Chapter Four

Entry Modes
 Basic foreign expansion entry decisions

 A firm contemplating foreign expansion must make

three decisions
 Which markets to enter
 When to enter these markets
 What is the scale of entry
 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 or where speculative financial
bubbles have led to excess borrowing
 Timing of entry

 Advantages in early market entry:

– First-mover advantage.
– Build sales volume.
– Move down experience curve and achieve cost
advantage.
– Create switching costs.
 Disadvantages:
– First mover disadvantage - pioneering costs.
– Changes in government policy.
 Scale of entry

 Large scale entry

– Strategic Commitments - a decision that has a
long-term impact and is difficult to reverse.
– May cause rivals to rethink market entry.
– May lead to indigenous competitive response.
 Small scale entry:
– Time to learn about market.
– Reduces exposure risk.
 Reasons for Entering International Markets
• growth

• profitability
• achieving economies of scale
•Achieving economies of scope (re-usability)
• risk spread
• access to imported inputs
• uniqueness of product or services
• marketing opportunities due to life cycle
• spreading R&D cost 6
 Identifying opportunities in international
markets

• Extreme focus product strategy

• Products-country matrix strategy
• Growth-share matrix of exports
• Market focus strategies

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 MODES OF ENTREING
INTERNATIONAL MARKETS
This is an institutional mechanism by which a firm makes
its products or services available for consumers in
international markets.
• Mode of entry is determined by:
- the ability and willingness of the firm to commit
resources
- the firms’ desire to have a level of control over
international operations
- the level of risk the firm is willing to take

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 Pioneers vs. Fast Followers
 Pioneers
– Can gain and maintain competitive edge in new market
– May not perform as well in the long run as followers
 Are most successful when
– High entry barriers exist
– Firm has sufficient size, resources, and competencies
 Followers
– Many become followers by default
– May let pioneer take initial risks
 Are most successful when
– There are few legal, technological, cultural, or financial barriers
– They have sufficient resources and competencies to overwhelm
the pioneer’s early advantage

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 Entering Foreign Markets
Non Equity Modes
 Exporting
– Selling some regular production overseas
– Requires little investment
– Relatively free of risk
– Indirect exporting
– Direct exporting
 Subcontracting
 Countertrade
 Licensing
 Franchising
 Contract Manufacturing

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 Exporting
 Production in home country
 Exports: production is carried out in home country and
finished goods are shipped to the overseas markets for
sale
 Indirect exports: process of selling products to an export
intermediary in the company’s home country who in turn
sells the products in the overseas markets
 Direct exports: process of selling the firm’s products
directly to an importer in the overseas market

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 Cont’d …

 complementary exporting: use of distribution

channels of an overseas firm to make the product
available in the overseas market

 provide offshore services: This is to support the

overseas clients with the help of information and
communication technology

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 Cont’d …
 Indirect exporting through home-based exporters
 Manufacturers’ export agents
 sell for the manufacturer
 Export commission agents
 buy for overseas customers
 Export merchants
 purchase and sell for own accounts
 International firms export to their own affiliates
 use the goods overseas

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 Cont’d …
 Indirect Exporting
– Advantages
 Simpler than direct exporting
– Disadvantages
 Commission paid to export agents, commission
agents, export merchants
 Foreign business can be lost if exporters decide to
change their sources and supply
 Exporting firm gains little experience from
transactions handled by others

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 Cont’d …
 Direct exporting refers to the exporting of goods and
services by some entity within the producing firm

 Sales company
– Business established to market goods and services
produced by others
 Internet has simplified direct exporting
– Cost of trial low

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 Non-Equity Mode: Turnkey Projects
 Turnkey projects are used to export
– technology
– management expertise
– capital equipment (some cases)
 Exporter of a turnkey project may be a
– contractor that specializes in designing and erecting
plants in a particular industry
– company that wishes to earn money from its
expertise
– producer of a factory
 After a trial run, the facility is turned over to the
purchaser 16
 Cont’d …
 Overseas turnkey projects: conceptualize, design,
install, construct, and carry out primary testing of
manufacturing facilities or engineering structures for an
overseas client organisation
 Types : built and transfer (BT), built, operate, and
transfer (BOT), built, operate, own (BOO)
 International management contracts: a company
provides its technical and managerial expertise for a
specific duration to an overseas firm

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 Non-Equity Mode: Licensing
 Licensing refers to a contractual arrangement in which
one firm sells access to its patents, trade secrets, or
technology to another firm
– Licensee pays fixed sum and sales royalties (2%-5%)
 Licensing is attractive because
– courts have begun upholding patent infringement
claims
– patent holders have started suing violators
– foreign governments have begun enforcement of their
patent laws

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 Non-Equity Mode: Franchising
 Franchising is a form of licensing in which one firm
contracts with another to operate a business
 The franchisee gets a
– well-established name
– proven set of procedures
– carefully controlled marketing strategy
 The franchisor retains the right to enforce processes and
strategy
 The franchisee expects operational, marketing, supply
chain, R&D, etc. support

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 Non-Equity Mode: Contracts
 Management Contract
– Arrangement by which one firm provides management
in all or specific areas to another firm
 Contract Manufacturing
– Arrangement in which one firm contracts with another
to produce products to its specifications but assumes
responsibility for marketing

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 Equity-Based Modes of Entry
 Equity-based entry modes include
– wholly owned subsidiaries
– joint ventures
– strategic alliances
– mergers and acquisitions

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 Wholly Owned Subsidiary
 In a wholly owned subsidiary, the company has full
equity ownership of the foreign entity
 Entry strategies
– build a new plant (greenfield investment)
– acquire a going concern
– purchasing the company that used to be the local
distributor allows the firm to obtain an established
distribution network

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 Joint Venture
A joint venture is:
 a corporate entity formed by international company and
local owners
 a corporate entity formed by two international
companies for the purpose of doing business in a third
market
 a corporate entity formed by the international company
and a government entity
 a cooperative undertaking between two or more firms
for a limited-duration project
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 Cont’d …
 Disadvantages of joint ventures
– Shared profits
– Loss of control
 Minority ownership control is possible if:
– Foreign firm holds 49% of shares, gives another 2%
to local law firm or trusted national, balance owned
by local firm
– There is a local majority partner (sleeping partner)
 Management contract stipulates that global
partner controls specific key aspects of a joint
venture even though it holds only a minority
position
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 Equity or Non-Equity Based Mode:
Strategic Alliances
 Strategic alliances involve partnerships between
competitors, customers, or suppliers
 International strategic alliance: the relationship between
two or more firms that cooperate with each other t o
achieve common strategic goals but do not form a
separate company
– Can take various equity or non-equity forms
 The goals of strategic alliances include
– Faster market entry and start-up
– Access to new products, technologies, and markets
– Cost-savings by sharing costs, resources, and risks
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 Equity or Non-Equity Based Mode: Strategic
Alliances
 Strategic alliances can be joint ventures
– Pooling alliances are driven by similarity and
integration
– Trading alliances are driven by the contribution of
dissimilar resources
– Alternatives to mergers and acquisitions
 Future of Alliances
– Many fail or are taken over by a partner
– Difficult to manage due to diverging, strategies,
operating practices, and organizational cultures
– Partner may acquire technological or other
competencies and become competitor
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 Factors for selecting partners for
cooperation
 The alliance partner should have some strength which
 can be translated into business values for the alliance
 The alliance partners should be committed to
 cooperative goals
 It is preferable that the alliance partner should have
 Multi-cultural business environment

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 Factors affecting the selection of entry
mode
External factors
• Market size
• Market growth
• Government regulations
• Level of competition
• Level of risk
• political
• economic
• operational
• Production and shipping costs 28
 Cont’d …

Internal factors
• Company’s objectives
• Availability of company resources
• Level of commitment
• International experience
• Flexibility

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 Finally

Benefits of IBM
 More opportunities
 Avenue for learning new concepts and challenges
 Possibility of developing a global brand
 A room to benefit from economies of scale & scope
 Spread of risks … AND
 Wider scope for innovation and creativity.

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