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This dissertation aims to develop a model to explain the differences in foreign market entry mode decisions between various industries in Sweden. The study investigates the preferred entry modes of companies in different industries and the factors influencing their choices. The research is based on existing theories and aims to create a new model that describes industries' choice of foreign market entry mode.
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Abstract
The research on internationalisation goes back a long time. Despite this, there exist no theories on how different industries enter new markets, and by which mode of entry. This dissertation attempts to develop a model with the purpose to explain the differences in foreign market entry mode decision between industries. In order to describe these differences, the foundations of our model are the relative degree of firm specific assets and the need of local representation, and if the industry use the firm specific asset internally or externally.
The suggested model is based upon concepts of prior theories on internationalisation, with a focus on Dunning´s Eclectic Paradigm. What separates the proposed model from the Eclectic Paradigm is the need of local representation, which differences are of great importance of different industries. The Uppsala Internationalisation model and Transaction Cost Analysis were also contributing in the development of the model. Propositions were created on each industry to test the validity of the model and the presumed entry mode decision. As this dissertation used a deductive approach, the model was developed by existing theories of internationalisation and then tested empirically by an internet-based questionnaire on companies on the Swedish stock market.
The result demonstrated the applicability of the model. In addition, the analysis contains a detailed description of the findings on each industry, and summarises the model with a combined result. Finally, the conclusions are presented to summarise the work, the practical implementations and suggestions for further research.
Figure 6.7.2: The suggested/actual entry mode in the manufacturing industry Figure 6.8.1: The predicted/actual entry mode in the service industry Figure 6.8.2: The suggested/actual entry mode in the service industry Figure 6.9.1: The predicted/actual entry mode in the transport industry Figure 6.9.2: The suggested/actual entry mode in the transport industry Figure 6.10.1: The predicted/actual entry mode in the IT industry Figure 6.10.2: The suggested/actual entry mode in the IT industry Figure 6.11.1: The predicted/actual entry mode in the energy industry Figure 6.11.2: The suggested/actual entry mode in the energy industry Figure 6.12.1: The initial Industry Internationalisation model Figure 6.12.1: The final Industry Internationalisation model
List of Tables Table 3.1: Summary of the three theories Table 4.1: Basics of the Industry Internationalisation model Table 5.1: Results of the questionnaire Table 6.2.1: Result from the finance industry Table 6.3.1: Result from the material industry Table 6.4.1: Result from the healthcare industry Table 6.5.1: Result from the consumer discretionary industry Table 6.5.2: Statistical analysis of the consumer discretionary industry Table 6.6.1: Result from the building industry Table 6.6.2: Statistical analysis of the building industry Table 6.7.1: Result from the manufacturing industry Table 6.7.2: Statistical analysis of the manufacturing industry Table 6.8.1: Result from the service industry Table 6.9.1: Result from the transport industry Table 6.10.1: Result from the IT industry Table 6.10.2: Statistical analysis of the IT industry Table 6.11.1: Result from the energy industry
Appendix Appendix 1: Cover letter and questionnaire.......................................... 117
Chapter 1: Introduction
In the first chapter, we will present the background, problem and purpose of our dissertation. We will present the research questions and briefly discuss the limitations of our approach. In the end of this chapter we show the outline of the dissertation.
1.1 Background To find a subject for our dissertation we started to think about what we thought had been most interesting during our time at Kristianstad University. As international business students we have always been fascinated by how and why companies enter new markets. We wanted to look further into which mode of entry companies in Sweden prefer to use in different regions, and what factors affect their choice of entry mode. The focus will be on different industries, and if we can see a pattern in their choice of entry mode.
There are several theories that cover the internationalisation of companies. The theories are often well known and widely accepted by researchers and business practicians. Even if business is constantly evolving, these theories are so well developed that they still describes internationalisation accurately and can be used to develop new theories to describe future ways of internationalisation. The theories are often very specific why companies pursue international trade and relations, reasons for internationalising, which entry modes that exist and especially what factors that influence company leaders’ decisions to internationalise. However, when reviewing these theories and reading business literature and scientific business articles, we believe that researchers often refer to companies as a universal unity and not reflecting over that companies are different. Researchers often have several good arguments for factors that influence the companies’ decisions but they often fail to mention that factors affect companies differently. We will therefore examine if you can relate internationalisation factors and choice of entry mode to different industries.
1.5 Limitations The research was limited to small and medium sized companies depending on the resources and time of the researchers. Naturally, we cannot examine companies all-around the world, therefore we have limited our research to companies in Sweden since we all live in Sweden. Another limitation is time, and we are not able to review all research articles that cover this area of business which may lead to us missing some important articles.
1.6 Outline Chapter 2: Method In this chapter the choice of methodology and scientific approach are discussed. The chapter will present how primary data and secondary are collected. In addition, it contains a presentation of the chosen theories.
Chapter 3: Theoretical framework Chapter 3 will present well-known theories from acknowledge researchers that describes how companies internationalise. The theories discuss factors and problems that affect companies’ choice of foreign entry mode. These theories constitute the basis of our dissertation and are used to create a new model that describes industries choice of foreign market entry mode. Finally, it will describe the entry modes.
Chapter 4: Creating an alternative model In this chapter we will present an alternative model based on previous mentioned theories. The model will show which entry mode is the most preferred and used by companies in different industries. The model is based on theories and industries’ predicted choice of entry mode and motivated with propositions that will be presented.
Chapter 5: Empirical method In chapter 5 the method for the empirical research will be explained. This will include the research strategy, the data collection method and the sample. Further, we will discuss the questionnaire, the operationalization and the data analysis. At the end the reliability and validity will be discussed.
Chapter 6: Analysis of the survey In chapter 6 each industry will be analysed separately. By using the results from the questionnaire and comparing it to the propositions we will see if the propositions and the industry internationalisation model are working. At the end of this chapter we will have a final presentation of the model and if it had to be configures.
Chapter 7: Conclusion In the last chapter the dissertation will be summarised. The applicability of the industry internationalisation model is discussed. In addition, criticism to the methodology will be presented together with modifications, practical implementations and future research.
free way. The aim is to be independent; not trying to be affected or you affect the research. Since we study entire industries the purpose is to generalise our findings, which you try in a positivistic approach. However, the difference to a realistic approach is minimal when the objective is to study the behaviour of a company (Saunders et al. 2007).
2.3 Secondary Data: Choice of theory When reviewing the topic and explanation of internationalisation many theories and models came across. Some theories are more acknowledged than others, and the majority of the theories have extensions by other authors. However, a pattern of the most commonly used theories could be seen. In addition, in alignment with our research purpose, we have chosen the theories that we think could be used to explain the way different industries enter new markets. The theories that we have chosen are:
develops, and with that the physical distance to markets increases (Johanson and Vahlne, 1977).
Some of the most important sources in our theoretical framework were articles written by the creators of the specific theories. In addition, we have also studied literature from researchers that have analysed the theories further, and some of the most important extensions.
2.4 Primary Data We created a webpage on which we published a questionnaire. The purpose was to test the model we had developed, and the questions in our survey were linked to the model. The reason why we chose an internet-based survey was to emphasise the anonymity of the participant, hoping this would increase the number of participants. The online questionnaire makes is possible for the participants to decide themselves when to answer. Additionally, the questionnaire could be interlinked with a program (Excel) making it easier to analyse the results. A letter was sent out to 266 companies on Mid cap, Small cap and First North^1 on the Swedish stock market, with a link to the webpage www.modeofentry.com. On the webpage, the participants could read information about the writers of the dissertation and their background. To get a high response rate a follow-up letter was sent one week after the first letter. To strengthen our model we also conducted personal interviews with present and former high-level executives in different industries (see chapter 5 for details).
(^1) The Mid Cap, the Small Cap and the First North are lists on the Swedish stock market. The lists contain small and medium sized companies located in Sweden.
differences between countries and prefer a moderate initial commitment when doing business abroad. They want companies to gradually increase their commitment as they acquire knowledge and experience in that market. Researchers from first school prefer that companies enter new markets with a low risk entry mode such as export and with time increase their involvement by choosing an entry mode with higher commitment (Pan & Tse 2000).
The second school analyse the transaction cost phenomena. Researchers state that companies will internalize operations that it can perform at a low cost and let others perform activities that can be done at lower cost elsewhere (externalize). When a company externalize their activities transaction costs will occur. These costs include amongst other cost of monitoring, controlling and inspecting suppliers and products. The second school’s advocates assume that managers consider all entry modes at the same level and that all factors are of equal importance (Pan & Tse 2000).
The third school of thought focus much on location specific factors. John Dunning is one of the most prominent researchers in this area. He state that companies’ entry mode decisions rest on three factors, ownership-, location- and internalisation factors. He calls attention to location factors as he believes them to have an increasing affect to managers’ entry mode decisions (Pan & Tse 2000).
The three theories we have chosen all have some affiliation to one of the three schools. For instance, the Uppsala internationalisation model belong to the first school researchers and the eclectic paradigm belongs to Dunning from the third school. We will now present the theories and we will return to this discussion later in chapter four when we will create an alternative model that highlight industries entry mode choice.
3.3 The Uppsala Model During the 1970s two Swedish researchers, Johanson, Vahlne and Wiedersheim- Paul, at the University of Uppsala in Sweden studied the internationalisation process of companies. They created a model to explain the internationalisation
process of firms; and named it the Uppsala model. The model has its theoretical base in the behavioural theory of the firm (Cyert & March, 1963; Aharoni, 1966).
The Uppsala model focuses on gradual integration, acquisition and use of knowledge about foreign markets and operations, and on incrementally increasing commitments to foreign markets (Johanson & Vahlne, 1977). An important aspect of the model is that it is a dynamic model; it describes the internationalisation of a firm as a process. This process is expressed in the model through psychic distance and the establishment chain of the firm; these will be discussed more lately. The process evolves with interplay between the development of knowledge about the foreign markets and operations, and an increasing commitment of resources to those markets (Johanson & Vahlne, 1990, in Johansson et al, 1994). The model tries to explain that firms internationalize when they learn more about new markets.
Assumptions in the Uppsala model -The establishment chain and the psychic distance As mentioned earlier, the process in the Uppsala model is expressed by psychic distance and the establishment chain (Johanson & Vahlne, 1990, in Johanson et al, 1994). These patterns were noticed when the Swedish researchers studied the internationalisation process for a number of Swedish companies. The first pattern, the establishment chain, means that a company commits to engage in operations in a certain foreign country through small incremental steps. For every new step the commitment increases. The researchers could see that the companies started with exporting and with time they started using sales organisations and in the end their own manufacturing operations. The establishment chain is illustrated in figure 3.1:
Figure nr 3.1: The Establishment chain (Source: Own model, based on Johanson and Wiedersheim-Paul, 1975, in Johanson et al, 1994)
Sporadic export
Agent Sales subsidiary
Production
Three Exceptions The Uppsala model shows that companies take small and incremental steps when it comes to the market commitment dimension and the geographical and cultural dimension (Hollensen, 1998). However, there are three exceptions:
The core concepts of the Uppsala model -State Aspects and Change Aspects The model is based on four core concepts: market commitment, market knowledge, current activities and commitment decisions. Market commitment and market knowledge constitute state aspects and current activities, and commitment decisions constitute change aspects. The state aspects are the resource commitment to foreign markets and the knowledge about the market and operations. The change aspects are decisions to commit resources and the performance of current business activities (Johanson & Vahlne, 1977). Market knowledge and market commitment are assumed to affect both commitment decisions and the way current activities are performed. These in turn change knowledge and commitment (Johanson & Vahlne, 1977, cited in Aharoni, 1966). In this way you can see that the four core concepts of the Uppsala model are linked together, affecting each other. This is illustrated on the next page in figure 3.3:
State Aspects Change Aspects
Figure 3.3: Mechanisms of internationalisation – State and Change Aspects (Source: Johanson & Vahlne, 1990, in Johanson et al, 1994)
The Uppsala model assumes that the firm strives to increase its long-term profit, which is assumed to be equivalent to growth (Johanson & Vahlne, 1977, cited in Williamson, 1966). Another assumption is that the firm is striving to keep risk- taking at a low level. These assumptions characterize the decision making of the firm and become a frame for in which all decisions are taken. The model assumes that the state of internationalisation affects perceived opportunities and threats which in turn influence commitment decisions and current activities (Johanson & Vahlne, 1977). The following section will review the four core concepts:
State Aspects As mentioned earlier, the two state aspects are composed by market commitment and market knowledge. Market commitment is considered because of the assumption that the commitment to a market affects the firm´s perceived opportunities and risk (Johanson & Vahlne, 1977).
Market commitment The market commitment concept is assumed to be composed of two factors: the amount of resources committed and the degree of commitment, i.e. the difficulty of finding another way to use and transfer the resources. The amount of resources is described as the size of the investment. Resources invested in a particular market can often be considered as committed to that market. The problem arises when the resources can be sold quickly and the financial resources can be used
Market Knowledge
Market Commitment
Commitment decisions
Current activities
