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Mode Of Entry Strategy: A Comparison Of A Commodity And An Equipment Type Business

1037 words - 5 pages

When deciding to engage in international trade an enterprise must make a choice of mode of entry into a foreign market. Depending on their resources, commitments, and long-term goals, the enterprise may select exporting (direct or indirect) or equity investment (foreign direct investment (FDI) or licensing/franchising) as a mode of entry (Peng, 2014). Exporting requires the least commitment, has the lowest investment of resources (and resulting risk), and capitalizes on use of home country capital – economy of scale. However, the tradeoff is higher transportation costs, potential loss of profit from local distribution, and liability of foreignness compared to equity based modes of entry. At the other end of the spectrum, FDI requires the most commitment, highest investment (and risk), and presents the necessity of managing a satellite facility in a foreign country. Conversely, it reduces transportation costs, greater access to local knowledge and profits, and counter liability of foreignness (Quick, 2010; Carter, 1997). Therefore, analysis of a business, the industry, and the environment of home and host country is necessary to determine the best mode of entry.
Agricultural commodities such as corn, is a type of business that would be most successful as an export business. From an industry point of view, there is little distinction amongst commodities; soybeans from the US are the same as corn from Brazil. Because of product homogeneity, the incentive to form strategic alliances between rival firms and resulting FDI is low. Research by Qui (2006) indicates competing firms are more likely to form strategic alliances as product differentiation increased. Those alliances gravitated towards FDI. When product differentiation was low, MNEs chose exporting as mode of entry. The decision for export or FDI as a mode of entry is often a function of the differential between cost of transportation and cost of production in the host country (Quick, 2010; Carter, 1997).
Resource considerations include the high capital requirements to produce corn. Because the capital requirements are for large tracts of real property which some of our major corn importers (Japan, South Korea, and Taiwan) do not have (USDA, 2013) Since costs of producing corn in the US are lower relative to cost of production in importing countries exporting is also better fit. Exporting is also preferred when production is greater than consumption in the home country such as in the U.S. or if consumption exceeds production in the host country such as recent years with China (FAO, 2011).
An institution-based view, points to onerous restrictions (Tanzania, 2011), to outright bans on farmland ownership such as Hungary’s policy (UPI, 2012). Informal institutes are also applying pressure on governments to ban or restrict farmland ownership in Australia (AAP, 2013). The institutional factors along with the high investment required for crop production on a commercial scale to compete...

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