Factors Influencing Market Entry Strategy for MNEs

This essay discusses the critical factors that influence the selection of market entry strategy for multinational enterprises (MNEs). It explores the impact of internal factors such as firm size, international experience, product characteristics, and technological capability, as well as external factors such as cultural distance, country risk, market size and growth, and legal barriers. The essay also highlights the importance of equity entry modes for firms with greater resources, international experience, and technological capability.

Running head: MANAGING IN GLOBAL CONTEXT
Managing in Global Context
[What are the critical factors in choosing the ideal market entry strategy for the MNEs?]
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1MANAGING IN GLOBAL CONTEXT
The multinational enterprises (MNEs) are faced with multiple questions to answer while
they make plans for entering a foreign marketplace. One of the most challenging and common
questions that they are needed to answer is deciding the best mode of entry. There are various
modes through which MNEs can enter the target foreign market; however, apart from
understanding these entry modes they have another important task to consider. This is to research
and understand the potential impact of the country’s external environment on the chosen entry
mode. For example, exporting could be the best mode of entry for certain countries. It may be
due to numerous factors like a less favourable political state of the country or else. An
unsupportive political state might prevent foreign companies from setting up manufacturing and
other various facilities (Han et al., 2018). For example, Walmart still does not have any physical
existence in India despite so much of speculation on their entrance to India (Harris, 2013). This
essay is also in the line of the discussion in the above paragraph. The essay identifies factors,
which have impact on the selection procedure for the best market entry mode. The selection of
an appropriate entry mode can have the effects of political, economic and other important
external factors of the target country. This research essay tries to establish a discussion to
identify what all factors affect the market entry for MNEs. This discussion will be conducted in
reference to a few scholarly articles.
International market entry mode has been an extensive research area for global
researchers. The selection of integrated and non-integrated entry modes depend on various
factors. As observed by Pinto et al., (2017), the firm adopts the integrated modes to enter the
marketplace in situation when they have limited suitable partners in the host country. In other
situation like when the host government is not so favourable for foreign ownership when there is
high uncertainty in the country and when the firm is short of resources, non-integrated entry

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modes are the most preferred market entry strategy. However, the article does not identify any
such influence of market size and firms’ desire to become an established market player on its
foreign operations. Firms that had enhanced control on product customisation and also had closer
interaction with their customers preferred the integrated entry modes. Firms carrying an intention
to attain a rapid growth in a foreign marketplace preferred going for non-integrated modes. As
per the article, the discussed factors may be impactful under diverse entry situation.
Bruneel & De Cock (2016) identify locational advantages and ownership as impactful on
the market entry choice by SMEs. This is in particular to the computer software industry. The
article examined the behaviour of selecting marketing mode between cooperative, independent
and integrated modes of entry. Larger firms those which have higher resource capabilities and
have more locational advantages as compared to SMEs they will most certainly prefer integrated
entry modes. Additionally, firms those who follow product differentiation strategy they also
prefer going for integrated entry modes. By doing this they avoid losing their competitiveness to
the local partners. A foreign market that provides long-term investment potential to the firms is
mainly approached with integrated entry modes.
Hitt, Li & Xu (2016) in order to identify the impact of market risks on selecting the most
suitable market entry mode considered an integrated international risk framework. The influence
was compared between the diverse selection modes such as non-equity mode, wholly owned
subsidiary and a joint venture in the context of an emerging market like Malaysia. It was being
found in this article that all type of market risks affect the firm's entry mode. The article also
finds a negative relationship between market risks and the choice of market entry. In a situation
when there are high market risks the firms decided sticking to reduced control and lower

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resource commitment. Some of the factors as found in this article that greatly impacts the entry
mode choice are customer taste, industry structure and marketing infrastructure.
In the opinion of Anderson & Sutherland (2015), the choice between acquisitions,
Greenfield investments and joint ventures by MNEs can have the influence of the industry
structure in the manufacturing industry. The article finds that MNEs firms prefer Greenfield
operations over acquisitions and joint ventures mostly in industries that are highly concentrated.
On the other hand, MNEs will prefer acquisitions and joint ventures over Greenfield operations
in industries that are characterised by plant scale economies. It is because any new creation of
facility in such industries will disrupt the business of all firms including the new entrant.
However, firms tend to have their inclination towards Greenfield operations over joint ventures
and acquisitions in industries that have high growth rates. It is due to a fact that a growing
industry has the capacity to absorb a new facility created through Greenfield investment.
Wooster, Blanco & Sawyer (2016) helped to identify the impact of uncertainty on making
selection between low control resource commitment modes, and high control resource
commitment modes by MNEs in the context of the service industry. The article uses ordinal
logistic regression to examine the impact. The article finds that capital intensive firms prefer to
share control and investment in a case of a huge cultural difference between the home country
and host country, and there is a high risk in the host country. However, a higher control and the
resource commitment modes is most suitable to firms having lower exit costs and categorised
under knowledge-intensive firms. They do it to gain competitive advantage in a market, which is
still very much unexplored. With respect to demand-based uncertainty, any changes in the client
requirement have little or no influence on the capital intensive firm. However, knowledge-
intensive firms are highly vulnerable to any such scenario. In such a situation, the knowledge-

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intensive firms are left option no other than going for adopting high control modes. However, the
risks such as technological changes can affect both the knowledge-intensive and capital intensive
firms. Risk of technological changes can lead these firms to adopt the low control modes.
Elliott, Jabbour & Zhang (2016) examined the firms’ entry behaviour in China. The
article finds that in case when there is quality governance and stable political environment in
China, the majority of firms will go with the equity modes of entry. The article found that the
level of law and policy in an emerging country like China significantly impacts the selection
criteria for market entry modes. However, government effectiveness, controlled corruption, and
voice and accountability were being found as having the least impact on the business choice for a
foreign market entry. The political environment was found as having the greatest impact. This is
followed by regulatory quality. Therefore, the article concludes that in a country where the
institutional environment is mostly favourable, MNEs favour high control entry modes.
Andreu, Claver & Quer (2017) observed and examined the priority selection between a
joint venture and wholly owned subsidiary by Chinese firms in relation to entering a foreign
marketplace. Chinese firms’ entry to foreign markets were based on both their strategic fit in the
host country environment and their intent to go global. It was being found that Chinese firms
give preference to strengthening of their capability and competency in relation to cost control
and quality control when they are faced with tough competition in host countries. They do it by
going for a wholly owned subsidiary. However, when a host country is characterised by high
growth potential, Chinese firms will adopt for joint venture entry mode. They do so to attain fast
track establishment, which is hardly possible through a wholly owned subsidiary. Chinese firms
those who wish to develop a worldwide business network and to emerge like a challenging

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global player they chose wholly owned subsidiary as the strategy to develop an integrated global
business network.
Liou, Chao & Yang (2016) discussed the impact of business environment in host country
in regards to political risk, language diversity and cultural distance. Moreover, the discussion is
being made in relation to selecting the best out of a joint venture and wholly owned subsidiary. It
was being found in this article that when there are high political risk and cultural barriers but no
significant language diversity between home and host countries the firms prefers joint ventures
instead of a wholly owned subsidiary. However, such a decision is strongly subject to similarities
in language between both home and host countries. They go for joint ventures when they have no
issues in regards to formal and informal communication. On the other hand, when there is a
language diversity between the partnering countries and have difficulties understanding each
other’s’ communication, the scenario gets changed. In all such cases, they prefer going for
wholly owned subsidiary instead of a joint venture. It is because the flow of information gest
disturbed, which result in increased cost and difficulty level related to their cooperation. In such
a situation, forming a joint venture with one of the selected local partner is not a healthy option
to control or reduce external uncertainties. The article considered the importance of political risk,
cultural distance and language diversity in relation to selecting the market entry mode.
Prajogo (2016) has identified various factors influencing the firms’ choice for market
entry. According to this article, there are various factors, which impact the firms’ choice for
entry mode. There are various environmental factors, which influence the firms’ market entry
choice. The political, economic, social, technological, environmental and legal forces of the host
country are being considered to select the most feasible market entry mode. An environmental
scanning done this way is used to identify whether to go for joint venture, wholly owned

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subsidiary and other modes of entry. For an example, in a case when political risk in the target
host country is low, the market potential is high, macroeconomic conditions are stable and legal
restrictions are very few, firms will decide to for full control and ownership in the host country.
On a similar note, in a case when in the home country the competition is increasingly high and
there are also low restrictions on foreign expansions, the firms have more reasons to encourage
for adopting high ownership and control modes.
Schu, Morschett & Swoboda (2016) have integrated the environmental influences and
resource-based influences to identify and analyse their impact on the entry choice mode. This
study is being made in context to China-Hong Kong. The study has found that firms possessing
highly differentiated characteristics tend to prefer equity entry modes. There was no evidence
found on the impact of firms’ size on the selection making process for entry mode. The
characteristic features in both home countries and host countries were found as factors impacting
the entry mode strategy of Hong Kong firms for entering China. Firms those who operate in a
highly dynamic market and are continuously pressurised for a highly demanding trend in the
home market, they prefer adopting an equity mode of entry. On a similar note, when a host
country has a similar situation, and the market is more dynamic and is also open for foreign
direct investment (FDI), firms prefer to stick with equity entry modes.
The range of scholarly articles as discussed so far explains that there are few
determinants that actually drive or influence the selection of the most suitable market entry
mode. Based on the findings of the scholarly articles used in this study, the list of determinants
can be broadly divided into internal factors and external factors. The list of internal factors
includes like firm size, international experience, product characteristics and technological

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capability. Similarly, the list of external factors includes cultural distance, country risk, market
size and growth, and legal barriers.
Firm size is one of the most important factors to have an influence on the firms’ entry
mode choice. Smaller firms have very limited human and financial resources to dispose. This is
why they are exposed to more risks. It is because any chances of failure of foreign investment
can even result in the insolvency of the entire firm. On the contrary, larger firms possess greater
knowledge, greater productive resources, greater market power and economies of scale (Bruneel
& De Cock, 2016). Larger firms have better capabilities to bear the risks that are usually
associated with foreign market entry. Therefore, it can be said that larger firms are positively
related to and passionate for the adoption of equity entry mode.
When a firm ventures into a foreign market, it gains an understanding of how to tackle
the local economic and environmental constraints. The moment a firm grows into experience, the
firms’ capability to control the costs and returns, to leverage the market demand, to identify the
customers’ needs and to evaluate the true economic behaviour is also increased. They become
more confident in regards to dealing with challenges and managing foreign operations.
Consequently, they are also willing to greater resources. However, firms that have lesser
experience are bound to face diverse business situations in foreign countries. They tend to face
greater uncertainty. They are more likely to make mistakes with the risks and returns. It is due to
this reason they hesitate to utilise greater resources in the foreign market (Hollender, Zapkau &
Schwens, 2017). It, therefore, can be said that firms with better international experience are
more likely to adopt an equity mode for market entry.
Firms with technological capability like high R&D capability face a greater amount of
risk from leaking their proprietary technology to their rival companies in a case when they intend

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to operate with non-equity modes. This means firms with non-equity modes may lose their
control of technology to the local companies in partnership (Ahammad et al., 2018). So, in order
to avoid such consequences firms with greater technological capability prefer the equity modes
of market entry instead of going for non-equity modes.
The product characteristics assist the firm in developing an ability, which is required to
differentiate the product line as compared to the rival companies. The ability thus developed
includes attributes like sales force training needs, product uniqueness, the extent of product
establishment, and the degree to which the maintenance and service are required for the product.
It is to be noted that products, which are service intensive may find difficulties in serving from a
distant market. In such cases, it is important that the company is placed fairly close to its
customers and is able to meet the local needs. Therefore, in case of a product that is a service-
intensive equity mode is the most preferred option to enter a foreign marketplace. It is
noteworthy that innovative products possess intangible components in huge quantity in regards
to marketing and technological expertise. To deal with all such products specialised training
programs must be designed and put for the employees. Therefore, product characteristics are
mostly associated with the equity entry mode (Hollender, Zapkau & Schwens, 2017).
Cultural distance is one of the most important factors to have an impact on the choice of
market entry mode. In fact, a cultural analysis of the target foreign country is thoroughly made
before entering the foreign marketplace. Notably, culturally close countries share similar
languages, a more or less similar set of business governing norms and similar cultural
characteristics. The rate of difficulty in operating a business will grow with increasing distance
between the host country and home country. Cultural uncertainty will be more when there is
greater distance between the host country and home country. Additionally, costs incurred in

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collecting information and establishing communication will also be greater (Ojala, 2015).
Therefore, in cases when there is a huge cultural distance between the host and home countries,
the equity entry modes will largely be avoided. Moreover, they will use an entry mode that
demands a lower resource commitment from the firm.
Market size and growth potential are some of the most important host country factors
that influence the entry mode choice. The bigger the market size the higher will be the growth
potential. Moreover, the inclination of the growth-centric firm will also be more towards the host
country. Furthermore, the firm will be encouraged to commit greater resources to be able to
establish and to support potential growth for the company (Ravelomanana et al., 2015). On the
contrary, firms operating in smaller markets tend to restrict their usage of resources due to the
limited growth opportunity in such markets. In smaller markets, firms will choose non-equity
entry modes instead of going with the equity entry modes. In markets that offer low sales
potential, firms are left with limited choice for the market entry. They have limited options for
market entry such as in the form of licensing and indirect exporting. On a similar note, in
markets having low growth potential or are declining, firms tend to go with non-equity modes
(Ravelomanana et al., 2015).
A country risk that has its traces in the country’s political and economic factors can
significantly influence a country and its potential attractiveness. Unstable and unpredictable
political and economic environmental states both affect a country’s attractiveness as it increases
the risk of doing business. In addition to this, it discourages to adopt an entry mode that requires
a firm to commit greater resource requirements. On the contrary, countries that are politically
stable and also offer free market mechanism have more reasons to look attractive to firms (Kraus

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et al., 2015). These countries also have stable macro-economic indicators. In all such countries,
firms will use equity entry modes.
Legal barriers like trade tariffs, excessive and hard trade regulations, and the imposition
of quotas on the imports encourages local firms to adopt equity entry modes. They are
encouraged to prefer joint venture and wholly owned subsidiary as the chosen entry mode.
Similarly, when there are high restrictions imposed on foreign ownership the firm is forced to
adopt the non-equity entry modes (Schellenberg, Harker & Jafari, 2018).
To conclude, it can be said that the decision on entry mode is dependent on various
internal and external factors. The selection of entry mode has a direct influence of resources,
capabilities and skills. In addition, there are various firm-level factors like firm size, which
influence the decision to go for an entry mode. In this research essay, the various external factors
impacting the choices for entry modes have also been discussed. The most common of these
factors is the cultural distance between the host country and home country. Host country risk
follows it as the second most influencing external factor. Larger cultural distance and high
country risk are negatively associated with the equity entry modes. There are other external
factors also like legal restrictions, restrictions on foreign ownership, etc.
It is recommended that both global and local firms should thoroughly assess the host
countries on these internal and external factors to identify the best market entry mode.
The second point of recommendation will be to observe other companies who have been
highly successful in foreign countries. This observation will help to identify the most productive
entry mode for the host country and factors that they had considered to reach this decision.

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