Entry Mode Theory

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The Entry Mode Theory
-Different Approaches-

Topic Paper for International Strategic Management

Outline

Abstract3
Introduction3
Overview of Entry Mode Theories4
The Uppsala Model4
The Uppsala Model - Example4
The Uppsala Model – Limitations5
Porter’s Diamond Model6
Porter’s Diamond Model - Example6
Porter’s Diamond Model - Limitations8
The Born Global Concept8
The Born Global Concept – Example9
The Born Global Concept – Limitations10
Conclusion - the comparison and relation of Entry Mode Theories11
Chronological development11
Level of risk12
Time consumption13
Investment cost14
Typical type of corporation14
References16

Abstract

The literature focuses on three entry mode theories, being: The Uppsala Model, Porter’s Diamond and the Born Global Theory. In the following, the three theories will be briefly explained and with the help of a real-life example illustrated.        After that, the theories are looked at from different dimensions. For a quick overview, a table considering the dimensions of year of publication, risk, time consumption, investment cost and the typical type of corporation was developed. This will enable the comparison process and the following conclusion.

Introduction

Entering a new market can be both profitable and challenging. Despite the risks involved, companies increasingly opt for establishing a branch in foreign markets. The reasons for this vary from location economies and economies of scale through to economies of scope, but are all built on the common goal of gaining access to a new market. All this was enabled by the ongoing increase of globalization, with lower transportation and communication costs. This paper tries to illustrate the various approaches on how to become an international operating company; and, in the following, will discuss, exemplify and evaluate the different approaches.

       The essay will focus on the development and possible correlations of the three main theories in a chronological order. At first, the Uppsala Model by Johanson and Vahlne (1977) will be discussed. Secondly, a closer look at the born global theory developed by McKinsey in 1993 will be taken. Last but not least, the focus will lie on Porters’ diamond model.

Overview of Entry Mode Theories

In order to demonstrate the relation among the theories and foster the discussion about them, each theory will be first discussed briefly. Afterwards, a practical example will be given and the limitations provided.

The Uppsala Model

The Uppsala Model is a prominent entry mode theory that was developed by the two Swedish authors Johanson and Vahlne in their paper “The internationalization process of the firm” in 1977. The model assumes that the lack of knowledge about foreign markets and operations is a major obstacle for firms striving for internationalization. In order to overcome this lack of knowledge firms must first gain experience in their domestic markets before entering the physically and psychologically closest foreign market.

The authors describe physical and psychic distance as geographical and cultural distance, respectively. Johanson and Vahlne “believe that internationalization is the product of incremental decisions”. More precisely, the authors argue firms usually enter a market by simply exporting their product and then gradually moving to more committed operation modes, e.g.: own production facilities or subsidiaries.

The Uppsala Model - Example

To name a suitable example of a firm which approached internationalization with the Uppsala concept, the company Volvo will be examined. Volvo started its activities in 1927 in Sweden with the goal to go global and sell their products also in numerous different countries. Volvo first developed a strong domestic base in Sweden and later on in 1928 exported first to countries which were culturally close to their own, namely Finland, Denmark and Norway.

Here,...
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