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Methods of entry in foreign markets

Methods of entry in foreign markets

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Published by: sahebpiri on Apr 16, 2011
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´It does not matter how much big you are, but it matters much, how do you enter to succeedµ


200 nation-states

long-run profit potential

for firms y Size of market y Purchasing power (present wealth) y Future wealth

petrol prices.EXAMPLE:- A tyre manufacturing company. seeking to export tires should collect the data like transportation infrastructure. increase in vehicle ownership. . alternative modes of transportation. production of vehicles in the prospective foreign markets.

. For Example:Whirlpool used the data of other household appliances while deciding to introduce dishwasher in South Korean market.Sometimes the companies use the proxy data.

Balance cost & risks ² rank markets y Future economic growth rates y Free market system & country·s capacity for growth y Favorable = Stable and developing markets without upsurge in inflation rates or private-sector debt .

auto factories in Brazil.. . Ford. The companies planning to enter global markets should know the trade policies. Audi and Mercedes. General Motors. i.e. general legal and political environment of the foreign markets.Benz have established manufacturing facilities. They also export from Brazil to other nearby countries. In order to avoid high tariffs.

Value an international business can create in a market y Suitability of product for market y Nature of indigenous competition y Not widely available & satisfies an unmet need y Greater value = ability to charge higher prices & build sales volume more rapidly .

BASIC MARKET ENTRY DECISION ² TIMING OF ENTRY Early entry .Firm enters foreign market before other foreign firms 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 First y y y .

. These firms established production facilities. Procter & Gamble and Unilever entered Central and Eastern European countries immediately after the collapse of communism in these countries. distribution channels etc. in these countries in order to get first-mover advantages. Companies should also use data regarding prospects for growth of the market.

First mover disadvantages Pioneering costs y Time & effort in learning the rules y Mistakes due to ignorance y Liability of being a foreigner y Costs of promoting & establishing a product ² educating customers (KFC in China -> benefit to McDonald·s) .




Alternatively. but this amount would be quite less compared to that would be necessary under other modes. it needs to invest financial resources. the company can enter international market with no or less financial resources. .ADVANTAGES OF EXPORTING INCLUDE:- Need for limited finance: If the company selects a company in the host country to distribute. if the company chooses to distribute on its own.

The company can enter the host country on a full-scale. if the product is accepted by the host country·s market. . customer and the market of the host country gradually.Less Risk:Exporting involves less risk as the company understands the culture.

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.



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 Indirect exporting usually means that the company sells to a buyer (importer or distributor) in the home country who in turn exports the product .

This transaction is treated as exports in India and imports in USA. of products by Hindustan Lever in India to Unilever in USA.INTRACORPORATE TRANSFERS I T are selling of products by a company to its affiliated company in host country. Selling .

ENTRY MODES . Samsung/Chips) 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.EXPORTING Advantages Disadvantages 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. sales & service to another company they may have divided loyalties because they carry competing products or are a large MNE (Diebold) .


e. technology. the domestic manufacturer leases the right to use its intellectual property. trade marks etc. work methods. copy rights. brand names. i. Here . the manufacturer in the domestic country is called ¶licensor· and the manufactuer in the foreign country is called ¶licensee·. In this mode of entry. patents. to a manufacturer in a foreign country for a fee.

BASIC ISSUES IN INTERNATIONAL LICENSING Companies should consider various factors in deciding negotiation. However. there are certain common factory which affect most of the international licesnses. Each international licensing is unique and has to be decided separately. .

.BOUNDARIES OF THE AGREEMENTS The companies 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. . (iii) Pepsi can grant license to other companies in Netherlands to produce other products of Pepsi. 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.

Determination of Royalty Determining Rights. Privileges and Constraints Settlement Mechanism Duration Dispute Agreement .

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. inventions. trademarks) Licensee puts up most of the capital to get the operations going ² 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 (CocoCola/clothing) Primarily used by manufacturing firms Does not give firm tight control over manufacturing.LICENSING Advantages Disadvantages Receive royalties for granting the rights to intangible property to licensee for specified period (patents.ENTRY MODE . y Cross-licensing can mitigate risk by holding each other hostage for misuse y Firms can reduce risk by forming a joint venture with each party taking equity stakes . processes. designs. copyrights. formulas.


. The franchisor can exercise more control over the franchised compared to that in licensing. franchising is growing International at a fast rate. Franchising is a form of licensing.

µ this agreement the franchisee pays a fee to the franchisor.UNDER FRANCHISING: ´an independent organization called the franchisee operates the business under the name of another company called the franchisor. Under .

employee training. reservation services. The franchisor provided the following services to the franchisee: Trade marks Operating system Product reputations Continuous support systems like advertising. . quality assurance programmes etc.

BASIC ISSUES IN FRANCHISING The franchisor has been successful in the home country. The factors for the success of the McDonald are later transferred to other countries. McDonald was successful in USA due to the popular menu and fast and efficient services. . The franchiser may have the experience in franchising in the home country before going for international franchising.



ENTRY MODE . supply chain) Royalty payments that are some percentage of franchisee·s revenues Firm relieved of many costs & risks of opening new market. design. Primarily used by service firms (McDonalds) Franchiser sells intangible property (trademark) & insists franchisee agrees to abide by strict business rules (location.FRANCHISING Advantages Disadvantages Involves longer term commitment than licensing. staffing. methods. 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 y Firm can set up ´master franchiseµ in each country ² subsidiary which is JV (McDonalds & local firm) .


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

economic and political encourage the formation of joint ventures. technological. Joint . required human talent etc. and enable the companies to share the risks in the foreign markets. Various environmental factors like social. ventures provide required strengths in terms of required capital. latest technology.

. 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.

Motor Corporation entered into a joint venture with Beijing Automotive Works called Beijing Jeep to enter Chinese market by producing jeeps and other vehicles.EXAMPLE : Massey-/Ferguson entered into a 51% joint venture in Turkey to produce Tractors. American .

political system & business system Sharing market development costs & risks with local partner In some countries. political considerations make JVs the only feasible entry mode Risk of giving away your technology to a partner y Hold majority ownership for more control in venture y 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 ² 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 . culture.ENTRY MODE ² JOINT VENTURES Advantages Disadvantages Typically 50/50 with contributed team of managers to share operating control Firm benefits from local partner·s knowledge of competitive conditions. language.


. 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 producerµ.

view of frequently changing economic. these whollyowned subsidiaries are highly risk averse. In . social and political conditions globally. 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.

As . manufacturing is established abroad through direct investment. parts and components are often exported from the home country. 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).

ENTRY MODE ² SUBSIDIARY Advantages Disadvantages When there is technological competence wholly-owned subsidiary reduces risk over losing control Give firm tight control over operations in country -> engage in strategic coordination with profits Can realize location & experience curve economies ² centrally determined decisions Most costly method of market entry Risk associated with learning to do business in a new culture Political risks is also involved in foreign investment .


Domestic companies enter international business through mergers and acquisitions. the domestic company may purchase the foreign company and acquires its ownership and control. A Alternatively. domestic company selects a foreign company and merges itself with the foreign company in order to enter international business. .

the domestic company faces serious problems in gaining access to international market. . Otherwise. Domestic business selects this mode of entering international business as it provided immediate access to international manufacturing facilities and marketing network.

Acquiring a firm in a foreign country is a complex task involving bankers. Sometimes host countries imposed restriction on acquisition of local companies by the foreign companies. technology.ENTRY MODE ² ACQUISITION Advantages Disadvantages The company immediately gets the ownership and control over the acquired firm·s factories. mergers and acquisition specialists from the two countries. employees. brand names and distribution networks. lawyers. regulations. . The company can formulate international strategy and generate more revenues. Labor problems of the host country·s company are also transferred to the acquired company.

STRATEGIC ALLIANCES ´Look at the sky. The whole universe is friendly to us and conspires only to give the best to those who dream and work. We are not alone.µ .

partnerships may emerge in many forms including research and development consortiums. cross-licensing and cross-equity arrangements. co-production alliances. Strategic . 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. co-marketing partnerships.

Strategic . existing or potential in critical areas. This strategy seeks to enhance the long term competitive advantage of the firm by forming alliance with its competitiors. instead of competing with each other. alliance is also sometimes used as a market entry strategy.

market.S.S. the Japanese firm can use the same strategy for the sale of its products in the U. The Isuzu Motors Ltd. pharma firm may use the sales promotion and distribution infrastructure of a Japanese pharma firm to sell its products in Japan. . And Fuji Heavy Industries Ltd. Of Japan have set up a joint plant in the U.S. In return.FOR EXAMPLE : A U. which can build cars for Fuji and trucks for Isuzu in the same line.


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. are a number of multinationals and affiliates of multinationals which employ this strategy in India in respect of some of the products they market. There Example- . Etc. Park Davis. Unilever ltd. Under Contract Manufacturing.

Bata also contracted with a number of cobbler in India to produce its footwear and concentrate on marketing.a Los Angeles based company contracts with Chinese plants to produce toys and Mega toys concentrates on marketing. Mega Toys. .EXAMPLES: Nike has contracted with a number of factories in south-east Asia to produce its athletic footware and it concentrates on marketing.

In some cases. Contract manufacturing also has the risk of developing potential competitors. It frees the company from the risks of investing in foreign countries. .ENTRY MODES ² CONTRACT MANUFACTURING Advantages Disadvantages The company does not have to commit resource for setting up production facilities. If idle production capacity is readily available in foreign country. it enables the marketer to get started immediately. Less control over the manufacturing process. there will be the loss of potential profits from manufacturing.

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