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International Business

Week 7

Entering Foreign Markets


Jurusan Manajemen
Gedung 2, Lt. 1, Kampus Universitas Andalas Limau Manis, Padang, Sumatera Barat, Indonesia 25163 Telp. +62 751 73530, +62 751 71088, Fax. +62 751 71089, email: mdfeua@yahoo.com

School of Management Andalas University

School of Management Andalas University

Key Decisions before Internationalization

Why - Should a firm enter foreign markets?

Driven by company objectives Choice of countries AND market segments Timing now or later Enter on a small/trial scale or on a large scale What mode should the firm use to enter a foreign market?

Where Which markets should the firm enter?

When should it enter the selected market(s)?

What should be the scale of foreign market entry?

How should the firm enter foreign market(s)?

Which business(es) should be globalized? All these decisions are interrelated

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Why does a firm enter foreign markets?

Factors influencing the decision to internationalize

Objective

To achieve sales growth and/or profitability Compete more effectively against local and foreign competitors (in domestic and international markets) Leverage company resources and capabilities internationally to overcome local market saturation and tap global opportunities (customers) Take advantage of foreign country (eg. labor, government incentives) to reduce costs Enhance organisational learning via cross-border engagement

Managers interest and ability to

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Why does a firm enter foreign markets? (contd.)

Foreign market entry is for marketing and/or sourcing

Basic factors of production

Advanced factors

Raw materials, labor, capital Technical/managerial knowledge/skills Parts and components Finished products/services - consumer/industrial

Foreign market entry is a critical decision especially for small firms with limited resources The decision influences the scope of the firms activities, i.e., whether it remains a domestic firm or becomes an international firm

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Where Which foreign markets to enter?

Country attractiveness criteria


Population size versus market size Per capita income PPP based vs currency translated Income growth rate Suitability of co. products for foreign markets (B2B, B2C)

Overall and by segments Language and culture

Competitive environment Countrys political, legal and regulatory environment

Examine overall costs, benefits and risks Criteria may be weighted differently depending on the importance of the factor for the business/decision
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Timing of entry: When to enter?

First mover advantages (FMAs) arise when a firm preempts rivals through the following factors:

Establish strong brand equity Capture demand


Create switching costs for customers

Build sales volume Move down experience curve ahead of competitors Gain cost advantage Tie customers to first movers products/services

Become the industry norm/standard Establish favorable relationships & social ties with customers & government (important in high-context cultures)

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Timing of entry: First-mover Disadvantages

Incur cost of creating infrastructure for new industry (ex. component suppliers for a new car industry) Cost of training customers to use a new product (ex. ATMs)

Followers can learn from the first movers dos and donts by poaching employees and customers Regulations may change in favor of followers (ex. lower fees for mobile licenses)

Diffusion of innovation is slow in the beginning First mover incurs the cost of waiting and training

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What should be the scale of entry?

What level of resources to commit?


Large scale entry is a strategic commitment (a decision that has long-term impact and is difficult to reverse)

Affordability resources available internally & externally Alternative use of resources (ex. Invest abroad versus in the home country in the same or other businesses)

Small scale entry


Higher risks (large, irreversible commitments) (-) Higher returns (signal commitment, more FMAs) (+) Test market (+) Reveal strategy to rivals (-)

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Six Modes of Foreign Market Entry

Entry modes can be classified into three groups:

Market modes

Exporting Turnkey projects (also executed in multiple modes) Licensing Franchising International joint ventures (IJV) Wholly-owned subsidiaries (WOS)

Long-term contract modes


Ownership modes (FDI)


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Internationalization Strategies Grid

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Exporting

Sell domestically produced goods in foreign markets

Alternatives in exporting

Direct to customers

From home country (ex. Orders by phone, fax, email, website) In home country In foreign country

Indirect via agents or distributors


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Turnkey projects

Export know-how embedded in process plants


Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples Oil refinery, steel plant, chemical plant Percent inputs sourced from home, host or third countries Build, operate, own, lease, transfer These are PPPs Public Private Partnerships Examples: infrastructure, eg. roads, airports, power plants

Alternatives

New/mix modes BOT, BOOT, BOLT


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Licensing

Involves two entities


Licensor (license owner/seller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee Examples of intangible property

Licensor = owner/seller of knowledge/intangible property Licensee = buyer of knowledge/intangible property

Chemical formula for a drug or a drink, ex. Coca cola Designs and drawings for a car or an air conditioner Copyrights for software, music and Disney characters Brand names, ex. Barbie, Billabong

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Franchising

Licensing of technology plus business systems

Franchising = technology + management

Additional condition

Franchisee must follow strict rules of operating the business as laid out by the franchisor

Examples McDonalds, Kwik Kopy,

Bakers Delight, Boost Juice


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Licensing/Franchising

Payment alternatives

Useful under the following situations


Fixed fee Variable fee Combination of fixed and variable fees

To protect against technological obsolescence, agreements include sharing improvements between licensor & licensee Cross-licensing

Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits through exports or FDI (if these two are competing options)

Two-way licensing Mutual hostage

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FDI modes: IJV and WOS

International joint ventures (IJV)

Firm owns the foreign company jointly with one or more partners (domestic or foreign)

Most IJVs are between two firms, one domestic and one foreign Majority, minority or equal foreign ownership

Alternatives

Example BHPs coal mining joint venture in India Firm owns 100% of the company in the foreign country Alternatives (discussed in FDI)

Wholly-owned subsidiary (WOS)


Acquisition or Greenfield Vertical, horizontal or diversified FDI

Example Toyota in Australia

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Relative advantages and disadvantages of foreign entry modes

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Relative advantages and disadvantages of foreign entry modes (contd.)

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Decision Framework for Entry Mode Choice

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Addl. factors influencing entry mode choice

INTERNAL: Company objectives/criteria

Long-term versus short-term orientation to ROI


Long-term sales and market share versus short-term profits

Company size, resources and capabilities


Resource commitment financial/managerial control, risk

Time for implementation Country attractiveness factors distance (geog & psychic), costs, infrastructure, regulations Product-market factors

EXTERNAL

Competition Customer needs

Overall FIT among business, country, mode, timing, scale

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Country Attractiveness Matrix

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Summary: What we learnt today?

Why - Should a firm enter foreign markets?

Driven by company objectives Choice of countries AND market segments Timing now or later Enter on a small/trial scale or on a large scale What mode should the firm use to enter a foreign market?

Where Which markets should the firm enter?

When should it enter the selected market(s)?

What should be the scale of foreign market entry?

How should the firm enter foreign market(s)?

Which business(es) should be globalized? All these decisions are interrelated

School of Management Andalas University