CH4 - Internationalization of service firms

Define "mode of entry" in international marketing.

It is the institutional arrangement through which a firm enters a foreign market to offer its goods/services.

List the main modes of entry into foreign markets.

• Indirect exporting

• Direct exporting

• Licensing

• Franchising

• Joint venture (JV)

• Subsidiary (partly or wholly owned)

• Strategic alliances

• E-commerce/virtual presence

Differentiate between indirect and direct exporting.

• Indirect: Via intermediaries; low cost/risk, no customer contact

• Direct: Company handles exports; more control, profit, and feedback

What is a licensing agreement?

A contract where one firm (licensor) grants another (licensee) the right to use its brand, tech, or IP to sell products in return for fees or royalties.

What is franchising in global expansion?

A business model where a franchisor grants a franchisee the right to operate under its name with support in exchange for fees. Used often for fast expansion.

What is a joint venture in international business?

A new company created by two or more firms pooling resources for a shared objective. JV partners share risks, profits, and control.

What's the difference between a wholly owned and partly owned subsidiary?

• Wholly Owned: Parent owns 100% of shares – full control, high cost/risk

• Partly Owned: Parent owns 50–99% – shared control, lower investment

What are the types of strategic alliances?

• Manufacturing

• Marketing

• Distribution
  They involve shared goals without forming a new company (unlike JV).

How does Zara choose entry modes?

• Subsidiaries in culturally close markets (Europe)

• JVs in high-potential, culturally distant markets (India with Tata)

• Franchising in smaller/high-distance markets (Kuwait, Puerto Rico)

What influences the choice of mode of entry?

• Costs and risk

• Control needs

• Speed

• Long-term goals

• Product complexity

• Company size/flexibility

• International experience

• Cultural, legal, and market conditions

Pros and cons of indirect export?

✔ Low cost & risk, uses local knowledge
✘ No customer contact, low feedback, low control

Pros and cons of direct export?

✔ Full control, more profit
✘ Higher cost, complex logistics

What are the pros/cons of a wholly owned subsidiary?

✔ Total control, brand consistency
✘ High cost, high risk, limited local knowledge

What are the 3 approaches to choosing an entry mode?

• Naïve Rule – Same MoE used for all countries

• Pragmatic Rule – Choose a workable mode per market

• Strategy Rule – Evaluate all options systematically

What risks do exporters face with distributors?

• Manipulated data

• Misaligned pricing

• Low promotional investment

• Risk of non-exclusive distributors lacking motivation

How can exporters manage distributor issues?

• Performance-based pay

• Long-term contracts

• Maintain trust and communication

• Expand service offering (pre/post-sale support)

What factors push toward internalization (high control modes)?

• Large firm size

• High international experience

• Complex product

• High control & protection needs

• Tacit know-how

What external factors influence MoE?

• Socio-cultural & geographical distance

• Market size/growth

• Country risk

• Laws/regulations

• Trade barriers

• Competitive pressure

• Number of intermediaries

What internal factors influence MoE

• cost/risks

• speed

• long-term objectives

• company size/flexibility

• international experience

• control / managerial reasons

• product complexity/differentiation

• relationships

Why does product complexity influence entry mode?

Complex or highly differentiated products often require direct control to maintain quality and brand standards, encouraging internalized modes

How does company size influence entry mode?

Larger firms typically have more resources to commit to high-control, high-cost modes like subsidiaries or JVs. Smaller firms may prefer exporting or licensing.

How does socio-cultural distance affect entry mode?

High cultural distance increases uncertainty, making partnerships (e.g., JVs or franchises) more favorable than wholly owned subsidiaries.

What entry mode is best for high control?

Wholly owned subsidiaries—used when control over brand, operations, or IP is essential.

What entry mode is best for flexibility and low investment?

Exporting (especially indirect) or licensing—lower risk, fewer resources required, and easier to exit.

What entry mode suits fast international expansion?

Franchising and licensing—quick market penetration with minimal capital investment.

External environmental forces that affect mode of entry (in-depth)

• Socio-cultural distance: Greater distance increases risk, may require local partners

• Country risk/demand uncertainty: Economic/political instability encourages low-risk modes

• Market size & growth: Larger, growing markets attract investment-heavy entry

• Direct/indirect trade barriers: High barriers can discourage entry or force JV/local production

• Competitive environment: Intense competition may require fast and committed market entry

• Number of intermediaries: Fewer intermediaries = more pressure for direct entry

• Laws & regulations: Restrictions can limit mode options (e.g., foreign ownership bans)

• Geographical distance: Increases costs, affects logistics and communication

What are internal factors influencing entry mode? (in depth)

• Costs/risks: Financial exposure and tolerance for risk

• Speed: How quickly the company wants to enter the market

• Long-term objectives: Strategic alignment and commitment

• Company size/flexibility: Larger firms may handle risk better

• International experience: Familiarity with global operations

• Control/managerial reasons: Preference for decision authority

• Product complexity/differentiation: Unique products may require control

• Relationships: Existing or potential business ties

How does firm size influence entry mode?

Larger firms → more resources → + internalization (Direct)

How does international experience affect entry mode decision?

More experience → better ability to manage abroad → + internalization (Direct)

What is the effect of product complexity on entry mode?

Complex products require control and quality assurance → + internalization (Direct)

How does product differentiation advantage affect entry mode?

Unique or premium products need brand protection → + internalization (Direct)

What does risk aversion suggest about entry mode choice?

Risk-averse firms avoid high-commitment options → − internalization (Indirect)

How does a need for control influence entry mode?

High control preference = ownership & investment → + internalization (Direct)

How does flexibility impact entry mode decision?

Desire for flexibility = lower commitment = − internalization (Indirect)

How does the tacit nature of know-how affect entry mode?

When know-how is difficult to transfer, firms prefer direct control → + internalization (Direct)

How does opportunistic behavior influence entry mode choice?

To avoid risk of opportunism, firms internalize more → + internalization (Direct)

How do transaction costs affect entry mode?

High transaction costs (e.g., monitoring agents) → + internalization (Direct)

What impact does sociocultural distance have on entry mode?

Greater cultural gap increases risk → − internalization (Indirect)

How do country risk and demand uncertainty affect entry mode?

Risky, unstable environments push firms to avoid high investment → − internalization (Indirect)

What is the impact of market size and growth on entry mode?

Larger/growing markets justify full control and investment → + internalization (Direct)

How do trade barriers (direct/indirect) influence entry mode?

Barriers may make exporting harder, encouraging local production → + internalization (Direct)

How does the intensity of competition affect entry mode?

High competition may push firms to remain flexible → − internalization (Indirect)

What does the availability of export intermediaries mean for entry mode?

If few export partners are available, firms must do it themselves → + internalization (Direct)

CLARIFICATION: What does (+ / −) Internationalization Mean?

• (+) Increasing Internalization
  → The firm is more likely to internalize operations (i.e., own and control activities in the foreign market).
  → Leads to hierarchical or direct modes like subsidiaries, joint ventures, or direct export.
  → More investment, control, risk, and long-term commitment.

• (−) Decreasing Internalization (i.e., Increasing Externalization)
  → The firm outsources or externalizes operations to partners (i.e., gives responsibility to others).
  → Leads to indirect or low-control modes like indirect export, licensing, franchising.
  → Lower cost, risk, control, and more flexibility.

CLARIFICATION: What does (Direct) / (Indirect) Mean?

• (Direct)
  → The company deals directly with the foreign market (e.g., setting up a subsidiary, direct exporting).
  → Usually high control and high involvement.

• (Indirect)
  → The company enters via third parties or intermediaries (e.g., agents, distributors, export houses).
  → Usually lower risk, less commitment, and less control.