Foreign direct entry mode in a transition economy: A design-oriented approach

In this thesis a study is conducted for a Dutch small and medium sized enterprise in order to finish the master study Business Administration at the University of Twente. This company, Company Y - former Company X, established in Bosnia and Herzegovina an international subsidiary called Company Z. Company Z hasn’t been successful until now and therefore the management of Company Y realised that a change is needed. The aim of this study was to research how Company Z can be transformed into a profitable foreign subsidiary. To fulfill this aim, the following research question was developed: with what kind of entry mode can Company Z be transformed into a profitable foreign subsidiary with the requirements taken into consideration? A design-oriented research approach was chosen because this research method is used often by researchers to solve business problems. Because design-oriented projects focus on solving or improving business problems, these practitioners are satisfied with a solution, and therefore do not focus on scientifically proving the solution. In this research domain a rigour-relevance gap exists. First the difference between descriptive and prescriptive research has been explained followed by the difference between explanatory and exploratory research. Explaining these differences indicate possible ways of bridging this gap which was discussed in chapter two of this paper. At the end of chapter two the regulative cycle was explained which we used as a guidance to solve the current business problem. The regulative cycle is used by many managers and academics in their aim of solving business problems. After explaining the research methodology (design science) we focused on the problem definition. We conducted internally an analysis with both directors and the employees, and we also externally interviewed competitors and potential customers. The information was collected by using a qualitative research method; namely semi- structured interviews were conducted. These interviews provided information about the financial limitations, made clear that the current employees need to be retained, and the property lot that has been acquired needs to be utilised. Also the causes of the problem were highlighted, with the following three important issues: a lack of communication competences, Company Z lacks also competitive advantage, and no profit generating activities are carried out. The next step was analysing the findings. The causes of the problem were validated and analysed to be sure that these issues really cause the business problem. Also external interviews were conducted with four managers of four different (international) companies active in the Bosnian market. After these analyses a literature study was conducted to research what possible solutions can be for Company Z, in this case what kind of entry modes Company Z can use to re-enter the Bosnian market and to be transformed into a profitable foreign subsidiary. This study provides the following possible entry modes: exporting, with contractual agreements such as licensing and franchising; making foreign direct investments that entail alliances, joint ventures or acquisitions; or making new wholly owned subsidiaries. The advantages and disadvantages of these entry modes were described, and we analysed the three issues on how they influence each particular entry mode. After this theoretical analysis two important theoretical perspectives, that are important for internationalising companies, were discussed; namely the resource-based view and the institutional-based view. Company Z resources were described and analysed, and the institutional environment of Bosnia and Herzegovina was researched so that it is clear how these institutions can influence the foreign entry mode choice. At that moment, all the analysis were taken together an a possible solution was defined. The advice for Company Z to re-enter the Bosnian market is to establish a joint venture. In the last chapter the choice for a joint venture was explained and discussed, and a change plan was developed. Finally the contribution to the literature and possible future research directions were explained.