Bachelor thesis in Business Administration Influential Factors of Foreign Market Entry Modes A case of Swedish MNCs into the Chinese Market Examensarbete nr: Author: Berkan Basören & Michael Olugunna Supervisor: Tao Yang Examiner: Lena Bjerhammar Högskolan Dalarna Subject: Business Administration 791 88 Falun Credits: 15 Sweden Tel 023-77 80 00 Influential Factors in Foreign market Entry Modes (Berkan Basören & Michael Olugunna) ACKNOWLEDGEMENT We are pleased to finally finish our Bachelor thesis. We would like to thank everyone who contributed to our thesis. First of all, we would like to thank our supervisor Tao Yang who guided us during all seminars. We couldn’t have finished our thesis without her assistance. We also thank Sabine Gebert-Persson and Lena Bjerhammar for their valuable suggestions to improve our thesis and Sarah Berglind who helped us with language and referencing. Our special appreciation goes to the interviewees who dedicated their time to provide us with all information needed for this research: Tobias Hägglöv, Chief Business Analyst, Electrolux; Svante Lindholm, former Manager Sandvik China and; Helene Birknert, Head of Communications, Ericsson Sales and marketing. Finally, we thank our families for their support and all of our lecturers during our studies. “I am very grateful to God, for He is ever faithful to me. My gratitude goes to my family for their love, patience and support throughout my study period; I could not have accomplished this without you guys. I cannot but say a special thank you to Helen Holmquist and Monica Eriksson for their advice and words of courage, also to all my friends for their love and support. Olawale Abudu, you are a special friend” Michael Olugunna May 2012 Berkan Basören and Michael Olugunna i Business Administration Thesis – 15hp Högskolan Dalarna (Spring 2012) Influential Factors in Foreign market Entry Modes (Berkan Basören & Michael Olugunna) ABSTRACT Globalization has reduced the significance of geographical boundaries. Companies that successfully establish themselves in foreign markets experience many benefits. One of the key decisions in the process of foreign market entry is selecting market entry modes since selection of entry modes is a significant determiner in the success of company. Entry mode selection is influenced by external and internal factors. Therefore, company has to consider external and internal factors and choose the most appropriate entry mode which will maximize its chance to succeed in the chosen foreign market. The purpose of this thesis is to identify the factors that influence entry mode decisions of Swedish MNCs when entering the Chinese market. A research question regarding influencing factors in entry mode decisions is formulated. Root’s theory and Hollensen’s work on entry modes are presented in theoretical framework which is followed by conceptual framework where the theory and literatures used are summarized to provide clearer picture to the readers. This research is a qualitative one and uses case study approach. Data regarding to entry modes and influencing factors is collected from three Swedish MNCs Electrolux, Sandvik and Ericsson through interviews. Our findings show that, in order to be able to control their products and business activities, the three Swedish MNCs investigated in this study used direct export and direct investment. However, joint venture is an alternative while the MNCs are spreading their business activities in China, as the Chinese government protects local businesses. Market size and the growth potential of the market inspired companies to enter China. Internal and external factors jointly influence the selection of entry mode into China. Among them, internal factors are less effective than external factors. Factors that influenced Swedish MNCs decisions in the selection of entry modes into China are mostly related to external factors: Chinese market factors; Chinese production factors and environmental factors are most influential ones. ii Business Administration Thesis – 15hp Högskolan Dalarna (Spring 2012) Influential Factors in Foreign market Entry Modes (Berkan Basören & Michael Olugunna) Contents 1. INTRODUCTION ............................................................................................................... 1 1.1. Background ............................................................................................................................. 1 1.2. Chinese Market Overview ....................................................................................................... 2 1.3. Swedish business in China ...................................................................................................... 3 1.4. Problem Description ................................................................................................................ 3 1.5. Purpose .................................................................................................................................... 4 1.5.1. Research question ............................................................................................................ 4 2. THEORETICAL FRAMEWORK ....................................................................................... 5 2.1. Entry Modes ........................................................................................................................... 5 2.2. Factors in Entry Mode Decision .............................................................................................. 8 2.3. Conceptual Framework ......................................................................................................... 11 3. METHODOLOGY ............................................................................................................ 12 3.1. Research Strategy ................................................................................................................. 12 3.2. Data Collection ...................................................................................................................... 14 3.3. Data Analysis ........................................................................................................................ 15 3.4. Reliability .............................................................................................................................. 15 3.5. Validity .................................................................................................................................. 16 3.6. Limitation .............................................................................................................................. 16 4. EMPIRICAL DATA .......................................................................................................... 17 4.1. Case 1 – Electrolux ................................................................................................................ 17 4.2. Case 2 – Sandvik ................................................................................................................... 20 4.3. Case 3 – Ericsson .................................................................................................................. 22 5. ANALYSIS ........................................................................................................................ 26 6. CONCLUSION .................................................................................................................. 35 7. REFERENCE .................................................................................................................... 37 Appendices ................................................................................................................................ 40 iii Business Administration Thesis – 15hp Högskolan Dalarna (Spring 2012) Influential Factors in Foreign market Entry Modes (Berkan Basören & Michael Olugunna) 1. Interview with Electrolux .............................................................................................................. 40 2. Interview with Ericsson ................................................................................................................. 43 3. Interview with Sandvik ................................................................................................................. 46 iv Business Administration Thesis – 15hp Högskolan Dalarna (Spring 2012) Influential Factors in Foreign market Entry Modes (Berkan Basören & Michael Olugunna) 1. INTRODUCTION To start with, background will be presented in order for the readers to have a clear insight into the topic, followed by the problem description, purpose of this paper and finally, research question will be formulated. 1.1. Background Globalization is a significant trend today. It is bringing the world closer. Geographical boundaries are disappearing. The companies that successfully managed to establish themselves on new foreign markets may experience a variety of benefits such as higher growth rate and higher profit margins. Competition among firms is greater now than ever. The decision to expand business abroad and being able to compete in different foreign markets is the most valuable one for most firms. Even though most companies would prefer to remain local champions, the pulling factors from the foreign markets are just overwhelming (Kotler & Keller, 2006). Multinational Corporations (MNC) are corporations that operate in more than one country (Pitelis & Sugden, 2000). According to International Labor Organization (2011), today 50,000