Market Entry Strategy Selection in China

Topics: Economics, Investment, Foreign direct investment Pages: 11 (3878 words) Published: March 3, 2011
Market Entry Strategy Selection in China

Foreign firms deciding to entrer a host country face numerous options of entry modes, which include equity joint ventures, wholly foreign owned enterprises, acquiring existing firms, franchising and licensing, contractual joint ventures, representative offices, build-operate-transfer and so forth. However, the most important process a foreign company should do before deciding an entry modes is to make sure it know the targeted market very well by considering the production factor, the market factor, and environment factor in host country. This essay will give a general introduction about the location choice of foreign direct investment (FDI). After that, it will focus on China’s location factors which have an influence on FDI. Then, four main entry modes in China will be discussed including advantages and disadvantages. Finally, some available and realitic entry modes in China will be suggested.

Literature Review
International investment is becoming an increasing important part in doing business worldwide for multinational corporations. Dunning’s compromise theory of international production proposed in the 20th century 70’s indicates that there are three basic elements, namely the advantages of ownership, internalization and location, if a company intend to do international investment (Yan, 2003). The classification system of foreign direct investment (FDI) adopted by Guiming (2002) is four fold: the production factor in host country, the market factor in host country, environment factor in host country, geographical conditions, cultural diversity factors and other factors. Focusing on China, due to the various economic and non-economic factors, FDI in China is different from region to region. Dunning divided the locational factors whicn affect FDI into four groups: market factors, trade barriers, cost factors and the investment environment. The location selection factors influencing FDI can be classified into four groups below: cost factors, policy factors, market factors and centralization economic factors (Yi, 2004; Yadong, 2002; Wanda and Harm, 2002). When comes to entry modes, Yadong (2002) suggests that there are various kinds of entry modes available to foreign investors at present in China, incorporating equity joint ventures (EJV), wholly foreign owned enterprises (WFOE), acquiring existing firms, franchising and licensing, contractual joint ventures, umbrella companies, representative offices, branch, build-operate-transfer and so forth. This essay is mainly focus on the first four tnery modes, each of which is associated with advantages and disadvantages (Yadong, 2002; Tim & Morgen, 2004; Charles, 2009; Harry & Freek, 1998). For example, Tim & Morgen (2004) believes that from western companies’ point of view, EJVs can be a better way of learning more about China and long-term connections to the Chinese market. However, on the other side, Yadong (2002) augues that the marketplace in China is becoming increasingly more competitive since more companies are attracted by the first-mover advantages and business opportunities in China. Finally, Yadong (2002) suggests that foreign companies select an entry mode not only according to the strategic objectives, but also the different stages they are at. Then he proposes two realitic methods. One is the combination of EJV and WFOE, and the another one is to consider an EJV and a WFOE in sequence.

1. General introduction about the location choice of foreign direct investment 1. The location theory of foreign direct investment
After the Second War, with the globalization process accelerating, foreign direct investment starts to play an increasing vital role in the world, therefore, Foreign direct investment has increasingly become the international academic research topic. Recently, denning (Dunning)’s compromise theory of international production proposed in the 20th century 70's remains the...
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