This chapter makes obvious earlier findings that are relevant for this study. It examines most of the major areas related to entry mode strategies begin with an introduction of the motives of internationalization. The theoretical frameworks initiated with descriptions of the theoretical approaches to entry modes. The study is covering the motives behind a firm’s decision to internationalize its business activities together with an understanding on why and how firms should engage in international business activities. Finally, the theoretical framework will end with the choices of foreign direct entry modes and the factors for that choice of entry modes. This chapter is drafted in connection to the research questions.

2.2. The Theoretical Approaches to Entry Modes

Most past studies (Liu, 2004; Ekeledo & Sivakumar, 2004; Johansson, et. al., 2006; Kalfadellis & Gray, 2002; Ekeledo & Sivakumar, 2004; Buckley and Casson, 1976; Casson, et. al., 2009) on the international entry mode of MNEs have adopted one of three theoretical approaches: the internalization theory, the eclectic theory and the resource-based theory.

2.2.1 Internalisation theory

Internalisation theory provides a clarification of the enlargement of the multinational enterprise (MNE) and gives insights into the reasons for foreign direct investment (FDI) (Kalfadellis & Gray, 2002). Internalization theory was conceptualized by Buckley and Casson (1976). Buckley and Casson (1976) assets this theory has been a leading theme in international business literature relating to the growth of the MNEs and FDI. In other words, internalization is all-purpose encompassing theory which can clarify FDI.

In brief, Buckley and Casson (1976) make obvious clarification that the MNEs organize bundles of activities internally such that it is capable to extend and utilize firm-specific advantages (FSAs) in familiarity. Given the occurrence of market failure, internalization proceeds as a governance mechanism to extend and utilize FSAs. The theory is first and foremost concerned with categorizing the circumstances in which the cross boarder markets for transitional products are likely to be internalized within hierarchies (Dunning & Lundan, 2008). Besides, drawing the upon the earlier insights of Casson, et. al. (2009) internalization theory is best known as a theory of the boundaries of the firm. From their explanation, the boundaries of a firm will be set at the margin where the benefits of bringing a further activity into the firm are just counterbalance by the costs involved.