METHODS OF ENTRY IN

FOREIGN MARKETS
“It does not matter how much big you
are, but it matters much, how do you
enter to succeed”
BASIC MARKET ENTRY DECISION
- WHICH MARKET
200 nation-states
 Different long-run profit potential for
firms
Size of market
Purchasing power (present wealth)
Future wealth
EXAMPLE:-

 A tyremanufacturing company, seeking to

export tires should collect the data like
transportation infrastructure, alternative
modes of transportation, petrol prices,
increase in vehicle ownership, production
of vehicles in the prospective foreign
markets.
Sometimes the companies use the proxy
data.

For Example:-

Whirlpool used the data of other household

appliances while deciding to introduce
dishwasher in South Korean market.
Balance cost & risks – rank
markets
Future economic growth rates
Free market system & country’s
capacity for growth
Favorable = Stable and developing
markets without upsurge in inflation
rates or private-sector debt
 The companies planning to enter global markets
should know the trade policies, general legal and
political environment of the foreign markets.

In order to avoid high tariffs, General Motors,

Ford, Audi and Mercedes- Benz have
established manufacturing facilities, i.e., auto
factories in Brazil. They also export from Brazil
to other nearby countries.
Value an international business
can create in a market
Suitabilityof product for market
Nature of indigenous competition
Not widely available & satisfies an
unmet need
Greater value = ability to charge higher
prices & build sales volume more
rapidly
BASIC MARKET ENTRY DECISION –
TIMING OF ENTRY
 Early entry - Firm enters foreign market before
other foreign firms

 First
mover advantage
Ability to preempt rivals & capture demand
by establishing strong brand name
Build sales volume and ride down the
experience curve with a cost advantage
Create switching cost that tie customers into
products & services
 Companies should also use data regarding
prospects for growth of the market.

Procter & Gamble and Unilever entered

Central and Eastern European countries
immediately after the collapse of communism
in these countries. These firms established
production facilities, distribution channels
etc. in these countries in order to get first-
mover advantages.
Firstmover disadvantages -
Pioneering costs
Time & effort in learning the rules
Mistakes due to ignorance
Liability of being a foreigner
Costs of promoting & establishing a
product – educating customers (KFC in
China -> benefit to McDonald’s)
MODES OF ENTRY IN FOREIGN
MARKETS
EXPORTING
ADVANTAGES OF EXPORTING INCLUDE:-

Need for limited finance:

If the company selects a company in the host country to

distribute, the company can enter international market
with no or less financial resources.

Alternatively, if the company chooses to distribute on its

own, it needs to invest financial resources, but this
amount would be quite less compared to that would be
necessary under other modes.
Less Risk:-

Exporting involves less risk as the company

understands the culture, customer and the
market of the host country gradually.

The company can enter the host country on a

full-scale, if the product is accepted by the host
country’s market.
Motivation for exporting:-

Motivation for exporting are proactive and reactive.

Proactive motivations are opportunities available in the

host country.

Reactive motivations are those efforts taken by the

company to export the product to a foreign country due
to the decline in demand for its product in the home
country.
FORMS OF EXPORTING
DIRECT EXPORTING

 In direct exporting the company sells to a

customer in another country
 It is selling the products in a foreign country
directly through its distribution arrangements or
through a host country’s company.

 Baskin Robbins initially exported its ice-cream to Russia

in 1990 and later opened 74 outlets with Russian
partners. Finally in 1995 it established its ice cream
plant in Moscow.
INDIRECT EXPORTING

Indirectexporting usually means that

the company sells to a buyer
(importer or distributor) in the home
country who in turn exports the
product
INTRACORPORATE
TRANSFERS
I T are selling of products by a company
to its affiliated company in host country.

 Selling of products by Hindustan Lever in

India to Unilever in USA. This transaction
is treated as exports in India and imports
in USA.
ENTRY MODES - EXPORTING
Advantages
 Avoids the often substantial cost of
establishing manufacturing
 May help firm achieve experience curve
& location economies
 Firm may manufacture in centralized
location & export to other national
markets to realize scale economies from
global sales volume (Sony/TV,
Matsushita/VCR, Samsung/Chips)
Disadvantages
 Not appropriate if lower cost
manufacturing locations
 High transport costs can make exporting
uneconomical especially bulk products
 Tariff barriers can make exporting
uneconomical
 If firm delegates marketing, sales &
service to another company they may
have divided loyalties because they carry
competing products or are a large MNE
(Diebold)
LICENSING
 Inthis mode of entry, the domestic
manufacturer leases the right to use its
intellectual property, i.e. technology, work
methods, patents, copy rights, brand
names, trade marks etc. to a manufacturer
in a foreign country for a fee.

 Here the manufacturer in the domestic

country is called ‘licensor’ and the
manufactuer in the foreign country is
called ‘licensee’.
BASIC ISSUES IN INTERNATIONAL
LICENSING

 Companies should consider various factors in

deciding negotiation. Each international
licensing is unique and has to be decided
separately.

 However, there are certain common factory

which affect most of the international licesnses.
BOUNDARIES OF THE AGREEMENTS

 Thecompanies should clearly define the

boundaries of agreements. They determine
which rights and privileges are being
conveyed in the agreement.
EXAMPLE:-
 Pepsi-cola granted license to Heineken of Netherlands
with exclusive rights of producing and selling Pepsi-
Cola in Netherlands.
 Under this agreement the boundaries are:

(i) Heineken should not export Pepsi-Cola to any other

country.
(ii) Pepsi supplies concentrated coal syrup and Heineken
adds carbonated water to produce beverage.
(iii)Pepsi can grant license to other companies in
Netherlands to produce other products of Pepsi.
Determination of Royalty

Determining Rights, Privileges and

Constraints

Dispute Settlement Mechanism

Agreement Duration
ENTRY MODE - LICENSING
Advantages
 Receive royalties for granting the
rights to intangible property to licensee
for specified period (patents,
inventions, formulas, processes,
designs, copyrights, trademarks)
 Licensee puts up most of the capital to
get the operations going – mitigates
development cost & risk
 Allows firm to participate where there
are barriers to investment (Fuji-Xerox)
 Frequently used when firm possesses
intangible property but does not want
to develop the business application
itself (Coco-Cola/clothing)
 Primarily used by manufacturing firms
Disadvantages
 Does not give firm tight control over
manufacturing, marketing & strategy
to realize experience curve & location
economies
 Does not allow firm to coordinate
strategic moves across countries by
using profits earned in one country for
competitive attacks in another
 Firms can lose control over the
competitive advantage of their
technological know-how.
 Cross-licensing can mitigate risk
by holding each other hostage for
misuse
 Firms can reduce risk by forming
a joint venture with each party
taking equity stakes
FRANCHISNG
 Franchising is a form of licensing.

 The franchisor can exercise more control

over the franchised compared to that in
licensing.

 International franchising is growing at a

fast rate.
UNDER FRANCHISING:
 “anindependent organization called the
franchisee operates the business under the
name of another company called the
franchisor.”

 Under this agreement the franchisee pays

a fee to the franchisor.
 The franchisor provided the following
services to the franchisee:

 Trade marks
 Operating system
 Product reputations
 Continuous support systems like
advertising, employee training,
reservation services, quality assurance
programmes etc.
BASIC ISSUES IN FRANCHISING
 The franchisor has been successful in the home country.
McDonald was successful in USA due to the popular
menu and fast and efficient services.

 The factors for the success of the McDonald are later

transferred to other countries.

 The franchiser may have the experience in franchising in

the home country before going for international
franchising.
EXAMPLES:-
ENTRY MODE - FRANCHISING
Advantages
 Involves longer term commitment than
licensing. Primarily used by service
firms (McDonalds)
 Franchiser sells intangible property
(trademark) & insists franchisee agrees
to abide by strict business rules
(location, methods, design, staffing,
supply chain)
 Royalty payments that are some
percentage of franchisee’s revenues
 Firm relieved of many costs & risks of
opening new market.
Disadvantages
 No manufacturing so no location
economies & experience curve
 May inhibit the ability to take profits
out of one country to support
competitive attacks in another
 Risk of worldwide reputation if no
quality control
 Firm can set up “master franchise” in
each country – subsidiary which is JV
(McDonalds & local firm)
JOINT VENTURES
CONCEPT OF JOINT VESTURES
 Two or more firms join together to create a new
business entity that is legally separate and
distinct from its parents.

 Joint
Ventures are established as corporations
and owned by the funding partners in the
predetermined proportions.

 Joint ventures are shared ownerships.

 Variousenvironmental factors like social,
technological, economic and political
encourage the formation of joint ventures.

 Jointventures provide required strengths

in terms of required capital, latest
technology, required human talent etc. and
enable the companies to share the risks in
the foreign markets.
 Joint ventures involve the local
companies.
 This act improves the local image in the
host country and also satisfies the
governmental requirements regarding joint
ventures.
EXAMPLE :-
 Massey-/Ferguson entered into a 51% joint
venture in Turkey to produce Tractors.

 American Motor Corporation entered into a joint

venture with Beijing Automotive Works called
Beijing Jeep to enter Chinese market by
producing jeeps and other vehicles.
ENTRY MODE – JOINT VENTURES
Advantages
 Typically 50/50 with contributed team
of managers to share operating control
 Firm benefits from local partner’s
knowledge of competitive conditions,
culture, language, political system &
business system
 Sharing market development costs &
risks with local partner
 In some countries, political
considerations make JVs the only
feasible entry mode
Disadvantages
 Risk of giving away your technology to
a partner
 Hold majority ownership for more
control in venture
 Wall-off technology that is central
to your core competency
 Does not give firm control over
subsidiaries that it might need to realize
experience curve or location economies
 Global strategic coordination – firm use
JV for checking competitor market share
and limiting cash available for invading
other markets (TI & Japan)
 Shared ownership can lead to conflicts &
battles for control if goals/objectives
change or they take different views on
strategy
SUBSIDIARIES
 According to Peter F. Drucker

“It is simply now possible to maintain

substantial market standing in an
important area unless one has a physical
presence as a producer”.
 Multinational companies also plan to enter
into a new international market
establishing themselves in overseas
markets by direct investment in a
manufacturing or assembly subsidiary
company.

 Inview of frequently changing economic,

social and political conditions globally,
these wholly-owned subsidiaries are
highly risk averse.
 A wholly-owned subsidiary in manufacturing
can involve investment in a new manufacturing
or assembly plant or the acquisition of an
existing plant (such as Coca-Cola Compnay
purchases local bottling plant in developing
countries).

 As manufacturing is established abroad through

direct investment, parts and components are
often exported from the home country.
ENTRY MODE – SUBSIDIARY
Advantages Disadvantages

 When there is technological  Most costly method of market

competence wholly-owned entry
subsidiary reduces risk over losing
control  Risk associated with learning to
do business in a new culture
 Give firm tight control over
operations in country -> engage in
strategic coordination with profits  Political risks is also involved in
foreign investment
 Can realize location & experience
curve economies – centrally
determined decisions
ACQUISITIONS
 Domestic companies enter international
business through mergers and acquisitions.

A domestic company selects a foreign company

and merges itself with the foreign company in
order to enter international business.

 Alternatively,the domestic company may

purchase the foreign company and acquires its
ownership and control.
 Domestic business selects this mode of entering
international business as it provided immediate
access to international manufacturing facilities
and marketing network.

 Otherwise,the domestic company faces serious

problems in gaining access to international
market.
ENTRY MODE – ACQUISITION
Advantages
 The company immediately gets
the ownership and control over the
acquired firm’s factories,
employees, technology, brand
names and distribution networks.
 The company can formulate
international strategy and generate
more revenues.
Disadvantages
 Acquiring a firm in a foreign
country is a complex task
involving bankers, lawyers,
regulations, mergers and
acquisition specialists from the
two countries.
 Labor problems of the host
country’s company are also
transferred to the acquired
company.
 Sometimes host countries imposed
restriction on acquisition of local
companies by the foreign
companies.
STRATEGIC ALLIANCES

“Look at the sky. We are not

alone. The whole universe is
friendly to us and conspires only
to give the best to those who
dream and work.”
A global strategic alliance is an agreement
among two or more independent firms to
cooperate for the purpose of achieving common
goals such as a competitive advantage or
customer value creation.

 Strategic
partnerships may emerge in many
forms including research and development
consortiums, co-production alliances, co-
marketing partnerships, cross-licensing and
cross-equity arrangements.
 This strategy seeks to enhance the long
term competitive advantage of the firm by
forming alliance with its competitiors,
existing or potential in critical areas,
instead of competing with each other.

 Strategic
alliance is also sometimes used
as a market entry strategy.
FOR EXAMPLE :-

 A U.S. pharma firm may use the sales promotion and

distribution infrastructure of a Japanese pharma firm to
sell its products in Japan. In return, the Japanese firm
can use the same strategy for the sale of its products in
the U.S. market.

 The Isuzu Motors Ltd. And Fuji Heavy Industries Ltd. Of

Japan have set up a joint plant in the U.S. which can
build cars for Fuji and trucks for Isuzu in the same line.
CONTRACT MANUFACTURING
 Under Contract Manufacturing, a company
doing global marketing contracts with firms in
foreign countries to manufacture or assemble the
products while retaining the responsibility of
marketing the product.

 There are a number of multinationals and

affiliates of multinationals which employ this
strategy in India in respect of some of the
products they market.

 Example- Park Davis, Unilever ltd. Etc.

EXAMPLES:-
 Nike has contracted with a number of factories in south-
east Asia to produce its athletic footware and it
concentrates on marketing.

 Bata also contracted with a number of cobbler in India

to produce its footwear and concentrate on marketing.

 Mega Toys- a Los Angeles based company contracts with

Chinese plants to produce toys and Mega toys
concentrates on marketing.
ENTRY MODES – CONTRACT
MANUFACTURING
Advantages Disadvantages

 The company does not have to commit
resource for setting up production
facilities.
 It frees the company from the risks of
investing in foreign countries.
 If idle production capacity is readily
available in foreign country, it enables
the marketer to get started
immediately.
 In some cases, there will be the loss of
potential profits from manufacturing.
 Less control over the manufacturing
process.
 Contract manufacturing also has the
risk of developing potential
competitors.