The influence of internal and external factors on entry modes

2007:075

D - U P P S A T S

The influence of internal andexternal factors on entry modes

Anna Puljeva Peter Widén

Luleå tekniska universitet

D-uppsats Marknadsföring

Institutionen för Industriell ekonomi och samhällsvetenskap

2007:075 - ISSN: 1402-1552 - ISRN: LTU-DUPP--07/075--SE

“To say that a company cannot afford to plan an entry strategy is to say that it cannot

afford to think systematically about its future in world markets.”

(Root, 1994, p.3).

ACKNOWLEDGEMENTS We are pleased to finally have finished our Master’s thesis. Researching this area has

given us a great amount of new and interesting knowledge about internal and external

factors influencing the entry mode. We hope that this new knowledge can be of use in

our future carriers as well as for fellow researchers in the future. During this time

period there has been a lot of hard work as well as moments of laughter. There have

been a lot of people involved and without their encouragement this thesis would not

have been possible to complete. Our greatest appreciation goes to our supervisor Mr.

Håkan Perzon at Luleå University of Technology, as well as our family and friends.

Luleå University of Technology, June 4, 2007

Anna Puljeva Peter Widén

ABSTRACT As internationalization and globalization increases in today’s business society, it

becomes ever more important for individual business to keep up with the

development. The way a company ventures from their domestic market to new

geographical markets is of great importance for how well the company succeeds with

their overall business mission. Selecting the right entry mode is an important decision

that demands a lot of resources and thorough planning. When selecting entry mode a

wide range of internal and external factors must be taken into consideration before

making the final decision. This thesis purpose is to provide a better understanding of

the impact of internal and external factors on Swedish SMEs’ choice of international

market entry strategies. In order to reach the purpose we constructed two research

questions regarding how the internal and external factors influence firm’s choice of

international market entry mode. Based on the research questions, a literature review

was conducted, which resulted in a conceptual framework that presented what would

guide the data collection. In order to collect data, a qualitative, case study

methodology was used, using a multiple case study through interviews as our main

data collection tool. The main conclusions regarding the internal factors revealed in

this thesis are that company size/resources limit the companies’ possibilities to

choose market entry modes which demands great financial resources, it also affects

the management risk attitude toward being more risk averse. Further the findings

suggest that even though the companies in the study do not exclude any single market

entry mode, they prefer the use of entry modes from which they have previous

experience. The findings also suggest that the motive for engaging in

internationalization is that the domestic market is insufficient due to the size and

maturity. The main conclusions regarding the external factors revealed in this thesis

are that industry feasibility/viability of MEM influences the choice of market entry

mode when there is an interest of a market as the company will alter their market

entry mode in order to avoid legal difficulties when trying to reach the market. This is

further enhanced by the factor of market barriers as they might force the company to

choose a specific market entry mode in order to avoid legal difficulties when entering

a new international market. Target country production factors can be overcome

through effective implementation of well thought strategic plans, without affecting the

companies’ choice of market entry mode. Finally our findings suggest that the

geographical distance influence on the choice of market entry mode decreases when

the company’s resources and knowledge increase.

SAMMANFATTNING Allt eftersom internationalisering och globalisering ökar i dagens affärsvärld blir det

viktigare och viktigare för enskilda företag att vara delaktiga i utvecklingen. Hur ett

företag går till väga när de söker sig utanför sitt hemlands gränser för att hitta nya

geografiska marknader är enormt viktigt för hur de kommer att lyckas med hela deras

affärsverksamhet. Att välja rätt marknadsinträdessätt är ett viktigt beslut som kräver

stora resurser och noggrann planering. När företaget skall välja inträdessätt finns det

stora mängder interna och externa faktorer som bör beaktas innan det slutgiltiga

beslutet skall tas. Syftet med den här uppsatsen är att skapa en större förståelse för

hur inverkan av interna och externa faktorer påverkar svenska små och medelstora

företag i deras val av marknadsinträdessättstrategier. För att nå det syftet

konstruerades två forskningsfrågor gällande hur de interna och externa faktorerna

påverkar svenska små och mellanstora företags val av marknadsinträdessätt. Utifrån

forskningsfrågorna genomfördes en litteraturstudie, vilket resulterade i upprättandet

av en teoretisk referensram, som fungerade som guide för vad för data som skulle

samlas in. För datainsamlingen användes en kvalitativ fallstudiemetodologi, en

flerfallsstudie med intervjuer som huvudsaklig datainsamlingskälla. De huvudsakliga

slutsatserna gällande de interna faktorerna i denna uppsats är att, företags

storlek/resurser begränsar möjligheterna att välja marknadsinträdessätt som kräver

stora resurser, det påverkar också ledningens attityd gällande risktagande åt att bli

mindre benägna att ta risker. Vidare antyder resultaten att även om företagen i

uppsatsen inte exkluderar något inträdessätt, föredrar de inträdessätt som de har

tidigare erfarenhet av. Resultaten visar också att motiven för att inleda företagets

internationalisering är att den inhemska marknaden inte är tillräckligt stor, eller är

mättad. Vi har också hittat belägg för att valet av inträdessätt beror på företags kort-

och långsiktiga mål. De huvudsakliga slutsatserna gällande de externa faktorerna i

den här uppsatsen är att branschens genomförbarhet/godtagbarhet av ett visst

inträdessätt påverkar valet av marknadsinträdessätt, eftersom företaget i fråga

kommer att förändra vilket sätt de träder in på en specifik marknad för att undvika

komplikationer på grund av lagar och förordningar. Detta är ytterligare förstärkt av

faktorn handelshinder eftersom företaget kan tvingas att välja ett specifikt

marknadsinträdessätt för att undvika straffskatter och dylika hinder för fri handel.

Målmarknadens produktionsfaktorer kan överbryggas av genomförandet av väl

genomtänkta strategier, utan att påverka företagets val av internationella

marknadsinträdessätt. Slutligen visar våra data på att det geografiska avståndets

inflytande på inträdessättet minskar i samband med att företagets resurser och

kunskaper ökar.

TABLE OF CONTENTS

1. INTRODUCTION.....................................................................................................................................1

1.1 BACKGROUND .................................................................................................................................1 1.2 PROBLEM DISCUSSION..................................................................................................................5 1.3 PURPOSE AND RESEARCH QUESTIONS ...................................................................................6 1.4 DEMARCATIONS..............................................................................................................................6 1.5 THESIS OUTLINE..............................................................................................................................7

2. LITERATURE REVIEW........................................................................................................................8

2.1 INTERNAL FACTORS ......................................................................................................................8 2.1.1 Theory by Koch (2001)............................................................................. 8 2.1.2 Theory by Brassington and Pettitt (2000) ................................................ 11 2.1.3 Theory by Hollensen (2001).................................................................... 11 2.1.4 Theory by Root (1994)............................................................................ 11 2.1.5 Theory by Bruhno and Schilt (2001) ....................................................... 13 2.1.6 Additional theory by Root (1994)............................................................ 15

2.2 EXTERNAL FACTORS ...................................................................................................................15 2.2.1 Theory by Koch (2001)........................................................................... 15 2.2.2 Theory by Root (1994)............................................................................ 17 2.2.3 Theory by Bell (1995)............................................................................. 18 2.2.4 Theory by Bruhno and Schilt (2001) ....................................................... 18 2.2.5 Additional theory by Root (1994)............................................................ 19

2.3 CONCEPTUAL FRAMEWORK .....................................................................................................20 2.3.1 Research question 1 - How do internal factors influence firm’s choice of international market entry mode?..................................................................... 20 2.3.2 Research question 2 - How do external factors influence firm’s choice of international market entry mode?..................................................................... 21

3. METHODOLOGY .................................................................................................................................23

3.1 RESEARCH PURPOSE....................................................................................................................23 3.2 RESEARCH APPROACH................................................................................................................24 3.3 RESEARCH STRATEGY ................................................................................................................24 3.4 DATA COLLECTION ......................................................................................................................25 3.5 SAMPLE SELECTION.....................................................................................................................26 3.6 DATA ANALYSIS............................................................................................................................26 3.7 QUALITY STANDARDS ................................................................................................................27

3.7.1 Validity................................................................................................... 27 3.7.2 Reliability ............................................................................................... 27

4. EMPIRICAL DATA...............................................................................................................................29

4.1 CASE 1 – MEVA...............................................................................................................................29 4.1.1 Case 1 – Data regarding RQ1: How do internal factors influence firm’s choice of international market entry mode?...................................................... 29 4.1.2 Case 1 – Data regarding RQ2: How do external factors influence firm’s choice of international market entry mode?...................................................... 31

4.2 CASE 2 – PURAC.............................................................................................................................32 4.2.1 Case 2 – Data regarding RQ1: How do internal factors influence firm’s choice of international market entry mode?...................................................... 32 4.2.2 Case 2 – Data regarding RQ2: How do external factors influence firm’s choice of international market entry mode?...................................................... 34

5. DATA ANALYSIS ..................................................................................................................................35

5.1 CASE ANALYSIS RESEARCH QUESTION 1.............................................................................35 5.1.1 Theory by Koch (2001)........................................................................... 35 5.1.2 Theory by Brassington and Pettitt (2000) ................................................ 37 5.1.3 Theory by Hollensen (2001).................................................................... 37 5.1.4 Theory by Bruhno and Schilt (2001) ....................................................... 38 5.1.5 Theory by Root (1994)............................................................................ 39

5.2 SUMMARIZATION OF FINDINGS IN RESEARCH QUESTION 1 .........................................40 5.3 CASE ANALYSIS RESEARCH QUESTION 2.............................................................................41

5.3.1 Theory by Koch (2001)........................................................................... 41 5.3.2 Theory by Root (1994)............................................................................ 42 5.3.3 Theory by Bruhno and Schilt (2001) ....................................................... 43 5.3.4 Additional theory by Root (1994)............................................................ 44

5.4 SUMMARIZATION OF FINDINGS IN RESEARCH QUESTION 2 .........................................45

6. CONCLUSIONS AND IMPLICATIONS...........................................................................................46

6.1 RESEARCH QUESTION 1 – HOW DO INTERNAL FACTORS INFLUENCE FIRM’S CHOICE OF INTERNATIONAL MARKET ENTRY MODE?..........................................................46 6.2 RESEARCH QUESTION 2 – HOW DO EXTERNAL FACTORS INFLUENCE FIRM’S CHOICE OF INTERNATIONAL MARKET ENTRY MODE?..........................................................47 6.3 IMPLICATIONS FOR THEORY ....................................................................................................48 6.4 IMPLICATIONS FOR PRACTITIONERS/MANAGERS ............................................................49 6.5 IMPLICATIONS FOR FUTURE RESARCH.................................................................................49

REFERENCES ............................................................................................................................................50

APPENDIXES

INTRODUCTION

1

1. INTRODUCTION This first chapter is intended to give an introduction through a background to the

research area. The background will be followed by the problem discussion, which will

lead to the purpose and research questions of this thesis. Finally demarcations will be

presented, followed by a layout for the rest of the thesis.

1.1 BACKGROUND

Internationalization/Globalization

According to Bender and Fish (2000) the world is in an era of globalization, and companies are continuously affected by the competition around the world. Internationalization is necessary because, from a national view, economic isolation has become impossible. Failure to participate in the global marketplace assures declining economic capability of a nation (Czinkota and Ronkainen, 2004). As businesses are no longer limited by national boundaries and therefore organizations are performing activities outside their home countries. Barkema, Shenkar, Vermeulen and Bell (1997) argues that through accumulate experience in foreign markets, firms gain local market knowledge and develop routines and process for dealing with the foreign context. The concept of globalization and internationalization is referred to as the trend toward greater interdependence among national institutions and economies. It is a trend that is characterized by “denationalization” in which national boundaries are becoming less relevant. It also refers to the cooperation between national actors (Wild, Wild and Han, 2003). In addition, Friedman (1999) states that globalization is not a phenomenon or just some passing trend, indeed it is an overarching international system, shaping the domestic politics and foreign relations of virtually every country. According to Root (1994) the new global economy has created business environments that require firms to look past the traditional thinking of the domestic market, and to start looking at business from an international global perspective instead. Friedman (1999) also brings out the tremendous opportunities and benefits that come with globalization. Furthermore the increasing globalization according to Bender and Fish (2000) leads to an increase in international joint ventures, companies establishing subsidiaries and sales offices abroad. If companies want to become successful, they must manage their knowledge within the organization, especially across national borders. Internationalization process

Kotler and Armstrong (2001) explain the process of a company’s internationalization in five stages. These stages are (1) deciding whether to go international or not, (2) deciding which markets to enter, (3) deciding how to enter the market, (4) deciding on global marketing programs, and (5) deciding on global marketing organizations. According to Kotler and Armstrong (2001) first the company has to decide whether to go international or not. The company has to compare and evaluate the opportunities and risks of going abroad, and whether or not they have the ability to survive on the global market. Second, the company has to try to define their international marketing objectives and policies, and decide upon which market to enter. Then the company must choose how many countries to enter. In the initial stage of their internalization many companies choose to enter either one or a few countries in order to create a deep relationship. After selecting markets, the company has to decide how to enter that/those markets. There are several market entry modes a company can chose from, for example export, strategic

INTRODUCTION

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alliances and foreign direct investment (FDI). Each entry mode contains commitments and risks as well as control and potential profits. The next stage is to decide on a global marketing program and adjust their national marketing program to international standards. This is a question of using either a standardized marketing mix or an adapted marketing mix, adjusted for each new market. The final stage of the internalization process is to decide upon a global marketing organization, most companies have at least three different ways of managing their international activities. Generally, companies start with organizing an export department, then an international division is created and finally they become a global organization (Kotler and Armstrong, 2001). Eriksson, Johanson, Majkgård and Sharma (1997) emphasize the difficulties with the process of internationalization. They also consider international entry as an incremental process that begins relatively late in a firm’s life cycle which might warn of potentially negative consequences of early internationalization on firm survival, this is further supported in findings made by Johanson and Vahlne (1977, 1990). Entry strategies

According to Osland, Taylor and Zou (2001) globalization of business has grown rapidly in recent decades, which has in turn forced companies to develop strategies for entering and expand their businesses into new markets. One of the most crucial strategic decisions an international company has to make is selecting a mode for entering a new foreign market. Entry strategies for international markets are according to Hollensen (1998) a key strategic issue for companies in today’s rapidly growing and internationalizing market. Root (1994) states that entry strategies help to set the objectives, goals, resources and policies in order to guide the company’s international business activities to reach sustainable growth on the international market. He further emphasizes that it is important to realize that a company’s entry strategy is not a single market plan, but a combination of several market plans. When companies consider entering new foreign markets they have to have a specific set of strategic alternatives that varies by different target markets, and the different entry mode alternatives. Managers need to consider how their company best can enter a specific market and take into consideration the risk and environmental factors that are associated with the different entry strategies (Deresky, 2000). The foreign market entry selection is highly significant for the company’s future performance and survival on the international market (Ekeledo and Sivakumar, 2004). According to Bradley (2002) the concept of market entry refers to the difficulty or ease a company face when entering international markets. “Entry is one of the supreme tests of competitive ability. No longer is the company providing itself on familiar ground, instead it has to expose its competences in a new area” (Bradley, 2002, p.244). Furthermore, Terpstra and Sarathy (2000) state that one of the most critical decisions in the internationalization process is the choice of method of entry into foreign markets. This, because the entry mode decision is a macro decision, companies do not only choose a level of involvement in the foreign market, they also make choices about their marketing program. Entry modes An international market entry mode is an arrangement that creates the possibility for a company’s products, technology, human skills, management, or other resources to enter into a foreign country (Root, 1994).

INTRODUCTION

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Bradley (2002) states that all aspects of marketing have to be of superior performance in order for a company to have a successful market entry. When selecting the appropriate mode of entry, companies have to answer two questions: first, what level of resource commitment are they willing to make? And second, what level of control over the operation do they desire? The factor influencing these two questions is the perceived risk of entering a new country and a new market, thus it has to be taken into consideration and the alternatives have to be well evaluated because this will eventually lead to the entry mode choice (ibid). Bradley (2002) further states that once a strategy is selected companies have to select the right type of market entry mode. The foreign market entry modes can be divided into three groups: 1. Export entry modes 2. Contractual entry modes 3. Investment entry modes Export entry modes include direct and indirect exporting i.e. selling to foreign visitors on the domestic market or to foreign agents, distributors or a subsidiary. The difference between export entry modes and the other entry modes, contractual and investment entry modes, is that within export entry modes the final product is produced outside the target market. Contractual entry modes include licensing, franchising, contract manufacturing etc. The third group, investment entry modes, includes joint ventures, foreign direct investment (FDI), and acquisitions etcetera (Bradley, 2002). Furthermore Root (1994) argues that from an economist’s perspective, a company can arrange entry into a foreign country in only two ways. First, it can export its products to the target country from a production base outside that country. Second, it can transfer its resources in technology, capital, human skills and enterprise to the foreign country, where they may be sold directly to users or combined with local resources (especially labor) to manufacture products for sale in local markets. From a management/operations perspective, these two forms of entry break down into several distinctive entry modes, which offer different benefits and costs to the company. These are: Export Entry Modes • Indirect • Direct Agent/Distributors • Direct Branch/ Subsidiary

Contractual Entry Modes • Licensing • Franchising • Technical agreements • Service contract • Management contracts • Construction/ turnkey contracts • Contract manufacture • Co-production agreements

INTRODUCTION

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Investment Entry Modes • Solo venture: new establishment • Solo venture: acquisition • Joint venture: new establishment/ acquisition Root (1994) argues that export entry modes differ from the other two primary entry modes (contractual and investment) in that a company’s final or intermediate product is manufactured outside the target country and subsequently transferred to it. Thus exporting is confined to physical products. Further Root (1994) states that contractual entry modes are long-term non equity associations between an international company and an entity in a foreign target country that involve the transfer of technology or human skills from the former to the latter. The third kind of entry mode is stated by Root (1994) to be the investment entry mode, which involves ownership by an international company of manufacturing plants or other production units in the target country. In terms of ownership and management control (which is the distinctive feature of this entry mode), foreign production affiliates may be classified as solo ventures with full ownership and control by the parent company or as joint ventures with ownership and control shared between the parent company and one or more local partners. A company may start a solo venture from scratch (new establishment) or by acquiring a local company (acquisition) (Root, 1994). There is evidence that many firms develop their export business gradually (Albaum, Strandskov, Duerr and Dowd, 1994). Several authors (Hollensen, 1998; Albaum, Strandskov and Duerr, 1998) argues that the most common mode for entering international markets is export. Hollensen (1998) emphasizes that this can be done direct or indirect and Albaum et. al. (1998) states that it is often the first step of a firm’s internationalization. Many companies appear to grow into international activities through a series of phased developments. They gradually change strategy and tactics as they become more involved. Others enter international markets after much research, with long-range plans fully developed (Cateora, 1996). According to De Burca, Brown and Fletcher (2004), there are various approaches when selecting entry modes for foreign markets and these have different implications for small and medium-sized as oppose to large sized firms. Most small and medium-sized enterprises that enter foreign markets do it in a country-by-country basis. In this way the small actors can expand to new markets in a suitable pace with good control over the development (ibid).

INTRODUCTION

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1.2 PROBLEM DISCUSSION

Hollenstein (2005) explains that the internationalization process for small and medium sized enterprises (SMEs) involves limitations of resources in form of finance, information and management capacity to a much higher extent that for multinational cooperation’s (MNC’s). According to the recommendation of the European Union (http://europa.eu/scadplus/leg/en/lvb/n26026.htm) the definition of SMEs is based on the number of employees and their turnover or annual balance sheet. If there are less than 50 employees and the turnover/ balance sheet does not exceed 10 million the company is regarded as a small enterprise. The definition of a medium sized enterprise on the other hand is up to 250 employees with an annual turnover not exceeding 50 million or a balance sheet not exceeding 43 million annually. SME’s also face external barriers such as laws and regulations and imperfections to a higher extent than MNC’s (Hollenstein, 2005). Bradley, Meyer and Gao (2006) argue that many SMEs are forced to internationalize, particularly high technology firms, due to a focus on niche markets, shorter product life cycles and, frequently, the small size of their domestic markets relative to the potential that exists abroad. The authors however state that these firms’ face a serious dilemma, should they attempt to internationalize unaided or do they try a form of partnership with stronger firms in their business system that can help them. The authors argue that the primary foreign market entry mode used by small business is exporting, additionally it is argued that this is an effect of exporting offering an effective means of internationalization without over- extending the capabilities or resources of the firm. The authors also stress that small firms often skip some- and/or all of the “internationalization stages” as many firms must be international from the outset. Hollensen (1998) states that if a company in the initial stage of its internalization makes a poor selection of entry modes, it can become a threat for its future market entries and expansions. However, there is no entry mode that can be seen as the best choice. The selection of entry mode is different from one company to another and is influenced by a number of factors, both internal and external to the company (ibid). How a company deals with the external factors depends on the internal factors that a company is facing when choosing an entry mode (Root, 1994). It is of great importance for SME’s to find out what factors that was central in the modal choices of other companies. This is in order to improve the SMEs’ strategies and entry mode selection and not make the same mistakes as others have done (Osland, Taylor and Zou, 2001). Deresky (2000) points out that SME’s often use export as an initial entry mode since it is a low-risk alternative, and in addition it does not demand large capital resources or investments and withdrawal is relatively easy. Obadia and Vida (2006) bring up that companies more often choose to open foreign subsidiaries to expand internationally. Additionally the authors state that the size of the company is of great importance for the internationalization to be successful, as the SME’s tend to be less prepared than larger firms to deal with issues such as geographic, cultural, and institutional distance between the home country and the country in which the investment was made. The authors pinpoint the lack of research made on the specific reasons why SME’s performance when internationalizing and specifically regarding issues that SME’s face with their foreign subsidiaries.

http://europa.eu/scadplus/leg/en/lvb/n26026.htm

INTRODUCTION

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Selecting the right entry mode is an important decision, which demands a lot of resources and thorough planning. When selecting entry mode a wide range of factors must be taken into consideration before making the final decision (Young, Hamill, Wheeler and Davies, 1989). Furthermore Koch (2001) states that all factors proposed to influence the market/ market entry mode selection process fall into three broad categories: external, internal, and the mixed, internal/external category. In addition to this Root (1994) states there is difference in the internal and external factors when companies choose a market entry mode. The difference is that the company management rarely can influence the external factors. In the final decision of market entry mode, there is supposed to be a balance between different factors that are in conflict with each other, and in the end a balance between risk and control must be established. These external factors can seldom be affected by managers’ decisions and are external to the company and may be regarded as parameters of the entry mode decision. Because no single external factor is likely to have a decisive influence on the entry mode for companies in general, these factors only encourage or discourage a particular entry mode. The author also puts forward that a company’s choice of its entry mode for a given product/ target country is a net result of several, often conflicting forces. The factors influencing company’s choice of entry mode are according to Johansson and Vahlne (1977) divided into two main groups, external factors and internal factors. The external consists of determinants regarding the company’s environment while the internal are determined by company specific factors.

1.3 PURPOSE AND RESEARCH QUESTIONS

Based on the problem discussion the research purpose of this thesis is to provide a better

understanding of the impact of internal and external factors on SMEs’ choice of

international market entry strategies.

In order to reach the purpose of this thesis the following research questions were developed. RQ 1: How do internal factors influence firm’s choice of international market entry mode? RQ 2: How do external factors influence firm’s choice of international market entry mode?

1.4 DEMARCATIONS

There is vast research made in the area of companies choosing entry mode in a foreign market. The majority of the research has been focused on the internationalization process of firms. Our research will, in accordance with our frame of reference, focus on the factors influencing the company’s choice of entry mode in new markets. The theories on the subject bring forward three different types of factors, internal, external and the mixed category. We will only focus on the internal and the external factors, since the mixed category factors can be included in one or the other of the internal and external factors.

INTRODUCTION

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1.5 THESIS OUTLINE

This report will be divided in six chapters as shown in figure 1.1: Introduction, Literature review, Methodology, Data Presentation, Data Analysis and Conclusions and Implications. The Introduction presents the research area through a background and problem discussion. It also contains the overall purpose, which leads to the specific research questions. Finally it clarifies the demarcations and the outline of the thesis. The second chapter, Literature review, will present the theories connected to the research area and will lead to the conceptual framework used in this report. The third chapter, Methodology, will present and motivate the choices we have made regarding research method. Chapter four, Data Presentation, presents the empirical data collected. In the fifth chapter, Data Analysis, we will compare the empirical data to the conceptual framework in form of a case-analysis. Finally in chapter six, Conclusions and Implications, we will present the findings to the stated research questions and provide recommendations for future research.

CHAPTER 1 Introduction

CHAPTER 6 Conclusions & Implications

CHAPTER 4 Data Presentation

CHAPTER 2 Literature Review

CHAPTER 3 Methodology

CHAPTER 5 Data Analysis

Figure 1.1: Outline of the thesis

LITERATURE REVIEW

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2. LITERATURE REVIEW In the previous chapter we outlined a research area that led to an overall purpose, landing in

two research questions. In this chapter an overview of previous studies related to the research

area is presented. This chapter will review literature studies related to our first research

question regarding the internal factors influence on firm’s choice of international market

entry mode and to our second research question regarding the external factors influence on

firm’s choice of international market entry mode. Finally, a conceptual framework, based on

theory is displayed.

2.1 INTERNAL FACTORS

2.1.1 Theory by Koch (2001)

Koch (2001) introduced a holistic model of the market and Market Entry Mode Selection process (MEMS). All factors proposed to influence the market/ market entry mode selection process fall into three broad categories: external, internal, and the mixed, internal/external category. Some of the proposed categories of factors may influence some others, adding to the complexity of the decision process. These factors are shown in figure 2.1 on page 10.

Company size/ resources

According to Koch (2001) smaller companies usually have fewer market servicing options, as their very limited own resources may simply not allow, or discourage from, some market entry modes. For example, establishing a fully owned subsidiary often involves very substantial investment and correspondingly high risk levels. Similarly, small companies may not have sufficient management potential and special skills to enter foreign market through establishing fully owned foreign-based subsidiaries or international joint ventures. The influence of company size on its freedom of choice in selecting market entry mode and their relevant preferences depends on industry-specific resource demands for individual market entry modes. Management locus of control

Koch (2001) also states that the significance of management locus of control for the degree of company international business involvement and the market entry mode preference is often underestimated, if not overlooked altogether. Yet strong internal, or external, loci of control are likely to considerably affect manager perceptions; the way their institution works and their market entry mode decisions may thus, particularly in less experienced companies, determine the outcome of this decision process. If the decision is significantly influenced by a number of managers, we have a potentiality of locus of control discord; depending on its management style, the company will either disregard loci of control, which do not agree with the decision maker or undertake actions aimed at achieving perceptual consensus with regard to the situation at hand. Finally, one has to acknowledge that individual loci of control may change, as a result of some critical events or, more gradually, as the relevant experience grows. Management risk attitudes

The level to which the company will accept various international business risks depends on the context according to Koch (2001): the company’s financial situation, its strategic options, the competitiveness of its competitive environment, its relevant experience etc. Risks may be estimated by using appropriate formulae. One should, however, bear in mind that the perception of risks associated with individual market entry modes or countries may influence companies’ decisions considerably, as well. The less risk-averse the management, the more

LITERATURE REVIEW

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likely it is for the company to select countries that show greater long-term prospects and promise to enhance the firm’s capabilities. Market share targets

When criterion used in market entry mode selection is sales or market share maximization, market entry modes, which are believed to be most likely to deliver the desirable results within established planning periods, will be preferred (Koch, 2001). Calculation methods applied

The broad alternatives of risk or benefit based calculation method and cost or control based calculation method are available also with regard to the market entry selection (Koch, 2001). Profit targets

According to Koch (2001) various market entry modes are likely to produce different levels of profit; equally importantly, the dynamics of profit generation of various modes will be very dissimilar. The former will show some profits almost immediately and then may soon level off, the latter may mean no profits for three or four years (construction cycle, time needed to establish all necessary market contacts, acquire/ build all necessary assets, train the sales force as required, develop customer base, etc.). A long decision horizon may prefer the latter; a short one will prefer the former. Experience in using individual MEMs

The market entry mode decision is affected by how many times, how recently and in what circumstances the company or its competitors have used any particular entry mode. The decision is depending on the success rate and degree of the MEM when used in earlier market entries. The experience of a particular entry mode influences the decision through the perceived use of a particular mode of entry. Due to the manager’s choice of entry mode is likely to be subject of scrutiny, the choice is likely to be made to favor a MEM which the manager have experienced success in an earlier market entry.

LITERATURE REVIEW

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Figure 2.1: Factors influencing market entry mode selection

Source: Adapted from Koch (2001), p.353

CHARACTERISTICS OF THE COUNTRY

BUSINESS ENVIRONMENT

SUFFICIENCY AND RELIABILITY OF

INFORMATION INPUTS

COMPANY SIZE/ RESOURCES

INDUSTRY FEASIBILITY/

VIABILITY OF MEM

EXPERIENCE IN USING INDIVIDUAL

MEMs

CALCULATION METHODS APPLIED

MANAGEMENT RISK ATTITUDES

POPULARITY OF INDIVIDUAL MEMs IN

THE OVERSEAS MARKET

MARKET BARRIERS

MARKET GROWTH RATE

GLOBAL MANAGEMENT

EFFICIENCY REQUIREMEMENTS

MARKET SHARE TARGETS

IMAGE SUPPORT REQUIREMENTS

MANAGEMENT LOCUS OF CONTROL

COMPETENCIES, CAPABILITIES AND SKILLS REQUIRED/

AVAILABLE FOR EACH MEM

PROFIT TARGETS

MARKET ENTRY

MODE SELECTION

External category

Mixed category

Internal category

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2.1.2 Theory by Brassington and Pettitt (2000)

Brassington and Pettitt (2000) discuss two other internal factors. These are Payback and

Speed. With payback the authors’ mean the time it takes for the company to create revenue from an investment in a new market that influences the company’s choice of foreign market entry mode. The authors also state that speed, with which the author means the time it takes to reach the target market, also greatly influences the choice of entry mode.

2.1.3 Theory by Hollensen (2001)

Hollensen (2001) brings up three more factors of internal nature that might influence the choice of market entry mode. These are: Complexity and differentiation of the product The product complexity and differentiation of the product that the company is about to market to a new international market may very well influence the choice of entry mode according to Hollensen (2001), as it influences the cost of shipping, economies of scale, technology transfer, and already existing know-how, as an example the author brings up the risk of licensee abuse of technical know-how and that it might render unbearable costs to ship heavy or large goods due to the high shipping costs. Risk The amount of risk the company is willing to take when entering a new market is according to Hollensen (2001) influencing the choice of foreign market entry mode, the scale of risk connected to entry mode ranges from exporting, which is the least risky; to wholly owned subsidiaries or production facilities which, involves the most risk due to the heavy resource committed to such entry. Flexibility

Somewhat connected to risk, mentioned above, is the flexibility of the chosen entry mode as it according to Hollensen (2001) influencing the choice of entry mode, as it is crucial to a company to be able to swiftly respond to changing market conditions or even withdraw entirely from a market. This is, as the risk factor ranging from export being the most flexible due to the low cost involved, to wholly owned subsidiaries due to the high cost of withdrawing from such a high involvement entry.

2.1.4 Theory by Root (1994)

Root (1994) argues that how a company responds to external factors in choosing an entry mode depends on the internal factors. As seen in Figure 2.2 (page 12), he also puts forward two internal factors, and these are: Product Factors

Root (1994) states that highly differentiated products with distinct advantages over competitive products give sellers a significant degree of pricing discretion. These products can absorb high unit transportation costs and high import duties and still remain competitive in a foreign target country. In contrast weakly differentiated products must compete on a price basis in a target market, which may be possible only through some form of local production. Hence high product differentiation favors export entry, while low differentiation pushes a company toward local production and choosing an entry mode such as contract manufacture or equity investment. Furthermore, if a company’s product is a service, such as engineering, advertising, computer services, tourism, management consulting, banking or retailing then the company must find a way to perform the service in the foreign target country, because

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services cannot be produced in one country for export to another. Local service production can be arranged by training local companies to provide the service (as in franchising), by setting up branches and subsidiaries (as an advertising agency or branch bank) or by directly selling the service under contract with the foreign customer (as in technical agreements and construction contracts). Technologically intensive products give companies an option to license technology in the foreign target county rather than use alternative entry modes. Products that require considerable adaptation to be marketed abroad favor entry modes that bring a company into close proximity with the foreign market (branch/ subsidiary exporting) or into local production (Root, 1994). Resource/ Commitment Factors

Root (1994) also states that the more abundant a company’s resources in management, capital, technology, production skills and marketing skills, the more numerous are their entry mode options. Conversely, a company with limited resources is constrained to use entry modes that call for only a small resource commitment. Hence company size is frequently a critical factor in the choice of an entry mode. Resources must be joined with a willingness to commit to foreign market development. A high degree of commitment means that managers will select the entry mode for a target country from a wider range of alternative modes than managers with low commitment. Therefore, a high-commitment company, regardless of its size, is more likely to choose equity entry modes.

Target country Market factors

Home country factors

Target country Production

factors

Target country Environmental

factors

Country product factors

Company resource /

commitment factors

Foreign market

entry mode decision

External Factors

Internal Factors

Figure 2.2: Factors in the entry mode decision

Source: Adapted from Root (1994), p.9

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2.1.5 Theory by Bruhno and Schilt (2001)

Bruhno and Schilt (2001) have developed a model in which the authors present internal and external factors that influence a company’s choice of marketing channel. The authors also state that these factors should not be studied isolated but instead viewed as related to each other. See figure 2.3 on page 14. These are the internal factors:

Motive

The first factor; the motive, is meant to answer questions such as: What motives were there in the company for internationalization? A small home market and a strong competitive product are examples of answers to that question. What motives influenced the company’s choice of entry mode? There are also examples of indirect motives that may influence the choice of entry mode, such as a temporary contact with a company outside of the home country (Bruhno and Schilt, 2001). Goals

What goals did the company have with their internationalization? Have the goals changed since the start with the international business? Are there any long-term and/or short-term goals for the company? What specific goals exists regarding market shares and sales volume? Does the company have any ambition to gain a great part of a market in a specific country (Bruhno and Schilt, 2001)? Strategy

Does the company have special strategies for the abroad activity? Are there any specific strategies for each market? Does the company work with development of these strategies (Bruhno and Schilt, 2001)? Product

What qualities does the product have that will be exported? Are these products standardized or adaptable? How many products does the company have? These questions affect the company’s way of conducting the internationalization (Bruhno and Schilt, 2001). Management

How extensive is the international experience in the company? Is there any specific experience of any marketing channel in the company? Are there any general ideas on how the managers should pursuit their international strategy? How great is the management’s engagement? What competencies are demanded in the international activity? Does the management develop these competencies? What language skills are there amongst the management? How great is the knowledge of different marketing channels and their pros and cons (Bruhno and Schilt, 2001)? Resources

How does the financial, human and technological resources influence the company’s choice of marketing channel? Limited resources can limit the company’s freedom of choice when choosing a marketing channel (Bruhno and Schilt, 2001). Customer relationships

How many customer relationships does the company have? Are the company’s customer relationships homogenous or heterogeneous? Does the company put any effort on developing their customer relationships (Bruhno and Schilt, 2001)?

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Resources

Motive

Networks

Customer relationships

Competitors

Goals

Strategy

Market

Product

Management

Entry mode selection

Figure 2.3: Influencing factors in entry mode selection

Source: Adapted from Bruhno & Marco Schilt (2001), p.44

Networks

Does the company have any existing contacts and relationships in the different markets? Does the company have the opportunity to get any help from other Swedish firms on the different markets? Does the company have any external part involved in their international act? Does the company actively work with development of participation in different networks? Does the participation in the different networks affect the choice of market (Bruhno and Schilt, 2001)?

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TABLE 2.1 Internal factors influencing the Entry Mode Decision

2.1.6 Additional theory by Root (1994)

Root (1994) has also summarized the influence of internal factors on the choice of entry mode as shown in Table 2.1.

2.2 EXTERNAL FACTORS


Koch (2001) states that the following factors are the external, as also seen in Figure 2.1 (page 10).

Industry feasibility/ viability of MEM

Some entry modes, like fully owned foreign subsidiary and international joint ventures, may be excluded by law in some countries; some of these exclusions may relate to selected industries considered to be of strategic significance for the state. Other entry modes like licensing may involve excessive know-how dissemination risk, particularly if the foreign country is not a signatory to the appropriate international conventions. Other hindrances (e.g. restrictive labor regulation and practices, cost of labor, insufficient level of skill) may discourage from establishing a subsidiary, or a joint venture operation in a foreign market. Investing in a foreign subsidiary may secure a favorable taxation treatment (for instance, tax holidays) and save the company a lot of money on avoiding paying custom duties (Koch, 2001).

Characteristics of the overseas country business environment

While the general characteristics of overseas country business environments are usually very easy to obtain these days, industry and company-specific information is usually more difficult to acquire. Whilst the former category of information is not always free from bias, complete and up-to-date, the latter is considered quite sensitive and usually not provided for free of charge, a concern for small beginners, in particular. Similarity and volatility of general business regulation/practices, business infrastructure and supporting industries levels of development, forms, scope and intensity of competition, customer sophistication and

Indirect and Agent/ distributor Exporting

Licensing Branch/ Subsidiary Exporting

Equity Investment/ Production

Service Contracts

Internal Factors: Differentiated products X X Standard products X Service- intensive products X X Service products X X X Technology intensive products X Low product adaptation X High product adaptation X X X Limited resources X X Substantial resources X X Low commitment X X X High commitment X X

Source: Adapted from Root, (1994), p.16

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customer protection legislation are amongst those characteristics which would normally attract the attention of potential entrants into a foreign market (Koch, 2001). In addition Hollensen (2001) adds to this that a highly competitive business environment may lead to the company entering through less resource intense entry modes in order to avoid unnecessary risk.

Market growth rate

As a market entry selection criterion, market growth rate can be expected to be of considerable significance. If a market is growing at a fast rate, and this rate of growth does not seem sustainable over several years, the company will be advised to tap into this opportunity without any delay and use indirect or direct exporting. If demand in a foreign market is anticipated to be very large, but only in several years, establishing own manufacturing/ marketing subsidiaries may be the best answer (Koch, 2001).

Image support requirements

In some industries, companies want to build and sustain the image of a leading global supplier have to be present in leading markets. Some companies may license their inventions to increase their role as global providers of newest technology, and influence the relevant industry standards (Koch, 2001). Global management efficiency requirements

Koch (2001) argues that the increasing involvement in international business raises the awareness of the limitations of the company’s resources and, sooner or later, results in a re-definition of the company’s global strategy. For some companies choosing a diversified, multinational mode of operation is the answer, for others – the standardized, global approach may turn out to be more appropriate from the strategic efficiency point of view. Critical success factors and companies’ core capabilities must be examined to find the optimal organizational structure and strategy to follow.

Popularity of individual MEMs in the overseas market

According to Koch (2001) some country markets may show a high popularity level for some modes of market entry with the industry in question. Selection of entry mode by new potential entrants will be influenced by the experience, degree of success of the former entrants and the anticipated product market situation. On the other hand, companies that had positive experience in different entry modes in other markets before may sometimes be tempted to try an alternative to the mode of entry prevalent in the new market, if that could improve strategy match.

Market barriers

Koch (2001) states that amongst barriers that can make access to foreign markets more difficult, the following categories are considered of major importance:

• Tariff barriers • Governmental regulations • Distribution access • Natural barriers (market success and customer allegiances) • Advanced versus developing countries • Exit barriers

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As mentioned earlier, Root (1994) argue that a company’s choice of entry mode for a given product/ target country is a net result of several, often conflicting forces. The author has developed a model that is divided in external and internal factors where external factors are market, production, and environmental in both the target and home countries. The external factors that Root (1994) puts forward are described below. See Figure 2.2 for the model (page 12). Target Country Market Factors

The present and projected size of the target country market is an important influence on the entry mode. Small markets favor entry modes that have low breakeven sales volumes (indirect and agent/ distributor exporting, licensing and some contractual arrangements). Markets with high sales potentials can justify entry modes with high breakeven sales volumes (branch/ subsidiary exporting and equity investment in local production). Further Root (1994) argues that another dimension of the target market is its competitive structure. Markets can range from atomistic (many nondominant competitors) to oligopolistic (a few dominant competitors) to monopolistic (a single firm). An atomistic market is usually more favorable to export entry than an oligopolistic or monopolistic market, which often requires entry via equity investment in production to enable the company to compete against the power of dominant firms. In target countries where competition is judged too strong for both export and equity modes, a company may turn to licensing or other contractual modes (Root, 1994). Target Country Production Factors

Root (1994) also states that the quality, quantity, and cost of raw materials, labor, energy and other productive agents in the target country, as well as the quality and cost of economic infrastructure (transportation, communications and port facilities) have an evident bearing on entry mode decisions. Low production costs in the target country encourage some for of local production as against exporting and finally, high costs would militate against local manufacturing. Target Country Environmental Factors

Root (1994) argues that the political, economic and sociocultural character of the target country can have a decisive influence on the choice of entry mode and the most noteworthy may be government policies and regulations regarding to international business. Restrictive import policies (high tariffs, tight quotas and other barriers) discourage an export entry mode in favor for other modes. Another environmental factor is the geographical distance. When the distance is great, transportation costs can make it impossible for some export goods to compete against local goods in the target country. Thus high transportation costs discourage export entry in favor of other modes that do not incur such costs. The target country’s economy can also influence the choice of entry mode. Equity entry modes are usually not possible in centrally planned socialist economies, so companies wanting to do business in with socialist countries must rely on nonequity exporting, licensing or other contractual modes. Furthermore, the size of the economy (as measured by gross national product), its absolute level of performance (gross national product per capita), and the relative importance of its economic sectors (as a percentage of gross national product) are of importance. Generally these features relate closely to the market size for a company’s product in the target country. The cultural distance also influences the choice of target countries, because companies tend to first enter those foreign countries that are culturally close to the home country (Root, 1994).

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Home Country Factors

Market, production, and environmental factors in the home country also influence a company’s choice of entry mode to penetrate a target country. A big domestic market allows a company to grow to a large size before it turns to foreign markets. The competitive structure of the home market also affects the entry mode. Firms in oligopolistic industries tend to imitate the actions of rival domestic firms that threaten to upset competitive equilibrium. Finally, there are two other home country factors that deserve to be mentioned. High production costs in the home country relative to the foreign target country encourage entry modes involving local production, such as licensing, contract manufacture and investment. The second factor is the policy of the home government toward exporting and foreign investment by domestic firms (Root, 1994). In addition Root (1994) also bring forward the geographic distance as an influencing factor due to the fact of high transportation cost when the distance is great and to such markets establishing local presence might be more suitable for the company.

2.2.3 Theory by Bell (1995)

Bell (1995) contributes to the previous theory by stating that firms initially target neighboring countries and subsequently enters foreign markets with successively greater “psychic distance” in terms of cultural, economic and political differences and also in relation to their geographical proximity. Bell (1995) found that “psychic distance” is a key factor in the selection of export markets. The research showed that there is an overall pattern that indicates that 50 – 70 per cent of firms entered “close” markets in the initial stages of export development. Thus, for example, Finnish firms’ targeted Sweden, Norway and the former USSR – countries that are geographically and culturally proximate with Finland, especially, in the case of the latter, has very strong historic ties. Similarly Norwegian firms selected Sweden, the UK, or Finland. The author also found that some 30 – 50 per cent of firms had initiated exports with sales to countries that could be considered as either psychologically or geographically proximate. The in-depth interviews that Bell conducted revealed several important factors that strongly influenced firms’ initial and subsequent market selection decisions, namely: client follower

ship and sector targeting (Bell, 1995).


Bruhno and Schilt (2001) have developed a model where they present internal and external factors that influence a company’s choice of marketing channel. The authors also state that these factors should not be studied isolated but instead viewed as related to each other. See figure 2.3 on page 14. These are the external factors:

Market

Are there any trade barriers or laws and regulations that limit the company’s choices with internationalization? How does this affect the choice of entry mode (Bruhno and Schilt, 2001)? Competitors

How many competitors does the company compete with in the respective market? How large market share does the company have? How does the competition influence the company’s choice of marketing channel on the respective market (Bruhno and Schilt, 2001)?

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TABLE 2.1 External factors Influencing the Entry Mode Decision


Root (1994) has summarized the influence of external factors on the choice of entry mode as shown in Table 2.1.

Indirect and Agent/ distributor Exporting

Licensing Branch/ Subsidiary Exporting

Equity Investment/ Production

Service Contracts

External Factors (Foreign Country): Low sales potential X X High sales potential X X Poor marketing infrastructure X Good marketing infrastructure X Low production cost X High production cost X X Restrictive import policies X X X Liberal import policies X X Small geographical distance X X Great geographical distance X X X Dynamic economy X Stagnant economy X X X Exchange rate depreciation X Exchange rate appreciation X X Small cultural distance X X Great cultural distance X X X Low political risk X X High political risk X X X External factors (Home country): Large market X Small market X X Low production cost X X High production cost X X X Strong export promotion X X Restrictions on investment abroad X X X

Source: Adapted from Root, (1994), p.16

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2.3 CONCEPTUAL FRAMEWORK

Miles and Huberman (1994) explain conceptual framework as the explanation of the most important elements to be studied in a thesis, the authors also add that this can be performed and shown in a graphical or a narrative form. The conceptual framework, which emerges from the studied literature in this thesis, is created to help us collect the data needed to answer the research questions. In order to do so, the literature perceived as most relevant to the research area will be selected and presented in the order of the previously stated research questions, furthermore each presented theory is also connected to each specific research question.

2.3.1 Research question 1 - How do internal factors influence firm’s choice of international market entry mode?

In order to answer the first research question we will among others rely on Koch’s (2001) holistic model of the market entry mode selection process. Koch mentions seven internal factors that influences the choice of entry mode from which we will focus on:

• Company size/ resources

• Management risk attitudes

• Market share targets

• Profit targets

• Experience in using individual

MEMs

We will not look into Management locus of control and Calculation methods applied, since these two factors are highly individually varying and difficult to label. Brassington and Pettitt (2000) also brings forward two internal factors that add an additional dimension to the subject, which we will investigate, and these are:

• Speed • Payback

Furthermore Hollensen (2001) states three internal factors of which we will use only Complexity and Differentiation of the product factor, as it is highly relevant to the chosen industry of this thesis. We have chosen not to focus on the Risk and Flexibility factors, as they are included in earlier mentioned theories. Root’s (1994) theory regarding Product factors and Resource/ Commitment factors will not be used since there are more recent theories published regarding these factors and will be covered with previously mentioned theories. We will however use the theories brought forward by Bruhno and Schilt (2001), who mentions eight internal factors, of which we will consider five, leaving out the product, management and resources factors, since they are already included in earlier mentioned theory. These factors are:

• Motive

• Goals

• Strategy

• Customer relationships

• Networks

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Bell (1995) brings forward the predomination for exporting as an internal factor, which will not be used, since the chosen firms already have established export channels in their businesses. Finally, Root’s (1994) summarization of internal factors in table 2.1 on page 15 will be used as a complement to the above mentioned theories since it has a clear connection between the internal factor and the actual choice of market entry mode and these are:

• Differentiated products

• Standard products

• Service-intensive products

• Service products

• Technology-intensive products

• Low products adaptation

• High products adaptation

• Limited resources

• Substantial resources

• Low commitment

• High commitment

The above mentioned internal factors will be used as base for developing the interview guide which will be used to answer our research questions and thereby fulfilling the purpose of this thesis.

2.3.2 Research question 2 - How do external factors influence firm’s choice of international market entry mode?

Koch (2001) has developed a holistic model of the market entry mode selection process. Koch mentions seven external factors that influences the choice of entry mode from which we will focus on:

• Industry feasibility/ viability of MEM

• Characteristics of the overseas country

business environment

• Market growth rate

• Market barriers

We will on the other hand not use Image support requirements, Global management efficiency requirements and Popularity of individual MEMs in the overseas market in this current study, as these are not relevant to the research area. Hollsensen (2001) brings forward two other external factors, which are Highly competitive business environment and Forced choice of entry mode. We will not take these under consideration when conducting our thesis, since both these factors are integrated in Koch’s (2001) theory of market entry mode selection. Furthermore Root (1994) adds another theory where he discusses four external factors to consider when choosing market entry mode selection. Of these four we will focus on:

• Target country market factors

• Target country production factors

• Home country factors

The choice to leave out the fourth factor of Target country environmental factors was made because environmental factors are as earlier mentioned brought up in previous theory. As a complement to Root’s (1994) model of external factors influencing the entry mode decision Root (1994) highlights the Geographic distance as an additional important external factor, which we will investigate together with the contribution made by Bell (1995) that firms initially target neighboring countries and subsequently enters foreign markets with greater “physic distance”.

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Regarding Hollensen’s (2001) statement of the importance in Available number of export intermediaries will be disregarded, as it is not relevant to the thesis purpose. From Bruhno and Shilt’s (2001) theory we have chosen to focus on the external factor of Competitors, as the market factor is already more extensively covered in previously mentioned theory. Finally Root’s (1994) summarization of the external factors shown in table 2.1 will be used as a complement to the external factors previously mentioned since it has a clear connection between the external factors and the actual choice of market entry mode and these are: External Factors (Foreign Country):

• Low sales potential

• High sales potential

• Poor marketing infrastructure

• Good marketing infrastructure

• Low production cost

• High production cost

• Restrictive import policies

• Liberal import policies

• Small geographical distance

• Great geographical distance

• Dynamic economy

• Stagnant economy

• Exchange rate depreciation

• Exchange rate appreciation

• Small cultural distance

• Great cultural distance

• Low political risk

• High political risk

External factors (Home country):

• Large market

• Small market

• Low production cost

• High production cost

• Strong export promotion

• Restrictions on investment abroad

The above mentioned external factors will be used as base for developing the interview guide which will be used to answer our research questions and thereby fulfilling the purpose of this thesis.

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3. METHODOLOGY In this chapter the methodology used in this thesis will be presented. This chapter presents

and motivates how, the data will be collected in order to find answers to our research

questions, and by that fulfilling the purpose of the thesis. It starts with presenting the purpose

of the research, followed by the research approach. Then the research strategy will be

examined, moving on to the data collection, the sample selection and data analysis. Finally,

the means of how to increase validity and reliability are discussed. The presentation of the

methodology is presented below in figure 3.1.

3.1 RESEARCH PURPOSE

According to Yin (1994), there are three different categories of research; exploratory, explanatory and descriptive. These three classifications can be founded on how much knowledge the researcher has about the problem before starting the investigation, and further, the type of information that is needed in order to deal with the purpose of the thesis. Exploratory research is performed when a problem is difficult to limit and when there is little or restricted research on the topic. According to Denscombe (2000) the purpose of exploratory research is to gather as much information as possible through the use of different sources, in addition Yin (1994) states that an exploratory study should state a purpose and the criteria to judge the exploration successful. According to Foster (1998) descriptive research is performed when studying a problem area with already existing theories or information. The goal with this type of research is to develop careful descriptions of different patterns that were suspected in the exploratory research. Finally, according to Yin (1994), explanatory research explains the causal relationships between cause and effect. Moreover, Denscombe (2000) argues that the aim of explanatory research is to develop a theory in order to explain the empirical generalization developed in the descriptive stage. Bearing these criteria in mind, we can define our study as being mainly descriptive, however it will also be exploratory and to some extent explanatory. This is based on the purpose of this thesis being to provide a better understanding of the of impact internal and external factors on Swedish SME’s choice international market entry strategies. In order to find answers to our research questions we will have to explore the thesis topic and in the end of this thesis we will also begin to explain the research area.

Validity & Reliability

Research Approach

Research Strategy

Research Purpose

Sample Selection

Data Collection

Data Analysis

Figure 3.1: Schematic Presentation of Chapter 3 Source: Adapted from Foster (1998), p.81

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24

3.2 RESEARCH APPROACH

Denscombe (2000) brings forward two general research approaches, quantitative and qualitative. The qualitative research is a broad term, which covers a variety of styles of social research. Foster (1998) states that qualitative research emphasizes processes and meanings that are not rigorously examined or even measured in terms of quantity, intensity, amount, or frequency. Qualitative research method is according to Bryman (2001) based mainly on words as opposed to quantifying when collecting and analyzing data. The author further argues that a qualitative research strategy is inductive, interpreting and constructive. According to Holme and Solvang (1997) there are several specific criteria for qualitative methodology such as in-depth and description and understanding. Furthermore the authors state that both the qualitative and quantitative approaches are aimed at creating a better understanding of the society and to comprehend how individuals, groups and institutions act and influence each other. Saunders, Lewis and Thornhill (2000) argue that it is possible to use more than one approach to a research project, the authors argue that exploratory, descriptive and explanatory research is not mutually exclusive as research approach. An exploratory research approach is according to Winter (1992) used when there are little previously written about a subject. Descriptive research on the other hand is according to Yin (2003) a complete description of a single phenomenon within its context, which goal is to develop and explain empirical generalizations. Further Eriksson and Wiedersheim-Paul (2001) argue that descriptive research involves the choice of perspective, aspects, levels, terms and concepts. In addition Saunders et. al. (2000) argues that the objective of descriptive research is accurately portraying a profile of persons, situations or events. The objective of explanatory research is according to Eriksson and Wiedersheim-Paul (2001) to analyze cause-effect relationships, it explains what causes produce what symptoms. In addition Miles and Huberman (1994) state that explanatory research concerns the activity of making complex issues understandable by presenting how their component parts connect with theory. This thesis is exploratory, describing and somewhat also explanatory in the area of internal and external factors influencing small and medium sized companies’ choice of foreign market entry mode. The thesis purpose is to gain a greater understanding of the research area, which makes the thesis exploratory. However, it will also be descriptive as it brings up common matters, or patterns, within the area of research. Finally, as we will draw some conclusions of the findings of the research, this thesis will also be somewhat explanatory. Although the thesis will contain parts of all these three research approaches it will mainly be descriptive. As the purpose of this study is to gain a gain a greater understanding of a specific phenomena our research approach will be qualitative.

3.3 RESEARCH STRATEGY

Our research strategy will be an oversight of how we will go about answering the research questions stated in chapter one. Denscombe (2000) argues that there is no “right” strategy, when choosing a qualitative research approach, however, the author argues that some strategies are more suitable than others when dealing with specific questions. From the five research strategies stated by Yin (1994): survey, case study, experiment, history and archival analysis, we have chosen to perform a case study due to its suitability to this thesis. The author states that a case study is suitable to answer how and why questions and focuses on contemporary events and does not require control over behavioral events. In addition Eriksson and Wiedersheim-Paul (2001) highlight that a case study involves investigating few entities but many variables, which gives an in-depth situational picture. Due to that our research

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strives to provide a better understanding of the of impact internal and external factors on Swedish SME’s choice international market entry strategies we need no control over behavioral events. We will also focus on contemporary events and due to the fact that both our research questions starts with how, a multiple case study is the most appropriate research strategy for this thesis.

3.4 DATA COLLECTION

Yin (1994) states six different sources of evidence for conducting a case study: interviews, documentation, archival records, direct observations, participant observations and physical artifacts. Denscombe (2000) argues that the sources should be combined if possible, which is also supported by Yin (1994), both these author’s referrers to this as triangulation. According to Yin (1994) the use of triangulation in case studies allow the investigator to address historical, attitudinal, and behavioral issues in a broad range. The author further states that no single source has an advantage over the others. Instead the different sources of evidence complement each other, since they all have strengths and weaknesses. When conducting a case study the researcher should try to use multiple sources of evidence in order to improve the validity and reliability of the thesis. With this in mind we will use multiple sources of data in order to perform this study and confirm the research results in a broad range perspective. Davidson and Patel (2003) bring up questionnaires, telephone or personal interviews, observations and documents as data collection methods. In this study, in addition to the reviewed literature, telephone interviews with the researched companies’ officials will be our main data collection method. Documentation is according to Yin (1994) relevant to every case study topic, and is mostly used to confirm and augment evidence gathered from other sources. The main purpose for using documentation in this study was to gain background information regarding the internal and external factors that influence the companies’ choice of foreign market entry mode. According to Denscombe (2000) documentation often is a great source of finding background information on a subject to be researched. It was used in the study in order to find background information on the research subject. There are however possible drawbacks with documentation as an information source. The researcher has to be aware that documentation are second hand information and might therefore not always be accurate or outdated. Interviews is best used, according to Denscombe (2000), when the researcher needs to answer questions that are complex and/or contain emotions or experience form a specific subject. It also allows the respondent to answer questions in his/her own words and develop the answers as to get the full picture of the subject at hand. The interview guide was constructed through using our frame of reference and in a chronological order we created interview questions using the theories regarding the internal and external factors. The questions where formulated to get the respondent to answer in a descriptive manner without the possibility to answer yes or no. In addition, several fellow individuals have viewed the interview guide, in order to ensure the comprehensibility of the questions and the appointed supervisor has also approved it. Due to the lack of resources and the great geographic distance we have chosen to perform the interviews over the telephone. We have also chosen to send the interview guide in advance to the respondents, in order to make sure that they had, or could get, the data regarding their respective company’s internal and external factors influencing their foreign market entry mode that we needed for this thesis.

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3.5 SAMPLE SELECTION

According to Yin (1994) it is essential to find relevant and manageable samples to collect empirical data from. The author further states that a single case study has the opportunity to include subunits of analyses, which leads to a better insight through a more complex design. Further Saunders et. al. (2000) state that non-probability sampling is best used in case studies, which is when a deeper understanding of a problem is required. Non-probability sampling can be conducted through judgment, quota, convenience and probability. In this thesis we have chosen to use non-probability sampling, through convenience sampling, in order for us to collect the relevant sample. As stated earlier the aim of this thesis is to perform a multiple case study and for this thesis the sample selection will be based on the following criteria:

• Swedish small and medium sized company • Production company • Heavily dependent on international sales

Additionally the interviews will be performed on two company officials from the companies that are to be researched. The companies are both producing companies in the industrial/municipal water processing appliance industry. They are both of similar size and belong in the small and medium sized company category. The above listed demands for the companies to be researched rendered us the two chosen companies, namely: Läckeby Water AB and Nordic Water AB. Läckeby Water Group is a wholly owned Swedish group, with their main office just outside Kalmar (Sweden), that offer contracting, products, and service for industrial water processing and biogas production. The company is established in three continents with Europe and Asia as their primary markets. The product part of Läckeby Water Group is called Purac, and their range is internally developed licensed products (http://www.lackebywater.se). Nordic Water Products AB is a part of the Tyco Group and is active in industrial and public waste- water processing appliances’, it has a main office in Gothenburg on the Swedish west coast and has three product centers. The three product centers (Meva, NWP, and Zickert) all offer own designs, products and service as part of their range (http://www.nordicwater.se).

3.6 DATA ANALYSIS

After collecting the empirical data, the process of data analysis was performed. The purpose of this was to find answers to the research questions stated in chapter one. Yin (1994) states that data analysis involves examining, categorizing, tabulating, or otherwise recombining the collected data. The author further argues that every investigation should have a general analytic strategy, which treat evidence fairly, produce compelling analytic conclusions, and rule out alternative interpretations. In addition, the author states that the analytical strategy should help the researcher to choose a technique that completes the analysis of the research. Yin (1994) brings forward two such strategies; firstly, that the theoretical propositions that initially lead to the case study should be followed and secondly, that a descriptive framework is developed to organize the case study. According to Miles and Huberman (1994) there are two forms of available analyses when applied to empirical data, namely within-case analysis and cross-case analysis. Within-case analysis is argued to compare the collected data against the theory used, whereas cross-case analysis compares the data from different cases with each other. As this thesis will compare two companies’ data to each other we will be performing a cross-case analysis. According to Miles and Huberman (1994) qualitative data analysis focuses on data in the form of words,

http://www.lackebywater.se

http://www.nordicwater.se

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these data (in form of words) need processing in form of a three-stage analysis, referred to as concurrent flows of activity. The three stages, which will be performed after the data has been collected, are stated below:

• Data Reduction – Selects, abstracts, simplifies, focuses, and transforms the collected data

• Data Display – Organizes and compresses the data which enables easy conclusion drawing

• Conclusion Drawing and Verification – The researcher decides the meaning of occurrences, noting regularities, patterns, explanations, possible configurations, causal flows, and propositions

3.7 QUALITY STANDARDS

According to Saunders et. al. (2000) it is not enough to simply collect and analyze data for research to ensure quality. In order to reduce the possibility of getting the wrong answers the researcher has to be aware of two particular emphases on research design namely: validity and reliability.

3.7.1 Validity

The definition of validity is according to Denscombe (2000) to what extent the research data and the methods for obtaining these data are considered precise, correct and accurate. The definition is further developed to include the questions of how well the data reflects the truth, the reality and the main questions. There are three kinds of validity according to Yin (1994): construct, internal and external. Construct validity involves the process of establishing the correct operational measures for the studied concepts. Internal validity will not be discussed here, since it should not be used in descriptive or explanatory studies. The external validity deals with the issue of determining if a study’s findings are possible to generalize beyond the immediate case study. In this thesis we have used triangulation. The components of this triangulation consist of our data collection methods as documentation and telephone interviews. In addition, several fellow individuals have viewed the interview guide, in order to ensure the comprehensibility of the questions and the appointed supervisor has also approved it. The interview guide was then sent to the respondents in order to make sure that they had, or could get, the data regarding their respective company’s internal and external factors influencing their foreign market entry mode that we needed for this thesis. The interviews were made by both researchers via speaker telephone as to avoid individual interpretations of the respondents’ answers. In addition, both researchers took notes and the interviews were recorded in order to avoid misinterpretations. No major generalizations will be drawn of this thesis as the research is performed and strictly limited to Swedish SME’s in the industrial water processing appliance industry and we have also stated some implications for further research in the end of this thesis.

3.7.2 Reliability

The definition of reliability is according to Denscombe (2000) is that a measurement can be reproduced with similar results and that therefore variations in the results is entirely depending on variations in the measured area and not in the instrument of measurement. The interviews were performed in Swedish as it is the native language of both of the researchers and the respondents. This allows the respondent to freely answer and elaborate on the

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questions asked by the researchers, however it forces the researchers to perform a translation of the respondents answers which might render a reliability problem due to unintentional translation interpretations by the researchers. Even though we have been very careful in our attempts to perform this study we would like to point out that subjectivity is always a factor to be considered when performing research, which might influence the respondent or his/her answers. Therefore it is not certain that if performed again the study would lead to the same result, however the results should be similar if performed by following the interview.

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4. EMPIRICAL DATA

In this chapter we will present the data collected through the interviews. First, we will present

data from Case 1, which in turn will be divided according to research question one and two,

following the order of the interview guide, which was based on the previously mentioned

theories. Then the data from Case two will be presented in the same order.

4.1 CASE 1 – MEVA

The respondent is Krister Lundberg who is the Managing Director of Meva. Krister Lundberg, Sören Andersson and Per Mellergård founded the company in 1990. Meva’s annual turnover is approximately 250–300 million SEK and the company has roughly 12–15 million SEK in annual profit. There are 70 employees divided on five locations in Sweden. The company’s main business area is municipal and industrial waist water treatment and their products are differentiated. The entry modes used by Meva are direct export, indirect export, fully owned sales

subsidiaries and cooperation with other companies in the target countries. In the cases when fully owned sales subsidiaries are established the reason for that has been that local sales agents has been declared bankrupt. The company produces every component domestically and then delivers the assembled product to the buyer. Meva’s international sales amounts to approximately 85 percent of the total turnover, further the company has been international since the start-up because of the domestic market being too small to be profitable. The internationalization of Meva started through industry trade-shows where connections with future sales agents were made. The company attends 10–15 different trade-shows worldwide and the reason for attending is networking. The internationalization process started in the Scandinavian countries and Germany, which is, considered to be the single most important market for their industry because of two main factors; firstly, laws and regulations regarding environment are usually initiated there and then spread around Europe, and secondly the high population density forces them to recycle their water multiple times, which generates demand for effective waste water treatment facilities. Today, Meva has annually sales in 45 countries and the total number of nations sold, to at least once, is 68. The company’s future goals with their extended international operations are currently focused on increasing sales in former Soviet and east European states such as: Russia, Belarus and Ukraine. As an example the company has received orders from both Azerbaijan and Kazakhstan. They also strive to increase their sales in South-America, which is hard because of the trade barriers (i.e. penalty duties). When entering a new international market, it is of great importance for Meva that the infrastructure is well developed. They also strive for first mover advantage and avoid entering mature markets.

4.1.1 Case 1 – Data regarding RQ1: How do internal factors influence firm’s choice of international market entry mode?

The single most important internal factor is the management’s ability, flexibility and

dedication, since it is the management’s responsibility to lead the company through all possible hurdles when entering a new international market. The knowledge is fundamental factor as it creates the base from which the management makes decisions regarding international market entries. The factor of competitive advantages is more or less neglected by the respondents company, the main reason for this is, according to the respondent, that Meva

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is the market leader in their segment and thereby create their own terms of competition. The remaining internal factors stated regarding the influence on the company’s choice of international markets (resources, product adaptation, planning and control within the

company and employee motivation and ability), are considered of less importance as the respondent views them as a part of management ability, flexibility and dedication.

When it comes to the company’s choice of international market entry mode the respondent views all the internal factors as necessary to bear in mind, however, the most important internal factors are long-term goals, relations and management influence. The remaining factors (time to market, resources, flexibility, risk, return on investment, type of product,

company size and international experience) are considered to be important to the company when combined, rather than when singled out. In order to avoid risks when entering new international markets, Meva uses contracts for terms of payment and guarantees to assure financial security. Furthermore their strategy is to conduct sales only in SEK, and if the customer demands any other currency, actions are taken to avoid exchange rate losses. The respondent clearly states that the company does not take any currency risks and that this is also clearly stated in the company strategy. Meva’s company structure is considered to be flat, and product-orientated. The company gathers information about market conditions in other countries through engagement in business associations, such as World Water, as well as national and international consultants such as Sweco. The consultant’s turn to Meva with a project, which in turn Meva develop a solution for, Meva thereby gain knowledge about the market conditions in that particular country. This is usually performed three to five years before launching a project and is considered to be a great way of keeping up with current events on existing markets as well as the development of new emerging international markets. The decision in what way to enter a

new international market is often not directly taken by Meva but rather as a result of cooperation with large international firms that buy Meva’s products for installation abroad. Thereafter the cooperation often leads to local knowledge about Meva and their products, which if conditions are favorable in turn leads to further establishment by Meva in that particular market. Such further establishment is often reached by cooperation with a local sales agent. Meva considers the competition to come from mainly the same firms both nationally and internationally. The main competitors are the German company Huber and the American company US Filter. Additionally there are approximately 40 small local companies that reproduce Meva’s products. Finally there is also a Swedish firm, Hydro Press, which is lead by two of the former partners of Meva that the respondent considers to be a competitor. Meva does not actively gather any information about how these competitors enter a new international market. However, they are aware that there are great similarities in the way Meva and their competitors enter new international markets. The goal for Meva, when entering a new international market, is to establish a market within three to five years. It is not necessary for the market to be profitable, however, by the second year it is supposed to be well established and have continuous sales. When entering a new international market there are no stated market share targets and the company does not consider return on investment being of great importance. Profit targets and establishment time, on the other hand, is of great importance as the respondent says that “we are in business to make money”. Regarding the internationalization and entering new markets, Meva has succeeded very well with two exceptions, the people’s Republic of China and the USA. The reason for failure in

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these two particular markets is according to the respondent cooperation with the wrong partners’, also the respondent state that in the USA the market approach was wrong as the business and the legal system in America differs greatly from any other country. The respondent states that the “general agent” system in America has discouraged the company from trying to enter the market without cooperating with one of those general agents. Despite the two failures mentioned the company is not discouraged by previous experiences when choosing entry mode for a new international market, each specific entry is adapted to the current market conditions rather than compared to experiences of success or failure in previous market entry attempts. Therefore the respondent states that previous failure with a specific entry mode does not exclude that entry mode in another market because of the ever-changing market conditions. When entering a new market the company usually reaches profitability within one to three years from market entry, despite the company lack of a specific strategy when entering a new market the respondent states that Meva is well aware of the patience needed when entering a new market. The respondent states that the closest thing to a strategy for Meva when entering a new international market is to maximizing sales in order to reach profitability.

4.1.2 Case 1 – Data regarding RQ2: How do external factors influence firm’s choice of international market entry mode?

When Meva initiated their internationalization the geographic distance was of great importance. Due to that the internationalization started simultaneously with the company, it was important to be able to reach the international market without spending unreasonable amounts of resources on travels and transportation of products. Now other factors such as infrastructure, laws and regulations and market size and growth rate are considered to be of greater importance when choosing a new international market. The infrastructure is essential for the company to be able to deliver the products to the end user location. Laws and

regulations are important to be aware of, as a large part of the customer base is municipals/governments and thereby have special rules regarding trade agreements. Finally, the respondent emphasizes the importance of market size and growth rate, as it is crucial for reaching profitability in the market. Regarding the factors that affect the company choice of market entry mode, the respondent state that trade barriers is the most important factor as they usually work through foreign distributors. The trade barriers’, make them adapt their way of reaching the target country to avoid penalty duties in the target country, for example in Brazil. The remaining external factors (geographical distance, social and cultural differences, laws and regulations,

infrastructure, exchange rate stability, knowledge and information about the market, political

stability, tax advantages, market size and growth rate, competition and uncertainty to access

demand) are not considered to be of great importance as the company most often enters the market through cooperation with a sales agent in the target country, which then handles these factors without Meva’s involvement. Meva’s strategy when it comes to markets with high growth rate is to try to gain the so called “first mover advantage”. This is performed by determining which markets will reach high growth rate and establishing their presence in these types of markets before it occurs. Meva does not have any restrictions from the Swedish government regarding trade, and there are no home specific factors of relevance when it comes to choosing entry mode into new international markets.

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4.2 CASE 2 – PURAC

The respondent is Peter Thulin who is the marketing director of Purac. Purac was founded in 1956 as a subsidiary to TetraPac. The company group’s annual turnover is approximately 600 million SEK and with roughly 20 million SEK in annual profit. The company employs around 185 people, and the core business is contracting for treatment of waist water, process water and drinking water, as well as treatment of biological waste and their products are standardized. The entry modes used by Purac are mainly direct export, cooperation with other companies

and subsidiaries in a few countries. Purac’s international sales amounts to approximately 50-70 percent of their total annual turnover and the company have been international since the mid seventies. The internationalization process started because of a maturing Swedish market and thereby forced Swedish companies in the industry to either change direction or search for new markets. The internationalization process started in the Scandinavian countries and then continued to Germany. Today, Purac is represented by subsidiaries in Norway, Denmark, Germany and the People’s Republic of China because these markets have high demand according to the respondent. Furthermore, the East European and South-East Asian markets are important to Purac although the company is not represented by subsidiaries in those markets. The company future goal with their extended international operations is simply to grow, which is totally coherent with the company strategy. This is also a part of the decision as to why the company is and should continue to conduct international business, as the Scandinavian market is relatively small and matured. When entering a new international market, it is of great importance for Purac that the market has enough projects with secured financial resources for the projects to be finished, as Purac does not agree to any projects without that project being sufficiently financed. The last time the company entered a new geographic market, the reason was that there is a new emerging market for biogas (which is also one of Purac’s product range), which opens up because of the increasing strive to decrease the dependency of fossil fuel.

4.2.1 Case 2 – Data regarding RQ1: How do internal factors influence firm’s choice of international market entry mode?

When entering new international markets there are several internal factors of importance, which according to the respondent, all affects the company to a various degree. The internal factor of knowledge is of great importance since the company has to know how to conduct business in an international environment. According to the respondent knowledge it is also a part of their competitive advantage as well as management ability, flexibility and dedication meaning that the company posses these factors and that they thereby affects the company’s choice of international markets. Resources are always a critical issue, since it is impossible for the company to finish a project without sufficient resources, even though every project should be financially viable. Regarding product adaptation the respondent state that the company tries to find suitable markets for their product rather than adapt their product to the market. The planning and control within the company has shown to be absolutely crucial for the company’s success with internationalization. Finally, the employee motivation and ability for international engagement is high, since it has been a clearly stated part of the company’s strategy for many years.

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Regarding the company’s choice of international market entry mode the respondent views time to market to be a factor that is hard to assess and that is usually takes longer than foreseen, but is not seriously affecting the company’s choice of entry mode. Purac sees the greatest risk lies in failure to secure payment rather than high investment involvement due to the strategy of continue the internationalization through project to project. Long- term goals are also considered very important since the future is hard to predict, and there has to be a long- term market for their product to successfully establish a local subsidiary in a specific geographical market. The remaining internal factors (resources, flexibility, return on

investment, management influence, type of product, company size, international experience

and relations) are of lesser importance since the company conducts business project-by-project and thereby determine whether further establishment, with more resource intense involvement, is desirable. As a further measure to avoid risk Purac has made it a clear strategy to ensure that the control and decision power of subsidiaries does not leave the Swedish headquarter. Purac is divided in three divisions, one marketing and sales division, one production division and one technical division. The marketing and sales division is responsible for the gathering

of information about market conditions in other countries; this is made through a wide array of methods, mainly through international press, conferences and their sales personnel. This type of information then creates the basis for the decision in what way to enter a new

international market, which is made by the company’s management, although the basic strategy is to conduct business project-by-project as a first involvement in a new international market. Purac considers themselves as market leaders and their main national competition to be Malmberg Water AB and VA-ingenjörerna, furthermore they consider their main international competitors to be Veolia and Degrémont, two large French companies. Purac does not gather any information about how these, or their other, competitors enter new international markets. However, although it is not a clearly stated strategy they do get some information through various business contacts. When entering a new international market, the goal is to continue to win projects and finish them, this hopefully creates a basis for establishment of subsidiaries in that particular market. Purac does not consider return on investment to be very important, since every project is supposed to be financially viable. This is also true for the profit target factor as it is supposed to already be met due to the earlier mentioned strategy that every project brings profit. The Establishment time however is according to the respondent very important, since the company’s objective is to grow internationally. However, the respondent states that Purac has to have at least one to three years’ patience with new establishments to give them time to grow before deciding whether to consider the entry successful or not, and thereafter decide whether to continue their efforts in that market. Market share targets are not a strategic objective for the company as they strive to win contracts regardless of how this will affect their total market shares. So far Purac has, according to the respondent, succeeded very well with their internationalization with one exception, Poland. The reason for failure in Poland is argued to be the loss of control and decision power coming from Sweden. This previous

experience has taught the company not to let go of the control from the Swedish headquarters when establishing on a new international market. The time it takes for a new market entry to reach profitability depends on how long time it takes for the company to win their first contract. The respondent states that the company’s main strategy for entering new international markets is to grow through finding strong local partners, which allows them to

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win contracts and at the same time become as locally oriented as possible without losing control and decision power from the headquarters in Sweden.

4.2.2 Case 2 – Data regarding RQ2: How do external factors influence firm’s choice of international market entry mode?

When choosing how to enter an international market, Purac considers the geographic distance being an important issue because of both time difference and transportation distance. Even though, it has become of less importance, due to the high degree of internationalization in the society today. The social and cultural differences are regarded not so important, although the respondent feels that it might be easier to conduct business in the Scandinavian countries as the company has a greater knowledge of the countries social and cultural values due to the closeness, both geographically and socially/culturally. The respondent also states that there has to be a well-established legal system for them to consider establishment that involves company resources. The infrastructure is of great importance due to availability and the possibility to transport not only products but also company personnel. There also has to be a certain level of technical capacity in order for Purac’s technical knowledge to be demanded. The respondent argues that if there are trade embargoes, it is not of interest for Purac to establish on that market and when it comes to penalty duties, it is more important to increase the local cooperation to be able to bypass the penalty duties, which can have a clear influence of the company’s choice of market entry mode. Furthermore, Purac always assess the competition before entering a new international market, as a way to measure if a successful market entry is possible and through which way the entry should be performed. If the competition is regarded as high, the company does not use entry modes that demand heavy resource commitment. Also, presence of political stability is important for the company, before establishing in the market. Furthermore the respondent states that, the geographic

distance increases the interest to cooperate with a local partner. It is therefore considered the single most important external factor when choosing market entry mode. The remaining external factors (exchange rate stability, knowledge and information about the market, tax

advantages, market size and growth rate, uncertainty to assess demand, social and cultural

differences, laws and regulations and infrastructure) are of less importance even though they influence in various degree for the decision of which way to enter a new international market. Purac’s strategy when it comes to markets with high growth rate is to follow the development of new emerging markets such as People’s Republic of China and India, and await the right opportunity to make a market entry. The markets financial resources have to be sufficient in order for the company to get involved. Purac does not have any restrictions from the Swedish government regarding trade, except for following the national restrictions and trade embargoes regarding which countries not to enter, for example North Korea. There are also no home specific factors of relevance when it comes to choosing entry mode into new international markets.

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5. DATA ANALYSIS

In this chapter the analysis of the empirical data received during the case studies will be

presented. To begin with, a case analysis will be presented for the two cases comparing the

empirical data in chapter four with the conceptual framework in chapter two. Finally a

summary will be presented for each research question in form of a table for clarity reasons. This data analysis will be displayed in line with the research questions.

5.1 CASE ANALYSIS RESEARCH QUESTION 1


Koch (2001) introduced a holistic model of the market and Market Entry Mode Selection process (MEMs). The author brings forward seven internal factors that influence the market entry mode selection. These are: company size/resources, management locus of control, management risk attitudes, market share targets, calculation methods applied, profit targets and experience in using individual MEMs. As stated in our conceptual framework we have chosen to focus on company size/resources, management risk attitudes, market share targets, profit targets and experience in using individual MEMs. Company size/resources

Koch (2001) states that the company size/resources often affect the company’s choice of market entry mode since smaller companies usually have fewer market servicing options, as their very limited own resources may simply not allow, or discourage from, some market entry modes. The data collected in case one does verifies the theory, in that the company is regarded as a SME and as such they do not have a company representative for market information gathering, but rather it is included in the everyday work assignments of the sales and marketing personnel. This is also consistent with our findings regarding case two as the company is regarded as a SME with no specific department for information gathering. Koch’s (2001) theory is regarding case one, also supported in the way that international market entry is somewhat discouraged from establishing fully owned subsidiaries. In the cases when fully owned subsidiaries have been established, it has been because local sales agents have gone bankrupt and Meva has then taken over their organization. By taking over an already existing organization the demanded investment is not as great as developing an entirely new sales subsidiary. Koch’s (2001) theory were further verified in case two, as the company according to the respondent use several different market entry modes, although direct export and cooperation with other companies are preferred, subsidiaries only occurs in a few countries with favorable target country conditions. Management risk attitudes Koch (2001) state that management risk attitudes depend on the level to which the company will accept various international business risks, the company’s financial situation, its strategic options, the competitiveness of its competitive environment and its relevant experience. Our findings show that in case one the company shows a positive result but according to the respondent the management attitude toward risk is to play it safe which contradicts Koch’s (2001) theory. Furthermore, the company is case one considers themselves as market leaders with two large international firms as their main competitors. The company has extensive experience which in combination with the company’s positive view of the future, according to Koch’s (2001) theory should make them less risk averse, which is not the case thus the theory

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is contradicted. Additionally the respondent in case two argues that they are also risk averse despite their positive result and adds to the contradiction of the theory. The company in case two also has a great amount of experience in their industry and considers themselves among the best in the industry. They consider their main competitors being two French companies and predict their future development to be positive. Their competitive environment should according to the theory make them less risk averse than our findings constitute. Market share targets According to Koch (2001) the Market share targets depend on what way of market entry mode is selected and depends on if the company strives for sales or market share maximization. Our findings in case one show that the company does not have any specific market share targets although their strategy to increase sales in international markets, which contradicts the theory since the company do not alter their market entry mode due to their market share targets. On the other hand our findings in case two revealed that Purac does not have any specific way of entering a new international market for maximization of growth reasons even though their goal is to grow internationally thus they choose an entry mode due to suitability for each project, which in turn verifies the theory stated by Koch (2001). Profit targets

Koch (2001) states that the profit targets of the company affect the choice of market entry mode. Depending on which way a company chooses to enter a new international market, the profits will vary. The author argues that an entry mode that reaches profit quickly often shows difficulties to bring long-term profits, while entry modes with a long-term profit as a goal does not bring profits as quickly but is able to sustain a long-term profitability. Our findings in case one showed that Meva has a long term profit orientation and clearly states that patience for generating profit is necessary. Although there are no immediate profit targets the company expects to reach continuous sales within two years. These findings support the theory stated by Koch (2001). Our findings in case two shows that Purac has a project-to-project profit target orientation, where every project is supposed to bring profit. These findings are not consistent with Koch’s (2001) theory regarding profit targets since Purac despite their short-term profit target is able to sustain a long-term profitability. Experience in using individual MEMs

Koch (2001) argues that the experience in using individual MEMs depends on the experience of a particular entry mode and that it influences the decision through the perceived use of a particular mode of entry. Our findings in case one showed that the company’s experience influences them in the way that they have a preferred mode of entry in cooperation with a large international firm, thus supporting Koch’s (2001) theory. Our findings in case two showed that the company has learned not to let go of the control as this has been the main reason for earlier market entry failure. This might directly or indirectly influence the choice of market entry mode according to the respondent. These results verify the theory argued by Koch (2001).

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5.1.2 Theory by Brassington and Pettitt (2000)

Brassington and Pettitt (2000) also discuss two other internal factors, payback and speed. As stated in our conceptual framework we will investigate both. Payback

With payback Brassington and Pettitt (2000) mean the time it takes for the company to create revenue from an investment in a new market that influences the company’s choice of foreign market entry mode. Our findings in case one reveled that time to return on investment did not independently have significant importance on their choice of market entry mode, but rather as an underlying factor, in combination with several other factors, toward the long-term goal of achieving profitability. These findings do not support Brassington and Pettitt’s (2000) theory. Our findings in case two also contradicts the theory argued by Brassington and Pettitt (2000) as the company conducts business project-by-project and thus not pay any special attention to the time it takes for the company to create revenue from an investment. Speed With speed Brassington and Pettitt (2000) mean the time it takes to reach the target market, also greatly influences the choice of entry mode. Our findings in case one revealed that the company’s goal is to establish a market within one to three years and to have continuous sales by the second year of entry. The time to reach the market does not affect the choice of entry mode, thereby contradicting the theory argued by Brassington and Pettitt (2000). Furthermore, the findings from case two also contradicts the theory stated by Brassington and Pettitt (2000), thus the company states that time to market is a factor that is hard to assess and often takes longer time than predicted, and thus not seriously affect the company’s choice of market entry mode.

5.1.3 Theory by Hollensen (2001)

Hollensen (2001) brings up three more factors of internal nature that might influence the choice of market entry mode, these are: complexity and differentiation of the product, risk and flexibility. As stated in our conceptual framework we will only focus on the Complexity and differentiation of the product. Complexity and differentiation of the product

With complexity and differentiation of the product, Hollensen (2001) mean that the product influences the cost of shipping, economies of scale, technology transfer, and already existing know-how and thereby may influence of market entry mode. In contradiction to theory, the differentiation and complexity of the product is not singled out as a factor that affects the choice of market entry mode, due to the high transportation cost the company has as they deliver their product directly to the end user. Furthermore our findings in case two reveled that the complexity and differentiation of the product does not affect the company’s choice of market entry mode, especially since the product differentiation is negligible, and thereby contradicts the theory stated by Hollensen (2001).

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Bruhno and Schilt (2001) have also developed a model in which the authors present internal and external factors that influence a company’s choice of marketing channel. The internal factors are: motive, goals, strategy, product, management, resources, customer relationships and networks. As stated in our conceptual framework we will investigate all of them except for product, management and resources. Motive Motives for entering a new international market can according to Bruhno and Schilt (2001) be small domestic market and/or strong competitive products. Our findings in both case one and case two showed that the motive for internationalization and entering a new international market was that the domestic market was relatively small and matured. These findings support Bruhno and Schilt’s (2001) theory. Goals

Goals can according to Bruhno and Schilt (2001) be long and/or short-term and influences the choice of international market entry mode. Our findings in case one showed that the company’s short and long-term goals with their internationalization are to maximize sales especially in the Former Soviet Union states and South-America. As the respondent mentioned long-term goals as one of the critical factors for the company’s choice of international market entry mode, the theory stated by Bruhno and Schilt (2001) is verified. Furthermore, case two revealed that the company’s short-term goal is to continuing winning projects and create a large customer base, enabling the establishment of subsidiaries in new emerging markets such as People’s Republic of China and India. The company’s long-term goal is to increase their sales of biogas in the United States. Thereby further verifying Bruhno and Schilt’s (2001) theory, as long-term goals were considered very important to be able to successfully establish local subsidiaries. Strategy

According to Bruhno and Schilt (2001) strategic goals for entering international markets and the development of these strategies, can affect the choice of market entry mode. Our findings in case one revealed that the company does not have any clearly stated strategy regarding international market entry. The closest to a strategy is according to the respondent maximization of sales. This finding contradicts Bruhno and Schilt’s (2001) theory, since a non-existing strategy cannot affect the company’s choice of market entry mode. Our findings in case two however, verifies Bruhno and Schilt’s (2001) theory as their outspoken strategy is to become as locally oriented as possible without loosing control and decision power from the headquarters in Sweden. Customer relationships According to Bruhno and Schilt (2001) the number of, as well as, the nature of the customer relationships affects the choice of international market entry mode. Our findings in case one revealed that both companies is case one and two, did not consider their customer relationships as a influencing factor when choosing a entry mode, and thereby our findings contradict the theory stated by Bruhno and Schilt (2001).

DATA ANALYSIS

39

TABLE 5.1 Internal factors influencing the Entry Mode Decision

Networks

Bruhno and Schilt (2001) state that the company’s existing or lack of existing contacts and relationships can influence the choice of international market entry mode. Our findings in case one shows the importance of networking when choosing a way of entering a new international market, as it is a great part of the company’s way of conducting business through attendance at trade-shows and their cooperation with industry-specific consultancy firms. These business activities induce cooperation with local partners rather than opening subsidiaries in a specific market, thereby supporting the theory stated by Bruhno and Schilt (2001). Furthermore, our findings in case two also verifies the theory stated by Bruhno and Schilt (2001), since the company has an ambition to become as locally oriented as possible, which only is possible through successful networking according to the respondent.


Root (1994) has also summarized the influence of internal factors on the choice of entry mode as shown in Table 2.1 in chapter 2. As stated in our conceptual framework we will use this theory to show the connection between the internal factors and the actual choice of market entry mode.

When placing the company in case one in Root’s (1994) table our findings reveled that the company’s products are differentiated and technology intense. Furthermore, the products are highly adaptable and the company has substantial resources and uses mainly low commitment market entry modes. After a compilation of the factors influencing the market entry mode decision the company should according to Root’s (1994) theory use the entry mode of Licensing or Branch/ subsidiary exporting. After comparing our findings to the factors in Root’s (1994) theory our findings showed that the company uses mainly indirect and agent distributor exporting, which thereby contradicts the theory. It is however worth mentioning that our findings placed the company in the Licensing or Branch/ subsidiary exporting entry modes by only slight margin, which therefore makes the contradiction to theory not conclusive. Furthermore our findings in case two revealed that the company’s products are standardized and technology intense. Additionally the company use low product adaptation and has substantial resources. This together with their high commitment should place the company in the category of equity investment/ production according to Root (1994). However, our findings show that the company mainly uses Indirect and Agent /distributor

Internal Factors: Case one Meva

Case two Purac

Preferred entry mode

Differentiated products X Indirect and Agent /distributor exporting or Branch/ subsidiary exporting

Standard products X Equity investment/ production Service- intensive products Service products Technology intensive products X X Licensing Low product adaptation X Indirect and Agent/distributor exporting High product adaptation X Licensing, Branch/ subsidiary exporting or

equity investment/production Limited resources Substantial resources X X Branch/ subsidiary exporting or equity

investment/production Low commitment X Indirect and Agent /distributor exporting or

Licensing High commitment X Branch/ subsidiary exporting or equity

investment/production

DATA ANALYSIS

40

exporting, which contradicts the theory argued by Root (1994). The results in case two were more conclusive in the contradiction against theory than our findings in case one.

5.2 SUMMARIZATION OF FINDINGS IN RESEARCH QUESTION 1

We have summarized our findings regarding research question one in table 5.2 below.

Theory Factor Case 1 - Meva Case 2 - Purac Company size/resources Verifies Verifies Management risk attitudes Contradicts Contradicts Market share targets Contradicts Verifies Profit targets Verifies Contradicts Experience in using individual MEMs

Verifies Verifies

Koch (2001)

Payback Contradicts Contradicts Speed Contradicts Contradicts

Brassington and Pettitt (2000)

Complexity and differentiation of the product

Contradicts Contradicts Hollensen (2001)

Motive Verifies Verifies Goals Verifies Verifies Strategy Contradicts Verifies Customer relationships Contradicts Contradicts Networks Verifies Verifies

Bruhno and Schilt (2001)

Preferred entry mode Contradicts Contradicts Root (1994)

TABLE 5.2 Summarization of findings regarding RQ 1.

DATA ANALYSIS

41

5.3 CASE ANALYSIS RESEARCH QUESTION 2


Koch (2001) states that the following factors are the external in his holistic model of the market and Market Entry Mode Selection process (MEMs): industry feasibility/ viability of MEM, characteristics of the overseas country business environment, market growth rate, image support requirements, global management efficiency requirements, popularity of individual MEMs in the overseas market and market barriers. As stated in our conceptual framework we will focus on industry feasibility/ viability of MEM, characteristics of the overseas country business environment, market growth rate and market barriers. Industry feasibility/ viability of MEM With industry feasibility/ viability of MEM, Koch (2001) states that some entry modes may be excluded in some countries because of laws and regulations. The theory is heavily based on target country specific factors such as labor cost, technical know-how dissemination risk, and insufficient level of skill etcetera. However our findings suggest that the company in case one views the laws and regulations as the only specific part of this theory that would apply to them, as all production is performed in Sweden, thus not affecting the researched company. In addition, our findings in case one revealed that laws and regulations are regarded as a important factor, because of the company’s customer base, is to a great extent consistent of municipals and governments, which have special rules regarding trade-agreements, which affects the choice of market entry mode. These findings verify the theory brought forward by Koch (2001). Furthermore our findings in case two revealed that Industry feasibility/ viability of MEM is important for the company as well as established legal system are crucial in order for Purac to consider establishment that involves company recourses, further enhancing the support for theory argued by Koch (2001). Characteristics of the overseas country business environment

Koch (2001) argues that depending on which characteristics there are on the overseas country business environment, it will influence the company’s choice of entry mode. Similarities and volatility of general business regulation/practices, business infrastructure and supporting industries levels of development are amongst those characteristics, which would normally attract the attention of potential entrants into a foreign market. Our findings in case one revealed that a developed and functional infrastructure is essential for the company’s choice of international market, which indirectly affects the choice of market entry mode. Even though the infrastructure is of importance, the company in case one does not gather information about the characteristics of the overseas country business environment, which contradicts the theory argued by Koch (2001). Furthermore our findings in case two revealed that the company views it as important to know the characteristics of the overseas country business environment in order to assess the possibilities of a successful market entry. When conducting this assessment the infrastructure is of great importance as it is a necessity for enabling the transportation of both products and personnel. These findings verify the theory brought forward by Koch (2001). Market growth rate According to Koch (2001) market growth rate can be expected to be of considerable significance. If a market is growing at a fast rate, and this rate of growth does not seem sustainable over several years, the company will be advised to tap into this opportunity without any delay and use indirect or direct exporting. Our findings in case one contradicts

DATA ANALYSIS

42

this statement as it does not affect the choice of entry mode for the company, instead the company sees the importance of market growth rate when prospecting new emerging international markets. Furthermore, our findings in case two revealed that the company in case two has a more restrictive strategy regarding markets with high growth rate, as they follow the development and await the right opportunity before entering the market. According to the respondent the high growth rate itself does not affect the company choice of market entry mode, thus contradicting the theory stated by Koch (2001). Market barriers

Koch (2001) state that market barriers can make access to foreign markets more difficult. Our findings in case one reveled that market barriers are important as the company regards them as the most important factor when choosing market entry mode. The trade barriers make them adapt their way of reaching the target country to avoid penalty duties in the target country, for example Brazil. These findings verify the theory brought forward by Koch (2001). Furthermore our findings in case two revealed that the company regards it as important to increase the cooperation with local partners in order to avoid penalty duties, which thereby influences the choice of market entry mode, and verifies the theory argued by Koch (2001).


Root (1994) argues that a company’s choice of entry mode for a given product/ target country is a net result of several, often conflicting forces. The author brings forward four external factors: target country market factors, target country production factors, target country environmental factors and home country factors. As mentioned in our conceptual framework we will focus on target country market factors, target country production factors and home country factors. Target country market factors

With target country market factors, Root (1994) mean that the present and projected size of the target country market is an important influence on the entry mode, suggesting that the break even sales volume has to be in relation with the company’s investment when entering a new international market. The data revealed that the companies in both case one and case two, disregard the breakeven sales volume when deciding which entry mode to use, and the company in case one argues that the factor does not influence their choice of market entry mode, thus contradicting the theory stated by Root (1994). The company in case two has yet another view of the issue, which is to, simply disregard markets where competition is heavy and unfavorable and focus on markets which are less competitive, thus contradicting the theory argued by Root (1994).

Target country production factors Root (1994) state that target country production factors influence the entry mode because the quality, quantity, and cost of raw materials, labor, energy and other productive agents in the target country, as well as the quality and cost of economic infrastructure (transportation, communications and port facilities) have an evident bearing on entry mode decisions. Our findings in case one revealed that this factor is irrelevant to the company, because all their production is based in Sweden, thus contradicting the theory brought forward by Root (1994). Furthermore, our findings in case two revealed that the company through their project-by-project strategy eliminates the target country production factors effect on choice of market entry mode, as every project has to be financially viable, thus contradicting the theory argued by Root (1994).

DATA ANALYSIS

43

Home country factors

Root (1994) state that home country factors such as market, production, and environmental factors also influence a company’s choice of entry mode to penetrate a target country. Our findings in case one and two revealed that the domestic market for both companies is relatively small, and did not allow the companies to mature before forced into internationalization, which would suggest that the companies should use entry modes that do not demand great amounts of resources. Although this is found to be true for the companies in both case one and case two, the theory can not be verified as the relatively high production costs in the companies’ domestic market should induce usage of entry modes that involve production abroad, which is not the case. As our findings regarding home country factors are inconclusive we cannot argue that they either support or contradict the theory brought forward by Root (1994). Geographic distance (Root, 1994 and Bell, 1995) In addition Root (1994) also bring forward the geographic distance as an influencing factor. Bell (1995) contributes to this by stating that firms initially target neighboring countries and subsequently enters foreign markets with successively greater “psychic distance”. As stated in our conceptual framework we will investigate both these factors. Our findings in both cases verify the theories argued by Root (1994) and Bell (1995) as both researched companies initiated their internationalization to the Scandinavian countries and Germany. Today both companies, has successively expanded their range of internationalization and entered countries with greater geographic and “psychic distance” such as the United States.


Bruhno and Schilt (2001) have developed a model where they present internal and external factors that influence a company’s choice of marketing channel. The external factors are market and competitors, and as stated in our conceptual framework we will only focus on competitors. Competitors

Bruhno and Schilt (2001) state that the amount and the strength of competitors in an international market affects the choice of market entry mode, as the willingness to allocate resources will be greater in a market with less competition. Our findings in case one revealed that although the company has competitors, they view themselves as market leaders in their industry and does not consider competition to be of great importance when choosing a market entry mode, thus contradicting the theory argued by Bruhno and Schilt (2001). Furthermore, our findings in case two revealed that Purac, even though they consider themselves as market leaders, always assess the competition before entering a new international market, as a way to measure if a successful market entry is possible and through which way the entry should be performed. If the competition is regarded as high, the company does not use entry modes that demand heavy resource commitment, thus verifying the theory stated by Bruhno and Schilt (2001).

DATA ANALYSIS

44

TABLE 5.3 External factors influencing the Entry Mode Decision


Root (1994) has also summarized the influence of external factors on the choice of entry mode as shown in Table 2.1 in chapter 2. As stated in our conceptual framework we will use this theory to show the connection between the external factors and the actual choice of market entry mode. The companies in case one and case two, selects an international market through stating a set of terms that has to be fulfilled in order for them to take interest in that particular market. This has been taken under consideration when placing the companies in Root’s (1994) table to be able to perform a relevant analysis of the theory.

Case one

Meva Case two Purac

Preferred entry mode

External Factors (Foreign Country): Low sales potential High sales potential X X Branch/ subsidiary exporting, equity

investment/ production Poor marketing infrastructure Good marketing infrastructure X X Indirect and agent/distributor exporting Low production cost - X Equity investment/ production High production cost - Restrictive import policies Liberal import policies X X Indirect and agent/distributor exporting or

Branch/ subsidiary exporting Small geographical distance X X Branch/ subsidiary exporting or indirect

and agent/distributor exporting Great geographical distance X X Licensing, equity investment/ production

or Service contracts Dynamic economy X X Equity investment/ production Stagnant economy Exchange rate depreciation X X Equity investment/ production Exchange rate appreciation X X Indirect and agent/distributor exporting or

Branch/ subsidiary exporting Small cultural distance X X Branch/ subsidiary exporting or equity

investment/ production Great cultural distance X Indirect and agent/distributor exporting,

licensing or Service contracts Low political risk X X Branch/ subsidiary exporting or equity

investment/ production High political risk External factors (Home country): Large market Small market X X Indirect and agent/distributor exporting or

branch/ subsidiary exporting Low production cost High production cost X X Licensing, equity investment/ production

or Service contracts Strong export promotion X X Indirect and agent/distributor exporting or

branch/ subsidiary exporting Restrictions on investment abroad

When placing the companies in case one and case two in Root’s (1994) table, our findings reveled that both companies have similar demands for the international market, such as high sales potential, good marketing infrastructure, restrictive import policies, dynamic economy

DATA ANALYSIS

45

and low political risk. These factors are considered to be basic demand for interest in any international market. Furthermore, the factor of production cost is not relevant for case one as they produce all their products in their domestic market. In case two on the other hand, the company preferred low production cost although they adapt their prices to the cost of production. The geographical distance has no bearing on the decision of which international market to enter for neither company. In addition, exchange rate depreciation/ appreciation does not affect the companies as they take measures to avoid currency losses. When it comes to the factor of cultural distance the company is case one argues that the cultural distance factor is of less importance and does not affect the choice of international market. The company in case two however, prefers markets with a small cultural distance, as they consider it easier to conduct business with a similar business culture. As for the home country factors, both companies have the same domestic market and similar domestic market conditions such as small market, high production cost and strong export promotion. When these terms are fulfilled the company has to choose a mode of entry and according to a compilation of influencing factors in the theory argued by Root (1994) the company in case one should use the entry mode of Branch/ subsidiary exporting. It is however worth mentioning that our findings placed the company by only slight margin in this category. Our data revealed that the company in case one mainly uses the market entry mode indirect and agent distributor exporting, thus contradicting the theory. Furthermore, a compilation of influencing factors in the theory argued by Root (1994) the company in case two should use to the entry mode of branch/ subsidiary exporting or equity investment/ production, but are in fact using Indirect and Agent /distributor exporting, which contradicts the theory argued by Root (1994). The results in case two were more conclusive in the contradiction against theory than our findings in case one.

5.4 SUMMARIZATION OF FINDINGS IN RESEARCH QUESTION 2

We have summarized our findings regarding research question two in table 5.2 below. Theory Factor Case 1 - Meva Case 2 - Purac Koch (2001) Industry feasibility/ viability of

MEM Verifies Verifies

Characteristics of the overseas country business environment

Contradicts Verifies

Market growth rate Contradicts Contradicts Market barriers Verifies Verifies Root (1994) Target country market factors Contradicts Contradicts Target country production

factors Contradicts Contradicts

Home country factors - - Root (1994) and Bell (1995)

Geographic distance Verifies Verifies

Bruhno and Schilt (2001)

Competitors Contradicts Verifies

Root (1994) Preferred entry mode Contradicts Contradicts

TABLE 5.4 Summarization of findings regarding RQ 2.

CONCLUSIONS AND IMPLICATIONS

46

6. CONCLUSIONS AND IMPLICATIONS In this chapter we will present the findings and conclusions, as a result, the answers to the

earlier stated research questions will be provided. The findings will be presented jointly with

each research question. Our conclusions will then be presented along with implications for

management, existing theory and finally implications for future research.

6.1 RESEARCH QUESTION 1 – HOW DO INTERNAL FACTORS

INFLUENCE FIRM’S CHOICE OF INTERNATIONAL MARKET ENTRY

MODE?

After analyzing the data in chapter five we found that the factor company size/ resources influences the choice of market entry mode as SME’s tend to initiate their internationalization through export before using more resource intense market entry modes, such as subsidiaries. This can according to theory be a result of lack of resources (travels and transportation costs), lack of financial risk tolerance and foreign business experience. Lack of financial resources can also force the company to use their sales and marketing personnel as a tool for gathering market information, as opposed to companies with great resources having the possibility to employ personnel with that specific purpose, thus the understanding of market conditions might be non sufficient. In addition the theory argues that management risk attitudes should be less risk averse when being financially successful, but we found that the company size may affect the willingness to subject the company for risk, thus the company management might use less resource committing market entry mode in order to minimize financial risk. Finally, we found that although the companies do not exclude any market entry mode, the companies prefer market entry modes that they have previous experience of, thus experience in using

individual MEMs affect the market entry mode decision. As long as a specific entry mode does not result in total failure, the decision to use this particular entry mode will not be evaluated, and thereby not being confirmed as the best way of entering a market. When choosing an international market entry mode payback should affect the decision, according to theory, however the companies do not consider this to be an issue worth much thought. We found that the reason for this could be their obvious preference for low resource committing entry modes, at least for their initial entry mode decision. Although we found Speed, is not considered important by the respondents in this thesis, it could have a serious impact on managerial decisions regarding international market entry modes. We found that there are issues regarding the speed factor that are hard to determine, such as when it is important to reach a specific market quickly, and as an effect of this companies might miss great opportunities in new international markets. The complexity and differentiation of the product could according to theory affect the market entry mode decision, as different product features could render difficulties of various kinds when entering a new international market. We found that the companies do not take their product features into consideration when choosing market entry mode, which might render additional costs and missed opportunities regarding economies of scale. We found that the motive for engaging in internationalization is that the domestic market is insufficient due to size and maturity. The goal with the internationalization is according to our findings growth. We also found that the goals can be both short-term and long-term and in a long-term perspective the goal of growth will develop a need to internationalize the entire


47

company and create sales and production platforms outside the domestic market. Furthermore, we found that the companies in order to reach their goals, employs different strategies. When the long-term goal is to open a subsidiary the company’s short-term goal, will try to become as locally oriented as possible, as this enables them to establish contacts for future establishment. When the long-term goal is to maximize sales, the short-term goal is to reach as many profitable markets as possible. Despite the great importance of customer

relationships when conducting business, it does not affect the companies’ choice of market entry mode, but rather how business is conducted when reaching a specific market. Networks are according to out findings of great importance for both our companies due to two main reasons: meeting potential sales agents and customers in trade-shows, which induces internationalization through entry modes such as sales agents/distributor exporting, and secondly gaining contacts through which you can increase the local knowledge, needed for entering markets through local presence, such as the opening of sales or production subsidiaries, thereby affecting the choice of market entry mode. This choice of market entry mode will most likely be performed through using previous experience in using individual MEMs. We found that despite the companies’ similarities regarding industry and target markets, the companies have different preferred entry modes. However, both companies are profitable which leads us to the conclusion that there is not just one single effective market entry mode, but rather different ways of reaching ones objectives, thus there is no right or wrong regarding internal factors influencing the company’s choice of market entry mode. It is not the product or the company that should be deciding which market entry mode to use, but rather the current conditions regarding strategy, product and target market.

6.2 RESEARCH QUESTION 2 – HOW DO EXTERNAL FACTORS

INFLUENCE FIRM’S CHOICE OF INTERNATIONAL MARKET ENTRY

MODE?

After analyzing the data in chapter five we found that the factor of Industry feasibility/

viability of MEM influences the choice of market entry mode as there has to be a well established and functional legal system in order for the companies to even consider a market entry. The influence on the market entry mode depends on the possibility to use the preferred market entry mode of the companies. Due to the interest of the market the company will alter their market entry mode in order to avoid legal difficulties when trying to reach the market. If an alteration of market entry mode is not performed the companies will lose the benefits of that particular market. Even though the companies have a preferred market entry mode, industry feasibility/ viability of MEM will force them to adapt their way of entering a new market. The company choice of market entry mode does not depend on the growth rate of a specific market, although the companies’ strategy differs greatly regarding such markets. The influence of the growth rate factor is affecting the choice of which markets to enter, rather than influencing the choice of which way to enter. Furthermore, we found that the market

barriers on attractive markets might force the companies to choose a specific entry mode in order to reach the market of interest. In the same way as the industry feasibility/ viability of

MEM might force the companies to choose a certain market entry mode, the market barriers will create the need for adapting their choice of market entry mode in order to reach profitability in the market of interest.


48

We found that Target country market factors are initially more important for the choice of market than the way to make a market entry. The impact of Target country market factors on the choice of market entry mode occurs only if a specific market is considered desirable enough to enter. Furthermore we can conclude that the two companies avoid the influence of target country production factors on the companies’ choice of market entry mode by using two different strategies. The companies avoid additional cost to the company by having their production in their domestic market, in case one, and adjust their prizing to cover the additional cost, in case two. The companies can therefore use a single market entry mode even though the target country factors vary greatly between different markets. Target country

production factors can be overcome through effective implementation, of well thought strategic plans, without affecting the companies’ choice of market entry mode. In addition, we found that the geographic distance is of great importance in the initial stage of the companies’ internationalization. However, the importance tends to decrease with time due to the companies increasing resources and knowledge. This together with the globalization of the business environment enables the companies to reach markets farther from their domestic market. When trying to reach does distant markets the companies also have to accept the increase in “psychic distance”. The increase of the geographic/”psychic” distance will influence the choice of market entry mode, as the companies will be forced to adapt their way of entering a market to the costs, market barriers, business culture and political climate to reach the target country. The great amount of varying external factors that could influence a company’s choice of market entry mode, will make it hard to pass judgment of right or wrong regarding which way to enter a new international market. There is according to our findings a thin difference between when to use a specific entry mode or not. The conclusion drawn from this is that the external factors will always exist and there is little the companies can do to eliminate the effects of these factors, therefore they have to adjust their own behavior rather than trying to change the way of the world.

6.3 IMPLICATIONS FOR THEORY

The purpose of this study was to provide a better understanding of the impact of internal and external factors on Swedish SMEs’ choice of international market entry strategies. Two research questions were constructed and in order to answer the research questions a literature review was conducted which lead to the development of a conceptual framework. Based on the framework data was collected and analyzed in order to describe and starting to explain the area of research. Although the area of international market entry is vastly researched our findings reveal inconsistencies between the studied theories and our empirical data. These inconsistencies can be viewed as a contribution to existing theory, leading to the conclusion that the area needs further research. We have through this research gained a deeper understanding of the impact of internal and external factors influence of international market entry strategies.


49

6.4 IMPLICATIONS FOR PRACTITIONERS/MANAGERS

This research has provided a better understanding of the impact of internal and external factors on Swedish SMEs’ choice of international market entry strategies. We have found that it is important for practitioners/managers to formulate a clear strategy regarding market entry modes, as it is crucial to have clearly stated objectives and a clear view of the current situation when entering a new international market. When selecting the objective for market entry modes it is important to look at both internal and external factors and evaluate every market entry situation individually as both internal and external factors will influence the possibility to successfully perform a market entry. Use the evaluation and previous experience to maximize performance and minimize risk. Furthermore, we recommend that no market entry mode should be excluded due to earlier failures, instead evaluate what went wrong and learn in order to improve performance. Use international market entry modes strategically to gain competitive advantages such as being first to a new emerging market. Finally, we recommend that information regarding current market situation and competitors should be actively gathered in order to increase the success regarding implementation of market entry mode strategy.

6.5 IMPLICATIONS FOR FUTURE RESARCH

This research has provided a better understanding of the impact of internal and external factors on Swedish SMEs’ choice of international market entry strategies. However, it would be of interest to further investigate the research area in more detail. Suggestions on how this could be carried out are to conduct the same study with greater number of cases in order to explore larger patterns. It would also be of interest to learn if the outcome of our study is industry-specific and/or country-specific. Furthermore, a study investigating if there are patterns/similarities between MNEs and SMEs would be of interest as to learn how the company size/resources affect the choice of international market entry mode. Finally, it would be of interest to investigate the impact of internal and external factors on entry mode on a non- Swedish company entering the Swedish market.

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th Ed. Upper Saddle River:

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International Marketing. vol. 14 No. 4 pp. 57-86.

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Osland, G. E., Taylor, C. R., & Zou, S. (2001). Selecting International Modes of Entry and Expansion. Marketing Intellegence & Planning 19 (3), p. 153-161. Root, F. R. (1994). Entry Strategies for International Markets. San Francisco: Jossey-Bass, Inc. Saunders, M., Lewis, P., & Thornhill. (2000).Research Methods for Business Students (3rd Ed.). Gosport: Pearson Education Limited Terpstra, V., & Sarathy, R. (2000). International Marketing 8

th Ed. Forth Worth: Dryden.

Wild, J. J., Wild, K. L., & Han, J. C. Y. (2003). International Business 2

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Prentice Hall. Winter, J. (1992). Problemformulering, undersökning och rapport (3rd Ed.). Stockholm: Almqvist & Wiksell förlag AB. Yin, R. K. (1994). Case study Research- Design and Methods. Thousand Oaks: Sage Publications Inc. Yin, R. (2003). Case Study Research – Design and Methods (3rd Ed.). Thousand Oaks: Sage Publications Inc. Young, S., Hamill, J., Wheeler, C., & Davies, R. J. (1989). International Marketing Entry and

Development: Strategies and management. Hermel Hempstead: Harvester Wheatsheaf. Other sources of information http://www.nordicwater.se (2007-05-31) http://www.lackebywater.se (2007-05-31) http://europa.eu/scadplus/leg/en/lvb/n26026.htm (2007-05-31)

http://www.nordicwater.se

http://www.lackebywater.se

http://europa.eu/scadplus/leg/en/lvb/n26026.htm

APPENDIX 1

Background questions

1. Name and title of the respondent? 2. Who founded the company and when? 3. Company turnover and result? 4. How many employees does the company have? 5. What is the company’s core business?

International operations

6. What kind of international market entry modes have the company used to enter

international markets? • Direct export (without intermediaries) • Indirect export (with intermediaries) • Licenses • Franchising • Contract production • Sales subsidiaries • Production subsidiaries • Strategic alliances (joint ventures) • Cooperation with other companies 7. How much of the company’s total sales is international (per cent)? 8. How many years have the company been involved in international trading? 9. Why did the company choose to become international? 10. How did the company start the internationalization? 11. To which countries did the internationalization start? 12. In which countries is the company represented in today? 13. What future goals does the company have with their extended international

operations? 14. Which are the most important reasons when the company chooses international

markets, and market entry mode? 15. Why did the company choose to enter a new geographic market last time it was

performed? Internal factors

16. How has the following internal factors influenced the company’s choice of

international markets? • Knowledge? • Resources? • Product adaptation? • Competitive advantages? • Management ability, flexibility and dedication? • Planning and control within the company? • Employee motivation and ability?

17. How has the following internal factors influenced the company’s choice of

market entry mode in new international markets?

• Time to market? • Resources? • Flexibility? • Risk?

APPENDIX 1

• Return on investment? • Long-term goals? • Management influence? • Type of product? • Company size? • International experience? • Relations?

18. How does the company handle risk when entering new international markets?

Company structure

19. How does your organizational scheme look? 20. How does your decision process look when deciding how to enter a new international

market?

21. How do you gather information on market conditions in other countries?

22. How is decisions made regarding which market entry mode is used to enter a new international market?

Competition

23. Who are the company’s competitors nationally/internationally?

24. How does the company gather information regarding the way your competitors enter new international markets?

Targets

25. What targets does the company have when establishing on a new international market? 26. How has the following target factors influenced the company’s choice of entry

mode into the international market? • Market share targets? • Profit targets? • Establishment time? • Return on investment?

International establishment 27. How have you succeeded in your previous international market entries?

28. How does the company’s previous experience of specific entry modes affect your

choice of market entry mode when establishing on a new international market?

29. How fast has the company shown positive results with your previous new activities on new international markets?

Strategy 30. What strategy does the company have when entering a new international market?

APPENDIX 1

External factors

31. How has the following external factors influenced the company’s choice of international markets?

• Geographic distance? • Social and cultural differences? • Laws and regulations? • Infrastructure? • Exchange rate stability? • Knowledge and information about the market? • Political stability? • Trade barriers? • Tax advantages? • Market size and growth rate? • Competition? • Uncertainty to assess demand? • Costs to be active on the market?

32. How has the following external factors influenced the company’s choice of entry

mode in new international markets? • Geographic distance? • Social and cultural differences? • Laws and regulations? • Infrastructure? • Exchange rate stability? • Knowledge and information about the market? • Political stability? • Trade barriers? • Tax advantages? • Market size and growth rate? • Competition? • Uncertainty to assess demand? 33. What is the company’s strategy when it comes to entry modes into international

markets with high growth rate? 34. Which restrictions does the company have from the Swedish government when it

comes to trade?

35. Which home specific factors have influenced the company’s choice of entry mode into new international markets?

APPENDIX 2

Bakgrundsfrågor

1. Namn och titel på respondenten? 2. Vem grundade företaget och när? 3. Företagets omsättning och resultat? 4. Hur många anställda har ni i ert företag? 5. Vad är företagets huvudsakliga verksamhet?

6. Vilken typ av inträde på internationella marknader har företaget utnyttjat?

• Direkt export (utan mellanhänder) • Indirekt export (med mellanhänder) • Licensera • Franchising • Kontrakt-tillverkning • Dotterbolag som sköter försäljning • Tillverkande dotterbolag • Strategiska allianser (samägda dotterbolag) • Samarbete med annat bolag

Internationell verksamhet

7. Hur stor del av företagets totala försäljning är internationell? (i procent) 8. Under hur många år har företaget bedrivit internationell handel? 9. Varför valde företaget att bli internationella? 10. Hur började företaget internationalisera? 11. Till vilka länder började företaget sin internationalisering? 12. I vilka länder är företaget representerat idag? 13. Vilka framtida mål har företaget med att utöka sin internationella verksamhet? 14. Vilka är de viktigaste motiven idag när företaget väljer internationella marknader och

typ av inträde på marknaden? 15. Varför valde ni att gå in i en ny geografisk marknad den senaste gången ni gjorde det?

Interna faktorer

16. Hur har följande interna faktorer påverkat företagets val av internationella marknader?

• Kunskaper? • Resurser? • Produktanpassning? • Konkurrensfördelar? • Ledningens förmåga, flexibilitet och hängivenhet? • Planering och kontroll inom företaget? • Anställdas motivation och förmåga?

17. Hur har följande interna faktorer påverkat företagets val av inträde på den internationella marknaden?

• Tid att ta sig in på marknaden? • Resurser? • Flexibilitet? • Risker? • Återbetalningstid av investering? • Långsiktiga mål?

APPENDIX 2

• Ledningens påverkan? • Typ av produkt? • Företagets storlek? • Internationell erfarenhet? • Relationer?

18. Hur hanterar ni risker vid nyetablering på internationella marknader?

Företagsstruktur

19. Hur ser ert organisationsschema ut?

20. Hur samlar ni in information om andra länders marknadssituation?

21. Hur tas beslut om på vilket sätt ni går in i en ny internationell marknad?

Konkurrens 22. Vilka konkurrenter anser ni att ni har nationellt/ internationellt?

23. Hur skaffar ni kunskap om på vilket sätt era konkurrenter går in på nya internationella

marknader?

Mål 24. Vilka mål har ni när ni etablerar er på en ny internationell marknad? 25. Hur har följande målfaktorer påverkat företagets val av inträde på den

internationella marknaden? • Marknadsandelsmål? • Vinstmål? • Etableringstid? • Tid till avkastning på investering?

Internationell etablering 26. Hur har ni lyckats i tidigare internationella marknadsinträden?

27. Hur påverkar era tidigare erfarenheter av specifika inträdessätt era val av

etableringssätt på nya internationella marknader?

28. Hur snabbt har ni visat positivt resultat på era tidigare nystartade aktiviteter på en ny marknad?

Strategi

29. Vad har ni för strategi vid inträde på en ny internationell marknad?

APPENDIX 2

Externa faktorer

30. Hur har följande externa faktorer påverkat företagets val av internationella marknader?

• Geografiskt avstånd? • Sociala och kulturella skillnader? • Lagar och förordningar? • Infrastruktur? • Stabilitet i växelkurs? • Kunskap och information om marknaden? • Politisk stabilitet? • Handelshinder? • Skattefördelar? • Marknadens storlek och tillväxt? • Konkurrens? • Kostnader att verka på marknaden? • Osäkerhet att bedöma efterfrågan?

31. Hur har följande externa faktorer påverkat företagets val av typ av inträde på

den internationella marknaden?

• Geografiskt avstånd? • Sociala och kulturella skillnader? • Lagar och förordningar? • Infrastruktur? • Stabilitet i växelkurs? • Kunskap och information om marknaden? • Politisk stabilitet? • Handelshinder? • Skattefördelar? • Marknadens storlek och tillväxt? • Konkurrens? • Osäkerhet att bedöma efterfrågan?

32. Hur ser företagets strategi ut för inträde på internationella marknader med stor

tillväxthastighet?

33. Vilka reststriktioner har ni att följa från svenska staten vad gällande handel?

34. Vilka faktorer på svenska marknaden påverkar företagets val av inträdessätt på nya internationella marknader?

Documents

The influence of internal and external factors on entry modes