CHAPTER THREE

FOREIGN MARKET ENTRY-STRATEGY

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 Introduction
Chapter Contents:
3.1 International Business/market entry strategies:
3.2 Entry Modes
3.2.1 Exporting
3.2 .2. Turnkey projects
3.2.3. Licensing
3.2.4. Franchising
3.2.5. Establishing joint ventures with a host country firm
3.2.6. Setting up a wholly owned subsidiary in the host
country
Management contracting
Contract manufacturing/international subcontracting
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 Introduction
Several factors affect the choice of entry mode including:
Transport costs/geographical distance
Trade barriers
Political risks
Economic risks
Costs for production, labor
Products image, competition, taxation, market potential/demand
The optimal mode varies by situation what makes sense for one
company might not make sense for another
Example: Although Winston cigarettes are made in Venezuela
with the same tobaccos and formula as the Winston cigarettes in the
USA, Venezuelans still prefer the more expensive US made
Winston.
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 Basic Foreign Market Entry-Strategy Decisions

Firms entering foreign markets make three

basic decisions:
1. Which Markets to Enter
2. When to Enter Those Markets
3. On What Scale to Enter Those Markets

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 Which Foreign Markets?
There are many nation states in the world.

They do not all hold the same profit potential for a firm.

The choice of foreign markets will depend on their long run profit potential.

Favorable markets are politically stable developed and developing nations

with free market systems and relatively low inflation rates and low private
sector debt.
Less desirable markets are politically unstable developing nations with mixed
or command economies, or developing nations with excessive levels of
borrowing.
Markets are also more attractive when the product in question is not widely
available and satisfies an unmet need
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 Timing Of Entry

Once attractive markets are identified, the firm must consider the
timing of entry
Entry is early when the firm enters a foreign market before other
foreign firms
Entry is late when the firm enters the market after firms have already
established themselves in the market.

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 Timing Of Entry
First mover advantages are the advantages associated with entering a
market early

First mover advantages include:

the ability to preempt rivals and capture demand by establishing a
strong brand name. E.g. Coca Cola
the ability to build up sales volume in that country and ride down the
experience curve ahead of rivals and gain a cost advantage over later
entrants
the ability to create switching costs that tie customers into products or
services making it difficult for later entrants to win business.

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 Scale of Entry and Strategic Commitments
After choosing which market to enter and the timing of entry, firms need to
decide on the scale of market entry.
Entering a foreign market on a large a significant scale is a major strategic
commitment that changes the competitive playing field.
Firms that enter a market on a significant scale make a strategic
commitment (the decision has a long term impact and is difficult to reverse)
Small-scale entry has the advantage of allowing a firm to learn about a
foreign market while simultaneously limiting the firm’s exposure to that
market.

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Forms of International Business

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Forms of International Business
– Inter-firm trade: Inter firm trade is process of buying, selling or exchanging goods and

services between two or firm more firms hailing from different countries.

– Intra-firm trade: Intra-firm trade is between affiliates of companies located in different

countries, in other words it is the trade between two subsidiaries of a company.

– Inter-Governmental trade: Whenever a buyer and a seller come together, each expects to

gain something from the other. The same expectation applies to nations that trade with each

other.

A. Bilateral Trade: Exchange of resources between two countries and also covers

establishment of commercial relationships to facilitate trade and investment.

B. Unilateral Trade: Unilateral trade means that one country reduces its trade restrictions

without any formal agreement for correspond from its trade partners.

C. Multilateral Trade: A multilateral trade involves three or more countries that allows them

to trade with each other without discrimination.

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 3.2 Foreign Market Entry Modes/Strategies

Foreign Market Entry Modes/Strategies

Are possible ways/alternatives of penetrating, joining and serving a given

foreign market/s.

They can serve company’s products, technology, human skills,

management or other resources to enter into a foreign country.

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 Features of foreign market entry modes/strategies

 Require long term thinking

 Require deployment of budget

 Need conducting cost-benefit analysis

 Can be copied, improved and implemented by competitors

 May range from simply exporting to that of even purchasing another

company abroad
 Are to be formulated, implemented and evaluated at the top level
management
 May face expected/internal or unexpected/external challenges

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 Types of Foreign Market Entry Modes/Strategies

There are six different ways/i.e strategies to enter a foreign market:

1. Exporting
2. Turnkey projects

3. Licensing

4. Franchising

5. Establishing joint ventures with a host country firm

6. Setting up a wholly owned subsidiary in the host country

Managers need to consider the advantages and disadvantages of each entry

mode.

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 3.2.1 Exporting
Exporting
Is the simplest, least risky, easiest, and fastest means/strategy of joining
foreign market/s.
Involves simply exporting what is produced and sold locally abroad.

The exported product is the same as the one marketed in the home market.

Is to be applied mostly by “beginner exporters’’ or by a government as well.

Is a common first step in the international expansion process for many
manufacturing firms.
Later, many firms switch to another mode to serve the foreign market

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 3.2.2 Turnkey Projects
A turnkey project refers to a project in which clients pay contractors to
design and construct new facilities and train personnel.
At completion of the contract, the foreign client is handed the "key" to
a plant that is ready for full operation.
 Complete construction of any industrial plant abroad

Turnkey projects are common in the chemical, pharmaceutical, cement,

fertilizer, petroleum refining, and steel mills industries.
The governments of many oil-rich countries have set out to build their
own petroleum refining industries, so they restrict FDI in their oil and
refining sectors.

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 3.2.3 Licensing
A licensing is an arrangement whereby a licensor grants the rights
to intangible property to another entity (the licensee) for a specified
time period, and in return, the licensor receives a royalty fee from the
licensee.
Intangible property like: patents, inventions, formulas, processes,
designs, copyrights, and trademarks.

Example: 50 percent of the drugs sold in Japan are made under license from
European and US companies.
Coca-Cola has licensed its brand name to more than 3000 products which are
marketed by 200 licensees in thirty countries. Coca-Cola markets
internationally by licensing bottlers around the world and supplying them with
the syrup needed to produce the product.
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 3.2.4 Franchising
Franchising is a specialized form of licensing in which the franchiser not
only sells intangible property (normally trademark) to the franchisee but insists
that the franchisee agree to abide by strict rules as to how it does business.
Must obey certain rules given by franchiser.

The franchiser will often assist the franchisee to run the business on an
ongoing basis and receive royalty fee representing a percentage of the firm’s
revenue.
While licensing is often employed by manufacturing firms, franchising is
employed by service firms such as: McDonald’s, Sheraton, Hilton Hotels. etc.

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 Franchising
 Compared to licensing, franchising agreements tends to be:

 longer and the franchisor offers a broader package of rights and resources
usually includes:
o equipment, managerial systems,

o operation manual,

o initial trainings, site approval

Advantages of Franchising
 Franchising as an entry mode has advantages similar to licensing.

 Avoiding the risks and costs involved in opening a foreign market on its
own, a franchiser is able to build a global presence quickly and relatively low
cost and risk.
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 3.2.5 Joint Ventures
A joint venture is the establishment of a firm that is jointly owned by
two or more independent firms
Most joint ventures are 50:50 partnerships
oA joint venture is a firm that is jointly owned by two or more firms.

o When more than two firms participate the joint venture is sometimes called a
consortium.
oOften, one firm controls more than 50 percent of the venture.

oDevelopment costs and risks are also shared by partners.

o Example: Toyota and GM, Toyota needed direct access to the U.S. market,
while GM benefited from the technology and management approaches
provided by its Japanese partner. Fuji–Xerox.
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 3.2.6 Wholly Owned Subsidiaries

In a wholly owned subsidiary, the firm owns 100 percent of the stock.

Firms can establish a wholly owned subsidiary in a foreign market in

two ways:

1)Setting up a new operation in the host country (Greenfield venture),

2)Acquiring/Buying an established firm in the host country.

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 Selecting Foreign Market/Entry Mode/Strategy

Which is strategy is the best? (discuss )

All entry modes have advantages and disadvantages

Every strategy has its own cost and returns (benefits).

There is no one best perfect strategy to be used

The optimal choice of entry mode involves trade-offs

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END OF CHAPTER THREE

THANK YOU!!!

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 These are some of the construction companies in
Ethiopia that are a major contributor to this growth:
 Sur Construction. ...
 Rama Construction. ...
 DMC Construction PLC. ...
 MIDROC Construction Plc. ...
 Zamra Construction. ...
 Sunshine Construction Plc. ...
 Universal Construction. ..

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 The 10 Global Biggest Exporting Industries
I
Exports for 2021
 1. Global Pharmaceuticals & Medicine Manufacturing
$650,607,7B
 2. Global Oil & Gas Exploration & Production $1,275,2B
 3.Global Car & Automobile Manufacturing $463,2B
 4.Global Apparel Manufacturing $444,6B
 5. Global Plastic Product & Packaging Manufacturing $401,0B
 6.Global Auto Parts & Accessories Manufacturing $364,2B
 7.Global Consumer Electronics Manufacturing $344,4B
 8.Global Iron Ore Mining $265,4B
 9.Global Paper & Pulp Mills $190,0B
 10. Global Semiconductor & Electronic Parts Manufacturing

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 The Top Ten Leading 150 Global Licensors Include:
 The Walt Disney Company – $54.7B.
 Meredith Corporation – $26.5B.
 Authentic Brands Group – $12.3B.
 WarnerMedia – $11B.
 PVH Corp. – $10.6B (estimated)
 Universal Brand Development – $7.1B.
 Hasbro – $6.9B.
 ViacomCBS – $5.8B.

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10 of the most profitable franchises in 2021
 McDonald's. ...
 Dunkin' ...
 The UPS Store. ...
 Dream Vacations. ...
 The Maids. ...
 Anytime Fitness. ...
 Pearle Vision. ...
 JAN-PRO.

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