International Business
The Effect of National Culture on the Choice of Entry Mode
Foreign direct investment has increased dramatically over the last couple of decades and this trend has been studied. However, it is argued that the entry model form many of these investments has not been studied with the same rigor. It is commonly thought the composition of national cultures on Hofstede's scale and the distance between the two cultures influences the model of entry that is chosen. The study proposes that the cultural distance between two cultures as well as the uncertainty avoidance principles will guide the selection and compares data on 228 entries into the U.S. market through acquisition, wholly owned greenfield, and joint venture. The study finds several correlations in the data and concludes that the entry mode is influenced by cultural factors.
Position of the Author
The position of the author is that there is a gap in the literature that examines the influence that culture can have on direct foreign investment with the entry model as the vehicle for this relationship. The multiple regression tests that were run on the cultural variables showed significant correlations. The author believed that this was an indirect method for validating the usefulness of Hofstede's cultural factors and their scales. The author also seemed surprised at the strength of the relationships...
The author also suggests that more research could be conducted to provide more insights into foreign investment methods.
Analysis of the Issue
When companies wish to expand into foreign markets they have a few available choices for entry. The primary entry models are through a greenfield investment, joint venture, or through an acquisition. In the greenfield model, a firm will enter the market directly with their products or services. This requires them to basically start from scratch in a new market but they have the advantage of sole ownership. Of the three different models, this one has the potential to be the most profitable. When firms are comfortable with the new market and have the capital to build market share then this is often the model for entry that is chosen.
The next two modes are comparatively less profitable but allow the firm to mitigate some of the uncertainty that could be posed through a new market entrance. When a firm acquires an international firm for the purpose of entering a new market then they are often able to acquire their employees, processes, and intangible benefits of the established business. However, to acquire such a company often requires that a premium price be paid for the acquisition. The final model is to enter with a joint-partnership in which two…
