Entry Modes in International Business

The Eclectic Paradigm presents a general framework for determining the extent and the pattern of the internationalization of the firm.

According to the Eclectic Paradigm, the capacity and desire of firms to go abroad depends on ownership-specific and location-specific advantages. Ownership-specific advantages include having or being able to acquire assets not available to another country’s firms. Such assets refer to ownership-specific advantages because they are assumed to be unique to firms of a particular nationality of ownership. Location-specific advantages include assets that are peculiar to a specific location in their origin and use.

The internationalization process model sees internalization as a cyclical process between state variables (assets, capabilities, commitments, and performance) and change variables (knowledge development and commitment processes).

Linkage-leverage-learning framework argues that internationalization process includes connecting and making business with resource-rich companies or companies already active in the target market, gaining access to resources which are outside the firm and which can be incorporated through specific tactics and the repeated application of the previous two steps.

First-mover advantages include catching learning effects, achieving economies of scale, and forging alliances with the most attractive local partner, and setting the standards and rules.

Late-mover advantages comprise free-riding on first movers’ pioneering investments, avoiding considerable technological and market-related uncertainties, and evading being locked into a set of fixed assets or cannibalizing the existing product lines in favour of the new ones.

The born-global firm refers to a young entrepreneurial company that initiates international business activity very early in its evolution, moving quickly into international markets.

Exporting refers to selling products which have been produced in one country to customers in the other country or countries.

A firm must evaluate four critical factors in considering exporting as its entry mode. First, firms should make sure whether there is home country subsidization encourages exporting as an entry mode, and there are no tariffs and no nontariff barriers imposed by host countries. Second, marketing matters may also affect the decision to export. Third, the firm must think about the physical distribution costs and its inventory-carrying costs and those of its foreign customers. Finally, firms choosing to export from domestic factories must ensure that these factories sustain competitive levels of customer service for their foreign customers.

Strategic alliances, a medium to a long-term relationship between firms, are formed to support partners to achieve their strategic objectives through cooperation.

Contract manufacturing refers to the undertaking of the production of finished goods or parts.

Licensing refers to a particular form of contract manufacturing that permits firms to commercialize intellectual property.

Franchising is a particular form of licensing in which a franchisor grants a franchisee the right to use the franchisor’s trademark and business processes to offer products which carry the franchisor’s brand name.

R&D contracts refer to outsourcing agreements in R&D between firms.

Joint marketing is an agreement between two or more partners based in different countries that focuses on international market expansion through access to capabilities and resources in international markets.

Consortia, project-based ventures, are started by multiple partners to fulfill large-scale projects.

A turnkey project refers to the export of technology, management expertise, and, in some cases, capital equipment.

A build-operate-transfer (BOT) arrangement includes a firm or a consortium of firms contracting to complete a significant infrastructure project abroad, operates it for a specified period, and then transfers ownership to the project sponsor.

A management contract permits a foreign firm the right to manage the daily operations of a firm but not to make decisions about ownership, financing, or strategic and policy changes.

A minority equity alliance is formed when at least one partner takes partial ownership of the other partner.

A joint venture is a separate organization formed by two or more firms that have equity ownership in the new entity.

A merger is the joining of two independent companies to form a combined entity. An acquisition refers to the purchase or takeover of one company by another.

A greenfield investment refers to an entry mode through which a firm invests directly in another country by establishing a new wholly-owned subsidiary.

Greenfield investment is a type of foreign direct investment (FDI) in which foreign operations of the firm in a given country start from scratch.