Chapter 8: Entering the International Market Alternative methods for foreign market entry:

1. Production in home market

Concerns and Issues of Going International • Indirect export
Business strategy, marketing strategy, and managerial – Trading company
considerations are the determining factors a company examines – Export management company
when it decides to enter a new foreign market. Most companies – Piggyback
are established with the ambition to serve a particular • Direct Export
market/consumer need within a given national market. – Foreign distributor
A relatively smaller number of business ventures, though, usually – Agent
related to high technological applications or other very – Marketing subsidiary
specialized fields are launched at an international level from the 2. Foreign production sources
moment of their conception. • Contract manufacture
• Licensing
Motivation • Assembly
Globalization has created a business environment where almost • Joint venture
every firm is likely to be subject to international competition. • Full ownership
Increased global competition through the expansion of many Other entry modes such as joint ventures and full ownership of
global firms throughout the world is a frequent factor that leads facilities involve more control, but entail additional risk. Most
companies to counterattack by expanding in other markets. A classifications of decision criteria for mode of entry list the
stagnant national market, or an attempt to reduce the following criteria:
dependency and the associated risk from the national market is • Market size and growth
another cause leading to international expansion. • Risk
• Government regulations
Concerns, Risks, and Issues • Competitive environment
International marketers have to make a multitude of decisions • Local infrastructure
regarding the entry mode, which may include the target • Company objectives
product/market, the goals of the target markets, and the mode of • Need for control
entry, the time of entry, a marketing mix plan, and a control • Internal resources
system to check the performance in the entered markets. • Assets and capabilities
 • Flexibility.
In explaining foreign market servicing policies, the role of
nonproduction activities must be made explicit. The location of
research activities is widely debated, especially in relation to
spatial agglomeration. There is also an extensive literature on the
entry aspects of marketing and distribution, much of it in a
transactions cost framework.
International Business Research: Determining International
Business Research Objectives
Marketing research is of utmost importance for attaining the
necessary information that will allow correct decision making and
avoid costly mistakes. With the increase of economic integration
among many regional country groups it has become imperative
to monitor the regulatory environment that might either
encourage or try to prevent certain business forms.
Distribution and Sales Channel Identification
Market coverage and degree of market penetration are key
factors for successful marketing performance in the foreign
market. Trading companies and agents active in distribution
channels tend to operate in different market segments.
Foreign Market Entry Strategies
Export Marketing
Tariffs and duties are the two main market protection instruments
used in such policies, while nontariff trade barriers of various
types are also frequently practiced. The type of export
requirements prevailing is of utmost importance for selecting the
export foreign market entry mode for each firm in each target
market.
Export Market Entry Modes
Direct export entry modes are chosen whenever a relatively high
volume of exports is projected and therefore a higher level of
investment is needed. The various indirect forms of export offer
more flexibility, requiring less commitment, thereby being
suitable for relatively limited export volumes.
Indirect Exports
Indirect exporting is favored as an export market entry mode
when the firm depends on its foreign market operations at a
higher level. Piggyback is the practice when a manufacturer uses
the sales force and distribution network of another firm, in order
to market its products. The carrier is usually the larger firm that
has already established either its own export facilities or a
distribution network. The importance of having a physical
presence in the foreign market cannot be over-emphasized. Firms
intending to enter international markets should first develop a
good understanding of the ethical values of the host country,
before developing a strategy for market entry into that country.
In general, though, firms select more cooperative modes of entry
in low investment risk markets.
Contractual Entry Modes
Licensing
This form of foreign market entry is based on a contractual
relationship where the licensor is the firm that possesses an asset
in the form of a patent (or the know-how to produce a product
or provide a service) and the licensee is a firm in the host country
that is willing to exchange the use of the foreign firm’s technology
in the host market with a certain remuneration (generally the
payment of royalties).
Advantages
 Appealing to small companies that lack resources due to low
risk and capital commitment, while maintaining improved
delivery and service levels in local markets.
 Adequate marketing information and control through access
to lowcost information about local market performance and
competitive reactions, as soon as the licensed product enters
the local market.
 Ability to take advantage of the possession of a patented
product that is subject to rapid technological changes while it
is otherwise unprofitable to simultaneously exploit along
multiple markets.
Disadvantages
 Limited flexibility to apply sophisticated technology and
marketing advances at a later stage.
 Limited profit potential in case the product is more successful
than initially thought.
 Policing the implementation of the licensing agreement is
either inefficient or very expensive.
A typical license agreement package might consist of the
following elements:
 Patents, designs, trademarks, copyrights
 Product and processes specifications
 Quality control procedures
Franchising
Franchising has proved to be a very efficient form of international
expansion. Franchising often concerns retailing, quite often there
are some hundreds or thousands of franchisees in a certain local
market. A master franchising firm might be presented as a type
of "franchise wholesaler".
Advantages
 Rapid entry and expansion in the foreign market without any
major risk assumption or capital investment requirements.
 High franchisee motivation to achieve objectives, boosting
profits as they are closely tied to their own efforts.
 Effective adaptation to local market conditions based on
excellence due to affiliation of local knowledge of the
franchisee.
Disadvantages
 Revenues may not be adequate, due to the usually low level
of royalties that are established to attract more franchisees.
 Absence of a master franchisee in a certain country might
cause entry delay.
 Cultural problems (sweatshops, fair-trade, and sustainability
issues) might affect the image of the whole chain.
Franchising is well suited to serve as a market entry mode
in activities with a relatively high human resource and service
component and that need to be delivered in geographically
dispersed local outlets.
Foreign Manufacturing
International firms engage in contract production or
contract manufacturing either within a framework of allocating
low-cost production facilities in many countries around the globe
(depending mostly on the local labor market conditions
prevailing at that period of time) or because this is the only
market access possible due to government limitations and other
local conditions.
Advantages
 Labor cost advantages
 Savings via taxation, lower energy costs, raw materials, and
overheads
 Lower political and economic risk
Disadvantages
 Risk of future competition from contract manufacturer
becoming a future competitor by enhancing technology and
marketing skills.
 Backlash from the company’s home market employees and
labor unions due to the loss of employment in the home
country
 Issues of quality and production standards (strict codes of
ethical and total quality conduct should be imposed on
subcontractors).
Investment Entry Modes
Firms that consider investing in a foreign market usually
base themselves on some experience they already have with
either production or marketing transactions they have developed
in the course of some years.
Portfolio Investments by Multinational Corporations
In order to maintain a balanced investment portfolio,
MNCs regularly invest in foreign firms by acquiring a relatively
small percentage of their equity capital. Within the framework of
a corporate strategy they systematically monitor opportunities
and conditions in foreign markets and evaluate their equity
participation in the most promising foreign firms.
Foreign Direct Investment
Early literature on foreign market entry focused on the
choice between exporting and foreign direct investment (FDI).
The cost-based view of this decision suggested that the firm must
possess a certain advantage that would overcome the cost of
“foreignness.” Superior technological and marketing skills had
been identified as such “compensating” factors. This could
contribute to a successful foreign entry.

Joint Ventures
Although cooperative joint ventures between two or more
firms are the most frequent type of international joint venture
(IJV), in cases where governments impose restrictions as to the
maximum allowed level of control to a firm in the host market, a
(minority) equity joint venture becomes the most appropriate
alternative solution.
Wholly-owned Subsidiaries
Wholly owned and fully controlled entry modes especially
branches and subsidiaries represent the highest level of resource
commitment in the target market.
Mergers and Acquisitions
Acquisition refers to the purchase of sufficient stock of an already
existing firm in order to gain control, whereas in a merger two or
more firms might form a new company, by pooling resources and
assets and sharing equity of the new firm according to the
valuation of the resources each contributed.
Greenfield Operations
A Greenfield investment entails building a subsidiary from
scratch and usually targets local production and marketing in the
host market as well. Real estate and other resources are
purchased locally and employees are hired and trained using the
investor’s management, technology, know-how, and capital.
Strategic Alliances
International strategic alliances can take various different
forms such as simple licensing agreements between two partners,
market (access)-based alliances, operations and logistics
alliances, operations (shared production)- based alliances; their
most distinct characteristic is that they are made so as to pursue
a common goal.
International Logistics and Transportation Issues Related to
Foreign Market Entry
Modern supply chain structures and management are
discussed more extensively in the next chapter, as part of the
marketing mix that the international firm is going to contractual
forms of foreign market entry (e.g., licensing) would be greatly
affected by the skills of the licensor to effectively manage and
monitor the quality performance of the licensees and by the
learning and adaptation skills of the latter to develop a high level
of quality in the distribution of the designed good design and
implement in order to operate in any given market.