Question

List and explain the entry modes available to a firm as it contemplates setting up cross-border operations.

Answer 1

Available entry modes to a firm as it contemplates setting up cross-border operations are as follows-

1. Export- there are three types of exporting: indirect (lowest risk entry mode), direct (very common entry mode) and cooperative (organization can use as a foreign market entry strategy). In indirect exporting the organization is merely selling their product to an agent in the foreign market who then sells the product on to an intermediary. A direct export does not involve an agent who sells the goods to the intermediary. Cooperative exporting allows organization to enter in an agreement with another foreign or local organization to use its distribution network.

2. Licensing- it is an agreement that permits organizations in the target country the rights to use the property of the licensor. This property is intangible and includes patents, trademarks, and production techniques. The licensee is required to pay a fee in exchange for the rights specified in the contract between the parties.

3. Franchising- in it semi-independent business owner (franchisee) pays fees and royalties to the franchisor to use a company’s trademark and sell its products or services. It is a largely successful method of cross-border market entry.

4. Joint venture- it is a cooperative arrangement between two or business entities, often for the purpose of starting a new business activity. Each business entity contributes assets to the joint venture and agrees on how to divide up income and expenses.

5. Wholly owned subsidiary- it is the process whereby an organization enters a foreign market with 100% ownership of the foreign entity. Two ways of wholly owned subsidiary are acquisition and Greenfield operations. Acquisition is the purchase of a foreign operation. Greenfield operation is the creation of a new operation and legal entity in the foreign market. It is very expensive mode of entry in foreign market but it gives 100% ownership as well.

No entry mode is considered to be superior to another. The entry mode which is more beneficial is dependent upon the organizations circumstances, goals, and objectives.