An Iterative Multi-Attribute Risk Trade-Off Approach to SME's Foreign Market Entry Mode Decision

Cui Cheng Xiao

Abstract

With Singapore government encouraging Small and Medium Enterprise (SMEs) to venture abroad, foreign market entry mode choice is increasingly becoming one of the most important decisions faced by SMEs who desire to expand and grow internationally. Market entry modes are typically classified as export, contractual agreements and investment modes, with variants under each category. Entry decision is multi-criteria decision problem which could be solved by Analytic Hierarchy Process (AHP).

This thesis proposed an iterative risk trade-off approach of AHP towards foreign market entry mode decision. It is a novel approach which has not been discussed in the past literature review. In the proposed methodology, multi-attributes of entry modes is grouped as effectiveness and compared against riskiness of entry modes. AHP is used to determine the riskiness and effectiveness weight of each alternative though pairwise comparison between all alternatives. From the risk trade-off analysis, dominated alternatives are eliminated and new alternatives are created to replace dominated or high-risk alternatives. AHP procedures are then repeated. Iteration terminates when no more new alternatives can be generated. Entry modes would be chosen among the alternatives at the last iterations. An example of a SME considering foreign market entry is used to illustrate the proposed methodology. Results are compared against the traditional AHP one-pass approach and it was shown that traditional one-pass approach are inadequate as it is only able to rank alternatives and decision maker does not learn or gain any insight that could improve his or her decision while proposed methodology eliminates dominated alternative and create new alternatives through learning in the iteration.

The proposed methodology is an interactive tool which helps decision makers to decompose multiple entry alternatives into smaller problem, where they could consider fewer alternatives at each time, improving cognition effectiveness in decision making. Repeated iterations lead to the development of better understanding of the trade-offs among the alternatives for the decision-makers which also allow them to assess entry modes more critically. Decision makers also learn and gain new insights from risk-trade off analysis, thereby generating new creative alternatives.