Inmodeling the entry mode or foreign market servicing decision, from both economics and process perspectives, there has been a focus on the choice of individual modes rather than the prospect of using a combination of modes in a foreign market at a point in time. For example, in a recent review of earlier studies, Kim and Hwang (1992, p. 29) noted: "Common to existing studies ... is their assumption that each entry decision is made in isolation." While this reduction of the decision-making situation has simplified model building and eventual testing, ithas been at the expense of reflecting the reality of the situation that companies frequently face - of not simply choosing one method versus another, but rather of putting together the most appropriate
package
of methods for penetrating a foreign market.Figure 3 presents an illustrative example of the range of foreign market servicing methods that a company might use in different foreign markets at a given point in time (t2), in response to the type of internal and external influences noted previously. While in some markets a single mode may be used (markets 2, 3, and 4), in others a combination or package of modes might be employed (markets 1 and 5). The firm's foreign market servicing pattern shown at time
t
2 could be the outcome of a number of package alterations during preceding periods, as illustrated for Foreign Market 4.Inthis market, the company is shown as using a broad package at its entry point (to),which led to an altered package at time ti' then full acquisition of the operation at timet
2•Research into the use of management contracts in international operations, for example, has shown that most management contracts are used in connection with other modes of operation (Brooke, 1985). Inone case a Swedish companyentered a Middle Eastern market via a turnkey operation at the outset, but also took a small equity position in the foreign venture, along with a management contract involving management of the continuing operation (a dairy farm and milkprocessing unit). As a result of its insider position, the Swedish company was not only able to maintain its place as principal supplier to the venture of spare parts, equipment, and the like, but later won the contract for a new turnkey project that represented
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an extension of the earlier one (Sharma, 1984). The management contract's full role and significance in this case, from the perspective of foreign market penetration, were developed within the context of the total package of foreign market servicing activity by the Swedish company. Likewise, the contribution of different parts in the overall package differed over time-although ultimately fitting into a cohesive whole. However, only in the longitudinal perspective is it fully clear what roles the different parts of the foreign operation package play.
Figure 5.3.
Foreign Market Service Packages.
Firm
Internal and External Influences on International Operations (process and situational)
~,
Foreign Market Servicing Package(s)
~
Operation Exporting Exporting Exporting Wholly Turnkey&
Types & owned Exports &
In general, therefore, from a company's perspective, an important question is not only the fit and contribution of the different parts of an operation package at a particular point in time,
but also the fit and contribution over time. The longer term potential of a given market and, more particularly, of different combinations of operation packages to exploit it may not be foreseen or even considered in decision making at the outset; therefore, alterations over time will often take on the character of emergent strategies (Mintzberg and McHugh, 1985). In his study of foreign licensing activity by Swedish companies, Svensson (1984, p. 223) found that where a stepping stone strategy from licensing to other operation modes was used it "was seldom intended from the beginning but emerged as the firm's financial resources and . management production and marketing skills increased." However, the ability of a company
to respond to any possibilities that emerge may be affected by the form in which the initial foreign entry package is constructed - as the case of the Swedish company in the Middle East noted above demonstrates. A licensing and/ or joint venture arrangement might of itself . restrict the ability of a firm to switch to other operation forms.
Ifthe choice of any particular foreign operation mode is undertaken in a package context, the decision to actually use it may have little to do with its normally assumed foreign marketing role, but rather could be explained by the way in which it contributes to the functioning of a broader package. An illustration is the way in which licensing activity is often linked to foreign direct investment. Despite its potential as an independent contributor to foreign market penetration, its primary purpose in this context may be as a means of achieving more effective controlover a joint venture partner, to transfer funds from the subsidiary, and/ or to reduce taxation payments in the country concerned (Luostarinen and Welch, 1990). In such situations, the choice setting commonly employed in studies of entry mode choice noted previously becomes highly inappropriate.
Accepting the broadened choice situation poses a significant problem for economics-based models of entry mode choice because of its attack on the assumption of isolated choice between single modes (Kim and Hwang, 1992). Additionally, the issue has not been accounted for in process-oriented studies, which are typically based on relatively restricted measures of internationalization, as noted previously. In fact, tracing the influence of process-related variables through time becomes much more difficult when packages of modes
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are involved, as their impact may be more diffused (and less obvious) through parts of the package. For both economics and process approaches though, an extended range of questions associated with the packages themselves becomes important in the mode choice context; for example, why do companies use single versus multiple modes of operation and why do they move into and out of these formats over time (see Figure 3)?