Topics: Investment, Foreign direct investment, Subsidiary Pages: 8 (2663 words) Published: February 20, 2013
2 Literature Review
2.1 Type of entry mode
For the sake of expanding sales, acquiring resources and minimizing risks, domestic firms commenced to engage in international business, which contains many factors such as marketing objectives, strategic reasons, behavior motivations or economic rationales in the process (Peng, 2006). For domestic firms, foreign market is far different from their own countries’, thus it is vital for these firms to choose an appropriate mode to enter foreign market.

Hill (2005) stated that there are normally six modes that a firm can choose to enter foreign markets: exporting, turnkey projects, licensing, franchising, initiating joint ventures with a host-country firm and establishing a new wholly owned subsidiary in the host country. Exporting, which means shipping goods abroad for sale or exchange, remains the most popular entry mode so far. Many firms in manufacturing industry act as exporters to initiate their global expansion and some may switch to other modes later. Diebold (Hill 2005) is an example to use this mode. Turnkey projects refer to projects in which clients pay contractors for designing and constructing new facilities and training personnel. The term “turnkey” means proverbial “key” to the facilities ready for operations since on completion of the project, contractors hand it to clients. In a licensing agreement, a licensor grants another entity the rights to use certain intangible property for a specified period, and in return, the licensee pays a royalty fee to the licensor (Hill, 2005). In specific, the intangible property includes patent, inventions, formulas, process, designs, copyrights and trademarks. As a specialized form of licensing, franchising is a project in which the franchiser sells not only the intangible property, but also the model of doing business to the franchisee (Hill, 2005). This is not one-off sales since the franchiser will provide assistance in running the business to the franchisee on an ongoing basis. Joint Venture is a new form of entity which is jointly owned by two or more parent companies (Peng, 2006). Parent companies will retain their separate identities but share the operational responsibilities and financial risks and rewards. Joint venture has three forms: the minority JV (less than 50 percent partnership), majority JV (more than 50 percent partnership) and 50/50 JV (Peng, 2006). In a wholly owned subsidiary, the parent firm has a hundred percent control of the stock of the subsidiary. There are two ways to establishing a wholly owned subsidiary in a foreign market. One is through greenfield venture, which means setting up a new operation in a foreign country; the other one is through acquisition, which means acquiring an existing firm in the host country. 2.2 Influence factors of entry mode

All the entry modes have advantages and disadvantages, hence trade-offs are inevitable when selecting an entry mode. Peng (2006) pointed that several factors influenced entry modes selection. This most important one is resources and capabilities. The amount of resources required by each entry mode is very different. For example, wholly owned subsidiary is the most expensive mode, if a firm cannot afford it; it has to go with other cheaper modes, such as licensing and franchising. In addition, amount of control play a significant influence. Different modes of entry give different degree of control over the subsidiaries. For example, in franchising and licensing, quality control is difficult, and amount of control in joint venture depends on the level of ownership, wholly owned subsidiaries give the most control in decision-making. Moreover, Managers are afraid to lost technology to their local partners when some high risk of losing technology modes is selected. For examples, in licensing, the licensees very often reproduce technology; joint venture partners may also learn technology from the firm; technology risk is probably lowest in wholly owned...
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