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.

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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.

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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

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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

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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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