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Choice of Market Entry of Manufacturing and Services Firms Essay

Choice of Market Entry of Manufacturing and Services Firms

            This particular study suggests that differences between international entry mode choices of manufacturing and service firms can easily be explained by the disparities in their reaction to transaction cost based variables and trust propensity as well as the influence of risk (Brouthers, 2003). In this study, two aspects are apparent:

As a result of the investment rigorous nature of manufacturing, environmental uncertainties and risk propensity influence the mode choices of manufacturers.
Behavioural uncertainties trust propensity and specificity of asset ultimately influence every entry mode of the service provider due to the people-intensive nature of services.
Previous research classifies three general attributes of transactions said to influence the perception of transaction cost. They are environmental uncertainty, behavioural uncertainty, and asset specificity. Transaction Cost Economics (TCE) studies that have been involved in surveying the international entry mode choice have revealed that service and manufacturing firms respond in a different way to the three TCE stimuli.

The first stimulus to examine is the asset specificity and mode choice. One of the fundamental tenants of TCE is that the specificity of the assets employed in a transaction has a major impact on the efficiency (transaction costs) of optional governance

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structures. Researchers investigative the issues of international entry mode choice have suggested that, the greater the specificity of the assets needed in an international investment, the greater the transaction costs created by potential opportunism.

They propose that as asset specificity increases, firms tend to internalize transactions

And at the same time use wholly owned modes of entry. But as asset specificity reduces, joint venture modes of entry are favored.

According to research, service firms differ with respect to the asset specificity of their service, and these differences may result in variations in mode selection. A hypothesis can therefore be formed that service firms making soaring asset specific investments favor wholly owned modes of entry over joint ventures.

On the other hand the accord among TCE intellectuals on the impact of asset specificity for international manufacturing mode choice is consistent with basic TCE guidance. Manufacturing firms making bigger asset specific investments are expected to favor wholly owned modes of entry over joint ventures while manufacturing firms making less asset specific investments will favor joint venture modes of entry. It can therefore be concluded that manufacturing firms making huge asset specific investments prefer wholly owned modes of entry to joint ventures.

The second stimulus is the environmental uncertainty and mode choice. Environmental uncertainties according to Gatignon and Anderson (1988) refer to the extent to which a country’s legal, political, cultural, as well as economic environment threatens the stability of a business operation. For environmental uncertainty and services, service firms that perceive high levels of environmental uncertainty will tend to favor wholly owned modes of entry over joint ventures. When it comes to environmental uncertainty and manufacturing on the other hand, manufacturing firms perceiving soaring levels of environmental uncertainty tend to favor joint venture modes of entry over wholly owned subsidiaries.

The third and final stimulus is the behavioral uncertainty and mode choice.

In simple words, behavioral uncertainty and the principal theory of transaction costs presume that opportunism bounded rationality and risk all help to create high costs in monitoring and/or controlling the behavior of partner firms (Williamson, 1991). The mode choice is seen as a trade-off between internal organizational costs and transaction costs. Wholly owned modes therefore cut down the cost of international coordination between parties located in different countries hence providing firms with transaction cost savings. However, internal organizational costs will vary with the nature of the activity. Internalization therefore replaces one type of cost by another. In this case, transaction costs by internal organization costs. Service firms perceiving soaring levels of behavioral uncertainty tend to favor joint venture modes of entry over wholly owned subsidiaries. On the other hand, manufacturing firms perceiving high levels of behavioral doubt tend to favor wholly owned entry modes over joint ventures.

Methodology used range from data sources, control variables, analytical methods, questionnaire design, and questionnaire administration.

Researchers have found that with respect to service firms, greater asset specificity and environmental uncertainty as well as reduced behavioral uncertainty would be related to the use of wholly owned modes of entry. On the other hand, manufacturing firms compared to services respond differently when it comes to developing their internationalization strategies. Hypothesis indicate  that for manufacturing firms,  high levels of asset specificity and behavioral uncertainties, and low levels of environmental uncertainty would be associated with the use of wholly owned modes of entry.

            This study however has its limitations. For instance, the study is cross sectional. The effects of transaction cost variables on entry mode strategy continue being unexplored. It may turn out that the associations outlined in this study transform over time, particularly in rapidly changing regions. Second, the study has used measures based on culture of both control valuables risk and trust propensity. Although in line with prior entry mode research, studies in the future may wish to develop more situation-specific measures of risk and trust propensity which can more precisely assess the risk and trust propensity involved in international entry mode decision processes. Finally, the CEE nations are changing to market-based economies from command economies. The effect of this would be a different set of entry mode decision criteria as compared to the result in moves between market-based economies. Therefore the findings of this study might not be relevant to entry in less or more developed nations. However, future efforts aimed at examining other target regions would help in determining if the findings can be generalized.

Reference Page

Brouthers, K. D., & Brouthers,L. E. (2003). Why Service and Manufacturing Entry Mode

            Choices Differ: The Influence of Transaction Cost Factors, Risk and Trust. 40:5,

            0022-2380.

Gatignon, H. and Anderson, E. (1988). ‘The multinational corporation’s degree of control

            over foreign subsidiaries: an empirical test of a transaction cost explanation’.

            Journal of Law, Economics and Organization, 4, Fall, 305–36.

Williamson, O. E. (1991). ‘Comparative economic organization: the analysis of discrete

            structural alteratives’. Administrative Science Quarterly, 36, 269–96.

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