Academic journal article Entrepreneurship: Theory and Practice

Entrepreneurial Entry into Foreign Markets: A Transaction Cost Perspective

Academic journal article Entrepreneurship: Theory and Practice

Entrepreneurial Entry into Foreign Markets: A Transaction Cost Perspective

Article excerpt

This paper explores the potential difficulties that smaller entrepreneurial organizations(1) face when first entering the international environment, particularly focusing on the partnership that entrepreneurs often use for entry. Since entrepreneurial firms are typically resource constrained (Jarillo, 1989; Spann, 1990; Stinchcombe, 1965; Vesper, 1990), they must leverage their resources in order to successfully enter an international market. Utilizing a partner with some knowledge of the target market, or what Oviatt and McDougall (1994) call hybrid entry strategies (e.g., export agent, licensing, joint ventures, strategic alliances, etc.), can help leverage the entrepreneur's resources. The current paper focuses on foreign export agents because this is often one of the earliest entry methods an entrepreneur uses. Unlike direct sales to foreign customers (which requires identifying who those customers are), or licensing, joint ventures, etc. (which requires greater integration and risk), foreign export agents can leverage the entrepreneur's resources with relatively lower up-front costs. Transaction cost economics (TCE) is an ideal lens for evaluating the export agent strategy because it suggests a cost effective structure for conducting international operations (Hennart, 1982). Specifically, TCE provides a basis for exploring why the parties might join together and what problems and issues each party might encounter in dealing with the other. The paper has implications for entrepreneurs considering overseas opportunities, including how to protect themselves without stifling their chances for successful entry. The discussion and propositions lend themselves to future empirical research.

The paper proceeds as follows: First, a quick review of past research into entrepreneurial entry strategies is presented followed by an overview of why firms are motivated to expand internationally. The section also highlights many of the problems firms face in international markets, with special emphasis on how these problems affect smaller businesses. The bulk of the paper uses the TCE framework to illustrate a general structure the relationship might employ, and some specific threats of opportunistic activity. Next, the paper calls upon agency theory (AT), which is closely related to TCE, to identify specific relationship desires by the two parties. The paper concludes with a brief discussion of implications for the entrepreneur (i.e., overall survival) and future research suggestions.

PAST RESEARCH

The number of smaller firms exporting goods has increased by over 22% since 1987 - a 150% increase in the dollar value of those goods - (Brown, 1995) - to the point where 96% of all U.S. exporters are firms with fewer than 500 employees (Prosak, 1993). Although entrepreneurs are exploring opportunities overseas more frequently, the research related to this topic has been somewhat ignored (Oviatt & McDougall, 1994), but that is changing (see special issue of Entrepreneurship Theory and Practice on international entrepreneurship). The majority of research on internationalization focuses on large multinational enterprises (MNEs; Brush, 1995). The research that looks at smaller firms can be categorized by studies that investigate factors leading to entry success, motives for entering an international market, and differences between exporters and non-exporters (Brush, 1995).

Within the first stream, investigators have examined generic strategies (e.g., Namiki, 1988), joint ventures (e.g., D'Souza & McDougall, 1989), as well as success factors associated with specific target countries (e.g., Jansson & Hisrich, 1981; Loucks, 1981; Szyperski & Klandt, 1981). A second, larger stream of research focuses on the many factors that motivate firms to seek international expansion, including maturing U.S. market (Namiki, 1988), stiff foreign competition within the U.S. market (Hazard & Yoffie, 1989), and favorable foreign market conditions (Aharoni, 1966; Hymer, 1960; Simpson, 1973). …

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