School of Business, Economics and IT

Division of Business Administration

Analyzing and Managing Foreign Modes

of Entry.

Course : IFD 900

Autumn 2016
Authors:

USMAN AYOUB
KASHIF USMAN KHAN
Administration

Supervisor:
Ahmad Ahmadi
Ph.D., in Business

Contests:
1.
Introduction
.1
1.1
Background.1
1.2 Problem Description.
2
1.3
Purpose..3
1.4 Research
Question.3
2.
Methodology
..4
2.1 Research
Method.4
3. Empirical
Description
.5
3.1 Case Study of Theme Park.
.6
3.2 Case Study of
Haier.7
3.3 StarBucks.
8
3.4 Case Study of
Huawei.9
3.5 Case Study of
lvsbyhus.9
4.
Theory
.10
4.1 Exporting.

...10
4.2 Contract Manufacturing.
.11

4.3
Licensing
.11
4.4
Franchising
.11
4.5 Wholly-Owned
Subsidiaries
.11
5.
Interpretation
..12
6.
Conclusion
..13
7.
References
..14

1. Introduction:
Now the world is going towards globalization, every company wants to produce more profit
and know companies are establishing their businesses globally for different purposes, some
of them are Increasing profit, Increasing sales, new innovations, Effective production, New
market opportunities, Competitive advantages and etc. But for entering foreign market
companies must analyze various internal factors as well as some external factors which can
effect directly the decision for entering global market. Some of the internal factors are Firm
size, Firm marketing strategy, its international experience, profit related to competition,
degree of control and commitment and external factors are environmental, political, legal
environment, culture environment, language barriers, economic environment, have been
identified as contingency variable that effect foreign market entry choice. International
organizations adopt different modes of entry for entering foreign market which are; Exports,
Countertrade, Contract manufacturing, Licensing, Franchising, Non-equity Strategic alliance,
Equity-based joint venture. Wholly owned subsidiaries, Foreign Direct Investment,
Acquisition, Joint Ventures. So in our literature we study different modes of entry for
adopting foreign market which can be chosen by a company to enter a new market, how they
compete and achieve goals in global market by understanding all these factors.

1.1. Background:
During two decades it is identified that every organization expanding their businesses
globally. The layer of Global-Trade brought a lot of opportunities and challenges. In modern
era more and more firms and organizations are becoming involved in international activities.
Most of the countries eliminate trade barriers and opening borders for international trade by
joining WTO which acts as intermediary for reaching global market. According to Ohmae
(1994) global localization is the advance form of globalization process which means
management has local and global orientation with different external factors influencing parent
and host country such as legal, political, cultural and economic distances. As every
organization must choose an entry method to enter foreign market. Rob and Vettas (2003)
developed a theory in which they describe two modes of entry Export and FDI (foreign direct
0

investment) to provide goods and services in foreign market. According to this theory
variable cost of export will higher than the FDI because of transportation cost, taxes, tariffs,
labor cost and fix cost of export is lower than the FDI. Rob and Vettas theory based on
variable and fix cost so it depends upon the decision making which is most important for
organization. Rao (2003) elaborates production cost and transaction cost. A firm decides to
move its production facilities to a foreign country if gains from internalizing transaction costs
are greater than costs incurred by investing in foreign countries. For example, a firm chose
FDI as mode of entry which means decreases transaction cost by searching foreign partner or
also reduce the number of contracts with other organizations across borders. (Kumar &
Subramanian, 1997; Twarowska&Kakol, 2013; Wach, 2014). Discuss that organizations
engage in foreign business operations for different reasons including goals of increasing
profit, attractive foreign investment policies, low cost in host country, expansion of business
or for competition. Most important is the decision of entry mode that how they enter in
foreign market and once it select the target market then it operates in that market. But the
efficiency of operation and output depend upon the decision making which mode of entry
organization chose for enter into foreign market. Entry modes for international business
operations are categories based on degree of control, resource commitment, exporting,
agreements, wholly owned subsidiaries and strategic alliances. These modes are divided into
non-equity (exports and contractual agreements) and equity (strategic alliances and wholly
owned subsidiaries) modes. (Pouf& Chigwende 2013). In Equity based entry Mode Company
establishes wholly-owned subsidiary, with 100% ownership or with joint venture subsidiary
with less than 100% ownership. Subsidiary has legal entity under laws of its country of
foreign location. In legal terms subsidiaries are created in one legal form of economic
activities occurring in the laws of host country (Buckley &Caisson 1998; Wach 2014).

1.2.
Problems
Identification:

description

and

Companies entering foreign market might face many problems because of business
environment and the way in which companies operate. An organization which use different
entry modes also faces different problems. But in our study we will focus on ownership of
international organizations specially when they use joint venture as mode of entry in foreign
market. Because in the ownership of international companies required proper control over all
1

operations effectively like in the case of Disney Theme park and Haier when they chose joint
venture as mode of entry they were not able to implement their decisions in their projects. As
we have chosen a common topic so there are also many other problems which can be face by
international organizations that are: language difference, culture difference, political
environment, trade barrier for non-region, restriction on different products, resources
requirement. So it is very important for international manager to search and analyze all
possible issues and make decision which entry mode is better for organization. They must use
their experience and failure or success of other companies experience which will help them
in making decision.

1.3. Purpose:
The purpose of this study is to contribute towards very important aspects of different modes
of entry which are used by multinational organizations to adopt global market. we have
discussed different case studies for understanding important factors in selecting entry modes
and implements them to reach international market. These case studies also help to
understand different entry modes not a specific mode and how organizations expand their
business internationally. Through this study we also understand the problems face by
multinational organizations when they select entry mode and how they solve these problems.
This study also indicates that how large and small enterprises set their goals to become
international. And then they select different modes of entry and then they implement their
modes of entry to enter international market.

1.4. Research Question:

Why companies use different modes of entry to enter in foreign market?

2. Methodology:
This part is the main section for any study as it defines how research will have conducted,
how the data is collected and it affect the result. This part is very interesting both for readers
and authors. Through this process we hold a track to conclude the study with all relevant
steps and readers concern about accuracy and results of the study. Methodology explains
research technique data analysis and the data which leads to the answers of research
questions. But in our literature we use Interpretation and secondary data collection method.
Secondary data means the data which is already collected and readily available from different
sources like internet, books and literatures. We use this method for data collection because. It
saves efforts and time saving. It helps to make primary data more specific since with the help
of secondary data, we are able to make out what are the gaps and deficiencies and what
additional information needs to be collected. It helps to improve the understanding of the
problem. It provides a basis for comparison for the data that is collected.

3. Empirical Description:
As we discussed above that it is a general topic so we will try to classify mode of entries
through different resources. According to Isobel Doole, Robin Lowe, in book of international
Marketing Strategy, Analysis development and implementation, 5th edition marketing entry
decision is determined by firms objectives and attitudes to international market and
capability of its managers to operate in foreign countries. Various alternative market entry
methods

are shown in figure 1. which help us to understand span of international

involvement from almost zero to upwards

In this literature we discuss about the level of ownership in different mode of entries through
different case studies.
In the case of Disney theme parks, its an opportunity to test about major theories in setting of
large investment with little chance of adverse commitments. Disney Themes Park followed
internationalization process for entering new market like Tokyo, Japan, or Hong Kong. In
Disney successful strategies it follows a simple approach like involving with local partners to
transfer and adopt the Disney experience.
In 1992, Hong Kong government announced plans for Disney theme park which was finally
opened in 2005 and operated by jointly owned company by government of Hong Kong and
Disney called International Theme parks. Investment in this theme park is over HK$14
billion, the theme parks board of directors has 11 members; The Hong Kong Government
appoints five directors while Disney names four of them. Two independent non-executive
directors are jointly appointed by the Hong Kong Government and Disney. Disney selected a
joint venture as entry mode for Hong Kong. This entry mode is an option between a licensing
agreement and a WOS, with its own advantages and disadvantages. The main benefit of a
4

joint venture is, in this case, the close relationship with the local government that Disney is
developing. Asia is a complicated market and it usually pays to not only have the government
on your side, but to have it as a major investor. It also benefits the venture to have a local
partner with deep knowledge of traditions and customs. Thus, from and institutional and
cultural point of view the selection of a joint venture was justified.
A major disadvantage in this venture was, the company is not the majority shareholder in
joint company and depends on Hong Kong government for any major decisions moreover
other investments may be beneficial for Disney but they are not able to do because of
problems with partners another problem was the major risks of joint ventures is the
probability of a partner stealing the others capabilities in order to later compete on its own.
This is clearly a risk for the Hong Kong theme park and even more for the Chinese one.
Disney learnt its lesson and corrected its internationalization approach for its Hong Kong
venture. A hybrid approach was the right entry mode and this reflected in positive
performance for the company. The cultural differences between the US and Hong Kong are
high, thus confirming Disneys decision to select a Joint Venture as a mode of entry.
In 2nd case study we discuss the FDI (Foreign Direct investment) as entry mode. In this mode
the ownership remains in the hands of the company.
By understanding this case of Haier, it is more important to understand the management style
rather autocratic management style and which was reported to be something of a culture
shock to the American workers and whats more what made a real cultural shock was the
fact that the Chinese were surprised at the Americans surprise (Yi & Ye 2003, p.222). As in
china employees are expected follow to higher management decision but in US staff respond
with questions, ask about recommendations. But Haier introduce family concept in global
market which focus on different cultures and closed relationship. For avoiding different
cultures issue Haier adopted two ways firstly Haier focus and encourage learning from each
other and develop the concept of family where the employees from two different cultures
understand the value of each other. Secondly running local business in local way Haier to
deal with the cultural differences by showing respect the distinctive culture in the US factory
(Ichinamag.com 2009).
When Haier management realize company own R& D capacity is not enough they decide to
use FDI (Foreign direct investment) mode for entering in April 1999 Haier started project in

South Carolina with industrial park. There was the basic reason of this decision to start work
in US even most of the location were located worldwide.
Less significance of the high labor cost: it traditionally understands Chinese products have
low price derived from low production cost. China and other developing countries and thus
reduced the significance of the high labor cost in the US production (Zhang 2006, p.61).
Haier identified problem and decide to enter in new market through FDI and establish a
manufacturing plant in US. Through it Haier meet consumer habits, market demand and get
ownership advantage.
In our 3rd case study we explain that Starbucks use acquisition as mode of entry the purpose
of this mode was to retain ownership in their hands. Starbucks Corporation roaster coffee
shop brand in UK.

Starbucks acquisition 65 coffee company stores in UK May 1998

(Starbucks UK Home Page). For enter in new foreign market acquisition was the fastest way
for Starbucks. Schultz said Europe was a "major strategic opportunity to achieve our goal of
creating and building an enduring global brand" (Holmes 1998). Starbucks plan long term
strategy by opening 500 retail stores in Europe by the end 2003. Starbucks expand business
smartly by gaining opportunity of low competition level in earlier times. Starbucks become
Top 10 UK Best Places to Work in 2007 (Starbucks Homepage 2008). Starbucks UK was
listed as one of UK Top 50 Best Places to Work (ranked 34th), awarded by the Great Places
to Work Institute, in partnership with the Financial Times.
Starbucks corporation faces many problems during expanding its business in UK, the
management attitude problems. In 2001 Koch determined degree of risk depends on
companys financial situation, its strategic options, and competitiveness of the environment.
When Starbucks an American company enter in market of UK mainly faces cultural distance
between American and UK cultures. There was another problem faced by Starbucks, in 1998
UK coffee market was not mature, and competitive pressure was high.
From this case study of Starbucks, we conclude that company chose wholly-owned
subsidiary as mode of entry due to its expansion strategy and global management efficiency
requirements and Starbucks chose American-style operated coffee
company existing in the UK

In 1996 Huawei take a decision to enter e new market. They wanted to begin business in
Russia internationally. They use joint venture as mode of entry with Russian BetoKonzern
6

that was named as Beto-Huawei. That was very hard step for Huawei because they were new
in that market and spent four years before they got the first order. The initial stage of
internationalization, Huaweis market selection strategy was targeting the markets that have
weak telecommunication infrastructure but have great developing potential. First, because of
the network effect (Katz & Shapiro 1994) and telecommunication products related to
information security, Huawei first chose those host markets which have good relationship
with home country. Then, based on its own advantages of technological research and
development (R&D), Huawei chose the joint venture as the first foreign market modes.
AS hawei is one of the leading company but in 1996 hawei started business internationally
with Russia by using joint venture as mode of entry. The major problem was before entering a
new market they were not well prepaid. They did not study the culture of their consumers, not
studied the market level because of that, they spent a lot but get nothing and joint venture
with BetoKonzern was also failed for four years in helping them to take over this big
problem.
This study shows that internationalization of hi-tech firms from developing countries is
harder than those companies from developed countries. Organizations must have studied the
culture, market value, profit level, and other important issues which are helpful in doing a
good business before entering a new market. The hi-tech firms usually do not strictly follow
the stage theory. They often straightly employ the modes of joint ventures, FDI or
contractual entry modes to enter a new international market.
In our last case we discuss exports, it is very easy way for entering new market, in this mode
ownership plays very important role while doing businesses across borders. In 1980
Alysbyhus starting export when built house in Sweden sold in Finland. At the beginning
Alysbyhus made export through local sales representatives it was because of proper control
over the whole value chain. Alysbyhus started export to Norway in 1996 and Denmark in
1998. For testing new market Alysbyhus in 1996-1997 export made to Estonia and Lithuania
but found there is not enough demand of their products. After that Alysbyhus seek the market
of German but the problem was other Swedish companies already tried this but not success.
For entering in new market Alysbyhus chosen entry mode of direct exports through sales
representatives and direct Investment by opening production plant.
when company entering in new market by using export as mode of entry they face many
problems like transportation cost is very high one house delivery transportation required three
7

trucks. Alysbyhus also experiencing that they are losing their customer due to long delivery
time which was in 2004 for a wooden house in Sweden was almost one year.
Alysbyhus business is highly depend upon customer demand so Alysbyhus chosen new
market through export which is geographically close to consumers and where the products
demand is available. The other factor which influence to Alysbyhus is the same tradition of
woodhouse building in market only Denmark tradition is to build houses with stone and
concrete.

4. Theory:
Through this literature we examine that over two decades every small and large size firms
and organizations wants to adopt foreign market. The aim of every organization is to earn
profit on large scale and that is only possible when they enter in foreign market. Every
company has a desire to enter foreign market to improve competitive position but it is related
to some internal factors includes firm size, firm marketing strategy, international experience,
and its degree to control commitments. And for entering a new market organization must
choose an entry mode. First we examine various entry modes like exporting, counter trade,
contract manufacturing, licensing, franchising, equity based joint ventures and wholly-owned
subsidiaries. Furthermore because of increasing importance of entry modes and
organizational competitions foreign investment and entry modes that includes collaborative
alliances also plays vital role for doing business in global market.

4.1 Exporting:

It is simply define as selling of ones goods and services in another

country. It is considered as simplest mode of entry to enter a new market across borders. In
exporting company have various choices that how it will export its products like they export
their products in international market through its own affiliates or branches or company use
export commission house or through an export buyer who acts as purchasing agent for
various foreign buyers. There are two types of exporting one is direct exporting and the other
is indirect exporting.
A) Indirect exporting: In this type of exporting companies sells their products to another
country by using a person, or organization as intermediary. Many small and medium size
organizations do not have cost efficiency or knowledge of new market to export directly. So
they use this type of exporting in their business.
B) Direct Exporting: In this type companies internalizes the export function and takes
responsibility for selling its products to an exporter or to the buyer located in foreign market
without using intermediary. This type of export involves more expenses then indirect method.
Countertrade: it refers to the transactions involving flow of goods and services in two or more
directions. This is important in world trade especially in developing and controlled
economies. However, it has potential strategic downsides and risks. It is complicated entry
modes and in this mode company uses an intermediary like third party or agent for business
abroad. Countertrade helps in solving the problems with inconvertible and fluctuating
currencies, but it requires the ability to profitably dispose of the goods acquired through
9

countertrade agreement. There are four principals of countertrade (1) pure barter in which
both countries agree on an agreement of each others goods as payment for the transaction. In
simple words according to this principal trade of goods and services between two countries
without use of money (2) Switch Trading is the trade involving three or more countries like
England trade computers to Brazil and in exchange for coffee. But as English may not want
coffee, with the help or switch trading they sell coffee to an Italian company which hiked the
price of computers and commission paid to the switch trader. (3). Counter purchase is the
deal in which one country exports products to the other country and in return promises to
spend some or all receipts on the imports of the company. (4). Buyback is the principal which
involves in licensing of trademarks, lending capital or building plant in other country and
agree to buy its output payments.
4.2 Contract Manufacturing: It is another mode of entry in which an agreement is done
between a company and a foreign producer in which producer manufactures the company
product. Under this agreement company retains the responsibility for the promotion and
distribution of its products. For example, British pharmaceutical company makes an
agreement with a company in Pakistan to manufactures its cough syrup. And then promote it
in Pakistan or globally.
4.3 Licensing: It is simply defining as one firm gives permission to the other to produce or
sell its products or use its trademarks and in return firm gets a royalty or money according to
the agreement which is agreed by both parties. The licensing agreement is between parent
company and one or more foreign affiliates or government enterprise. Foreign licensing is
involving more risk than straight exporting or countertrade, but it is less risky than direct
investment in foreign production.
4.4 Franchising: It is the simple form of licensing which is defines as transfer of technology,
business systems, brand name, or trade mark by a franchisor to an independent company or
person who is franchisee. Like the fast-food chain of McDonalds has franchise all over the
world. According to an estimate 50% of businesses are franchisee around the world. In this
form franchisee depends on franchiser for the business system, and franchiser depends on
franchisee for the royalties and payments.
4.5Wholly owned subsidiaries: Means to buy 100% shares of other company the company
which owns called parent company and has rights to hold all subsidies and control all
operations. So these are the some of entry modes which are commonly used by organizations
for entering global market. There are some other entry modes like foreign direct investment,
acquisition, joint ventures, which are discussed in studies.
10

5. Interpretation/Discussion:
In this part we discuss about comparison between the empirical data we collected and theory.
According to Yin (2003), data analysis involves examining, categorizing, tabulating or
otherwise recombining the data. To be able to determine what and why to analyze every
research should have a general analytical strategy. Yin (2003) takes up two different types of
analyses: within-case analysis and cross-case analysis. In the within-case analysis the data
collected from one single case compares against the frame of references, while in the crosscase analysis the data collected from several different cases compares against each other. In
both types of analysis, the data is compared in order to find similarities and dissimilarities. So
in this section we discuss about theoretical frame work and empirical data we collected. In
general, the results from this literature are projected with previous work in the area of
internationalization. This shows that there is no single internationalization theory which
explains all aspects of such complex process. one of our case studies of Disney Theme Park,
we observe that company use joint venture as entry mode for internationalization. Disney
Theme Park start business in Hong Kong with holding less shares and government had more
shares so that was the problem for company to take any decision independently. This type of
study show that companys ownership plays very important role and management should
view all aspects regarding different cultures, challenges when they decide to expand their
business globally. In our second case study, Haier started business in US by using FDI as
mode of entry in which ownership was completely in the hands of Haier management so they
implement their own decisions and was successful, even they face cultural and environmental
problems. This shows that ownership is very important for expending business. The success
of Starbucks Corporation was totally depending upon the ownership through acquisition.
Another example of our study is lvsbyhus which has used two of these modes in their
foreign market entry: direct exporting and manufacturing subsidiaries. The empirical data we
collected and theory is somehow similar because every organization choose entry mode
according to their internal and external factors. The entry mode decision plays very important
role in every organization whenever they decide to adopt global market but according to the
theory every mode of entry can be use by organization but as we studied above the commonly
use entry mode was joint venture, FDI (Foreign direct investment), exporting, because these
modes of entry help to understand the culture, market value, competition of the other country.
Every organization does not use traditional ways for internationalization process small
company use exporting entry mode to enter in foreign market, where large scale
11

organizations use FDI (Foreign direct investment), joint ventures for international business.
Some companies may stop at a particular stage, skip stages or even reverse the process. This
discussion shows that before taking any decision to adopt international market every
organization evaluate their resources capacity economic conditions and it is better to share
higher profits with a value-adding local partner than to keep loses in a solo venture. Above all
discussion show that companies use different modes of entry but the ownership play a very
important role in the success of companys operations.

6. Conclusion:
The purpose of our literature is to understand that how different companies adopt
internationalization process by using entry modes. Our study shows that internal and external
factors are determined by the organization before selection of market and choice of entry
mode. The question of our study is why companies want to reach foreign market? Why they
use different modes of entry to enter in foreign market? Every company wants to globalize
their business for earning profit, expand business activities and for finding opportunities in
new market. For this purpose, company first evaluates new market, its flexibility, consumers
demand, market risk and probability of success. And then company chose mode of entry
which one is beneficial and easy to enter in target market. Companies also want to reach
foreign market because they want to learn new market their culture and values, demand of
consumers, and new technology for improving their production level. For this purpose, small
and large scale organizations use an entry mode to enter a new market. Because these entry
modes help companies in taking best decisions to enter a new market. According to theory
there are many different modes of entry but we conclude in our study that company use those
methods which is beneficial for it.

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7.

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Albaum G., Duerr E. & Strandskov J. (2002), International Marketing and Export
Management.Fourth edition. Financial Times Prentice Hall, Harlow, UK. Pp 27-34.

Bell, S.2008. International Brand Management of Chinese Companies:

Case Study on Chinese House Hold Appliances and Consumer Electronics
Industry entering US and Western European market. Essen: Physica
Verlag Heidelberg, P159

Calof, Jonathan and Paul Beamish. "Adapting to Foreign Markets:

Explaining Internationalisation." International Business Review Vol. 4
No.2, Pp 41-43.

Hickman M 2008, Starbucks is bottom of high street coffee test, in

independent, accessed 29 April 2008, Pp 24,25.
from < http://www.independent.co.uk >

MIN-CHAN PYO: Why Firms Provide Goods to Foreign Markets Using a

Combination of Entry Modes: University of Seou Seoul, Korea (2010)

Arvind V. Phatak, Rabi S. Bhagat, Roger J. Kashlak International management,

management in a diverse and dynamic global environment.2nd edition.

Authors: Donglin Wu and Fang Zhao; Entry modes for International Markets; Case
Study of Huawei: Vol.3 No.1.March 2007, Pp 183-196.

Isobel Doole, Robin Lowe, International marketing strategy, Analysis, Development

and Implementation, Edition 5th, Pp232.

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