Globalization of Business
When an organisation decides to enter an overseas market, there are certain decisions that they have to take. Selecting the entry mode into a foreign market is one such crucial decision for any firm that would wish to go international. For a business to successfully enter a foreign market there are certain factors that they need to understand and consider. This analysis looks into the three most important strategic factors in selecting an entry mode into a foreign market. These factors are grouped into internal, external and a mixture of both internal and external. These factors are further subdivided into other factors. This review also looks into these factors and in the process demystify the process of doing business as well as their influence on the success of the business. Such a critical analysis would be important for any business that would like to make it big on the international platform.
Table of Contents
1. Introduction 3
2. Overview of factors influencing entry into foreign markets 3
3. External Business Factors 4
4. Internal Business Factors 6
5. Mixed Factors 8
Globalization of business has become an emerging trend in business today. Many businesses are driven by the need to expand their operations from a local scale to an international one. Market entry and selection is influenced by business thrust, competitiveness in target markets and government regulations in foreign business entry. Deciding on the mode of entry into a market requires understanding all modes available (Ramada-Sarasola, 2009 p. 5). Market entry into international territories is influenced by a wide range of factors. This research paper seeks to explore the relationship between entries into foreign markets and factors that influence entry into the foreign markets.
Businesses may face a wide range of challenges when going international. According to Ahmed, Mohamad, Tan, and Johnson (2010 p. 806), the challenges influence their choice of mode of entry into the international market. The different types of foreign market entries include direct export, indirect export, franchising, licensing, sale subsidiaries, manufacturing subsidiaries, joint ventures, contracting, and strategic alliances. Each one of these entry modes are influenced by unique factors triggered by economic, social, and political dynamics.
Overview of Factors Influencing Entry into Foreign Markets
The external factors affecting the selection of international market entry mode include the size of the market, market growth, government regulations, competition levels, risks levels, socio-cultural differences, production and shipping costs, trade barriers and the available intermediaries. Internal factors are influenced by specific aspects of the organizations involved which include the company objectives, company’s available resources, commitment levels by the management and employees, flexibility, experience in doing international business, and company size (Zekiri, & Angelova, 2011 p. 574). The third category of factors is a mixture of both internal and external factors. These factors are a combination of both internal and external factors in a business. They include capabilities, competencies and skills that are unique for a certain market entry mode selection and a combination of availability and reliability of information inputs.
a. External Business Factors
One of the most instrumental external business factors that affect international businesses are the social cultural differences. Business aspects such as culture and language ties influence the prospects of a business venturing into a foreign market (Ahmed, Mohamad, Tan, and Johnson, 2010 p. 808). Countries with similar social cultural practices are more likely to experience smoother export of business.
Other external factors include the risks and demand uncertainties associated with a country. They are important in analysing the viability level of investment in a country. Less risky countries provide the best environment for doing business (O’Cass, Ngo and Heirati, 2012 p. 225). Consequently, based on the risks that a business is likely to face in a foreign nation, businesses are able to set levels of investments and risks that they would be willing to take.
Some of the common business risks include political risks, economic risks, and operational risks. Political risks such as conflict and political instability dissuade businesses from successfully entering a business environment (Ahmed, Mohamad, Tan, and Johnson, 2010 p. 810). Economic risks arise due to the volatility of the exchange rates of currencies in the target markets and differences in balance of payments which affect the cost of inputs of production as well as marketing activities in such markets (O’Cass, Ngo and Heirati, 2012 p. 228). Furthermore, businesses experience difficulties to operate in business environments where inflation levels are high. Additionally, operation risks are integral in the running of a business. If a marketing system in a foreign country is similar to the business’ home country, the business is likely to benefit from a better understanding of the operational issues that may affect its activities.
Market size and its associated growth is influences the globalization of businesses into a foreign market. Foreign markets with higher potential are likely to experience more investments. According to Lai, Chen and Chang (2012 p. 383), they remain highly unexploited, which means that organizations that decide to do business in such environments are more likely to benefit from a larger market base. Markets that are highly saturated are more likely to experience limited growth. Therefore, if a business has to succeed, it must invest in a market that is experiencing steady growth rates or has the potential for growth.
Government laws and regulations are important considerations when choosing a foreign market entry mode. Businesses entering foreign territories must adapt to the target country’s laws and regulations (O’Cass, Ngo and Heirati, 2012 p. 229). Some of the legal issues raised in foreign markets include the regulations on imports and exports. Some countries limit imports into their economy while others only permit local manufacturing of certain products. Moreover, some governments regulate the entry modes and prescribe what foreign businesses can be allowed into their borders. Other governments may require foreign businesses to have local partners.
The competition levels in an overseas market and its contribution to business success is an important factor to consider. Businesses need to choose the best strategy to that can swiftly respond to market forces. It would be prudent to set up a business in an environment that is less prone to competition rather than one with high competition which may limit the possibilities of business success (Cui, Lin and Fuming, Jiang, 2010 p. 436). Competition is the factor behind setting up of automotive dealerships in emerging markets such as India, This has helped the automotive industry to respond to stiff competition..
Market growth is important in selecting the entry criteria in a business. If a market is experiencing fast growth which seems unsustainable for a long period of time, it can invest in such an economy through indirect or direct exports (Nalbandyan, 2017 p. 55). If the demand for goods in the target country is anticipated increase for a long period of time, the business may opt to establish its marketing or manufacturing subsidiaries in the country.
The development of physical infrastructure and social amenities is a condition that foreign businesses have to consider prior to venturing into an over-seas market. These most important amenities include roads, telecommunications infrastructure, marketing channels, and financial institutions. The infrastructure help to ensure that there is ease in doing business. The availability of good infrastructure has been the main factor behind major investments in Asian countries such as in Hong Kong, Dubai and Singapore (Chang and Ming, 2009 p. 2960). Many Asian economies have now developed into centres of international business.
b. Internal Business Factors
The size of an organization and the resources it has at its disposal are important in establishing a foreign market. Small companies have fewer options compared to large companies. This can be attributed to the fact that they have limited resources which may discourage them from certain modes of market entry (Nalbandyan, 2017 p. 58). A company planning to establish fully fledged subsidiaries may be required to have a substantial investment portfolio as it would be exposed to high risk levels. Small companies may experience difficulties in penetrating into foreign markets as they may lack the required resources to set up subsidiaries. The selection of the market entry mode largely depends on the industrial demands for the individual markets.
The control levels taken by the management also plays a critical role in the success of a business in a foreign country. As Chang and Ming (2009 p. 2964) indicate, managers’ are very influential in determining how business operations are implemented. If a business decision is made by several managers, there is a likelihood of discord in the control of the business. A business should therefore have a central decision making organ or otherwise work out a strategy for reaching a consensus on various issues. Business management is closely associated with its objectives. Companies in a domestic market have limited aspirations and as they enter a foreign market, they need to adopt proactive strategies to enable them exploit the opportunities in the international market.
Companies prefer market share targets that are aimed at the maximization of the existing sales. It is quite interesting that there is a preference for ventures that are likely to deliver the desirable outcomes (Duarte & Suarez, 2010 p. 561). Market share targets are therefore important when choosing the mode of business operations and marketing strategies in overseas markets. Market share is closely related to the type of product or services that the business seeks to sell. Different characteristics of the business including its location are very crucial in determining its success in taking up a large market share.
Analysing the market potential and the willingness of the business to set aside resources in a certain market plays an important role in the choice of the entry mode. According to Hill (2011 p. 24), businesses are required to analyse various investment alternatives before allocating the required resources. Furthermore, the business must be ready to respond to various competitive forces in the foreign countries. This can only be achieved by adopting strategies that will maintain them in business.
A business that is considered well exposed to the dynamics of international business is likely to have an easier time penetrating into the international markets. The efficiency of such a business depends on the employees’ experience (Selimi and Zekiri, 2017 p. 583). They tend to have a better understanding of the challenges and the most effective strategies in solving them. They are likely to have more ease in decision making as they have the necessary knowledge in all the aspects of business operations. Therefore, the risk of making huge operational blunders is much lower.
The flexibility of a business is very instrumental in determining the level of success in the international market. For instance, a market that today seems very successful and attractive might not remain the same in the next few years. Changes in the business landscape can be attributed to changes in the legal structures, the political environment, change of preferences by customers, emergence of new market segments, or change in competition (Hill, 2011 p. 28). If a business is to survive in a foreign market it must have the capability to adopt these changes.
Market share targets by a foreign company in the international market largely influence the mode of selection of the entry strategy. According to O’Cass, Ngo and Heirati (2012 p. 231), the market share target is important when the company’s objective is to maximize on sales and market scope. To achieve a larger market share, businesses might opt for subsidiaries as their entry modes. If the goal is to increase their revenue from exports, they may settle for indirect exporting rather than other forms of foreign market entry modes.
c. Mixed Factors
The competencies and capabilities in foreign market entry modes play crucial roles in the success of a business. From the evolution experienced in global business appraisal, there have been improvements in the competition levels, making it an important consideration in business decision making (Zekiri, & Angelova, 2017 p. 582). The categorization of competencies, skills, and capabilities depend on the business locations, product category, business forms, and the company objectives.
Human Resource (HR) policies play an integral role in the determination of a company’s international market strategy. HR policies have huge implications on the workforce within the foreign market (Pehrsson, 2008 p. 65). Information should be sufficient and reliable. Lack of sufficient information make it hard for companies to make decisions on the most appropriate entry modes. The use of inaccurate and obsolete data may make it impossible to compare markets and evaluate market dynamics.
The research has broadly analysed the effects of internal, external, and mixed factors on entry mode in foreign markets. It has been shown that these factors must be considered before making decisions on entering into international markets. Consequently, a business must critically analyze these factors before making such risky investments. Furthermore, a business must also analyze the validity and applicability of these factors to their business models. This will help them identify the existing opportunities as well as the possible challenges in the prospective market. Detailed market analysis before venture helps companies to avoid failures and losses.
Ahmed, Z., Mohamad, O., Tan, B. and Johnson, J. (2010). International risk perceptions and mode of entry: a case study of Malaysian multinational firms. Journal of Business Research, 55(10), pp.805-813.
Chang, Yi-Chieh and Ming-sung, Kao (2009). ―Governance and the Choice of Entry Mode by FDI Firms Entering China‖, Economics Bulletin, Vol. 29(4) pp. 2957-2966.
Cui, Lin and Fuming, Jiang (2010). ―FDI entry mode choice of Chinese firms: A strategic behavior perspective‖, Journal of World Business, Vol. 44, pp. 434-444
Duarte, Cristina Lopez and Marta, M. Vidal-Suarez (2010). ―External uncertainty and entry mode choice: Cultural distance, political risk and language diversity‖, International Business Review, Vol. 19, pp. 575-588
Hill, C.W.L (2011). International Business – Competing in the Global Marketplace. New York:McGraw-Hill Companies Inc.
Lai, J., Chen, L. and Chang, S. (2012). The board mechanism and entry mode choice. Journal of International Management, 18(4), pp.379-392.
Nalbandyan, H. (2017). SMES ENTRY MODE CHOICE INTO FOREIGN MARKETS. Business Strategies, (1), pp.55-59.
O’Cass, A., Ngo, L. and Heirati, N. (2012). Examining market entry mode strategies via resource-based and institutional influences: Empirical evidence from a region-within-country economy context. Australasian Marketing Journal (AMJ), 20(3), pp.224-233.
Pehrsson, A. (2008); International Strategy: Methods for Competitiveness. Växjö: Växjö University Press
Ramada-Sarasola, M. (2009). Determinants in the Choice of Entry Mode for MNCs Going Offshore – The Hard Task of Getting Meaningful Results. SSRN Electronic Journal.
Selimi, D. and Zekiri, D.(2017). Internationalization of businesses and selection of entry modes in other markets. ILIRIA International Review, 7(1).
Zekiri, J. & Angelova B. (2011). ― Factors that influence entry mode choice in foreign markets‖, European Journal of Social Sciences, Vol. 22(4), pp. 572-584
Figure 1: Representation of factors influencing entry mode selection
Figure 2: Showing difference between internal and external factorsMore Essay Samples: In 250 words, please discuss: The firm’s external environment consists of three parts: the general environment, the industry environment »360. inc