Major Ways of Entering

Foreign Market
SUBMITTED BY: SHUBHA BROTA RAHA (EMBA 2011-14, SIBM BANGALORE)

Index
S.No. TOPIC SLIDE NO.
1 REASONS FOR ENTERING FOREIGN MARKET 3
2 EVALUATING COST, BENEFIT AND RISKS 4
3 DIFFERENT MODES OF FOREIGN ENTRY 5
4 EXPORTING – DIRECT & INDIRECT 6-9
5 LICENSING 10
6 FRANCHISING & KFC 11-13
7 CONTRACT MANUFACTURING 14
8 MANAGEMENT CONTRACTS 15
9 TURNKEY PROJECTS 16
10 FDI WITH/WITHOUT ALLIANCE & NOKIA 17-22
11 FACTORS INFLUENCING MODE OF ENTRY 23
Reasons for entering foreign market
World Market
Location
Economies
Economies
of Scale
Economies
of Scope
To seek lower
production factor costs
To expand sales and
production volume
To exploit proprietary
assets
Evaluating cost, benefit and risks
C
O
S
T
S

- Direct cost
the Firm incurs in
entering a new
foreign market and
included costs
associated with
setting up a
business operation
- Opportunity cost
a firm has a limited
resources, entering
one market may
preclude or delay its
entry into another
B
E
N
E
F
I
T
S

- Expected sales
- Profits from the
market
- Lower acquisition
and manufacturing
costs
- Foreclosing of
markets to
competitors
- Competitive adv.
- Access to new
technology
- Opportunity to
achieve synergy
with other
operations
R
I
S
K
S

- Exchange rate
fluctuations
- Additional
operating
complexity
- Direct financial
losses due to
inaccurate
assessment of
market potential
Different modes of Foreign Entry
 EXPORTING
-indirect exporting
-direct exports
-intra-corporate
transfers

 LICENSING

 FRANCHISING




 SPECIAL MODES
-Contract manufacturing
-Management Contracts
-Turnkey projects

 FDI with alliances
 FDI without alliance


Exporting
 A function of international trade whereby goods
produced in one country are shipped to another
country for future sale or trade. The sale of such goods
adds to the producing nation's gross output. If used for
trade, exports are exchanged for other products or
services. Exports are one of the oldest forms of economic
transfer, and occur on a large scale between nations
that have fewer restrictions on trade, such as tariffs or
subsidies.
Indirect Exporting
 Indirect exporting means that the firm participates in
international business through an intermediary and does
not deal with foreign customers or markets.
 Types of intermediaries:
 Combination Export Manager (CEM)
 Export Merchants
 Export Broker
 Export Commission House
 Trading
 Piggyback Exporting


Direct Exporting
 Direct exporting means that the firm works directly
(without intermediaries) with foreign customers or
markets with the opportunity to develop a relationship
 Export without intermediaries through own exporting
departments:
 Export department.
 Export Sales Subsidiary

Exporting – Pros and Cons
Advantages
Relatively low
financial exposure
Permit gradual
market entry
Acquire knowledge
about local market
Avoid restrictions on
foreign investment
Disadvantages
Vulnerability to
tariffs and NTBs
Logistical
complexities
Potential conflicts
with distributors
Licensing
 In this agreement, the international company, the
licensor, agrees to make available to another company
abroad , the licensee, use of its:
 Patents and trademarks
 Manufacturing process
 Know-how
 Trade secrets
 Managerial and technical services.

Franchising
 Franchising is a form of licensing.
 Transfer of technology, business system, brand name,
trademark and other property rights.
 Franchisor: developed the business, lends the names
and brands.
 Franchisee: buys the rights (fees or royalties) to operate
the business under the name of the franchisor
Franchisor examples are Mc Donald’s, KFC, Domino’s
etc.
KFC’ Foreign Entry through
Franchising
 Yum! Brands is the largest restaurant group in the world. Kentucky
Fried Chicken, or KFC, is the dominant subsidiary of Yum! Brands and
what KFC’s product focus in the fast food industry is fried chicken.
KFC is very successful in the fast food industry internationally.
According to KFC official website description, “There are more than
15,000 KFC outlets in 105 countries and territories around the world”.
 KFC is the largest restaurant chain in China, with 4,563 outlets
 KFC sales in the United States in 2013 were estimated at $4.22 billion
by Technomic
 Japan is the third-largest market for KFC after China and the United
States with 1,200 outlets
KFC’s local cultural strategy
 KFC has another important strategy that has contributed to their
global success called local cultural strategy. Local cultural strategy
means KFC spend much of their time and resources on analyzing
the local consumption eating habits. According to the eating
habits, KFC will create and produce related cultural fast food.
Customers will directly benefit from the perceived value derived
from KFC’s menu. The local cultural strategy helps KFC to increase
customer loyalty. The best example where the local cultural strategy
was implemented is KFC restaurants in the China. There are more
than 4,000 KFC outlets in 80 cities in China. In order to be successful,
KFC incorporated more than 30 different menu items in order to
complement the local cultural strategy
Contract Manufacturing
 Contractual agreement between a company and a
foreign producer under which the foreign producer
manufactures the company’s product

 The company controls promotion and distribution

 E.g. Pharmaceutical industry.

Management Contracts
 It is a long term agreement, in which the legal owners of
the property and real estate enter into a contract with
an outsider firm to run and operate the business.

 The Firm gets regular payments as well as
comissions.

Turnkey Projects
 The international company engages in the design and
construction of the entire operation, once it is finished,
the management goes to local personnel in exchange
of a substantial fee.

 Airports, dams, electric power stations, roads, factory
complexes: steel mills, refineries, chemical plants and
automobile plants.

FDI without alliances
Companies enter the international market through FDI ,
invest their money, establish manufacturing and
marketing facilities through ownership and control.

 Greenfield strategy- the term Greenfield refers to
starting of the operations of a company from scratch
in a foreign market.
FDI with alliances
Strategic alliance is a cooperative and collaborative approach to
achieve the larger goals.
Role of alliances
 Many complicated issues are solved through alliances
 They provide the parties each other’s strengths
 Helps in developing new products with the interaction of 2 or more
industries
 Meet the challenges of technological revolution.
 Managing heavy outlay
 Become strong to compete with a multinational company.

FDI with alliances
Modes of FDI through alliances are:
 Mergers and acquisitions
 Joint ventures
 Merger : The combining of two or more companies, generally by offering the
stockholders of one company securities in the acquiring company in exchange for the
surrender of their stock.
e.g. On 19 June 2006, Nokia and Siemens AG announced the companies would merge their
mobile and fixed-line phone network equipment businesses, creating Nokia Siemens Networks.

Each company has a 50% stake in the infrastructure company, headquartered in Espoo, Finland.
About 20,000 Nokia employees transferred to this new company.
 Acquisition : When one company takes over another and clearly established itself as the new
owner, the purchase is called an acquisition.
e.g. HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion
Nokia’s acquisition of Intellisync Corp, Sega.com, Navteq, Enpocket, etc

FDI & Nokia
 FDIs that are undertaken to strengthen the existing market structure
or explore the opportunities of new markets can be called 'market-
seeking FDIs.'
 'Resource-seeking FDIs' are aimed at factors of production which
have more operational efficiency than those available in the home
country of the investor.
 FDI activities may also be carried out to ensure optimization of
available opportunities and economies of scale. In this case, the
foreign direct investment is termed as 'efficiency-seeking
 For Nokia it was more or less a mix of all of the above three motives.
Some of the key examples for NOKIA can be listed as follows:
Mergers, Collaborations and Acquisitions by Nokia
Nokia – Mergers & Acquisition
 On 22 September 2003, Nokia acquired Sega.com, a branch of Sega to
develop the Nokia N-Gage device.
 On 16 November 2005, Nokia agreed to acquire Intellisync Corporation, a
provider of data and PIM synchronization software,[87]completing the
acquisition on 10 February 2006.
 On 19 June 2006, Nokia and Siemens AG announced the companies would
merge their mobile and fixed-line phone network equipment businesses,
creating Nokia Siemens Networks. Each company has a 50% stake in the
infrastructure company, headquartered in Espoo, Finland. About 20,000
Nokia employees transferred to this new company.
Nokia – Mergers & Acquisition
 In 2007, Nokia agreed to acquire Navteq, a U.S.-based supplier of digital
mapping data, for $8.1 billion[4][93] and finalized the acquisition on 10
July 2008.
 In September 2008, Nokia acquired OZ Communications, a privately held
company with approximately 220 employees headquartered in Montreal,
Canada.
 On 8 August 2006, Nokia agreed to acquire online music
distributor Loudeye Corporation for approximately US$60 million
 In July 2007, Nokia acquired all assets of Twango, a comprehensive media
sharing solution for organizing and sharing photos, videos and other
personal media
 In September 2007, Nokia agreed to acquire Enpocket, a supplier of
mobile advertising technology and services

Nokia – Mergers & Acquisition
 On 24 July 2009, Nokia agreed to acquire certain assets of Cellity, a
privately owned mobile software company,[96] completed on 5
August 2009.
 In September 2009, Nokia acquired certain assets of Plum Ventures,
Inc to complement Nokia's Social Location services.[98]
 In March 2010, Nokia acquired Novarra, a mobile web browser firm.
 In April 2010, Nokia acquired MetaCarta, a local search technology
firm.[100]
 In 2012, Nokia acquired Smarterphone, a developer of an operating
system for feature phones, and the imaging company Scalado
Factors influencing mode of entry
Entry Mode
Degree of Control
Systemic Risk Dissemination
Risk
Resource
Commitment
Export Low Low Low Low
Countertrade Low Low Low Low
Contract
Manufacturing
Medium Medium Low to Medium Low
Licensing Low Low High Low
Franchising Low to Medium Low Medium Low
Management
Contract
Medium Low Medium Low
Turnkey Low Low Low Low
Joint Venture Medium-high Medium-high Medium to high Medium to high
Wholly Owned
Subsidiary
High High Low High
THANK YOU
thank you
BY: SHUBHA BROTA RAHA (EMBA 2011-14, SIBM BAMGALORE)