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Discuss The Factors That Might Influence The Entry Mode Of An Multinational Company Into Emerging Markets

1248 words - 5 pages

A Multinational Enterprise’s (MNE) Entry mode is a function of its goals and of the host country’s institutional and market setting. Using a three-level analysis this essay will discuss the determining factors of a firm’s entry mode decision focusing on the trade offs of Joint Ventures, Acquisitions and Greenfield .
Methods of entry can be categorized as functions of equity invested by MNEs upon market entry (BarkemaiandiVermeulen,i1998). Joint-Ventures (JV) are joint ownership contracts with a local actor thereby granting access to the market through proxy. Greenfield and Acquisitions are both equity intensive entry modes. Greenfield entails the creation of a new subsidiary, which may either be wholly owned or co-owned by a partner with complementary assets whilst an acquisition is the purchase of a local firm by the MNE thereby allowing it direct access to the host market.

An MNE’s entry mode is a function of the host’s market institutional setting. Institutions, tasked with the enforcement of property rights and the rule of law, oversees market mechanisms (North,i1990). Yet institutions in emerging markets often fail to promote efficient transactions thereby limiting the ability of firms to acquire necessary inputs through market exchanges (Meyer et al.,i2009). The State’s stance towards FDI will dictate the MNE’s behavior. It may intervene in the market to protect strategic thereby preventing MNEs from entering through Greenfield or acquisition. Oppositely a State may actively seek FDI and leverage their control of the rule of law to grant preferential treatment to foreign firms. Throughout Sakhalin II, the Russian government promoted FDI by reducing tax obligations for Shell, Matsui and Mitsubishi.

From an information economics perspective, weak institutional integrity exacerbates information asymmetry. High asymmetry will increase transaction costs preventing the entrant from accurately estimating a firm’s thereby increasing the premium over price paid (Caves,i1996).

In a weak institutional setting with low market efficiency and high information asymmetry an MNE is unlikely to acquire a local firm. Whilst Greenfield may allow it to bypass the information asymmetry problem it will find itself unable to acquire resources on the market. JV would allow to acquire a network of pre-established relationships with a local interface allowing it to counteract market lacunas (Meyerietial., 2009). Whilst JV grants some protection from market risk, an agency problem may arise from the dichotomy of the MNE and partner’s goal especially if the MNE seeks to control the outflow of its proprietary knowledge (KogutiandiSingh,i1988).

At the industry level, the competitive landscape and expected profit have clear implications for a firm’s entry mode. In regards to industry concentration an MNE is likely to privilege acquisition if well-established actor controls the market yet this will be...

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