Entry Mode Factor

2.5 Factors that influence the entry mode decision

After understanding the most common entry modes, it is necessary to explain the different factors that influence the entry mode decision. There are a lot of different studies available that try to gather all the variables that can influence the entry mode decision. (Sarkar, M., & Cavusgil, S. T., 1996). However, more and more researchers are focused on the influence of one particular variable, like corruption (Rodriguez, P et al., 2005) or national culture (Kogut, B., & Singh, H. (1988). This research will focus on the most important variables which can be divided into internal factors and external factors.

2.5.1 Internal factors

2.5.1.1 Company size and resources

Koch (2001) declares that

High valued products are often exported to foreign markets because local production isn’t always possible. While, on the other hand, production can be located to foreign countries to reduce the shipment costs, especially for large products on distant markets (ibid). According to Hollensen (2007), a more complex and technical product will require a before and after sales services, which is not possible fir every entry mode. Concluding, the characteristics, use and selling of a product may vary from one product to another, which can influence the entry mode choice (Hollensen, 2001).

2.5.1.4 Risk

Koch (2001) declares that a foreign market entry decision is considerably influenced by the perception of risks associated with individual market entry modes. Miller (1998) declares that the degree of risk increases in the order of exporting, licensing, franchising, strategic alliances, joint venture and wholly owned subsidiaries. Concluding, Ekeledo et al. (2004) state that wholly owned subsidiaries demands the highest commitment of company resources, exposes the company to the highest level of risk, but it allows the highest return on investment.

2.5.1.5 Level of

(2004), market laws and regulations can prevent import to the foreign target market. This could permit enterprises to only establish in less attractive geographical locations.

2.5.2.4 Cultural distance

Cultural distance can be seen as an important external factor that influences the entry mode decision. Enterprises prefer to enter countries that have a cultural similarity with the country of origin (Root, 1994). Studies showed that when the cultural distance is large, enterprises tend to set up a joint venture, rather than a wholly owned subsidiary (Agarwal, 1994). According to Peinado et al. (2007), cultural distance can be considered as one major source of uncertainty.

2.5.2.5 Geographical distance

A larger geographical distance can make transportation of some exported goods very expensive and make it impossible to compete against local goods in the target market (Root, 1994). Thus high transportation costs discourage export as entry