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Selection of Entry Mode into a Foreign Market: The Cases of U.S. Firms in China
By
Han Ping LEE
2010
A Dissertation presented in part consideration for the degree of MSc International Business.
1
Abstract
Today we see it as natural that companies gradual internationalize to gain success and
increase the growth and profit. As internationalisation, they become ever more
important for individual business to keep up with the development. Every movement
there is reason behind. They do this because they have motivations to do so or they
must to do so in order to be competitive on the ever changing market nowadays.
Selecting the right entry mode expanding to other countries is an important decision
that demands a lot of resources and through proper scheduling. However, they are wide
range of internal and external factors influence firm’s choice of international market
entry. Enter the right market with appropriate entry mode it might be victorious; the
consequences of the entry mode choice can have strong effects on the success of the
firm. The study empirically validates the theory in the specific situation of U.S firms in
same sector made their presence into China market, which kind of entry modes they
went for; further how their market’s entry is influenced by underlying factors. Two
qualitative case studies of two U.S MNEs namely Intel and IBM were undertaken. A
literature review was conducted, which resulted in a conceptual framework that
presented what would guide the data collection.
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Dedication
I humbly dedicate this to,
My family,
All of your supports and cares make me so comfortable and confident in my journey to
success.
My lectures,
Who always guide me when I need help.
My friends,
Thank you for everything you’ve done for me.
3
Acknowledgments
It is a fantastic feeling being finished with this Master thesis. The subject that I have
been working with during the last 3 months has been very interesting and research
motivating, and it has given me theoretical experience and perspectives.
Also, a special thanks, goes to my supervisor Dr Chengqi Wang who has taken time to
provide me with a valuable guidance perhaps I couldn’t take the full advantage of.
Again, I would like to convey my heartiest appreciation to him for intensifying my
learning curve.
Further, I must express my heart-felt gratefulness to my parents for their
encouragement and financially support of my living cost in England and as well as tuition
fees throughout my master degree.
Lastly, I hope that this thesis will be interesting and useful reading material for future
students that want to write a thesis within this area and also for other people that have
an interest in this subject.
University of Nottingham, UK
September 2010
Han Ping LEE
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Table of ContentsAbstract..........................................................................................................................................2
Dedication......................................................................................................................................3
Acknowledgments..........................................................................................................................4
List of Figures..................................................................................................................................7
List of Tables...................................................................................................................................7
Chapter 1 - Introduction.................................................................................................................8
1.1 Background...........................................................................................................................8
1.2 Problem discussion...............................................................................................................9
1.3 Purpose and research questions.........................................................................................12
1.4 Outline of the thesis...........................................................................................................12
Chapter 2 – Theoretical Frameworks............................................................................................14
2.1. The theoretical approaches to entry modes......................................................................14
2.1.1 Internalisation theory..................................................................................................14
2.1.2 Eclectic paradigm.........................................................................................................15
2.1.3 Resourced-based theory..............................................................................................17
2.2 Firm motives for internationalisation.................................................................................17
2.2.1 Proactive Motivations..................................................................................................19
2.2.2 Reactive motivations....................................................................................................21
2.3 Where, When, How............................................................................................................22
2.4 Internal factors influencing the choice of entry mode........................................................26
2.4.1 Firm Specific Characteristics........................................................................................26
2.4.2 Company size/ resources.............................................................................................26
2.4.3 International experience..............................................................................................27
2.4.4 Product Factors............................................................................................................27
2.4.5 Management risk attitudes..........................................................................................28
2.5 External Factors influencing the choice of entry mode.......................................................28
2.5.1 Home country factors..................................................................................................28
2.5.2 Target country market factors.....................................................................................29
2.5.3 Target country environmental factors.........................................................................29
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2.5.4 Target country production factors...............................................................................30
Chapter 3 – Methodology.............................................................................................................31
3.1 Research purpose...............................................................................................................31
3.2 Research approach.............................................................................................................32
3.3 Research strategy: Case Study............................................................................................33
3.4 Data collection....................................................................................................................35
3.5 Data Analysis.......................................................................................................................38
Chapter 4 - Data presentation......................................................................................................40
4.1 Case 1: INTEL.......................................................................................................................40
4.1.1 Case 1 – Data regarding RQ1: What are the motivators or why they choose china to internationalise?...................................................................................................................41
4.1.2 Case 1 – Data regarding RQ2: How the underlying factors were influence the decision of foreign market entry mode?.............................................................................................43
4.2 Case 2 – IBM.......................................................................................................................47
4.2.1 Case 1 – Data regarding RQ1: What are the motivators or why they choose china to internationalise?...................................................................................................................47
4.2.2 Case 2 – Data regarding RQ2: How the underlying factors were influence the decision of foreign market entry mode?.............................................................................................49
Chapter 5- Data Analysis...............................................................................................................52
5.1 Motives of U.S Large firm (INTEL & IBM) to go international..............................................52
5.2 Within- case analysis...........................................................................................................54
5.2.1 Theories applied to Intel- the underlying factors influence the decision of foreign market entry mode...............................................................................................................54
5.2.2 Theories applied to IBM- the underlying factors influence the decision of foreign market entry mode...............................................................................................................60
5.3 Cross case analysis..............................................................................................................64
Chapter 6 - Conclusions................................................................................................................70
6.1 Conclusion of the study......................................................................................................70
6.1.1 Research Question 1 - What are the motivators or why they choose china to internationalize?...................................................................................................................71
6.1.2 Research Question 2 - How the underlying factors were influence the decision of foreign market entry mode?.................................................................................................72
6.2 Limitations and implication for future research..................................................................73
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References....................................................................................................................................75
List of Figures
Figure 2.1 Domestic Market Conditions and Globalization
List of Tables
Table 2.1 Why Firms Go International
Table3.1 Relevant Situations for Different Research Strategies
Table 3.2 Six Sources of Evidence: Strength and Weaknesses
Table 5.1 Cross case analysis: factors influencing the choice of entry mode
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Chapter 1 - IntroductionThe introduction contains four subsections. It begins with a brief presentation about the
background. Following, the actual problem of central ideas, research purpose, and
research questions are presented. Lastly, the part ends up with the outline of the thesis.
1.1 Background
In the late 1970s, China has opened its economy and merges to become one of the
world’s most influential global economies. China's ongoing economic revolution has had
a deep impact persisted throughout the world. Since the years, the socialist market
economic system has been initially established, and the basic role of market’s allocated
resources has drastically strengthened. A central division of the economic reform
process in China has been the promotion of foreign direct investment (FDI) inflow. Until
today, China is the fourth-largest economy in the world and it was rated the number
one choice for Foreign Direct Investment (FDI) in 2006 (fdi.gov.cn, 2010). Nevertheless,
China has sustained average economic growth of over 9.5% for the past 26 years
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(state.gov, 2010). In 2006, its $2.68 trillion economy was about one-fifth the size of the
U.S. economy (state.gov, 2010).
China is a rapidly growing market to the global economy. Since China’s official access to
World Trade Organization (WTO) in 2001 (Fung, 2004), China has pledged to further
liberalize its trade regime and this has made it easier for foreign companies to operate
there (gao.gov, 2005). As part of its WTO succession, China undertook to get rid of
certain trade-related investment measures and reopen specified sectors that had
formerly been restricted to foreign investment. Over the period, China has authorized
foreign investors to manufacture in the preferred form of FDI and put up for sale a wide
range of products on the domestic market (state.gov, 2010). New regulations, systems,
and managerial measures to implement these commitments are being concerned. Most
important remaining barriers to foreign investment of inconsistently enforced laws and
regulations and the lack of a rules-based has permissible.
There is no relationship will be as important to the twenty-first century as the direct
investment between the United States, the world’s great power, and China, the world’s
rising power. According to U.S. government data, “the average annual rate of foreign
direct investment (FDI) in China is $1.4 billion a year. The $1.4 billion represents barely 1
percent of the total average annual U.S. direct investment of approximately $127 billion .
(Fung, 2004)” Thus, increasing of U.S foreign direct investments inflows to China have
been accompanied by the rising of industries output in the country, leading an
important role of economy’s success to China.
U.S. direct investment in China envelops an extensive range of manufacturing sectors,
numerous outsized hotel developments, restaurant chains, and petrochemicals.
According to the U.S government official data, U.S. companies have entered agreement
by setting up more than 20,000 equity joint ventures, contractual joint ventures, and
wholly foreign-owned enterprises in China (state.gov, 2010). In view of that, there is
recorded as much as 100 U.S. based multinationals have ventures in China, several of
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them with multiple investments. Refer the data from the U.S. Department of
Commerce, “in 2002, the projected rate of return of U.S. direct investment in China was
14.08 percent, compared with 8.15 percent for U.S. direct investment in all countries”
(hktdc.com, 2010). At least in the moment, whichever U.S. multinational companies who
want to be internationalized in the Asia-Pacific minimally cannot afford not to be in
China. Economist belief, the growing of U.S. investment in China was estimated to be
ever-increasing through the years, making the United States one of the largest foreign
investor in China (state.gov, 2010).
1.2 Problem discussion
The work of Root (1994) is seen by Ekeledo & Sivakumar (2004); Aman (2008) to be in a
similar view to define the entry mode as an institutional arrangement that a firm uses to
market its product in a foreign market in the first three to five years. This is also seen as
the time it usually takes for a firm to fully enters a foreign market (Aman, 2008). When
companies consider entering new foreign market they have to have a specific sets of
entry strategic alternatives that varies by different target markets, and the different
entry mode alternatives (Puljeva & Widen, 2007). Root (1994) contents that this entry
strategies conduct the company‘s business activities to reach sustainable growth on the
international market. However, when it comes to the entry mode process there are
numerous different theories affecting a company’s perspective (Björk et al., 2008). For
example, an improper entry mode may possibly cause the business failure and
withdrawal from the market. As a consequent, it may result in substantial financial
losses to the firm.
Extant frameworks for entry mode strategy provide a complete explanation of entry
mode choice by firms in today’s business environment (Ekeledo & Sivakumar, 2004;
Aman, 2008; Björk et al., 2008; Puljeva & Widen, 2007). But, previous research has not
yet thoroughly developed common definitions and frameworks on the phenomenon of
the motivations of those MNCs going international from beginning. For example, there
is always a question in my mind while study the post literature studies, why does these
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firm decide to go international? Therefore, this research gap motivates my
contributions. As common view, every movement there is reason behind. According to
Hollensen (1998), ahead of companies enter the internationalisation process, they have
something or someone inside or outside the company to initiate the implementation of
the internationalisation process. For instance, factor in going international is the same
as it is for any business decision: determination and commitment to succeed (Czinkota,
2004). Management must want to go international and make a serious, determined
commitment to identifying potential and to making the commitments and preparation
necessary to succeed (Czinkota, 2004). As conclude, a company going for
internationalisation because they have motivations to do so (proactive motivations) or
they must to do so (reactive motivations) in order to be competitive on the ever
changing market nowadays.
Previous studies have put emphasis to the external factors of emerging market
environment and the internal factors of company specific factors including entry
strategy which have a great influence on multinational companies’ performance.
According to Aman (2008), the external factors consists of the international nature and
attractiveness of the product category, turnarounds of periods between local and
international market, the general potential of the chosen international market,
government regulations and and other external stake holders in both the domestic and
international markets. Meanwhile, internal factors could be seen as the firm size,
international experience and the product itself.
Based on the previous studies, the influence of the underlying factors of a choice of
entry modes strategies will be also my primary concern. However, my study will differ
from previous studies in various significant ways. Firstly, the major objective of this
study is to investigate whether foreign market entry mode strategies of small and
medium enterprises (SMEs) are applicable to large organizations (corporate). Previous
research studies (Aman, 2008; Puljeva & Widen, 2007) on entry mode strategies have
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been focused exclusively on SMEs. The question of whether findings from these studies
are applicable to the large organizations has been motivated my investigation.
Theoretically, the difference size of the company has its unlikeness influence for the
internationalisation to be successful, and this is also different deal with issues such as
geographic, cultural and environment barriers (Puljeva & Widen, 2007). Therefore, a
major task of this study is to ascertain both the influence of internal and external factors
determinants of foreign market entry mode choice to large multinational firms. It has
been predicted that this category of larger firms will differ significantly from SMEs in
their choice of entry mode.
In this thesis I will deal with the issue of entrepreneurial ventures that internationalize
from a very early stage of their existence and the study is made on U.S entrepreneurs
that has established in China. This can be considering to another objective part of this
study to investigate the case studies of U.S firms direct investment in China. The status
of FDI between the U.S and China is significant for several reasons. First, U.S. invest
toward China are based upon the supposition of the rapidly developing Chinese
economy affords a rare opportunity for U.S. businesses to expand the markets. With the
large population of China, the products manufactured by U.S. firms in China are great
demand in the Chinese market (Fung, 2004). Yet, even only small percentages of
consumers who can afford high-quality goods in China however can stand for a large
demand (Fung, 2004). It is fully ensures the U.S companies in China is carried on to meet
up internal economies benefits from reduces the cost of production. To sum up, the
investment relationship between China and U.S is worth to investigate from my purpose
of studies and it is also good for future research.
1.3 Purpose and research questions
Concluding, the research question could be expressed as:
(1) What are the motivators or why they choose china to internationalise?
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(2)How the underlying factors were influence the decision of foreign market entry mode?
1.4 Outline of the thesis
The thesis is divided into six chapters, starting with background and introduction,
followed by the literature review, methodology, data presentation, data analysis and
ending with the conclusions. Chapter one gives a brief introduction of the subject which
leads to the research purpose and research questions. Chapter two presents the
literature review with the theoretical framework that is related to the research
questions. Chapter three covers the methodology which explains how the study was
performed in order to answer the research questions. Chapter four contains with the
empirical data gathered within the investigation from the case studies. The data mainly
collected through journals browsing, business newspapers, company’s annual report
and the net for articles related to the subject in question. Chapter five, which is data
analysis, which is applied the theory to the gathered data. The gathered data will be
analyzed in a within-case analysis and cross-case analysis, comparing each case against
the theory from the frame of reference. At last, the findings and answering to the
research question will be concluded in Chapter Six. This in turn leads to
recommendations for future studies.
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Chapter 2 – Theoretical Frameworks
This chapter make obvious most of the major areas related to entry mode strategies,
and first of all it begins with an introduction of the motives of internationalisation.
Together, the theoretical frameworks initiated with descriptions of the theoretical
approaches to entry modes. Following, the study is covering the motives behind a firm’s
decision to internationalise its business activities mutually with an understanding on why
and how firms should engage in international business activities. Finally, the theoretical
framework will end-up with the choices of foreign direct entry modes and the factors for
that choice of entry modes. This chapter is drafted in connection to the research
questions.
2.1. The theoretical approaches to entry modesMost past studies (Liu, 2004; Ekeledo & Sivakumar, 2004; Johansson, et. al., 2006;
Kalfadellis & Gray, 2002; Ekeledo & Sivakumar, 2004; Buckley and Casson, 1976; Casson,
et. al., 2009) on the international entry mode of MNEs have adopted one of three
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theoretical approaches: the internalization theory, the eclectic theory and the resource-
based theory.
2.1.1 Internalisation theoryInternalisation theory provides a clarification of the enlargement of the multinational
enterprise (MNE) and gives insights into the reasons for foreign direct investment (FDI)
(Kalfadellis & Gray, 2002). Internalization theory was conceptualized by Buckley and
Casson (1976). Buckley and Casson (1976) assets this theory has been a leading theme in
international business literature relating to the growth of the MNEs and FDI. In other
words, internalization is all-purpose encompassing theory which can clarify FDI. In brief,
Buckley and Casson (1976) make obvious clarification that the MNEs organize bundles of
activities internally such that it is capable to extend and utilize firm-specific advantages
(FSAs) in familiarity. Given the occurrence of market failure, internalization proceeds as
a governance mechanism to extend and utilize FSAs. The theory is first and foremost
concerned with categorizing the circumstances in which the cross boarder markets for
transitional products are likely to be internalized within hierarchies (Dunning & Lundan,
2008). Besides, drawing upon the earlier insights of Casson et al. (2009), internalization
theory is best known as a theory of the boundaries of the firm. From their explanation,
the boundaries of a firm will be set at the margin where the benefits of bringing a
further activity into the firm are just counterbalance by the costs involved. Regarding to
the cost involved, Ekeledo & Sivakumar (2004) contends that the internalization theory
relies heavily on transaction costs analysis. Hence, Ekeledo & Sivakumar (2004)
distinguishes between research, which view the internalization theory and the
transaction cost theory are the same theory; both are costs associated with negotiating,
and enforcing a contract. These transaction costs contain every single costs associated
with various aspects of the value-added chain from the production to the consumption
of goods and services. In this academic paper, the internalization approach stresses the
values of firm-specific advantages (FSAs) and has been used to illustrate how U. S. MNEs
enter and operate in China’s market.
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2.1.2 Eclectic paradigm The second approach is proposed by Dunning (1980, 1993, and 2000). Eclectic paradigm
which builds on the framework of Dunning (1980) has been combined numerous strands
of international business supposition on cross-border business activities. Eclectic
paradigm put forward that cross-border business activities of multinational companies
are composed of ‘three advantages’: they are ownership specific advantages, Location
specific advantages and Internalization advantages (OLI) (Dunning, 1980, 1993, 2000;
Zhu, 2008; Liu, 2004). The eclectic paradigm is straightforward, yet reflective. It claim
that the extent, geography and industrial composition of foreign production undertaken
by MNEs are related to the three sets of mutually supporting variables, which
themselves, contain the mechanisms of those three sub-paradigms (Dunning, 2000). Liu
(2004) cited in Dunning (1993) identifies ownership advantages take place as firm-
specific factors, such as firm size, internationalise experience and skills of the
management or unique know-how. Björk, et al. (2008) further illustrate the ownership
advantage refers to aggressive, or monopolistic, which helps a foreign firm to overcome
the disadvantages of competing with local firms. In general, a comprehensive review of
these competitive advantages; as the more they engage in, increase their foreign
production (Dunning, 2000). The second is the Location specific advantages (L) of
alternative countries or regions, for undertaking the value adding activities of MNEs
(Dunning, 1980, 1993, 2000). Hill (2009) cited in Dunning sub-paradigm means this
advantage arise from make the most of resource endowments or assets that are tied to
a scrupulous foreign location and that a firm comes across to combine with its own
unique assets (technological, marketing, or management competence). These
advantages can be familiarity to the market or even varies regulations favouring an
entry, like tax level and political policies. Within the literature from Hill (2009), greater
attention has been paid to the two examples of Dunning’s argument- natural resources
& human resources. “Natural resources, such as oil and other minerals, which are by
their character specific to certain locations” (Hill, 2009, p: 253). Meanwhile, human
resources, such a low-cost and highly skilled labour, the cost and skill of labour vary from
country to country (Hill, 2009, p: 253). A firm who meet the Dunning’s argument, thus it
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must undertake Foreign Direct Investment (FDI). More notably, however, the basis of
the model is open to criticism; these factors have an increasing impact on the non-
production related costs (i.e., the transaction costs). Dunning (1980, 1993, and 2000)
also popularized the Internalization theory from previous section approach and
distinguish this with his eclectic paradigm of internalization advantage. He refers it to
“contractual risks” be in charge of the foreign business more constructive than other
entry modes. Further, Dunning describe it toward MNEs’ capability to competently
internalize their ownership specific advantages to ease the transaction cost during the
international production. Importantly, internalization advantages focus on industry-
specific variables (Björk, et. al., 2008). Within the theory, the firm can retain the assets
and skills also keep away from uncertain transaction cost caused by market
imperfection.
2.1.3 Resourced-based theoryResource-based theory stems from research by Edith Penrose (1959) and it has found
considerable support by Prahalad and Hemel (1990), Rumelt (1991), Peteraf (1993),
Ekeledo & Sivakumar (2004), Halawi et al (2005). The resource-based theory observes
the firm but not the industry, as the source of competitive advantage, mainly in the
resources and capabilities of the firm (Ekeledo & Sivakumar, 2004; Johansson et al.,
2006). One such stream of research, leading from the Grant (1991) studies the
resourced-based view of competition draws upon the resources and capabilities that
exist in an organization, or that an organization might want to develop, in sort to
achieve a sustainable competitive advantage. A capability is the capacity for a group of
resources to act upon the task or activity. Whereas, resources are the source of a firm’s
capabilities, which capabilities refer to the main source a firm’s competitive advantage
(Björk et al., 2008). Accordingly, competitive advantage defined as the ability to earn
returns on investment consistently above the average for the industry (Halawi et al.,
2005). They point toward a firm is believed to have a competitive advantage when it
implements a significance creating strategy not at the same time being implemented by
potential competitors. Whilst the framework of Mahoney and Pandian (1992) further
17
cited upon by Halawi et al. (2005), competitive advantage is a purpose of industry
analysis, managerial governance as well as firm effects in the structure of resource
advantages and approaches. In some cases an organization’s resource based
competitive advantage may allow them to generate new markets and add value for the
consumer. Regarding to the entry modes, Ekeledo & Sivakumar (2004) contents that the
resource-based approach is assume to be sole ownership of default entry mode. The
resource-based theory expects the companies will favour sole ownership as entry mode
strategy when going international, especially preferred by U.S. firms found from the
researchers Anderson & Gatignon (1986).
2.2 Firm motives for internationalisationTo start with, this theoretical part will present the framework of theories concerning
reasons and motivators for companies seeking foreign markets. In the literature,
extensive research has been done on studying the internationalisation motivation.
Firstly, the issue I concerned is thus to why the companies expand internationally.
Amongst the research, Kotabe (2000) finds that a company initiates its business
activities in domestic market, gradually expands to other markets. Another word, the
growing of business trade has affected the form of economic integration moving from
domestic to internationalisation. Ng (2007) contends that, the main reasons for
companies internationalise are to stand firm with international competition or business
development, impacting continuous business operation. Whilst the framework of Leavy
(1984), built upon by Ng, of a company’s international activities is important to its
market survival and expansion. Similarly, Rundh (2007) sees the major implication of
this. Such research, he feels, the success of a company in international business has to
distinguish the changes in the international environment and build up the strategies in
exceptional competence. However, the international activities decision must be
considered carefully to avoid any uncertainties (Leavy, 1984). Consideration has been
given to methods of assessing of international risks.
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Based upon motives for internationalisation of the firm, Czinkota (2004) identifies the
motivations are mixed and multiple. In his article, he provides an overview of the typical
proactive and reactive motivations to go international, which showed in table 1.1.
From him, “proactive motivations represent stimuli to attempt strategic change.
Reactive motivations influence firms that are responsive to environmental changes and
adjust to them by changing their activities over time.”(Czinkota, 2004, P: 4)
The framework used in this research for the purposes of analysis, further supported by
the researchers Johansson, Schorling & Strandberg (2006). According to them, the
proactive firms internationalise because they want to and reactive firms go international
because they have to.
Proactive Motivations
Profit advantage
Unique products
Technological advantage
Government Incentives
Economies of scale
Reactive Motivations
Competitive pressures
Overproduction
Declining domestic sales
Excess capacity
Saturated domestic markets
Table 2.1 Why Firms Go International
2.2.1 Proactive MotivationsJohansson, et al. (2006) explains that the great influence of proactive motivation for a
company to internationalise is the earning profits. In general, it is accepted that the
leading and the most important motive of internationalisation in the capitalism
economy is the profit maximization by either increasing the revenue or decreasing the
cost of production. Additionally, according to Czinkota (2004), stated the firms not only
compete with the rivals in home countries but also the international competitors in the
face of a globally increasing competition. For any product sales or services, there are
19
more potential consumers and sales in the world than in any single country. Yet, the
companies operating in international market can make the most of firm-specific
advantages by replicating competences abroad in order to achieve continuous business
growth (Ng, 2007). This is seen to provide the best visual representation. In another
word, the business performance is expected to increase upon internationalisation.
Management may perceive international sales as a potential source of higher profit
margins or of more added-on profits.
The second major motivator according to Johansson, et al. (2006) results from
distinctiveness of the companies’ unique product or a technological advantage.
According to the author, he pointed the uniqueness be able to provide a competitive
advantage and result in major business success abroad. The companies’ products
offering might face only slight competition in global markets or its technology know-how
may be one of a kind in a specialized field (Czinkota, 2004). Nevertheless, the exploiting
of the firm-specific advantages by replicating competences abroad helps to expanding
the continuous business growth. For example, interviewed data from HeartMath
Scandinavia AB according to Oluduro & Okonkwo (2009) provides a unique service
which puts them ahead of their potential competitors. At least in the moment the
company affirmed that competition has not been much of a predicament or influence
on any of their internationalisation decisions.
Czinkota (2004) asserts government incentives have traditionally played a major
motivating position. Most countries at this willing to seek foreign investments because
of jobs it will create, the competitiveness it will enhance, and the impact it will have on
their trade balance. For example, Daniels et al. (2009) pointed out Japan as an example
who took out full-page advertisements in the Wall street Journal and Financial Times
2007 to entire foreign companies to consider Japan as a location for their investment.
These incentives consist of lower taxes, training of employees, loan guarantees, low-
interest loans, exemption of import duties, and subsidized energy and transportation
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(Daniels et al., 2009). Support for these incentives also comes from Czinkota (2004),
further stress the reduced corporate tax remain the host countries as competitive of
inward FDI. Yet, with series of attractive incentive packages can change the situation at
the right time (OECD, 2002).
The last proactive from Johansson, et al. (2006) contention will be economic of scale.
The authors explain that the internationalisation generates economics of scale and
scope as a firm moves into international market by using labour and production abroad
instead of more expensive domestic resources. This view is supported by the findings of
Lögdkvist, et al. (2008), suggested that this is so called economic motive, is arise when
firms take advantage of lower labour costs, natural resources and capital, additionally of
regulatory conduction such as taxation recession. All the way through capabilities
abroad enlargement, the company can increase the cash inflows further creates
economies of scale (Lögdkvist, et. al., 2008). Whilst the framework of Shenkar & Luo,
(2004, built upon by Lögdkvist, et. al (2008), the ‘first mover advantage’ also a key of
economic motive for a firm to globalize in order to be the first mover to the target
market.
2.2.2 Reactive motivationsFirms act reactively as well as proactively. There are a variety of reactions, such a prime
form of motivation is overproduction (Czinkota, 2004). ‘Overproduction causes the great
depression’ (Czinkota, 2004). In economics, overproduction can be short-term surpluses
in various sectors, where there is not enough demand to meet an existing supply.
Indeed, firms may try to use foreign markets as an inventory outlet through depression
in the domestic business cycle (Czinkota, 2004). However, Johansson et al. (2006) builds
on this distinction, indicates that this internationalisation action will reduce once the
domestic demand meets the supply. He feels, customers abroad are less interest with
this impermanent international business.
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Other things remaining equal, another reactive motivation will be reaction to saturated
domestic markets. More specifically, Kim (2004) considers two factors in the domestic
market, namely domestic market saturation and company’s competitive position in the
domestic market. The author contents that, when the domestic market is gradual
saturate, there will increase the level of firm’s globalization. This research seeks to
narrow this void in the literature. In other word, firms internationalise when their
domestic market can no longer offer growth opportunities (Kim, 2004). The work of Kim
(2004) is seen by Czinkota (2004) to be in a similar vein to that a firm may not find it
profitable when the domestic market is saturated. Whilst Czinkota (2004) offers a
comprehensive review of the ‘products marketed domestically by the firm may be at the
declining stage of the product life cycle’ (p: 6). Indeed, nor should he suggested the firms
must internationalise, opt to prolong the product life cycle by expanding the market.
Increasingly, an alternative way for the firm to grow is to enter a new foreign market.
Also, Kim (2004) extends the reactive motivation with the description of economic of
scale, to analyze the relative attractiveness of a firm’s competitive position in the
domestic market and its global strategic intent. Kim (2004) divides variables into two
intents, profit-oriented and growth-oriented. Within the literature, a firm may take
domestic competitive position as consideration before it internationalises. Data
collection spanned, “the less competitive the firm, the more growth-oriented its global
strategic intent,” (Kim, 2004, p.5). He stresses, the less competitive domestic player
perceives that its weakness in the domestic market stems from its lack of economies of
scale. Thus, the framework used in this research for the purposes of analysis, the firm
forced to growth-oriented through internationalisation. These two relationships are
showed in Figure 2.1
22
Figure 2.1 Domestic Market Conditions and Globalization (Kim, 2004, p: 5)
2.3 Where, When, HowIn previous theoretical framework review, there must be a strong initiating force to push
the firm towards internationalisation. Literature on internationalisation indicates a
variety of ways internationalisation has been measured. Within a number of motivators,
attempts have been looking forward the dynamics of the internationalisation process.
However, when arguing the process of Internationalisation, consideration has been
given to methods of three different features, Where, When, and How individually.
Studies of the location selection Where to expand predominate, Lögdkvist, et al. (2008)
contend that, concerns are focus on country-specific factors. Country-specific factors
can be observed at various levels. Firstly at the national level, Liu (2004) stresses the
host country's investment environment is significant for multinational firms to settle on
their entry decision. Within the literature, greater awareness has been paid to the
magnetism of a foreign market in terms of its market size (Cuyvers, et al., 2008; Liu,
2004) and investment risk (Liu, 2004). It has been identified that, a country with larger
market size, normally has the better prospects for market growth and higher per capita
GDP (Gross Domestic Product) growth taken into account for those investors regard as
location advantage (Cuyvers, et al., 2008). Literature in the market size influences the
23
location decisions of investors has emphasised in two main perspectives. Firstly, it is
expected sale volume (Cuyvers, et al., 2008).
“Foreign direct investment becomes economical option when the volume of production
exceeds a level at which the average cost of serving the market by means of exports is
greater than the average cost of production within the market.” (Cuyvers, et al., 2008, p:
5)
Second, market size can be economic and strategic motivator.
“A larger market size leads to the realization of scale economies in the production
process; capturing demand and scale effects.” (Cuyvers, et al., 2008, p: 5)
Indeed, in subsequent research, Liu (2004) refers the location selection factors come out
with the combined impact of market potential and investment risk. From him, the ideal
development is a grouping of high market potential and low investment risk. “When
investment risk is high, firms still willing to penetrate the host country market because
high risk is generally associated with high rates of return” (Liu, 2004, p: 22). The
establishment in countries with high market potential means better cash flows and
future opportunities. Indeed, foreign investors have to make known with the business
environment to minimize investment risk.
Timing is the second critical factor when come to a decision When to initiate the
internationalisation process. Research tends to focus on Lögdkvist, et al. (2008), as they
split the timing option into two groups: early mover and late entrant. In view of that,
both of them have individual advantages and disadvantages. Within the literature, early
movers benefit from greater market power, resources, sustainable leadership in
technology, buyer switching costs, which all of them are so called ‘first mover
advantage’ (Lögdkvist et al., 2008). Within each category there are a number of specific
24
mechanisms. Take an example in technological leadership , an important distinction
between the two mechanisms is that made by Liberman & Montgomery (1987): “(1)
advantages derived from the “learning” or “experience” curve, where costs fall with
Cumulative output,” and (2) “success in patent or R&D races, where advances in product
or process technology are a function of R&D expenditures” (p: 2). Liberman &
Montgomery (1987) contend that, early entrant gain a sustainable cost advantage if
learning can be held in reserve proprietary. Similarly, first movers are able to gain
advantage if technology know-how can be patented when technological advantage is
fundamentally a role of R&D expenditures. Indeed, in subsequent research from
Shenkar & Luo (2004), first movers have to express their self in most of the uncertainty
from rules and regulations as well as free-rider problems; these first movers
‘disadvantages are most often the late mover advantages.
Going to the last stage, MNEs that wish to invest abroad are required to choose How to
enter the new market by cautiously evaluating various types of entry modes. The
importance of the foreign market entry mode decision has been well documented. The
entry mode chosen is main impact the level of control over the MNC has over the
venture (Root, 1994). The author stated that entry mode is an institutional arrangement
that creates the possibility for a firm’s products, technology, human skills, management,
or other resources to enter into a foreign country. In a similar vein, Ng (2007) essentially
adopts the selection of an appropriate entry mode strategy is crucial and affects overall
success. Over the past two decades, market entry researchers have identified several
different types of foreign entry modes including low control non-equity modes (Agarwal
& Ramaswami, 1992; Hill, et al., 1990; Chiesa & Manzini, 1998), covering exporting,
licensing/contractual agreement, franchising, strategic alliance, and high control equity
modes, such as joint venture and wholly owned subsidiary. Each of these entry modes is
associated with an altered level of control, resource commitment, and dissemination of
risk. When it comes to FDI-related entry modes (Eicher & Kang, 2005) it involves
ownership of property, assets, projects, and businesses invested in a host country. In a
25
related paper of explanations, entry modes with low levels of control over operations
and marketing, but are also associated with lower levels of risk. In contrast, other entry
modes such as joint ventures and full ownership of facilities involve more control.
However, these entry modes give the company more in charge of foreign operation and
economic conduction but they also entail more risk, long-term commitment and
resource and capital investment (Johansson et al, 2006).
After a firm has decided the internationalisation process of Where, When, How, also
there are a wide range of factors must be taken into consideration before making the
final decision company’s approach to foreign entry mode selection. According to
founding from researchers Root(1994) & Koch (2001), there are numerous factors of
various strengths in attendance, affecting the entry mode decision a complex process
with frequent trade-offs between suitable entry modes. In the concluding decision of
market entry mode, there is supposed to be a balance between risk and control must be
established (Puljeva & Widen, 2007). All factors proposed to influence the market entry
mode selection process have been split into two broad categories: external and internal.
2.4 Internal factors influencing the choice of entry mode
2.4.1 Firm Specific CharacteristicsWhen it comes to a decision in the form of market entry strategy, the firms first
considers its own-specific characteristics (Bougheas et al., 2006), spefically, it implies to
a firm’s capabilities and resources that determine the stream of competitive advantage
in the marketplace (Bharadwaj, 2000). Further contention comes from Johansson et al.
(2006), these capabilities can refer to a firms’ proprietary technology, tacit know-how,
superior managerial skills, and market knowledge or either business experience. It also
described to how a firm can do with its assets, that is, how well and advantageously the
firm can perform activities in its business field. On this point, Ng (2007) cited in Porter
(1980) also emphasised the firm capabilities intensely influencing the alternative of
entry strategy and ability to execute the chosen strategy. In the same study, the firm-
26
own characteristics (Bougheas et al., 2006) has been concerned with issues of strategy
implementation, organizational structure, systems of control, capability and resources
and management approach. However, all these has been examined as first and
foremost, influences the outcome of entry selection Ng, 2007).
2.4.2 Company size/ resourcesA number of frameworks have been proposed in the literature signify that the prospect
of international activity increases with firm size (Björk et al., 2008), for the most part as
international expansion call for a great deal of resource commitment by the expanding
firm (Aman, 2008; Koch, 2001). Briefly, Hollensen (1998) in his view further contends
that a company’s size is an indicator of its resources; as the more resources a company
gains the further the international participation will increase. In a same paper
explanation, these resources are valuable for the MNCs in addition to give them a
competitive advantage when entering a foreign market. A comprehensive review of the
influences of company size/ resources, in each of these tiers, companies with limited
resources should only choose an entry mode that only demands a small amount of
resources commitment (Root, 1994). This view is supported by Koch (2001) and he
asserts that smaller companies, especially SMEs have lesser market servicing options,
due to their limited own resources may simply not allow, or depress from varies of the
market entry modes. In contrast, larger firms might better than smaller ones because of
larger resources and network will conceivably be more likely to establish integrated
modes (Björk et al., 2008).
2.4.3 International experienceResearch on large firms showed that the process of going abroad is fast and continuing.
There is a distinguishing line drawn between objective knowledge and experiential
knowledge (Björk et al., 2008). The explanations, which are put forward that objective
knowledge is refers to a sort of community’s goods readily accessible to any firms,
whereas experiential knowledge defines to firm’ specific factors and achieved by being
active on the market. Exclusively, the internationalisation process of the firm is driven by
a firm’s experiential knowledge. In other words, this is so call a firm’s international
27
experience. According to Hollensen (1994), this is attained through operating in a
specific foreign country or abroad in the international environment. From him,
international experience is important in the detection of opportunities and risks. These
notably lower the cost and uncertainty (Johanson & Vahlne, 1977), also makes a higher
level of likelihood for committing resources to foreign markets. For instance, an
experienced firm that has previously built up the local market knowledge is probable to
avoid major hazards by internalizing market transactions (Madhok, 1997). As a
consequent, the longer history of a firm active in international market, the more it gains
the experience and in turn, the more the firm can expect higher expected profitability
(Björk et al., 2008).
2.4.4 Product FactorsResearch tends to focus on specific internal factors, while the product characteristic that
is concerns of manufactured goods eventually affects the entry mode decision
(Johansson, 2006). Literature tends to use the product characteristics defined as the
multipart nature of tangible and intangible elements that differentiate it from the other
entities in the international marketplace (Fraser & Hite, 1983). To the extent that a
product’s physical characteristics offer several basis of differentiation that decide a
firm’s success in the international market, however, the condition is depend on how
well the product or service is and on how well a firm is able to differentiate the product
from the offerings of competitors (Ng, 2007). In addition to product factors, Root (1994)
stress the common view that highly differentiated products with distinct advantages
against competitive products give sellers a crucial degree of pricing discretion. Within
the literature, these distinctive products are able to absorb high unit transportation
costs and still remain high competitive in a foreign target country. Therefore, it is
reasonable to assume that product characteristics are associated with increased
internationalisation and effects of entry performance.
2.4.5 Management risk attitudesCommonly, foreign markets are seen as more risky than domestic markets. The degree
to which the firm will recognise different international business risks in general depends
28
on the company’s financial condition, strategic alternatives, the competitiveness of
competitive environment and management itself (Koch, 2001). Whilst the framework of
Agarwal & Ramaswami (1992), built upon by Björk et al. (2008), pointed out the smaller
with less experienced companies tend to use low involvement entry modes in high
potential markets. Whereas, Root (1994) builds on this distinction contends that the
large firms with international experience capability tend to use more integrated entry
modes in high contractual risk markets. However assume others thing equal, it is likely
for any large or small firms behaviour a proper management risk attitude, which always
bear in mind to select a country that only show higher degree for long-term prospects to
enhance the firm's capabilities (Koch, 2001).
2.5 External Factors influencing the choice of entry mode
2.5.1 Home country factorsExternal factors (Hollensen, 1994; Ng, 2007; Björk et al., 2008) take account of all the
external variables that impact the selection of entry mode contained by a country or a
region; for case in points like market, environment and production factors (Root, 1994).
In a similar study, these factors can seldom be affected by management decisions but
may perhaps encourage or discourage certain entry modes.
Given current trends in globalization, market, environmental, and product factors in the
home country significantly influence a company’s choice of entry mode (Root, 1994).
Support for this literature comes from (Puljeva & Widen, 2007; Aman, 2008), further
suggest that the competitive structure of the home market affects that entry mode.
Relatively, higher production costs in the home country weigh against to the foreign
target country encourage entry modes involving local production, such as licensing,
contract manufacture and investment. Additionally, the home country also refer to
home government’s attitude by tax incentives to encourage the home companies
further exporting abroad or outward foreign direct investment Consequently, these
factors motivated the local SMEs or large companies gradual internationalise.
29
2.5.2 Target country market factorsTarget country’s market factors are common criterion used in market selection due to
the eventual purpose of a firm to gain foreign market shares and exploit competitive
advantages (Ng, 2007). According to Root (1994), the size of target market is an
important influence on the entry mode. As such, markets with low sales potential favour
entry modes that have low breakeven sales volumes (exporting/licensing). In contrast,
markets with high sales potential can justify entry modes that require high breakeven
sales volume (FDI-related entry modes) in view of the fact that they generate more sales
volume (Root, 1994). Apart from the market size factor, attractiveness of the target
country include host country’s market competitive structure, population structure, per
capita income, bilateral trade, legal system, political, economic, social and culture, and
technology issues (Ng, 2007). Also, a firm who see the host market factors also see the
quality and accessibility of the local marketing infrastructure as important
consideration. Simply, high potential markets tend to get more involvement from the
management and they simply chose an entry mode with much own commitment
(Hollensen, 1994).
2.5.3 Target country environmental factorsTarget country environmental factors constitute the external institutional environment
(Ng, 2007) in which foreign entrants are embedded, and consist of political economic
and socio cultural character of the target country can have a decisive influence on the
choice of entry mode (Root, 1994; Puljeva & Widen, 2007). Besides, the environment
factors included the governmental policies and regulations such as restrictive import or
investment policies which affecting the choice of entry modes. For instance, the
empirical evidence proposed from Root (1994), say that restrictive import policies
discourage an export entry mode in favour for other modes, also, the country risk of
political unsteadiness and the threat of expropriate will favour entry modes with limited
commitment. When country risk is high, a firm will make effort to limit its exposure to
such risk by restricting its resource commitment in that particular market (Hollensen,
1998; Ng, 2007). Moreover, researchers (Puljeva & Widen, 2007; Lögdkvist et al., 2008)
30
distinguish between researches, which adopt the geographic distance as part of
environmental factor to concern. From them, transportation costs can make it
impossible for exported goods to compete with local made products when the distance
is long. Thus high transportation costs discourage export entry; hence, most firms are
favour of other modes that do not incur such costs.
2.5.4 Target country production factorsProduction factors concern for example quality, quantity and costs of materials, labour
and other production input as well as of the infrastructure (Root, 1994). The status of
the country’s infrastructure such as transportation, communication and shipping
facilities plays a part in the process of selecting entry mode (Lögdkvist et al., 2008). In
many ways the theory by Root (1994) is a far superior explanation of production factors
such low production cost encourage some for local production as against exporting and
high costs would militate against local manufacturing. Hollensen (1998) has in this
category also included, direct and indirect trade barriers. In a related paper, Hollensen
(1998) essentially adopts the tariffs and quotas on import of foreign products as well as
discouraging trade regulations favour the establishment of FDI related entry modes or
other arrangement with a local company.
Chapter 3 – Methodology
This chapter will present the methodological framework used in order to collect, and
examine the collected data. Throughout the chapter different perspectives on research
methods will be explained, along with justifications of the specific choices I made to this
study. Specifically, this chapter will be divided into five parts: research purpose, research
approach, research strategy, data collection and data analysis.
3.1 Research purposeThe purpose of this study is to gain a deeper understanding to the motivation and the
factors affecting them to enter a foreign country. Bernardzon (2010) distinguished three
31
purposes of conducting research; explorative, descriptive and explanative. These three
classifications allow the researchers be aware of the problems before starting the
research, and additional, collecting and investigating the category of information that is
considered necessary in order to deal with the purpose of the thesis (Puljeva & Widen,
2007).
An explorative research means to explore or search through a problem to develop new
and relatively unknown knowledge, in order to gain better insights and understanding.
According to Bernardzon (2010), explorative research require the insights of ‘looking
around’ and concerns in judge the happening, questions asking, information gathering
or investigating a topic from a new angel. In addition, Björk et al. (2008) content that, an
exploratory study is supposed to state a purpose and the criteria to judge the
exploration successful. The work of Foster (1998) is seen by Puljeva & Widen (2007) to
be in a similar vein to that of the descriptive research is performed when studying a
problem area with already existing theories or information. A descriptive research is
fundamentally to exemplify characteristics of a population or a phenomenon. This
research is type of grouping that consists of numerous research methodologies, namely
self-reports, observations, surveys and case studies (linguistics.byu.edu, 2010). This is
also intended at precise on depicting people, events or situations (Bernardzon, 2010). At
last, explanative is the research focus on gaining an explanation of a situation, usually in
the form of casual relationships (Bernardzon, 2010). Similarly, Puljeva & Widen (2007)
clarify the relationships from explanatory research is between cause and effect. It could
be done through using group discussions, questionnaires, random sampling or
interviews.
The purpose of this study is mainly descriptive in order to make an accurate description
of the situation by using gathered data and case existing theory; however it will also be
some extent explanatory research criteria due to the design of the research question.
32
Sometimes, the uniqueness of descriptive and explanatory research is connected. For
instance, it is always difficult to describe a data without a proper explanation.
3.2 Research approachAnalysis the research approach towards methodology, there are commonly consist of
two views, inductive approach and deductive approach (Lögdkvist et al., 2008; Björk et
al., 2008). From the authors, inductive approach involves the development of a theory
resulting from the observation of empirical data, while the data collection occurs before
the authors formulate the theories. Whereas deductive approach has a theory as a
foundation of research and thereafter collects data to test whether the expectations
correspond to the reality (Lögdkvist et al., 2008; Björk et al., 2008). In this thesis, the
inductive approach cannot be used since the theory has been formulated. Therefore,
deductive approach is more suitable in this thesis due to the approach is proofing facts
with theory.
According to Björk et al. (2008), data collection can be made either with a qualitative or
a quantitative approach. He feels, the methods to use, depends on the phenomenon of
the studies. Qualitative research is a research strategy that generally highlighting the
points to a certain extent rather than quantification in the collection and analysis of data
(Oluduro & Okonkwo, 2009). In words of Denzin and Lincoln (1994), “qualitative
research involve the studied use and collection of a variety of empirical materials; case
study, personal experience, introspective, life story interview, observational, historical,
interactional, and visual texts that describe routine and problematic moments and
meaning in individuals' lives” (p: 3). Björk et al. (2008) asserts the method is especially
closeness to the respondent, ease to capture values, attitudes and perceptions in dept
and detail. In counter view, Björk et al. (2008) further means the quantitative research
require the researchers to test a limited amount of variables with a large sample size. It
entails the collected works of numerical data as demonstrate a view of the correlation
between theory and research as deductive, affirmed that those data having an
objectivist conception of natural science and social reality (Oluduro & Okonkwo, 2009).
33
Applying the above arguments to the context of the current study, it seems that the
qualitative research should adopt in this study flexibility in nature. Concerning the
research questions are characterized by “why’& “how”, in such cases, qualitative
strategy is preferable since it is investigative, gives new understanding of a specific
phenomena and insights.
3.3 Research strategy: Case StudyDifferent research strategies can be used to be able to answer the research questions
and reach the purpose. Dependent on the research questions, Frandberg & Kjellman
(2004) refer the researcher has control over behavioural events and to what degree the
focus is on contemporary events the researcher can chose the most suitable research
strategy (Yin, 1994). However, none of the research strategies are superior or inferior to
any other (Backsrom& Ulvefeldt, 2010). It is significant to decide a research strategy
that will enable one to answer particular research questions and meet the objectives of
the research.
Empirical data collection can be done by a number of different research strategies such
as through experiment, survey, archival analysis, history, and case study (Yin, 1994).
These strategies and the classification of them are shown in the table below.
Strategy Form of research
question
Requires control
over behavioral
events?
Focuses
contemporary
events?
Experiment How, why Yes Yes
Survey Who, what, where,
how many, how
much
No Yes
Archival analysis How, why No Yes/ No
34
History How, why No No
Case Study How, why No Yes
Table3.1. Relevant Situations for Different Research Strategies
Source: Yin, 1994, p: 6
The problem formulation in my case, the research questions, has a how/why/what
characters, which leaves me with the possibility for an experiment, history or case study
approach for the research. I do not consider making an experiment since it does require
control over behavioural events and this does not make sense to my study. This is
because such questions deal with operational links needing to be traced over time
rather than simple frequencies or incidents (Yin, 1994). I do not consider making a
survey or an archival analysis since the research questions I set are not formed to
answer who, how many or how much. Hence, the research strategy that I conduct will
be case study and combine with part of historical research strategy to acquired in-depth
knowledge and experience of the cases individually. The case study research strategy is
preferred due to my research question is contained of how/why, also the researcher
does not have control over the event and the focus is on a contemporary phenomenon.
However, a case study can be either single-case or multiple-case (Yin, 1994).
Accordingly, the single-case study investigates on an entity, a company, a decision or a
region, in-depth. In a multiple-case study, two or more entities are studied which gives
the opportunity for comparisons. In my article, multiple-case is chosen because I believe
that it will give me a rich description of a special phenomenon, special place or
situations as a possible way to go with multiple nuances.
3.4 Data collectionData collection for case studies can rely on many sources of evidence. Evidence come
from Yin (1994) for case studies may come from six sources, namely: documentation,
archival records, interviews, direct observation, participant observation and physical
artefacts (p: 81). The distinction between the six sources that made by author are call
for different skills and methodological procedures. They all differ from each other and
are best suited in different situations. However, they can complement each other or can
35
be combined when collecting data (Johansson et al., 2006). A useful overview of the six
major sources considers their comparative strengths and weaknesses are showed in
table 3.2 below.
Source of evidence Strengths Weaknesses
Documentation Stable: can be reviewed
*Unobtrusive: not created
as a result of the case
*Exact: contains exact
names, references and
details of an event *Broad
coverage: long span time,
many events and many
settings
*Retrievability: can be low
*Biased selectivity: if
collection is incomplete
*Reporting bias: reflects
(unknown) bias of author
*Access: may be
deliberately blocked
Archival records *(Same as for above for
documentation) *Precise
and quantitative
(Same as above for
documentation)
*Accessibility due to
privacy reasons
Interviews *Targeted: focuses on case
study topic *Insightful:
provides perceived causal
inferences
*Bias due to poorly
constructed questionnaire
*Response bias
*Inaccuracies due to poor
recall *Reflexivity:
interviewee gives what
interviewer wants to hear
Direct observations *Reality: covers event in *Time consuming
36
real time *Contextual:
covers context of event
*Selectivity: unless broad
coverage *Reflexivity: event
may proceed differently
because it is being
observed Cost: hours
needed my human
observes
Participant observations *(same as for direct
observations) *Insightful
into interpersonal behavior
and motives
*(same as for direct
observations) *Bias due to
investigator’s manipulation
of events
Physical artifacts *Insightful into cultural
features *Insightful into
technical operations
*Selectivity *Availability
Table 3.2.Six Sources of Evidence: Strength and Weaknesses
Source: Yin, 1994, p: 80
According to Björk & Jonsson (2008), the most common way to conduct a case study is
open ended strategy which will give the researcher the possibility to ask the
respondents for the facts of a matter as well as for the respondents’ opinions about
events. In this situation, interview is one of the important sources for case study,
according to Yin (1994), interview best for the researcher needs to understand the
complex and/or contain emotions or experience from a specific subject. However, the
method is failed on this study. Reasonably, it is because the study is mostly contain on
historical research strategy, for instance, it contained the previous company
achievement in internationalisation, or how’s the former managers’ decision on entry
strategies to China and the various factors influences their decision on entry mode. I
37
have tried to make an interview both with the Intel Chengdu and IBM Shanghai human
resource department; simultaneously I sent the interview guide in advance to the
respondent’s regarding their respective company’s underlying factors influencing their
foreign market entry mode that I needed for this thesis. However, the answers provided
from the respondents were very limited or else to say it was nothing help up with my
studies due to their narrow knowledge’s about the company history. Because of the
interviewer’s and the context’s influence it is hard to reach objectivity. In turn of
substitution, I have chosen the combined of documentation and archival records as
sources of evidence to my study. Reviewed literature, reviewed company’s history,
former president dialogues, companies’ annual report, annual numerical financial
statement and internet resources, will be my main data collection method.
For case studies, documentation and archival records are according to Yin (1994)
relevant to every case study topic, and is mostly used to confirm and augment evidence
gathered from other sources. Support this come from Puljeva & Widen (2007), these
documentations and records are great source of finding background information on the
research subject. They provided other specific details to corroborate information from
other sources. Refer to the table 3.2, the only different between documentation and
archival records, is archival records can be highly quantitative.
3.5 Data AnalysisAfter deciding on how to gather the data for the thesis, it is important to know how to
analyze the data (Yin, 1994). According to the author, data analysis can be based on two
different strategies. These can be described as:
a) Relying on theoretical propositions, which is preferred strategy to follow the
hypothetical scheme that led to the case study. Also, the results from previous
studies concerning the research questions are compared to the researcher’s
findings from the case study.
38
b) Developing a case description, which means to develop a descriptive framework for
organizing the case study. This strategy is used when there is little previous research
in the subject.
Also, Miles and Huberman (1994, p: 10) also states that the analysis consists of three
simultaneously different activities:
A: Data reduction, which refers the process stage where data is focused, selected,
abstracted, simplified and transformed. The purpose of this process is to organize the
data; therefore conclusions can be verified and drawn
B: Data display, which is the segment that the data is concentrated and organized in a
compressed way to make it simpler for conclusion drawing.
C: Conclusion drawing and verification, which is the phase where the researcher begins
to make comments and clarify what things means. This is done by noting regulations,
patterns, explanations, configurations, casual flows and propositions.
Applied the theories on my study, research data analysis can be done through two
different specific techniques. These are a) within-case analysis can be described as to
compare the data collected against the theory used or b) cross-case analysis which can
be described as to compare data in one case to data in another case. As this thesis will
compare two companies’ data to each other, which performed a cross-case analysis.
The collected data will be compared with the prior studies of SMEs. At last, conclusions
will be drawn and presented after both of the within-case and the cross case analyses
are conducted.
39
Chapter 4 - Data presentation
This chapter consists of the collected data from case study. The part focuses on
presenting two case-studies at a time. From the method of collection purpose, the data
are collected through journals browsing, business newspapers, company’s annual report
and the internet articles related to the subject in question. The relevant case studies
consist of the data gathering from two U.S direct investment companies (Intel & IBM) in
China. To start with, I will present a background of the studied companies, thereafter the
40
data in each case will be presented in the same order as the research question in chapter
one.
4.1 Case 1: INTEL
Intel (Integrated Electronics) began in 1968, founded by Gordon E. Moore & Robert
Noyce (Intel annual report, 1971). They were soon joined by Andrew Grove, leading the
company to become the world’s largest computer chipmaker and the 5 th most admired
company in America today. The company's goal was to make semiconductor memory
practical to use as an electronics component. Traced back to 1971, Intel brought the
world’s first microprocessor (Intel annual report, 1971). Over period of years, Intel
supplies the PC manufacture with chips, boards, systems and software. In 1994, Intel
was a $10 billion producer of computer chips (newsweek.com, 1996). Over the period of
time, Intel had pioneered two of the most important building blocks of modern
technology, memory chips and microprocessors (Intel annual report, 1994). Since it was
founded in 1968, Intel has been challenging the status quo. Every single generation of
Intel processors proposed superior performance, further if gave better energy efficiency
and unlocking innovative possibilities for people around the world (Intel annual report,
2007). Shown left to right are five generations of Intel processors: 45nm Hi-k metal gate
Intel® Core™2 processor (2007); Intel® Pentium® 4 processor (2000); Intel® Pentium®
processor (1993); Intel386™ processor (1985); and 4004 microprocessor (1971) (Intel
annual report, 2007).
4.1.1 Case 1 – Data regarding RQ1: What are the motivators or why they
choose china to internationalise?
“China’s the next big thing of Intel, and we should be the country manager to integrate
our efforts and strategy going forward”, Sean Maloney (Intel’s Asia Pacific Operations
regional director) (Tan, 2010, p: 18).
41
The reason to led Intel executives’ conscious of the advantages of China might
correspond to its cost effectiveness (Shah et al., 2003). Earlier as explained, a firm
internationalizes abroad either to exploit a foreign market or to secure better right to
utilize certain inputs, especially cheap labour or cost effectiveness, and certainly the
factors influenced Intel´s decision to set up a new plants in China. Cited from some
experts, the U.S. government generally allows semiconductor technology transfers to
China if the technology is at least three generations older than the current technology in
the United States (Yinug, 2009). Consequently, Intel has no worried about home country
restriction and this factor has allowed them to expand their business abroad easily.
One such source cited the Intel’s international assessment caught up of four phases:
prequalification, site research, contingent announcement and delivery, and start-up
(Intel annual report, 1990). First of all, cited from Sean Maloney (Intel’s Asia Pacific
Operations regional director), the increasing level of U.S market saturation always
discourages them to further expand their business in domestic market, and hence they
are forced to seek an Asia country for longer offer growth opportunism, and China
always their first choice after the process of site research (Tan, 2010). From him, the
company chose China because the management team see the country specific factor
(Tan, 2010). First, the company see the great market potential due to the large
populations. Secondly, cited from Intel former CEO Pat Gelsinger, he found that
everybody he met in the Chinese government was determined and generally very well
informed on foreign technology while he first site-visited ever to China. Also, he feels,
the government has a series of local mayors and central officials who had single
purpose, which was to develop the country around with a strong technology base. They
offered advice and incentives to foreign investors from a range of free tax to free land,
aim to attract the inward FDI to improve the quality of their industry structure. Empirical
evidence comes from Chengdu former mayor Ge Honglin, as Intel business uses
sensitive equipment and needs better utilities support, hence, there was a lot of
pressure on their local officials to learn and to improve (Tan, 2010, P: 58).
42
Data collection spanned, Intel does not think the competitors as their market barriers,
but the company do not ignore it. Cited from Intel former president Andrew S. Grove in
his book, this is due to “competitors that wrote off or hardly knew existed will stealing
business later”, (Grove, 1997, p: 34). What his first decisions was the location of the
plant. In this case, the company avoid setting up a new plant in the cities where all the
other semiconductor companies were located, like Shanghai, Wuxi and Suzhou. Explain
from Grove (1997), this can happen when people easily move from one company to
another, and it may possible to exploit the company’s valuable knowledge to the
competitors. Hence, for Intel, the place they wanted to be was the regions that would
clearly be key areas of China’s growth and development, also this was good long-term
reasons to heed the Chinese government’s call for investments in these less developed
areas. The empirical data to support this was recorded In August 2003, Intel announced
to construct a semiconductor assembly and test facility in Chengdu Hi-Tech Industrial
Development Zone in Sichuan Province (intel.com, 2010). What convinced Intel that
Chengdu was the right place was the local government’s response to all its concerns (Li
& Luo, 2004). Further in March 2007, Intel built a wafer fabrication plant in Dalian, a
coastal city in Liaoning province in northeast China (Tan, 2010).
Recorded from the past Intel annual report, China was a big country with an enormous
population, but there was no usage model for PCs. It was really only the government
that was start using computers in the early 1990s. The time came in 1993-MNCs setting
up operations in China began to turn into a steady flow. American computer makers like
Compaq started building factories, Motorola’s plant in Tianjin was already churning out
papers, and Chinese officials were developing an enormous appetite for PCs (Tan, 2010).
And, importantly, there were signs that the United States might start easing its controls
on technology exports (Tan, 2010). Toward 1990s, Intel adapted to global
semiconductor competition by developing leadership products such as microprocessors
(Intel annual report, 1990). Therefore, Intel used the firm’s specific product-
43
microprocessors with technology know-how as company’s prequalification entered to
China proactively. Further, Intel adopted a strategy of focusing on the most advanced
type of chips and product areas where Asian competitors were weak (Jones, 2010). In
1995, the heavy investments were paying off: in 1995, it was bringing a new 0.35-micron
manufacturing process into China (Intel annual report, 1995). Intel’s Technology and
Manufacturing Group has been studying the possibility of setting up a plant in Wuxi,
which in the coastal province of Jiangsu (Tan, 2010). A joint venture with a non-US
company would mean more heavy US export controls, and with Intel’s usual pace of
aggressive product development it made a lot more sense to have a wholly owned
factory (Liu & Diamond, 2005). So in November 1995, Intel announced plans to build its
first test factory in China (Intel annual report, 1995). Construction of the assembly and
test plant at Pudong in Shanghai began in 1996. In the end, these investments benefit
Chinese PC buyers directly in the form of more powerful, less expensive computing
options.
4.1.2 Case 1 – Data regarding RQ2: How the underlying factors were influence
the decision of foreign market entry mode?
As previously theoretical framework noted, there are several factors to consider when
determining an appropriate foreign market entry strategy. However, the first thing of
Intel to consider when entering the Chinese market is whether they have substantial
firm capabilities to cope with the international business. Instead, Intel had been a large
company with more resources therefore it was likely to fit into place in the international
market easily. Further, the company has greater knowledge and internationalisation
experience (Malerba & Orsenigo, 1993), hence it might not have to chosen to work with
agents while enter to foreign market. Refer to historical of Intel, It has entered few
foreign countries before China over the past couple of years and has thereby gained
international experience which it uses in its future decisions on entry mode. Briefly, the
international experience is gained from its ages of knowledge acquisition. To the
contents of study, Intel does not consider return on investment to be very important
since they invest in companies for strategic reasons. The purpose of the company was to
44
make investments around the world to further its strategic objectives and support the
key business initiatives (Intel Annual Report, 2009).When Intel enters new foreign
markets they look at and evaluate how it went into foreign markets, whether it is
possible to enter in the same way that it has been used before.
When Intel initiated their internationalization, the geographic distance was a great
consideration (Helena, et al., 2006). To Intel, geographic distance may influence the
company significantly, because it helps the company to save the spending in
unreasonable amounts of resources on travels and transportation of products. To avoid
any extra transportation cost, Intel was more likely to choose a foreign direct
investment (FDI) entry mode (Larraín, et al., 2001). Precisely, FDI entry modes can
refers to equity joint venture and wholly owned subsidiary. For the first entry to China,
Intel was chosen joint venture as learning experience, which seems to be preferred
when cultural distance is large between the host and the home countries (Tan, 2010).
This is due to Intel sees risk aversion (Grove, A. S., 1996) as core competence as the
company chose joint venture which can allowed them to get out of the market fast and
it was consider to be less risky. But, Intel pulled out of the venture a couple years later
because the managers realize wholly owned subsidiary would be better on profit factors
(Tan, 2010). Empirical data, the company has opened a first wholly owned subsidiary
Architecture & Development Laboratory as method in 1995 (Intel.com, 2010).
Theoretically, establishing a wholly owned subsidiary is generally the most costly
method, but the substantial capital of Intel able to support this. Empirical evidence,
Intel annual report showed the climb from $4.8 billion in 1991 to $25.1 billion in 1997
(Intel annual report, 1999). By means of these well-built financial revenues, the
company is accepted to attain their target profits and enough capital to cope with any
investment risk.
According to Tan (2010), Intel was not an early starter in China. Other electronics
multinationals were quicker off the mark in setting up an existence when China began in
45
1978 to open its doors to foreign trade and investment. A number of these companies
had been active in China elongated before the Cultural Revolution. Siemens, for
example, business trading with China in 1872 and in 1985 was the first foreign
enterprise to sign an agreement with the Chinese government for cooperation in several
industries, including electronics (Tan, 2010). Instead, Intel always assesses the
competition before entering a new international market. This, however, provides Intel
with an opening to compete on price and quality with either local rivals or early foreign
entrants.While Intel always judge against itself with the competition and which decision
it makes and what the outcome is, despite the fact that the purpose is not to copy any
competitor (Grove, A. S., 1996).
Now other factors such as infrastructure, target environment factors are considered to
be of greater importance when choosing a new market international market. The
infrastructure is essential for the company to be able to deliver the products to the end
user location. Target country environment factors such as social culture, economical and
political factor is important to be aware of the company choice of entry (Björk et al.,
2008). In China, the biggest environment factor is the large population, which is the
main influence factor to Intel’s top management emphasizes the importance of China’s
great market size and growth rate, as it is crucial for reaching profitability in the market
(Jones, 2010) . Other words to say, this is also a part of market factor. The empirical
evidence concerning the data cited from Intel’s former president Pat Gelsinger, “China is
a cash-rich nation and it will do better than most, and it will continue to emerge as a
more and more significant consumer of technology products and the trend is
unstoppable” (Tan, 2010, p.136). Among the external factors, host country’s social and
cultural differences could affect the company’s choice of entry mode. Arguably, the
factor discussed is not a major barrier for Intel to China. Instead, Intel is the most
successful in the middle way of doing business which includes both Western and Eastern
culture. A supportive explanation come from Intel former president Grove (1996), Intel
always has good knowledge to deal with countries social and cultural values, due to they
46
had a bunch of strong-minded and very passionate expatriates managers can work
actively with the international engagement, or else to say the culture differences was
not a factor influence the company’s China entry.
Earlier part mentioned that the company avoid setting up a new plant in the fully-
developed cities (coastal areas of China) where all the other semiconductor companies
were located, like Shanghai, Wuxi and Suzhou. As substitution, they built their plants in
Chengdu (West China) and Dalian (North China), during the year 2001 and 2007
respectively. The both entry was a brave, aggressive decision because at that time,
compared to the coastal areas of China, there were still lagging behind. Perhaps, there is
considerable risk to build a sophisticated plant in an untested site with worries about
infrastructure, transportation and other logistic needs. However, according to SH Wong
(Director of Intel’s worldwide Assembly and Test Operation), all this worried have been
solved by the local government incentives. He said, “There were so many issues, and
with each problem the local government showed its commitment to find solution” (Tan,
2010, p: 57). Regarding foreign-owned firms that presently have or plan to have front-
end fabs in China, press reports indicate that these projects benefited or will benefit
from Chinese government incentives (Yinug, 2009). In related paper, press reports
indicate that Intel received up to $1 billion in incentives from the Chinese government
to build its new front-end fab in Dalian, which is scheduled to begin production in 2010.
It was impressed the Intel’s CEO desire and determination, and this kind of attitude
showed by the local government has speed up their internationalization to “going west”
and “heading north”. In other words, incentive policies ease them to choose variety of
entry mode flexibility, further increase the internationalisation.
4.2 Case 2 – IBM
The company’s origins traced back to the early 20th century, when Thomas J. Watson,
Sr., combined several small companies to International Business Machines Corporation
(IBM) (bookrags.com, 2010). Today, IBM is one of the world's largest information
47
technology companies, also rated the world's foremost suppliers of computer-related
products and services (bookrags.com, 2010). Headquartered in Armonk, New York, IBM
produces just about every type of equipment needed for information processing,
storage, and retrieval. IBM's success was based on two key beliefs: as they concern their
employees, and also customers' success would be IBM’s number one objective (IBM
annual report, 2007). The peak of the IBM can be traced back to the year 1981, under
new CEO John Opel, IBM has introduced its first personal computer, the IBM-PC, which
rapidly became the world's most well-liked personal computer (bookrags.com, 2010). Of
prime importance was the fact that IBM was a pioneer in computation long before most
people talked about computers. The company’s early electro-mechanical tabulation and
punch-card devices introduced computation to business, academia, and government
(Louis, 2002). In IBM’s case, the big technology shift came with the advent of integrated
circuit- as what we now know as the semiconductor chip.
4.2.1 Case 1 – Data regarding RQ1: What are the motivators or why they
choose china to internationalise?
IBM’s history in China dates back to 1934, when it first entered the country (ibm.com,
2010). This was because IBM, American nation, lacks knowledge of the Asian market,
manufacturing and operations, and therefore a Joint Venture (JV) with a local company
is more than just a legal requirement, and it provides better management, better
decision making, a lower risk, and a local knowledge of culture and operations which are
indispensable to a new entrant. Empirical data, within the last 18months of their first
entry, IBM has partnered with more than 250 private backed start-ups (ibm.com, 2010).
Cited from IBM former president Louis V. Gerstner (2003), timing is everything. He say,
the right moment to take appropriate action, it make the changes while the company is
still healthy and save much more of company strength, employees and strategic position
(Gerstner, L.V., 2003). Historically the success of IBM China was built on a strong,
centralized planning and control system, combined with a highly effective sales branch
structure (IBM annual report, 2007). Countries were responsible for short and medium
term targets, and for managing their resources and skills to achieve these targets. “IBM
48
In the late 1980s IBM was the world's largest producer of a comprehensive line of
computers, a leading producer of office equipment, and the largest manufacturer of
integrated circuits” (bookrags.com, 2010).
It is important to note that IBM continues to be committed to continued technology
leadership (Jones, 2010, p.52). While large company like IBM is capable of producing
high quality goods that needed to produce in appropriate advanced technologies. The
company has even begun to transfer a portion of its manufacturing to geographically
close and lower-cost country-China in 1980s. Eventually, the company was largely
product and technology driven, and product strategies were primarily developed at
corporate headquarters. The motive of IBM to do that, mainly due to spread the unique
ideas abroad since the opportunity costs of exploiting these products in other markets
are very low. To meet the overseas demand, IBM is increasing its head count in these
geographic regions while reducing its head count in the United States (Jones, 2010,
p.57).
The early 1990s, IBM had become clear that the marketplace was developing so fast,
and into so many niches, that the old centralized planning and control structure was
incapable of reacting fast enough (ibm.com, 2010). It was necessary for IBM continues
to seek a profitable equilibrium between domestic and overseas, not altruism and
patriotism. It is important to use offshore manufacturing capacity to be price
competitive, critically to be low cost compared to competitors. Further, IBM‘s
specialized marketing knowledge will distinguish the company from its competitors.
According to IBM, it is highly imperative to have good market knowledge, educated and
competent personnel in order to succeed on the foreign market (Gerstner, L.V., 2003).
Additionally, the company see profit potential and business possibilities and have the
knowledge that could favour the Chinese market. Again, Louis V. Gerstner cited in his
book, believes that the entry of China will bring them a much low production cost
compared to their domestic market, as consequent these will creates economic of scale
49
(Gerstner, 2002). He feels, without the use of third-party contract manufacturers, their
company would not be cost competitive and would have closed. He stresses, IBM always
has a balance exist between manufacturing products in low-cost geographic regions and
having corporations that are profitable.
4.2.2 Case 2 – Data regarding RQ2: How the underlying factors were influence
the decision of foreign market entry mode?
First insight the intro stage of internationalization, IBM first made research on the
country and investigated the market growth. IBM sees the target market factors as
important factors when deciding on the choice of entry mode. Research based on 1934,
the China was not the large market during the year they first entry, however, the market
still seems interesting to IBM due to market growth and population size is growing. IBM
first internationalize to China by teaming up with local partners through the form of
joint venture (JV). Empirical data recorded in 1934; IBM joint venture with the Beijing
Union Medical College Hospital installed the earliest commercial processor (hi138.com,
2010). This is due to limited resources and market knowledge for them to gain
understandings about Chinese markets during the year of limited foreign enterprises in
China. Economically this JV makes sense, as IBM could potentially acquire or take
advantage of from Chinese partners, making this a Brownfield rather than a Greenfield
investment, reducing set-up costs as IBM would benefit from the existing facilities and
infrastructure. Instead, within the period of learning experience in China, IBM has been
fully developed the capability of acquiring, evaluating, integrating, and deploying
knowledge.
The year of IBM internationalise to China is the devastation of Europe and Japan during
World War II, and this gave the United States a exclusive opportunity to govern
international commerce, and this home country advantages given IBM an opportunity
to internationalise overseas easily (Jones, 2010). Again, the host and home country
factors has influenced the entry strategies of IBM (Goodnow & Hansz, 1972), regarding
to the weakling of home country and the rising of host country-China simultaneously
50
motivated IBM to a second entry to China in the mid of 1980s. The time, the frenetic
growth of Chinese manufacturing and the rise of the middle class after the country has
enacted the openness policy in 1978 are leading to a conflict with other nations,
especially largest economic country – United State (america.gov, 2009). Empirical
evidence, conventional research reported that there was decline in funding on new
areas of technology by the U.S, government and industry in early years of the 21 st
century. Without access to leadership technologies, the competitiveness of U.S. industry
has weakened because of the U.S. corporations were high cost compared to those in
developing countries. From this to explain, the characteristic of the China’s business
environment has motivated the second entry of IBM. Toward 1992, IBM officially
announced the setting up in Beijing, China International Business Machines Co., Ltd.,
which is an IBM first wholly-owned enterprise in China (ibm.com, 2010). According to
the research, the growing of the target country markets factors are supporting IBM to
open up their own subsidiary. This, the size of Chinese market has influenced IBM to
switch the choice of entry mode method from joint venture to wholly-owned subsidiary
(WFOE). To some extent, IBM did not use joint ventures, but they still co-operate
through local agents and partners. Combining the partners’ respective technologies and
market advantages, IBM became fully into China’s implementation in 1995.
According to Louis V. Gerstner (2003) (IBM former president), “Everything management
is supposed to define direction, set strategies, encourages team work, motivate
employees” (p.35). Internally, there were underlying factors affect the choice of entry
mode. IBM pointed out that the global management efficiency and management’s
ability have made them more adaptable. IBM strives for minimizing the risk in order to
not face any major downswing in the economy because it has management’s
responsibility to lead the company through all possible hurdles when entering a new
international market. When they first entry to China, they joint venture with local
enterprises and IBM was at the same time gaining experience and management locus of
control. The international experienced gained by IBM has increased when time have
51
been passing. Lately, they gained enough resources and customers network that there is
possible to build a wholly own subsidiary (WFOE) in the market . Towards WFOE, IBM
begun to sell their products, the brand become more known which led to that IBM could
expand and become more profitable and larger.
Theoretically, a larger company has greater possibilities since they have larger resources
and they have move people that can work actively with the international engagement
that smaller companies have. Not surprisingly, IBM can form their own subsidiaries
abroad flexibility or go through agents or choose any other kind of entry mode method
to internationalize due to the large companies size and financial resources. The
time ,IBM has adapted to global semiconductor competition by adopted a strategy of
focusing on the most advanced type of chips and product areas where Asian
competitors were weak, hence the product factor is more or less given IBM a
competitive advantage in foreign markets. The company was essentially product and
technology driven, and product strategies were first and foremost developed at
corporate headquarters. Also from an organizational capabilities perspective, IBM
integrated forward and act upon all the marketing and distribution functions itself by
establishing a sales subsidiary in Chinese market (IBM annual report, 1990) . By the early
1990s it had turn out to be clear that their marketplace in China was well-developed,
and into so many niches. In times gone by the success of IBM in China was constructed
lying on a strong, centralized planning and control system, joint with a highly efficient
sales branch structure.
Chapter 5- Data Analysis
This chapter aim to make data analysis to the data collected which presented from
previous chapter, comparing each case against the theory from the frame of reference.
The data analysis first begin with the motives of both investigated companies firm and
follow by a within case analysis, where the analysis will take form by combining the
52
theoretical framework. Then, the chapter will end up with cross-analysis, where the
results from the two investigated companies will be compared against each other, as
well as prior studies of SME to see whether my study will differ from previous studies on
SMEs in various significant ways. To simplify the data, the results of comparison are
presented in a table5.1.
5.1 Motives of U.S Large firm (INTEL & IBM) to go international
The internationalisation theory concerned with classifies the state of affairs in which the
cross boarder markets for transitional products are likely to be internalised within
hierarchies (Dunning & Lundan, 2008). According to Ekeledo & Sivakumar (2004),
internationalisation theory is about the same to transaction cost theory, which claims
that the minimization of transaction costs is of great importance when going
international. Whilst seeing the entry mode issue from a transaction costs perspective, it
seen that both Intel and IBM have followed the theory since they internationalise to the
China where no transaction cost exists. At the same time the theory focus primary on
the internal strengths, accordingly Intel and IBM capable to extend and utilize firm-
specific advantages (FSAs) in familiarity.
Johansson et al. (2006) has previous signify that the motives for conducting
international business include: market motives, economic motives, strategic motives or a
combination. These indicate to whether the U.S entrepreneurs’ internationalisation
motives are headed for market seeking in foreign countries or else to protect the firm’s
existing market share and/or competitiveness. The motive for internationalisation could
be increase the return through higher revenue and/or lower costs (Lögdkvist et al.,
2008), also a strategic nature to create economies of scale or benefits from a first mover
advantage (Johansson et al., 2006). The motives to Intel, when decided upon foreign
investments, first of all were U.S market saturation. More specifically, Kim (2004) has
stated the motivation level of firm does globalise increases as the domestic market
becomes more saturate. While the theory applied to Intel, it was analysed that the Intel
found their domestic market can no longer offer growth opportunities. To explain this
53
come from Hollensen (1998), suggested a shrinking domestic market or a need for a
larger customer bases constantly an external trigger for Intel to enter the international
market. Meanwhile, the motive of IBM first China entry, was contrast to Intel by the fact
of home country advantage, which was the devastation of Europe and Japan during
World War II gave United States a unique opportunity to dominate the international
commerce and, later, to dominate the world political stage as the biggest
superpower(Jones, 2010). From this, the United States was able to exploit its own
unchallenged economic and political power; all these have given IBM the opportunity
and aspiration to invest abroad. IBM enjoyed the home country’s economic motives are
in line with the theory by Shenkar and Luo (2004), where this give opportunities for
home entrepreneurs and firms seek market opportunities in other countries.
The home country effects has been a reaction motivation for Intel and IBM to
internationalise because they have to, or more honestly to say that it can be explained
to the proactive motivation of profits enhancement to them, since that it is all relevant
to the market economy. Lögdkvist et al., (2008) concludes that, these motives can either
be offensive meaning; to seek opportunities in foreign markets or defensive (Erdener &
Vinay, 1984), or limit competition as well as to protect themselves from the risk of
unfavourable changes in governmental directives (Lögdkvist et al., 2008). Another
aspect is that foreign competitors can enter the domestic market and offer better
products to lower prices (Hollensen, 1998), however large company like Intel and IBM
do not agree with this theory because they do not consider other companies as
competitors. They didn’t’ point any specific core competence; instead many different
parts linked together them competitive advantages. From the explanation, it was mainly
due the firm’s specific product and technology know-how. Ng (2007) contends that, it is
easier for a company to enter a new foreign market if they have a unique product or
competence. Both Intel and IBM have these unique products or competence likely to
receive direct inquires from a foreign market than other companies that do not have
them. Research tends to focus on specific categories of long term business
54
opportunities, unique products are essential for Intel to have in order for them to
survive on the foreign markets (Ng, 2007).
Another data collection spanned, Intel and IBM moved into China market was using
labour and production abroad instead of more expensive domestic resources. To them,
the entering of China creates economics of scale, according to Johansson et al. (2006),
this is because of manufacture production in China has traditionally involved labour-
intensive processes. This view is supported by the findings of Lögdkvist, et al. (2008),
suggested that this is so called economic motive, is arise when firms take advantage of
lower labour costs, natural resources and capital. According to Gustavsson & Lundgren
(2006), the fixed costs can be spread out over more different units when a company
enters new foreign markets. Nevertheless, interestingly, both Intel and IBM see the
opportunities from the China’ population, and a market that was not well developed
but was fast moving. New thinking might infer suggestions, such as Björk et al. (2008),
claims that the prominent economic growth was a great motive for international firms
to enter these markets. The theory states that the growth of the international market
can create a demand for certain products which can pull companies into the
internationalisation process (Hollensen, 1998).
5.2 Within- case analysis
5.2.1 Theories applied to Intel- the underlying factors influence the decision of
foreign market entry mode
Company size/ resources are a critical factor in the choice of entry mode. According to
the resource-based theory a small company would limit to any high-control entry mode.
Hollensen (1998) states that although SMEs may desire a high level of control of the
foreign operations and wish to make a larger commitment, but due to limited resources,
they are more likely to start with export modes/joint venture but not acquisition/wholly
owned subsidiary. To explain, the set up of fully owned subsidiary often demands very
large investments; small companies many times do not have satisfactory management
potential and resources to enter market abroad through establishing fully owned
55
foreign based subsidiaries or international joint ventures (Aman, 2008). According to
Koch (2001), the size of the company is related to the amount of resources that the
company had, instead small companies does not applicable to the theory. In contrast to
this study, Intel started up with joint venture and after that with the wholly owned
subsidiary through organic growth, which is seen that they deal it flexibility. Thus, the
large size of Intel means the company easy to adopt an entry mode either to start the
wholly-owned subsidiary or go through acquisitions. It could be more demanding as well
as easier for large company to choose any market entry modes that need a large
amount of resources, because they have it.
Previous studies have showed Swedish SME Plannja (Aman, 2008)and Norway SME Xtra
(Johansson et al., 2006) has not mentioned having any firm specific capabilities of
proprietary technology and they could not find any either, so it seems that this was not
something that would affect the choice of entry mode. Johansson et al (2006) further
stated in their cases research and found most of the SMEs didn’t see the choice of entry
mode to any large extent on the existing tacit know-how, due to the fact that they used
local staff when entering a new international market, which leaves the tacit know how
in the home country. Proprietary technology normally resides in a firm’s product,
process, or management technology. At the root of these can found from Hollensen
(1998), which refer the SMEs lack of proprietary technology or else local-market
knowledge. Instead, a firm with a proprietary technology that is a sustainable
competitive advantage in a foreign market will use a full control mode to enter the
market. The framework presented tends to have good explanatory abilities to Intel,
which the proprietary technology they held is a sustainable competitive advantage to
control the use of the asset in the foreign market by using a collaborative mode of
operation to enter the market. Historically the success of Intel in China was largely drive
by product and technology, and these capabilities were primarily developed at
corporate headquarters.
56
Previous researchers’ findings on SMEs surveyed; the international experience limited
their choice of entry mode in the way as it is suggested in theory. The findings conclude
them with inexperienced firms and not accustomed to the local culture are likely to use
a collaborative entry mode (Anderson, 1997). According to the resource-based theory in
the frame of reference, a firm is inexperienced and not accustomed to the local foreign
market culture which likely to use a low-risk, low-control, collaborative entry mode
(Anderson, 1997). However, Intel distinguishes between research, which adopts the
international experience they gained fasten the internationalise process. Intel has seal
years of international experience which is beneficial when making entry mode choices.
Earlier chapter mentioned, Intel has learned from previous entries and has developed a
strategy to grow organically and follow large clients. Especially, the international
experience Intel is determined not only by the age of the firm, but also by its efforts
knowledge acquisition. This research seeks to narrow this void in the literature, as Intel
has gained international experience both industry and geographical over the years, it
will favour a high control entry mode such as joint venture or wholly owned subsidiary.
To support my view to this, empirical evidence can found from data presentation, which
Intel invested in China was gone through a large scale directly from the start.
A number of frameworks have been proposed in the literature tends to use the product
characteristics to decide a firm’s success in the international market in several basis of
differentiation, further impact on the choice of entry mode. As for the case, prior
studies on SMEs has shown a significant positive effect relevant to product
characteristics as internal factors that significantly influence on decision of the market
entry strategy indirectly (Hollensen, 1998; Ekeledo & Sivakumar, 2004; Aman, 2008;
Lögdkvist, et al., 2008). This is mainly due to the product characteristic which increase
international demand, as the need to exist demand widely, the need for a strong culture
and for a high control that influences the choice of entry mode (Johansson et al., 2006).
Similarly, the influences made in SMEs, also impact the decision of Intel entry strategies
(Goodnow & Hansz, 1972). Intel has adapted to global semiconductor competition by
57
developing leadership products such as microprocessor. The products development
impacts their core competencies. According to theory, such complexity and
differentiation of the product could affect the market entry mode decision; different
product features could render difficulties of various kinds when entering a new
international market (Hollensen, 1998). Eventually, a unique product provides Intel with
a differentiation advantage those other firms in a competitive market. Seeing the
strategic fit, these study shows how well Intel’s target and strategies fit its internal
capabilities, also the company has taken effort to persuade public about their aims are
clear, specifically, the nature of the product do not compete directly with competitors
in the same sector.
Leading some scholars to conclude, the smaller with less experienced companies tend to
use low involvement entry modes, namely exporting in high potential markets (Björk, et
al., 2008). The company has extensive experience which in combination with the
company’s positive view of the future, according to Koch (2001), this makes them better
in risk aversion. While risk aversion means by the author, asserts that the firms are
willing to take the high level of risk management. Entry exist risks and challenges for
firms, mostly to SMEs in acquiring the relevant resources for operating in conditions of
high uncertainty in foreign markets (Johanson & Vahlne, 1977). Briefly, when the
market risk is high, firms tend to go for an entry mode with low costs and less
involvement. According to Intel, risk aversion is greatly concerned; if Intel chooses a
wholly owned subsidiary then Intel has to conduct a presentation of the entry mode as
well as the risks connected to the entry mode. Empirical evidence can found the first
entry to China, Intel was chosen joint venture as learning experience, and after that only
pulled out of the venture to wholly-own subsidiary. This was because Intel sees risk
aversion as a core competence; they want to avoid risk to every degree with different
mode of entry, namely joint venture which can be seen as less risky among the high
control entry mode since they can get familiar with the market fast.
58
Despite the disparities above and everything remain equal, research found the large
companies and SMEs have agreed with the home and host country factors are affected
the choice of entry mode. However, there is divergence in the theoretical considerations
of the advantages and limitations of SMEs in the literature. Arguably, SMEs have certain
advantages over large enterprises, in that they are more able to overcome governance
problems (Johansson et al., 2006). Some researchers say that SMEs have the flexibility
and ability to adapt the new environment more quickly than large enterprises, and SMEs
able to use these advantages in internationalizing (Burpitta, W.J. & Rondinellib, 2004). In
turns to large organization like Intel, it was applicable in switching course when the
environment changes. This was the case has many times happened on Intel in China,
especially the home country effects United States faced a slowdown, and host country
China still growing.
According to the theory on market entry modes, the environmental, market and
production factors of the host country market can affect the choice of entry mode. To
the relevant study, host country environment factor of social and cultural differences
could affect the company’s choice of entry mode. Prior studies on most of the SMEs
have considered cultural differences, for instance, Trelleborg AB (Swedish SME) was
looking for a salesman that can speak the local language and understand the client
better (Lobban & Reyes, 2007). But, Intel did see the factor does not huge affect the
decision making on their entry strategies (Goodnow & Hansz, 1972). Some experts mean
Intel has a greater knowledge of the country’s social and cultural values, due to they had
a bunch of strong-minded and very passionate expatriates’ managers to deal with the
culture gap. From analysis, this was key success to Intel because it gave them better
understanding to the local customers and also better knowledge’s about socio-cultural
environment, which include the native language. Another data collection spanned that
Intel is knowledgeable in the middle way of doing business which includes both Western
and Eastern culture. Therefore, it builds trust and reliability providing meaning to life
inside the organization.
59
To reveal the host country’s attractiveness as location advantages, the researchers have
concluded their studies, further evaluated seven aspects of underlying factors for the
entry (Hollensen, 1998; Goodnow & Hansz, 1972; Burpitta, W.J. & Rondinellib, 2004).
These factors were market situation, natural resources, research and development of
technology, labour resources, competition, FDI boom and tax breaks. While study to the
market situation, it is necessary point out the U.S market saturation to Intel, was a
major home country pushing factor. In China, large population in terms to great market
size and growth rate, was the main influencer to Intel’s top managers, and they had
emphasised the factor will crucial for reaching profitability in the market. This is a good
presage for Intel, whose their entry strategy relies on taking advantage of this new
urban wealth, the subsequent rise in consumerism and the consequent desire for new
products. The fact that production in U.S created costs and saturation in home country
can be seen as a pushing factor for Intel internationalisation to China. Low host
country’s production cost was considered to be a location advantage since according to
Intel it was seen as an important underlying location specific factor. Low production cost
to some researchers, is stand for low costs of materials, labour and other production
input as well as of the infrastructure. However, the factor of production cost is not
relevant for SMEs as some researcher says that they produce all the products in their
domestic and choose to export (Hollensen, 1998; Johansson et al., 2006). They believe,
exporting is a safer way in international business, however, it may cause a high
transportation cost.
5.2.2 Theories applied to IBM- the underlying factors influence the decision of
foreign market entry mode
To some extent, IBM similar to Intel by seeing the company size influence their choice
on foreign market entry mode when they first entry to China. Anecdotal evidence from
previous chapter, IBM did to joint venture with the Beijing Union Medical College
Hospital install the earliest commercial processor. Also, IBM first internationalise to
China in 1934 only teaming up with local partners through the form of joint venture but
60
not the wholly owned subsidiary. This can be explained that the size of the IBM was still
developing and they didn’t have enough capital to set up a fully owned subsidiary
demands large investments. This fact supports Koch (2001) contention that the
company is not well-develop, as their very limited own resources may simply not allow,
or discourage from, some market entry modes. However, the company size of IBM
increases over time so they did to start up acquisitions. For instance, towards 1980s,
IBM has been fully developed the capability of acquiring, evaluating, integrating, and
deploying knowledge. Such case, the size was direct impact the choice of entry mode as
long as IBM has the pre conditions, which are the necessary funds, chosen a wholly
owned subsidiary.
Past IBM internal annual report has shown IBM did conduct much market research
before they direct invest abroad. It can be seen that the company posses the specific
market knowledge capabilities to imply a market diversification strategy whenever it
entered the different markets. Supports this come from Pedersen (2004), a MNC usually
encounter much advantages and flexibility in relation to indigenous firms in terms of
familiarity with the local business environment. In contrast, unfamiliarity may cause
uncertainty (Johanson & Vahlne, 1977) that impedes effective decision making and leads
to difficulties in dealing with local governments and partners. Apart of market research
before entry, IBM gained deeper market knowledge through the local partners. In the
initial stage, IBM began their activities in China by teaming up with local partners
through some form of joint venture. Theoretically, JV is to share resources and
uncertainty in attaining goals that would be not easy to achieve alone (Johanson &
Vahlne, 1977), or to provide a hedge against uncertainties for foreign firms with very
limited understanding of and experience in the Chinese markets (Thang & Zhang, 2008).
Within the literature, JV partners are resourceful channels to learn from. They can
provide input on the domestic market and environment, sources of raw materials, and
contacts with government authorities, local suppliers, and labour unions (Thang &
Zhang, 2008).
61
IBM did see the international experience together constitutes the firm-specific
capabilities which affect their choice of entry mode. A possible explanation from Root
(1994), international experience can be a competitive advantage and experience can
only be gained over time. Support from this come from Hollensen (1998), international
experience has grown, markets with less cultural similarities, farther away, have also
been entered. In time, IBM consciously constantly evaluates and learns from the first
entry by joint venture and it was important for coming entries. Theoretically,
acquisition is an alternative method for IBM to gain market specific experience quickly.
Since data on acquisitions were not collected, it is hard to say with certainty. However,
IBM still gained experience from the partners and has developed a strategy to grow
organically and follow large clients. The length of international experience allows the
generalization of experiences between similar markets, and these experiences gained
have made IBM braver in the sense that the more experience it got, the more money it
can put in wholly owned subsidiaries later. Results from data presentation support the
predictions.The empirical evidence, for this research, consists of IBM International
Business Machines Co. Ltd, Beijing, which is an IBM first wholly-owned enterprise in
China.
Back in the early 1990s, when a Chinese person saw or heard “IBM”, the words and
images came to his/her mind maybe “Big computers” “Think Pads” or “big company”.
What’s interesting is that these descriptions not only come from products or services,
but also to people and a business culture. IBM might be unique in this regard, which has
given them a competitive advantage by their product characteristic and further
influenced the entry strategies (Goodnow & Hansz, 1972). Historically the success of
IBM in the China was largely product and technology driven, and product strategies
were primarily developed at corporate headquarters. The presented a whole avenue of
possibility for IBM to build up their products at a rate which will keep up with the
demands of the market. Also, the fact that IBM entered to china by setting up the first
62
wholly-owned enterprise in Beijing, indicates that the company wants to establish the
own brand abroad. It helps identify determinants of entry mode strategy that may not
be held to the SMEs. This fact supports Johansson et al. (2006) contention that this
could refer to branding strategy, as a part of the nature of the product has affected the
choice of entry mode because it increases the need and essential to exist locally about a
high quality product. Or else to say, the factor of product differentiation can appear to
be an attractive approach.
Unlike many previous studies on risk aversion that attempted to explain the influences
in the level of entry mode, IBM do believe risk is not any factor that affects their choice
on mode of entry. As noted in the earlier chapter, IBM only strives for minimizing the
risk by avoiding any major downswing in the economy. However, no empirical data has
empirically examined the risk aversion is estimated when selecting any type of market
entry mode. This study is cross-sectional in nature and hence also subject to the
limitations associated with such research designs. This makes it very hard to see any
connections between empirical data and previous research presented by Koch (2001).
Previously mentioned, it can actually seen that the wholly owned subsidiaries have
became an attractive option in China as IBM entered through joint venture and
gradually progressed to ownership. This is due to IBM sees the market factors of China’s
economic reformed and loosening government restrictions, these had creating
opportunities for market entry. Especially after China’s WTO accession has been made
significant market openings, which facilitate foreign firms’ entry strategies (Goodnow &
Hansz, 1972) from most exporting and joint venture to acquisitions. Market penetration:
China’s entry into the WTO conducted in an era of improved market access and
transparency across most industries (Jones, 2010), this time, foreign companies began
to enjoy unprecedented levels of operational flexibility. The market size and growth
after China’s WTO seems interesting to IBM as the target’ country market size affects
the entry mode decision. The development of Chinese economy and the upgrading of
63
people’s living standard, there was dramatic increase in the local buying habit (Thang,
1982). Accordingly, research suggest that in high-growth markets, IBM tend to prefer
wholly-owned modes of entry so they can obtain scale economies, hence reducing per
unit costs and establishing a long-term presence. The phenomenon is identified by
Hollensen (1998), contends that high potential markets tend to get more involvement
from the management and they purely chose an entry mode with own subsidiary
commitment.
Extending the work of Ng (2007) to this study, the findings suggest that the choice of
entry modes is influenced by a firm's familiarity with the characteristics of the host
environment factors, for instance the local regulations affect the choice of entry mode.
Arguably, the factor is great influenced to IBM, whether it is permitted or not to start a
wholly owned subsidiary. Not surprisingly, when the host country has restrictions on
local content, foreign exchange or ownership level, IBM is unlikely to be able to
negotiate for a high control mode of entry. This fact supports Koch (2001) contention
that the maturity and penetration level of the market affects the amount of achievable
and attractive acquisitions. Refer the view of IBM to market factors; they are competing
with price, design and timely distribution. Closely associated to Hollensen (1998), a firm
gain market share opportunities to be able to sell at a more favourable price than
competitors, right material and inexpensive production are necessary. However, results
from data collection do to support the predictions. This is because the result showed
that IBM has improved its production process which has helped the firm to save costs in
production.
5.3 Cross case analysis
In this section the two cases included prior studies of SMEs will be compared with each
other and with the theory mentioned in the frame of reference. This will form an
overview in a table 5.1 based on the within cases analysis in the data analysis, which is
the factors influencing and methods and strategies for entering. This summarizes the
analysis we have conducted and the answers will be further discussed below.
64
Company
Theory
Intel IBM SMEs
Internal Factors
Firm specific capabilities
Company size/ resources
International experiences
Yes
Yes
Yes
Yes
Yes
Yes (to some extent,
IBM did not see the
this factor during
the first entry, but it
was impact the
company to set up
own subsidiaries
Yes (to some extent,
the lack of
internationalisation
has limited their
choice of entry
mode)
Yes (to some extent,
the lack of
internationalisation
has limited their
choice of entry
mode)
Yes (to some extent,
the lack of
internationalisation
has limited their
choice of entry
mode)
65
Product factors
Management risk attitudes
Yes
Yes
later)
Yes
No
No
Yes
External Factors
Home country
Target’s country market factor
Target’s country environment
factor
Target’s country production
factor
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No (to some extent,
they produce all the
products in their
domestic market and
preferred for
exporting)
Table 5.1 Cross case analysis: factors influencing the choice of entry mode
Table 5.1 showed a cross case analysis of the factors influencing the choice of entry
mode. From the studies, an obvious distinction between the companies will be made by
the firm size in choices of entry mode selection. There is a positive relationship between
66
their sizes and its choice of a high control entry mode. When looking at the firm size it
can see large differences between the large firms Intel and IBM acquire a large market
share and they went for a Greenfield investment and built their business from scratch.
The existing literature states that although SMEs may desire a high level of control of
the foreign operations and wishes to make a larger commitment, however they are
limited to export modes or joint venture methods but not acquisition or wholly owned
subsidiary. For instance, to set up a fully owned subsidiary demands large investments;
small companies still do not have satisfactory resources. The size of the company is
related to the amount of resources that the company had, instead small companies
have a limited amount of resources. SMEs have fewer resources than large firms, and
thus they must rely on additional factors when entering foreign markets. Market
knowledge may be considered such a factor, as well as a commitment to learning.
International experiences also a factor driven in choices of entry modes. Research given
SMEs had little international experience which made them a little bit isolated in their
decision. The findings conclude them with inexperienced firms and not accustomed to
the local culture are likely to use a collaborative entry mode (Anderson, 1997). The
easiest way for them was to joint venture with local firm to get more knowledge of the
market and also to gain more international experience. The phenomenon can found in
IBM‘s first entry to China with less international experience and market knowledge,
hence IBM has chosen to partner with more than 250 private-backed start-ups there.
And these experiences gained from partner have made IBM braver in the sense that the
more experience they got the more money they put in wholly owned subsidiaries later.
Instead Intel already had a wide knowledge of the world markets before they
internationalise to China and this made them the most obvious choice was to start a
Greenfield investment, initially build their own brand in the country.
While larger companies Intel and IBM are capable of producing high quality goods
requiring appropriate technologies and have even begun to transfer a portion of their
67
manufacturing to other lower-cost countries, however many SMEs are still in a state of
uncertainty (Johanson & Vahlne, 1977). It is expected that many SMEs still lack the
knowledge, nature of the product and technology know-how needed to actively engage
in even the first steps of internationalisation. These factors had discouraged them only
to start with exporting and limit their internationalisation activities to securing any
international risk. As such, because of lack of resources, SMEs do not approach
internationalisation in a systematic fashion and do not possess formal strategies.
Therefore, the suited theories concerning approaches to foreign market entry mode
selection are more suited for MNCs and that SMEs often uses a mix of the stated
approaches.
The way of seeing risk, and the way of handling risk is of great importance when going
abroad. However, IBM does believe risk is not any factor that affects their choice on
mode of entry. As in any study, this study is characterized by inherent limitations of the
research process due to less information of founding. Instead, Intel has risk aversion as a
core competence; they want to avoid risk to every degree, decided about a safer mode
of entry for their first entry to China, namely joint venture which can be seen as less
risky since they can get out of the market fast. Intel wanted to grow into the market by
using their good connection with the local partners and went in to the market one step
at a time. Also, founding from SMEs show a positive result, which suggest the internal
factor of management risk attitudes was affected their entry strategies (Goodnow &
Hansz, 1972). While the disparities may show SMEs did not have the knowledge to go
for a Greenfield investment with own entities like Intel had. SMEs had less
internationalisation experience and internal resources, tend to use low involvement
entry modes, namely exporting due to its low risk/return alternative. This mode, while
providing them with operational control, lacks in marketing control spending that may
be essential for market-seeking firms.
68
Although company capabilities are important determinants of a firm’s level of
internationalisation, however a proactive view toward external factors of understanding
the target country factors is another important consideration. To the large extent the
investigated companies in this study as well as SMEs agrees with each other regarding
the external factors influence the choice of market entry modes. From prior researcher’s
studies, SMEs have certain advantages over large enterprises, in that they are able to
more easily overcome governance problems. They argue SMEs have the advantage of
flexibility and ability to adapt to their environment more quickly than large enterprises.
But not all of those are successful, because SMEs also face certain disadvantages to
large enterprises, which may slow down their process in the foreign market as well as
discourage them from pursuing international opportunities. In points of view,
internationalise into unknown markets can be encountered with different economic,
political, and social conditions and with unfamiliar cultural and business practices;
certainly it can be risky and expensive. Studies have found that the greater the
perceived cultural distance between the parties, the more likely a SME will favour
licensing or exporting over a wholly-owned subsidiary. Instead, Intel & IBM approach a
host government about entering into a joint venture or full ownership mode of entry;
they believes there are certain advantages associated with host country production that
would not be afforded by exporting. This is due to the choice to enter through a high
control entry mode was determined by their firm’s capabilities and prior experience
with foreign direct investment. Also, they tend to adopt a high control mode to enter
China market when resource commitment is low and when host government restrictions
are not present.
69
Chapter 6 - Conclusions
The intention of this chapter is to fulfill the research purpose by summarizing the entire
study and also by highlighting the key findings of the study. The chapter then pursues to
the limitations of the study and presents the recommendations for future research.
6.1 Conclusion of the study
The purpose of this study is to provide a deeper understanding of the motives for
internationalization and factors that influence U.S large firms’ choice of foreign market
entry method to China. For the purpose of this studies, an important distinction to
70
previous studies by investigate the phenomenon of the motivations of those MNCs
going international from beginning, however, these motivation are less concern by
previous researchers. Secondly, my study is differing from previous studies by emphasis
how the external factors and internal factors influencing the large firm’ choices of entry
mode, additionally, further analysis whether these factors are applicable to SMEs. To
this I address the following research questions: (1) what are the motivators or why they
choose china to internationalize? (2) How the underlying factors were influence the
decision of foreign market entry mode?
To answer those research questions the researchers started to review literature that
would lead to a conceptual framework, which have been the fundament for this thesis.
The literature review provided a critical analysis of the views and insights of various
researchers on the subject area and served as vital source of secondary data. The
theoretical frameworks initiated with descriptions of the theoretical approaches to
entry modes. The study is covering the motives behind a firm’s decision to
internationalize its business activities together with an understanding on why and how
firms should engage in international business activities.
6.1.1 Research Question 1 - What are the motivators or why they choose china
to internationalize?
The motives for conducting both cases internationalize include: market motives,
economic motives, strategic motives. The motives when Intel decided upon foreign
investments were that the market in U.S gradually saturated. In contrast to say the
motive of IBM, the fact that the devastation of Europe and Japan during World War II
lately 1930s gave the United States a unique opportunity to dominate the international
commerce and, later, to dominate the world political stage as the biggest superpower.
IBM enjoyed the strong home country’s economic motives during 1930s, provided
unique opportunity to dominate the international commerce. When it comes to
proactive motivations, IBM started with proactive motivations to grow, since their
strategy is not much to follow customers, but later transform to reactive motivation.
71
Intel on other hand started out being reactive by following their customers and home
market saturation. Nevertheless, interestingly both Intel and IBM see the opportunities
from the China’ population, and a market that was not well developed but was fast
moving. In other words to say, they saw a potential in China market with an opportunity
to earn money and they wanted to enter the market as fast as possible. Furthermore,
the firm’s specific product and technology know-how is another factor pushes them to
enter a new foreign market. From the founding of two case studies, the company that is
larger and has more differentiated products received direct inquires form foreign
customers and markets which smaller companies not often received. One motive that fit
both of the cases was using labour and production abroad instead of more expensive
domestic resources. Manufacture production in China has traditionally involved labour-
intensive processes. This view is so called economic motive, is arise when they take
advantage of lower labour costs, natural resources and capital.
They were certain specific conclusions out of these study concerning U.S’s large firms
motives for internationalization:
Saturated home market is a major motivation for Intel; IBM enjoyed home country-
specific advantages and them to international markets.
Market grow with large china population
Differentiated products, which received direct inquires from foreign customers
Economic motives, which refer to labour costs, natural resources and capital
6.1.2 Research Question 2 - How the underlying factors were influence the
decision of foreign market entry mode?
The study has implications for a wide range of international entry mode concerns of
firms, providing essential insight for considering a variety of factors when seeking to
enter new markets. These factors are about various strengths in attendance, affecting
the entry mode decision a complex process with frequent trade-offs between suitable
entry modes These include the internal factors by overall firm capabilities include firm
72
size/resources, international experiences, availability of adequate operating capital, risk
management attitude versus that of competitors plus the ability to differentiate the
product from the competition. The framework recognizes the importance of firm-
specific resources in developing foreign entry strategies; firm-specific resources drive
entry mode strategy. Firm specific resources are common indicator of constraints and
advantages regarding the ability of accepting high costs and risk. For this study, the large
companies see the firms’ large size, capital and international experience as significant
influences, chose the high control entry mode such Joint venture and wholly owned
subsidiary. They chose high control entry mode since they wanted to enter the market
fast, to get a large share quickly in the fast growing economy. Also, the products
characteristic impacts their core competencies, provided them with a differentiation
advantage to other firms in a competitive market. Indeed, in subsequent differences,
IBM did not influence the choice of market entry strategies by its management risk
attitudes. Additionally, external factors should consider the similarity of the foreign
market to the home market, target’s country environment factor, market factor and
production factors. From the findings in this study, both of the companies consider
home and host country factors to influence the decision of entry mode. For instance,
legislation can limit the legal company form of ownership and thereby the choice of
entry mode. Also, the finding shows the companies are affected on the speed of the
China market growth when making their choice of entry mode. Chinese government
incentives, the domestic consumption and the cheap labour with permitting cheaper
production costs (cost per unit will be lower) potentially make the China an ideal
location for foreigner direct investment.
To sum up, the factors influence the SMEs in prior studies are all applicable to large
firms of this study. But to some extent, a comprehensive review of the influences of
variables, in each of these tiers, there are differences of specific entry mode selection
between large companies and SMEs. Empirical evidence, these studies show how large
companies do have the prerequisites when entering new foreign markets. An SME do
73
not have the same amount of resources that a larger company have since the resources
are often limited, and therefore the SME are forced to choose an entry mode that only
demands a small resource commitment as for example export. The relevant factors,
again, not allow SMEs to establish their own production abroad and are more or less
forced to choose export as their entry mode. However, a key contribution founded of
this study, concluded that the suited theories concerning approaches to foreign market
entry mode selection are more suited for large firms and that SMEs often uses a mix of
the stated approaches. However, there is no single most important factor but only
several factor combinations can affect the choice of entry mode and performance.
6.2 Limitations and implication for future researchConsiderations for the limitations of this study are discussed in conjunction with
possible future research. First, this study has only looked at technology & manufacturing
sectors. However, it would be of interest to make the same study to investigate other
industries either the service or consultancy companies. Second, the selection of entry
modes is based on a company perspective either its firm capabilities or management
attitude towards the host country. Sometimes, the motivators or influencing factors are
wide differing to vary sizes of company and their business service sectors. Therefore, a
comparative study of market entry selection of large firms from different countries is
suggested in future studies. Despite these limitations, this study has clearly provided the
first clarification of motivation for large firms to internationalise, also internal and
external factors influence of international market entry strategies. Also, the impact of
wholly owned subsidiaries and joint venture, internalization advantages, and entry
mode affecting the operation of U.S subsidiaries in China has been discussed.
The area of international market entry is immeasurably, some of my findings may reveal
inconsistencies between the studied theories. However, these inconsistencies can be
viewed as a contribution to existing theory, leading to the conclusion that the area
needs further research. In future studies, the sample can be extended with regards to
analysis the market barriers, firm’s managerial characteristics, culture, scope,
74
government relationship and experience of the companies in order to increase the
external validity. Also, the future studies could be made with quantitative approach,
with a purpose to rank the importance of the motivators or influencing factors, hence to
increase the possibility of generalizing the findings.
Words Count: 20,572
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