Thesis Proposal for MSc in Logistics
at
Molde University College
Determinants of Foreign Entry Modes in China:
Theories and Evidences
Supervisor: Arnt Buvik
Author: Pingping Qiu
December 2004
Contents
1. Introduction………………………………………………………………………3
2. Literature review…………………………………………………………………4
2.1 Transaction cost analysis (TCA) and entry modes…………………….…………4
2.2 Bargaining power theory (BPT) and entry modes……………………………….4
2.3 Organizational capability theory (OCT) and entry modes…………………….…5
2.4 Synthesis of the theories…………………………………………………………..5
3. Decision framework……………………………………………………………….6
3.1 Main attributes of entry modes…………………………………………………...6
3.1.1 Entry modes and control…………………………………………………………6
3.1.2 Entry modes and resource commitment………………………………………….6
3.1.3 Entry modes and dissemination risk……………………………………………..7
3.1.4 Attributes of JVs and WFOEs……………………………………………………7
3.2 Entry mode decision framework………………………………………………….8
3.2.1 External environment factors……………………………………………………8
3.2.2 Internal environment factors…………………………………………………...10
3.2.3 Strategic variables……………………………………………………………...11
4. Research methodology…………………………………………………………12
References…………………………………………………………………………15
2
1. Introduction

Since the “open-door” policy was launched in 1979, China
has attracted substantial foreign direct investment (FDI).
Since 1992, China has been the second largest FDI
recipient in the world just behind the United States.
 With its formal entry into the World Trade Organization
(WTO) on December 11, 2001, China continued to keep
the momentum to attract massive foreign investment and
became the largest recipient of foreign investment in 2003.
By the end of August 2004, China has applied foreign
investment of US$ 545.029 billion (People’s Daily, 2004).
 The choice of an appropriate entry mode is a critical
determinant of the likely success of the foreign operations
and has crucial impact upon competitive advantage of
multinational firms (Root, 1994).
 The purpose of this paper is to theoretically explore the
determinants which the foreign firms take into
consideration when they decide the proper entry mode into
China.
 And then empirical case studies of several Norwegian
firms in China will be conducted to test the general
decision framework.
 The remainder of the proposal is organized into three parts.
Section 2 briefly reviews the relevant literatures. After that
several propositions and the decision framework are
proposed. The last section deals with the research setting
and method.
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2. Literature review
2.1 Transaction cost analysis (TCA) and entry modes
2.2 Bargaining power theory (BPT) and entry modes
2.3 Organizational capability theory (OCT) and entry modes
2.4 Synthesis of the Theories
3. Decision framework
3.1 Main attributes of entry modes
 This paper will mainly focus on the two most often used
entry modes in China, i.e. joint ventures (JV) and wholly
foreign owned enterprises (WFOE).
 They have different implications for the degree of control
that an MNC can exercise over the foreign operation, the
resources it must commit to the foreign operation, and the
risk it must bear to expand into the foreign country (Hill et
al., 1990).
3.1.1 Entry modes and control
3.1.2 Entry modes and resource commitment
3.1.3 Entry modes and dissemination risk
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3.1.4 Attributes of JVs and WFOEs
Entry mode
Joint ventures (JV)
Attributes
Control
Resource commitment
Dissemination risk
Medium
Medium
Medium
High
Low
Wholly foreign owned High
enterprises (WFOE)
3.2 Entry mode decision framework
Determinants
Desired Attributes
External
Environment
Internal
Environment
Entry Modes
Joint
Ventures
 Degree of Control
 Resource Commitment
 Dissemination Risk
Wholly Foreign
Owned
Enterprises
Strategic
Variables
3.2.1 External Environment Factors
Proposition 1. As the external uncertainty typically labeled
as “country risk” in China keeps declining, MNCs are
more willing to take high resource commitments and thus
adopt WFOE entry mode.
Proposition 2. As Chinese market potential is huge and
market demand keeps on rising, MNCs are more willing to
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take high resource commitments and thus set up WFOEs to
enter China.
3.2.2 Internal Environment Factors
Proposition 3. MNCs with little or no host country
experience will try to limit resource commitment, and
selecting the JV mode is preferable. Otherwise, firms with
significant host country experience may prefer WFOE so
as to maximize payoffs.
Proposition 4. MNCs whose competitive advantage is
based on firm-specific know-how will prefer high-control
mode in order to minimize the dissemination risk.
3.2.3 Strategic Variables
Proposition 5. Other things being equal, MNCs that
pursue a global strategy will prefer high-control entry
modes, and thus WFOE is a better choice. Otherwise,
firms that pursue a multi-domestic strategy will favor
low-control, i.e. JV entry mode.
4. Research Methodology
Most of the research in the field of business process has been
done by empirical observation and case studis. A number of
surveys of businesses in local regions have also been undertaken.
Much of the development of methods, guidelines and
“best-practice” in this rapidly changing field is originating from
inspirational “gurus” and management consultants, working
with pioneering organizations.
 This study will use the embedded multiple-case study
approach (Yin 1994) to discover relevant principles for
multinationals to successfully select the entry mode in
China.
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 Four case studies will be analyzed to determine the key
principles, in addition to those supported by the literature.
The four companies involved, with their subsidiaries in
East China, are:
o IV Group -- IV Techmould Suzhou Co. Ltd.
o Glamox Group -- Glamox (Suzhou) Lighting Co.
Ltd.
o Borregaard Chemicals -- Borregaard Industries Ltd.
(China)
o Kenmore International -- Kenmore Refrigeration
Components (Wuxi) Co. Ltd.
 The organizations selected for analysis are from a range of
business sectors, and vary in the selection of entry modes

The common factor is that they have all established
manufacturing subsidiaries in China and each of these
subsidiaries is regarded as a successful business unit by its
parent company.
 The case studis will be developed using both documentary
evidence and qualitative interviews.
 Documentary evidence to be used include joint venture
contracts, annual reports, website information,
promotional material, parent company documentation,
published case descriptions, magazine and newspaper
reports, and government printed sources.
 A qualitative research design will be employed, with the
MNC’s decision process of selecting entry mode in China
as the unit of analysis.
 Key informants are selected for interview on the basis of
their close involvement in the development of the business
unit.
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 Each case will be analyzed from the same viewpoint and
summarized in the same format.
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