9.2.1 Six entry modes
The heading 'Six entry modes' is used to indicate that Hill (2005) deals with:
- exporting
- turnkey projects
- licensing
- franchising
- joint ventures
- wholly-owned subsidiaries
The entry mode chosen will frequently involve trade-offs between the desire to have maximum control and the advantages to be gained from particular entry modes. For example, a joint venture may be the only way to gain entry to a new market, even though it will inevitably lead to a lack of control over the technology used in the joint venture.
The textbook deals with these six modes quite adequately. Table 14.1 on page 495 provides a good summary of the advantages and disadvantages of each mode and there is no point in repeating that material here. What follows is a series of notes relating to entry modes which is intended to 'flesh out' the material in your textbook. You will also find reference to management contracts which are not mentioned in Hill's (2005) book.
Additional points:
- The entry mode employed should be consistent with the firm's objectives and the choice will often involve a trade-off among objectives.
- The factors which influence the choice of entry mode are:
- legal considerations
- the nature of the competition
- political factors
- economic risk
- the nature of the assets to be employed
- the firm's experience.
- Firms may use different entry modes in different countries and for different products. As diversity increases, the task of coordinating the foreign operations becomes more complex.
- Firms usually want complete ownership of foreign operations to guarantee control and prevent loss of profit. However, host countries usually want a share of the action and the resources that the MNE will bring into the host country.
- Joint ventures are often motivated by the complementary resources firms have at their disposal, and just as often by governmental preferences.
- Turnkey projects usually require high level negotiation skills to deal with host country government officials.
- In the absence of the six entry modes listed above, MNEs may achieve their objectives through long-term contract manufacturing and output-sharing arrangements. The firm contracts with a local manufacturer to produce products for it according to its specification. The firm's sales organisation markets the product under its own brand.
- Management contracts are a means of securing income with little capital outlay. They are usually used for expropriated properties in LDCs, for new operations, and for facilities with operating problems. Management contracts involve the sale of technical or managerial expertise, and one of the responsibilities of the hired manager is to train local nationals so they will be able to run the business when the contact expires.
- Contracting foreign business does not negate management's responsibility to ensure that company resources are being optimally employed. This involves constantly assessing the work of the outsiders such as contract managers and evaluating new options for their employment.
Keep these points in mind as you read Hill (2005) and an article on recent research into franchises.
In your text
Hill 2005, Chapter 14, pp. 479-500.
Reading 9.2
Davis, P. 2003, 'Disenfranchised', Management Today , August, pp. 12-14.
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