Entry Modes into China

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Introduction

Research studies explain that China has steadily risen to become one of the major contributors of the global economy in the last few years. With a gross domestic product growth of an estimated 10%, the country is ranked position three with relation to the world’s largest economies. Economic forecasts predict that by the year 2050, China would have surpassed all industrialized nations with relation to purchasing power parity, and for that reason, will be the leader of the global economy (Fishman, 2005). Evidently, the country has been subject to a considerable amount of economic growth, and more companies are looking into the ways through which they can tap the Chinese market. Accordingly, China’s astounding economic renaissance has encouraged business organizations and investors to examine the different ways through which they can enter the Chinese market.

As researchers explain, it is crucial the organizations device new approaches regarding the entry and retention of the business into the Chinese market. Further research on the issue explains that by the year 2005, China had reached a economic high, as the country attracted a revenue of about $1 billion per week (Naughton, 2007). This goes to show how good of a market that China has become over the years. For that reason, business organizations have considered various modes of entry into the country so as to assure their companies of the best possible success in the international market. Most of the firms that have made it in China have looked into business strategy options such as the acquisition of resources and supplies, the diversification of the different sources of supply and low-cost business strategies for the Chinese Market (Fishman, 2005). An examination of the performance of these businesses and firms in the Chinese market, as well as, the market entry modes and the different factors for success is necessary to understand how firms can best survive doing business in China. Though most organizations are reluctant in revealing company information regarding this issue, various successful entry modes have been identified to help in understanding of the Chinese market and its significance to businesses and organizations.

This paper examines the different types of entry modes available for companies wishing to expand their business to the Chinese market. Fundamentally, the paper identifies home production, contractual market entry, and foreign production as the three key entry modes into China. The advantages and disadvantages of each mode will also be examined, and a discussion of the various ways in which the modes have changed overtime provided.

Entry Modes into China

The mode of entry into a new market is one of the most fundamental decisions that business organizations have to make at one point in their business cycle. As research studies explain, a company’s choice of entry into a new market influences the organization in various ways including an organization’s production and marketing strategies. Fundamentally, the choice of a business’s entry mode into a new market determines the how the company faces the various challenges it faces in the new market (Gielens & Dekimpe, 2007). There are as many as fifteen different modes of market entry options for firms wishing to enter a new market. However, these modes of entry vary according to the market, which the company aims to expand its business. More specifically, researchers and economists have identified three chief entry modes into China including, home production, contractual market entry and foreign production (Li, 1995). These three key modes of entry have been subdivided into other options, which companies have employed to ensure their success in the Chinese market.

Home production

Also referred to as the export strategy, the home production entry mode into China defines a market entry point whereby an organization produces goods and services at their respective home countries, and sells to China as their host nation. With an estimate 200 million consumers, China has paved the way for companies to export products and services to their market, thus making it a preferred entry strategy for most businesses and organizations (Gielens & Dekimpe, 2007). This entry mode has been identified as one of the best business strategies for entry into the Chinese market, especially since it avoids the costs related to setting up shop in China. This entry mode, however, cannot work without the use of private entities that help the business organization in selling their products or services in China (Li, 1995). Accordingly, home production, as a mode of entry into China can occur in two main ways including direct and indirect exporting.

Direct exporting

Direct exporting is a form of home production that companies entering China export directly to Chinese customers interested in the purchase of the company’s products and services (Li, 1995). With such an entry mode approach, the business organization handles all market research activities, as well as, the distribution methods that the company will take on for success in the Chinese market. However, the organization will be required to have a connection to the Chinese market, which may be in the form of foreign sales representatives or foreign distributors. If a company opts for the use of foreign sales representatives, they will be required to assign representatives in China to sell their products and services (Gielens & Dekimpe, 2007). The use of foreign distributors demands that companies assign distributors in China whose responsibility will be the distribution of company products and services to the Chinese market. Some of the advantages of this market entry approach is the potentiality to increase profit owing to the elimination of intermediaries, as well as, having full control over the company’s activities. The main disadvantage of this strategy is that it demands a considerable amount of people power, so as to, ensure that the business is successful in China.

Indirect exporting

Indirect exporting is the second approach when considering the option of home production as a market entry strategy into China. As research studies illustrate, companies that have used this entry mode as a strategy have been successful in acquiring Chinese customers especially since it demands the use of Chinese intermediaries to facilitate business activities. This market entry approach requires a company to sell their products and services to an intermediary, who in turn sells these products and services to Chinese consumers (Li, 1995). Accordingly, this market entry approach can be conducted in two main ways including the use of local agents and trading companies in the home country, which in this case is China. The main advantage of this market entry mode is the fact that it is a risk free strategy, that assures the company of almost immediate acceptance of their products and services into the market (Gielens & Dekimpe, 2007). It also frees the organization from various responsibilities, thus allowing the organization to focus on other important business activities.

Contractual Market Entry

Researchers have also identified contractual market entry as the second mode of entry for business organizations wishing to gain a market share in China. In definition, contractual market entry defines the use of contracts as a way of penetrating into a new market. Contractual trade in business involves two or more companies entering into a contract and agreeing to do business with each other. Research studies explain that contractual market entry has long been favored by companies when entering foreign markets (Gielens & Dekimpe, 2007). In most cases, the contractual agreements involve the main company contracting other local companies for the sale of their product and services. In essence, the entry mode requires that a formal permission be granted to local companies in a host nation for the use of the foreign company’s resources for payment. This can occur in two main ways including licensing and franchising.

Licensing

Licensing is a form of contractual market entry strategy whereby local companies are provided with licenses to operate with the main company’s resources and facilities (Li, 1995). Most companies that have succeeded in their market entry into China grant Chinese local companies the permission to conduct business activities using the various brands that the company has. The main advantage of franchising as a market entry mode is that it helps in building a company’s corporate image, and facilitates the development of marketable products and services (Gielens & Dekimpe, 2007). However, this strategy provides a lot of restriction for the companies being licensed, and if not, the licenser will not have control over the sale of the products or services.

Franchising

Franchising is another form of contractual market entry strategy, and it has also been widely used by companies entering into the Chinese market. It is a mode of entry that defines the use of a firm’s name or business model so as to conduct business operations in a particular place (Li, 1995). Franchising in China is commonly used as a business strategy for international companies in the food and beverage industry. Just like licensing, the main advantage of this entry mode is that it helps build a company’s corporate image. This entry mode also benefits companies in terms of staff training and development, as the local franchise companies are provided the opportunity to train their staff members to the standards of the franchising company.

Foreign Production

Also referred to as the equity strategy, foreign production refers to the a mode of entry, whereby a company carries out both production and sale activities in their local home, as well as, the host nation (Gielens & Dekimpe, 2007). Research studies illustrate that out of the three entry mode strategies into China, foreign production is the most widely used entry mode strategy by big companies such as Coca Cola.

Strategic Alliance

A strategic alliance refers to a hompe production approach to market entry whereby a business organization enters into an agreement or collaboration with another firm in the host nation. With this entry mode, the companies that are in alliance share responsibilities of the production and sale of goods and services (Li, 1995). This strategy is advantageous to companies wishing to gain a market share in China because it assures the foreign company of an already existing market. By obtaining an alliance with a company in the host nation, foreign companies benefit from the host company’s market share. However, this strategy can be disadvantageous because of the sharing of profit between companies.

Joint Ventures

The last identified mode of entry for organizations into china, joint ventures are an approach to foreign production whereby instead of sharing company duties and responsibilities, they share ownership of the company (Li, 1995). Accordingly, joint ventures allow shared ownership between the foreign company and a company in the host nation. The advantages and disadvantages of joint ventures are similar to those of strategic alliances.

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