The Importance Of Expansion In Foreign Market

1649 Words 7 Pages
Globalisation facilitated the growth, competitiveness and internationalisation of the business landscape, establishing opportunities for firms to expand globally, invest in foreign countries, encouraging business growth, competition and new-market opportunities (De Villa, Rajwani & Lawton,2015). Expansion into foreign markets requires firms to make important strategic decisions regarding which mode of entry to implement. The long-term commitment (Samiee,2014) of the mode of entry, while a key strategic decision, is costly and time-consuming, often irreversible, which consequently impacts business performance (Tsang,2005). Ultimately, entry mode choice involves critical deliberation of risks, returns, control and commitment (Ji & Dimitratos,2013), …show more content…
Entry choice depends on risk reduction (Samiee,2013), requiring firms assess potential risks and evaluating expected returns. Risk tolerance and willingness to take a chance on conditions impact a firms entry decision (Samiee,2013), with large, experienced firms more likely to undertake risky investments. Host country risk is a significant concern businesses need to consider as unstable host countries can negatively impact the business investment environment, affecting operations and profitability (Tsang,2005). Formal environment changes may introduce new transaction costs, or eliminate FDI incentives, and when investment risk is high, firms tend to avoid committing large amounts of assets, preferring exporting or JV options with lower equity ownership, as a method of minimising losses if/when unfavourable political events occur (Agarwal & Ramaswani,1992). Investment risk also requires the need for investing firms to have local knowledge of the destination country. This has seen companies establishing joint partnerships as a method of obtaining local knowledge, however in turn this method can also cause issues in terms of partner cultural distance, sharing assets and lack of complete control (Kogut & Singh,1988). However, this can be …show more content…
Hernandez & Nieto (2015) discovered the importance of legitimacy and efficiency when overcoming regulatory distance challenges on entry choice. Developed nations seeking to invest in developing (with lower regulatory development), e.g. US investing in Brazil (Hennart, Sheng & Pimenta,2015), need to consider regulatory unpredictability and corruption, which can be hazardous and costly to business. In this case, firms need to ensure external legitimacy, and can achieve this via low-commitment modes (when adaptation problems arise). Hernandez & Nieto (2015) also explored positive regulatory distance, developing nation firms expanding into developed nations, which can offer benefits (accessing new technology, customer bases). In this case, good governance enhances FDI performance, with regulatory issues easier to understand, making operations simpler. However, efficiency needs to be considered by evaluating the potential risks/costs of implementing higher resource-commitment

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