Global Marketing
Chapter 9: Some approaches to the choice of entry mode
Entry mode: an institutional arrangement for the entry of a company’s products and services into a new foreign
market. The main types are export, intermediate and hierarchical modes.
Rules for choosing mode of entry:
Naive rule: the decision-maker uses the same entry mode for all foreign markets. This rule ignores the
heterogeneity of the individual foreign markets.
Pragmatic rule: the decision-maker uses a workable entry mode for each foreign market. In the early
stages of exporting, the firm typically starts doing business with a low-risk entry mode. Only if the
particular initial mode is not feasible or profitable will the firm look for another workable entry mode.
In this case not all potential alternatives are investigated and the workable entry may not be the ‘best’
entry mode.
Strategy rules: this approach requires that all alternative entry modes are systematically compared
and evaluated before any choice is made. An application of this decision rule would be to choose the
entry mode that maximizes the profit contribution over the strategic planning period subject to:
o The availability of company resources;
o Risk;
o Non-profit objectives.
Transaction cost approach:
Opportunistic behaviour from the export intermediary:
In this connection the export intermediary’s opportunistic behaviour may be reflected in two activities:
In most producer-export intermediary relations, a spit of the sales0promoting costs has been fixed.
Thus statements by the export intermediary of too high sales promotion activities may form the basis
of a higher payment from producer to export intermediary.
The export intermediary may manipulate information on market size and competitor prices in order to
obtain lower ex-works prices from the producer. Of course, this kind of opportunism can be avoided if
the export intermediary is paid a commission of realized turnover.
Opportunistic behaviour of producer:
The export intermediary carries a great part of the economic risk and will always have the threat of
the producer’s change of entry mode hanging over his head. If the export intermediary does not live
up to the producer’s expectations, it risks being replaced by another export intermediary, or the
producer may change to its own export organization (sales subsidiary), as the increased transaction
frequency (market size) can obviously bear the increased costs.
Export intermediary responses to opportunistic behaviour of producer:
Establish personal relations with producer’s key employees;
Create an independent identity in connection with selling the producer’s products;
Add further value to the product which creates bonds in the agent’s customer relations.
, Factors affecting the foreign market entry mode decision:
Equity: some investment of a defined financial value.
Tacit: difficult to articulate and express in words – tacit knowledge has often to do with complex products and
services, where functionality is very hard to express.
Intermediate modes: somewhere between using export modes (external partners) and hierarchical modes
(internal modes).
Chapter 9: Some approaches to the choice of entry mode
Entry mode: an institutional arrangement for the entry of a company’s products and services into a new foreign
market. The main types are export, intermediate and hierarchical modes.
Rules for choosing mode of entry:
Naive rule: the decision-maker uses the same entry mode for all foreign markets. This rule ignores the
heterogeneity of the individual foreign markets.
Pragmatic rule: the decision-maker uses a workable entry mode for each foreign market. In the early
stages of exporting, the firm typically starts doing business with a low-risk entry mode. Only if the
particular initial mode is not feasible or profitable will the firm look for another workable entry mode.
In this case not all potential alternatives are investigated and the workable entry may not be the ‘best’
entry mode.
Strategy rules: this approach requires that all alternative entry modes are systematically compared
and evaluated before any choice is made. An application of this decision rule would be to choose the
entry mode that maximizes the profit contribution over the strategic planning period subject to:
o The availability of company resources;
o Risk;
o Non-profit objectives.
Transaction cost approach:
Opportunistic behaviour from the export intermediary:
In this connection the export intermediary’s opportunistic behaviour may be reflected in two activities:
In most producer-export intermediary relations, a spit of the sales0promoting costs has been fixed.
Thus statements by the export intermediary of too high sales promotion activities may form the basis
of a higher payment from producer to export intermediary.
The export intermediary may manipulate information on market size and competitor prices in order to
obtain lower ex-works prices from the producer. Of course, this kind of opportunism can be avoided if
the export intermediary is paid a commission of realized turnover.
Opportunistic behaviour of producer:
The export intermediary carries a great part of the economic risk and will always have the threat of
the producer’s change of entry mode hanging over his head. If the export intermediary does not live
up to the producer’s expectations, it risks being replaced by another export intermediary, or the
producer may change to its own export organization (sales subsidiary), as the increased transaction
frequency (market size) can obviously bear the increased costs.
Export intermediary responses to opportunistic behaviour of producer:
Establish personal relations with producer’s key employees;
Create an independent identity in connection with selling the producer’s products;
Add further value to the product which creates bonds in the agent’s customer relations.
, Factors affecting the foreign market entry mode decision:
Equity: some investment of a defined financial value.
Tacit: difficult to articulate and express in words – tacit knowledge has often to do with complex products and
services, where functionality is very hard to express.
Intermediate modes: somewhere between using export modes (external partners) and hierarchical modes
(internal modes).
