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How Language Differences Can Influence Entry Mode Strategy of Multinational Corporations - Coursework Example

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This paper 'Influence of Language on MNCs Entry Mode Strategy' tells us that multinational corporations use international business strategies to obtain specific advantages such as economies of scale, increased market share, competitive advantage, and increased investments. There are various modes of entry…
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Influence of language on MNC’s entry mode strategy s Introduction Multinational corporations use international business strategy to obtain specific advantages such as economies of scale, increased market share, competitive advantage and increased investments. There are various modes of entry that Multinational corporations may use to enter international markets. Such methods of entry include exporting, joint ventures, licensing, wholly owned foreign investments, franchising, and mergers and acquisitions. The choice of the right entry mode depends on various factors including internalizing advantages, ownership, and location. Choosing the right method of entry is essential because it determines the success of the company in international business. If a company chooses the wrong mode of entry, it may eventually fail to capture the international market and win customers. Therefore, multinational corporations should always identify the best modes of entry depending on their location, purpose, culture, and ownership. Furthermore, multinational corporations should choose methods of entries that will enable them to deal with certain barriers of entry effectively. One of the barriers of businesses engaging in international business is language barrier. Differences between language in the home and host countries always cause a great barrier for business entry. Multinational corporations should always choose the mode of entry that will be least affected by the language differences. Language differences between the home and the host countries increase liability of foreigners, uncertainties in the international business and costs associated with the language barriers caused (Brouthers, 2002). Multinational organisations need to deal with multiple languages in the international market and the associated administrative and transactional costs that come about as a result of language differences. Language barriers have varying effects on different entry modes. The entry mode that a multinational corporation chooses will therefore influence the extent to which the multinational corporation is exposed to language barrier in the international market. This critical discussion paper will highlight some of the key ways that language differences affect the choice of entry modes by multinational corporations. It will do so by first identifying and defining some of the entry modes that an organisation may chose, and how each entry mode is influenced by language differences between the host and the home and host country. It will then proceed to explain the impact of language barrier on international business. The paper will also discuss how differences host and home country affect the choice of appropriate entry modes by multinational corporations. Entry Modes There are various modes of entry into the international markets. Each of the modes has its own risks, costs and benefits. The following are some of the modes of entry in their order of risk: exporting, licensing, franchising, management contract, turnkey contract, joint venture, wholly owned subsidiary, and strategic alliance. Each of these modes of entry is influenced to different extents by language barrier between the host and home country depending on the nature of the company, its purpose for internationalization, and its culture. Exporting Exporting involves a firm manufacturing products in its domestic market and exporting it to foreign markets. This is characterised by physical movement of goods and services across borders. There are two types of exporting; indirect and direct exporting. Indirect exporting occurs when a third party assumes the responsible to export goods in a foreign country. This requires a number of factors to succeed: documentations, physical movement of goods and setting up of sales and distribution channels, export houses, confirmation houses and buying houses. The advantage of indirect exporting is that the process of exporting goods is handled by another firm (Davis et al, 2000). It also has low financial risk and requires little capital investment. Indirect exporting also has a number of disadvantages namely: firm isolation from the export process, little control over local marketing, little market feedback, and no after sales services. Direct exporting involves a firm exporting its products without using a third party. This requires the firm to develop in-house expertise such as local contacts, market research, documentation and transportation, and local pricing policies. Direct exporting has the least risk in international business and allows the firm to gain experience and economies of scale in domestic production. The disadvantages of this method is that it may be exposed to exchange rate risk, the firm does not enjoy low-cost locations for manufacturing of goods, high transport costs, and tariff barriers. Contractual modes Contractual methods of international market entry include licensing, franchising, turnkey contracts, and management contracts. Licensing is a contractual mode of entry whereby the licensor sells its intellectual property rights to licensee. Franchising involves selling property to franchisee under strict conditions. Lastly, management contracts involve the process through which a supplier in a given country performs management functions for a customer from a foreign country. One of the disadvantages of contractual modes is that the there is low control by the multinational corporation. It is also difficult for the firm to recover technology and know-how once it licenses it to another company in the host country. The method is also affected by high transaction costs as the firm tries to find suitable licensee and negotiates with them. Technology transfer costs can also be incurred by the licensing firm. One advantage of this method is that it allows a firm to enter the market in which FDI restrictions are applied. Contractual modes also solve the problems if high transport costs and trade restrictions. It is also a low risky strategy that minimizes the costs of establishing enterprise. Foreign Direct Investment (FDI) FDI refers to the internalization of international activities through managerial control. It involves producing goods locally and selling them internationally in order to overcome tariffs, reduce the cost of inputs, integrate different stages of production, and take advantage of location advantages. FDI allows a multinational corporation to access raw materials and seek strategic assets. A company engaging in FDI faces the highest political and economic risks. Equity Joint Ventures A joint venture is a separate company that is formed when two independent entities come together to achieve a common business objective. A joint venture leads to the formation of an independent legal entity without control from the parent companies. However, each of the parent companies has some contributions to the separate legal entity. Joint venture allows home country company to overcome host country restrictions. The two companies also enhance share capital contributions. Furthermore, local firms give local advantages due to their contact with key players in the local market, e.g. governments and suppliers. Financial and political risk is also shared between the two parties. Merger/acquisition This involves a large company acquiring a smaller firm by purchasing its assets. The acquiring company acquires an existing firm in order to earn quick returns and access the knowledge of the local market. Mergers and acquisitions allow multinational corporations to access resources (assets and brands). The disadvantages of this mode of entry include: difficulties in asset pricing, difficulties in integrating the two firms, and search costs. Greenfield A Greenfield mode of entry in internationalisation is an investment in a foreign market which is undertaken from scratch. This type of investment can be matched to the resources of the multinational corporation that seeks to invest in international market. It does not face pricing difficulties and enhances the use of state of the art technology. It does not require an existing firm but may be highly affected by language barrier in form of language difference between the host and home country. Selecting an entry mode An entry mode is selected by multinational corporations by considering various factors. These factors are mainly technological know-how, management know-how, and pressure for cost reduction. A firm seeking technological know-how may use a wholly owned subsidiary except when the venture is intended to reduce risk of loss of technology or when technology advantage is considered to be transitory. In these cases, licensing or joint venture is preferred. A firm that seeks management know-how will choose franchising and subsidiaries, whether a joint venture or wholly owned subsidiary. A company with the pressure of cost reduction may use both exportation and wholly owned subsidiary to enter the international market. Influence of Language differences between home and host country Language difference between the host and home country seems to be neglected by studies trying to establish MNCs choice of entry modes. However, Harzing (2003) argues that language difference is a powerful factor in international business. Welch et al (2001) suggests that language has a great effect on the pattern of internationalization. Multinational corporations usually prefer enter countries with a common language before entering with different languages (Harzing, 2003). Language community has a significant impact on the choice of international market entry mode by multinational corporations. Harzing (2003) argues that language and culture are closely related, and language should be included in the analysis of international market entry mode among multinational corporations. Regarding to entry modes, multinational companies with limited international experience choose culturally similar foreign markets while multinational firms with sufficient international experience choose more unfamiliar foreign markets. In both cases, international market entry modes differ. For example, an internationally experienced US-based organisation such as Walmart will choose linguistically unfamiliar foreign market such as Saudi Arabia. On the other hand, a US-based multinational corporation with little international experience will choose a linguistically familiar market such as the UK. In this case, entry modes for the UK and Saudi Arabia differ. There is a wide range of literature that attempt to explain how the choice of an appropriate entry mode by multinational corporations is influenced by language differences between the host and home country. Vidal-Suarez and Lopez-Duarte (2013) suggest that cultural distance influences the entry mode and ownership structure of foreign investment processes. They argue that literature dealing with the role of cultural distance in the choice of entry mode is extensive, but there is no definite conclusion so far. Some studies argue that cultural distance between the host country and home country lead to the use of wholly owned subsidiaries as appropriate entry modes in order to avoid engaging in partnership with firms with cultural values and behaviours that the company does not understand. The choice of wholly owned subsidiary in this perspective is considerably influenced by the language differences between home and host country because language is one of the key elements of cultural distance in international business. The language difference between home and host country creates a cultural distance that MCs must bridge before they engage in international business. Bridging the cultural distance and the language barrier between home and host country may be achieved by using the best mode of entry. Vidal-Suarez and Lopez-Duarte (2013) suggest that the best option to achieve this is wholly owned subsidiary. If there is a language difference between the host country and the home country, multinational corporations may choose to form a partnership with a company in the host country which has specific knowledge on the language of the host country. In this case, foreign direct investment is not appropriate. Mergers and acquisitions are better choices. Third parties always play a good role in bridging the gap caused by cultural distance in terms of language differences between home and host countries. In this case, multinational corporations may choose an entry mode which takes into consideration the role of third parties. For instance, indirect exporting uses third parties to export goods in international markets. Such third parties may be partners, agents or trading companies in the host country which have a good knowledge of the culture and language of the host country. Exporting requires a lot of negotiations with various firms in the host country; hence understanding the local languages of the host country is necessary. If the multinational company does not understand the language of the host country, then a third party who understands it can be used to enter the market (Egger & Lassmann, 2012). In this case, indirect exporting may be necessary. Vidal-Suarez and Lopez-Duarte (2013) have found out in their study that absence of linguistic distance (small language differences between host and home country) causes a multinational company to choose full ownership in the host country because there is no barrier. This form of ownership then requires an entry mode that allows full ownership. In this case, foreign direct investment is considered as a necessary mode of entry. On the other hand, if the linguistic distance is high (high language differences between home and host country), then the type of ownership will be partially owned because the company needs to partner with a company that can bridge the linguistic distance between the host and home country. A multinational corporation with language proximity and international experience in the host country can handle differences in various cultural dimensions between the host and home country without the presence of a local partner (Dow & Kuranaratna, 2006). However, if the multinational corporation does not have sufficient language proximity and international experience, then it will need a local partner in order to understand and handle various cultural dimensions in the host country. Therefore, language proximity and international experience play a crucial role in the choice of entry modes because it determines whether a company should engage a partner in its entry modes or not. In this perspective, internationalization is considered as a knowledge development process and an increasing commitment to foreign markets (Johanson and Vahlne, 1977). Contingency theory suggests that market knowledge and experience constitute firm specific factors. Market knowledge requires an understanding of the local language of the host country, and in turn the market knowledge determines the experience of multinational corporations in the international markets. Therefore, high language differences between the host and home country causes low market knowledge and leads to poor market experience for the multinational corporations. This necessitates the organisation to choose an entry method that leads to partnership with a firm that has good knowledge and experience of the local market in the host country. Barbosa et al (2004) suggest that with good knowledge and experience of the host country market obtained through low cultural and linguistic/language distance between the host and home country, a multinational corporation is more likely to choose a Greenfield entry mode over acquisition entry mode. Prior experience and knowledge of the host language by the foreign company reduces the disadvantage of alien status. In this reasoning, differences in language between the host and home country also increase the cost of learning about the new market. This is because MNCs have to learn the language of the host country in order to understand its market, hence incurring learning costs. In this case, acquisition mode of entry is preferred over FDI and Greenfield investment. This is because the multinational corporations acquiring foreign firms are able to use the foreign firms’ knowledge and experience in the host country’s language; hence reducing the problems of language barrier and market knowledge. Low cultural distance between the host and home country results in lower costs of learning. This results in a higher probability of Greenfield or foreign direct investments. Johanson and Vahlne (1977) argue that language differences between host and home country among other cultural factors leads to lack of knowledge that hinders effectiveness in decision making in international market operations. Luo and Peng (1999) suggest that there is a negative relationship between cultural distance and the performance of subsidiaries in foreign markets. Foreign subsidiaries from linguistically and culturally distant countries are more likely to fail than those from linguistically and culturally similar countries. In this case, multinational firms choose wholly owned subsidiaries if the cultural distance between the host and home country is low because low cultural distance leads to higher performance of wholly owned subsidiaries. On the other hand, if the cultural distance between host and home country is high, then the multinational corporation should not choose subsidiaries as a mode of entry because the subsidiary’s performance will be low. In this perspective, cultural distance includes language differences between the home and host countries among other factors. In situations whereby there are many language differences between home and host countries, then the cultural distance is high and performance of subsidiaries will be low. Therefore, the language differences between home and host country determine whether the company will choose a wholly owned subsidiary as an entry mode or not. If the language difference between the home and host country is high then the company will not choose wholly owned subsidiary as an entry mode, and if the language difference is low, then the multinational corporation should choose wholly owned subsidiary as an entry mode. MNCs attempting to enter the international market through acquisitions always face integration problems. Cultural distance in terms of language difference between home and host countries among other cultural factors influences entry mode strategy for MNCs, especially in acquisitions (Bhaumik and Gelb, 2005). Linguistic differences between the host and home country cause negative impact on acquisition entry. Greenfield investment entry is helpful because it enables the multinational corporation to avoid costs of integration which could have otherwise been incurred in acquisition entry. However, other multinational firms consider acquisitions as important entry modes if they are seeking to acquire knowledge about the local market of the host country. This is because language differences between the host country and the home country lead the multinational firm to use local firms which understand the language of the host country to obtain knowledge and information from the local markets. Friberg and Loven (2007) proposes that there is an interaction effect between entry modes and cultural distance between host and home country which leads multinational corporations to use the issues of culture when choosing the right entry mode in international business. Multinational corporations that have technical knowledge and would wish to train labour in the host country will choose an entry mode that is suitable for them given the cultural and language distance between the home and host country. If the host country and the home country have significant differences in language, then training labour in the host country will be difficult. As a result, the multinational company will choose an entry mode that will enable it use trainers who understand the national language of the host country to train its employees. In this case, acquisition, joint venture or strategic alliance is necessary so that the acquired firm can utilise the linguistic prowess of the acquired firm in the host country to offer training to its labour or employees from the host country. In most circumstances, the choice of the best mode of entry by multinational corporations is also influenced by market imperfections, especially in the host country. In this case, information asymmetry in the market causes the multinational corporation to incur search costs in order to identify the right acquisition candidate or object. If the language between the host and home country is the same, the search for an acquisition object becomes easier and the search costs reduce. Therefore, it is costly for Multinational Corporation to enter international markets through acquisitions if the language difference between the host country and home country is high. In such cases, MNCs avoid acquisition as an entry mode. Similarly, multinational corporations choose acquisitions if the language difference between the host and home country is low. Search costs are not incurred in wholly owned subsidiaries or FDI. These methods may therefore be suitable for the company to use when there is a high linguistic distance between the host and home country. Harzing (2003) sought to establish the impact of cultural distance on the choice between equity and non-equity entry modes using thirteen previous studies. Language was considered as one of the cultural factors that determine culture distance. Among the studies, seven studies found that there is a negative relationship between cultural distance and equity entry modes. This shows that the higher language difference between the host and home country, the less the multinational corporations choose equity entry modes to enter international markets. Four studies indicated a positive relationship between CD and equity entry modes. As indicated in the section of selecting an appropriate entry mode, it has been established that managerial knowhow determines the choice of the mode of international market entry by multinational corporations. It is clear that multinational corporations which seek managerial knowhow choose franchising, JVs and subsidiaries as entry modes to enter international markets because franchisees and joint ventures may provide the required managerial knowhow for the multinational corporation. Feely and Harzing (2002) argue that communication is essential to management and communication relies on shared language; hence language difference is an essential element in management. Therefore, multinational corporations which seek managerial knowhow should consider the aspect of shared language between the host and home country before choosing the right method of entry into international market. There are various instances of international blunders that result from language barriers. For instance, a British manager who is always humorous, motivational and inspirational may find it difficult to do that while working through an interpreter in Russia. Communication across language barrier is considered as one of the most detrimental operational problems in international business (Imberti, 2007). Managers need to develop a good international entry strategy in order to succeed in terms of communication. Choosing the right entry mode is paramount to having a good international strategy. For instance, mergers and acquisitions as modes of entry may be necessary in situations where there is a high language difference between the host and home country. This is the case if the parent company seeks good management through effective communication (Imberti, 2007). The problem of language barrier in communication can be overcome by acquiring or merging with a firm that has a good knowledge of the host county’s language. In this case, the parent company’s management will communicate through the managers of the acquired or merged company. One of the problems of language barrier in communication is miscommunication. In this case, the native of the host country who communicates the information given by the management of the parent company may misinterpret or confuse the information. They may also pass ambiguous or incomplete information; exacerbating the problem of information asymmetry in the home market rather than solving it. Misunderstanding between the host country’s managers and home country’s managers may lead to grave problems for the international business. Therefore, it is important for the parent company to choose the best entry mode in order to solve such misunderstandings. The second problem of language barrier is the power/authority distortion. In a situation where the language of the home country is English and the language of the host country is non-English, English is likely to be the language used in communication. In this case, the balance between power and authority will be distorted. Joint venture partners, mergers, subsidiaries and parent companies from non-English countries will relinquish their control in the relationship. Their formal authority may remain, but their power in the relationship will be exercised by the parties whose language is preferred for communications in the relationship. In this case, non-equity modes of entry are preferred to equity modes. Adapting to foreign market needs is also considered to be one of the barriers to internationalization which is highly motivated by language differences between home and host country among several other factors (Calof and Beamish, 1995). Whenever a market enters an international market, the local market in the host country will inspire the MNCs to adapt to its market conditions and needs. These Multinational corporations therefore require a high knowledge of the host country’s market. This knowledge, if attained, will enable the multinational corporations to produce goods and services that can meet the needs of the local market. Knowledge if the market can be obtained through surveys. To achieve this, the MNCs require a good understanding of the local language of the host country. As mentioned earlier, a market research in a host country where language is unfamiliar to the parent company leads to higher costs. These costs can be minimised by acquiring a firm that has a good understanding of the language of host country. Some entry modes also require negotiations and discussions with firms from the host country. Mergers and acquisitions, joint ventures, and franchising require the parent company to negotiate well with the candidates or objects of internationalization in foreign markets (Reagans and McEvily, 2003). Such negotiations require both the parent and the host companies to use a common language in order to understand each other. However, such negotiations may be difficult and costly if there is a difference between the host and home country languages. Good negotiation skills in international business require effective communication. Language is a key element in communication. If negotiation takes place between parties from countries with dissimilar languages, results of the negotiation is likely to favour the company from the country whose language is used. In any negotiation, all parties often seek to retain as much power and authority as possible. However, Julian (2009) argues that the MNC from the country whose language is used in negotiation often ends up with higher authority and power than the other party. Therefore, a multinational organisation will always avoid negotiating with companies from countries with the most widely used and prominent languages such as English-speaking countries if they intend to retain power and authority. Psychic distance is an aspect of international business which entails the distance between two countries as a result of differences in language, culture, industrial development, legal and political system, and level of education (Johanson and Vahlne, 1977). The psychic distance theory suggests that the longer the psychic distance between home and host countries, the higher the risk and uncertainty in the host country. Borrowing from this concept, it is plausible to assert that a high language difference between host and home country leads to higher risks and costs in the environment of the host country. To avoid such risks, multinational corporations will choose entry modes that will mitigate the risks that result from language differences if the language difference between host and home country is high (Grady and Lane, 1996). For instance, forming a strategic alliance or using joint ventures will be good entry methods. This is because the multinational company will share the risks and costs of the host environment with the strategic partner or the joint venture in the host country. As the language difference between home and host country widen, it becomes difficult for multinational corporations to transfer knowledge, cope with the demands of the host country, manage relations with suppliers and customers, and interact with the host colleagues and subordinates (Calof and Beamish, 1995). In this case, the cost of transferring knowledge of multinational corporations will become higher than the benefits. The interaction between language difference and MNC’s entry mode may determine the cost of transferring such knowledge. In cases of high language difference between home and host country, MNCs should choose entry modes that can reduce the costs of knowledge transfers associated with high language differences. In this case, mergers and acquisitions, strategic partnerships, and joint ventures will be important because costs of knowledge transfer can be minimised by collaborating with a firm or partner from the host country. On the other hand, if the language difference between the host and home country is low, then it is beneficial to use direct exporting, foreign direct investment and Greenfield investment. Conclusion From this discussion, it is clear that language differences between home and host country can influence MNC’s entry mode strategy depending on the purpose of the multinational company for internationalization, the experience of the MNC in international business, and other factors. Multinational organisations choose entry modes that will enable them to meet the needs and demands of the host country, reduce costs of knowledge transfer, increase power and authority over host companies, and achieve effective management and communication in the host country. References list Barbosa, N., Guimaraes, P. and D. Woodward. (2004). Foreign Firm Entry in Portugal: An Application of Event Count Models. Applied Economics, 36(5), 465-472. Bhaumik, S. K. and Gelb, S. (2005). 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Language distance and international acquisitions: A transaction cost approach. International Journal of Cross Cultural Management. Read More
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When organizations are making entry into a diverse cultural market, they must have a strategy of incorporating the concept of diversity to gain access and respond to the customers' demands while remaining competitive (Caldwell, 2003; Doremus et al.... Diversity involves taking every member of the working force onboard in mncs irrespective of their culture and other difference that may occur.... From an mncs's perspective, there are different aspects of diversity, with each playing a critical role....
13 Pages (3250 words) Research Paper
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