Research Methods Paper

Literature Review: Cultural Distance and Entry Mode

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1. Introduction

Globalization has opened new business avenues for organizations through the means of internationalization of the business. The organizations, in order to survive and sustain in global competition, adopt the route of international expansion. Internationalization has become a key facilitating factor for organization to grow their business and there are several reasons which encourage an organization to enter international market; low growth or stagnancy in home market, enhancing global market, exploring attractive foreign markets or to counter global competition by expanding operations. The decision to expand in foreign market requires deliberation and analysis because the costs of failed expansion are usually huge for an organization. Once the management takes the decision to expand in a foreign country, the company has to consider the optimum entry mode in the identified market. Lu (2002) described the selection of entry mode in foreign mode as a key strategic decision during internationalization process to be made by management. Root (1987) defines foreign market entry mode as “an institutional arrangement that makes possible the entry of a company’s products, technology, human skills, management, or other resources into a foreign country” (187).

Foreign market entry mode influences the international marketing plan of the company which makes entry mode a significant determinant of performance and success of the organization in foreign market. Furthermore, foreign market entry mode requires considerable time and money investment and it is significantly difficult to alter the entry mode strategy once it has been put into implementation. The importance of entry mode for the performance and success of business and the difficulty of reversing the entry mode strategy, it is immensely important to articulate the entry mode strategy appropriately before implementing it. There are three major types of entry modes for the businesses into a foreign market; export, contractual and foreign direct investment. These entry modes are further divided in sub-categories and businesses usually prefer the entry mode most viable to them economically and operationally. Each entry mode has varied implications on the resources an organization has to commit to enter into the foreign market, along with the control on foreign operations and the exposure to risks. The choice of entry mode is considered to be associated with cultural distance as well. Cultural distance is the differences between the national cultures of two countries and is primarily considered to be the difference between the culture of organization’s home country and the foreign country wherein organizations wants to expand the business. Cultural distance impacts entry mode in a country and several researches found an association between the cultural distance and entry mode strategy (Kogut and Singh, 1988).

1.1 Research Study

The research study is focuses on analyzing relationship between culture distance and selection of entry mode in international market. The study focuses on two main variables i.e. culture distance as an independent variable and selection of entry mode as dependent variable. The primary objective of the research study is ‘to analyze the role of culture distance on selection of mode of international market entry’. Research questions that will be utilized under the research study are:

· What all options of international market entry modes are available for the small and large companies?

· How culture distances influence the choice of international market entry mode?

· How culture distance and business entry mode in foreign market influence the performance of business in international market?

The purpose of literature review is to analyze and synthesize the research work performed by earlier researchers on the research topic. The synthesis of existing literature allows for the identification of themes discussed by researchers. The major themes which are covered in literature review are; different types of entry modes available to enter into international market; influence of culture distance on selection of entry mode; and impact of culture distance along with entry mode on business performance in international market, challenges in selection of international market and entry mode and different factors that influence selection of business entry mode in international market.

2. Major Themes in Literature Review

The literature review reveals several major themes related to the research topic of cultural distance and the entry mode of business in the foreign market. Several researchers have worked on prevalent themes pertinent to research topic and have shed light on the important dimensions of the research topic.

2.1 Challenges in Selection of International Market and Entry Mode:

Sacha (2005) in his study analyzed various factors that impacts selection of entry mode while expanding business in international, markets. According to the author, there are various factors such as entry time, political and economic environment, social and culture conditions, and completion level of the host country influence the decision related with international entry mode. Sacha in his article describes different types of research that were conducted for past few years to analyze feasibility of business entry in international market. This study provides information on book that covers literature available on the subject (Sacha, 2005).

Papadopoulos & Martin (2011) in their article describe major challenges companies face while selection and segmentation of international market. The authors define different ways how companies deal with the challenges present in selection of international markets. The research study conducted by the authors utilize available secondary information and observation. Findings of the study inform that there are various factors that decide selection of international market such as product type, competitive advantage of the company, experience of global market and characteristics of target market (Papadopoulos & Martin, 2011).

Foreign markets have tremendous opportunities, but analyzing risks and opportunities is a challenging task. Companies that are entering into foreign markets should evaluate markets on macro factors. A comparative study on industries, existing and potential products and consumer behavior helps in determining the right entry mode for international market (Papadopoulos & Martin, 2011; Lee et al., 2011).

Ulrich et al. (2012) in their study conducted on 170 Danish SMEs analyzed various factors that impact selection of international entry mode, and evaluate relationship between entry mode and financial performance of the companies. According to the authors, the major challenges faced by the company while expanding business in foreign market are diversity, availability and characteristics of the target market, consumer behavior and environmental factors. These factors determine which should be shortlisted by the company. It important for the companies to select markets that have availability of good size of target market. Target markets can be evaluated on different factors such as profile of target group of consumers, economic environment and purchasing capacity of the consumers, consumer requirements, changing trends, and upcoming events (He & Wei, 2011; Lee et al., 2011; Ulrich et al., 2012). These factors influence also helps in determining the selection of entry mode.

2.2 Types of Entry Modes Available with the Companies for Entering into International Market:

Brouthers (2013) in his study analyzed how business can make effective decisions related with entry in international market. The author analyzed performance of the different entry modes selected by the companies and associated transactional cost. According to the author, size of business, prior business experience of international market, and type of commodity or product play a major role in determining entry mode for business (Brouthers, 2013).

Lee et al. (2011) mentioned that cultural distance impacts decisions of entry in international market in great way. Companies prefers to have wholly owned subsidiary in international market, in case culture distance is high between local country and targeted international market. Morschett et al. (2010) in their article describe how companies select right entry mode to enter in international market. The authors analyze the data of 72 companies to determine the selection of wholly owned subsidiary or cooperative entry modes. The authors mentioned that companies do not prefer to have wholly owned subsidiary if legal restrictions and market risks are high. Market size and growth also impacts selection of international business entry modes (Morschett et al., 2010; Ulrich et al., 2012).

Lee & Lieberman (2010) in their study describe the acquisition and internal development as possible methods to enter in to new market. According to the authors, company can enter into new market by acquiring exiting well-known or evolving brand that is operating in same field or products. Internal development such as establishing new wholly owned subsidiary is another way to enter into new international market. The authors mentioned that acquisitions helps in filling present gaps in the business by acquiring new product, skills or knowledge.

Papadopoulos & Martin (2011) mentioned that selection of international entry modes depends upon various factors such as government policies of host country, economic stability, cultural distance, and market size and competition. Restriction on foreign direct investments and conservative policy for franchise operations limit the choice of entry modes for the companies who want to enter into foreign market. Sacha (2005) talk about international entry modes by using path analysis. The author explained how favorable government policies of foreign countries stimulates companies to invest in those countries. For small companies and companies that have no experience of operating in international market, export is best entry mode at initial stage as it carry minimum risk (Papadopoulos & Martin, 2011; Sacha, 2005).

2.3 Influence of Culture on Selection of International Entry Mode:

Lee et al. (2011) in their research study analyzed how culture distance influence selection of international market entry modes. The study focuses on analyzing impact of culture on entry modes adopted by various multinational corporations. The study analyzes role played by culture in making selection of entry mode i.e. establishing new setup of business or acquiring existing local business. The study analyses if impact of culture is decreased when companies have vast global experience. The findings of the research study shows that MNCs prefer to establish new business when entering in new global market. The study also shows no relation between impact of culture on companies’ performance and global experience of the companies. The study covered 320 companies under primary research for the research purpose. The companies were selected randomly. The study helps in understanding major factors associated with the performance of companies entering into new global market. The study also provides information on impact of culture on different industries. The culture does not impact all industries in same way and some industries such as food and clothing are more impacted by the local culture (Lee et al., 2011).

Hutzschenreuter et al. (2010) in their study analyzed the impact of cultural distance on international business expansion. The authors mentioned that high culture distance and diversity negatively impact business expansion in international market because of cost and complexities associated with it. The study was conducted on 91 German organizations who are operating in international market. Findings of the study revealed that operation of wholly owned subsidiaries in highly diversified market is complex (Hutzschenreuter et al., 2010).

Papadopoulos & Martin (2011) describe the importance of culture in selection of international business entry mode. The authors mentioned that developing countries have high potential of business growth, but limited information on target market and consumer behavior. Developed countries have good profiling of target segments and ample information on consumers, which make selection of entry mode easier as compare to developing countries. Ulrich et al. (2012) talk about importance of cultural understanding and its impact on selection international business entry mode by saying “Companies with a high degree of international experience are more likely to use high control entry modes”. (Ulrich et al., 2012, p 16).

2.4 Different Factors That Influence Selection of Business Entry Mode in International Market:

Nielsen & Nielsen (2011) in their study analyzed various factors that influence the selection of international business entry modes. Characteristics of top management team (TMT) and companies’ experience of international market play major role in determining right entry mode. The study revealed that “TMTs with international experience are more likely to choose full-control entry modes over shared-control entry modes, nationally diverse TMTs are more inclined to opt for shared-control over full-control entry modes when entering foreign markets” (Nielsen & Nielsen, 2011, p 1). It is important to consider international experience of team members and cultural diversity as two separate factors while determining the entry mode.

Papadopoulos & Martin (2011) consider market size, consumer characteristics and cost associated with every mode of entry as major factors that determine the selection of international business entry mode. Sacha (2005) mentioned that companies analyze the risk associated with international market, market size, company size, skills & capability, competitive advantage and product life cycle while deciding on international business entry mode. The risk is high in establishing wholly owned subsidiary if product is on maturity or decline stage in international market (Papadopoulos & Martin, 2011; Sacha, 2005).

2.5 Impact of Culture and Selected Entry Mode on Performance of Business in International Market:

He & Wei (2011) in their article established a relationship between international market selection and orientation with business performance. The author mentioned business performance in both culturally close and distance markets depends upon their own capabilities, skills and assets. Sacha (2005) describe that companies with diversified teams are more capable to understand diversified markets that positively impacts their ability to perform in international market. Companies with experience of international market prefer to select fully controlled entry modes in order to achieve better financial results and reduce interference.

Lee at al. (2011) establishing setup from the base requires higher time, resources and skills. However, controlled entry modes often produced better results if performed in right strategic manner. Companies should select modes after evaluating the cost and benefits involved in the process. Papadopoulos & Martin (2011) mentioned that culture can impacts performance of international business in both positive and negative way. If culture distance is high then companies are required to think according to the consumers of different markets, and should customize their products as per local needs of international consumers. Companies can sale general product across all markets if culture and requirements of consumers are same across all target market (Lee at al., 2011; Papadopoulos & Martin, 2011).

References

Brouthers, K. D. (2013). Institutional, cultural and transaction cost influences on entry mode choice and performance. Journal of International Business Studies, 1-13.

**He, X., & Wei, Y. (2011). Linking market orientation to international market selection and international performance. International Business Review, 20(5), 535–546.

**Hutzschenreuter, T., Voll, J. C. and Verbeke, A. . (2011). The Impact of Added Cultural Distance and Cultural Diversity on International Expansion Patterns: A Penrosean Perspective. Journal of Management Studies, 48(2), 305–329.

**Lee, C.A., Bang, H.Y., Ha, J.W., Lee, J.Y., and Kim, Y.H.Y. (2011). An analysis of cultural impact on international business performance via foreign market entry mode: case of South Korean MNCs . Journal of Management and Marketing Research , 1-8.

**Lee, G.K., and Lieberman, M.B. (2010). Acquisition vs. internal development as modes of market entry. Strategic Management Journal, 31(2), 140-158.

**Morschett, D., Schramm-Klein, H., & Swoboda, B. (2010). Decades of research on market entry modes: What do we really know about external antecedents of entry mode choice? Journal of International Management, 16(1), 60-77.

Nielsen, B.B., & Nielsen, S. (2011). The role of top management team international orientation in international strategic decision-making: The choice of foreign entry mode. Journal of World Business, 46(2), 185-193.

**Papadopoulos, N. & Martin, O. (2011). International market selection and segmentation: perspectives and challenges. International Marketing Review, 28(2), 132-149.

Sacha, J. (2005). Reviving Traditions in Research on International Market Entry. International Marketing Review, 22(4), 474-475.

**Ulrich, A. M. D., Boyd, B., & Hollensen, S. (2012). Financial Performance of Entry Mode Decisions: Effects of Control in . International Journal of Business and Management, 7(24), 12-28.