Entering Global Markets

Ex Ante Considerations
• Motivation and Timing of Foreign Market Entry
• Market-entry objectives can be driven by resource seeking, market seeking,
efficiency seeking and knowledge or innovation seeking.

• Innovation seeking is closely related to the term agglomeration. This refers to

the clustering of activities in certain locations and the resulting knowledge
spillover between similar firms.

• Intertwined with the objectives for entering foreign markets is the question of
timing the market entry. In this context, managers are often referring to the
merits of the so-called first mover advantages, that is, advantages a firm
accrues because it enters a market early.
• However, not all is bright for first movers. The potential advantages
may be offset by latecomers, who are able to take advantage of
investments made by first movers, for example, if the first movers
have to spend a lot in order to educate a market about the merits of a
new technology. Latecomers can take advantage of such marketing
investments and concentrate on emphasizing the differential
advantages of their particular product.

• First movers have more opportunity to exploit advantages but do not

have a birthright to success.
EXAMPLE
• In 2002, social networking hit its stride with the launch of Friendster
(which later turned into a gaming site, and ultimately is on a
permanent hiatus since June 2015). MySpace launched a year later,
and won the competition as the more hip alternative, appealing to
the more music-inclined demographic. Both were ahead of their time
by offering a social networking experience on the web. That was until
Facebook launched in 2004 and completely tore up the competition,
leaving MySpace and Friendster to a relegated world of early movers.
IMPORTANT TO REMEMBER
• Unfortunately, research on the relative advantages and disadvantages
of early versus late movers is still inconclusive.
Balancing Risk and Control
• Generally speaking, there is least risk when production takes place in
the home market and the products are exported.

• Most risky are wholly owned foreign subsidiaries.

• An important aspect in selecting between different market entry

modes is also the learning opportunities offered.
• For example, when all exporting is outsourced to an export
management company that deals with customs requirements,
handles all documentation, export finance issues and deals with the
customers in foreign markets, a company will have virtually no
opportunities to learn how to market its products in a foreign
environment
Schlegelmilch, B.B. (2016). Global Marketing Strategy: An Executive Digest.
Switzerland: Springer International Publishing. Page-45
Exporting
• Such companies are typically manufacturing at home and serve
foreign markets with their products.

• Exporting offers considerably more flexibility due to its small resource

commitment and limited risks.

• If an export market development in a particular region does not turn

out to be quite what was expected, exporting companies can
relatively easily retreat from the market.
 Exporting (Cont.)

CAN BE PAIRED WITH OTHER

MODES
• However, in many cases corporations combine
exporting with other entry modes, such as joint
ventures or wholly owned subsidiaries. Toyota,
for instance, established a variety of
manufacturing plants in important locations in
Asia, Europe, and North America. From there it
exports the products to neighboring countries.
 Exporting (Cont.)

• Exporting can also be combined with an offshore sales office. Webspy,

an Australian software company, not only exports its software, but
has also established sales subsidiaries in London and Seattle to service
its two most important regional markets, Europe and North America.
 Exporting (Cont.)

Indirect Exporting
• Under indirect exporting, a manufacturer outsources all activities
related to foreign markets to a specialized company located in its
home country.
• Although the company knows that its products are exported, the
business transaction remains a domestic transaction.
• Domestic partners handling foreign businesses for corporations are
referred to as export trading companies (ETCs), export management
companies (EMCs), export merchants, export brokers, combination
export managers, manufacturer’s export representatives or
commission agents, and export distributors.
• Many of these terms and labels are used inconsistently.
 Exporting (Cont.)

Indirect Exporting
• A typical export service provider acts as the export department for
several companies that either lack export experience or treat export
as a marginal activity.

• Among the services provided are marketing research, channel

selection, arranging financing and shipping, and documentation.
How it is done?

Two methods of indirect exporting:

 Selling to a merchant exporter or export house

 Selling to visiting or resident buyers

Selling to a merchant exporter or export house

Merchant exporters buy goods from manufacturers and sell

them abroad. They operate on their own, thereby undertaking
all risks involved in exporting. They take their own purchasing
decisions. In other words, they are free to decide what should
they do, where and at what price. They maintain their
branches at port towns and foreign countries. They carefully
watch the market trends and assess the prospects of export
market. Generally, export houses specialize in certain
commodities. Companies which are not in a position to start
export departments of their own, sell to export houses.
 Exporting (Cont.)

Selling to visiting or resident buyers

There are resident buying representatives who represent big

foreign companies. Their volume of purchase is substantial. Selling
to resident buyers relieves the manufacturer from the botheration
of cumbersome formalities involved in exporting. In other words,
the manufacturer enjoys the fruits of exports without being
burdened with the actual exportation of goods. Moreover,
the resident buyers help manufacturers adapt products by
providing valuable information about the overseas markets. They
provide guidance on product specifications, designs and style,
offer training in quality control and advise on packaging, labeling
and shipping.
http://www.business-in-guangzhou.com/tag/xiaobei-lu
 Exporting (Cont.)

Direct Exporting
• Direct exporting requires a more extensive commitment of resources,
but in turn provides the manufacturer with better control and market
presence.

• There are two main options: direct market representation and

independent market representation
 Exporting (Cont.)

Direct Market Representation

• Although the mode of market entry is referred to as direct
representation, companies are usually not selling directly to the
consumer but to wholesalers or retailers.
• The two major advantages of direct representation in a market are
control and communications.
• Decisions concerning program development, resource allocation, or
price changes can be implemented more easily compared to indirect
exporting. The company is in a much better position to steer such
efforts.
• A major advantage of direct market representation is also the
opportunity to learn and acquire knowledge from the target market.
 Exporting (Cont.)

Independent Market Representation

When companies often do not have a sufficiently large sales volume to
justify the cost of direct representation. Where sales volumes are small,
possibly because of the size of the country market, independent agents
or distributors are effective market entry vehicles.

Types-
• Agents are independent companies, or individuals, who act on
behalf of the exporter. They typically represent different non-
competing companies and obtain orders on a commission basis.
Thus, agents do not take ownership of the goods they handle.
http://www.manchester.ac.uk/study/international/country-specific-information/china-mainland/contacts/#country-profile
 Exporting (Cont.)

Independent Market Representation

• Distributors do take ownership. They typically buy products from the
exporting company and sell these products in the market. Since they
take on the market risk, both in terms of unsold products as well as
profits, they demand higher margins than an agent’s commission.
Moreover, distributors frequently demand exclusive rights for a
specific sales territory. This can sometimes come into conflict with
competition laws restricting the possibility of setting up exclusive
distribution arrangements.
http://www.bizbangladesh.com/business-news-2507.php
http://www.micropakltd.com/distributors/bangladesh/
 Exporting (Cont.)

Independent Market Representation

• Piggyback exporting, also called piggyback marketing or mother hen
sales force, is yet another form of independent market
representation. Under this arrangement, a manufacturer obtains
distribution of products through another company’s distribution
channel. The active distribution partner benefits through a better
capacity utilization of the distribution system, and the manufacturer
benefits in that the cost of such an arrangement are much lower than
that of a direct market representation.
 Exporting (Cont.)

Independent Market Representation

• A case in point is the Kauai Kookie Kompany, whose owners observed
Japanese tourists stocking up on cookies before returning home from
Hawaii. Now the cookies are sold in a piggyback arrangement with
travel agencies in Japan. The cookies can be purchased from a
catalogue after travelers have returned home, thus reducing the
amount of baggage.
https://www.kauaikookie.com
EXPORTING OF SERVICES
• Exporting services has a number of unique characteristics.
• For instance, Indian companies capture an increasing portion of
business process outsourcing (BPO) which includes services such as
finance and accounting, human resources, and design and
engineering.
Many firms do engage in the export of services without possessing a local delivery
system, which is referred to as embodied object export. Embodied object means
that “soft services” can often be stored or embodied in some physical form, like
reports, construction plans, or DVDs, which can be sent to the foreign customer.
Another cost-effective form looks more closely at the value chain of a company. The company’s staff who are abroad
on a short-term basis perform the functions that must be delivered locally at the client’s place. This strategy, which is
called embodied people export, is used in services such as market research, product design, or management
consultancy. This approach provides a particularly useful, resource-conserving alternative, which accounts for the
“tacit” nature of the information.
Contractual Agreement
Licensing
• Licensing involves a producer renting out intellectual
property to a third party.
• Normally the licensor—the party granting the license—is
compensated by the licensee—the party obtaining the
license—through a lump sum and royalties, which are both
specified in the license agreement.
• Different forms of licensing agreement do exist.
1. Know-how agreements where permission is given to use a specific
technological or management knowledge about how to design,
manufacture, or deliver a product.
• Intel, for example, licensed the right to a new process for making computer
chips to a chip manufacturer in Germany.

2. Trademark and copyright licensing, which refers to agreements that

permit the holder to use its propriety name, characters, or logos.
• For example, Disney made approximately EUR 17 billion in 2005 by granting
other firms the right to use their logo.
• In the fashion industry, where strong brand names are critical, companies
license their brand in order to enter new markets and enhance brand
awareness.
• Food and beverage licensing also represents a very lucrative
business. Cadbury Schweppes, for example, licenses several of its
brands. Among these brands are Snapple, Dr. Pepper, and Halls. The
main goal of licensing for Cadbury Schweppes is to increase the
brand awareness of the umbrella brand.

• Another example is the licensing agreement between Coca-Cola and

Danone, which includes the distribution of the product Evian. This
has generated a win-win situation for both companies. Coca-Cola
gained a much stronger position to compete with its rival, Pepsi, in
the bottled water competition, while Danone has increased sales
and brand awareness by having a strong partner in the US market.
Advantage
• The main advantages of licensing as a foreign market entry mode
include,

the ability to enter a market with little capital outlay

to circumvent trade barriers and government restrictions

and tap into local knowledge and expertise.

Disadvantage
• The downside of licensing is-

• the limited contact with customers

• little control over the product and the image developed in the
market
• the danger of having one’s intellectual property infringed upon by the
licensee. In fact, by infringing on a company’s intellectual assets, a
previous partner can develop into a serious competitor in the foreign
market. (example given on the next slide)
• LG Electronics Inc.’s Zenith unit made patent-infringement claims
against Sony Corp., which was the licensee for a signal processing
technology. Zenith claimed that after the license expired, Sony
was not willing to prolong it, but continued to use the technology,
thereby infringing on the patent.

• Many simpler products can also be affected. Mattel, the US-based

toy manufacturing company, for example, licensed the right to
distribute the Barbie doll to the Brazilian toymaker Estrela. As
soon as the agreement expired, the Brazilian firm developed its
own doll, called Susi, which it then sold on the Brazilian market.
Later, Susi was also launched in Argentina, Chile, Paraguay, and
Uruguay and experienced vast successes in these markets.
Franchising
• Franchising refers to agreements between two parties where the
franchisor grants the franchisee the right to run a business bearing
the former’s name.
• The most popular form of franchising is business format franchising,
under which a franchisor’s total business concept, encompassing its
production, brand, technical and managerial know-how, marketing,
patents, trademarks, etc. are provided to the franchisee.
Examples
• Benetton exemplifies successful internationalization through
franchising. It exerts rigorous standards on their approximately 7000
franchises. Their influence on single outlets not only includes
compulsory requirements regarding collection and store
management, but also regulation on regional marketing. Through its
international franchising, Benetton leverages the advantage of its
strong brand awareness due to its aggressive print advertisement and
insures low market entry costs.
• Other examples of business format franchising include 7-Eleven, the
world’s largest operator and franchisor of convenience stores. Many
of the 28,000 stores worldwide are outside of the USA. For example,
the company has over 10,800 stores in Japan.

• McDonald’s, KFC, Pizza Hut, Subway, Starbucks Coffee and Ha ̈agen-

Dazs are further examples of leading companies pursuing
international market entry via franchising
• Many companies use so-called master franchising agreements. Here,
the franchisee does not only operate outlets on its own, but also
seeks out other franchises in the host market.

• For example, Cendant, the world’s largest franchiser of real estate

brokerages, uses this method to franchise Century 21 Real Estate in
China and France. The company now has over 15,000 independent
real estate offices worldwide.
• While reduced investment costs are key advantages for franchisors,
the franchisee can become part of a recognized network with the
minimal capital needed for the franchise.
• This ability to buy into recognized networks makes franchises
particularly attractive for emerging markets.
• However, franchising is not without risk. Maintaining a consistent
standard among its franchisees presents the company with a
considerable challenge.
Outsourcing
• Outsourcing refers to an arrangement between a company and its
independent supplier to manufacture components or to provide
services according to well- defined specifications.
• Closely connected to outsourcing is the term off-shoring. While
outsourcing always refers to a relationship between independent
corporations—but not necessarily to a situation where both
corporations are located in different countries—off-shoring always
refers to a cross-border arrangement, though not necessarily between
independent corporations.
• When certain organizational tasks are carried out abroad by an
organizational unit of the same company, this is referred to as captive
off-shoring.

• In the realm of manufacturing, one of the key issues is technology

sourcing, i.e., whether to make something in-house or purchase it
from other companies (make- or-buy decision).
CO MARKETING
• An increasing number of companies agree to market their products
and services jointly. Often, such co-marketing involves more than just
two firms.
• For example, airline alliances such as One World and Star Alliance
jointly promote their products through code sharing, coordination of
flight schedules, frequent flyer programs, sharing of airport lounges,
etc.
• Fast food restaurant such as McDonalds often forge agreements with
toy makers or film studios which allows them to use popular toys or
movie characters to promote their product.
• Co-marketing can improve customer appeal and provide access to
new market segments. However, it increases coordination costs and
permits only limited control. Still, as a means to penetrate
international markets, co-marketing often offers an efficient and
effective market entry method.
Wholly Owned Subsidiary
• A wholly owned subsidiary, i.e., one with 100 % ownership,
represents the most extensive form of market entry in global markets.
It may be achieved by establishing an entirely new start up, a so-
called green-field investment, or by making an acquisition. While a
wholly owned subsidiary requires the greatest commitment of
resources, both in terms of management time and financial capital, it
offers the fullest means of participating in a market.
Cont.
• wholly owned subsidiaries are not the first step into a foreign market.
Companies may move from licensing or joint venture strategies to
ownership in order to achieve faster expansion in a market, greater
control, or higher profits. In this context, one has to be careful with
terminology. The term foreign direct investment (FDI) needs to be
distinguished from wholly owned subsidiary. While a foreign direct
investment presumes that the investor has control or significant
influence over the investment, which also applies to a wholly owned
subsidiary, foreign direct investment is usually defined as an equity
capital stake of 10 % or more.
Cont.
• Many of the advantages previously discussed under joint ventures
also apply to a wholly owned subsidiary, including access to markets,
avoidance of tariffs or quota barriers, and knowledge transfer.
However, there are also a number of unique advantages of wholly
owned subsidiaries, such as no profit-sharing with a partner company,
better operational control and, closely connected, the speedier imple-
mentation of strategies, as well as better protection of intellectual
property. Among the downsides are no risk-sharing and, at least in
terms of a green field operation, less access to local knowledge. The
latter, of course, does not hold for acquisitions.