Although every foreign market entry mode comes with its peculiar
challenges, the question of market uncertainty is a recurring trait no matter
the entry choice embarked upon by a firm. According to Peck & Shell (1991)
uncertain markets are analogous to imperfect markets. In such markets firms are
known to: have an influence over market prices - exercising monopolistic power
in such markets; or governmental policies erect a barrier to entry and exist - which
either forces the institution to remain in the market or incur a huge cost if
it decides to leave the market. In addition, the suppliers offer differentiated
products or services and the information asymmetry that encourages prices is in
existence. Sanders and Boivie (2004) note that information asymmetry results in
the increase in both adverse selection – hidden information – and moral hazards
– hidden actions – (Nayyar, 1990; Stiglitz, 1965). Furthermore, uncertain
markets are also as a result of other characteristics other than the firm’s
behaviour, an example is that of a difference in time lag in the market (Peck
& Shell, 1991). Whereas each market entry mode has its own advantages and
disadvantages (Anderson & Hubert, 1986), organizations are required to
evaluate their mission and vision, and compare these core values with the
strategic intent to go abroad. This essay will describe and analyse two
specific market entry modes, then suggest ways that organizations can use in selecting
the most appropriate entry mode strategy in uncertain markets.
One of the ways a firm can enter an uncertain market is by a strategic
alliance. Barlett, Sumantra & Beamish (2008) see a strategic alliance as a
cooperative agreement among certain organizations in the sharing of research
projects, minority equity concerns or a joint venture. Mowery, Oxley &
Silverman (1996) mention five desiderata behind the formation of such a
strategic entity: the hankering for the acquisition of cutting-edge
technological skills or competency from partnering firms; the inclination to
increase market power – achieved by strategic coordination among competitors in
a specific market; the capital requisition for the development of such
projects; anticipated associated risk with innovation; and the desire to spread
cost. Alternatively, a firm could enter a foreign market by an acquisition
entry mode, purchasing part or the entire entity of an existing institution.
Slangen & Hennart (2007) point out that this entry mode choice gives such a
firm the status of a partial owner – when part of an existing firm is purchased
– or a wholly owned subsidiary – when the entire entities of the existing firm
are purchased. In addition, Kogut & Singh (1998) consider the purchase of
stocks in an existing company, competent enough to take control of the
activities of the firm, as an acquisition.
The selection of the most suitable foreign market entry mode for a firm
nurturing such an intention usually follows a strategic analysis process. This
procedure enumerates the objectives of the firm, comparing such aspirations
with the gains associated with going abroad. Hennart & Reddy (1997) propose
that a strategic alliance takes place only because there is an existence of
high transaction cost to the firms involved. Anderson & Gatignon (1986)
describe transaction cost as the cost of participating in a market; an
explication of this construct results in a transaction cost analysis. Four key
elements arise from this analysis, they are:
I. Transaction
specific assets: which state the investments, both physical and human that are specialized to one or a few users or uses;
II.
External
uncertainty: elaborating on the unpredictability of the entrant’s external
environment
III.
Internal
uncertainty: the entrants inability to determine its agents performance by
observing output measures
IV.
Free-riding
potential: agents’ ability to receive benefits without bearing the associated
costs.
The most prominent grounds for choosing a strategic
alliance over an acquisition entry mode are when there are governmental and
institutional barriers (Hennart & Reddy, 1997); these obstacles could be
local laws or regulations that prohibit foreign direct investment or
differences in corporate culture that prevent employees of both firms from
integrating (Hennart & Reddy, 1997).
The acquisition entry mode has a strong relationship with a firm’s
international strategy, Hazing (2002) notes that there are two types of
international strategy that firms follow: the global strategy – renowned for
efficiency, thus producing standardized products in a remarkably cost-efficient
manner with an emphasis on economies of scale and scope. And the multidomestic
strategy – symbolized for its focus on decentralized networks, allowing its
firms to compete at the local level by adapting its product and or service
offering to local taste and preferences. The multidomestic international
strategy is acclaimed for a low level of integration (forgoing the benefits of
economies of scale and scope) and a high level of localization. These
characteristics suggest the most suitable entry strategy for firms intending to
go abroad, where the multidomestic strategy corresponds strongly with
acquisition intent. Hazing (2002) suggests that the fact that a firm is willing
to readapt its business strategy to suit local desires gives such an
institution a better chance at achieving its objective, if it enters the market
by acquisition.
This paper has given an account of the features of an uncertain market
and how these traits determine the choice of foreign market entry mode. In
order to enhance the success of the decision to go abroad, especially where an
air of uncertainty is present, it is first necessary to fully understand the
firm’s corporate level strategy, the firm’s mission and vision, and the
conditions prevalent in the chosen market. Such a strategic assessment identifies
needs and opportunities for all involved, and provides opportunity for
partnering institutions to recognise and value the strategic liaison. A
collaborative approach to goal setting (if the firm opts for a strategic
alliance) and the design of intervention strategies (if the organization
chooses an acquisition entry mode) provides the best chance of successful
implementation
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