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NON-EXPORT METHODS OF MARKET
ENTRY
(FOREIGN PRODUCTION METHODS)
• After companies have acquired experience in
exporting some find it profitable to produce in
foreign countries. This is Foreign Direct
Investment.
• When a firm decides to undertake foreign
production, it must choose between:
– No Ownership Methods and
– Ownership Methods.
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1. LICENSING
• Licensing is granting permission to a foreign
business to manufacture a product by using the
exporting firm’s Intellectual Property rights.
• The Intellectual Property includes brand names,
patents, formulas, processes, designs, copyrights.
• The person granting the licence is usually called
the licensor, and the person receiving the licence
is usually called the licensee.
• In return, the licensor receives a royalty fee.
• The Manchester United Football Club has been
particularly successful in licensing the use of its
brand.
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Disadvantages to the Licensor
• The licensee may be unable to develop the
market in the way that the licensor would
wish.
• A licensee may learn so much about the market
and product that the licensor is no longer
required.
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No Ownership Methods
• Three of the most common approaches to
foreign production on a No Ownership
arrangement are:
– Licensing
– Franchising
– Strategic Alliances.
Advantages to the Licensor
• Licensing is attractive for firms lacking capital to
develop operations overseas, since the licensee puts up
most of the capital necessary to get the overseas
operation going.
• Licensing can be attractive when a firm is unwilling to
commit substantial financial resources to an unfamiliar
or politically volatile foreign market.
• Licensing can be used to bypass Tariff and Non-Tariff
barriers as well as barriers to investment.
• The licensor normally receives royalty fees as a
percentage of sales; as sales grow, so does revenue to
the licensor.
Advantages to the Licensee
• The licensee avoids research and development
cost associated with developing a new product.
• There is less risk for he capitalizes on
established know-how.
• Disadvantages to the Licensee
• NONE
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2. FRANCHISING
• Franchising is similar to Licensing.
• Franchising is basically a specialized form of
licensing in which the franchisor not only
sells intellectual property but also insists that
the franchisee agree to abide by strict rules as
to how it does business.
• The franchisor often assists the franchisee to
run the business on an ongoing basis.
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Advantages to the Franchisor
• Franchising is attractive because:
• It avoids the costs and risks of opening up a
foreign market.
• Firms can quickly build a global presence.
– Disadvantages to the Franchisor
• 1. Franchising is unattractive because the
geographic distance of the firm from its
franchisees can make it difficult to detect poor
quality.
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Disadvantages to the Franchisee
• NONE
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• As with licensing, the franchisor typically
receives a royalty payment, which is a
percentage of the revenues.
• Whereas Licensing is pursued primarily by
Manufacturing firms, Franchising is employed
primarily by Service firms.
• Kentucky Fried Chicken is a good example of
a firm that has grown by using a franchising
strategy.
Advantages to the Franchisee
– Economies of scale in Advertising: Franchisors
offer national advertising campaigns that take
advantage of economies of scale.
– Name Recognition: A person from another country
who has previously enjoyed the product or service,
will visit a franchise facility because of their past
positive experiences. Name/menu/brand
recognition gives customers assurance.
– Support: The Franchisor always train the
Franchisee in everything from the technology
involved to accounting.
3. STRATEGIC ALLIANCES
• Strategic alliances refer to cooperative
agreements between competitors.
• Strategic alliances are contractual agreements,
in which two companies agree to cooperate on
a particular task.
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Advantages of Strategic Alliances
• Strategic alliances facilitate entry into a foreign market
by taking advantage of partner’s local market
knowledge and working relationships with key
government officials in host country (social capitals).
• Allows cooperating firms to share fixed costs and
capture economies of scale in production and/or
marketing.
• Partners bring together complementary skills and assets
by filling gaps in technical expertise or knowledge of
local market; they learn from each other.
• Enhance image in the world marketplace.
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Ownership Methods
– Two of the most common approaches to foreign
production on an Ownership arrangement are:
– Joint ventures,
– Wholly Owned Subsidiaries
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Advantages of Joint Ventures
– Partners in the host country can increase the speed
of market entry because of their knowledge of the
local market, culture, language, political systems,
and business systems.
– Local partners can have influence on host-
government policy by speaking out against
nationalization or government interference.
– The costs and risks of opening a foreign market are
shared.
– Some countries, restrict 100% foreign ownership.
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Disadvantages of Strategic Alliances
• Overcoming language and cultural barriers.
• Time consuming for managers in terms of
communication, trust-building, and
coordination costs.
• Mistrust when collaborating in competitively
sensitive areas.
• Clash of egos and company cultures.
• Dealing with conflicting objectives, strategies,
corporate values, and ethical standards
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1. JOINT VENTURES
• Joint ventures occur when a foreign and a local
firm form a new company to produce and
market a product.
• It is based on the premise that each company
can contribute complementary resources to the
joint company.
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Disadvantages of Joint Ventures
• As with licensing, a firm that enters into a joint
venture risks giving control of its technology
to its partner.
• Differences in the aims and objectives of the
partners can cause disagreements over
strategies to follow.
• If one partner has a greater equity stake, can
lead him becoming dominant and the other
partner becoming resentful.
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2. WHOLLY OWNED SUBSIDIARY
• In a wholly owned subsidiary, the
manufacturer owns 100 percent of the stock.
• Establishing a wholly owned subsidiary in a
foreign market can be done in two ways.
• The firm either can set up a new operation in
that country, often referred to as a greenfield
venture, or it can acquire an established firm in
that host nation and use that firm to promote
its products.
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Disadvantage
• It is the most expensive method of market
entry as this requires the greatest commitment
in terms of resources.
– It should be undertaken when demand for the
market appears to be assured.
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Disadvantages of Investing in
Manufacturing Abroad
• Subsidiaries are far removed from the home
country and are thus often difficult and
expensive to control.
• The risk of nationalization, confiscation,
domestication, and expropriation exists to a
greater degree than when using other methods.
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Advantage of Wholly Owned
Subsidiary
• When a firm's competitive advantage is based
on technological competence, a wholly owned
subsidiary will often be the preferred entry
mode because it reduces the risk of losing
control over that competence.
– Many high-tech firms prefer this entry mode for
overseas expansion (e.g. firms in the
semiconductor, electronics, and parmaceutical
industries).
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Export or Non- Export Modes?
• Both approaches have advantages and
disadvantages.
• Advantages of Investing in Manufacturing Abroad
• Capitalizing on low-cost labor.
• Avoiding high import taxes.
• Reducing transportation costs.
• Gaining access to raw materials.
• Developing "goodwill" in the foreign nation
because direct investment may help in that
nation's economic development.
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Which strategy option, Export or Non-
Export, should a firm select?
• Naturally, the one that is the more efficient.
• Furthermore, firms sometimes shift back and
forth from one strategy to another, as
efficiency dictates.
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SELECTED ISSUES FOR
DISCUSSION
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2. Entry Mode is Strategy
• Entering foreign markets can be via Export vs.
Non-Export Modes.
• The Export Mode of market entry channels are
based upon the manufacture and supply of a
product in the exporters' domestic country.
• The Non-Export Mode involve production in
overseas plants.
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3. Level of Involvement
• The most important characteristics of the
different market entry methods is the level of
involvement of the firm in international
operations.
• The methods involve different levels
involvement from virtually zero, when the firm
merely makes the products available for others
to export to total involvement where the firm
might operate a subsidiary.
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1. Channels as Strategy??
• Although Channel Selection is considered a
Tactical decision for implementing the chosen
Country Market or Segment (a strategic
decision) it has also wider repercussions on an
organization's market.
• Some analyst, therefore, consider Channel
Selection as STRATEGIC decision.
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• The choice of either one or the other has wider
repercussions on an organization's market.
• Therefore, the decision between Export vs.
Non-Export Mode is considered by many
academics and practitioners as a strategy
decision.
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• The level of involvement has significant
implications in terms of levels of risk and
control.
• Associated with higher levels of involvement
is greater Control and higher Risk due to
higher cost of investment.
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Involvement, Risk and control in Alternative

Channels of Distribution

• Wholly-Owned Subsidiary
• Joint Venture NON-
Levels of • Assembly EXPORT
Involvement, • Licensing
• Strategic Alliances
Control,
Risk • Direct Exporting
• Agents
• CEM EXPORT
• Piggyback operations
• Export Merchants

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