DETERMINANTS OF ENTRY MODE

A firm adopts various modes for its entry into business transaction
across borders. Which particular mode a fi rm should adopt depends, at
least, upon four factors. They are:
1. Subservience of the corporate objective = When the objective of a firm
spreading internationally is simply to earn profits and not necessarily to
maintain control over the entire operation, only trading activities will serve
its purpose. But if control is the primary objective, the investment mode, and
especially investment in a wholly owned foreign subsidiary, will be the best
course of action. Thus, a particular mode is selected in tune with the very
objective of the firm behind international business.
2. Corporate capability= The corporate objective shaping the entry mode
must be supported by the company’s capability to select the particular entry
mode. For example, if the company’ financial position is not strong enough
to make large investment abroad, it will be difficult for the company to make
such investment even if it is desirable on the grounds of fulfilling corporate
objectives. Thus, the choice of the entry mode depends, to a considerable
extent, on the capability of the company going international.
3. Host country environment =The host country environment too
influences the entry mode. It includes many aspects, such as the regulatory
environment; cultural environment; political and legal environment;
economic environment, especially the size of the market and the production;
the shipping cost, and so on (Root, 1987). When the managers of a firm are
not well acquainted with the values, beliefs, customs, language, religion, and
other aspects of the target market, the fi rm does not prefer to invest there.
Rather, it limits its business only to trading activities in such cases. The
company starts operation in the host country only when the managers are
acquainted with the cultural environment in the host countries. Again, if the
political conditions are not congenial in the target market or if the legal
formalities are lengthy, large investment is often avoided. Sometimes, when
the host government bans certain types of investment, foreign investors
cannot make such investments even if they wish to make them. In India, in
1973, the government had fixed a ceiling on foreign equity participation.
Foreign companies that did not favor the ceiling dismantled their operations
in India (Sharan, 1992). Yet again, it is the size of the market in the host
country that influences the entry mode of foreign fi rms. When the market is
large and ever expanding, foreign fi rms prefer to enlarge their involvement
through investment. But if the size of the market remains small, trade is the
only suitable option. Last but not least, if the cost of production in the host
economy is lower than in the home country, the host country attracts foreign
investment. In fact, this is one of the important reasons that companies from
the developed world have moved to developing countries. If the shipping cost
is also low, it is possible that the fi rm may shift the entire production
process to the low-cost host country and may ship the output back to the
home country for meeting the domestic demand. If, on the other hand, the
host country does not represent cost effectiveness, trading remains the only
way out.
4. Perceived risk = Perceived Risk refers to the set of uncertainties that a
consumer feels after buying goods or services. Perceived Risk is generally
associated with products having higher prices like luxury cars, bags,
laptops, etc. Consumers generally do deep research before buying expensive
goods by asking friends and experts, to avoid any kind of issues after buying
the product. Perceived Risk is very common in consumers while buying
products in the markets, but Perceived Risk makes it difficult for new brands
to enter the market. Manufacturers and marketers make every effort to
lessen these risks in the consumer’s mind by offering guarantees and
assurances, securing the support of reputable organizations, and enlisting
well-known and reputable celebrities to serve as brand ambassadors for the
brand. Perceived Risk is affected by a variety of elements such as individual
ideas, experiences, and emotions. The degree of control an individual has
over the circumstance, the potential negative effects, and the likelihood that
the risk will occur also have a major impact on how consumers perceive risk.
External influences including media or social standards, also affect how risk
is perceived. This risk is generally associated with a product, like a teenager
perceiving a high social risk when deciding whether to wear a certain outfit
to school due to the fear of being judged by their peers. Perceived risk is also
associated with services like a person experiencing a high physical risk when
deciding whether to participate in extreme sports like bungee jumping or
skydiving.