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Foreign Market Entry PPT Nots
Foreign Market Entry PPT Nots
� Various entry strategies are available and these can broadly be categorized
under exporting, contractual agreements, International alliances and FDIs
Exporting
� Exporting – involves a manufacturing firm producing products outside the target country
and subsequently transferring those products to it. There are two form of exporting. It’s
the easiest and cheapest method of market entry
� Indirect exporting- uses intermediaries who are located in the company's home country
and who take responsibility to ship and market the products. E.g export houses, export
management companies, export trading companies, piggy backing etc…
� Direct exporting- the firm becomes directly involved in marketing its products in foreign
markets, because the firm itself performs the export task (rather than delegating it to
others). This necessitates the creation of an export department responsible for tasks such
as market contact, Market research , Physical distribution , Export documentation , Pricing
etc…
Exporting
MNE Customers
Export of Goods
Forms of direct exporting
To implement a direct exporting strategy, the firm must have
representation in the foreign markets. This can be achieved
in a number of ways:
• Sending international sales representatives into the
foreign market
• For example, Disney's mode of entry in Japan had been licensing.. The licensee in return
pays an initial fee and/or percentage of sales to the licensor. In this kind of agreement the
licensee maintains some level of autonomy/ independence . Some companies that have used
licensing include coca cola, peps cola, shell etc…
Licensing
Licensor:
– Offers know-how
– Shares technology
– Allows for the use of its brand name
• Licensee:
– Pays royalties for the rights to use
licensor’s technology, know-how, and
brand name
Licensing Cont….d
Advantages
• Low initial investment , Avoids trade barriers, Potential for utilizing location
economies, Access to local knowledge, Easier to respond to customer needs
Disadvantages
• lack of control over the maintenance of the quality on the foreign
market(s)
• Difficulty in transferring tacit knowledge
– Negotiation of a transfer price
– Monitoring transfer outcome
• Potential for creating a competitor
• Licensee may not be committed
• Provides limited returns compared to other forms of international expansion
Licensing cont…d
When is licensing appropriate?
• When the licensor is small with limited resources
• When the government regulations do not permit any other entry
strategy
• When the market is small and does not justify the investment
associated with other entry mode
• When a quick entry into a particular market is required
• When the political risk in the host country is high
• Where the Legal protection is possible in target environment
• Where Low sales potential is expected in target country.
Licensing Agreement
HOME COUNTRY HOST COUNTRY
Licensing of Technology
and know how
Viterbo, Italia
Buenos Aires 18
Differences between franchising & Licensing
Franchising Licensing
• Can and often does involve significant • Generally regarded as a low to zero equity form
equity involvement in the host country of international association.
• Only part of the entrants business function
• Most, if not all of the entrants business transferred to the local recipient
function transferred to the local recipient
• Entrant generally has limited control over day to
• Entrant exerts considerable control over day activities of contracted parties
independent operatives’ day to day activities
• Contract Manufacturing is also often used when a company enters a new market and
has an activity that is required but is not a core nor is proprietary in nature, like the
manufacturing of clothes, or simple goods like clothing and other consumer goods.
• Contract manufacturing prevents the need for plant investment, transportation costs
and custom tariffs and the firm gets the advantage of advertising its product as
locally made
Contract manufacturing cont…..d
⚫ It is also associated with Low investment and is a quick way to
access an overseas market
� A drawback to contract manufacturing is loss of profit margin on
production activities, particularly if labor costs are lower in the foreign
market. There is also the risk of transferring the technological know-
how to a potential foreign competitor] The case of Flextronics, the
world’s biggest contract manufacturer, is a good example. It has
20,000 employees and 2.5 million square feet of manufacturing
capacity in Malaysia. It makes Sony Ericsson handsets, Hewlett-
Packard printers, Xerox copiers and products for dozens of other
companies
Management contracts
� A Management Contract is agreement between two companies , whereby one (internationalizing
firm) provides managerial assistance, Technical expertise & Specialized service to the second
company (foreign company) for a certain period in return for monetary compensation
� In a management contract the supplier brings together a package of skills that will provide an
integrated service to the client without incurring the risk and benefit of ownership
� The entry mode emphasize the growing importance of the services, business skills & management
expertise as sellable commodities in international trade.
� For managed firms management contracts helps them to attain expertise and/or
experience in a new field. For the managing firm, such a contract serves as a source
of income as well as an opportunity to scout a new market and establish the
company or its brand there
� Very popular in developing countries which suffer from managerial and skill deficiencies
International alliances
A relationship between two or more companies attempting to
reach joint corporate and market related goals. The
international alliances include;
� These three criteria imply that strategic alliances create interdependence between
autonomous economic units, bringing new benefits to the partners in the form of
intangible assets, and obligating them to make continuing contributions to their
partnership.
Disadvantages:
Repatriation of profits may be difficult if local government has control over/stake in the
local joint-venture partner.
Can produce a new competitor: the joint-venture partner
70% of all joint ventures break up within 3.5 years
– the firm risks giving control of its technology to its partner
– the firm may not have the tight control to realize experience curve or
locatio
economies
– shared ownership can lead to conflicts and battles for control if goals
and objectives differ or change over time 28
Joint Venture
• Lack of trust
• Cultural clash or ‘incompatible chemistry’
• Lack of commitment
• Lack of clear goals and objectives
• Performance risk (change of government, reduced demand,
competition, change in regulations)
• Poor partner selection
• Etc….
WHOLLY OWNED SUBSIDIARIES/ FDIs
• Many organizations prefer to establish their presence in foreign markets with
100%ownership through wholly owned subsidiaries. Under this method, organizations
obtain greater control over operations and higher profits since there is no ownership
split agreement.
• However, such entry method requires large investments and faces higher risks,
especially in the political, legal and economical arenas.
• There are two approaches for the wholly owned subsidiaries entry method; one is
through Mergers and acquisitions and the other through Greenfield investments.
• Greenfield investments means using funds to build an entirely new facility from
scratch
• acquisition approach use its funds to buy existing facilities and operations. This is
done by acquiring the equity of the firm that previously owned the facility.
ch8_13
MNE Investment
Local Firm
Profit
Foreign Acquisition Cont…d
Advantages Disadvantages
• Access to target’s local • Uncertainty about target’s value
knowledge
• Difficulty in “absorbing” acquired
• Control over foreign operations assets
• Control over own technology • Cultural clashes
MNE Profit
Investment