FOREIGN MARKET ENTRY STRATEGIES

Makerere university Business school ( MUBS)

Department of marketing & International Business
 Chapter Overview
 Introduction to foreign market entry

 Forms of market entry

 Factors to consider in foreign markets entry strategy

selection
 Introduction
 After market selection, the next step is deciding on the entry strategy

 Entry mode selection is interpreted to mean a suitable way for

enterprises to enter foreign markets

 A well chosen mode can enable a firm to gain competitive advantage,

Inappropriate mode decisions are difficult to change when long term
contracts or large resource commitments are made.

 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
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Revenues

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

• Selecting local representatives or agents to prospect the

market,
• .
• Using independent local distributors who will buy the
products to resell them in the local market (with or
without exclusivity).
 Forms of indirect exporting
Export management Companies (EMCs)
• Specialist companies that act as the export department for a number of companies

Export Trading Companies (ETCs)

• Extensive contacts, experience and operations in many different trading regions in the world
• Long-term commercial relationships all over the world

 Export commission house (ECH) that is a representative of foreign buyers who is

located in the exporter’s home country, offering services to the foreign buyers such
as identifying potential sellers and negotiating prices,

 Export/import broker as a specialist in performing the contractual function, and does

not actually handle the products sold or bought, bringing a buyer and a seller
together,

◦ cooperative exporting, also known as “piggybacking”

Using the distribution system of exporters with established systems for selling abroad who agree to
handle the export function of a non-competing company on a contractual basis.
carrier vs. rider
 Exporting cont….d
Advantages
• Low initial investment
• Reach customers quickly
• Complete control over production
• Benefit of learning for future
expansion
• Less complicated and less
expensive than direct exporting
methods
• Quickly provide access and wide
coverage of foreign markets
• Etc...
Disadvantages
• Potential costs of trade barriers i.e,
Transportation cost & Tariffs and
quotas
• Foregoes potential location
economies
• Difficult to respond to customer
needs well
• Little or no control over foreign
market decisions
• Lower profit margins
• Little experience/knowledge/foreign
contacts gained
 Exporting cont….d
When Is Exporting Appropriate?
 Low trade barriers
 Small firm with limited resources
 When the firm is in the initial stages of
internationalization
 Home location has cost advantage
 Customization not crucial
 When the target is small
 When the political risk in the foreign market is high
 Etc….
 Contractual Agreements

Contractual agreements are long-term associations between a company

and another in a foreign market

• Contractual agreements generally involve the transfer of technology,

processes, trademarks, trade names, patents or human skills .
• In short, they serve as a means of transfer of knowledge rather than
equity.
• Proprietary assets

• Contractual forms of market entry include: licensing, franchising,

management contracts, contract manufacturing, etc….
 Licensing
• Licensing is a non equity , contractual arrangement whereby a company (licensor)
licenses the rights to certain technological know-how, design, patents, trademarks and
intellectual property to a foreign company (Licensee) in return for royalties or other
kinds of payment.

• 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
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Licensing of Technology
and know how

MNE Local Firm

Fees and Royalties
 Franchising
• A franchise is a contract between a parent company( franchisor) and a franchisee that
allows the franchisee (local firm) to operate a business developed by the franchisor in
return for a fee. In franchising, it is the whole business concept that is the subject of a
franchising agreement whereby the owner of the concept, or franchisor, allows another
company, or franchisee, to replicate the business according to the same concept,
model, image and quality standards. Franchisors wide policies and practices have to be
strictly followed examples may include steers, Nandos, kenturchy fried chicken,
Dominos pizza, Starbucks etc…McDonald’s is possibly the most famous franchisor of
all
Adggcgvantages
• Quick market entry, Etc…
Disadvantages
– Quality control may be difficult, The franchisee may in turn be a competitor, requires
some control cost
• Note. The conditions under which Franchising is appropriate are similar to those of
licensing
 Franchising
Franchisor:
◦ Gives franchisee right to use brand name,
trademarks and business know-how in return for
royalties.
 Franchisee:
◦ Pays royalties for the right to use the know-how,
trademarks, and brand name.
Franchising (contd.) Example:
McDonalds St. Petersburg

Viterbo, Italia

Buenos Aires 18
 Differences between franchising & Licensing
Franchising
• Can and often does involve significant
equity involvement in the host country
• Most, if not all of the entrants business
function transferred to the local recipient
• Entrant exerts considerable control over
independent operatives’ day to day activities
• Chain of apparently commonly owned
enterprises established
 .The franchisee is given the rights to use the
company's trade name i.e., the franchisee is
not expected to establish its own identity in
the market place
Licensing
• Generally regarded as a low to zero equity form
of international association.
• Only part of the entrants business function
transferred to the local recipient
• Entrant generally has limited control over day
to day activities of contracted parties
• Individual enterprises established with limited
common characteristics
• In most cases, the licensee does not retain
rights to use the company’s trade name .
Instead, the licensee is expected to establish
its own identity in the marketplace
Contract manufacturing/ outsourcing
• In contract manufacturing, the firm’s product is produced in the foreign market
by local producer under contract with the firm. Because the contract covers
only manufacturing, marketing is handled by a sales subsidiary of the firm
which keeps the market control

• 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 common in construction industry, hotel industry and telecommunication industry

 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;

International Strategic alliances (ISAs)

International Joint Ventures (IJVs)
Consortiums
 International strategic alliances
 A strategic alliance involves at least two partner firms that: (1) remain legally
independent after the alliance is formed; (2) share benefits and managerial control
over the performance of assigned tasks; and (3) make continuing contributions in
one or more strategic areas, such as technology or products
 A+B= A and B

 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.

 It is a synergistic arrangement whereby two or more organizations

agree to cooperate in the carrying out of a business activity where each brings
different strengths and capabilities to the arrangement while maintaining their
individuality . e.g McDonald’s and Coca Cola worldwide
 International Strategic Alliances
•Examples of Strategic Allances
•Manufacturing:
– Manufacturing alliance (A non-equity relationship, in
which one firm handles the others manufacturing (or
some aspects of it),
– Contract manufacturing (manufacture of products)
Engineering alliances, Technological alliances, R&D
alliances
• Marketing:
– A non-equity relationship, in which one firm handles
marketing (or some aspects) for another firm.
• Distribution:
– One firm handles the distribution or some aspect of
the distribution process for another firm.
 Why Choose Strategic Alliances?

 Strategic alliances are attractive because they

 facilitate entry into a foreign market
 allow firms to share the fixed costs and risks of developing
new products or processes
 bring together complementary skills and assets that
neither partner could easily develop on its own
 help a firm establish technological standards for the
industry that will benefit the firm
 But, the firm needs to be careful not to give away
more than it receives
 International Joint Ventures
(IJVs)
Joint Venture: A corporate entity created with the participation of
two companies that share equity, capital, and labor, among
others.
A+B = C
• The creation of a foreign subsidiary jointly controlled (minority
and majority interests) by the parent company and a foreign
partner
– Preferred entry mode in developing countries, where they
contribute to developing local expertise and to the country’s
balance of trade if production is exported.
• International firm provides expertise, know-how, most of the capital,
brand name, reputation, trademark
• Local partner provides the labor, the infrastructure, local expertise and
relationships, and connections to the government
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 Joint Venture (contd.)
Advantages:
 Higher control entry mode, potentially resulting in higher profits.
 Costs and risks shared with joint-venture partner.
 Local partner shares local market expertise, relationship as well as connections to
government decision-making bodies.
–firms benefit from a local partner's knowledge of the local market, culture,
language, political systems, and business systems
–the costs and risks of opening a foreign market are shared
–they satisfy political considerations for market entry

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 location
economies
–shared ownership can lead to conflicts and battles for control if goals and
objectives differ or change over time 28
 Joint Venture
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MNE Local Firm

Share of
Inputs
Profit
Inputs Joint Venture
Company
Share of Profit
 Joint Venture
When Is a Joint Venture Appropriate?
 Large expected mutual gains in the long-run
 Trade secrets can be walled off
 when it enables a company to utilize the specialized skills
of a local partner
 when it provides access to markets protected by tariffs or
quotas, and
 When the government doesn’t allow 100% foreign
ownerships
 when the firm lacks the capital or personnel capabilities to
expand its international activities.
 Etc…
 CONSORTIUMS
 Consortia are similar to joint ventures and could be classified as such except for two
unique characteristics:
(1)They typically involve a large number of participants, and
(2)Consortiums are shorter medium-term arrangements involving various companies
that decide to join forces to implement a project; upon project completion, the
consortium is dissolved
 Consortiums are found in industries where costs and risks associated with R&D
lead multiple companies to form partnerships in order to achieve a common
objective.
 Examples include the pharmaceutical industry, where a new drug can cost $800
million to develop and bring to market; the formation of the Airbus Industries
consortium for the European production of commercial jets;
 Success factors for International
alliances
• Trust
• Management commitment
• Constant feedback
• Clearly defined goals and objectives
• Thorough planning
• Careful partner selection
• Open communication
• Etc…
 Why international alliances fail

• 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

REASONS FOR SETTING UP OVERSEAS

MANUFACTURE

• Nature of product e.g. perishable

• Costs of transporting and warehousing
• Barriers to trade e.g. tariffs and quotas
• Government regulations e.g. local investment
• Local manufacture viewed favourable by market
• Market information feedback
• Faster response and just-in-time delivery
• Lower labour cost
• Etc...
 Foreign Acquisition
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Investment
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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

Acquisition as an entry method is preferable in the following situations:

• When speed of entry is important for the business’ success.
• When barriers to entry (i.e. high economies of scale of local competitors) can be
overcome by acquisition of a firm in the industry targeted.
• When the entering firm lacks competencies important in the new business area.
•Etc….
 Acquisition cont…
Question: Why do acquisitions fail?

• Acquisitions fail when

– the firm overpays for the assets of the acquired firm
– there is a clash between the cultures of the acquiring
and acquired firm
– attempts to realize synergies by integrating the
operations of the acquired and acquiring entities run into
roadblocks and take much longer than forecast
– there is inadequate pre-acquisition screening
Going it Alone: “Green Field” Entry
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MNE
Profit

Investment New Subsidiary

Company
 Going it Alone: “Green Field” Entry
Advantages Disadvantages
• • Slower startup
Avoids risk of overpayment
• Gov’t restrictions may prevent 100%
• Able to gain experience ownership
• • High costs
Avoids problem of
• Requires knowledge of foreign
integration management
• Still retains full control • High political risk and high commitment

When Is “Green Field” Entry Appropriate?

 Lack of proper acquisition target
 When there is a strong financial base
 When there are government incentives
 When the governmnent policy encourages 100% foreign ownership
 Cost advantage in the foreign country
 When the political risk is low
 Strong market base
 Etc…
 Factors to consider is selecting the entry strategy

• Speed of entry required

• Firm size
• Company resources
• The risks in the target country
• Control needed
• Size of the market
• Payback period required
• Government regulations
• Etc…