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Part - VIII

4. Appropriate Entry Mode for MNCs

The choice of appropriate entry mode for an MNC depends upon the various factors listed above. While the attractiveness of a country from the MNCs strategic perspective is the key determinant of MNCs decision to make FDI in host country, the transaction costs associated with the mode of entries determine the MNCs mode of entry.

The companies that are "market seeking" should look at both the JVs and subsidiary route. They should opt for JV route if: -

• Tie up with local partners helps in mitigating costs associated with understanding markets and developing business contact and distribution networks.

• Agency costs associated with sharing a proprietary technology with a local partner is less than the benefits that it can accrue from such a relationship.

Otherwise "market seeking" companies should generally prefer the subsidiary route.

The companies that are "resource seeking" and are looking at host country for some critical resources should enter through the subsidiary route. Similarly, the companies which technology or IP intensive should prefer the subsidiary route so as to have better control.

The mode of entry for companies (both market and resource seeking) will be eventually determined by the government policy and regulatory environment of the host country. If the government policy is FDI friendly and the cap on FDI is removed then the companies should enter through the subsidiary route. Also, if the regulatory environment of a host country is not stable then the MNC should enter through JV route to reduce its risks.

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* Contributed by: -
Abhishek Gupta & Anurag Ghuwalewala,
PGP-2, Batch 2003-2005,
IIM Bangalore.