I.

Introduction:

Nowadays, the strong competition in saturated domestic environment has driven more and more European enterprises to turn to the high potential but yet fully explored Asian market in the hope of gaining more market share and increasing profits. However, when approaching a totally foreign market, such companies unavoidably encounter enormous problems concerning the psychic distance, environmental uncertainty, market entrance barriers created by local competitors, etc. Whether a company can overcome such problems and successfully operate in new markets depends on the strategic decision on which entry mode to use for that market. Basically there are four entry modes: exporting, licensing, joint venture, and sole venture. Each entry mode indicates a specific level of resource commitment to the foreign market, and each has its own advantages and disadvantages. In this article, we want to discuss how small and medium sized companies can choose its appropriate entry mode when entering a big and highly potential Asian market. Specifically, we will take our company BabyGo as an example. BabyGo is a medium sized company selling baby stroller. It has been operating in Sweden for 20 years and occupying 20% market share. Our company put a strong emphasis on the safety, high quality and security of the product. The fierce competition in Swedish market for baby product and the recognition of a more potential market, which is China, has led us to the decision of expanding our business in China. II. Theoretical background:

In the Uppsala model of internationalization, Jan Johanson and Vahlne, (1977) put a strong emphasis on the importance of the foreign market in determining a firms choice of entry mode when entering foreign market. However, Dunning (1977, 1980, 1988) argue that this choice should be an inclusion of three types of determinant factors: ownership advantage of a firm, location advantage of a market, and internationalization advantage of integrating transactions within the firm. In their study later (Choice of Foreign Market entry model: impact of ownership, location, and internationalization factors), Sanjeev Agarwal and Sridhar N Ramaswami made a substantial contribution to fixing the gap in Dunning's empirical literature by investigating how the inter-relationships among those determinants factors influence firms' entry choice. Peter J Buckley and Mark C. Casson, in their work, Analyzing Foreign Market Entry Strategies: Extending the Internationalization Approach (1998), also build a fully integrated analysis model of the foreign market entry decision, in which location costs, internationalization factors, financial variables, cultural factors, such as trust and psychic distance, market structure and competitive strategy, adaptation costs, and the cost of doing business abroad are identified as influential in determining the firms' choice of foreign market entry. In this article, we also base our decision of choosing joint-venture as the mode of entry into China on Yung-Chul Won and Leonard Konopa's work: Impact of host country market characteristics on the choice of foreign market entry mode. Based on the view of Goodnow(1985) and Root(1987), there are two kind of factors involved in firm's decision: internal factor, including characteristics of the firm and its product, and external factors - target country's market factor, environment factors production factors, and the competitiveness of local firms. First we will have a look at the external factors. In terms of

the general business environmental characteristics of the host country, Yung Chul and Leonard developed a "one product-two entry modes- two market models", based on which they developed and tested hypotheses. Empirical research has proved foreign direct investment through joint venture and sole venture are preferential in countries which have higher level of tariff or non tariff barriers (which will limit and increase cost if exporting), culture similarity, higher market opportunity (measured by market size and host country's economic development). Direct investment is also preferable in countries where there is lower means of foreign ownership restrictions. Regarding foreign market production hypothesis, Goodnow and Root's research strongly support that "when a foreign market is favorably endowed with production factor, firms are likely to use foreign production over exporting as an entry mode". they suggest five production factors, four of which are proved to have a significant influence on firms' choice of entry mode: the availability of local labor, raw imput material, local technology and transportation/communication. Host countries where these factors are highly available tend to attract foreign firms' direct investment. The third element in external factors we must take into account is the competitiveness of local firms in foreign market hypotheses. How strong the barriers to new market entrants created by local firms are determined by 5 factors: local competitors' lower product quality, marketing/management skills, brand name, distribution channel and corporate size. Contracdictory to usual predictions, the empirical research done by Ynung Chul and Leonard suggest that "it's imperative to use an aggressive market entry strategy when the level of competitiveness of indigenous firms is high", because "The aggressive foreign production direct entry strategy adopted when local firms represent a significant competitive entry barrier - provides greater access to the foreign market". Secondly, firms' characteristics and its product plays a very important role in firms' choice of market entry mode. As to this factor, Sanjeev Agarwal and Sridhar N.Ramaswami (Choice of foreign market entry model: Impact of ownership, location and internationalization) pointed out that "small firms with limited multinational experience were found to prefer entry into markets that were perceived to have high potential through a joint venture. Furthermore, firm with higher ability to develop differentiated products are encouraged to choose investment mode like joint venture rather than export, in fear of possible loss of their advantage in countries with higher contractual risks. Finally, smaller and less multinational firms prefer no entry or entry through joint venture in high potential markets. III. Dicussion:

When a firm decides to expand their business, they unavoidably encounter risk which comes from foreignness, dissimilarity, environmental uncertainty... The extent to which risk can be minimized depends on that firm's pre-conceived perceptions of the market, its preparations, strategic management decision making, and most importantly, its choice of entry model. As the Internationalization Process suggests, small and medium-sized companies, in a traditional way, usually turn to exporting through an agent as the easiest and safest way to approach a foreign market. Later on, market commitment increases in proportion with the incremental market knowledge, which in turns influences market commitment decision, and its current business activities. One may argue that exporting is a fast, low risk market access, with little

or no financial commitment, and by which, economies of scale in the home country can be exploited. However, the main drawback of this mode of entry is its limited control over distribution, marketing, sales, and little gained knowledge about the foreign market and overseas operations, not to mention the fact that the wrong choice of market and distributor can lead failure and thus loss of millions of dollars. Therefore, I believe that exporting is, opposed to common thought, a slow way to internationalize, low resource and consequently low risk and low return mode of entry. Furthermore, China and Sweden is a long distance from each other. Exporting a large number of products from Sweden to China will incur great expenses and economic loss compared to direct investment in production in China. For our company, we decide to follow a strategy that will generate big long term profit. For a project that we believe to generate greater rate of return, exporting is obviously not a suitable mode of market entry. Instead, higher resource commitment modes (joint venture and wholly-owned subsidiaries) are preferable.

1. The external environment: a. The general business environment After joining WTO, China has made great steps in reducing the trade barriers to other country members of WTO, especially their most important trade partners - America. The average tariff has decreased from 40% in 1985 to under 10% nowadays, accounting for 2.5% of total tax revenue in 2009 ( http://www.ecipe.org/chinese-trade-policy-after-almostten-years-in-the-wto-a-post-crisis-stocktake/PDF), Its weighted tariff is over 4% , which is "low-ish by developing-country standards and the lowest among large developing countries (e.g. compared with other BRIICS Brazil, Russia, India, Indonesia and South Africa)". Trade liberalization and trade rights are encouraged. In 2005, Chinese government decided to remove all import quotas, whereas licenses, specific tendering arrangements and price controls are almost minimized. Export subsidies are also abolished, as part of its WTO commitment. China has also experienced a significant climb up in the World ranking for trades and replaces Japan as the world's second largest trading nation. China is also ranked 48th position in the World Economic Forums Enabling Trade Index, and is now the second largest FDI recipient in the world. From the low tariff and no quota policy, one may argue that, according to Goodnow and Root's hypothesis, export is the preferential entry mode. However, it must be noted that, despite those amazing progress in liberalizing trade, China's score in World Bank's Ease of Doing Business Index is still rather low (rank 79), and there still exists a strong favoritism from the government to Chinese local firms in certain categories of products, especially intellectual products or telecommunication. In this case, companies with roots outside China wanting to export their products has to go through a stringent process of evaluation and review by the government, or even can be asked to transfer your technology. They obviously encounter a big disadvantage compared to those who have joint venture or wholly owned subsidiary in China.

Secondly, we have been making an effort in investigating the market opportunity of Chinese baby stroller. Obviously, China is a very big market for baby product in general and baby stroller specifically. China now has entered a new baby boom population, with 17.5 million babies born each year, accounting for 13% of the world's total, the number of children aging up to 3 years old being 70 millions. Experts predict that before 2016, population growth will be maintained at 16 to 20 million per year. (source from Product Market Study 1/2008 MATRADE Shanghai Chinas Baby Products Market). Furthermore, it's an interesting fact that the current parents in China used to be "baby boomers" in 1980s, who didn't experience social and economic hardship like their parents, and had access to high education and better career opportunities. They acknowledge the importance of the future generation and always want the best for their children. This is an important reason why there is such a high demand for the best baby care product nowadays. In addition, regarding economic development of China, there's no doubt that China is the fastest growing country in the world, which is threatening the number one position of American in terms of economic and social development. Its GDP growth in the first quarter of 2011 has expanded to 9.7% over the same quarter last year (http://www.tradingeconomics.com/china/gdp-growth). It also has the second highest millionaires in Asian (behind Japan) and the third highest in the world (behind USA and Japan). It can be concluded that China is a high potential market with fast growing economic performance, in which, according to Goodnow and Yungchul, high resource commitment mode of entry like joint venture and sole venture is high preferential in order to maximize profits. Compared to non-investment mode like export, high investment mode will generate greater long term profit for the firm through the establishment of long term presence in the market. From a small firm in Sweden, by investing in joint venture first, and later on wholly owned subsidiary with our own manufacturing factories in China, we can gradually achieve scale of economies. Thirdly, considering culture similarity, acknowledging the fact that China and Sweden don't share similar culture and languages, our companies have done lots of research and market analysis in advance, attempting to obtain greater understanding of foreign market. Furthermore, our company top manager is a Chinese who has previous working experience and understands the market thoroughly, which should be an important determinant factor in shortening the psychic distance between the company and China market. 2. The foreign market production factor: Understanding the importance of location-specific production endowment factors in determining the mode of entry, we have done careful research on the availability in labor, raw input materials, and transportation/communication in China (in our case we decide to use our own technology to produce so we exclude the factor of local technology) . Firstly regarding labor forces, China has by far been very successful in exploiting their competitive advantage in cheap and highly skilled workforce. With a population of more than 1.3 billion people, the labor supply in China now is estimated to be 909 million in 2009, which is predicted to reach its peak of 1 billion in 2016. Along with the increasing number of workers, their level of education does increase as well. Each year, there are more than 20 millions graduates from university, including 400000 and 800000 technicians and engineers.

Furthermore, the language barrier usually seen in the labor market abroad is no longer a problem in China, since most of students from famous universities in China are taught English as their second language. Secondly, in order to ensure high quality, longevity, and safety of our baby stroller, we use aluminum (instead of plastics or combination of materials) to make the frame and organic cotton for the seat, and plastics for the handle and wheels. Those raw materials are highly available in China. Actually, China is the world's largest primary aluminum producing country in the world, with the main producer being Aluminum Corporation of China Ltd. (Chalco), while three other primary aluminum producers, Shandong Huaxin Aluminum Company, Shanxi Guanlv Holding Co. Ltd., and Qingtongxia Aluminum Group Co (The China Factor: Aluminum Industry Impact, Warren H. Hunt, Jr http://www.tms.org/pubs/journals/jom/0409/hunt-0409.html) In terms of organic cotton, China is also one of the four main cotton producing country in the world (the rest are India, USA and Pakistan). With strong supporting policy from the government to stimulate the cotton industry (price incentive and above-quota premiums in cotton procurement) China has experienced significant increase in cotton production (with 100000 cotton farmers, 75000 textiles companies, Chinese cotton production requires an average 3,000 to 5,000 cubic metres of water per hectare3040% cent of all pesticides applied in China are applied to cotton, making it the most heavily treated agricultural crop) and is supplying most of the world's demand (http://china-cotton-association.co.tv/) (http://unctad.org/infocomm/anglais/cotton/market.htm). Plastics and rubber industry, after China's joining WTO, has also been developing quickly. In the first half of 2007, gross output of plastics products industry reached RMB364.5 billion, increased by 27.3% over the same period of 2006 whereas export delivery amounted to RMB80.84 billion, up by 18.52% over the same period of 2006 (source: Strong Development in Chinas Plastics Industry Chinaplas 2008 Consolidates No. 1 Position in Asia, Issued by Adsale Exhibition Services Ltd.) Finally, transportation infrastructure in China is convenient now. The deficiencies in infrastructure development has been something of the past since the Chinese Government realizes the urgent need in developing an efficient system to move goods and people around the country, in order to boost the economy. World Bank statistics show that, goods lost due to poor or obsolete transportation infrastructure was only one percent of Chinas GDP (in mid 1990s). Logistic costs account for 20% of a products price in China (which is 10% in China). Such high availability in raw materials will make production in China much convenient and less costly compared to the exporting cost from Sweden to China. That is one of the reasons why we come to the decision to establish a joint venture with a Chinese company and build our manufacturing companies in China. 3. Competitiveness of local firms in Foreign Market: In China baby stroller market, our biggest competitor is Goodbaby, which has been operating in China for a long time, accounting for 70% of the market. Therefore, this company possesses great advantage in economies of scale and is trying to exploit their advantage by expanding their business to Europe. However, Goodbaby is having a difficult time in domestic market. They encountered serious problems with their products' safety, which made customers shy away from Goodbaby's baby strollers. Chinese parents are turning to products

from foreign brand for security and high quality, which really opens the door for European firms like us. Chinese consumers want high quality and security, and we provide them what they need. Actually, Chinese consumers' preference for foreign brand over domestic brand is not a new phenomenon. This can be explained by an analysis of culture's influence on Chinese buyers' behavior. In a research Analysis of Culture and Buyer Behavior in Chinese Market done by Yan Luo (School of Management Tianjin University) he pointed out that Chinese consumers are influenced by their Mianzi and Guanxi cultures, which means that they "they expect others think them rich, generous, and have good taste, etc., no matter whether they are or not". This culture explains a luxury consumption tide in China. Chinese people "greatly value social harmony and smoothness of relationships within the extended family, the social significance of products are highly important be it to express status, gratitude, approval or even disapproval" (Jiang, 2005). Furthermore, Chinese consumers now tend to be more individual and want to be special. They are not as price sensitive as they were in the past. These arguments explain why Chinese consumers usually highly appreciate goods from foreigners, especially from Europe and America, which are usually much more expensive than domestic products but give them a sense of feeling rich, and being socially appreciated. 4. Firms' characteristics and product's characteristics: In their research, Snajeev Agarwal and Sridhar N.Ramaswami pointed out that the size of the firm has a determining influence of its choice of market entry. With 20% of market share in Sweden and no previous multinational experience, our company is still considered a medium sized firm with limited knowledge. In order to expand our business in a high potential market like China, especially when China is psychically distant from Sweden, we cannot afford a sole venture, which is quite risky and requires lots of financial involvement. Instead, we need to cooperate with a local firm which has a deep understanding knowledge of China market and a broad contact network. In that way we can more easily gain knowledge of the foreign market steps by steps. Considering products characteristics, BabyGos baby stroller is quite differentiated from a common one in China. Whereas most of baby stroller producers in China focus too much on appearance, color, offering their products at a cheap price, and trying to make a baby stroller more and more multifunctional (they assume that the consumers want value of money) but at the same time lose sight of the real purpose of a baby stroller. When a customer buys a pram for his or her baby, they want their babies to feel most comfortable and most secure. A baby stroller, therefore must fulfill their customers need of safety and comfort. Our products are design to provide Chinese customers what they are really looking for and what the domestic producers cannot provide them. Thus we believe that we can make a long term profit in this market. Through joint venture with a local producer, we can gradually test our knowledge and arguments steps by steps. IV. Conclusion: