International Market Entry Mode A Systematic Literature Review


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International Market Entry Mode – A Systematic Literature Review
Introduction This paper systematically examines the academic literature on international market entry mode (hereafter MEM). Ever since the first issue of the first volume of the Journal of Strategic Marketing this has been a topic of much discussion and research from scholars interested in strategic marketing issues here and elsewhere (Gannon, M, 1993; Crick and Crick, 2013).
This paper is divided into three main sections. The first section provides MEM definitions and conceptualisations. The second section critically reviews a series of key Internationalisation Theories that have emerged from and been applied to a firm’s MEM choice. These are; Transaction Cost Approach, Institutional Theory, the Eclectic Paradigm, the Uppsala Internationalisation Model and the Resource Based View. The third section summarises the current position and highlights three key gaps in the MEM literature, these being; a lack of studies on SME market entry, a lack of insight into market entry decision making processes and a too little integrative work that brings together related literature strands. The paper is enhanced by the inclusion of a number of tables that present an overview of key and well-cited conceptual and empirical work, listing themes, key concepts and findings and the location, industrial sector and other methodological details.
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MEM Concepts, Definitions and Perspectives
The question of how firms enter and operate in foreign markets has been a consistent and persistent topic in business research generally and strategic marketing literature specifically for decades (Crick and Crick, 2015; Hennart and Slangen, 2015, Canabal and White, 2008; Johansson and Vahlne, 1977, Johansson and Wiedersheim-Paul, 1975). Why is this? One fundamentally important reason is that it is widely recognized that strategic success and failure is principally determined by which entry mode is chosen and enacted (Charles et al, 2015; Agnal and Chetty, 2007; Brouthers, 2013/2002; Tse et al., 1997; Erramilli and Rao, 1993, Root, 1987; Anderson and Gatignon, 1986). Additionally, international market entry is a highly observable form of international expansion (Gerrath et al, 2013; Benito et al., 2009; Ragland et al, 2015).
Given the eclectic nature of MEM, and the diversity and variety of investigators and investigations a number of different and inconsistent [perhaps incompatible?] definitions exist (Morschett et al., 2010; Canabal and White, 2008). Johanson and Wiedersheim-Paul (1975: 306) refer to entry modes as “the development of operations in individual countries”. Root (1977:5) proposes a more specific definition by considering a mode “an institutional arrangement that makes possible the entry of a company’s products, technology, human skills, management or other resources into a foreign country.”
Anderson and Gatignon (1986) consider an entry mode a governance structure that allows a firm to exercise control over foreign operations whilst Hill et al. (1990) defines the phenomenon as a way of organising the business activities in a foreign country. Sharma and Erramilli (2004: 2) define an entry mode as “a structural agreement that allows a firm to implement its product market strategy in a host country either by carrying out only marketing
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operations (i.e. via export modes) or both production and marketing operations there by itself or in a partnership with others (contractual modes, joint venture, wholly owned operations).” Many MEM scholars (e.g. Olejnik & Swoboda, 2012; Nisar et al., 2012; Ojala & Tyrväinen, 2007; Brouthers & Nakos, 2004) predominantly treat entry mode as a selection from several specific and discrete alternatives, investigating MEM choice based on the categorisation of modes prior to fieldwork.
An alternative viewpoint (Hennart and Slangen, 2015; Shaver, 2013; Canabal and White, 2008; Zhao et al., 2004) is that both external and internal (firm-specific) antecedents and determinants affect modal outcome, and should therefore be the focus of study (Benito et al, 2009). External antecedents and determinants include (national) culture, cultural difference, market attractiveness, environmental uncertainty, legal environment. Internal antecedents and determinants include control, international experience, as well as assets and asset specificity. Based on these premises, researchers in the field have provided a wealth of explanations of how certain factors “encourage or discourage a particular mode” (Root, 1994: 8) and accumulated new theoretical knowledge.
Table 1 provides an overview of significant scholarly contributions taking such a antecedents/determinant perspective.
-Insert Table 1 about here-
Such normative studies, however, commonly neglect how the actual entry mode decisions are made in firms, and thus do not explicitly investigate the associated decision making processes, studies by Chen (2008) and Buckley et al. (2007) being noticeable exceptions. Decision making
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processes are affected by the characteristics of the key decision makers and/or their teams (Dean and Sharfman, 1993); and scholars (Hennart and Slangen, 2015; Canabal and White, 2008) call for more research that explicitly focuses on the entry mode decision making processes within firms.
The majority of MEM literature though commonly focuses on an examination of mode choice. Shaver (2013) makes the important point that too much research artificially constrains the range of entry modes examined, thereby limiting its scope and ignoring the broader and more holistic broader research issues. In particular, these scholars use comparative dependent variables (modal outcomes) such as Wholly Owned Subsidiary versus Joint Venture, Acquisitions versus Joint Venture, Export versus Foreign Direct investment, as well as contract versus Equity Joint Venture (Morschett et al., 2010) or Acquisitions over Greenfield (Chen, 2008; Slangen and Hennart, 2008) thus reflecting the identified predominant explanatory focus and emphasis on statistical measurement in MEM research.
Alongside the initial theoretical understanding of entry mode choice that is made between clearly defined and differentiated alternatives (Benito et al., 2009) researchers adopt very different classification criteria and variables in order to differentiate and determine the entry mode. Based on the variables of control, commitment and risk, Anderson and Gatignon (1986) identify 17 entry mode categories. Hill et al. (1990) went on to reduce those categories to three distinct types of entry modes: Licensing/Franchising, Joint Venture and Wholly Owned Subsidiary, a schema that only represents a singular and static perspective on entry modes. Root (1994) differentiates Export, Contractual as well as Equity modes. Others (Blomstermo et al., 2006; Sharma and Blomstermo, 2003; Zahra et al., 2000; Argawal and Ramaswami,
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1992) discuss entry modes in each of these categories according to the continuum of low- vs high-involvement and commitment.
Osland et al. (2001) propose to differentiate entry modes according to the three characteristics of resource commitment, level of control and level of (technology) risk. These three key characteristics are highly correlated, as increased control is considered to lead to lower technology risk, and control is highly associated with a need for resource commitment (Woodcock et al.,1994). According to Kumar and Subramaniam (1997) as well as Pan and Tse (2000), entry modes should be distinguished between non-equity modes (such as exporting or other contractual agreements and equity modes (wholly owned subsidiary or joint venture). Zhao et al. (2004) differ between ownership-based entry modes (OBEs) and contract based modes (CBMs).
More recently, Brouthers and Hennart (2007) classified entry modes into two broad categories, namely ‘Contracts’ and ‘Equity’ and argued that “the main difference in entry mode lies in the method chosen to remunerate input providers.” This definition seems to be preoccupied with the mode’s financial and contractual implications while in turn ignoring important aspects of ‘how’ business is really conducted in foreign markets, and hence how the various stages of the value chain are organised accordingly.
The theoretical views within this prior set of work exclude the notions of mode combinations (mixed modes), inter-mode changes as well as potential modifications and adjustments over time. Research has now moved away from an over-emphasis on categorisation, attempting to reduce the discrepancy between theory and practice whilst being more accepting of a less clear and distinct business reality.
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For example, moving away from a concentration on singular modes, Benito et al.’s (2009: 1458) definition of foreign operations modes as the “organizational arrangements that a company uses to conduct international business activities” relating “to the activities performed in particular locations at a given time” advocates a less stringent but pluralistic view on entry modes. This definition allows for the fact that firms in some cases combine operation modes for the same business activities and in the same host market, in order correspond and react to specific and complex value chain characteristics and requirements. It differs from the unitary entry mode focus inherent in the major part of the existing MEM literature, as it allows for “multiple modes in various types of combinations” (Benito et al., 2009: 1458).
Empirical evidence confirms that firms use ‘package modes’, by combining sales subsidiaries with distribution arrangements with a middle man (Petersen et al., 2001). Firms are seen to incrementally change the modes of operation by adding new modes to existing ones, which Petersen and Welch (2002) refer to as ‘mode combinations’. Research by Deligonul and Cavusgil (2006) reports that the use of a distribution partner is associated with substantial investments until these partners are partially internalised and operate as quasi sales subsidiaries. Findings by Welch et al. (2007) also suggest that various modes could be used simultaneously in one particular market – usually across different activities, but in some cases, for the same activity. Multiple modes might well be complementary, with the modes supporting each other in an overall market penetration strategy (Petersen et al, 2008)
A further research theme is consideration of the typical internationalisation pathways of SMEs (Kontinen and Ojala, 2012/2010; Boter and Holquist, 1996; Jones, 2001/1999; Bell, 1995) and
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the respective entry mode patterns (choices) of these firms. These researchers identify entry mode patterns in relation with the firms’ increasing engagement with international markets, but do not address the question of ‘how’ the entry mode decisions are actually made in those firms, and ‘how’ the entry mode decision making processes are structured accordingly. Jones (2001; 1999), referring to entry modes as ‘cross border links’, constructs these links according to three dimensions, namely ‘directional’, ‘international’ and ‘functional/value chain’.
Moving away from this pre-categorisation of entry modes prior to fieldwork, Spence’s (2003) and Crick and Spence’s (2005) investigation of internationalising high-tech oriented SMEs broadens and loosens the entry mode conception by determining the modes based on the informants’ narrated personal experiences during the interviews. Such conceptualisations and methodological approaches are replicated in subsequent exploratory research projects in similar research settings (Crick and Crick, 2014; Spence, 2010; Spence and Crick, 2009). This exploratory approach and move away from ‘pre-categorisation’ enhance the possibility for flexibility in terms of defining and depicting the actual recalled foreign market entry, hence the ‘real’ and precise organisation of foreign operations based on the individual narratives of the informants. These scholars, however, use a broader concept in their investigations of the development of foreign operations, namely ‘internationalisation strategies’, and only offer a less specific research focus, as entry mode decision making and respective choice can be considered only one outcome of broad investigations, rather than the explicit research rationale.
Internationalisation Theories Explaining Entry Mode Choice
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The hitherto entry mode conceptualisations and categorisations discussed are embedded in different theoretical assumptions and underpinnings. As a consequence, the following section discusses key Internationalisation Theories that seek to explain a firm’s entry mode choice. Critically reviewed and discussed are the theoretical perspectives of ‘Transaction cost approaches’, ‘Institutional theory’, ‘Eclectic Paradigm’, ‘Uppsala Internationalisation Model’ and the ‘Resource Based View’.
Transaction Cost Approach Transaction Cost Economics, (TCE), sometimes referred to as Transaction Cost Analysis is the most commonly adopted and applied Internationalisation Theory in MEM studies (Canabal and White, 2008).“TCE has served as the overriding perspective for theorizing entry mode choice and, accordingly, transaction-cost-related covariates have been recognized as major determinants of entry mode decisions.” (Zhao et al., 2004: 525).
Underlying TCE are two key assumptions. That actors operate and choose within a bounded rationality and that there is potential for actors to behave opportunistically as well as risk neutrally (Seggie, 2012). Further, the four key dimensions of transactions are taken as being: asset specificity, environmental uncertainty, behavioural uncertainty, and transaction frequency (Williamson, 1975). Luo (2007) proposes that opportunistic behaviour is more likely with partners from different cultural backgrounds and Shapiro (1987) suggests this is also true in more complex environments. Whereas a key decision maker may find it relatively easy to predict and forecast developments in domestic markets, this is likely to be more difficult and complex in international markets (Seggie, 2012; Klein, 1989).
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Williamson (1975) considers the unit of analysis the transaction and the focus of analysis as transaction costs rather than productions costs. Firms are assumed to sometimes deliberately and opportunistically engage in self-interested behaviours within relationships formed to construct a market entry – which might include lying, stealing, or violating agreements. Firms are faced with the ‘safe-guarding’ problem – assets specific to the transaction and relationships become vulnerable to exploitation and the firm investing into those assets is at risk of such opportunism, without being able to resort to the market and escape from the opportunistic behaviour within the relationship.
The systematic and explicit application of TCE to MEM choice appeared for the first time in Anderson and Gatignon’s (1986) work. They clustered 17 entry modes according to the degree of control the respective mode provides, continuing on to suggest that the most appropriate mode was a function of the tradeoff between control and the cost of the inherent resource commitment. Brouthers’ (2013/2002) seminal work on TC influences (alongside institutional and cultural influences) on MEM choice and firm performance confirms that those firms whose MEM choice could be predicted by the transaction cost theory performed significantly better, in terms of both financial and non-financial measures than those where it could not.
In the case of unpredictability of the host market environment, commonly referred to as country risk in the MEM literature, TCE implies a higher level of vertical integration (Morschett et al., 2010). Under conditions of strong uncertainty, it is difficult to anticipate all future contingencies for which adaptations and modifications of a contract with a partnering firm would be required (Anderson and Gatignon, 1986). If uncertainty creates a situation in which the value of an international opportunity cannot be predicted accurately, TCE suggests that firms should react by keeping the initial investment low while securing an option for further
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future investment (Brouthers et al. 2008). In these situations, cooperative entry modes are seen as an attractive alternative (Morschett et al., 2010).
Brouthers and Nakos (2004) explicitly apply transaction cost theory to SMEs entry mode choice and assert that SMEs that adopted modes predicted by transaction cost theory perform remarkably better than those firms using other modes. Brouthers and Brouthers’ (2003) comparative study on manufacturing and service firms suggests that differences in MEM choice can be principally explained by how the firms manage transaction cost variables. Although a few attempts have been made to explicitly apply TCA to SMEs, this theoretical lens seems to have a much clearer relevance for the study of MNEs (Whitelook, 2002). Since the choice of entry mode is an economic decision, an MNE is expected to choose the entry mode that offers the highest risk-adjusted return on investment (Anderson and Gatignon, 1986). Since aligning entry mode with transaction properties has subsequent consequences on performance, the assessment of TCE determinants is considered to remain important (Li, 1995), at least for larger firms. Table 2 summarises exemplary scholarly contributions that have explicitly adopted a transaction costs perspective in their investigations.
-Insert Table 2 about here-
For a young, resource constrained firm, the TCE does not offer a suitable explanation of their entry decisions (Burgel and Murray, 2000). In markets that are characterised by a fast moving, dynamic and competitive environment, MEM choice would not only be based on efficiency (transaction cost) considerations but also on other aspects, such as strategic motives that include internationalisation or the firm’s competitive position in the global markets (SanchezPeinado et al., 2007; Harzing 2002; Aulakh and Kotabe 1997).
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International Market Entry Mode A Systematic Literature Review