Foreign Business Environments and Entry Mode Choice: Organize Activities Internal within or External to the Firm?

Foreign Business Environments and Entry Mode Choice: Organize Activities Internal within or External to the Firm?

Maud Oortwijn (Warwick Business School, UK)
DOI: 10.4018/978-1-4666-0306-6.ch009

Abstract

The entry mode choice is at the core of International Business studies (Oortwijn, 2011a). IB research concerns the organization of firm activities across country borders and thus across different cultures and business contexts. These host country differences impact the firm’s way of working internally within the organization and in interaction with the external environment in the host country. Companies can consider a broad range of entry modes to organize across country borders, including partnership, trade, joint venture (JV), and wholly owned enterprise (WOE). The entry mode defines what activities are internalized within the firm and how the firm interacts with the external environment in different host countries.
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1. Entry Mode Options

Firms interested in serving foreign markets face a difficult decision with respect to the entry mode choice. The different entry modes are characterized by varying degrees of resource commitment, managerial control, risk exposure, profit return and involvement of local parties (Anderson & Gatignon, 1986; Pan & Tse, 2000). The impact of the complexity of working in multiple, often unknown business context(s), is the core of what concerns International Business (IB) scholars. The entry mode is an institutional arrangement for organizing and conducting international business transactions (Andersen, 1997). Companies can consider a broad range of entry modes, including Partnership, Trade, Joint Venture (JV) and Wholly-Owned Enterprise (WOE). These organisational modes manage international business activities differently, which impacts performance, control and interaction with cultural distant business environments. In this paragraph, more detailed descriptions of the mode options are provided.

1.1 Entry Mode Choice as a Central Theme

The core of IB studies is to understand the impact of developing and organizing business activities across cultural differences and country borders (Tung, 2008). The differences between markets and the complexity of managing business activities in and across different markets is the arena of IB studies (Johanson & Vahlne, 1977; Hennart & Arbor, 1982; Dunning, 2002; Hohenthal, et al., 2003). It is not surprising the entry mode choice is an extensively studied subjects in IB research (Werner, 2002; Griffith, 2008).

Institutional difference and cultural difference are arguably one of the most fundamental constructs in International Business (Dow, 2009). Inter-country differences are more difficult for Multinational Enterprises (MNEs) to access, harmonise or coordinate than the international transfer or dissemination of physical assets as such (Dunning, 2009). Entering a foreign, unknown country creates additional disadvantages and additional costs compared to operating in the home market, both in the strategic decision-making process of entry as well as in the start-up and operating phase (Sethi & Guizinger, 2002). Cultural differences are difficult to manage, both internally within the firm and externally in interaction with external parties in an unknown foreign business environment. As the entry mode defines what activities are internalized within the firm and how the firm interacts with the external environment in different host countries, entry mode choice is at the core of IB research.

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