Country evaluation, selection &

Foreign market entry

strategies
 Basic foreign expansion entry
decisions
• A firm contemplating foreign expansion must
make three decisions
– Which markets to enter??
– When to enter these markets??
– What is the scale of entry??
– Which is the best mode of entry??
 Basic Market Entry Decision
- Which Market??
200 nation-states
• Different long-run profit potential for firms
– Size of market
– Purchasing power (present wealth)
– Future wealth
• Benefits cost & risks trade off– rank markets
– Future economic growth rates
– Free market system & country’s capacity for growth
– Stable and developing
markets without upsurge in inflation
rates or private-sector debt
 Basic Market Entry Decision
- Which Market??
• Value an international business can create in
a market
– Suitability of product for market
– Nature of indigenous competition
– Not widely available & satisfies an unmet need
– Greater value translates into an ability to charge
higher prices & build sales volume more rapidly
 Basic Market Entry Decision
- Which Market??Process of country
evaluation & selection

Scan for alternatives

Choose & weight variables

Collect & analyze data for

variables

Use tools to compare

variables & narrow
alternatives

Make final country

Selection
 Basic Market Entry Decision
– Timing of Entry??
• Early entry - Firm enters foreign
market before other foreign firms

• First mover advantage

– Ability to preempt rivals & capture demand by
establishing strong brand name
– Build sales volume and ride down the experience
curve with a cost advantage
– Create switching cost that tie customers into
products & services
 Basic Market Entry Decision –
Timing of Entry??
• First mover disadvantages - Pioneering costs
– Time & effort in learning the rules of the game
– Mistakes due to ignorance
– Liability of being a foreigner
– Costs of promoting & establishing a product –
educating customers (KFC in China -> benefit to
McDonald’s)
 Scale of Entry??
• Large scale entry
– Requires commitment of significant resources &
implies rapid entry (Dutch ING spend billions to
acquire US operations)
• Strategic commitment
– Decision that has long term impact & is difficult to
reverse (entering market on large scale)
– Change the competitive playing field & unleash
number of changes – e.g. how competitors might
react
– Can limit strategic flexibility
 Scale of Entry??
• Small Scale Entry:
Advantages:
– Time to learn
about the
market.
– Limits company
exposure.
Disadvantages:
– May be difficult
to build market
share.
– Difficult to
capture first-
mover
 Basic market entry decisions
• Discussion based on
developing country
considerations
– Can use MNEs
to learn &
bench mark
against
– Can focus on
niches the MNE
ignores or
can’t serve
– Can piggyback
with MNEs (eg;
Jollibee)
Which Foreign market entry mode?
EXPORTING

• The commercial
activity of selling and
shipping goods to a
foreign country

• The most common

overseas entry
approach for small
firms
 EXPORTING
• Exporting can be either
– direct or indirect
– In direct exporting the
company sells to a customer
in another country
– In contrast, indirect
exporting usually means
that the company sells to
a buyer (importer or
distributor) in the home
country who in turn exports
the product
 EXPORTING
• The Internet is becoming
increasingly important as a
foreign market entry method
• Initially, Internet marketing
focused on domestic sales,
however, a surprisingly large
number of companies started
receiving orders from
customers in other countries,
resulting in the concept of:
– international Internet
marketing (IIM).
 Exporting..
Advantages:
• Easy implementation of strategy
• Less investment abroad which helps small firms
also to enter international business
• Minimal risks
• Casual international marketing effort
• Firm may manufacture in centralized location &
export to other national markets to realize scale
economies from global sales volume (Sony/TV,
Matsushita/VCR, Samsung/Chips)
 Exporting..
Disadvantages:
• Susceptibility to trade barriers
• Logistical difficulties
• Less suitable for service products
• Susceptibility to exchange-rate fluctuation
• Not appropriate if other lower cost
manufacturing locations exist
• High transport costs can make exporting
uneconomical especially bulk products
 CONTRACTUAL AGREEMENTS

• Contractual agreements are long-term, non-

equity associations between a company and
another in a foreign market
• Approaches:
– Licensing
– Franchising
– Contract manufacturing
– Management contracting
– Turnkey projects
 LICENSING
• An arrangement whereby a licensor grants the
rights to intangible property to another entity
for a specified period and in return, the
licensor receives a royalty fee from the
licensee.
• Offers know-how, shares technology, and
shares brand name with licensee; licensee
pays royalties; lower-risk entry mode; permits
access to markets
 Licensing..
Advantages:
• Helps company to spread out its R&D &
investment costs with incremental income
• Little additional capital or time investment
• Legitimate means of capitalizing on intellectual
property in a foreign market.
• Receive royalties for granting the rights to
intangible property to licensee for specified
period (patents, inventions, formulas,
processes, designs, copyrights, trademarks)
 Licensing..

Advantages:
• Allows firm to participate where there are
barriers to investment (Fuji-Xerox)

• Frequently used when firm possesses

intangible property but does not want to
develop the business application itself (Coco-
Cola/clothing)

• Primarily used by manufacturing firms

 Licensing..
Disadvantages:
• Inconsistent product quality may effect product
image negatively
• The agreement generally prohibits the originating
firm from exploiting the assets in particular foreign
markets
• Does not give firm tight control over
manufacturing, marketing & strategy to realize
experience curve & location economies
• Firms can lose control over the competitive
advantage of their technological know-how.
– Solution: Cross licensing agreements
 FRANCHISING
• Franchising is a specialized
form of licensing in which
the franchisor not only sells
intangible property to the
franchisee, but also insists
that the franchisee agree
to abide by strict rules as to
how it does business
• Longer-term commitments
 Franchising..
Advantages:
• Important way of gaining foreign returns on
certain kinds of customer-service and trade name
assets

• Limited financial commitment

• Involves longer term commitment than licensing.

Primarily used by service firms (McDonalds)
 Franchising..
Advantages:
• Franchiser sells intangible property
(trademark) & insists franchisee agrees to
abide by strict business rules (location,
methods, design, staffing, supply chain)

• Royalty payments that are some percentage of

franchisee’s revenues

• Firm relieved of many costs & risks of opening

new market.
 Franchising..
Disadvantages:
• No manufacturing so no location economies &
experience curve

• May inhibit the ability to take profits out of one

country to support competitive attacks in another

• Risk of worldwide reputation if no quality control

– Firm can set up “master franchise” in each country –
subsidiary which is JV (McDonalds & local firm)
 TURNKEY PROJECTS
• A product or service which
can be implemented or
utilized with no additional
work required by the buyer
(just by 'turning the key')".
• The contractor agrees to
handle every detail of the
project for a foreign client,
including the training of
operating personnel
 Turnkey project..
Advantages:
• A way of earning great economic returns from
the know-how & exporting process technology
• This strategy is useful where FDI is limited by
host government regulations
• Less risky than FDI in countries with unstable
political and economic environment
• Means of exporting process technology
(chemical, pharmaceutical, petroleum,
mining)
 Turnkey project..

Disadvantages:
• Firm has no long term interest in the country –
can take minority equity interest in company
• Firm may inadvertently create a competitor
(middle east oil refineries)
• If firm’s process technology is a source of
competitive advantage, then selling technology
is also selling competitive advantage to
potential competitors
 Contract manufacturing
• Contract
manufacturing is a
process that establish
a working agreement
between two
companies.
• As part of the
agreement, one
company will custom
produce parts or
other materials on
behalf of their client.
 Contract manufacturing
Advantages:
• The client does not have to maintain
manufacturing facilities, purchase raw
materials, or hire labor in order to produce
the finished goods so less capital investment is
required
• Helps to achieve benefits of economies of
scale
• Helps to achieve location economies
 Contract manufacturing
Disadvantages:
• Less management control
• Potential security or confidentiality issues
• Complexity
• Potential quality issues
 Management contracting
• A management contract
is an arrangement
under which
operational control of
an enterprise is vested
by contract in a
separate enterprise
which performs the
necessary managerial
functions in return for a
fee.
 Management contracting
• Management contracts involve not just selling
a method of doing things (as with franchising
or licensing) but involves actually doing them.
• A management contract can involve a wide
range of functions, such as technical operation
of a production facility, management of
personnel, accounting, marketing services and
training.
 Management contracting
Advantages:
• Management contracts are often formed
where there is a lack of local skills to run a
project.
• It is an alternative to foreign direct investment
as it does not involve as high risk and can yield
higher returns for the company when foreign
government actions restrict other entry
methods.
 Management contracting
Disadvantages:
• Loss of control
• Time delays
• Loss of flexibility
• Loss of quality
• Compliance
 STRATEGIC ALLIANCE
• Cooperative agreements between potential or
actual competitors
• A strategic international alliance (SIA) is a
business relationship established by two or more
companies to cooperate out of mutual need and
to share risk in achieving a common objective
• SIAs are sought as a way to shore up weaknesses
and increase competitive strengths.
• Licensing, Joint venture, consortia etc
 Strategic alliances
• Firms enter SIAs for several reasons:
– Opportunities for rapid expansion into new
markets
– Access to new technology
– More efficient production and innovation
– Reduced marketing costs
– Strategic competitive moves
– Access to additional sources of products and
capital
 Strategic alliances- JOINT VENTURES

• A JV entails
establishing a firm that
is jointly owned by
two or more
otherwise
independent firms.
 JOINT VENTURE
• Four Characteristics define joint ventures:
– JVs are established, separate, legal entities
– The acknowledged intent by the partners to share
in the management of the JV
– There are partnerships between legally
incorporated entities such as companies,
chartered organizations, or governments, and not
between individuals
– Equity positions are held by each of the partners
 Strategic alliances- Consortia
• Consortia are similar to joint ventures and could be
classified as such except for two unique
characteristics:
– They typically involve a large number of participants
– They frequently operate in a country or market in which
none of the participants is currently active.
• Consortia are developed
to pool financial and
managerial resources and
to lessen risks.
 Joint ventures..
Advantages:
• Smaller investment
• Local marketing and production/ procurement
of expertise from local partner
• Better understanding of the host country
• Typically 50/50 with contributed team of
managers to share operating control
 Joint ventures..
Advantages:
• Firm benefits from local partner’s knowledge
of competitive conditions, culture, language,
political system & business system

• Sharing market development costs & risks

with local partner

• In some countries, political considerations

make JVs the only feasible entry mode
 Joint ventures..
Disadvantages:
• Risk of giving control of technology to the
partners
• Shared ownership arrangement can lead to
conflicts and battles of control between the
investing firms.
Structuring the alliance to reduce
opportunism
 WHOLLY OWNED SUBSIDIARY

• The firm owns 100% of

the stock
• The firm can either set
up a
– Green-field venture or
– It can acquire an
established firm in the
host nation
 Wholly owned subsidiary
Advantages:
• Reduces the risk of loosing control over
technological competence
• Tight control over operations
• Helps to achieve location economies
 Wholly owned subsidiary..
Disadvantages:
• Larger commitment and risk
• Most costly method
• Risk of national expropriation
 Selecting an entry mode

Technological Know-How Wholly owned subsidiary, except:

1. Venture is structured to reduce
risk of loss of technology.
2.Technology advantage is transitory.
Then licensing or joint venture OK
Management Know-How Franchising, subsidiaries
(wholly owned or joint
venture)

Pressure for Cost Combination of exporting

Reduction
and wholly owned subsidiary