Once the MNC decides to target a particular country, it has to decide the best mode of entry. Mode of entry means the manner in which the firm would commence its international operations. There are several entry modes, each with their own sets of advantages and disadvantages. A firm would have to decide which mode suits its circumstances best before it could be adopted.
The different entry modes are:
(1) Export entry modes: Under these modes, the firm produces in the home country and markets in the overseas markets.
- Direct exports do not involve home-country intermediaries and marketing is done either through direct agent/distributor or through direct branch/subsidiary in the overseas markets.
- Indirect exports involving intermediaries in the home country and who are responsible for exporting the firm’s products.
(2) Contractual entry modes: These modes involve non-equity associations between an international company and a company or any other legal entity in the overseas markets.
- Licensing is an arrangement where the international company transfers knowledge, technology, patent, and so on for a limited period of time to an overseas entity in return for some form of payment, usually a royalty payment.
- Franchising: Franchising involves the right to use a business format, usually a brand name, in the overseas market in return for the franchise receiving some form of payment.
- Other forms of contractual arrangements, such as, technical agreements (for technology transfers), service contracts (for technical support or expertise provision), contract manufacturing, production sharing, turnkey operations, build-operate-transfer (BOT) arrangements, etc.
(3) Investment entry modes: These modes involve ownership of production units in the overseas market based on some form of equity investment of direct foreign investment.
- Joint venture and strategic alliances involve a cooperative partnership between two or more firms with financial interests as the basis of cooperation, (These entry options have been discussed earlier under the heading of cooperative strategies.)
- Independent ventures or wholly-owned subsidiaries are modes in which the parent international company holds 100 percent equity and is in full control. Such facilities may be created either through a new venture known as a Greenfield venture or acquired through takeover strategies.