's institutional environment, infrastructure, and workforce to determine the most suitable entry mode.
4. Choose an entry mode: Select an entry mode that balances control, risk, and investment requirements, considering the firm's resources, the host country's capabilities, and the level of risk tolerance.
5. Negotiate contracts: Establish clear contracts with partners or suppliers to mitigate risks and ensure favorable terms.
6. Monitor and adjust: Continuously monitor the entry mode's performance and adjust as needed to ensure the firm's goals are met.

Common Mistakes

• Mistake: Assuming comparative advantage predicts trade patterns ignoring transportation costs.
• Correction: Comparative advantage is a necessary but not sufficient condition for trade. Transportation costs, tariffs, and other trade barriers must also be considered.
• Mistake: Confusing FDI with foreign portfolio investment.
• Correction: FDI involves the establishment of a physical presence in a foreign country, while foreign portfolio investment involves the purchase of foreign securities.
• Mistake: Misapplying cultural dimensions as stereotypes.
• Correction: Cultural dimensions, such as Hofstede's power distance index, should be used to inform management style and decision-making, not to make assumptions about individuals or groups.

Exam / Case Interview Tips

• Local responsiveness vs global integration: Be able to distinguish between the need for local responsiveness (adapting to local market conditions) and global integration (standardizing processes across markets).
• Greenfield vs acquisition: Understand the differences between establishing a new operation (greenfield) and acquiring an existing one (acquisition).
• Economies of scale vs scope: Be able to explain how economies of scale (reducing costs through large-scale production) differ from economies of scope (reducing costs through diversification).

Quick Practice Scenario

A Brazilian firm wants to enter Germany – what entry mode is lowest risk?

Answer: Licensing, as it allows the firm to maintain control over its technology and brand while minimizing investment and risk.

Last-Minute Cram Sheet

• Modes of entry: Exporting, licensing, franchising, joint ventures, wholly-owned subsidiaries, strategic alliances, turnkey projects, management contracts.
• Comparative advantage: Opportunity cost, not absolute cost, determines specialization.
• Hofstede's power distance: Influences management style, not individual behavior.
• Transaction cost economics: Internalization reduces transaction costs.
• Resource-based view: Unique resources and capabilities influence entry mode choice.
• Hymer's ownership advantage: Firms' ownership advantages influence entry mode choice.
• Dunning's eclectic paradigm: OLI advantages influence entry mode choice.
• Porter's diamond: National competitive advantage influences entry mode choice.
• Kogut and Singh's country capabilities: Host country capabilities influence entry mode choice.
• Contract theory: Contract terms influence entry mode choice.
• Absolute advantage is different from comparative advantage – absolute means lower cost of production; comparative means lower opportunity cost, which always exists even if one country is better at everything.
• FDI involves establishing a physical presence, while foreign portfolio investment involves purchasing foreign securities.
• Cultural dimensions should inform management style, not be used as stereotypes.