Essay: Critically discuss the various modes of entry for which an

organization can internationalise their operations. Is there one

mode that is preferred above others?
Introduction
This essay will discuss the entry modes for international/foreign market operations. Foreign
market entry mode decisions are typically influenced by company and target market factors
such as: the organisations objectives, its international experience, internal resources and
capabilities, investment risk, government requirements, environment, access to local
knowledge and partners and ease of access to capital and other resources. This essay will
argue that there is no one mode that is universally preferred above others, rather appropriate
entry mode decisions should be made based on careful consideration of the organisations
objectives and circumstance.

Reasons for internationalising business operations

Organisations engage in international business operations for various reasons including
globalisation, saturation of home market, lower production costs in host country, favourable
foreign market environment and attractive foreign investment policies, with the ultimate goal
of increasing profit, expansion and tackling competition. A major decision for organisations
engaging in international operations is that of how to enter a foreign market once it has
chosen the target market it wants to operate in (Kumar & Subramaniam, 1997; Twarowska &
Kakol, 2013; Wach, 2014).
How an organisations international operation is structured and delivered is very much
determined by its entry mode/strategy. Hence, the entry mode is a key strategic decision that
defines subsequent decisions and actions of the organisation and its performance in the
target market (Kumar, Stam & Joachimsthaler, 1994; Kumar & Subramaniam, 1997).

Foreign Market Entry Modes

The international business and marketing literature classify entry modes for international
business operations into the following categories based on the risk-return trade-off, degree
of control, and resource commitment: exporting, contractual agreements, wholly owned
subsidiaries and strategic alliances. These modes can be segmented into non-equity (export
and contractual agreements) and equity (strategic alliances and wholly-owned subsidiaries)
modes (Mpofu & Chigwende, 2013).

The decision about whether an organisation implements an equity or non-equity foreign

market entry strategy is best determined by the organisations objectives and circumstance.
Within that decision, and depending on the organisations capability and level of international
experience, there are also choices to be made regarding specific equity or non-equity entry
modes to be implemented (Hibbert, 1997; Kumar & Subramaniam, 1997).

Non-equity foreign market entry modes

Exporting:
Exporting is the direct or indirect sale of goods and services produced in one country to
other countries. Exporting offers the lowest level of risk and the least market control. It is a
non-equity method of international business operations and can be broadly classified into
direct exporting, indirect exporting and cooperative exporting (Wach, 2014).

With direct exporting, the exporter makes direct contact with customers in the foreign market
and has control over its product and distribution. Types of direct exporting include: own
sales subsidiary/distribution network, own representative office for marketing, sales, and
consultation in the foreign market, foreign agents acting on behalf of the exporter and foreign
distributors (Wach, 2014).

Indirect exporting involves the use of local intermediaries in foreign markets to facilitate the
supply/distribution process and the exporter has no control over its products and distribution.
Forms of indirect exports include: Export trading companies, Export management
companies, Export merchants, Confirming houses, and Nonconforming purchasing agents
(Wach, 2014).

Direct exporting and indirect exporting share similar characteristics as both offer relatively
low cost and low risk entry modes (Arnold, 2003). However, direct exporting may incur
additional costs, for example, in the set up and operation of representative offices. There is
also the risk of low profitability and barrier to developing in-house local knowledge in indirect
exports or when foreign agents are used in direct exporting (Wach, 2014).

The third form of exporting, cooperative exporting, is one in which organisations enter into
agreement with a foreign/local organisation to use its distribution network, hence bypassing
barriers and risks associated with other market entry modes.

Cooperative exporting is

particularly favourable to small and medium sized firms because of the resource advantages
and the accelerated access to market that it offers (Wach, 2014).

Export grouping/consortium and piggybacking are two main forms of cooperative exporting.
With an export consortium, members benefit from joint promotion of products and services
and the cost of exporting is spread (Wach, 2014). Piggybacking is an arrangement between
a rider (a small/micro business) and a carrier (a larger organisation) in which the carrier is an
international business operator offering the rider access to its foreign distribution network for
a commission/charge (Terpstra & ChwoMing 1990). The carrier often benefits from the
complementary product lines and reduction of the costs of its distribution network, however it
runs the risk of dilution or damage to its reputation if the riders products are of lesser quality.
The rider enjoys the benefits of access to the carriers foreign distribution network but loses
control over the distribution of its product (Wach, 2014).

Contractual Agreements:
Contractual agreements are cooperative modes in which an organisation enters into a
contract with foreign partners to deliver its operations abroad. Examples include international
licencing, franchising, subcontracting and assembly operations.

In international licensing, the licensor enters into a contractual agreement with a foreign
entity (the licensee) that gives the licensee rights to use assets of the licensor (Wach, 2014).
The licensor typically possesses intangible assets such as technology, trademark, knowhow, patents or other intellectual property that it makes available to the licensee. The
licensee would typically pay an initial fee and/or percentage of sales to the licensor. The
effectiveness of this form of contractual agreement is affected by the host governments
commitment to intellectual property rights and the ability of the licensor to choose the right
licensing partners (Wach, 2014). Licensing is attractive to companies that are new to
international business because it can be easily tailored to the needs of both parties. It also
provides entrance into new markets that are not accessible through exporting and it involves
relatively low risk and low capital requirement (Friesner, 2014).

Disadvantages associated with international licensing as an entry mode include loss of

intellectual property/dilution of firm specific advantages through transfer of know-how, risk of
poor choice of licensee leading to damaged reputation or loss of brand quality, and risk of
licensee becoming a future competitor to the licensor (Brouthers, 2013; Friesner, 2014;
Wach, 2014).

International franchising is another form of contractual agreement similar to licensing, in

which the franchisor makes its business model or trademark available to the franchisee for
the sale of its products or services. In return, the franchisee pays a fee or royalty to the
franchisor (Malhotra et al. 2003). The low start-up cost associated with this entry mode
highly favours SMEs, and is particularly attractive to small and micro enterprises (Wach,
2014). A franchise agreement may provide the franchisee with access to franchisor
equipment, business model, training, trademark/brand name, operations and management.
It may also impose restrictions/guidelines on how the franchisee may use the franchise
(Mpofu & Chigwende, 2013). Franchising is a less risky and accelerated form of foreign
market entry mode because it is based on an already successful business model, the
franchisee typically has local knowledge and it allows simultaneous access to multiple
foreign markets. Hence, the franchisor is protected from typical risks associated with foreign
market operations (Mpofu & Chigwende, 2013). However, there are other problems that the
franchisor may have to contend with, such as: legal disputes with the franchisee, monitoring
and managing the performance of the franchisee, preserving franchisors image/brand
quality, and the risk of the franchisee becoming a future competitor (Wach, 2014). Overall,
the benefits associated with franchising is seen to outweigh the associated risks and hence it
is a popular foreign market entry and expansion mode (Hoy and Stanworth, 2003; Cavusgil
et al. 2008; Decker, 2013). Well known examples of successful franchises include KFC,
McDonalds, Subway, and Dominoes, these brands were able to rapidly expand their
operations globally using the franchise platform in a way that would not have been possible
through any other foreign market entry strategy.

Subcontracting - Turnkey operations: Turnkey operations refer to a project in which the

exporter (seller) is paid by a contractor (buyer) to design and build complete, ready-tooperate facilities. Turnkey is a way by which a foreign company can export its processes and
technology to other countries, especially industrial companies who need to export their entire
system to a foreign country such as those in the chemical, mining or petroleum industries
(Evans, 2005; Wach, 2014). With turnkey, there is the potential risk of company secrets
leaking to competitors and of the plant being taken over by the government. Large turnkey
projects could also suffer costly delays due to restrictive regulations. However, this entry
mode is particularly advantageous for industrial companies that specialize in complex
production technologies as it offers access to establish a plant in a foreign country where
direct investment is restricted (Evans, 2005).

Equity based foreign market entry modes

Equity based market entry modes are investment models whereby a company either
establishes a wholly-owned subsidiary, with 100% ownership or a joint venture subsidiary,
with less than 100% ownership. A subsidiary is a separate legal entity operating under the
laws of its country of foreign location. However, in legal terms, subsidiaries are created in
one of the legal forms of economic activities occurring in the law of the host country.
(Buckley & Casson, 1998; Wach, 2014).

Wholly owned subsidiaries are established either through acquisitions, whereby the
organisation acquires a foreign company to enter a foreign market or through greenfield
operations, which involves building a new organisation from start. With acquisition, the
organisation is able to limit its risk and maximise its access to the foreign market because of
the already established brand name and customer-base of the acquired company, which
provides it with accelerated access and foothold in the foreign market. Hence, acquisition
can potentially be the quickest route to entering and expanding in foreign markets through
equity (Buckley & Casson, 1998; Wach, 2014).

Greenfield operations offers a more expensive equity mode of foreign market entry due to
the costs of establishing a new business in a new country and the time consuming process it
entails, however it is gives full control to the parent company and has the potential to
produce above average returns (Wach, 2014).

Both modes are based on foreign direct investment and provide relatively lower production
costs and a direct presence in the foreign market. However, from a strategic perspective,
acquisition strategy is likely the more effective choice in service industries where customer
relationship, specialised know-how and customisation are critical. Greenfield investment on
the other hand, is likely more suited to projects involving capital intensive plants, where there
are no suitable platforms to acquire already established competitive advantages such as
skills and embedded capabilities. (Buckley & Casson, 1998; Wach, 2014).

The final form of equity based market entry mode discussed is the joint venture subsidiary.
An international joint venture (JV) is a collaborative equity strategy in which the organisation
has joint control, minority shares or majority shares in a foreign company. In JVs, investors
share ownership, control, risk, reward and proprietary rights (Durmaz and Tasdemir, 2014).
Primary reasons for forming a JV include sharing resources and leveraging on the combined

strengths of the partners to achieve common objectives such as government requirements

and access to new markets that the partners cannot achieve singularly (Wach, 2014). The
shared risk and the combined assets and resources of the partners help to reduce
investment costs hence making JVs, an attractive entry mode for risky markets (Durmaz and
Tasdemir, 2014). Potential problems that could arise with JVs include: how to manage
proprietary rights, disagreement over reward formula, cultural clashes and how to exit
(Chang et al., 2012). Environmental factors also play a significant role in this entry mode.
Studies indicate that the greater the perceived distance between the home and host country
in terms of culture, economic systems, and business practices, the more likely it is that an
international organisation will adopt joint venture as an entry mode (Koch, 2001).

To summarise, it is clear from the entry modes discussed that there are a variety of reasons
why organisations engage in international business and that the entry mode adopted differ
for various reasons. Likewise, entry modes vary in the degree of risk, control, resource
commitment and reward. When an organization enters a foreign market, it is important to
understand where they are positioned in relation to these variables in order to enable the
right decisions about which markets to enter, the segments to focus on, the structural form to
take, the level of investment and how to manufacture, market and sell its product/service.
Hence, organisations have to determine which entry mode will give them the best chance of
succeeding in their target market based on their goals and weighing their strengths and
limitations.

Conclusion
Based on the argument presented above, the author is of the opinion that there is not any
one market entry mode that is preferable above all others. Organisations wanting to
internationalize their operations, must perform prior due diligence including political,
economic, financial, internal, environmental and cultural analysis, in order to determine
which of the foreign market entry modes would be appropriate for its objectives, risk-return
profile and control requirements as well as any other vital requirements peculiar to the
organisations circumstance.

Completed Word Count: 2,189

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