MODES OF ENTRY

What are the basic entry decisions for firms expanding internationally?
A firm expanding internationally must decide:
➢ Which markets to enter
➢ When to enter them and on what scale
➢ How to enter them (the choice of entry mode)
There are no “right” decisions with foreign market entry, just decisions that are associated with different levels
of risk and reward.
Firms in developing countries can learn from the experiences of firms in developed countries.

1. Which markets should a firm enter?

Firms need to assess the long-run profit potential of each market
➢ The most favorable markets are politically stable developed and developing nations with free-market systems,
low inflation, and low private sector debt
➢ The less desirable markets are politically unstable developing nations with mixed or command economies or
developing nations where speculative financial bubbles have led to excess borrowing

2. When should a firm enter a foreign market?

“Once attractive markets are identified, the firm must consider the timing of entry”
➢ Early Entry – when the firm enters a foreign market before other foreign firms
➢ Late entry – when the firm enters the market after firms have already established themselves in the
market
THE FIRST MOVER

PROS CONS

➢ The ability to pre-empt rivals by establishing a
strong brand name
➢ The ability to build up sales volume, experience
curve
➢ The ability to tie customers into products or
services and making it difficult for later entrants to
win business
➢ Pioneering costs - arise when the foreign
business is so different from the home market
➢ The expense to learn the rules of the new
business game
➢ The costs of business failure, mistakes
➢ The costs of promoting and educating
customers

3. The scale of entry:

➢ Firms that enter foreign markets on a significant scale make a major strategic commitment that changes the
competitive playing field, which involves decisions that have a long-term impact and are difficult to reverse.
➢ Small-scale entry can be attractive because it allows the firm to learn about a foreign market, but at the same
time it limits the firm’s exposure to that market.

4. How can firms enter foreign markets?

➢ Entry options include (6):
○ Exporting ○ Joint venture with host country firms
○ Franchising to host country firms ○ Wholly owned subsidiary in the host
○ Licensing to host country firms country firms
○ Turnkey project
➢ The choice depends on:
○ Transportation costs & trade barriers
○ Political & economic risks
○ Firm strategy
 EXPORTING JOINT VENTURE

The commercial activity of selling and shipping goods

to a foreign country.
The most common overseas entry approach for small
firms.

Forms of export
➢ Indirect involvement means that the firm
participates in international business through
an intermediary and does not deal with
foreign customers or markets (Export
merchants, Export agents…)
➢ Direct involvement means that firms set up
Choices:
their own exporting departments
Choose Joint Venture
➢ Benefit from a local partner's knowledge of
Choices:
local culture, political systems, and business
Choose exporting:
systems
➢ it avoids the costs of establishing local
➢ The costs and risks of opening a foreign
manufacturing operations
market are shared
➢ it helps the firm achieve scales and location
➢ Satisfy political considerations for market
economies
entry
Not choose exporting:
Not choose exporting
➢ high transport costs and tariffs can make it
➢ Risks giving control of its technology
uneconomical
➢ May not have the tight control to realize
➢ agents in a foreign country may not act in
experience curve or location economies
exporter’s best interest
➢ Shared ownership can lead to conflicts and
battles for control if goals and objectives
differ or change

LICENSING WHOLLY OWNED SUBSIDIARY

Licensing is when a firm, called the licensor, leases
the right to use its intellectual property -
technology, work methods, patents, copyrights, brand
names, or trademarks - to another firm, called the
licensee, to use in a specified geographic area for a
specified period in exchange for royalties.
The property licensed may include:
➢ Patents
➢ Trademarks
➢ Copyrights
➢ Technology
➢ Technical know-how
➢ Specific business skills
➢ “Green field”: firms build a subsidiary from
the ground up. Greenfield venture may be
better when the firm needs to transfer
organizationally embedded competencies,
skills, routines, and culture
➢ Merger & Acquisition: acquire an existing
company. Acquisition may be better when
there are well-established competitors or
global competitors interested in expanding

Choices: Choices:
Choose licensing:
➢ The firm avoids development costs and risks
associated with opening a foreign market
➢ It avoids barriers to investment
➢ Capitalize on market opportunities without
developing those applications itself
Not choose licensing:
➢ The firm doesn’t have the tight control
required for realizing experience curve and
location economies
➢ The ability to coordinate strategic moves is
limited
➢ The proprietary (or intangible) assets could
be lost
Choose wholly owned subsidiary
➢ Reduces the risk of losing control over core
competencies
➢ Gives a firm the tight control over operations
in different countries that is necessary for
engaging in global strategic coordination
➢ May be required in order to realize location
and experience curve economies
Not choose wholly owned subsidiary
➢ Bears the full cost and risk of setting up
overseas operations

TURNKEY PROJECT

The contractor handles every detail of the project for a foreign client, including the training of operating
personnel
At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full
operation

Choices:
Choose turnkey project:
➢ Way of earning economic returns from the know-how required to assemble and run a technologically
complex process
➢ Less risky than conventional FDI
Not choose turnkey project:
➢ No long-term interest
➢ May create a new and direct competitor
➢ If the firm's process technology is a source of competitive advantage, then selling it through a turnkey
project is also selling competitive advantage to potential and/or actual competitors

STRATEGIC ALLIANCE

Relationship between two or more parties to pursue a set of agreed-upon goals or to meet a critical business
need while remaining independent organizations.
Strategic alliance attractiveness
➢ 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