Entrepreneurial Entry into Foreign Markets: A Transaction Cost Perspective

Posted: 17 Nov 2009

See all articles by Andrew Zacharakis

Andrew Zacharakis

Babson College - Arthur M. Blank Center for Entrepreneurship

Date Written: 1997


Uses transaction cost economics (TCE) to provide a theoretical basis for exploring entrepreneurial entry strategies into foreign markets and their consequences. The study focuses on foreign export agents because this is often one of the earliest entry methods used by an entrepreneur. TCE is a useful approach that suggests a cost effective structure for conducting international operations; it provides a means to explore the general structure such relationships may use, why parties might contract, and problems and threats each partner might encounter. Entrepreneurial firms face greater risks in entering international trade than multi-national firms; since they are usually limited in resources, they must leverage their resources. Typically, entering firms suffer from information discrepancy regarding the target market; to succeed they ally with a local partner with knowledge of the target market who can leverage the entrepreneur's resources. The structure for transactions has two poles: market governance (open market transactions) and hierarchy governance (within firm transactions). Many relationships are, however, hybrid forms of partnership (with export agent), which provide protection against risk. For such partnerships to be beneficial, there must be information asymmetry. Problems and risks facing partnerships arise from threat of opportunism, adverse section, and moral hazard. Hybrid relationships solve these problems. Agency theory identifies specific relationship needs of the two parties, which are handled via a nexus of contracts, which fall on a continuum from behavior-oriented to outcome-oriented. Outcome contracts benefit the entrepreneur, whereas behavior contracts are preferred by the agents. Safeguards or bonding make behavior contracts resemble outcome contracts. Concludes with implications for entrepreneurs considering overseas opportunities and areas for further research. (TNM)

Keywords: Partnerships, Agency theory, Market entry, Firm governance, International expansion, Contracts & agreements, Export industry, Exports & imports, International trade, International markets, Transaction cost economics, International alliances, Alliance formation

Suggested Citation

Zacharakis, Andrew, Entrepreneurial Entry into Foreign Markets: A Transaction Cost Perspective (1997). Entrepreneurship Theory and Practice, Vol. 21, Issue 3, p. 23 1997. Available at SSRN: https://ssrn.com/abstract=1506373

Andrew Zacharakis (Contact Author)

Babson College - Arthur M. Blank Center for Entrepreneurship ( email )

Babson Park, MA 02457-0310
United States

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