INTERNATIONAL MARKET ENTRY STRATEGIES

Abstract.
Entry mode selection is one of the most strategic aspects of international business. The
selection of international market entry strategy is an institutional decision that comprises the
choice of target market, entry mode, marketing plan and control system. The right entry
mode decision enables companies all assets to enter the targeted foreign markets. The entry
modes can be grouped in three categories; export based methods, non-equity methods
(contractual entry) and equity methods (investment entry). The export based methods can
be either indirect export and direct export. The main forms of non-equity methods
(contractual entry) are licensing, franchising, strategic alliances and equity methods
(investment entry) are foreign direct investment, joint venture and merger & acquisition.

Keywords: entry mode, equity method, export based method, non-equity method
Introduction
International market entry strategy is an institutional decision that comprises the choice of
target market, entry mode, marketing plan and control system. The entry mode decision
which enables the entry of a company's products, services, human or other resources into a
foreign country has an important effect on the overall performance of the international
operations. Although the international entry mode is the third most researched field in
international business behind foreign direct investment (FDI) and internationalization, a few
researchers just give a review of international entry mode. The main ones are Andersen’s
(1997) review about theories and frameworks; Sarkar and Cavusgil’s (1996) article analysis
the trends in the entry modes; Zhao, Luo, and Suh’s (2004) article about selection of owner
based entry mode and analysis of transaction cost economics; Harzing’s (2002) research
focusing on national culture in entry mode selection; Tihanyi, Griffith, and Russell’s (2005)
research significance of cultural distance on selection of entry mode, diversification of
internationalization and performance of MNEs (Canabal and White, 2008).
Sharma and Erramilli (2004, p. 2) define an entry mode as ‘‘a structural agreement that
allows a firm to implement its product market strategy in a host country either by carrying out
only the marketing operations (i.e., via export modes), or both production and marketing
operations there by itself or in partnership with others (contractual modes, joint ventures,
wholly owned operations)’’. Monopolistic advantages, internalization, internationalization,
transaction cost, strategic behavior, bargaining, and eclectic theories are the main
theoretical perspectives that have been used to explain the strategic decision of entry mode.
Those theories mainly differ from assumptions which emphasize different factors in the
selection of entry mode. Some of those theories are mainly for explaining the understanding
of internationalization like monopolistic advantages and also helps to understand the
selection of entry mode whereas some of the theories are just developed for explaining the
choice of entry mode (Canabal and White, 2008).
Selection of the entry mode fundamentally depends on the benefits, costs and required
resources (Sharma and Erramilli 2004; Blomstermo et al. 2006; Eriksson et al. 1997). The
main factors that have an effect on the decision of entry mode choice can be classified as
external and internal factors. Internal factors are the factors that have an effect on a
company's entry mode decisions and external factors are not under the control of the
company during the entry mode to the international markets (Zekiri and Angelova, 2011).
According to Root (1998) “how external factors influence selecting entry mode to market
depends on internal factors”. The external factors which are effective on the selection of
entry mode are listed by Root (1998) under four group which are listed below;
Target country market factors: The current market and its growth rate is an important
factor affecting the entry mode. The market size affects the choice of entry mode as
developing markets will attract more investment type of entry modes. If a country has a big
population or a growing young population, that country will receive more investment type of
entry mode. Competitive market structure is also an important aspect, it can be either
complete exclusive or multi exclusive market (Sharma and Erramilli, 2004).
Target country production factors: The production factors of a country covers raw
materials, workforce, quality, quantity, economical structure of a country, distribution costs
and they have an important effect on the decision taken during the entry mode selection
(Sharma and Erramilli, 2004).
Target country environmental factors: Political, economic, social, technological,
environmental and legal factors of the target market have an important effect on selecting
entry mode to market. The international barriers and regulations which are mainly tariffs and
quotas are the most important environmental factors. Economic factors such as national
gross production, interest rate, and per capita income are indicators which are closely
related with the market size of the target country. Social distance has also significant
importance as the companies are more comfortable in selecting investment mode when they
are familiar with the culture of the country they want to invest in. If the target market has a
different culture which consists of values, beliefs, customs, religion and languages, the
companies will probably prefer exporting or contractual mode as an entry strategy. The main
reason behind this selection is the low confidence in their abilities to manage the
international operation (Sharma and Erramilli, 2004).
Home country factors: Market, product and environmental factors of the home country
have an influence on selecting entry mode to international markets. Company’s competitive
position and competitive structure of the home market have important effects on the entry
mode. If the production costs are too high in the home country, the company will be more
selective in the entry mode selection and prefer licensing rather than foreign direct
investment (Sharma and Erramilli, 2004).
The internal factors of affecting the entry mode are listed as follows by Root (1998);
Country product factors: The products with competitive advantage are mainly produced in
the home country and exported whereas the basic products which have less competitive
advantage in the international markets are produced in the target market either by
production licensing or investment in the target market (Sharma and Erramilli, 2004).
Company resource-commitments factors: The resources of a company which are
management, capital, technology, production and marketing skills affects the decision of
selecting entry mode to the target market (Sharma and Erramilli, 2004).
Monopolistic advantages theory, internationalization theory, international product life cycle
theory, network theory, internalization theory, eclectic theory, transaction cost theory,
resource based view and contingency theory are the main theoretical perspectives that have
been used to explain the strategic decision of entry mode. Those theories mainly differ from
assumptions which emphasize different factors in the selection of entry mode (Andersen et
al., 2014). The rationale affecting the choice of entry mode is different according to the
theories above. If the company is not too experienced, the main country has competitive
advantage in resources, market is uncertain or product is at early stage of product life cycle;
exporting is preferred as an entry mode (Andersen et al., 2014; Dunning, 1977; Johanson
and Wiedersheim-Paul, 1975; Vernon, 1966). Foreign Direct Investment which is a equity
mode of entry is preferred when the product is at its maturity stage, when uncertainty is low
and imperfection is high in the market, if there are foreign markets which have cheaper
resources and company’s network relations are very strong (Andersen et al., 2014; Barney,
1986; Buckley and Casson, 1976; Dunning, 1977; Johanson & Vahlne, 1977; Vernon, 1966).
Licensing, which is a non-equity entry mode, is preferred when the internalization forces are
not efficient (Andersen et al., 2014; Dunning, 1980).
According to Driscoll (1995) entry modes can be classified into three main categories;
exporting, non-equity (contractual) and equity(investment). This classification mainly relies
on the span of the investment and control. Non-equity modes which are mainly contractual
entry modes that require less investment and control. On the other hand, equity modes
which are investment entry modes, therefore require high levels of control from the main
organization (Pan and Tse, 2000). In international business, the entry modes are closely
related to degrees of resource commitment, risk exposure, control level, extent of inter-
organizational dependence and profit return. To accomplish a successful internationalization,
three factors which are company factors, environmental factors and moderators should be
analyzed and then the most appropriate entry mode should be chosen. The company-owned
advantages, experience and strategic management are main company factors. Demand,
political, economic and socio-cultural conditions are the most important environmental
factors. Lastly, government policies and regulations, corporate policies and size of
companies are accepted as main moderators (Wu and Zhao, 2007).
Exporting
The most common form of entry modes to the international markets is export based method
which is buying goods internationally. Companies mainly export goods in order to increase
their sales and profits and import goods when they can supply the goods at a lower price
than the domestic market. Between the years 1950 and 2000, the word export was used as
a synonym for internationalization. Export is very important especially for emerging countries
as it is a major source of employment and foreign currency (Divrik and Baykal, 2022).
The companies should develop a strategic plan which has five-stage; export awareness,
export intention, trial, evaluation, and acceptance to be successful in export activity.
Generally, the stages of the export process are accepted to occur chronologically, however
sometimes some stages can occur at the same time. The first stage of the export process
which is export awareness is the problem or opportunity recognition stage. At this stage, the
company focuses on a target foreign market either as a solution to the problems in the home
market or interest in the foreign market as an opportunity for their global expansion. Second
stage is the export intention stage in which the motivational factors are important and those
factors which affect expectations as to the results of foreign involvement and more
specifically what type of entry is likely to be considered. At this stage, managerial attitude
has critical dimensions which are expectations and attitudes toward exporting and target
markets. Those dimensions can be specific attitudes to countries, customers, the exporting
process and resources needed. The next stage is the trial stage in which the engagement of
export activities and this engagement can be activated by an unexpected foreign order, trade
fairs, or visits to foreign markets. The evaluation stage occurs to appraise the sales and
profit figures of the trial stage. If the figures at the evaluation stage are convincing, the final
stage is adoption. At the adoption stage export activity is accepted by the company as a
continuous activity (Reid, 1981). There are mainly two types of export and import which are
direct and indirect export and import.
Indirect Export
Indirect exporting is a form of export when a company is not involved in the international
activity and performs the activities through intermediaries (Fletcher, 2004). Export
intermediaries act as a vital “middleman” role in international business, in other words they
act as a linkage between organizations. They link organizations that want to operate in the
international markets that otherwise not have been in touch. Export intermediaries can be
agents, distributors which are local or abroad and local branches of multinational companies
(Peng and York, 2001). In the indirect export, all functions of export which are
documentation, distribution and sometimes sales and marketing activities are subcontracted
to the export intermediary. However, the most valuable and difficult function of the export
intermediaries is to guide them to improve their abilities to learn as an organization, and
reduce their knowledge gaps related to foreign markets (Li, 2004).
Indirect export modes are associated with lower levels of risk, control and resource
involvement compared to direct export mode (Johanson and Wiedersheim-Paul 1975).
Indirect form of export mainly takes place when the company does not have the ability to
perform export by its own resources which can be human or financial resources. As the
export intermediaries have deep knowledge of specific export markets, they perform the
functions of export at a lower cost than the company (Li, 2004). On the other hand, as the
company has no contact with the target market, it does not receive any feedback about the
sales, marketing and product development and they may have a loss of control. As export
intermediaries are commercial organizations, the cost of exporting increases and companies
acquire lower profits compared to direct export (Blomstermo et al. 2006). Mainly small and
medium sized companies use indirect export but on the other hand multinational companies
establish their export subsidiary operations to manage the sales of all of their product
ranges.
Direct Export
Direct exporting is an activity in which a company is involved in selling its own products to
the foreign target markets. For direct exporting, the company should need deep and
expertise knowledge for conducting market research, export documentation and marketing
of the target market. Therefore, for direct exporting, companies should have sufficient
experience in international marketing. Furthermore, direct exporting requires deep analysis
of a foreign target market in order to choose the appropriate distributors for the market. The
direct export enables exporters to interact with the target market, receive feedback from the
customers and they gather more market information. In direct export, companies have more
sales and control on the target markets (Albaum et al, 2002). Mainly, direct exporting is an
approach used by heterogeneous companies when their productivity levels are very high to
cover a fixed cost. The customer-oriented approach of exporters mainly results in long-term
commitments (Melitz and Redding 2014).
In the direct export, a company can perform it either through its own channels or target
market intermediaries. In accordance with the incremental approach, the internationalization
theory anticipates that companies that begin with indirect exporting move to direct exporting
as they have more experience and knowledge of the target market. It is also estimated that
using target market intermediaries is more common than using the company's own
channels. According to the eclectic theory (Dunning 1980), companies decide to export if the
factors of location are supporting the production in the home country but this theory does
not differentiate between direct and indirect export modes. However, the transaction cost
theory, clarifies the choice between direct and indirect exporting mode according to deployed
assets specificity (Sharma and Erramilli, 2004).
Both direct and indirect export is considered as the less riskiest method of
internationalization as it does not require high investment levels. Therefore those methods
can be a way of testing the foreign markets before making the high investments for direct
investments. On the other hand, the main risk associated with the export based entry modes
is the fluctuation at the exchange rates which may have an negative effect on the calculated
profitability of the export sales. It should be noted that a great proportion of the international
trade and therefore export activities occurs between the subsidiaries of multinational
companies.
Non-Equity Methods (Contractual Entry)
The non-equity form of internationalization is a type of strategic partnership mainly in the
form of contractual agreements which transfer technology or know-how by a form of
contract, often involving patents,designs, trade secrets, trademarks and copyrights. These
are named intellectual property rights which have grown significantly since the 1980s and
they make up the majority of the international transactions (Cavusgil et al., 2014). The
contractual entry mode is mainly used when the company’s products are intangible and they
are generally based on cooperation between companies to manage transactions in the
market. This type of entry modes are mainly popular among the consumer service industry
(Krishna, 2002).
The non-equity entry modes require long term relationships between the companies and
generally they aim to transfer intangible assets such as knowledge or skills (Driscoll and
Paliwoda,1997). The main forms of contractual entry are licensing, franchising and know-
how arrangements (Dunning, 1980). In the contractual agreements, the capital investment of
the company is at minimum levels which means keeping the risks and costs in an
internationalization process. Theories of internalization, eclectic theory and transaction cost
theories which are based on the paradigm of market failure all have explanations for
selection of non-equity entry modes. If the mother company believes that it will have
competitive advantage in carrying the operations to the target market and transferring them
to a partner in the target market, it will prefer contractual modes as an entry mode (Sharma
and Erramilli, 2004).
Licensing
Licensing is an agreement of international activity in which permission is given by the
proprietary owner (licensor) to a foreign company (the licensee) in the form of a contract to
have the rights of a property or supporting products, and in some cases both of them.
Generally, the licensee gives a compensation as an advance payment and a percentage of
sales as a royalty to the franchisor in exchange for the intellectual property rights. However,
compensation can be also products, know-how or one-time payment (Cavusgil et al., 2014).
Licensing agreements are generally found in industries where fixed set up and R & D costs
are high such as industrial equipment, defense, pharmaceutical and chemical industries. The
common feature of those industries is that there is intense competition at local level to
capture market share (Brookes, 2014).
Main advantage of licensing is that, licensors do not have to make extra investment for the
target market. Licensing is a low-cost entry mode of internationalization as the company is
not involved in no or low level of investment which means low level of risk. The licensor
takes the advantage of the licensee's experience about the local market and distribution
channels which may be too costly and time consuming for the licensor. In addition the
licensor does not have to learn and acquire knowledge about the target market which is very
important for successful international operations and licensing is an effective tool to increase
brand awareness (Saari, 2017). The main disadvantage of selecting licensing as an entry
mode is the licensee can turn into a competitor in the future as they learn the trade secrets
of the licensor. In addition, licensing is not suitable for complicated products and a licensee
can damage brand equity by producing products of an inferior standard. Lastly, (Cavusgil et
al., 2014; Saari, 2017).
Franchising
Franchising is an agreement that the franchisee gets the rights to perform business activity
by the name or trademark of the franchisor instead of any patented technology. Franchising
has similar features with licensing but the main difference is; franchising is giving rights of
the total business system to the franchisee instead of giving the rights of intellectual property
rights. In franchising, the franchisee receives detailed business support to begin a business
which mainly includes more control and guidance on the operation management such as
training of human forces. Franchising is more common in the industries such as hotel, car
rental and fast-food restaurants. The common feature of these industries is they are mainly
more mature and service based domestic industries which have brand equity. Therefore
those brands establish a presence with low levels of direct investment and they use standard
marketing tools to develop a global brand and worldwide image (Cavusgil et al., 2014).
Generally, the franchising agreements are made for several years and if the main company
has an experience in the international markets they are mainly in a standardized form.
However, it may be difficult to keep the agreements standardized because of the cultural
differences in local markets. Under some circumstances, main companies may choose to
grant the rights of an area or territory to a company as a sub-franchisor which is named as
master franchise agreement. In master franchise agreements, as all the risks associated
with the market are on the franchisee, this helps the main company to save from time and
expenses. The increase in the levels of internationalization, made the master franchise
more popular (Brookes, 2014).
Receiving extensive support of management, marketing and human resources from the main
company is the main advantage of the franchise system. On the other hand, the main
disadvantage of the franchise system is that franchisees have to obey the rules of the
system established by the franchisor. For the main company, franchising is a type of mode
that requires low risk and capital commitment. In addition, franchising entry mode enables
fast market entry and easy adoption to target markets. However, for the main company the
revenues gathered may be low and hard to supervise the performance of franchisees
(Cavusoglu et al., 2014).
Strategic Alliances
A strategic alliance is “an agreement between firms to do business together in ways that go
beyond normal company-to-company dealings but fall short of a merger or a full partnership”
(Wheelen and Hungar, 2000 p. 125). Strategic alliances are an important mode of entry for
both small and multinational companies. Strategic alliances are partnerships of two or more
companies that work in the same direction to achieve mutual strategic targets. Through
strategic alliances, companies make their competitive advantage more sustainable by
increasing power in the market, accessing new financial or human resources and entering
new international markets (Prashant and Harbir, 2009).
Studies related to the success of strategic alliances have shown that between 30 to 70
percent of them cannot meet the expectations of the main company and they cannot
successfully offer strategic managerial benefits to the other partner (Bamford et al., 2004).
Strategic alliance termination rates are more than 50 percent and failure in strategic
alliances may result in destruction of partner companies shareholder values (Kale et al.,
2002; Lunnan and Haugland, 2008). The success of any strategic alliance is dependent on
three key factors which are relevant at steps of strategic alliance formulation (Gulati, 1998).
These three factors are (1) the formulation stage, in which the main company decides for the
right strategic partner, (2) the design stage, in which partners decide on managerial aspects
to inspect the strategic alliance, (3) the post formation stage, in which strategic alliance is
managed to increase the value (Schreiner et al., 2009).
Strategic alliances is an effective tool for diffusion of technology, entering a target market,
gaining knowledge about the leading companies in the market and bypassing governmental
regulations. Creating and managing a strategic alliance is not easy and most of the strategic
alliances fail because of managerial mistakes. In order for strategic alliances to be
successful, a detailed strategic plan outlines details of expectations of both parties. This
strategic plan should include pre and post collaboration activities. These collaboration
activities should cover various stages of the collaboration development and analyze different
forms of relationship development, sharing of resources and cooperation commitment
(Emami et al., 2022).
Equity Modes (Investment Entry)
The main form of the equity mode is the investment entry and it occurs when a company has
a high commitment in a market. The literature indicates that companies who have
international experience in advance are more likely to invest in wholly owned subsidiaries as
the previous experience decreases the risk of uncertainty and develops the operational skills
in the international markets. The main characteristic of the investment entry mode is the
direct investment in a production facility with continuous involvement (Cavusgil et al., 2014).
Research related to equity modes of internationalization is ample and main areas of study
are choice between acquisitions and greenfields or wholly owned subsidiaries and joint
ventures (Dikova and Van Witteloostuijn, 2007). The main forms of investment entry are
foreign direct investment, joint ventures, greenfields and acquisitions and mergers.
Foreign Direct Investment
Foreign direct investment (FDI) is the most complicated entry mode and it is a totally owned
subsidiary of a company in the international markets. According to the United States
Department of Commerce, foreign direct investment is accepted as FDI if a company takes a
share of at least 10 percent or more of a foreign company (Paul, 2013). The FDI can be in
the form of either purchasing an existing factory or setting up a completely new plant in a
foreign country. As FDI needs high levels of resource investments, FDI is much more riskier
than other entry modes but as risk is positively correlated with the possibility for higher
profits. In FDI, the company acquires more control over the assets by having the ownership,
it is preferred by the companies which prefer more control over the international investments.
FDI is the most complex entry mode and at the same time most leading entry mode of
international business (Griffin and Pustay 2015).
FDI entry mode has gained importance after World War II and FDI has grown enormously in
the past thirty years. FDI is seen as an important factor for economic development by the
majority of the countries and it is accepted as an integration of technology, capital and
management. Emerging countries are the countries receiving the highest amount of FDI and
those countries have higher governmental, economical and legal risks such as exchange
rate fluctuations and foreign trade barriers (Rafat and Farahani, 2019). Generally,
governments want to attract FDI to their countries and therefore they introduce laws and
regulations which promote FDI.
Joint venture
Joint venture is a form of business which involves creation of a new business by two or more
companies for a common goal. Joint venture is a type of strategic alliance that has its
management team and board of directors. In joint ventures, both companies participate
actively in strategic management decisions (Griffin and Pustay, 2015). Although joint
ventures are very popular worldwide, research shows that around 40 to 60 percent of joint
ventures cannot meet their establishment targets and the reasons behind this rate of failure
are conflicting objectives, organizational structures of the partner companies, different
cultures and shared decision-making and equity (Piaskowska et al., 2019).
Joint ventures can be managed in different ways; There can be joint management where
each company has one representative who reports to the main company. The second way is
that each company has primary responsibility. The last way is to hire a separate
management team to operate the joint venture. The joint ventures are mainly set for long
term relations. If the joint ventures are successful, they result in shared learning, cost saving
and wider product range (Griffin and Pustay, 2015).
Joint venture is an effective entry mode when a totally owned subsidiary is not allowed by
the target market’s legislation such as restrictions related to foreign investment. Joint venture
is also preferred when a company has limited resources such as limited information about
target market distribution channels. As a joint venture has two or more companies, the risk is
reduced compared to a single company, however conflict may occur because of partners'
different targets. Commonly, partners aim to take more than half of the investment to be the
major shareholder of the joint venture (Ali et al., 2021).
Merger & Acquisition (M&A)
Acquisition is the transfer of ownership and it occurs when a company buys another
operating company. The special form of acquisition in which two companies merge to form a
larger company is called merger. Mergers can be classified as sub-type of acquisitions.
Mergers have similar positive outcomes similar to joint ventures. The international mergers
are the best alternative when the social and cultural values are significantly different in the
target country. The M&A may be horizontal, vertical or conglomerate.
Horizontal M&A
Horizontal M&As are formed by companies that are competitors in the same market.
Literature shows that horizontal M&As may gather profit through stronger market power and
cost efficiencies. First, horizontal M & As are presumed to cut back the number of potential
rivals which in turn increase the market power of the partnered companies. Second,
literature indicates that if the larger partner has lower marginal costs, horizontal merger
causes price increase and in some cases cost savings which results in improvement in the
performance of the partnered companies. Third, in horizontal M&A as a result of resource
employee and physical assets sharing operating costs will be reduced and in addition
generally employee reduction occurs in related area acquisitions. Lastly, related area
acquisitions are less riskier than unrelated M&A as the top management will be familiar with
industry (Conyon et al.,2002; Flanagan and O’Shaughnessy,2003 Rozen-Bakher, 2018;
Tremblay and Tremblay, 2012).
Vertical M&A
Vertical M&As are formed by companies which have a buyer-seller relationship and
therefore they are accepted as more complicated than horizontal M&As. There are two kinds
of vertical M&As; backward and forward. When a company buys one of its suppliers it is
called backward vertical M&A and when a company buys a company that sells its products it
is called forward vertical M&A (Tremblay & Tremblay, 2012). However, vertical M&As are
seen as rare compared to horizontal or conglomerate M&As because of limited choices for
vertical M&As (Meador et al.,1996). Vertical M&As may enhance market access through
synergy gains but buyer-seller relation restraints the potential of synergy. Vertical M&As
enable flow of products and services between companies and this flow reduces the inventory
and increases utilization of capacity. Although integration stage of vertical M&As much more
complicated than horizontal M&As due to synchronization of product or services between the
companies, they could be very successful in imperfectly competitive markets (Kedia et al.,
2011; Rozen-Bakher, 2018).
Conglomerate M&A
Conglomerate M&As are made of companies which are totally unrelated which means either
they are in different geographic locations or their products or services are not competitors of
each other. The conglomerate M&As are made from companies that are producers of totally
different products and services which means unconnected product-market diversification.
There are contradictory views in literature about the impact of diversification on post M&A
performance. Some of the research shows that most of the companies do not benefit from
diversification and the diversified companies are valued less than if their segments are
valued separately. On the other hand, the vast differences related to products, markets and
locations make the integration process very difficult for conglomerate M&As which causes
them to lose their ability to generate synergy potential. Those vast differences in
conglomerate M&As make it more difficult to manage the operations and assets due to the
irrelevance and diversification (Rozen-Bakher, 2018; Tremblay and Tremblay, 2012).
Selection of an entry mode is an important research area for three reasons. First of all, the
entry mode decision is a complex decision which can be affected by external and internal
factors. Secondly, entry mode decisions have an important effect on the success of
investment. The influence of the entry mode decision is a strategic decision which requires
allocation of resources and once the entry mode decision has been taken, it is difficult to
revert to another mode without reasonable loss of organization’s resources. Lastly and
thirdly, the entry mode type has an effect on the competitiveness of the local industry such
as foreign direct investment can have benefits and threats to the local industry (Shen et al.,
2017).
The factors which have a strategic importance on the decision of entry mode choice can be
listed as follows;
Selection of partners for cooperation
Finding the right partner is a crucial decision for selecting the entry mode and the entry
mode can change according to the partners commitment to the business. If the company can
find the right partner to operate with, strategic alliances will be the choice of entry mode. In
some countries like Saudi Arabia, the companies are obliged to invest with a local partner
and therefore they will not have a chance of selecting “wholly owned subsidiaries as an entry
mode (Shen et al., 2017).
Cultural environment
If the target market has a different culture which consists of values, beliefs, customs, religion
and languages, the companies will probably prefer exporting or contractual mode as an entry
strategy. The main reason behind this selection is the low confidence in their abilities to
manage the international operation. The companies are more comfortable in selecting
investment mode when they are familiar with the culture of the country they want to invest in
(Shen et al., 2017).
Political and Legal Environment
If the politics is not stable, the companies will prefer exporting or contractual mode rather
than investment mode as they will not be interested in investment mode. The legal
environment such as high tariffs and quotas will also affect the entry mode selection. As high
tariffs may decrease export mode and increase investment mode (Shen et al., 2017).
Market Size
The market size also affects the choice of entry mode as developing markets will attract
more investment type of entry modes. If a country has a big population or a growing young
population, that country will receive more investment types of entry mode (Shen et al.,
2017).
Production and Shipping Costs
If the target market has very low production costs compared to the home country of a
company, the company will prefer investment or contractual mode. Low shipping costs make
companies prefer export as an entry mode whereas high transport costs make companies to
prefer contractual or investment entry as entry mode (Shen et al., 2017).
International Experiences
For most of the companies for internationalization is the export entry. The companies mainly
prefer using other entry modes after they can gain experience in the market. Mainly after
export, they continue with contractual and lastly with investment entry mode as those modes
require higher investment levels of all resources (Shen et al., 2017).

Digitalization and Entry Mode Selection

Digitalization has been playing an important role in shaping business and all the
organizations are forced to adopt this change by adjustments in their structure and strategy.
Digitalization is an important facilitator for all export, equity and non-equity based entry
modes. In export based mode, digitalization has a positive effect on small to medium
enterprises internationalization. Digitalization eliminates the difference in internationalization
of being small on scale. Before digitalization, small and medium sized companies which
mainly use export based entry modes had difficulties in reaching the international markets
because of their limited resources. By the help of digital technologies, those companies can
have easier access to the target markets, liability of selling to foreign buyers and cost of
marketing abroad is reduced (Divrik, 2022; Katsikeas et al., 2020).
In equity entry mode, digitalization accelerates the penetration of the target market by using
the digital marketing tools to set up the local production activities. Digital technologies also
increase the interaction between the head office and foreign branches which aim to react
more effectively to the changes in customers, competitors and environmental surroundings
in the foreign target market. Additionally, digital tools also help to develop cross-cultural and
multi-country marketing strategies for foreign markets more effectively (Katsikeas et al.,
2020).

References
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