Bartlett & Ghoshal's model of
international strategic focus as entry
mode predictor
An exploratory study
Master Thesis International Business & Management
A.W. Hofenk
MSc. Thesis International Business & Management
Title: Bartlett & Ghoshal's model of international strategic focus as entry mode predictor. An exploratory study
Date: January 14, 2010
Author: A.W. Hofenk Student number: s1384538
Email address: bart.hofenk@gmail.com
First supervisor: Dr. C. Dörrenbächer Second supervisor: Prof. Dr. L. Karsten
Abstract
This thesis discusses the predictive value of the international strategic focuses from Bartlett & Ghoshal (1989) (multinational, global, and transnational) on the entry mode choice.
The research is carried out by literature review and subsequently deduction of the relation between international strategic focus and entry mode choice. The relations are put to an initial test in an exploratory case study, which supported the hypotheses.
For multinational companies it is hypothesized that they are likely to employ multiple entry modes. This serves their main goal, serving markets. The ways they are served are of less influence to the internal functioning of the multinational company.
Global focused companies are proposed to prefer a wholly owned entry mode. The wholly owned mode supports the high control, and efficient production system needed in these industries. Transnational companies are suggested to have both multinational and global structural features, as well as specific transnational characteristics. Back office operations are viewed like global, because of the need for economies of scale. Front office operations are considered to represent a multinational structure to ensure local responsiveness.
Thereby this thesis contributes to the entry mode predicting literature which has not yet explored the relation between international strategic focus and entry mode.
Keywords
Preface
Starting off at the beginning of 2009, writing this thesis was quite a journey. In the
Being the apology of my formal career as a student, I would like to use this place for a short overview of some of the highlights and a word of thanks to the people part of it.
Multiple extracurricular activities kept me busy during my studies. Rowing, a semester at the Nottingham Trent University and International business research South Africa. These where all very instructive, but above all wonderfull experiences.
Following the assignment in South-Africa, I was offered the opportunity for an internship at AkzoNobel Salt Specialties. There I worked on an international business development
assignment concerning the Canadian market for KNZ® salt licks. As part of the internship I spent five weeks in Ontario and Quebec. This was a very challenging project, working independent abroad within a limited time span. Together with the research trip to South-Africa this experience has thought me a lot of invaluable (international) business skills.
Therefore I want to thank my supervisors at AkzoNobel Salt Specialties, Cees Schut, Klaas Leeuw and Betty Groen, for giving me the support and trust in my researches for them. The opportunities they offered for IBR South-Africa and my internship on the Canadian market were of great value to my personal and professional development.
For their support and remarks during the writing of this thesis I want to acknowledge my supervisors Dr. Dorrenbacher, and Prof. Dr. Karsten. The guidance on the choice of topic and discussions when I got stuck helped me maintain my focus and finish this thesis.
For their friendship and practical help during the last months of my work on this thesis I would like to thank some people in special. Bas van der Swaluw, Bosse Zwerink, Mark Wolkotte, Alex Veen, Ingrid de Waart, Elwin Man, Daan Dijxhoorn, and Derk Noordhuis.
Finally I want to thank my parents for supporting me in the wide range of activities I’ve always managed to come up with. Without your support I would not have been able to make all these experiences become reality.
I hope you will enjoy reading this thesis.
Bart Hofenk
Index
Chapter one: Introduction ... 4
Chapter two: Literature review ... 8
2.1 Entry strategy ... 8
2.1.1 Entry objectives ... 8
2.1.2 Entry modes ... 10
2.2 Entry mode predicting models ... 16
2.3 International structure and strategy ... 23
Chapter three: The relation between entry modes and structure ... 31
3.1 Entry mode configurations within the MNE ... 31
3.1.1 Single mode of entry ... 31
3.1.2 The export based firm ... 32
3.1.3 The licensing/ franchise based firm ... 33
3.1.4 The Joint Venture based international firm ... 34
3.1.5 The wholly owned international firm ... 34
3.1.6 Mixed modes of entry ... 35
3.2 International strategy typologies and entry mode ... 36
3.2.1 Multinational companies ... 38
3.2.2 Global companies ... 40
3.2.3 Transnational companies... 41
3.3 Conclusion ... 43
Chapter four: Illustrative case studies ... 47
4.1 Case design ... 47
4.2 Cases ... 47
4.2.1 The multinational case: Anheuser-Bush InBev... 48
4.2.2 The global case: Volkswagen Group ... 50
4.2.3 The transnational case: Unilever ... 52
4.3 Conclusion ... 53
Chapter five: conclusion ... 55
Chapter one: Introduction
For international operating firms, selection of the proper market entry mode is a highly important issue. A choice for the wrong mode can seriously threaten the success in the selected foreign market (Anderson & Gatignon, 1986; Agarwal & Ramaswami, 1992). Switching modes in a later stadium is a costly and difficult process (Welch, Benito & Petersen, 2007).
International Business scholars already published a comprehensive list of articles on entry mode decision making. Marketing strategy variables, industry variables, home- and host country variables, product characteristics, cultural distance, foreign experience, and many other factors are pointed out in literature (e.g. Root, 1984; Agarwal & Ramaswami, 1992; Ekeledo &
Sivakumar, 2004). Next to these there are multiple articles on entry mode predicting theories like transaction cost analysis, OLI, internationalization, and resource based theories. All have predictive capabilities, some more useful to certain companies or industries, others general.
In organizational contingency theory the organizational structure is supposed to be aligned with the organization’s strategy. Without this fit a company is regarded to function sub-optimal at the very least (Daft, 2004). Strategy, environment, technology, organizational size, and culture are considered the main moderating factors on structure by Daft (2004). The international business environment increases the complexity even further due to the different economic, cultural, and regulatory systems prevailing between countries.
Also here, logic deems that the international structure has also to be aligned with international strategy. Since the entry mode will become part of the organizational structure, there should also be a fit between international strategy and entry mode.
The academic work on the relation between international strategy and entry mode choice is however still in its infancy. Some researchers have investigated this relation on specific topics. E.g. Harzing (2002) studied the relation between global firms and greenfield investments versus acquisitions; Martinez & Lopez (2009) the link between global or multinational focus and entry mode (Joint Venture or wholly owned). So despite partial attempts, up until now there has been no elaborate study on the theoretical relation between international strategy and entry mode.
Therefore, the following research question is constructed:
“How can the relation between international strategic focus and entry mode choice be conceptualized?”
The research question will be answered by first conducting a literature review. This will help clarify the definitions used in, and focus of the research. Seen the fact that the subject of this thesis is a relative unexplored area, a wide introduction is made on the subjects surrounding the question. The review will start off with the most researched topic: international entry strategy. An entry strategy is constructed of three different parts: entry objectives, timing of entry, and the entry mode. To gain a better understanding of the factors playing in the entry mode choice, all parts of the entry strategy are discussed. From these, the entry mode is most important to this thesis, and therefore will be discussed comprehensively. Subsequently the most common streams in entry mode predicting theories will be described. This sheds light on the factors seen as important to international business scholars and practitioners. Since not all entries can be explained by one single theory, the most common are discussed here. Finally integrative theories are discussed which link different predicting theories together in order to gain higher predictive value.
This gives insight in the current thinking on entry mode prediction, which is useful in explaining the factors of influence on the entry mode choices within the strategic focuses of Bartlett and Ghoshal.
In the second part of the literature review the link between international structure and strategy of the firm is discussed. The international strategic focuses of Bartlett & Ghoshal (1989) will be discussed next. Harzing (2000) defined the internal structural characteristics of international, multinational, global, and transnational organizations. Chapter three will discuss the core of this thesis: the relation between the international strategic focus and entry mode selection.
Hypotheses will be constructed which will be put to an initial empirical test in exploratory case studies in chapter four. Chapter five, the conclusion discusses the results and provides directions towards further research.
Contribution to the existing literature
By taking the strategic focus as predictor of entry mode choice; this thesis will construct a new contingency model for entry mode prediction. Scholars and practitioners can use this model as a initial selection instrument which helps directing thought and discussion about the link between the internal organization and the environment.
Secondly it is Brouthers & Hennart (2007: 408) who point out a more specific topic: “One question few entry mode studies address is the reason (motive) for market entry. .... For example, firms might make very different decisions if they are entering a market to exploit existing resources versus entries use do acquire new knowledge or resources. Likewise, institutional environments may have a different impact on firms pursuing a global strategy versus those pursuing a
multidomestic strategy.”
According to them, the question if the market is entered for market-seeking, resource-seeking, multidomestic or global purposes is very important in explaining the used entry mode. Such links could have a ‘significant influence’ on organizational structures companies use abroad. Research on these topics should also give better insight into the interaction between strategic motives and other constructs as culture, and resources in entry mode decisions. Asmussen, Benito & Petersen (2009: 146) acknowledge that “Allowing for multiple entry motives can enrich the analysis of foreign operation mode decisions.”
This thesis will thus contribute to the literature by taking a companies’ strategic focus as the denominator for entry mode choice. This will complement the existing entry mode predicting models, of which the most influential are described in paragraph 2.2.
Thereby it helps practitioners and scholars towards a better understanding of entry mode selection from different theoretical angles. Gannon (1993) states that due to the environmental complexity, bounded rationality, and impossibility to predict the future the best a management can achieve is a satisfactory solution. Applying the strategic focus as entry mode denominator will help to understand, and interpret this environment. This will increase the chance of making the right choice of entry mode. By obtaining the right entry mode a company will score higher on performance and survival (Ekeledo & Sivakumar, 2004). And it will prevent the difficult and costly task of switching entry modes (Welch et al., 2007).
Research set up
This research is of a deductive nature. From the possible linkages found in current literature hypotheses are constructed on how Bartlett & Ghoshal models logically link to entry mode decisions. In this sense the thesis is exploratory, because it does not test the hypotheses empirical or statistical. In the case studies the hypotheses formed are exemplified for a
statistical testing on a dataset that is large enough to be statistical significant. When a plausible relation holds up in the exploratory case, further statistical research can be employed (Yin, 2009). The exploratory nature of the thesis therefore limits the generalizability and the validity of the proposed hypotheses.
Chapter two: Literature review
In order to explain why and how companies evolve international, several theories have been developed over the years. The entry mode choice, which is leading in this thesis, cannot be viewed independent from other factors and theories. For example, Brouthers & Hennart (2007) consider entry objectives as important entry mode denominators, while Kim & Hwang (1992) researched the impact global strategic factors, Ekeledo & Sivakumar (2004) the resource base of the firm, and Anderson & Gatignon (1986) take an economic standpoint by focusing on the minimal transaction cost. In this literature review the most important subjects will be discussed: entry strategies, and entry mode predicting theories. In the second part of the literature review, international strategic focus and organizational structures will be discussed.
2.1 Entry strategy
An entry strategy is made up of three parts: entry objective(s), timing of entry and entry mode. Entry objectives can be to develop new markets, acquire access to important resources, learning, and co-ordination of activities. The timing decision relates to the moment a business enters a new market. This depends on the window of opportunity in which the objectives can be met by the entering firm. It also depends on the risk a company is willing to take, does it want to be the leader or the follower. The chosen entry mode is the implementation itself, and of great influence on meeting the entry objectives. In the words of Hill, Hwang & Kim (1990: 117): “Identifying the appropriate entry mode in a given context is necessarily a difficult and complex task. The choice however is a critical determinant of the likely success of the foreign operation”. Pedersen, Petersen & Benito (2002) found that changing the entry mode, once implemented is very difficult, and carries long lasting consequences.
2.1.1 Entry objectives
Bartlett, Ghoshal & Birkinshaw (2004) describe three entry objectives. Securing key supplies was the first objective which urged companies to go abroad. Already in 1602 the Dutch VOC (East India Company) was set up to secure the spice trade in Indonesia. Later on, supplies of for example rubber for tires, and iron ore was needed for the car production. Although this is still important for production companies, this is usually not the main reason to venture abroad anymore.
The second wave of companies that went abroad was driven by the search for new markets to sell their products. In the beginning this started when organic growth in home markets became impossible due to competition or simply satisfaction of the market. It also lowered the cost base of the companies due to increased economics of scale and scope.
Europe, to Central America, to Eastern-Europe, and lately towards East-Asian countries like China, and Vietnam. The average time span in which a country is used as a lows cost labour pool is only about five years. Labour is not the only production factor that is chased after however, low cost of capital also became important. Although according to Buckley & Ghauri (2004) the capital market is the most liquid of all production factor markets, and acts on an international level, it can be illiquid. This is mainly due to government interventions like subsidies which attract companies which chase after low cost of capital.
In the early stages of internationalization, minimization of production factor costs was the most important objective. Such forms of internationalization can be described by the economic entry mode predicting models (internalization, transaction cost analysis and OLI), as described later on in this chapter.
Over time the competitive landscape became ever more complex, and although still important, the production factors alone did not posses enough explanatory power anymore. So in addition to these, Kim & Hwang (1992) propose a fourth group, the global strategic considerations. These ‘emerging motivations’ as Bartlett et al. (2004) call them, are of a strategic nature. They define three sets of forces that produce these motivations.
First there are ever higher need for economies of scale, and increasing R&D expenditures. This effect is enhanced by the shortening of product life cycles. In order to cope with the increased rate of creative destruction, companies are forced to change their strategies and company structures.
Through their international operations, companies acquired a lot of very useful information on international markets themselves. This in itself leads to better insights in lower factor costs or market opportunities in certain countries which can be exploited. This global scanning and learning capability then becomes an important asset of the internationalized company vis-à-vis it’s local and international rivals in exploiting scale and scope economies. Sethi & Guisinger (2002) also argue that a proper international business environment scanning function can be a great asset, and competitive advantage.
The third force, competitive positioning, is pure strategic in itself. Through subsidiaries in countries where its main rivals operate, an internationalized company can keep taps on them. Kim & Hwang (1992) give the example of the tire manufacturers Michelin from France and Goodyear from the U.S.A. Michelin tried to undermine the position of Goodyear in its home-market by lowering prices. What they did not anticipate on was that this price war was brought back to France by Goodyear in response.
In addition to the competitive positioning, Kim & Hwang (1992) also consider global
2.1.2 Entry modes
Root (1994) defines an entry mode as an institutional arrangement used by a firm to market its product in a foreign market. The entry strategy entails the first three to five years of the business in the new market. This time span is usually needed to completely enter the new market. Being the outcome of the international strategy, it is important to describe the main characteristics of the different possible entry modes. They have to match with the needs of the entry mode objectives described earlier and the internal, external, structural and strategic factors which will be described later on in this literature review.
Attributes of entry modes
In the most basic sense entry modes differ from each other in control (ownership), and investment intensity (equity or non-equity). These variables are connected to each other. High control normally means high investment intensity and vice versa. Agarwal & Ramaswami (1992) define three factors of influence on the entry mode decision. These are: risk- return, control and resource availability. Other scholars e.g. (Anderson & Gatignon, 1986; Hill, Hwang & Kim 1990; Chung & Ederwick, 2001) classify level of control, resource commitment, and risk involvement. Except for notation, these factors are basically the same.
Risk-return is the primary concern in all entry decisions, and in general all investments a
company initiates. What kind of return can be expected for a certain amount of risk is basically a pure financial question. A higher risk assumes higher potential return, and vice versa. A lot of work on entry modes is based on this principle.
When adding behavioural aspects, the control and investment intensity also play a role. Control is seen as the most important determinant of risk and return (Kwon & Konopa, 1993; Ekeledo & Sivakumar, 2003; Anderson & Gatignon, 1986).
Control in the words of Anderson & Gatignon (1986: 3): “Control (the ability to influence systems, methods, and decisions) has a critical impact on the future of a foreign enterprise. Without control, a firm finds it more difficult to coordinate actions, carry out strategies, revise strategies, and resolve the disputes that invariably arise when two parties to a contract pursue their own interests (Davidson, 1982). Q. In short, control is a way to obtain higher return.”
The downside of the higher return is the price for obtaining control and the resources the organization needs to exploit the control fully. From this perspective, control refers to a financial trade off between internalization and the market, associated with the transaction cost approach, which will be discussed later on.
specifically refers to the ability of, and flexibility in management decisions the management gets due to ownership level.
Market control refers to the competitive position the firm can take within a specific market. The source of this form of control lies in the competitive environment. However, in general a higher degree of ownership is needed to gain higher market control. This leads to higher commitment, and therefore chance on a better competitive positioning.
According to Agarwal & Ramaswami (1992), resource availability comprises the managerial and financial possibilities of a business to serve a foreign market. It refers to dedicated assets for the market entry. These assets cannot be re-used in another way. They are essentially sunk costs to the company. When the management is not adequate prepared to operate in the international business environment, the foreign operations will suffer. The financial investment intensity a company is willing to take depends on the risk-return trade-off a management makes and the risk they are willing to take. Investments can be primarily divided into equity and non-equity
investments. In non-equity investments a company can bring in knowledge, goodwill, etcetera. The level of equity, and therefore risk and control the entering company is willing to take is a very important indicator of the commitment to the new market.
If both these resources are unavailable, only low control modes of entry, like exporting or contracting are possible.
Mode options
Because there are so many different entry modes possible researchers normally select only a couple of stereotypical modes. Hill et al. (1990) use licensing, joint venturing, and wholly owned subsidiaries. Kwon & Konopa (1992) use export and foreign production. Agarwal & Ramaswami (1992) state that the four most common entry modes are: exporting, licensing, joint venture, and sole venture (wholly owned). Brouthers & Hennart (2007) name: contracts, WOSs, and JVs as the main modes of foreign entry employed. These most important entry modes will be discussed next.
Export
Welch et al. (2007) define three forms of export: direct, domestic indirect and foreign indirect export. The different models have their own implications on the organizational structure. In the case of direct export the producer is involved in the complete value chain, and supplies the foreign customers directly. Through the rise of e-commerce, this mode has become wider used, because it takes away a lot of the regular hurdles for international sales. After sales services can also be supplied through the website. This eliminates the need for a local partner, which
supplying proper technical services and knowledge to the customers. Often intermediaries do not possess the knowledge to fully support a product, which is an important reason for producers to venture abroad themselves. Thus for technologic advanced products for which the size of foreign sales is insufficient to justify a higher control mode the direct export mode is a good option. Services like architecture are also often sold on a direct export basis. For ad hoc projects in foreign markets a high degree of contact with the customer is needed. For these sorts of deals an indirect mode is out of the question.
Domestic indirect export is done through an intermediate located in the home country. These are often trading companies who possess the logistic-, and international networks needed for foreign sales. For the producer it is a low commitment, and low risk option for foreign expansion. Due to the cultural familiarity with the local intermediate this does not lead to problems. The downside of using this option is that it does not enable the producer to gain international experience
themselves, and holds back market intelligence that could improve the competitive position of the manufacturer. Foreign indirect export is similar to the domestic in the sense that an intermediate is responsible for the sales to the customer. Having an intermediate in the host country should increase market chances due to the network with other companies and consumer the
intermediate has in its own country. On the other hand it could lead to extra management complexity for the producer who has to deal with cultural differences in the relation with the intermediate.
Licensing/ Franchise
In this paper licensing and franchising are taken together. Although they are related, they are not the same. In a franchising agreement the franchisee becomes part of the franchisers
organizations to the outside world. The franchisee gets access to the product, trademark, service and the whole business format. The franchisee is required to follow the rules and procedures of the franchise, but owns the physical outlet. Franchising is commonly used in (fast food)
restaurants.
In a licensing agreement the licensee buys the right to use intellectual property, technology and/ or commercial rights for the use of trademarks or famous names, etcetera. The licensee can use this in its operations. The difference with franchising is the level of control a licensee keeps over its own operations where a franchisee has to follow the rules set by the franchiser.
As said, licensing involves the sales of rights to use intellectual property. The intellectual property itself remains in the ownership of the licensor. This enables the licensee to make use of an asset it does not have to develop on itself. This way firms lacking the resources or time to do this can buy it and go to business very fast.
Good examples of licensing are the bottlers of Coca-Cola and Pepsico who use the name, recipe, and trademark of the products in markets where the licensors do not own production facilities.
Joint venture
As all sorts of strategic alliances, joint ventures (JV’s) are cooperative organizational
arrangements. By bundling resources the companies in the JV try to improve their competitive position in a certain product area. The JV itself is a separate legal entity, which distinguishes it from other sorts of alliances. The level of control depends on the equity division in the JV. In legal terms, the company holding more than fifty percent of shares has control.
Joint ventures are set up for a special purpose. When this goal is reached, the JV is eliminated or spun off. Participating companies bring in complementary resources and/or capabilities. For example one company has access to markets and marketing expertise, while the other owns technology it wants to market.
The general advantage to the companies involved is the higher flexibility. They do not have to internalize all the needed knowledge and resources, but can just seek for the right partner in order to reach the goals. Since the JV is shared between multiple companies, the risk per company, and resources needed are lower.
Wholly owned
Wholly owned (WO) subsidiaries are the ultimate form of Foreign Direct Investment (FDI). The parent company owns 100 percent of stock in the subsidiary. The WO mode ensures highest control over operations of all possible modes. For that reason this mode is preferred in situations where company specific knowledge and information has high value. Therefore this mode is often used by service organizations. The high management control of the WO mode ensures better quality safeguarding, and minimizes information leakage of specific procedures used by the company to supply the services. The (financial) risk associated with the WO mode of entry is highest of all modes. The advantage of this is the high potential return. An important
disadvantage is the large amount of financial and managerial resources needed to set up a WO foreign operation.
Characteristics of entry mode Associated mode attributes Wholly owned Joint venture Licensing Agent/ distributor exports Up-front investment (financial and managerial) Resource commitment
High Medium Low Low
Speed of entry Control Slow Quick Medium Possibly quick Market
penetration
Risk/ return Medium Medium/ high Medium / low Medium/ low Control of market (customer knowledge)
Control High Medium Nil Low/ nil
Political risk exposure
Risk/ return High Medium Low Low
Technological leakage
Control Low High/ medium High Low
Managerial complexity
Resource commitment
High High Low Low
Potential financial return
Risk/ return - High risk - High/ medium return - High payout - Medium/ high risk - High/ medium return - Medium payout - Low risk - High return - Low payout - Low risk - Return?
Table 2.1 Comparison of selected entry modes. Adapted from Lasserre 2003 pp. 205
Entry mode models
There are different ways to model the available entry mode choices. They model the way of thinking about the relation amongst the different entry modes. This mental model can influence the choice, and therefore it is important to articulate them.
Figure 2.1 Entry mode model of increasing commitment. Adapted from Simyar & Argheyd (1987)
A second way of modelling the options comes from Pan & Tse (2000). They proved that the entry mode decision within management teams normally is made up of different sub-decisions. Each sub-decision filters out part of the available choices, thereby making it a hierarchical model. The first choice is between equity and non-equity modes. This is supposed to be the most important choice to a management, and therefore has to be taken first, before looking into the options more detailed. Due to the limited analytical capacity a management team has for the choice, this decomposition strategy is supposed to work more effective. Opposed to the model of increasing commitment the hierarchical model is thus much closer to everyday reality. The management can take the different hurdles step by step to avoid over-complex situations. As a second reason for division between equity and non-equity modes they state the enormous differences between the two extremes. E.g. the internal and environmental factors for the export mode differ very much from those of the wholly owned subsidiary. Therefore it is not logical to keep both options open for choice. This way they come to the entry mode hierarchy as displayed in Figure 2.2. When taken as a tool for management, at different levels of the tree, the proper questions can be asked to further narrow down the choice in a systematic way.
Figure 2.2 Hierarchical model of entry modes. Adopted from Pan & Tse (2000)
Selecting the most suitable mode of entry is a difficult and very important task. Switching to another mode is costly and hard to achieve without losing competitive edge (Anderson & Gatignon, 1986; Agarwal & Ramaswami, 1992; Root, 1994).
2.2 Entry mode predicting models
In order to predict the most suitable entry modes, over the years theorists have proposed several models. Not all models are equally suitable for all situations. For example local regulations, industry effects and market concentration have effect on the reliability of a model for a specific situation. Discussing the most important entry mode predicting models gives an oversight of the factors playing a role in the decision and their relative importance for different situations. Later on in this thesis this will help understanding the implications of the strategic focuses on entry mode choice.
models. These theories might be less useful for general cases, but do give a more complete picture of the factors of influence.
Internationalization theories
The internationalization model proposed by Johanson and Vahlne (1977), known as the ‘Uppsala model’, expects a gradual form of internationalization. In essence it consists of two dimensions: an external geographical/ cultural dimension of closeness, and an internal commitment
dimension. Through learning about foreign markets a company should internationalize from being a domestic firm, through exports, sales affiliates, to foreign production. Every step increases foreign commitment of the firm, and increases the level of knowledge on international markets. The acquired knowledge then furthers the internationalization into more (cultural) distant markets. The model expects early international business to take place in geographical and cultural close markets due to the knowledge the firm already possesses on these markets. Brooke (1986) altered the model to use it for the determination of entry models depending on the stage of internationalization. In unknown markets low control modes are predicted, while familiar markets are assumed to be served by high control modes.
A common heard criticism on this incremental theory is that it does not hold in some empirical cases. Due to the deterministic prediction this model is considered weak by Young, Hamill, Wheeler & Davies (1989).
Bjorkman & Forsgren (2000) state there are two problems with the model. First it assumes all companies and industries to be equal. In, for example, the high tech industry, learning is very steep and competition fierce. This leads to a completely different internationalization process than the paper industry which is far more mature. The second problem is the basic assumption of organizational learning. The theory assumes a homogenous management over time in which knowledge is incrementally gathered. In reality an organization is made up of individuals who differ in composition over time. This compromises the incremental build up of tacit knowledge sincerely. Johanson and Vahlne (1990) react on this and alter the model so it is more relaxed on the steps a firm takes in internationalizing. Through accumulation of resources and knowledge, firms are able to leapfrog steps. While the theory is by far not perfect, it is a forms a good base in the explanation of learning and development on international markets.
Internalization/ Transaction Cost Analysis theories
competitive. Next to transport costs in the case of exports, and the sunk costs when setting up or acquiring a subsidiary, Hymer defined costs from a tacit background.
These tacit costs stem from a lack of information about the host country compared to the national firm. Overcoming these liabilities should be a onetime investment. Secondly there is the way locals perceive the foreign firm, and how their governments, buyers and suppliers give local firms preferential treatment. Thirdly, host country government could apply different taxes and regulation standards to foreign firm. Finally the foreign firm faces exchange rate risks, which are not felt by national firms.
Hymer’s theory is essential one of internalization. These theories explain the choice between FDI and low level control modes like contracting or licensing. Within these theories this choice is basically one of transaction costs (Madhok, 1997). Williamson (1985) first explored transaction cost economies; this concept was then used by Anderson & Gatignon (1986) in their theory on Transaction Cost Analysis (TCA). Transaction cost theory assumes that the marketplace is cheaper than in-house manufacturing. However, on the marketplace there are all kinds of frictions, since in reality markets are imperfect. These frictions pose costs on the transaction which are called transaction costs. When transaction costs in the market become too high, the company will switch to FDI to overcome the market imperfections that cause the high costs. This theory is only applicable when the market is big enough to overcome overhead costs associated with an equity investment. If this applies there are four constructs who together determine the optimal control.
Anderson & Gatignon (1986) define:
1. Transaction specific assets: investments (physical and human) that are specialized for one or a few users or uses.
2. External uncertainty: the unpredictability of the entrant’s external environment 3. Internal uncertainty: the entrant’s inability to determine its agents’ performance by
observing output measures.
4. Free-riding potential: agents’ ability to receive benefits without bearing the associated costs.
factors: government regulations, strategic and competitive factors, non-transaction benefits and the assumption that profit maximization is the sole purpose of the firm. Ekeledo & Sivakumar (2004) also view the neglect of ‘strategic considerations’ like capability development as a major flaw in this model. Another downside to this model is that it cannot explain a possible choice for export based internationalization (Ekeledo & Sivakumar, 2004). The assumptions start from the contracting or licensing, already more investment intensive and control based than export. It then focuses on market imperfections that can only lead to more control and FDI.
Eclectic theories
Introduced by Dunning (1977) the eclectic theory is one of the most important theories in the explanation of FDI. The model is commonly known by the acronym OLI, standing for: Ownership, Location, and Internalization. All three are possible sources of advantages for MNEs. In order to survive abroad, a company has to posses advantages that overcome the extra cost of doing business abroad. These range from coordination of management activities, to product design, and the consumer perception of foreign products.
Ownership refers to the assets of a firm that are superior to those of others, and can be applied in different countries. Examples are specialized productions process, managerial skills, product characteristics, and patent. The term headquarter services from Helpman (1985) gives a good summary of this construct.
Location advantages describe the reasons for physical presence abroad. A commonly used distinction here is between vertical and horizontal investment. Vertical investment seeks similar production factors that are cheaper or better than in the home country. Horizontal investments are market seeking investments. When a foreign market becomes large enough such an investment might become feasible. For a company this can reduce the time to market period, dilute tariffs, and increase the economies of scale and scope. In essence these investments are centralization – localization issue. Brainard (1997) calls it a proximity-concentration trade-off. Through local production, all sorts of costs for transport, coordination, and tariffs are eliminated, but economies of scale through centralization are lost. From this perspective the entry mode decision comes down to computing the highest expected return on investment.
Although in literature a distinction as being made between vertical and horizontal investments, in reality this will always be a trade off between these two extremes.
Although this theory is still one of the most important in entry mode prediction (Ekeledo & Sivakumar, 2004; Dunning, 2000) it does not give a complete answer. Due to the main focus on economic factors, it neglects a range of options. Strategy, willingness to take risks, and cultural differences between operations in different countries are among the factors neglected. Ekeledo & Sivakumar (2004) also mention product characteristics: goods vs. services, and value to weight ratio. Other factors like transport costs, and exchange rate volatility are also overseen in the model.
Dunning (2000) reacts on the criticism that his model is too general. He proposes the OLI paradigm as an envelope for different theories developed by other scholars. In this revised paradigm the ownership is based on resource based theories. The location factor on institutional theories and the internalization factor on transactions cost theory.
Resource based theories
The resource base theory, best known from Barney (1991), stems from the notion that firms own firm specific assets. These assets differentiate them from other firms in the same industry, and give them a competitive advantage. According to the resource based strategy, firms tend to use entry modes that support their resources. This would explain differences between entry strategies among industries, and even within industries. From this perspective the choice becomes far more eclectic, and harder to predict from the outside. This said, the assumed base entry mode is full control, to fully exploit and protect the assets build up within the firm.
Ekeldo & Sivakumar (2004) define two sorts of internal factors which have an impact on choice of entry mode: firm specific resources, and strategic issues. Firm specific resources can be for example specialized assets, reputation, tacit knowledge, experience, and organization culture. Strategic issues stem from the firm specific resources. They are the options a company has on the market. The options can be either the protection of a competitive advantage or enhancement of resources. Madhok (1997) refers to the resource based perspective as organizational
capabilities (OC) theory. The strategy in OC theory as opposed to the profit maximization of internalization theory are characterised by Hedlund & Rolander (1990): “It is concerned with the efficient utilization of a firm’s resources and capabilities as well as their effective and efficient development. A balance between exploitation and development is considered essential for the sustained earning of rents” in Madhok (1997: 42).
According to Ekeledo & Sivakumar (2004) organizational capabilities are the things a company can do with their assets. On itself this is a somewhat vague phrase, but it refers to the human and knowledge factor in the organization which ‘makes the clock tick’. This knowledge, and
For entry mode decisions, the resource based approach leads to a mode which helps to exploit or develop the resources and capabilities best. Although a firm primarily has to be profitable, the focus is not on cost minimization as in the internalization theory. Malhotra et al. (2003) even give an example of the entry mode being the organization specific capability on itself: a strategic alliance which can offer a marketing strategy that enhances efficiency and effectiveness which the firms could not have reached separate. Mutinelli & Piscitello (1998) report that relative more companies in resource based industries are in joint ventures as opposed to wholly owned subsidiaries. They contribute this to the local ownership preference of host governments, which forces entrants to a collaborative approach when engaging in an equity investment.
International Product Life Cycle (IPLC)
Introduced by Vernon (1966), the IPLC is modelled from an American perspective. Like the original product life cycle it consists of four stages. In the first stage the US based company only exports. Secondly foreign production is started to fulfil the foreign market demand. The proposed mode here is a wholly owned production facility. In the third phase competitors from outside the US start to compete in the third country markets. Finally foreign firms enter the US to compete with the incumbent firms. There is a problem with this model in generalizing it. The focus on the US means it is not suitable for companies in countries with a small home market. Companies from The Netherlands for example will probably experience a steeper curve due to the smaller home market, and other competitive forces.
The entry objective important to this model is thus primarily seeking lower cost base. In addition to that, the IPLC model also encompasses the time dimension in industry evolution and market entries. Other models neglect the timing of entry, which is very important in the whole entry strategy. Therefore the entry modes predicted by this model differ across the stages.
Strategic behaviour theory
In duopolistic and oligopolistic competition firms, strategic actions of the opponents can have a big impact on the internationalization strategy of a company. Actions by firm Y in the home market of firm X can be retaliated in the home market of firm Y, by firm X. Bartlett et al. (2004) give an example of a TV manufacturer from Korea who financed its market share in the US against incumbents, with profits earned on the Asian and South American market. This market entry does not yield direct in financial sense for the Korean firm, but it does give a valuable check on their opponent from a strategic perspective.
Liability Of Foreignness
Another moderating factor on entry mode choice is the concept of Liability Of Foreignness (LOF). According to Chen, Griffith & Hu (2006: 636 – 637): “From a market entry standpoint, one of the greatest challenges for MNEs investing abroad is overcoming the liability of foreignness” Although this concept has been a popular research topic in recent years (e.g. Chen, Griffith & Hu, 2006; Eden & Miller, 2004; Luo & Mezias, 2002), its origins where laid by Hymer (1976). He identified the Cost of Doing Business Abroad (CDBA) as the cost a multinational firm has to overcome vis-à-vis the incumbents. Therefore the MNE has to possess characteristics that offset these higher costs in order to be competitive. Hymer identified ´real´ costs, and also cost of a tacit nature. While the TCA theory mainly focuses on the financial side of the Hymer´s study, the LOF theory builds on the tacit costs.
According to Eden & Miller (2001) research on CDBA has been largely focused on the sort of advantages needed to overcome these costs. The CDBA concept itself did not have receive much attention. That changed in the 1990s when especially Srilata Zaheer (Zaheer 1995; Zaheer & Masakoski 1997; Kostova & Zaheer, 1999; Zaheer, 2002) begun research on defining the elements of CDBA. From this research a new construct, Liability of Foreignness (LOF) was derived. According to Eden & Miller (2004) CDBA and LOF has been used interchangeably by different researchers. They propose a sharp distinction: “We argue that the key driver behind LOF is the institutional distance (cognitive, normative, and regulatory) between the home and host countries. CDBA, on the other hand is a broader concept that includes LOF, but also includes economic activity-based (production, marketing, distribution) costs related to geographic distance. Since these economic costs related to value-adding activities by the MNE can be anticipated and measured, and may well be finite, the core issue for MNE managers remains LOF” (Eden & Miller, 2004: 2).
Chen et al. (2006) compare entry strategies of MNEs from countries physically and culturally close to China with MNEs from countries further apart. They call them respectively low- and high LOF countries. The findings suggest that MNEs from low LOF countries normally use lower level control modes, and have resource seeking objectives (vertical investment). MNEs from high LOF countries on the other hand employ higher control entry modes, and are more often market seeking (horizontal investment). This suggests that next to economic, strategic, and government factors, there is a cultural component in entry mode choice.
Integrating theories
company characteristics as internal factors and foreign market characteristics as external. The internal factors are operationalized by him as corporate strength, competitive position, corporate policy, and product characteristics. The external factors being: foreign market opportunity, economic development/ performance, political environment, culture, comparative host country costs, and home government policies. In their research they mainly focus on the effect of external factors on entry modes. Ekeledo & Sivakumar (2004) propose a model based on the resource based perspective. Here the firm specific resources and strategic issues stemming from them have the main internal influence on entry mode choice. This combined with the nature of the product (product vs. services), and the external factors (host and home country factors) explain the degree of control in the chosen entry mode. Malhotra et al. (2004) created the most complete model so far. The core of their model is the IPLC theory which represents the dynamic effects of industry development. The authors argue that the American focus of the IPLC model does not matter anymore, and can be used for all developed and developing countries.
2.3 International structure and strategy
Whenever a company ventures abroad, the new subsidiary has to be woven into the existing organizational structure. From the perspective of contingency theory the attributes of an organization have to be aligned with their environment and strategy. For example, Yin & Zajac (2004) studied the importance of strategy- structure fit within franchising arrangements. They conclude that first a strategy has to be drawn. In order to sustain this strategy an organizational structure has to be developed which reflects this strategy.Another example is the Murray & Kotabe (2005) study; they researched the influence of alliance attributes(trust, relation specific investment, formalization, similarity, and environmental uncertainty), and alliance mode (equity or non-equity) on performance (improved efficiency and improved competitiveness. Their conclusion was that a good fit between the alliances attributes and structure is indispensible for alliance performance. Ju, Chen, Li & Lee (2005) conclude that the fit between alliance’ attributes and structure is an important factor influencing the competitive advantage of a company. In an international environment this is even more important. Brown (1990) researched the strategy – structure fit in the international context. Therefore he proposes two international strategies, a global and a country-centered. These strategies have different implications for the company structure supporting them. He concluded that the most important determinant for performance in international business is a proper strategy-structure fit.
International strategic focus
Typologies of international strategic focus are usually made up by the paradox of global
integration and local responsiveness. Stemming from the works of Bartlett (1986) and Prahalad & Doz (1987), nowadays most scholars use them, albeit they sometimes use different terms. The demand for global integration is in essence one for global synergy. According to De Wit & Meyer (2004) this can be reached through: aligning positions, integrating activities, and leveraging resources. The pressure towards global integration comes from the competitive environment a company operates in. With competitors reaping benefits from scale economies, a company can either follow or lose its competitive position. Companies for which global integration is most important, the foreign entry objective is most likely deriving economies of scale.
The demand for local responsiveness stem from local market forces. These include differences in customer needs, buying behaviour, attitudes, and substitutes. Another source can be the local government regulations which can differ a lot from one country to another.
Harzing (2000) summarizes eighteen papers in which typologies of international strategies are made. These typologies differ in name, meaning, and number of strategies defined per paper. Therefore some cannot be used interchangeably. According to Harzing, the typologies defined by Bartlett & Ghoshal (1989), displayed in figure 2.3, are most extensive. However they have only been derived from nine case studies. This is an important source of criticism by scholars (Hedlund & Ridderstrale, 1997; Harzing, 2000; Pla-Barber, 2002).
Figure 2.3 Responsiveness – integration framework. Adapted from Nohria & Ghoshal (1997)
First a general description of the international strategic postures will be provided. After this, more specific organizational characteristics are discussed together with the complexities stemming from the transnational strategies.
International
Companies considered international are in the early stage of internationalization. The
international operations are seen as a side business where products intended for the local market are sold. The international parts of the company are directed from the headquarters, and
managed by a manager who does not work independent. In the case of foreign production this is aimed at maintaining a competitive position in the home market. These firms are neither globally integrated nor adapted to local tastes.
The international companies’ structure is formed as in figure 2.4. Between the headquarters and subsidiaries there is mainly a flow of knowledge about technology, products, processes and systems. The control system is formal and relies heavily on planning and budgeting (Bartlett et al., 2004)
Figure 2.4 Organizational configuration of a international company – adapted from Bartlett et al. (2004)
When the international strategy was empirically tested, only meagre evidence was found for the international typology (Hedlund & Ridderstrale, 1997; Harzing, 2000; Pla-Barber, 2002).
Therefore this strategy will not be used further in this thesis.
Multinational
defined by Goold & Campbell (1987). Such companies mostly coordinate on a financial level, and refrain as much as possible from interference in strategy. At corporate level they are managed as a portfolio of SBU’s.
Figure 2.5 Organizational configuration of a multinational company – adapted from Bartlett et al. (2004)
Global
Global companies are designed to exploit economies of scale worldwide. Their products are standardized across the markets. Therefore they can search for the lowest factor costs and highest synergies. It is obvious they score low on local responsiveness, and high on integration. In the control model of Goold & Campbell (1987) the strategy can be labelled as ‘strategic planning style’. Power is highly concentrated in the headquarters from which operations are directed as efficient as possible. The common structural form for these companies is a hub and spoke model (Harzing, 2000). This model can be seen in figure 2.6. The flows in between the headquarters and subsidiaries mainly consist of goods.
Figure 2.6 Organizational configuration of a global company – adapted from Bartlett et al. (2004)
Transnational
not only a structural form. It more resembles a philosophy and its distinct structure is formed by management lines and groups. It deals with balancing sometimes opposing demands. In its core it is build to handle complex environments and change (Bartlett & Ghoshal, 2002 a). In the past it has sometimes been approached by using a matrix structure. This practice only led to more complexity in the organization without aligning it better with its environment. Bartlett & Ghoshal (1990) therefore argue to approach it as a frame of mind instead of a structural form.
This makes a transnational organization harder to pinpoint than global or multinational firms. This said, there are characteristics of transnational companies which can be described in structural terms and will be discussed next.
Transnational companies are structured as interdependent networks (Harzing, 2000). This can be seen in figure 2.7 with headquarters and subsidiaries connecting to each other. The flows
between the units of the organization are large and consist of components, products, resources, employees, and information. The subsidiaries can have relative high control of their own
operations. Not all subsidiaries are equal though, some can act as for example a knowledge centre (centre of excellence). This web of interdependencies is controlled not only by formal structures, but a myriad of formal lines, task forces, control groups, informal communication, etcetera. Decisions are normally taken together with all the groups of interest involved. Transnational industries are born out of need to cope with the ever growing complexity of their environment. Local tastes force the companies to be responsive, while competition forces towards internal integration to keep costs at a minimum. This is consistent with Nohria &
Ghoshal’s (1997) idea of requisite complexity. As Bartlett & Ghoshal (2002 b: 294-295) articulate it: “Some decisions tend to be made on a global basis, often at the corporate centre (most often research priorities and financing decisions, for example); other will be the appropriate
responsibility of local management (typically sales and service tasks and labour, for instance).
Figure 2.7 Organizational configuration of a transnational company – adapted from Bartlett et al. (2004)
division managers pushing for greater standardization to achieve scale economies, and local subsidiary managers advocating modifications to fit the product to their local market needs.” Some parts of the transnational can thus be viewed more like a global company, while other parts bear more resemblance with a multinational.
Peter Brabeck, the former CEO of Nestlé once said: “The closer we come to the consumer, in branding, pricing, communication, and product adaptation, the more we decentralize. The more we are dealing with production, logistics, and supply chain management, the more centralized decision making becomes. After all, we want to leverage Nestle's size, not be hampered by it.” Wetlaufer (2001: 116). Finally some parts are completely unique to the transnational, especially the network structure and the centres of excellence.
These differences in relative importance of internalization versus responsiveness in different parts of the value chain of a transnational will have its reflection on the likely entry modes. These implications will be discussed in chapter three.
Harzing (2000) provides a description of the internal structures of companies in the different international focuses (table 2.2). Most of the constructs in the table have already been discussed. Interdependencies not yet, and will therefore be discussed first.
Dependencies are the main construct used to describe headquarter subsidiary relations. This construct describes the HQ-subsidiary, and intra subsidiary linkages.
Harzing (2000) distinguishes three levels of dependencies: independence, dependence,
interdependence. Independence occurs when subsidiaries are not or only very limited dependent on the headquarters or other subsidiaries. These units are functioning as an independent
company. Independence is therefore associated with multinational companies.
In case of a dependent relation the subsidiaries are dependent on headquarters. They control the operation centrally, which is the case for global companies.
Organizational strategy Multinational Global Transnational
Organizational design and subsidiary role
Decentralized federation High Low Low
Network structure Low Low High
Inter-subsidiary flows Low Low High
HQ’s pipeline Low High Low/Medium
Centre of excellence Low Low High
Local responsiveness
Local production High Low Medium
Local R&D High Low Medium
Product modification High Low High
Adaption of the marketing High Low/
Medium
High
Interdependence
Total level of interdependence Low High High
Level of HQ dependence (dependence) Low High Medium
Level of subsidiary dependence (interdependence)
Low Low Medium
Table 2.2 Structure of companies in Bartlett and Ghoshal’s strategic focuses. Source: Harzing (2000: 110)
This table shows that especially the interconnectedness between the different parts of the transnational organization is strong. Another organizational design component which has
particular to the transnational is the existence of centres of excellence. Centres of excellence are business units that posses specialized knowledge which can be used by other units. This sort of knowledge sharing requires an organization in which knowledge can flow without being hampered by opposing goals; ergo the network structure.
In terms of local responsiveness the transnational scores in between the multinational and global companies in terms of local R&D and production. These functions are in specific the ones that can provide economies of scale. On the other hand the product modification and adaption of marketing, typical for local responsiveness scores high, just like a multinational company. The interdependencies show a fit with the organizational design and subsidiary role.
Chapter three: The relation between entry modes and structure
This chapter investigates the possible relation between Bartlett and Ghoshal’s model ofinternational strategic focus and entry mode preference. There is only a limited body of literature on the subject of the influence of international strategic posture on entry mode relations. The papers and books related to the subject will be used to construct a hypothetical description of MNEs using a particular entry mode, and those using mixed modes.
3.1 Entry mode configurations within the MNE
The entry modes a company employs can be either the same across all entries, or be mixed. In order to examine the possible relationship between entry modes and international strategic focus it is necessary to explore situations in which one entry mode is used across different entries. The ideal models for the four most common entry modes (WO, JV, licensing/ contracting, and export), will be described. Subsequently the relation between international strategy typology and entry mode will be theorised.
3.1.1 Single mode of entry
One would expect a large organization like an MNE to use different modes of entry across space and time. But there are reasons for firms to stick to a single mode of international entry.
According to Asmussen et al. (2009) an important reason for firms to use a common entry mode is interdependence. In this light they describe three sources of interdependencies; the first sources of interdependences are shared input of financial, physical or managerial resources. When operations in one country are affect by the resource availability in another. And economies of scale can be accomplished in the supply of these resources; standardization of entry modes becomes attractive. In the case of a limited availability of resources, entry modes might diversify. For example due to lack of financial resources needed for setting up only WO subsidiaries. A second form of interdependence between entry modes is intra-mode learning. If a companies’ management has for example learned from setting up a joint venture, they can use their expertise to set up more JVs. After multiple entries using one mode however, there can be a diminishing return on the learning effect. Most knowledge about a particular entry mode is already
internalized in the organization. This can be a reason to switch to another mode in order to learn from that mode.
The factors that lead to the use of a single mode of entry also differ per mode. Therefore, in the following section, per mode the main characteristics of the MNEs likely to use them are
described.
3.1.2 The export based firm
Firms using export as their main entry mode are mainly focussed on their local markets. The international activities are regarded as a way of utilizing excess production capacity, and
enlargement of turnover. Seen through the lens of the Uppsala model they are in the beginning of internationalization. Welch et al. (2007) confirm this by stating that it is often the start of the internationalization process.
Exports can be on either a regular or irregular basis. In terms of volume and value, exports are normally a minor part of the business compared to local business. Most of the firms using export as their entry mode will be in trade of physical goods. According to Welch et al. (2007) the ratio of physical goods versus services is about 4:1. The production may be central due to resources available, and the economies of scale stemming from centralization in order to be competitive.
Depending on the form of export chosen (direct, domestic indirect or foreign indirect export), the foreign component is limited to a combination of logistics, sales, product service, and marketing. Direct export of course performs them all. In the case of intermediates there can be some differences. Sometimes, the producer does the marketing and product service themselves, with the intermediate functioning as logistic centre. On other occasions this function is executed in cooperation with, or completely by the intermediate. This has its impact on the HQ -foreign market dependence, but overall it will be low. Products sold in export markets are normally generic. However packaging, marketing, and distribution can be adapted to local circumstances. In some cases specifications are also slightly adapted to local preferences or regulations. Local adaption of the product is generally low, but distribution and marketing can be adapted highly. This gives the exporter the possibility for high economies of scale while maintaining flexibility to the host markets. Davis, Desai & Francis (2000) found that firms using export as the exclusive entry mode experience high levels of external isomorphism, meaning high pressure to adapt to the environment. The control over foreign markets is limited, only for direct export this can be somewhat higher. But also here geographic- and cultural distance, in combination with local competition keeps the level of control low.
Companies using only export as their international market entry mode can be characterized as being international in Bartlett & Ghoshal’s framework. This only holds for those using a systematic approach with foreign sales offices. As discussed, the international strategic focus is not
3.1.3 The licensing/ franchise based firm
Firms using a licensing or franchise approach own an asset that can be exploited in different markets. Such an asset can be for example a trademark, specialized process or knowledge, as is often the case in licensing.
In a franchise based firm HQ defines strategy and supplies inputs. Local franchisees keep the management of the actual outlets. This keeps HQ relative simple while keeping geographical spread, and ensuring relative high return.
Economies of scale are reached in the input sourcing centered on HQ. Local responsiveness is guaranteed by the local franchisee who receives the freedom to tweak product and services to their local situation while maintaining within the rules set by HQ. Marketing tools are supplied by the parent firm as a template in which the franchisee can promote its local products.
Control is thus primarily focussed on financial flows, marketing expressions, and input supply. The level of independence the franchisee gets depends on the contract.
Yin & Zajac (2004) related the complexity of strategy to governance mode used (WO or franchise). Complex strategies contain a higher degree of mixed goals, strategic activity, and different points of view. They found that companies pursuing complex strategies more frequently opt for the franchise mode. This organizational form is better equipped to deal with the conflicting pressures of efficient resource usage, and adaptiveness to customer wishes. Franchisees have an edge over WO companies due to the higher level of autonomy and flexibility in solving operational problems, while WO companies have to exactly follow the parent companies rules and procedures. This way local management develops a skill set that is particularly suited to deal with the local complexities. Between franchisees there is almost no interdependence due to the fact that everything is coordinated from the parent, and for normal functioning horizontal bands is unnecessary.
For licensing a different structure is needed, since the licensee only uses the intellectual property of the licensor. To the licensor this mode enables broad geographic spread without the need for owning, and controlling foreign subsidiaries. This keeps their organizational complexity low, while ensuring income. Licensing is used by both very small firms, MNEs, and everything in between (Welch et al. 2007). For example, an inventor sells the right to use his ideas to MNEs on the one side of the spectrum, and an MNE like Coca-Cola licensing its trademark and production process to bottlers around the world at the other side. The reason for companies to become licensor normally stem from ‘negative’ motivations (Welch et al., 2007). Examples of negative motivations are high shipping costs, trade barriers, and lack of finance. Therefore this mode is usually considered a second best option.
