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TOPIC: MODES OF ENTRY OF FIRMS INTO FOREIGN MARKETS

Prepared by C. MWENDWA, 2011 – International Business

INTRODUCTION

Firms that lack local knowledge when entering a foreign market often incur unforeseen costs: relationship

damage, reputation damage, money costs, and time costs. But what exactly is a foreign market? The

question is problematic, because there is no neat, tidy, one-size-fits-all solution. You only need to speak

with a few international managers or executives to realize that they tend to define foreign markets relative

to the elements, components, or subsystems that they encounter, recognize, and rely on them to achieve

their specific goals and objectives of going abroad. For example, an international banker might encounter a

need to know foreign lending policies and banking regulations. Meanwhile, a general contractor might

stress cross-national differences in contract enforcement, occupational health and safety, and legal

responsibility for bearing the risk of uncertain sub-surface ground conditions. Alternatively, a marketing

manager of consumer electronics might emphasize global variation in distribution channels, customs

inspection protocols for product imports, and culturally defined expectations of value and quality. These

examples illustrate the enormous variance in how managers conceptualize foreign markets.

The concept of Internationalization

The concept of internationalization has evolved in the past three decades. Johanson & Vahlne (1977)

defined Internationalization as a process in which the firms gradually increase their international

involvement. They claimed that internationalization is the product of a series of incremental decisions.

Welch & Luostarinen (1988) discussed the “internationalization” as a dynamic concept: the process

increasing involvement in international operations, both sides of inward and outward should be involved in

a broader concept of internationalization. Beamish (1990) provides another comprehensive definition: “…

the process by which firms both increase their awareness of the direct and indirect influences of

international transactions on their future, and establish and conduct transactions with other countries”

(Beamish 1990, pp. 77-92; Coviello & Munro 1997). These definitions describe the concept of

internationalization from a variety of dimensions. Up till now, the consensual concept of

internationalization includes:

(1) Internationalization is a process that includes many incremental decisions and strategies.

(2) It involves various outward and inward products, service or resource transferring across national

boundaries.

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(3) Internationalization influenced by a series of factors that come from the firms and environments.

In this paper, we adopt the definition from Andersen (1997): Internationalization is the process of adapting

exchange transaction modality to international markets. This definition includes both entry mode strategy

and international market selection.

Foreign market entry modes differ in degree of risk they present, the control and commitment of resources

they require and the return on investment they promise. When an organization has made a decision to enter

an overseas market, it faces three major issues:

Marketing - which countries, which segments, how to manage and implement marketing effort,

how to enter - with intermediaries or directly, with what information?

Sourcing - whether to obtain products, make or buy?

Investment and control - joint venture, global partner, acquisition?

There are two major types of entry modes:

Equity based modes; wholly owned subsidiary, joint ventures, strategic alliances, mergers and

acquisitions.

Non-equity based modes; this mainly involves export.

The non-equity modes category includes export and contractual agreements, while the equity modes

category includes joint venture and wholly owned subsidiaries. It is worth noting that not all authorities on

international marketing agree as to which mode of entry sits where. For example, some see franchising as a

stand-alone mode, whilst others see it as part of licensing. In reality, the most important point is that you

consider all useful modes of entry into international markets.

Each of the entry strategies is discussed below in detail:

Non-equity-Based Modes of Entry

1. Exporting (Direct and Indirect exports)

2. Licensing

3. Franchising

4. Management Contract

5. Contract Manufacturing

6. Countertrade

7. Turnkey project

Equity-Based Modes of Entry

1. Wholly Owned subsidiary

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2. Joint Venture

3. Strategic Alliance (may also be nonequity)

Non-equity-Based Modes of Entry

1. Exporting

Exporting is the process of selling of goods and services produced in one country to other countries. It is the

most traditional and well established form of operating in foreign markets.

There are two types of exporting: direct and indirect.

Direct Exports:

Direct exports represent the most basic mode of exporting, capitalizing on economies of scale in production

concentrated in the home country and affording better control over distribution. Direct export works the

best if the volumes are small. Large volumes of export may trigger protectionism.

Sales representatives represent foreign suppliers/manufacturers in their local markets for an established

commission on sales. Provide support services to a manufacturer regarding local advertising, local sales

presentations, customs clearance formalities, legal requirements. Manufacturers of highly technical services

or products such as production machinery, benefit the most form sales representation.

Importing distributors purchase product in their own right and resell it in their local markets to wholesalers,

retailers, or both. Importing distributors are a good market entry strategy for products that are carried in

inventory, such as toys, appliances, prepared food.

Advantages of direct exporting:

Control over selection of foreign markets and choice of foreign representative companies

Good information feedback from target market

Better protection of trademarks, patents, goodwill, and other intangible property

Potentially greater sales than with indirect exporting.

Disadvantages of direct exporting:

Higher start-up costs and higher risks as opposed to indirect exporting

Greater information requirements

Longer time-to-market as opposed to indirect exporting.

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Indirect exports

Indirect export is the process of exporting through domestically based export intermediaries. The exporter

has no control over its products in the foreign market.

Types of indirect exporting:

Export trading companies (ETCs) provide support services of the entire export process for one or

more suppliers. Attractive to suppliers that are not familiar with exporting as ETCs usually perform

all the necessary work: locate overseas trading partners, present the product, quote on specific

enquiries, etc.

Export management companies (EMCs) are similar to ETCs in the way that they usually export for

producers. Unlike ETCs, they rarely take on export credit risks and carry one type of product, not

representing competing ones. Usually, EMCs trade on behalf of their suppliers as their export

departments.

Export merchants are wholesale companies that buy unpackaged products from

suppliers/manufacturers for resale overseas under their own brand names. The advantage of export

merchants is promotion. One of the disadvantages for using export merchants result in presence of

identical products under different brand names and pricing on the market, meaning that export

merchant’s activities may hinder manufacturer’s exporting efforts.

Confirming houses are intermediate sellers that work for foreign buyers. They receive the product

requirements from their clients, negotiate purchases, make delivery, and pay the

suppliers/manufacturers. An opportunity here arises in the fact that if the client likes the product it

may become a trade representative. A potential disadvantage includes supplier’s unawareness and

lack of control over what a confirming house does with their product.

Nonconforming purchasing agents are similar to confirming houses with the exception that they do

not pay the suppliers directly – payments take place between a supplier/manufacturer and a foreign

buyer.

Piggybacking: Piggybacking means that organizations with little exporting skill may use the

services of one that has. Another form is the consolidation of orders by a number of companies in

order to take advantage of bulk buying. Normally these would be geographically adjacent or able to

be served, say, on an air route. The fertilizer manufacturers of Zimbabwe, for example, could

piggyback with the South Africans who both import potassium from outside their respective

countries.

Advantages of indirect exporting:

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Fast market access

Concentration of resources for production

Little or no financial commitment. The export partner usually covers most expenses associated with

international sales

Low risk exists for those companies who consider their domestic market to be more important and

for those companies that are still developing their R&D, marketing, and sales strategies.

The management team is not distracted

No direct handle of export processes.

Disadvantages of indirect exporting:

Higher risk than with direct exporting

Little or no control over distribution, sales, marketing, etc. as opposed to direct exporting

Inability to learn how to operate overseas

Wrong choice of market and distributor may lead to inadequate market feedback affecting the

international success of the company

Potentially lower sales as compared to direct exporting, due to wrong choice of market and

distributors by export partners.

Those companies that seriously consider international markets as a crucial part of their success

would likely consider direct exporting as the market entry tool. Indirect exporting is preferred by

companies who would want to avoid financial risk as a threat to their other goals.

According to Collett (1991) exporting requires a partnership between exporter, importer,

government and transport. Without these four coordinating activities the risk of failure is increased.

Contracts between buyer and seller are a must. Forwarders and agents can play a vital role in the

logistics procedures such as booking air space and arranging documentation

2. Licensing

Licensing is the method of foreign operation whereby a firm in one country agrees to permit a company in

another country to use the manufacturing, processing, trademark, know-how or some other skill provided by

the licensor. An international licensing agreement or permit allows foreign firms, either exclusively or non-

exclusively to manufacture a proprietor’s product for a fixed term in a specific market.

A licensor in the home country makes limited rights or resources available to the licensee in the host

country. The rights or resources may include patents, trademarks, managerial skills, technology, and others

that can make it possible for the licensee to manufacture and sell in the host country a similar product to the

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one the licensor has already been producing and selling in the home country without requiring the licensor

to open a new operation overseas. The licensor earnings usually take forms of one time payments, technical

fees and royalty payments usually calculated as a percentage of sales. In this mode of entry, the

transference of knowledge between the parental company and the licensee is strongly present, the decision

of making an international license agreement depend on the respect the host government show for

intellectual property and on the ability of the licensor to choose the right partners and avoid them to

compete in each other market. Licensing is a relatively flexible work agreement that can be customized to

fit the needs and interests of both, licensor and licensee.

Following are the main advantages and reasons to use an international licensing for expanding

internationally:

Obtain extra income for technical know-how and services

Reach new markets not accessible by export from existing facilities

Quickly expand without much risk and large capital investment

Pave the way for future investments in the market

Retain established markets closed by trade restrictions

Political risk is minimized as the licensee is usually 100% locally owned

Is highly attractive for companies that are new in international business.

On the other hand, international licensing is a foreign market entry mode that presents some disadvantages

and reasons why companies should not use it as:

Lower income than in other entry modes

Loss of control of the licensee manufacture and marketing operations and practices dealing to loss

of quality

Risk of having the trademark and reputation ruined by an incompetent partner

The foreign partner can also become a competitor by selling its production in places where the

parental company is already in.

Licensing involves little expense and involvement. The only cost is signing the agreement and

policing its implementation. Those who decide to license ought to keep the options open for

extending market participation.

3. Franchising

The Franchising system can be defined as: “A system in which semi-independent business owners

(franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become

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identified with its trademark, to sell its products or services, and often to use its business format and

system.”

Compared to licensing, franchising agreements tends to be longer and the franchisor offers a broader

package of rights and resources which usually includes: equipment, managerial systems, operation manual,

initial trainings, site approval and all the support necessary for the franchisee to run its business in the same

way it is done by the franchisor. In addition to that, while a licensing agreement involves things such as

intellectual property, trade secrets and others while in franchising it is limited to trademarks and operating

know-how of the business.

Advantages of the international franchising mode:

Low political risk

Low cost

Allows simultaneous expansion into different regions of the world

Well selected partners bring financial investment as well as managerial capabilities to the operation.

Disadvantages of the international franchising mode:

Franchisees may turn into future competitors

Demand of franchisees may be scarce when starting to franchise a company, which can lead to

making agreements with the wrong candidates

A wrong franchisee may ruin the company’s name and reputation in the market

Comparing to other modes such as exporting and even licensing, international franchising requires

a greater financial investment to attract prospects and support and manage franchisees

4. Management Contract

This is an arrangement under which a company provides managerial know-how in some or all the

functional areas to another party for a fee that typically ranges from 2 to 5 percent of sales. International

companies make such contracts with

1) firms in which they have no ownership,

2) joint ventures,

3) wholly owned subsidiaries.

In Asia, many hotels operate under management contract arrangements, as they can more easily obtain

economies of scale, a global reservation systems, brand recognition etc.

5. Contract Manufacturing

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This is an arrangement in which one company contracts another to produce products to its specifications but

assumes responsibility for marketing. International firms employ contract manufacturing in two ways. One

way is to enter the market without investing in plant facilities. The firm contracts a local manufacturer to

produce products for it according to its specifications. The second way is to subcontract assembly work or

the production of parts to independent companies overseas. Mostly contract manufacturing benefits

companies who want to give their customers goods or services only they can provide, but using another

company to provide or produce the goods, thereby lowering costs.

When working with contract manufacturing there are advantages and disadvantages

The advantages are lower costs, flexibility, access to outside expertise in selling the product, and lower

capital requirements, since there is no need to produce anything. Contract manufacturing works if the

company gets involved with the right company. If the company were to get involved in the wrong

company, the whole process would not work. Or, the company engaging in the contract with the

manufacturer may assume too much or make the wrong assumptions. For one thing, it is hard to track

prices when the market changes, because the emphasis may be placed on the wrong company. Another

problem that can occur is the company may need to deal with suppliers for the products they are selling.

However, the supplier may only want to do deal with the original manufacturer. This may limit the

company from obtaining supplies.

6. Countertrade

This is by far the largest indirect method of exporting is countertrade. It involves commercial transactions in

which provisions are made, in one of a series of related contracts, for payment by deliveries of goods and/or

services in addition to, or in place of, financial settlement. Countertrade is the modem form of barter trade,

except that contracts are not legal and it is not covered by GATT (General Agreement on Tariffs and

Trade). It can be used to circumvent import quotas.

Khoury (1984) categorizes countertrade as follows:

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Countertrade has disadvantages:

Not covered by GATT so "dumping" may occur

Quality is not of international standard so costly to the customer and trader

Variety is low so marketing of that is limited

Difficult to set prices and service quality

Inconsistency of delivery and specification,

Difficult to revert to currency trading - so quality may decline further and therefore product is

harder to market.

Equity-Based Modes of Entry

1. Wholly Owned subsidiary

2. Joint Venture

3. Strategic Alliance (may also be nonequity)

4. Internet

1. Wholly owned Subsidiary

This will involve the greatest commitment in capital and managerial effort. The ability to communicate and

control the subsidiary may outweigh any of the disadvantages of joint ventures and licensing. However, as

mentioned earlier, repatriation of earnings and capital has to be carefully monitored. The more unstable the

environment the less likely is the ownership pathway an option.

A company that wishes to own a foreign subsidiary outright may:

Start from the ground by building a new plant;

Acquire a going concern;

Purchase its distributor.

Generally, a wholly owned subsidiary includes two types of strategies:

1) Greenfield investment and

2) Acquisitions.

Greenfield Investment is the establishment of a new wholly owned subsidiary. It is often complex and

potentially costly, but it is able to full control to the firm and has the most potential to provide above

average return. Wholly owned subsidiaries and expatriate staff are preferred in service industries where

close contact with end customers and high levels of professional skills, specialized know how, and

customizations are required. Greenfield investment is more likely preferred where physical capital

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intensive plants are planned. This strategy is attractive if there are no competitors to buy or the transfer

competitive advantages that consists of embedded competencies, skills, routines, and culture.

Greenfield investment is high risk due to the costs of establishing a new business in a new country. A firm

may need to acquire knowledge and expertise of the existing market by third parties, such consultant,

competitors, or business partners. This entry strategy takes much time due to the need of establishing new

operations, distribution networks, and the necessity to learn and implement appropriate marketing strategies

to compete with rivals in a new market.

Acquisition has become a popular mode of entering foreign markets mainly due to its quick access.

Acquisition strategy offers the fastest, and the largest, initial international expansion of any of the

alternative.

Acquisition has been increasing because it is a way to achieve greater market power. The market share

usually is affected by market power. Therefore, many multinational corporations apply acquisitions to

achieve their greater market power require buying a competitor, a supplier, a distributor, or a business in

highly related industry to allow exercise of a core competency and capture competitive advantage in the

market.

Acquisition is lower risk than Greenfield investment because of the outcomes of an acquisition can be

estimated more easily and accurately. In overall, acquisition is attractive if there are well established firms

already in operations or competitors want to enter the region.

On the other hand, there are many disadvantages and problems in achieving acquisition success:

Disadvantages:

Integrating two organizations can be quite difficult due to different organization cultures, control

system, and relationships. Integration is a complex issue, but it is one of the most important things

for organizations.

By applying acquisitions, some companies significantly increased their levels of debt which can

have negative effects on the firms because high debt may cause bankrupt.

Too much diversification may cause problems. Even when a firm is not too over diversified, a high

level of diversification can have a negative effect on the firm in the long term performance due to a

lack of management of diversification.

2. Joint Ventures

A Joint venture is an enterprise in which two or more investors share ownership and control over property

rights and operation, markets, intellectual property, assets, knowledge, and, of course, profits. Other

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benefits include political connections and distribution channel access that may depend on relationships.

Such alliances often are favourable when:

The partners' strategic goals converge while their competitive goals diverge

The partners' size, market power, and resources are small compared to the Industry leaders

Partners are able to learn from one another while limiting access to their own proprietary skills

Parties agree to develop, for a finite time, a new entity and new assets by contributing equity.

Joint ventures are a more extensive form of participation than either exporting or licensing. Joint ventures

can be equity or non-equity partnerships. Equity joint ventures are contractual arrangements with equal

partners. Non-equity ventures involve the host country partner in the arrangement with a greater

percentage.

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing,

technology transfer, local firm capabilities and resources, and government intentions. Potential problems

include:

Conflict over asymmetric new investments

Mistrust over proprietary knowledge

Performance ambiguity - how to split the pie

Lack of parent firm support

Cultural clashes

If, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete such as:

Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but

they also want to maximize their own competitive position.

The joint venture attempts to develop shared resources, but each firm wants to develop and protect

its own proprietary resources.

The joint venture is controlled through negotiations and coordination processes, while each firm

would like to have hierarchical control.

Joint ventures give the following advantages:

Sharing of risk and ability to combine the local in-depth knowledge with a foreign partner with

know-how in technology or process

Joint financial strength

May be only means of entry and

May be the source of supply for a third country.

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They also have disadvantages:

Partners do not have full control of management

May be impossible to recover capital if need be

Disagreement on third party markets to serve and Partners may have different views on expected

benefits.

If the partners carefully map out in advance what they expect to achieve and how, then many problems can

be overcome.

3. Strategic alliance

A strategic alliance is a term used to describe a variety of cooperative agreements between different firms,

such as shared research, formal joint ventures, or minority equity participation. The modern form of

strategic alliances is becoming increasingly popular and has three distinguishing characteristics:

1. They are frequently between firms in industrialized nations

2. The focus is often on creating new products and/or technologies rather than distributing existing ones

3. They are often only created for short term durations

Advantages of a strategic alliance

Technology Exchange: This is a major objective for many strategic alliances. The reason for this is that

many breakthroughs and major technological innovations are based on interdisciplinary and/or inter-

industrial advances. Because of this, it is increasingly difficult for a single firm to possess the necessary

resources or capabilities to conduct their own effective R&D efforts. This is also perpetuated by shorter

product life cycles and the need for many companies to stay competitive through innovation. Some

industries that have become centers for extensive cooperative agreements are:

Telecommunications

Electronics

Pharmaceuticals

Information technology

Specialty chemicals

Global competition: There is a growing perception that global battles between corporations be fought

between teams of players aligned in strategic partnerships. Strategic alliances will become key tools for

companies if they want to remain competitive in this globalized environment, particularly in industries that

have dominant leaders, such as cell phone manufactures, where smaller companies need to ally in order to

remain competitive.

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Industry convergence: As industries converge and the traditional lines between different industrial sectors

blur, strategic alliances are sometimes the only way to develop the complex skills necessary in the time

frame required. Alliances become a way of shaping competition by decreasing competitive intensity,

excluding potential entrants, and isolating players, and building complex value chains that can act as

barriers.

Economies of scale: Pooling resources can contribute greatly to economies of scale, and smaller companies

especially can benefit greatly from strategic alliances in terms of cost reduction because of increased

economies of scale.

Reduction of risk: In strategic alliances no one firm bears the full risk, and cost of, a joint activity. This is

extremely advantageous to businesses involved in high risk / cost activities such as R&D. This is also

advantageous to smaller organizations that are more affected by risky activities.

Alliance as an alternative to merger: Some industry sectors have constraints to cross-border mergers and

acquisitions, strategic alliances prove to be an excellent alternative to bypass these constraints. Alliances

often lead to full-scale integration if restrictions are lifted by one or both countries.

Disadvantages of strategic alliances:

The risks of competitive collaboration

Some strategic alliances involve firms that are in fierce competition outside the specific scope of

the specific scope of the alliance. This creates the risk that one or both partners will try to use the

alliance to create an advantage over the other. The benefits of this alliance may cause unbalance

between the parties, there are several factors that may cause this asymmetry.

The partnership may be forged to exchange resources and capabilities such as technology. This may

cause one partner to obtain the desired technology and abandon the other partner, effectively

appropriating all the benefits of the alliance.

Using investment initiative to erode the other partners competitive position. This is a situation

where one partner makes and keeps control of critical resources. This creates the threat that the

stronger partner may strip the other of the necessary infrastructure.

Strengths gained by learning from one company can be used against the other. As companies learn

from the other, usually by task sharing, their capabilities become strengthened, sometimes this

strength exceeds the scope of the venture and a company can use it to gain a competitive advantage

against the company they may be working with.

Firms may use alliances to acquire its partner. One firm may target a firm and ally with them to use

the knowledge gained and trust built in the alliance to take over the other.

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4. The Internet

The Internet is a new channel for some organizations and the sole channel for a large number of innovative

new organizations. The eMarketing space consists of new Internet companies that have emerged as the

Internet has developed, as well as those pre-existing companies that now employ eMarketing approaches as

part of their overall marketing plan. For some companies the Internet is an additional channel that enhances

or replaces their traditional channel(s). For others the Internet has provided the opportunity for a new online

company.

The eMarketing space consists of new Internet companies that have emerged as the Internet has developed,

as well as those pre-existing companies that now employ eMarketing approaches as part of their overall

marketing plan.

For some companies the Internet is an additional channel that enhances or replaces their traditional

channel(s). For others the Internet has provided the opportunity for a new online company. New companies

sprang up as the Internet began to be adopted. Entrepreneurs were investing heavily in all sorts of start-ups.

Some were successes, most were not. Examples of companies that trade exclusively and only on the

Internet include; Amazon, Lastminute.com and eBay.

Conclusion

Hibbert (1997:148) states that management must recognise that the attractiveness of market opportunities

overseas varies widely among industries as well as among individual firms. Any entry strategy must,

therefore, take account not only of corporate resources and industry prospects, but also of differences in

levels of industrial activity and economic growth rates of overseas markets. There is also, of course, a wide

variation in the capacities of individual firms to exploit foreign markets successfully. In setting up a strategy

for international operations, therefore, management must:

Assess opportunities in international markets for its products and technology as well as the potential

risks associated with these opportunities;

Examine the degree to which the firm can develop potential opportunities abroad in the light of its

own organisational and managerial competence.

Hibbert advises that in the evaluation of alternative strategies, management must also ensure that there is

some synergy of marketing, finance, technology and other resources, which can be utilised for:

Market entry strategy;

Development of marketing strategy in existing world markets;

Increasing standardisation of marketing operations on a global basis.

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Hibbert (1997:149) maintains that lack of planning also frustrates a vital aspect of operations – timing. To

exploit market and investment opportunities overseas, the timing of entry, negotiations, promotion and any

acquisitions must be judged carefully, in a planned sequence. Unless a firm can plan and time its entry into

foreign markets with precision, it may be excluded from certain promising markets permanently because the

first firm that undertakes local production overseas can often negotiate with the host government for

preferred treatment and special concessions. This can include a provision to make subsequent entry into the

market by competitors extremely difficult, if not impossible.

According to Hill (2000:428), any firm that is contemplating foreign expansion must first deal with the

issue of which foreign markets to enter and the timing scale of entry. The choice of which foreign markets

to enter must be driven by the assessment of relative long-term growth and profit potential.

Kotler (2000:367) argues that a company must consider the following major decisions in international

marketing:

Deciding whether to go abroad;

Deciding which markets to enter;

Deciding how to enter the market;

Deciding on the marketing program;

Deciding on the marketing organisation.

Several factors are drawing more and more companies into the international market.

These include:

Global firms offering better products or lower prices can attack a company’s domestic markets. The

company might want to counterattack these competitors in its home markets;

The company discovers that some foreign markets present higher profit opportunity than the

domestic market;

The company needs a larger customer base to achieve economies of scale;

The company wants to reduce its dependence on any one market;

The company’s customers are going abroad and require international servicing.

The challenge for established companies in the international arena lies in how to exploit opportunities in

their existing international markets effectively and, even more importantly, how to enter new and emerging

markets. Hough and Neuland (2000:266) continue that the complexity of the market entry decision becomes

clear when one realises that, with each market entry mode, there are advantages and disadvantages and

these are determined by factors such as trade barriers, transport cost, political risks, economic risks and firm

strategy.

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Beamish et al (1997:3) maintains that international transactions can influence a firm’s future in both direct

and indirect ways. Business decisions made in one country, (regarding factors such as foreign investments

and partnership arrangements), can have significant impact on a firm in a different country and vice versa.

The impact of such decisions may not be immediately and directly evident.

Beamish et al (1997:15) state that effective international management starts with the knowledge of key

variables in the global economic environment. In any industry in any country, managers must have an

overall knowledge of the where, what, why and how of the countries and regions of the world. This

knowledge starts with the size and growth rates of the country’s markets, populations, trade volumes,

compositions, growth rates, natural resource bases, and labour costs and their financial positions. The

authors maintain that this knowledge can be used as a first cut to identify the threats and opportunities that

might arise in their international operations. It can assist them to identify countries and regions to which an

organisation might export, and in which they might invest in production operations.

Hough and Neuland (2000:254) emphasise that firms expanding into new markets in foreign countries must,

inter alia, deal with differing political, cultural and legal systems with unfamiliar economic and competitive

conditions, advertising media, and distribution channels.

In choosing the entry mode, Toyne and Walters (1989) state that a company must ask itself the following

eleven critical entry questions:

1. What domestic regulations prohibit the sale of products and/or services to specific countries?

2. What is the nature and potential size of the market?

3. What are the political and social environments like?

4. What is the competitive environment like and what barriers are there to the market?

5. What are the major (generic) response characteristics of the market in terms of the marketing

mix?

6. What are the major characteristics of potential competitors?

7. What company demand can be expected?

8. What are the international logistical requirements necessary to serve the market?

9. What types of market presence are permitted and which optimum for the firm?

10. What are the resource requirements?

11. Does the market under review meet company’s objectives and goals and match its competitive

advantages?

Toyne Hill (2000:442) summarises the choice of entry modes as follows:

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Due to the advantages and disadvantages, trade-offs are inevitable when selecting an entry mode. For

example, when considering entry into an unfamiliar country with a track record for nationalising foreign-

owned enterprises, a firm might favour a joint venture with a local enterprise. However, if the firm’s core

competence is based on proprietary technology, entering a joint venture might risk losing control of that

technology to the joint venture partner, in which case this strategy may seem unattractive. Despite the

existence of such trade-offs, it is possible to make some generalisations about the optimal choice of entry

mode. Firms with domestic products that they believe will be successful in foreign markets face choice.

They can produce the product at home and export it, license the technology to local firms around the world,

establish wholly owned subsidiaries in foreign countries, or form joint ventures with local partners. Many

firms conclude that exporting is unlikely to lead to significant market penetration, building wholly owned

subsidiaries is too slow and requires too many resources, and licensing does not offer an adequate financial

return.

The result is an international joint venture. While seldom seen as an ideal choice, it is often the most

attractive compromise (Beamish, et al 1997:121).

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