ABSTRACT
Having decided to enter a foreign market, a multinational corporation (MNC) has to determine the appropriate mode for organizing its foreign business activities (Hill, Hwang and Kim, 1990). Firms entering foreign markets choose different entry modes ranging from licensing and franchising to foreign direct investments (joint ventures, acquisitions, mergers and wholly owned new ventures) (Rasheed, 2005). Foreign market entry mode is defined as ‘an institutional arrangement that makes possible the entry of a company’s products, technology, human skills, management, or other resources into a foreign country’ (Root, 1987). There are several theoretical streams dealing with this choice, such as economic factors analysis, transaction cost analysis, the OLI model and behavioural theory:
• Economic factors analysis. Buckley and Casson (1981) theorized that the entry-mode choice depends on the amount of fixed cost and variable cost associated with exporting or foreign production. The additional fixed costs involved in increasing home production to cater for exports are small. However, variable costs, including transportation costs and tariffs, will be high. Foreign production, by contrast, involves much larger fixed costs as it requires the acquisition of new production and distribution assets abroad. Variable costs, however, will be lower than for exporting because transportation and tariff costs are avoided. In these circumstances the most profitable mode will be determined by the level of demand. A low level of demand will not justify the fixed costs of foreign production, thus exporting will be optimal for small markets. Larger markets may justify the fixed costs required for foreign production. Buckley and Casson also suggested that firms will change the entry mode over time if the foreign market grows. Firms will begin by exporting and switch to licensing and foreign production as market size increases.
