Factors that Influence Entry Mode Choice in Foreign Markets

The selection of appropriate entry mode for a particular foreign market is a very important decision for the firms. They need to understand various factors which can affect their decision and choice of entry. Some of the important factors affecting the firm’s decision are being discussed here.

• External Factors
  • Market Size
  • Market Growth
  • Government Regulations
  • Level of Competition
  • Physical Infrastructure
  • Level of Risk
    • Political Risk
    • Economic Risk
    • Operational Risk
  • Production and Shipping Costs
  • Lower Cost of Production
    
    
• Internal Factors
  • Company Objectives
  • Availability of Company Resources
  • Level of Commitment
  • International Experience
  • Flexibility

External Factors

Market Size

Market size of the market is one of the key factors an international marketer has to keep in mind when selecting an entry mode. Countries with a large market size justify the modes of entry with long-term commitment requiring higher level of investment, such as wholly owned subsidiaries or equity participation.

Market Growth

Most of the large, established markets, such as the US, Europe, and Japan, has more or less reached a point of saturation for consumer goods such as automobiles, consumer electronics. Therefore, the growth of markets in these countries is showing a declining trend. Therefore, from the perspective of long-term growth, firms invest more resources in markets with high growth potential.

Government Regulations

The selection of a market entry mode is to a great extent affected by the legislative framework of the overseas market. The governments of most of the Gulf countries have made it mandatory for foreign firms to have a local partner. For example, the UAE is a lucrative market for Indian firms but most firms operate there with a local partner.

Level of Competition

Presence of competitors and their level of involvement in an overseas market is another crucial factor in deciding on an entry mode so as to effectively respond to competitive market forces. This is one of the major reasons behind auto companies setting up their operations in India and other emerging markets so as to effectively respond to global competition.

Physical Infrastructure

The level of development of physical infrastructure such as roads, railways, telecommunications, financial institutions, and marketing channels is a pre-condition for a company to commit more resources to an overseas market. The level of infrastructure development (both physical and institutional) has been responsible for major investments in Singapore, Dubai, and Hong Kong. As a result, these places have developed as international marketing hubs in the Asian region.

Level of Risk

From the point of view of entry mode selection, a firm should evaluate the following risks:

Political Risk

Political instability and turmoil dissuades firms from committing more resources to a market.

Economic Risk

Economic risk may arise due to volatility of exchange rates of the target market’s currency, upheavals in balance of payments situations that may affect the cost of other inputs for production, and marketing activities in foreign markets. International companies find it difficult to manage their operations in markets wherein the inflation rate is extremely high.

Operational Risk

In case the marketing system in an overseas country is similar
to that of the firm’s home country, the firm has a better understanding
of operational problems in the foreign market in question.

Production and Shipping Costs Markets with substantial cost of shipping as in the case of low value high-volume goods may increase the logistics cost.

Lower Cost of Production It may also be one of the key factors in firms deciding to establish manufacturing operations in foreign countries.

Internal Factors

Company Objectives

Companies operating in domestic markets with limited aspirations generally enter foreign markets as a result of a reactive approach to international marketing opportunities. In such cases, companies receive unsolicited orders from acquaintances, firms, and relatives based abroad, and they attempt to fulfill these export orders.

Availability of Company Resources

Venturing into international markets needs substantial commitment of financial and human resources and therefore choice of an entry mode depends upon the financial strength of a firm. It may be observed that Indian firms with good financial strength have entered international markets by way of wholly owned subsidiaries or equity participation.

Level of Commitment

In view of the market potential, the willingness of the company to commit resources in a particular market also determines the entry mode choice. Companies need to evaluate various investment alternatives for allocating scarce resources. However, the commitment of resources in a particular market also depends upon the way the company is willing to perceive and respond to competitive forces.

International Experience

A company well exposed to the dynamics of the international marketing environment would be at ease when making a decision regarding entering into international markets with a highly intensive mode of entry such as Joint ventures and wholly-owned subsidiaries.

Flexibility

Companies should also keep in mind exit barriers when entering international markets. A market which presently appears attractive may not necessarily continue to be so, say over the next 10 years. It could be due to changes in the political and legal structure, changes in the customer preferences, emergence of new market segments, or changes in the competitive intensity of the market.