The Art of Going Global by Olga E. Annushkina & Alberto Regazzo

Author:Olga E. Annushkina & Alberto Regazzo
Language: eng
Format: epub
ISBN: 9783030210441
Publisher: Springer International Publishing

5.3.2 Why Target Market Characteristics Matter in the Decision on an Entry Mode

The interdependence of foreign market selection and entry modes decisions is a perfect example of complex and dynamic strategic decision making. While the academic research has studied the two decisions indepth and separately, in the real world managers and entrepreneurs need to deal with the whole internationalization process in its entirety, and consider contemporarily foreign market characteristics, the number of markets addressed during each period of time, and the available and implementable entry modes.

The foreign market’s potential, level of risk, level of competition intensity and accessibility are the four main parameters influencing entry mode.

Foreign market potential. Your choice of entry mode will be influenced by the average size of potential partners or targets for acquisitions, or joint venture partners operating in a foreign market (the so-called “digestibility” of the acquisition target), as well as the availability of foreign partners. An early study on entry mode decisions by US advertising agencies revealed that the early steps of internationalization were made via directly founded and owned subsidiaries. Later, when the global advertising industry became more developed, the US firms started acquiring existing local firms, sometimes with minority participation.

When considering the potential of a foreign market, you should also question how confident you are that there will be consumer demand in your target market. Research shows that firms with a high certainty of demand in a local market (for instance, firms that internationalize to follow their domestic clients in their respective international ventures) are more disposed to take risks and to implement entry modes that require a high level of resource and commitment. They are also more likely to proceed without the involvement of local partners.

Foreign market risk. The level of foreign market risk in your chosen country of entry can influence your entry mode selection. This refers to “noncompetitive” factors such as macroeconomic and political instability, lack of institutions (resulting in a firm’s inability to enforce contracts or to protect intellectual property), and cultural and multiethnic tensions that can negatively influence the stability of a business. For example, entry modes with a higher level of control and resource commitment expose investors to major country risks. Firms, unsurprisingly, tend to avoid making equity investments in directly owned subsidiaries in high-risk countries.

It only makes sense to enter a highly competitive market if there are other factors that mitigate this. These include market growth potential, possibility to access strategic assets (brands, distribution networks, knowledge, tangible assets or natural resources), and the foreign market’s accessibility in terms of trade barriers or FDI legislation.

The first two characteristics call for higher-control entry modes: research has shown that Chinese firms, for example, choose to enter foreign markets with a high level of competition via wholly owned subsidiaries. On the other hand, high competition intensity and volatility may decrease a market’s attractiveness and its potential profitability for your firm. Therefore, some firms decide to opt for non-equity, contract-based entry modes, with a lower commitment of resources and time.

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