Chapter 6: The Political Economy Explanation of International Market Entry Mode Choice: An Exploratory Study
Shaoming Zou, Charles R. Taylor and S. Tamer Cavusgil OVERVIEW OF THE LITERATURE Consistent with the prior literature (e.g. Erramilli 1991; Agarwal and Ramaswami 1992; Root 1994; Tallman and Shenkar 1994), we distinguish four major entry alternatives: exporting, licensing/franchising, joint venture, and wholly-owned subsidiary. Since prior literature has established that it is inappropriate to compare exporting cases to forms of foreign direct investment in the context of the theories that are tested in this study (Hennart 1989; Kim and Hwang 1992; Erramilli and Rao 1993), we will focus on how the TCA and BP theories explain the choice between licensing/franchising, joint ventures, and full ownership. Each of these alternatives is associated with implications for: (a) the level of control the ﬁrm will enjoy over the foreign market operations, (b) the level of investment required, and (c) the level of risk the ﬁrm faces in venturing into the foreign market (Hill, Hwang and Kim 1989). Previous researchers have observed that, in general, as a ﬁrm moves from licensing/franchising to joint venture to wholly-owned subsidiary, the degree of control that the ﬁrm has over operations, the required level of investment, and the level of risk increase accordingly (Erramilli 1991; Agarwal and Ramaswami 1992; Root 1994; Shane 1994). While a number of theories have been used in previous studies to explain ﬁrms’ choice of entry mode from the low- to highcontrol modes, we will compare the two most frequently used theories in recent literature, transaction cost analysis (TCA) and bargaining power theory (BP)...
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