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2007:075

D-UPPSATS

The influence of internal and


external factors on entry modes

Anna Puljeva
Peter Widn

Lule tekniska universitet

D-uppsats
Marknadsfring
Institutionen fr Industriell ekonomi och samhllsvetenskap

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 Masters 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.
Hkan Perzon at Lule University of Technology, as well as our family and friends.

Lule University of Technology, June 4, 2007

Anna Puljeva Peter Widn


ABSTRACT
As internationalization and globalization increases in todays 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 firms 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 companys resources and knowledge increase.
SAMMANFATTNING
Allt eftersom internationalisering och globalisering kar i dagens affrsvrld blir det
viktigare och viktigare fr enskilda fretag att vara delaktiga i utvecklingen. Hur ett
fretag gr till vga nr de sker sig utanfr sitt hemlands grnser fr att hitta nya
geografiska marknader r enormt viktigt fr hur de kommer att lyckas med hela deras
affrsverksamhet. Att vlja rtt marknadsintrdesstt r ett viktigt beslut som krver
stora resurser och noggrann planering. Nr fretaget skall vlja intrdesstt finns det
stora mngder interna och externa faktorer som br beaktas innan det slutgiltiga
beslutet skall tas. Syftet med den hr uppsatsen r att skapa en strre frstelse fr
hur inverkan av interna och externa faktorer pverkar svenska sm och medelstora
fretag i deras val av marknadsintrdessttstrategier. Fr att n det syftet
konstruerades tv forskningsfrgor gllande hur de interna och externa faktorerna
pverkar svenska sm och mellanstora fretags val av marknadsintrdesstt. Utifrn
forskningsfrgorna genomfrdes en litteraturstudie, vilket resulterade i upprttandet
av en teoretisk referensram, som fungerade som guide fr vad fr data som skulle
samlas in. Fr datainsamlingen anvndes en kvalitativ fallstudiemetodologi, en
flerfallsstudie med intervjuer som huvudsaklig datainsamlingsklla. De huvudsakliga
slutsatserna gllande de interna faktorerna i denna uppsats r att, fretags
storlek/resurser begrnsar mjligheterna att vlja marknadsintrdesstt som krver
stora resurser, det pverkar ocks ledningens attityd gllande risktagande t att bli
mindre bengna att ta risker. Vidare antyder resultaten att ven om fretagen i
uppsatsen inte exkluderar ngot intrdesstt, fredrar de intrdesstt som de har
tidigare erfarenhet av. Resultaten visar ocks att motiven fr att inleda fretagets
internationalisering r att den inhemska marknaden inte r tillrckligt stor, eller r
mttad. Vi har ocks hittat belgg fr att valet av intrdesstt beror p fretags kort-
och lngsiktiga ml. De huvudsakliga slutsatserna gllande de externa faktorerna i
den hr uppsatsen r att branschens genomfrbarhet/godtagbarhet av ett visst
intrdesstt pverkar valet av marknadsintrdesstt, eftersom fretaget i frga
kommer att frndra vilket stt de trder in p en specifik marknad fr att undvika
komplikationer p grund av lagar och frordningar. Detta r ytterligare frstrkt av
faktorn handelshinder eftersom fretaget kan tvingas att vlja ett specifikt
marknadsintrdesstt fr att undvika straffskatter och dylika hinder fr fri handel.
Mlmarknadens produktionsfaktorer kan verbryggas av genomfrandet av vl
genomtnkta strategier, utan att pverka fretagets val av internationella
marknadsintrdesstt. Slutligen visar vra data p att det geografiska avstndets
inflytande p intrdessttet minskar i samband med att fretagets resurser och
kunskaper kar.
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 firms choice of
international market entry mode?..................................................................... 20
2.3.2 Research question 2 - How do external factors influence firms 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 firms
choice of international market entry mode?...................................................... 29
4.1.2 Case 1 Data regarding RQ2: How do external factors influence firms
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 firms
choice of international market entry mode?...................................................... 32
4.2.2 Case 2 Data regarding RQ2: How do external factors influence firms
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 FIRMS
CHOICE OF INTERNATIONAL MARKET ENTRY MODE?..........................................................46
6.2 RESEARCH QUESTION 2 HOW DO EXTERNAL FACTORS INFLUENCE FIRMS
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. 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 companys 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

1
INTRODUCTION

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, Majkgrd 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 firms 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 todays 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 companys international business activities to reach
sustainable growth on the international market. He further emphasizes that it is important
to realize that a companys 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 companys 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
companys products, technology, human skills, management, or other resources to enter
into a foreign country (Root, 1994).

2
INTRODUCTION

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 economists 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

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INTRODUCTION

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 companys 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 firms
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).

4
INTRODUCTION

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 cooperations
(MNCs). 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. SMEs also face external barriers such
as laws and regulations and imperfections to a higher extent than MNCs (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 SMEs 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 SMEs 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 SMEs
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 SMEs performance when internationalizing and specifically regarding
issues that SMEs face with their foreign subsidiaries.

5
INTRODUCTION

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 companys choice of its entry mode for a given
product/ target country is a net result of several, often conflicting forces.

The factors influencing companys 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 companys 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 firms choice of international market entry


mode?

RQ 2: How do external factors influence firms 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 companys 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.

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INTRODUCTION

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 CHAPTER 6
Introduction Conclusions & Implications

CHAPTER 2 CHAPTER 5
Literature Review Data Analysis

CHAPTER 3 CHAPTER 4
Methodology Data Presentation

Figure 1.1: Outline of the thesis

7
LITERATURE REVIEW

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 firms choice of international market
entry mode and to our second research question regarding the external factors influence on
firms 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 companys 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

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LITERATURE REVIEW

likely it is for the company to select countries that show greater long-term prospects and
promise to enhance the firms 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 managers 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.

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LITERATURE REVIEW

INDUSTRY
FEASIBILITY/
VIABILITY OF MEM
EXPERIENCE IN CALCULATION
USING INDIVIDUAL METHODS APPLIED
MEMs

MANAGEMENT CHARACTERISTICS
RISK ATTITUDES OF THE COUNTRY
BUSINESS
ENVIRONMENT

MARKET BARRIERS SUFFICIENCY AND


RELIABILITY OF
INFORMATION INPUTS

POPULARITY OF MARKET ENTRY


INDIVIDUAL MEMs IN MODE SELECTION
THE OVERSEAS MANAGEMENT LOCUS
MARKET OF CONTROL

PROFIT TARGETS MARKET GROWTH


RATE

GLOBAL
MANAGEMENT
EFFICIENCY MARKET SHARE
REQUIREMEMENTS TARGETS

IMAGE SUPPORT COMPANY SIZE/


REQUIREMENTS RESOURCES
COMPETENCIES,
CAPABILITIES AND
SKILLS REQUIRED/
AVAILABLE FOR EACH
MEM

External category
Mixed category
Internal category

Figure 2.1: Factors influencing market entry mode selection


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

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LITERATURE REVIEW

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 companys 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 companys 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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LITERATURE REVIEW

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 companys 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.

External Factors
Target country Target country Target country Home country
Market factors Environmental Production factors
factors factors

Foreign market
entry mode
decision

Country Company
product factors resource /
commitment
factors

Internal Factors
Figure 2.2: Factors in the entry mode decision
Source: Adapted from Root (1994), p.9

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LITERATURE REVIEW

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 companys 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 companys 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
companys 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 managements
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 companys choice
of marketing channel? Limited resources can limit the companys freedom of choice when
choosing a marketing channel (Bruhno and Schilt, 2001).

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

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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)?

Motive

Networks Goals

Customer Strategy
relationships
Entry mode
selection

Competitors Market

Resources Product

Management

Figure 2.3: Influencing factors in entry mode selection


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

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LITERATURE REVIEW

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.

TABLE 2.1 Internal factors influencing the Entry Mode Decision


Indirect Licensing Branch/ Equity Service
and Subsidiary Investment/ Contracts
Agent/ Exporting Production
distributor
Exporting
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

2.2 EXTERNAL FACTORS


2.2.1 Theory by Koch (2001)
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

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LITERATURE REVIEW

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 companys resources and, sooner or later, results in a re-
definition of the companys 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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LITERATURE REVIEW

2.2.2 Theory by Root (1994)


As mentioned earlier, Root (1994) argue that a companys 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 countrys
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 companys 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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LITERATURE REVIEW

Home Country Factors


Market, production, and environmental factors in the home country also influence a
companys 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).

2.2.4 Theory by Bruhno and Schilt (2001)


Bruhno and Schilt (2001) have developed a model where they present internal and external
factors that influence a companys 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 companys 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 companys
choice of marketing channel on the respective market (Bruhno and Schilt, 2001)?

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LITERATURE REVIEW

2.2.5 Additional theory by Root (1994)


Root (1994) has summarized the influence of external factors on the choice of entry mode as
shown in Table 2.1.
TABLE 2.1 External factors Influencing the Entry Mode Decision
Indirect Licensing Branch/ Equity Service
and Subsidiary Investment/ Contracts
Agent/ Exporting Production
distributor
Exporting
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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LITERATURE REVIEW

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 firms


choice of international market entry mode?
In order to answer the first research question we will among others rely on Kochs (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 Profit targets


Management risk attitudes Experience in using individual
Market share targets 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.

Roots (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 Customer relationships


Goals Networks
Strategy

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LITERATURE REVIEW

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, Roots (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 High products adaptation


Standard products Limited resources
Service-intensive products Substantial resources
Service products Low commitment
Technology-intensive products High commitment
Low products adaptation

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 firms


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 Market growth rate


Characteristics of the overseas country Market barriers
business environment

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 Kochs
(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 Home country factors


Target country production 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 Roots (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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LITERATURE REVIEW

Regarding Hollensens (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
Shilts (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
Roots (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 Great geographical distance


High sales potential Dynamic economy
Poor marketing infrastructure Stagnant economy
Good marketing infrastructure Exchange rate depreciation
Low production cost Exchange rate appreciation
High production cost Small cultural distance
Restrictive import policies Great cultural distance
Liberal import policies Low political risk
Small geographical distance High political risk

External factors (Home country):

Large market High production cost


Small market Strong export promotion
Low production cost 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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METHODOLOGY

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.

Research Research Research Data Sample Data


Purpose Approach Strategy Collection Selection Analysis

Validity & Reliability

Figure 3.1: Schematic Presentation of Chapter 3


Source: Adapted from Foster (1998), p.81

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 SMEs 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.

23
METHODOLOGY

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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METHODOLOGY

strives to provide a better understanding of the of impact internal and external factors on
Swedish SMEs 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 authors 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 companys internal and external factors influencing their foreign market entry
mode that we needed for this thesis.

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METHODOLOGY

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: Lckeby Water
AB and Nordic Water AB. Lckeby 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 Lckeby 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,

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METHODOLOGY

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 studys 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 companys 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 SMEs 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

27
METHODOLOGY

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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EMPIRICAL DATA

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,
Sren Andersson and Per Mellergrd founded the company in 1990. Mevas annual turnover
is approximately 250300 million SEK and the company has roughly 1215 million SEK in
annual profit. There are 70 employees divided on five locations in Sweden. The companys
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. Mevas 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 1015 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 companys 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


firms choice of international market entry mode?
The single most important internal factor is the managements ability, flexibility and
dedication, since it is the managements 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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EMPIRICAL DATA

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 companys 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 companys 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.

Mevas 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 consultants 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 Mevas 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 Mevas 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 peoples Republic of China and the USA. The reason for failure in

30
EMPIRICAL DATA

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


firms 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 Mevas involvement.

Mevas 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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EMPIRICAL DATA

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 groups 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. Puracs 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 Peoples 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 Puracs 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


firms 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 companys
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
companys success with internationalization. Finally, the employee motivation and ability for
international engagement is high, since it has been a clearly stated part of the companys
strategy for many years.

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EMPIRICAL DATA

Regarding the companys 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 companys 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 companys 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-ingenjrerna, furthermore they consider their main international
competitors to be Veolia and Degrmont, 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
companys 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 companys main strategy for entering new
international markets is to grow through finding strong local partners, which allows them to

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EMPIRICAL DATA

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


firms 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 Puracs 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 companys 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.

Puracs strategy when it comes to markets with high growth rate is to follow the development
of new emerging markets such as Peoples 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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DATA ANALYSIS

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

5.1.1 Theory by Koch (2001)


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 companys 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. Kochs
(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. Kochs (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 companys 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 Kochs
(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 companys positive view of the future, according to
Kochs (2001) theory should make them less risk averse, which is not the case thus the theory

35
DATA ANALYSIS

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 Kochs (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 companys experience
influences them in the way that they have a preferred mode of entry in cooperation with a
large international firm, thus supporting Kochs (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).

36
DATA ANALYSIS

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 companys 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 Pettitts (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
companys 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 companys 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 companys choice of
market entry mode, especially since the product differentiation is negligible, and thereby
contradicts the theory stated by Hollensen (2001).

37
DATA ANALYSIS

5.1.4 Theory by Bruhno and Schilt (2001)


Bruhno and Schilt (2001) have also developed a model in which the authors present internal
and external factors that influence a companys 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 Schilts (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
companys 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 companys choice of
international market entry mode, the theory stated by Bruhno and Schilt (2001) is verified.
Furthermore, case two revealed that the companys 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 Peoples Republic of China and India. The companys long-term
goal is to increase their sales of biogas in the United States. Thereby further verifying Bruhno
and Schilts (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 Schilts (2001) theory, since a
non-existing strategy cannot affect the companys choice of market entry mode. Our findings
in case two however, verifies Bruhno and Schilts (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).

38
DATA ANALYSIS

Networks
Bruhno and Schilt (2001) state that the companys 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 companys 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.

5.1.5 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 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.
TABLE 5.1 Internal factors influencing the Entry Mode Decision
Internal Factors: Case one Case two Preferred entry mode
Meva Purac
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

When placing the company in case one in Roots (1994) table our findings reveled that the
companys 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 Roots (1994) theory use the entry mode of
Licensing or Branch/ subsidiary exporting. After comparing our findings to the factors in
Roots (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 companys 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

39
DATA ANALYSIS

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.

TABLE 5.2 Summarization of findings regarding RQ 1.


Theory Factor Case 1 - Meva Case 2 - Purac
Koch (2001) Company size/resources Verifies Verifies
Management risk attitudes Contradicts Contradicts
Market share targets Contradicts Verifies
Profit targets Verifies Contradicts
Experience in using individual Verifies Verifies
MEMs

Brassington and Payback Contradicts Contradicts


Pettitt (2000) Speed Contradicts Contradicts

Hollensen (2001) Complexity and differentiation Contradicts Contradicts


of the product

Bruhno and Schilt Motive Verifies Verifies


(2001) Goals Verifies Verifies
Strategy Contradicts Verifies
Customer relationships Contradicts Contradicts
Networks Verifies Verifies

Root (1994) Preferred entry mode Contradicts Contradicts

40
DATA ANALYSIS

5.3 CASE ANALYSIS RESEARCH QUESTION 2


5.3.1 Theory by Koch (2001)
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 companys 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 companys 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 companys 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

41
DATA ANALYSIS

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).

5.3.2 Theory by Root (1994)


Root (1994) argues that a companys 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 companys 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).

42
DATA ANALYSIS

Home country factors


Root (1994) state that home country factors such as market, production, and environmental
factors also influence a companys 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.

5.3.3 Theory by Bruhno and Schilt (2001)


Bruhno and Schilt (2001) have developed a model where they present internal and external
factors that influence a companys 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).

43
DATA ANALYSIS

5.3.4 Additional theory by Root (1994)


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
Roots (1994) table to be able to perform a relevant analysis of the theory.

TABLE 5.3 External factors influencing the Entry Mode Decision


Case one Case two Preferred entry mode
Meva Purac
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 Roots (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

44
DATA ANALYSIS

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.

TABLE 5.4 Summarization of findings regarding RQ 2.


Theory Factor Case 1 - Meva Case 2 - Purac
Koch (2001) Industry feasibility/ viability of Verifies Verifies
MEM
Characteristics of the overseas Contradicts Verifies
country business environment
Market growth rate Contradicts Contradicts
Market barriers Verifies Verifies

Root (1994) Target country market factors Contradicts Contradicts


Target country production Contradicts Contradicts
factors
Home country factors - -

Root (1994) and Geographic distance Verifies Verifies


Bell (1995)

Bruhno and Schilt Competitors Contradicts Verifies


(2001)

Root (1994) Preferred entry mode Contradicts Contradicts

45
CONCLUSIONS AND IMPLICATIONS

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 FIRMS 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 SMEs 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

46
CONCLUSIONS AND IMPLICATIONS

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 companys 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 companys 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 FIRMS 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.

47
CONCLUSIONS AND IMPLICATIONS

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 companys 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.

48
CONCLUSIONS AND IMPLICATIONS

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.

49
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52
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 companys 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 companys 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 companys 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 companys 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 companys 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 companys 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 companys 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 companys 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 companys 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 companys 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 companys choice of entry mode into
new international markets?
APPENDIX 2

Bakgrundsfrgor
1. Namn och titel p respondenten?
2. Vem grundade fretaget och nr?
3. Fretagets omsttning och resultat?
4. Hur mnga anstllda har ni i ert fretag?
5. Vad r fretagets huvudsakliga verksamhet?

6. Vilken typ av intrde p internationella marknader har fretaget utnyttjat?


Direkt export (utan mellanhnder)
Indirekt export (med mellanhnder)
Licensera
Franchising
Kontrakt-tillverkning
Dotterbolag som skter frsljning
Tillverkande dotterbolag
Strategiska allianser (samgda dotterbolag)
Samarbete med annat bolag

Internationell verksamhet
7. Hur stor del av fretagets totala frsljning r internationell? (i procent)
8. Under hur mnga r har fretaget bedrivit internationell handel?
9. Varfr valde fretaget att bli internationella?
10. Hur brjade fretaget internationalisera?
11. Till vilka lnder brjade fretaget sin internationalisering?
12. I vilka lnder r fretaget representerat idag?
13. Vilka framtida ml har fretaget med att utka sin internationella verksamhet?
14. Vilka r de viktigaste motiven idag nr fretaget vljer internationella marknader och
typ av intrde p marknaden?
15. Varfr valde ni att g in i en ny geografisk marknad den senaste gngen ni gjorde det?

Interna faktorer
16. Hur har fljande interna faktorer pverkat fretagets val av internationella
marknader?
Kunskaper?
Resurser?
Produktanpassning?
Konkurrensfrdelar?
Ledningens frmga, flexibilitet och hngivenhet?
Planering och kontroll inom fretaget?
Anstlldas motivation och frmga?

17. Hur har fljande interna faktorer pverkat fretagets val av intrde p den
internationella marknaden?
Tid att ta sig in p marknaden?
Resurser?
Flexibilitet?
Risker?
terbetalningstid av investering?
Lngsiktiga ml?
APPENDIX 2

Ledningens pverkan?
Typ av produkt?
Fretagets storlek?
Internationell erfarenhet?
Relationer?

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

Fretagsstruktur
19. Hur ser ert organisationsschema ut?

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

21. Hur tas beslut om p vilket stt ni gr in i en ny internationell marknad?

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

23. Hur skaffar ni kunskap om p vilket stt era konkurrenter gr in p nya internationella
marknader?

Ml
24. Vilka ml har ni nr ni etablerar er p en ny internationell marknad?

25. Hur har fljande mlfaktorer pverkat fretagets val av intrde p den
internationella marknaden?
Marknadsandelsml?
Vinstml?
Etableringstid?
Tid till avkastning p investering?

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

27. Hur pverkar era tidigare erfarenheter av specifika intrdesstt era val av
etableringsstt p nya internationella marknader?

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

Strategi
29. Vad har ni fr strategi vid intrde p en ny internationell marknad?
APPENDIX 2

Externa faktorer
30. Hur har fljande externa faktorer pverkat fretagets val av internationella
marknader?
Geografiskt avstnd?
Sociala och kulturella skillnader?
Lagar och frordningar?
Infrastruktur?
Stabilitet i vxelkurs?
Kunskap och information om marknaden?
Politisk stabilitet?
Handelshinder?
Skattefrdelar?
Marknadens storlek och tillvxt?
Konkurrens?
Kostnader att verka p marknaden?
Oskerhet att bedma efterfrgan?

31. Hur har fljande externa faktorer pverkat fretagets val av typ av intrde p
den internationella marknaden?
Geografiskt avstnd?
Sociala och kulturella skillnader?
Lagar och frordningar?
Infrastruktur?
Stabilitet i vxelkurs?
Kunskap och information om marknaden?
Politisk stabilitet?
Handelshinder?
Skattefrdelar?
Marknadens storlek och tillvxt?
Konkurrens?
Oskerhet att bedma efterfrgan?

32. Hur ser fretagets strategi ut fr intrde p internationella marknader med stor
tillvxthastighet?

33. Vilka reststriktioner har ni att flja frn svenska staten vad gllande handel?

34. Vilka faktorer p svenska marknaden pverkar fretagets val av intrdesstt p nya
internationella marknader?