Entry Strategies

Kshitij Awasthi
 Modes of Entry

• Channel to gain entry to a new international market

• Non-equity based

• E.g., Export and contractual agreements

• Equity based

• E.g., Joint venture and wholly owned subsidiaries

2
 The Choice of Entry Mode

• Exporting
• Licensing
• Franchising
• Strategic Alliances
• Joint ventures
• Wholly-owned subsidiaries
 Choosing Among Entry Modes

• Distinctive competencies and entry mode

• Technological competency
• Wholly-owned subsidiary is preferred over licensing and joint
ventures
• Management competency
• Franchising, joint ventures, subsidiaries
• Pressures for cost reduction in entry mode
• Great pressure for cost reductions
• Exporting and wholly-owned subsidiaries
Entry Modes of International Expansion
The Advantages and Disadvantages
of Different Entry Modes
 Choice of International Entry Mode
Type of Entry Characteristics
Exporting High cost, low control

Licensing Low cost, low risk, little control, low

returns

Strategic alliances Shared costs, shared resources, shared

risks, problems of integration

Acquisition Quick access to new market, high cost,

complex negotiations, problems of
merging with domestic operations
New wholly owned Complex, often costly, time consuming,
subsidiary high risk, maximum control, potential
above-average returns
 How to decide Entry Mode
OLI is an acronym for
Ownership-, Location- and
Internalization- advantage.

A company needs all three

advantages in order to be
able to successfully engage
in FDI.

If one or more of these

advantages are not present,
the focal company might
want to use a different entry-
mode strategy.
8
 Ownership advantage

• Ownership advantage in order to overcome the liability of foreignness.

• Ownership refers to the possession of a certain valuable, rare, hard-to-
imitate, and organizationally embedded resource that allows a company
to have a competitive advantage compared to foreign rivals.
• The liability of foreignness however can be defined as the inherent
disadvantage that foreign firms experience in host countries because of
their non-native status. These disadvantages could vary from simply not
speaking the local language to having limited knowledge on the local
customer demands.
• The question that management should therefore ask itself is: does our
firm have a certain competitive advantage that can be transferred abroad
in order to offset our liability of foreignness?
• This could for example be a strong brand name with a great reputation,
unique technological capabilities or huge economies of scale.
9
 Location advantage

• Secondly, there must be some kind of location advantage in the market the company
is trying to enter.
• Again, given the well-known liability of foreignness, host countries must offer
compelling advantages to make it worthwile to undertake FDI.
• These advantages can be simply geographical (e.g. the Netherlands is in between
great economies like the UK and Germany and is moreover located next to the ocean)
or are present because of the existence of cheap raw materials, low wages, a skilled
labor force or special taxes and tariffs.
• A great tool to determine these location advantages is through Porter’s Diamond model.
• The question that management should ask itself here is: are any of these location
advantages present in the market we are thinking of entering? If the answer on this
question is NO, it might be wiser for management to keep production at home and
export products instead – assuming that there is demand in the foreign market. If the
answer is YES however, it might be interesting to perform certain value chain activities
abroad either through licensing/francising or through FDI.

10
 Internalization advantage

• To choose between licensing and FDI management should look at the final
advantage: internalization advantage.
• Is it more attractive to perform the value chain activity in-house than to have
it performed by an external party?
• Reasons to outsource certain activities to different companies abroad might
be because they are better at it, are able to do it cheaper, have more local
market knowledge, or because management simply wants to focus on other
activities in the value chain such as marketing or design.
• In this case management might want to license its product design to an
independent foreign company or outsource production. If the answer is YES
however, the firm should keep control over its activities and engage in FDI.
• This could be done through forming joint ventures with local partners,
acquiring existing local companies, or by starting from scratch through a
greenfield investment.
11
12
THANK YOU