Transaction Costs and Bargaining Power: Entry Mode Choice in Foreign Markets

This study examines the most appropriate entry mode choice in foreign markets by a set of Spanish multinationals, given certain characteristics of the firm, product, and the environment. The transaction cost and the bargaining power theories are applied to shed light on the important questions, that is, the "what", "where", and "how" of entry mode choice in foreign markets by the firms. The best entry mode choice in foreign markets by a firm is determined by the firm's preferences in control terms in entrytime abroad. Such behavior can not be exclusively explained in terms of transaction costs or bargaining power, rather by, the joined interactions of the variables of both frameworks which better explained in the entry mode choice in foreign markets by the MNE's. INTRODUCTION The considerations in choosing multinationals entry mode constitutes one of the most important strategic decisions in the internationalization process of the firm. Many reasons exist for the before-mentioned framework. This decision involves the ability of the firm to influence systems, methods, and it also has a critical impact on the future of foreign activity. The options in the entry mode choice in foreign markets puts in light the different perceptions that the firm has concerning the distinctive types of desired control, and that on a few occasions they prove unattainable, given their demands for resource commitment. For the firm based in foreign markets, control is the central factor in the organizational-financial pattern. Control also entails a strong commitment of resources and the action of the firm abroad implies important modifications within its organization, methods, and job related systems. Flexibility and adaptations to a new globalized market, constitutes an important factor in the evolution of foreign based operations at low costs which attenuate the risks derived from the commitment of resources. The growing importance of the control of operations abroad, signifies a renewed interest in the determinants of ownership structures of foreign subsidiaries. This is partly due to a new conception of the role of ownership in international business, as well as, an exhausted understanding of the process of negotiation between MNE's (multinational enterprises) and the governments of host countries. As a result, we can consider that the ownership structure that the MNE's actually end with is a function of control which they wish to maintain, faced with a greater power of negotiation relative to the local government. Based on control as the central factor in the entry mode choice and given its relationship with the bargaining power, it seems appropriate to unify transaction costs and bargaining power models, which coincide with a great number of explainable factors'. In accordance with the above framework it is possible to establish a kind of "pecking order" in the modes of entry, based on our expected levels of control. Obviously, there could exists for each firm a corporate governance adequate for each entry mode, as well as, an environment particular for a determined choice. Though there are many existing factors to consider in this decision, one should seek a simplified theory with sufficient explicative strength concerning the entrance of the firm into the foreign markets. REACHING A BASIC THEORY ABOUT ENTRY MODE CHOICE. When the firms focus on the entry modes in a binomial choice (full control and shared control), the transaction cost theory is appropriate to explain why the firms prefer full ownership vs. shared ownership. However, as stated by Gatignon and Anderson (1988), the transaction cost theory hasn't had success in explaining the more complex multinomial choice among entry modes because this theory does not distinguish well between the different degrees of partnership The transaction-cost approach begins with the assumption that the competition within the markets discourages the supply side opportunistic behaviors and forces suppliers to perform efficiently (Anderson and Coughlan, 1987; Anderson and Gatignon, 1986; Hennart, 1989). …