Institutions, Transaction Costs and Entry Mode Decisions : The Case of Swedish SMEs in India

Abstract: In the current third wave of internationalization companies from mature markets are investing in emerging markets and increase their foreign activities. For this internationalization process, companies need to enter the market with an appropriate entry mode strategy. Prior research focused mainly on MNC entry modes and also on factors as ownership, location or internalization advantages and not on SMEs and transaction cost theory. This thesis deals with the topic of institutions, transaction costs and entry mode decisions of Swedish SMEs in India. The purpose of this thesis is to understand the managerial perceptions about the influence of institutions on the degree of linkage specificity with which the transaction costs will be explored. This will lead to further knowledge about certain entry mode decisions of Swedish SMEs for the Indian market. This was studied with a qualitative research strategy using a multiple case study method. The empirical data was conducted via secondary data and primary data was collected via interviews with the sales responsible of the four case companies Norden Machinery AB, Slipnaxos AB, Håkansson Sågblad AB and Hedin Lagan AB. Main findings of the research were that institutions are perceived differently by the managers and therefore the institutions dissimilarly influenced the perceptions of the transaction costs. Furthermore, the study revealed that some managers decided their entry mode on the base of the perception of the transaction costs and some managers did not consider transaction costs when entering new markets. All in all it can be stated that transaction costs influence the entry mode of companies. The research is limited by the fact that transaction cost theory in general neglects factors as production costs. Managerial implications are that transactions costs should not be neglected as they help to choose a more successful entry mode and that the assets specificity and the behavioral uncertainties need to be taken into account when deciding upon an entry mode. Theory profits from this thesis as it proved that transaction costs influence entry mode decisions and that the linkage specificity is an important factor to include when combining transaction cost theory with entry mode decisions.