Basic Foreign Entry Decisions

Which foreign markets to enter? When to enter them? What scale? Which entry mode? There are no right decisions.just decisions that are associated with different levels of risk and reward

Basic Foreign Entry Decisions

Which foreign markets to enter?

When to enter them?
What scale? Which entry mode?

Which Foreign Markets

With over 200 nations in the world. and they do not all hold the same profit potential The decision to enter which market will be based on the assessment of the nations long-run profit potential The firm needs to consider the benefits, costs and risks of doing business in that country

But be careful of this generalization..a firm may enter a market due to multi-point competition and may not be seeking profits in this specific market

Which Foreign Markets

Long-run economic benefits of doing business in a country are a function of: size of the market purchasing power of consumers future wealth of consumers future economic growth rates suitability of the product for the market indigenous competition political stability

Which Foreign Markets

Favorable Politically stable developed and developing nations Free market systems No dramatic upsurge in inflation or private-sector debt Unfavorable Politically unstable developing nations with a mixed or command economy Where speculative financial bubbles have led to excess borrowing

Entry Modes
Exporting

Turnkey Projects
Licensing Franchising

Joint Ventures
Wholly Owned Subsidiaries

Determinants of Which Entry Mode

The optimal mode varies for each market situation depending on the: transportation costs trade barriers political risks economic risks business risks costs and required investment firms strategy Different firms may enter the same market with different entry modes

Exporting
Advantages Avoids cost of establishing manufacturing operations May help achieve experience curve and location economies

Disadvantages May compete with low-cost location manufacturers Possible high transportation costs Tariff and non-tariff barriers Possible lack of control over marketing and sales by delegating to agents

Turnkey Project
Allows a firm to export process technology Contractor agrees to handle every detail of project for foreign client
design construction training consultation and technical support

At completion of contract, the foreign client is handed the key to the project Most common in process technology industries
chemical pharmaceutical petroleum refining metal refining

Turnkey Projects
Advantages A means of exporting process technologies Can earn a return on valuable knowledge assets Can overcome FDI restrictions Less risky than conventional FDI Disadvantages No long-term interest in the foreign country May create a competitor Selling process technology may be selling the firms core competency and competitive advantage

Licensing
Agreement where licensor grants rights to intangible property to another entity (licensee) for a specified period, in return for a royalty fee Intangible property may be: patents, inventions formulas processes designs, copyrights trademarks

Advantages of Licensing
Reduces development costs and risks of opening a foreign market Attractive for firms that: lack capital are unwilling to take financial risk in an unfamiliar or politically volatile foreign market must overcome restrictive investment barriers does not want to develop the business applications of an intangible property

Disadvantages of Licensing
Limits the firms control over production, marketing and strategy to required to realize experience curve and location economies Limits the firms ability to coordinate strategic moves across countries (cross-subsidization) Loss of technology and the creation of a potential competitor

Reducing the Risk of Licensing

Cross-Licensing An agreement in which a company licenses valuable intangible property to a foreign partner and also receives a license for the partners valuable knowledge
allows firms to hold each other hostage

Joint Venture License technology through a joint venture where the licensor and licensee have important equity stakes and aligns the interests of both firms

Franchising
A specialized form of licensing in which the franchiser sells intangible property to the franchisee and insists on rules for operating the business Tends to involve longer term commitments than licensing Franchisor often assists the franchisee to run the business on an ongoing basis Primarily in the service sector

Franchising
Advantages Reduces costs and risk of opening foreign market Allows a firm to rapidly and inexpensively build a global presence Disadvantages May inhibit taking profits from one country to support competitive attacks in another country Quality control and protecting brand equity

Joint Venture
Establishing a firm that is jointly owned by two or more otherwise independent firms Typical ownership is 50/50but not always Having 50% or more does not necessarily mean that you have control of the joint venture

Joint Ventures
Advantages Benefit from local partners knowledge of market Share costs and risks with partner Reduce political risk Overcome investment barriers

Disadvantages Risk giving control of technology to partner May not have the necessary control to realize experience curve or location economies Limits ability to engage in coordinated global strategy Shared ownership can lead to conflict over goals and control

Wholly Owned Subsidiary

The firm owns 100 percent of the stock and establishes their presence via a greenfield venture or an acquisition of an existing firm

Wholly Owned Subsidiary

Advantages No risk of losing control of core competency or technology to a competitor Tight control over operations in different countries Helps realize learning curve and location economies Disadvantages Bear full cost and risk of foreign market entry Lack of local knowledge culture and consumer competition and consumers politics and laws

Acquisitions
Advantages Quick to execute Preempt competitors Possibly less risky than greenfield ventures because the firm is buying assets that are producing revenue and local knowledge Disadvantages Often produce poor results due to
overpayment for acquired firms assets overestimate of the potential for value creation (hubris) culture clash between firms problems with proposed operational synergies inadequate pre-acquisition screening

Reducing the Risk of Acquisition Failure

Carefully screen the targeted foreign firm and audit
operations and true value of technology and/brand financial and market position management culture

Reduce local management attrition from acquired firm

Quickly implement an integration plan

Greenfield Venture
Advantages Can build subsidiary it designs--not acquires Easier to establish own operating routines Avoids the unknown surprises with an acquisition Disadvantages Slow to establish Uncertainty and risky Preemption by aggressive competitor via acquisition Adds new capacity to industry

Acquisition or Green-Field Venture?

Well-established, incumbent firms Competitors also interested in entry

Acquisition

Embedded skills, routines, culture

No competitors

Green-Field Venture

Strategic Alliances
Cooperative agreements between potential or actual competitors Includes the range from joint ventures to short-term contractual agreements on specific tasks Contentious debate if they create any value only overcome short-term weaknesses competitively weaken a firm in the long term

Strategic Alliances
Advantages Facilitate entry and gain access into market Overcome local ownership regulations Learn about the market or technology Share fixed costs and risks (especially in R & D) Bring together complimentary skills and assets that neither firm has or can develop Establish industry technological standards

Strategic Alliances
Disadvantages Provides potential competitors a low-cost route to technology and markets Limits strategic degrees of freedom

Often is difficult and ends in divorce