To enter a foreign market, a manufacturer has a number of strategic options, each with its

own strengths and weaknesses. Many companies employ multiple strategies. IBM has
employed strategies ranging from licensing, joint ventures, and strategic alliances on the
one hand to local manufacturing and subsidiaries on the other hand. Likewise, McDonald’s
uses joint ventures in the Far East while licensing its name without putting up equity capital
in the Mideast.Walt Disney Co. has a 39 percent stake in Euro Disney while collecting
management and royalty fees which amount to $70 million a year.

One would be naive to believe that a single entry strategy is suitable for all products or in
all countries. For example, a significant change in the investment climate can make a
particular strategy ineffective even though it worked well in the past. There are a number of
characteristics that determine the appropriateness of entry strategies, and many variables
affect which strategy is chosen. These characteristics include political risks, regulations,
type of country, type of product, and other competitive and market characteristics.

The impact of culture on FDI is somewhat ambiguous. One study found no support for the
belief that foreign direct investments first took place in foreign markets close to the home
country before spreading to more culturally distant markets. Another study involved
service multinational firms and found that their foreign investments were negatively
related to the cultural distance between the home and host countries. Interestingly,
multinational corporations with social knowledge (i.e., ability to understand others’
general patterns of behavior) have less need to resort to ownership for control purposes.

Viacom Inc. appears to take culture into account in deciding on entry strategies. In the
case of its MTV channel, the company generally does not have partners, but in the case of
its Nickelodeon channel, the firm has made an effort to have local partners. It is difficult to
tell Europeans that they should have the same cultural underpinnings inherent in American
children’s programming. Although children may watch programming from other countries,
they are more inclined to watch their own programs.

Markets are far from being homogeneous, and the type of country chosen dictates the
entry strategy to be used. One way of classifying countries is by the degree.of.control.
exerted on the economy by the government, with capitalism at one extreme and
communism at the other. Other systems are classified somewhere in between depending
on the freedom allowed to private citizens in conducting their business activities. In free-
enterprise economies, an MNC can choose any entry strategy it deems appropriate. In
controlled economies, the options are limited. Until recently, the most frequent trade entry
activity in controlled economies was exporting, followed by licensing for Eastern Europe.
Market entry strategies are also influenced by product type. A product that must be
customized or that requires some services before and after the sale cannot be exported
easily to another country. In fact, a service or product whose value is determined largely by
an accompanied service cannot be distributed practically outside of the producing
country. Any portion of the product that is service oriented must be created at the place of
consumption. As a result, service-intensive products require particular modes of market
entry. The options include management contract to sell service to a foreign customer,
licensing so that another local company (franchisee) may be trained to provide that
service, and local manufacturing by establishing a permanent branch or subsidiary there.

A product that is basically a commodity.may require local production in order to reduce

labor and shipping costs. For a value‗added.or.differentiated product, a firm can depend
on the exporting mode because of the higher profit margin. Furthermore, local
manufacturing may destroy the product’s mystique and thus diminish a previously existing

market.

A study of foreign direct investment entries in the USA found that 65 percent entered the
USA through acquisitions and that joint ventures and greenfields accounted for 9 percent
and 26 percent respectively. Foreign acquisitions of American firms were more likely to fail
than foreign greenfield investments. Foreign-controlled firms failed less often than
domestically owned firms. There may be a relationship between ownership entry modes
and performance. According to one study of 321 Japanese firms entering the North
American market, new ventures outperform joint ventures, and joint ventures outperform
acquisitions.

There are two schools of thought that explain how multinational corporations select
ownership structures for subsidiaries. The first has to do with what the firm wants, and
MNCs want structures that minimize the transaction costs of doing business abroad (e.g.,
whole ownership). Factors affecting what the firm wants include the capabilities of the
firm, its strategic needs, and the transaction costs of different ways of transferring
capabilities. The second school of thought, related to what the firm can get, explains that
what it wants may differ from what it can get (e.g., joint venture). In this case, ownership
structures are determined by negotiations, whose outcomes depend on the relative
bargaining power of the firm and that of the host government. The statistical analysis
supports the bargaining school, in that attractive domestic markets increase the relative
power of host governments. However, there is no support for the prediction that firms in
marketing- and R&D-intensive industries have more bargaining power than others. MNCs
prefer whole ownership when they have a lotof experience in an industry or a country,
when intrasystem sales of the subsidiary are high, or when the subsidiary is located in a
market-intensive industry. The joint venture is the preferred mode when MNCs rely on local
inputs of raw materials and skills.

In practice, American manufacturers prefer joint ventures in the Far East because of legal
and cultural barriers. Regarding how American manufacturers want to enter the European
Union market, the preferred methods of entry (and the percent of preference) are: joint
venture (26 percent), sales representative (21 percent), branch/subsidiary (19 percent),
distribution facility (17 percent), increasing exports (9 percent), and expanding existing
facilities (8 percent).Their preferred European locations are: Britain (30 percent), Germany
(24 percent), France (9 percent), Italy (9 percent), the Netherlands (8 percent), Belgium (8
percent), Ireland (5 percent), Spain (5 percent), and Denmark (3 percent).

A company’s entry choice of joint ventures versus wholly owned subsidiaries may be
influenced by its competitive capabilities as well as market barriers. In the case of
Japanese investors entering the US market, they choose joint ventures when facing high
market barriers. However, they prefer to establish wholly owned subsidiaries when they
possess competitive capabilities. These ownership decisions are influenced more by
marketing variables than by technological factors. One caveat: the results vary across
industries (low technology vs. high technology) and products (consumer products vs.
industrial products).35 The costs of organizing a business in transition economies
influence entry mode choice. Host country institutions have an impact because
underdeveloped institutions drive up costs of establishing wholly owned ventures.

Institutional isomorphism seems to exist as later entrants often use the entry mode
patterns established by earlier entrants. In addition, this behavior exists within a firm as
companies exhibit consistency in their entry mode choices across time. In the case of
China, a company’s timing of entry is associated with non-equity modes, competitors’
behavior, and lower levels of country risk. Firms cannot delay their entry when the
competitors are moving in. In addition, a firm’s entry is accelerated if a non-equity mode of
entry is chosen. Favorable risk conditions (locational features), likewise, accelerate entry
timing. In addition, corporate size facilitates early entry. A firm of good size is able to
muster resources, extend support among the related products sectors, and capitalize on
economies of scale. This is consistent with the resource-based arguments that early
entrants differ from late entrants in terms of resources and capabilities.

One study focuses on conflicting results which show that cultural distance is associated
with wholly owned modes in some studies and with joint ventures in other studies. The
evidence shows that, for Western firms investing in Central and Eastern Europe,
investment risk moderates the relationship between cultural distance and entry mode
selection. Firms entering culturally distant markets that are low in investment risk
preferred cooperative modes of entry. However, if such culturally distant markets pose
high investment risk, wholly owned modes of entry are preferred.39 However, although
cultural distance is routinely used as an independent variable which supposedly
influences performance and entry mode choice, it is conceivable that the relationship may
be reversed. A case can be made that cultural distance is a dependent variable because
entry mode and performance may affect the perceived distance.