Entrepreneurial Entry into Foreign Markets: A Transaction Cost Perspective

The best opportunity for growth is often overseas, even for smaller entrepreneurial firms. However, resource-constrained smaller firms do not have as many available entry strategies as do larger multinational enterprises (MNEs). Smaller firms frequently must ally themselves with partners in order to make international expansion feasible (e.g. employing an export agent, licensing, joint venture, or strategic alliance strategy). The alliance of two distinct parties central to these entry strategies lends itself to a transaction costs economics (TCE) perspective. TCE illuminates the underpinnings of these relationships, in particular, highlighting problems and risks that the respective parties face when entering into the partnership. These problems arise from the threat of opportunism, specifically, adverse selection and moral hazard. The paper develops these problems within the entrepreneur/export agent realm and suggests methods for overcoming these problems.