Entering Foreign Markets

Slide
11-1

Key Issues
• Which markets to enter? When? What scale?
• What ways (modes) do firms use to enter
foreign markets? What are their
advantages/disadvantages?
• What is the relationship between strategy and
the choice of entry mode?
Slide
11-2

Enter Which Foreign Markets?

• There are 191 member-nations of the UN… (11/02)

– Switzerland joined last in 2002
• Each one’s attractiveness to a particular firm as a
particular market depends on:
– The firm’s objectives
– A balance of benefits, costs, and risks
Slide
11-3

Timing of entry: First Mover Advantages

• Preempt rivals; establish strong brand name;

capture demand
• Build sales volume; ride down experience
curve ahead of competitors; cost advantage
• Create switching costs for that tie customers to
1st mover’s products
• Establish social ties ahead of following foreign
competitors
– important in high-context cultures
Slide
11-4
Timing of entry: First-mover disadvantages;
pioneering costs
• Time spent to learn dos-don’ts; competitors can
learn from 1st mover
• If 1st mover introducing a new industry, it builds
infrastructure
• 1st mover “trains” customers for followers
• Break through host country’s adjustment to
“foreignness” issues
– Regulations may change as a result of 1st mover’s entry
Slide
11-5

Scale of entry
• What level of resources to commit?
• What level of resources can firm afford to
commit?
• A strategic commitment is difficult to reverse
– Has a long-term impact
– Means that the resources cannot be used elsewhere
• 1st mover advantages and large scale linked
• Small scale entry allows learning at low risk
• Entry in small or large potential market may
require the same level of initial resources
Slide
11-6

External or “arms-length” Modes of Entry

• Firm does business overseas without investing

in assets and human resources in target market

• Exports
– Sell “domestically” produced products into foreign markets
through local independent agents or directly to customers
– Eliminates costs of establishing manufacturing operations in a
host country
– Helps firm learn and achieve economies of scale
– May not be economically sound if manufacturing location is
not “lowest cost producing”
– Transportation, tariffs may be problematic
Slide
11-7
External or “arms-length” Modes of Entry
(Cont.)
– Turnkey projects
• Special case of exporting for firms that set up
production plants or build facilities for others
• The “exporting firm” builds the facility overseas, starts
it up, turns it over to the host country owner, and then
departs
• Oil firms, construction firms, manufacturers
Slide
11-8
External or “arms-length” Modes
(cont.)
• Licensing
– Licensor grants rights to licensee for use of
intangible property over a specified period in return
for a fee
– Intangible property: patents, inventions, formulas,
processes, designs, copyrights, trademarks
– Licensing agreement likely allows licensor quality
assurance rights over actual use of intangible asset
– If licensee sells to consumers using the licensor’s
brand name, the license may also give the licensor
rights to strategic brand control
Slide
11-9

External or “arms-length” Modes

(cont.)
• Franchising
– Franchisor, grants franchisee use of intangibles
under the condition that franchisee follow strict
rules of operating the business
– Mode of operation is part of the brand image
• International strategic alliances
Slide
11-10
“Internal” Modes of Entry: FDI
• Wholly owned subsidiaries
– Firms owned 100% by a company in a foreign
country
• International joint ventures
– Firms that are owned jointly by two or more
otherwise independent firms; most IJVs are
between two firms
– One (or more) parent firms are non-resident in
the host market
– Ownership % may vary from majority foreign
owned, to 50%-50% owned, to minority owned
by the foreign firm
Slide
11-11

Entry Mode Advantage Disadvantage

Wholly  Enables global strategic
owned coordination
subsidiaries  Protects technology
 Realizes (potentially) location
and experience economies
International  Gives access to local partner's
Joint knowledge
Ventures  Allows sharing of development
costs and risks
 May be more politically
acceptable than 100% foreign
ownership
 Allows foreign parent do
deploy resources across more
national markets at once
International  Similar to international joint
Strategic ventures
Alliances
 High costs and risks
 Requires overseas
management skills
 May be slower to implement
 Loss of control over
technology and managerial
know-how
 May impede global
coordination
 May make realization of
location and experience
economies more difficult
 Sharing of profit "pie"
 May be more difficult to
manage than international
joint ventures
Slide
11-12

Entry Mode Advantage Disadvantage

Franchising  Low financial risk  Lack of direct control over quality
 Relatively low  Successful international franchising
development costs requires considerable start-up and
ongoing presence overseas (cost)
 Is likely to impede, make global
coordination costlier than ownership
 Growth may be slowerdepending
on franchisee's intentions
 Sharing of profit "pie"
 Possible loss of know-how to
potential competitor
Licensing  Similar to franchising  Similar to franchising
 Fewer "maintenance"
costs than franchising
Exporting  Ability to realize  Transport costs
experience curve  Trade barriers
economies  Motivation of local agents a
challenge
Slide
6-15

Decision Framework for FDI

No
Are transportation costs Import No
high? Barriers? Export

Yes No Yes
Is know-how easy to
FDI
license?
Yes
Yes
Tight control over foreign
FDI
ops required?
No
Yes
Is know-how valuable and FDI
is protection possible?

No
License