A game theoretic analysis of firms' entry mode decisions

Limited research has been completed using formal modelling to investigate a firm's entry mode decisions. Addressing this issue, we formulate Dunning's eclectic model as a game theoretic problem. We develop a novel three‐stage game theory model to investigate the relationships and nuances of the core constructs of the eclectic model, i.e., ownership advantage, location advantage and internalisation (OLI). We develop an equilibrium solution to identify the optimal entry decisions for firms entering new markets using a two firm‐two country scenario when parameters including ownership advantage of firms, market size, production cost and country risks are varied. The results obtained provide insight for future research as well as having significant practical implications.