Entry Modes: How to Enter a Foreign Market

Abstract

The mode of entry into a foreign market is a broad notion. In this chapter, we discuss it in terms of the initial approach to a foreign market and as a decision between equity and non-equity (or contract-based) modes of legal presence and operations. The initial approach to a foreign market involves creating the relevant formal and informal business networks (and here we warn about the threat of bribery and corruption). Although the necessity of these networks is often acknowledged by firms, they do not always take concrete action to overcome the “liability of outsidership” formally (or legally). Equity and non-equity modes of entry vary in terms of opportunities to access local resources (through acquisitions or partnerships) and to exercise control over foreign operations and on the level of commitment of resources they require from headquarters. The decision on entry mode is complex and is often taken alongside the foreign market selection decision. In terms of the firm, the factors influencing foreign market entry include the firm’s characteristics, the resources and skills potentially committed to exploiting that market, the experience of the top management team, their diversity and other factors that determine the cognitive models they use, the firm’s strategy and organization, and the characteristics of the product or service offered. In terms of the foreign market, factors include the target market’s potential, the perceived level of risk, the intensity of the competition, the normative and competitive entry barriers, and the distance to the market. Finally, we discuss the basic elements necessary for building trust with foreign partners and for implementing a cross-border merger or acquisition. We conclude by emphasizing that the decision-making process about the foreign market entry mode is dynamic; it evolves over time, and firms may consider more than one operational option, a situation we discuss in Chap. 7 exploring the real options approach.