Internationalization/Transaction-Cost Theory

The internationalization theory is interchangeable with the transaction-cost theory whereby costs are considered as the intrinsic factor in determining the suitable mode of entry (Ekeledo & Sivakumar, 2004). These costs include; legal fees, negotiation costs, constraints in enforcing contracts, and domestic taxation.

In the event that costs are quite high, firms usually opt for the development of wholly-owned operations. The theory “assumes perfect competition, homogenous firms, and mobility of resources among firms, including perfect transferability of know-how between a parent company and its foreign subsidiary” (Ekeledo & Sivakumar, 2004, p.71).

In effect, the theory presupposes the high related transactional costs in expanding overseas. This necessitates the trade-off between cost of integration (resources commitments) and benefit of integration (control) (Anderson & Gatignon, 1986). The most preferred option in context is the establishment of a wholly-owned subsidiary.

Eclectic Theory

Eclectic theory overcame the shortcomings posed by the internationalization theory with emphasis on; OLI (ownership, location, and internal) advantages (Ekeledo & Sivakumar, 2004; Dunning, 1988). A firm “must possess certain advantages specific to the nature and/or nationality of their ownership” (Dunning, 1988, p.2) to garner ownership advantages.

Location advantages refer to “market potential and country risks that make conducting business in the foreign market profitable” (Ekeledo& Sivakumar, 2004). Internal advantages are company specific competences that enable a firm to prefer certain market entry modes after considering their benefits to the firm.

Resource-Based Theory

Connor (1991) noted that business performance was heavily influenced by the interconnection between a company’s resources and capabilities and core competencies. The level of “resource commitment, control, and technology risks are highly correlated” (Osland, Taylor, Zou, 2001, p.155).

In essence, a “firm compete well in a setting in which there is a fit between the firm’s resources and external opportunities” (Ekeledo & Sivakumar, 2004, p.73). The preferred entry mode in this respect is usually sole ownership or strategic alliances/joint-ventures. They provide a balance between control and resources commitment.

Uppsala Model

The Uppsala model “is very general and therefore applicable to many different organizations and different situations” (Forsgren & Hagstrom, 2007, p.292). It is a progressive model that commences with no regular export presence and ends with the establishment of a wholly-owned foreign manufacturing concern.

It is applicable to firms that intend to take advantage of increased local knowledge to upscale their investment in foreign markets. With a reduction in perceived risk profile of the foreign locality, a firm is able to increase its investment in the market. It is more suited to traditional businesses rather than internet-based businesses.

International Market Entry Strategies

According to Ghauri & Cateora (2010), the main objectives for a firm to seek market entry into a foreign country are; market-seeking, resource-seeking, and efficiency-seeking strategy. Market-seeking strategy is usually preferred by most internationalizing firms as they seek access to fast developing markets in emerging and frontier nations.

Market entry strategy consists of four basic factors; entry mode, entry node, entry role, and entry process (Jansson, 2007). The entry node refers to the way in which the firm will integrate locally while entry process refers to the process of establishing domestic relationships with local firms (Jansson, 2007).

The entry role defines the commercial perspective of the business transaction. In essence, an internationalizing company can approach a foreign market as a buyer, manufacturers, and/or seller. Market entry mode explicitly determines the choice of accessing the specific market. The options include; exporting, licensing, franchising, acquisition, JVs, and WOS.

Globalization strategies that are implemented impact on the preferred market entry mode. The most important criteria to consider when choosing a preferred market entry method are; financial risk, cost, control, and profit potential (Enz, 2010). The nature of business relationships also determines the preferred entry mode (Zineldin, 2007).

According to Zineldin (2007), company performance is interlinked with the preferred entry mode. It encompasses potential risks and information symmetries/asymmetry that either propel or hinder success. This is particularly evident for a firm that seeks to expand its international presence into emerging markets.

They are considered to be riskier legally and with less developed supporting frameworks such as infrastructure and economic factors. Johnson & Tellis (2008) indicated that the market entry mode that was preferred usually had direct implications production and marketing strategy. Trade-offs between business performance and market penetration are of utmost importance.