Modes of Foreign Entry: A Transaction Cost Analysis and Propositions

This article presents an abstract of an article about optimal methods for entry into a foreign market, published in the fall 1986 issue of the "Journal of International Business Studies". Selecting the optimal method for entry into a foreign market is an important factor in the success of international business operations. Modes of entry vary from full equity participation in wholly-owned subsidiaries, varied amounts of equity investment in joint ventures, to non-equity participation in licensing or contractual arrangements. In this article, the authors develop a set of testable propositions to evaluate the tradeoffs between alternatives and available returns on investment. They group forms of entry according to the level of control is the ability to increase returns by influencing decision-making. Types of entry that involve dominant equity ownership, such as wholly-owned subsidiaries or majority shareholder joint ventures, offer maximum control. Medium-control modes include balanced interest arrangements, such as equal partnerships and plurality shareholder. Low-control modes of entry include nonexclusive or nonrestrictive contracts and minority equity positions.