Selecting the mode of market entry plays a critical role in internationalization efforts. The choice of entrance is a vital decision for multinational enterprises (MNEs) regarding expansion of their markets (Tulung, 2017, p. 160). For EJA Real estate Corp., the method of market entry is through investing directly in the Cuban real estate market. Besides the decision on the mode of market entry, the management should consider factors unique to the Cuban market that might affect the choice and potential for success in the new venture. EJA Real estate Corp. should evaluate the market and determine suitability for its operations depending on cultural or social, political, legal, and environmental factors. Although venturing into a new market might be profitable for any organization, the mode of entry involves some risks relating to political, legal, currency movement, transfer of intellectual capital, market knowledge, channel relationships, cultural understanding, and competitive forces that the company should mitigate to become productive.
Critical Factors in Selecting a Method of Entering a New Market
Companies select a mode of entry that promises returns on investment based on forces inherent in the target market. Consequently, transaction cost model informs a course of action in the internationalization process (Brouthers, 2013b, p. 4). EJA Real estate Corp.’s management may decide to use an investment model upon analyzing the market and the company’s capability. However, the decision is not limited to economic capacity of the firm to invest in an international market. Conversely, transaction cost depends on market potential for the investment and location-specific costs contingent on unique market forces (Brouthers, 2013b, 4). The new market’s culture is critical because it determines the consumption decisions made by local consumers. For example, the Cuban culture will be essential in determining the willingness to sell historical properties to EJA Real estate Corp. for restoration. Thus, EJA Real estate Corp. should perform extensive market research to understand the environmental reality of a market before investing.
Investment decisions involve consideration of factors such as resource availability, transaction costs, and other factors unique to the new market. In a direct investment approach, the price depends on the economic and political environment of the host market. The management should consider the nature of institutional environment, including regulative, normative and cognitive aspects (Brouthers, 2013a, p. 17). Firms should conform to environmental pressures, including political and legal environment and the cultural reality of a market, to succeed in a new venture. In another study, Brouthers (2013b) studied the institutional and cultural contexts when making investment decision in a foreign country to reveal their effect on transaction cost (p.5). The environment is critical in determining the willingness of local firms and institutions to collaborate with EJA Real estate Corp. in buying and restoring historic properties.
The choice made by a company is driven by economic factors in the decision to use the investment model for market entry. Institutional economics determine how a multinational corporation is configured within the new market (Aparicio, Urbano, & Audretsch, 2016, p.3). The host market institutions assess economic performance of an industry and, in turn, impacts international firms’ investment decisions. For example, economic factors determine the market size, production expenses, and shipping costs incurred by an investor. EJA Real estate Corp. will perform better within an environment with economically enabling forces than a situation with economic forces that are detrimental to its performance. The management will also make a decision depending on the experience acquired when operating in other countries with similar and different conditions, such as Cuba. Evidently, the administration should consider the economic performance and institutional support within the host market before investing.
Investment Entry Mode in Mitigating Risks
Risks and uncertainty are common in internationalization and global expansion of multinational corporations. The market entry process involves the growth of business operations into a new environment amid uncertainty. Scholars draw links between various variables in the internationalization process, including “knowledge, networks, culture, the personal background of decision makers, and individual and firm commitment to international activity” (Liesch, Welch, & Buckley, 2014, p. 852). Consequently, managers in multinational corporations can understand the competitive advantage and address risks and uncertainty to prevent adverse outcomes when operating in a new market. To a great extent, risk and uncertainty mitigation depend on the mode of entry the company adopts when investing in an international environment. Therefore, EJA Real estate Corp.’s administration will manage major risks by using an investment model as opposed to other options, such as exportation and contracting.
The company has selected the investment approach since it can potentially override political, legal, currency movement, transfer of intellectual capital, market knowledge, channel relationships, cultural understanding, and competitive forces risks. The investment model follows the company’s perception of the Cuban market context and the ability of the firm to invest and compete in a new environment effectively. The investment mode of entry is beneficial in mitigating risks since it allows for high organizational control over the market (Müllner, 2016, p. 1). Müllner (2016) adds that within the direct entry mode context, the management can conceptualize the risk involved and decide depending on its level (p. 2). For instance, in high-risk environments, multinationals can benefit from direct involvement in the market and operations of a business. The perspective explains the decision by EJA Real estate Corp. to capitalize in Cuba using the investment mode of entry.
Using an investment model, EJA Real estate Corp. will have a direct access to the market while understanding potential risks and mitigating them. The management evaluates political, economic, cultural, and legal environment and identifies any possible hindrances to develop effective strategies to succeed in the particular context. By understanding the market dynamics, investment model will assist the company to align its business model to the industry, hence, control the currency movement and transfer intellectual capital from the parent company to the new market. Unlike other models, when a company is not directly involved in the market, investment mode of entry allows implementation of specific operations to achieve competitive advantage.
As evident from the discussion, the management of EJA Real estate Corp. has decided to invest in real estate in Cuba. Therefore, the company should consider the most effective mode of entry depending on the Cuban market dynamics. From an analysis of the available options, including exportation, contracting, and investment, the latter has been identified as the most suitable model of entry for the company in a new market. However, the management should understand critical factors underlying the decision and potential for investment model to mitigate risks inherent in the Cuban market.
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Brouthers, K. D. (2013). Institutional, cultural and transaction cost influences on entry mode choice and performance. Journal of International Business Studies, 44(1), 1-13. Retrieved from https://www.jstor.org/stable/pdf/23434098.pdf
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Tulung, J. E. (2017). Resource availability and firm’s international strategy as key determinants of entry mode choice. Jurnal Aplikasi Manajemen, 15(1), 160-168. Retrieved from http://jurnaljam.ub.ac.id/index.php/jam/article/view/916/900