Discuss briefly the factors that govern the choice of mode of entry into international business.
International business is basically concerned with trading of goods and services across national boundaries. In order to enter into international business, firms have various modes available to them. The following are the different factors governing the choice of a mode of entry into international business.
(a) Complexity: Complexity is a major factor governing the choice of a mode of entry into international business. The level of complexity differs from one mode to another. For instance, the degree of complexity in setting up a wholly owned subsidiary abroad is higher than that in starting an export and import business. Thus, for businesses which want to avoid complexities in their operations, certain modes are better than others.
(b) Risk involved: Different modes of entry into international business involve different levels of risks. For instance, the risk involved in the contract manufacturing, exporting and licensing modes are comparatively negligible. On the other hand, the risk is comparatively higher in setting up a wholly owned subsidiary for entering international trade. Thus, generally, modes with lower risks are preferred by companies.
(c) Ownership and control: Some entrepreneurs prefer to have full ownership and decision-making control over the foreign firm involved in their international business. A wholly owned subsidiary gives full decision-making control to the parent company over its foreign subsidiary. On the other hand, modes of entry into international business such as licensing and exporting do not offer ownership rights to the parent company.
(d) Investment: Every mode of entry does not require the same amount of investment. For instance, the level of investment required for setting up a wholly owned subsidiary is higher than for engaging in importing and exporting or for licensing a foreign company. Thus, the mode of entry preferred by a firm depends on its capacity and readiness to make an investment.