Entry Strategy and Strategic Alliances

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved 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

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Which foreign markets Favorable Politically stable developed and developing nations Free market systems Unfavorable Politically unstable developing nations

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Timing of entry Advantages in early market entry: First-mover advantage. Build sales volume. Move down experience curve and achieve cost advantage. Disadvantages: First mover disadvantage Changes in government policy.

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Scale of entry Large scale entry Strategic Commitments - a decision that has a long-term impact and is difficult to reverse. May cause rivals to rethink market entry. Small scale entry: Time to learn about market.

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Entry modes Exporting Licensing Franchising Joint Ventures

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Exporting Advantages: Avoids cost of establishing manufacturing operations Disadvantages: May compete with low-cost location manufacturers Possible high transportation costs Tariff barriers

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Turnkey projects Advantages: Less risky than conventional FDI Disadvantages: No long-term interest in the foreign country May create a competitor

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Franchising Advantages: Reduces costs and risk of establishing enterprise Disadvantages: Quality control

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Joint Ventures Advantages: Benefit from local partner’s knowledge. Shared costs/risks with partner. Disadvantages: Shared ownership can lead to conflict

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Wholly owned subsidiary Subsidiaries could be Greenfield investments or acquisitions Advantages: No risk of losing technical competence to a competitor Tight control of operations. Disadvantage: Bear full cost and risk

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Advantages and disadvantages of entry modes

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Partner selection Get as much information as possible on the potential partner Collect data from informed third parties Former partners Investment bankers Former employees Get to know the potential partner before committing

McGraw-Hill/Irwin International Business, 5/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Managing the alliance Build trust Learning from partners