Factors Influencing Firms Choice Of International Market Entry Economics Essay
Published: Mon, 5 Dec 2016
Today we see it as natural that companies gradual internationalize to gain success and increase the growth and profit. As internationalization, they become ever more important for individual business to keep up with the development. Every movement there is reason behind. They do this because they have motivations to do so or they must to do so in order to be competitive on the ever changing market nowadays. Selecting the right entry mode expanding to other countries is an important decision that demands a lot of resources and through proper scheduling. However, they are wide range of internal and external factors influence firm’s choice of international market entry. Enter the right market with appropriate entry mode it might be victorious; the consequences of the entry mode choice can have strong effects on the success of the firm. The study empirically validates the theory in the specific situation of U.S firms in same sector made their presence into China market, which kind of entry modes they went for; further how their market’s entry is influenced by underlying factors. Two qualitative case studies of two U.S MNEs namely Intel and IBM were undertaken. A literature review was conducted, which resulted in a conceptual framework that presented what would guide the data collection.
In the late 1970s, China has opened its economy and merges to become one of the world’s most influential global economies. China’s ongoing economic revolution has had a deep impact persisted throughout the world. Since the years, the socialist market economic system has been initially established, and the basic role of market’s allocated resources has drastically strengthened. A central division of the economic reform process in China has been the promotion of foreign direct investment (FDI) inflow. Until today, China is the fourth-largest economy in the world and it was rated the number one choice for Foreign Direct Investment (FDI) in 2006 (fdi.gov.cn, 2010). Nevertheless, China has sustained average economic growth of over 9.5% for the past 26 years (state.gov, 2010). In 2006, its $2.68 trillion economy was about one-fifth the size of the U.S. economy (state.gov, 2010).
China is a rapidly growing market to the global economy. Since China’s official access to World Trade Organization (WTO) in 2001 (hku.hk, 2010), China has pledged to further liberalize its trade regime and this has made it easier for foreign companies to operate there (gao.gov, 2005). As part of its WTO succession, China undertook to get rid of certain trade-related investment measures and reopen specified sectors that had formerly been restricted to foreign investment. Over the period, China has authorized foreign investors to manufacture in the preferred form of FDI and put up for sale a wide range of products on the domestic market (state.gov, 2010). New regulations, systems, and managerial measures to implement these commitments are being concerned. Most important remaining barriers to foreign investment of inconsistently enforced laws and regulations and the lack of a rules-based has permissible.
There is no relationship will be as important to the twenty-first century as the direct investment between the United States, the world’s great power, and China, the world’s rising power. According to U.S. government data, “the average annual rate of foreign direct investment (FDI) in China is $1.4 billion a year. The $1.4 billion represents barely 1 percent of the total average annual U.S. direct investment of approximately $127 billion. (hku.hk, 2010)” Thus, increasing of U.S foreign direct investments inflows to China have been accompanied by the rising of industries output in the country, leading an important role of economy’s success to China.
U.S. direct investment in China envelops an extensive range of manufacturing sectors, numerous outsized hotel developments, restaurant chains, and petrochemicals. According to the U.S government official data, U.S. companies have entered agreement by setting up more than 20,000 equity joint ventures, contractual joint ventures, and wholly foreign-owned enterprises in China (state.gov, 2010). In view of that, there is recorded as much as 100 U.S. based multinationals have ventures in China, several of them with multiple investments. Refer the data from the U.S. Department of Commerce, “in 2002, the projected rate of return of U.S. direct investment in China was 14.08 percent, compared with 8.15 percent for U.S. direct investment in all countries” (hktdc.com, 2010). At least in the moment, whichever U.S. multinational companies who want to be internationalized in the Asia-Pacific minimally cannot afford not to be in China. Economist belief, the growing of U.S. investment in China was estimated to be ever-increasing through the years, making the United States one of the largest foreign investor in China (state.gov, 2010).
The work of Root (1994) is seen by Ekeledo & Sivakumar (2004); Aman (2008) to be in a similar view to define the entry mode as an institutional arrangement that a firm uses to market its product in a foreign market in the first three to five years. This is also seen as the time it usually takes for a firm to fully enters a foreign market (Aman, 2008). When companies consider entering new foreign market they have to have a specific sets of entry strategic alternatives that varies by different target markets, and the different entry mode alternatives (Puljeva & Widen, 2007). Root (1994) contents that this entry strategies conduct the company’s l business activities to reach sustainable growth on the international market. However, when it comes to the entry mode process there are numerous different theories affecting a company’s perspective (Björk et al., 2008). For example, an improper entry mode may possibly cause the business failure and withdrawal from the market. As a consequent, it may result in substantial financial losses to the firm.
Extant frameworks for entry mode strategy provide a complete explanation of entry mode choice by firms in today’s business environment (Ekeledo & Sivakumar, 2004; Aman, 2008; Björk et al., 2008; Puljeva & Widen, 2007). But, previous research has not yet thoroughly developed common definitions and frameworks on the phenomenon of the motivations of those MNCs going international from beginning. For example, there is always a question in my mind while study the post literature studies, why does these firm decide to go international? Therefore, this research gap motivates my contributions. As common view, every movement there is reason behind. According to Hollensen (1998), ahead of companies enter the internationalization process they have something or someone inside or outside the company to initiate the implementation of the internationalization process. For instance, factor in going international is the same as it is for any business decision: determination and commitment to succeed (czinkota, 2004). Management must want to go international and make a serious, determined commitment to identifying potential and to making the commitments and preparation necessary to succeed (czinkota, 2004). As conclude, a company going for internationalization because they have motivations to do so (proactive motivations) or they must to do so (reactive motivations) in order to be competitive on the ever changing market nowadays.
Previous studies have put emphasis the external factors of emerging market environment and the internal factors of company specific factors including entry strategy which have a great influence on multinational companies’ performance. According to Aman (2008), the external factors consists of the international nature and attractiveness of the product category, turnarounds of periods between local and international market, the general potential of the chosen international market, government regulations and trade barriers and assistance presented by governments and other external stake holders in both the domestic and international markets. Internal factors could be seen as the firm size, international experience and the product itself. He also states that factors external to the firm can influence the type of market entry which is most suitable for the firm in a given situation.
Based on the previous studies, the influence of the underlying factors of a choice of entry modes strategies will be also my primary concern. However, my study will differ from previous studies in various significant ways. Firstly, the major objective of this study is to investigate whether foreign market entry mode strategies of small and medium enterprises (SMEs) are applicable to large organizations (corporate). Previous research studies (Aman, 2008; Puljeva & Widen, 2007) on entry mode strategies have been focused exclusively on SMEs. The question of whether findings from these studies are applicable to the large organizations has been motivated my investigation. Theoretically, the difference size of the company has its unlikeness influence for the internationalization to be successful, and this is also different deal with issues such as geographic, cultural and environment barriers (Puljeva & Widen, 2007). Therefore, a major task of this study is to ascertain both the influence of internal and external factors determinants of foreign market entry mode choice to large multinational firms. It has been predicted that this category of larger firms will differ significantly from SMEs in their choice of entry mode.
In this thesis I will deal with the issue of entrepreneurial ventures that internationalize from a very early stage of their existence and the study is made on U.S entrepreneurs that has established in China. This can be considering to another objective part of this study to investigate the case studies of U.S firms direct investment in China. To study U.S entrepreneurs in China is interesting first of all to let us know more about how United State as the world’s great power act in global market and secondly since China, the world’s rising power is one of the new emerging economic actors in the world, growing increasingly important each day on several different levels in the world economy. The status of FDI between the U.S and China is significant for several reasons. First, U.S. invest toward China are based upon the supposition of the rapidly developing Chinese economy affords a rare opportunity for U.S. businesses to expand the markets. With the large population of China, the products manufactured by U.S. firms in China are great demand in the Chinese market (Fung, 2004). Yet, even only small percentages of consumers who can afford high-quality goods in China however can stand for a large demand (Fung, 2004). It is fully ensures the U.S companies in China is carried on to meet up internal economies benefits from reduces the cost of production. To sum up, the investment relationship between China and U.S is worth to investigate from my purpose of studies and it is also good for future research.
Concluding, the research question could be expressed as:
(1) What are the motivators or why they choose china to internationalize?
(2)How the underlying factors were influence the decision of foreign market entry mode?
Outline of the thesis
The thesis is divided into six chapters, starting with background and introduction, followed by the literature review, methodology, data collection, data analysis and ending with the conclusions. Chapter one gives a brief introduction of the subject which leads to the research purpose and research questions. Chapter two presents the literature review with the theoretical framework that is related to the research questions. Chapter three covers the methodology which explains how the study was performed in order to answer the research questions. Chapter four contains with the empirical data gathered within the investigation from the case studies. The data mainly collected through journals browsing, business newspapers, company’s annual report and the net for articles related to the subject in question. Chapter five, which is data analysis, which is applied the theory to the gathered data. The gathered data will be analyzed in a within-case analysis and cross-case analysis, comparing each case against the theory from the frame of reference. At last, the findings and answering to the research question will be concluded in Chapter Six. This in turn leads to recommendations for future studies.
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