1. Entering Foreign Markets9
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Entering Foreign Markets

2. Entering Foreign Markets
INTRODUCTION
A firm expanding internationally must decide:
which markets to enter
when to enter them and on what scale
how to enter them (the choice of entry mode)

3. Entering Foreign Markets
There are several options including:
exporting
licensing or franchising to host country firms
setting up a joint venture with a host country firm
setting up a wholly owned subsidiary in the host country to serve that market

4. Entering Foreign Markets
The advantages and disadvantages associated with each entry mode is determined by:
transport costs and trade barriers
political and economic risks
firm strategy
While it may make sense for some firms to serve a market by exporting, other firms might set up a wholly owned subsidiary, or utilize some other entry mode.

5. Entering Foreign Markets
BASIC ENTRY DECISIONS
There are three basic decisions that a firm contemplating foreign expansion must make:
which markets to enter
when to enter those markets
on what scale

6. Entering Foreign Markets
Which Foreign Markets?
The choice between different foreign markets is based on an assessment of their long run profit potential.
Typically, the most favorable markets are those that are politically stable developed and developing nations that have free market systems, and where there is not a dramatic upsurge in either inflation rates, or private sector debt
Those that are less desirable are politically unstable developing nations that operate with a mixed or command economy, or developing nations where speculative financial bubbles have led to excess borrowing
Firms are more likely to be successful if they offer a product that has not been widely available in a market and that satisfies an unmet need

7. Entering Foreign Markets
Timing of Entry
With regard to the timing of entry, we say that entry is early when an international business enters a foreign market before other foreign firms, and late when it enters after other international businesses have already established themselves in the market

8. Entering Foreign Markets
The advantages associated with entering a market early are called first mover advantages, and include:
the ability to pre-empt rivals and capture demand by establishing a strong brand name
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 their products or services making it difficult for later entrants to win business

9. Entering Foreign Markets
Disadvantages associated with entering a foreign market before other international businesses are referred to as first mover disadvantages and include:
Pioneering costs (costs that an early entrant has to bear that a later entrant can avoid)

10. Entering Foreign Markets
Pioneering costs arise when a business system in a foreign country is so different from that in a firm’s home market that the enterprise has to devote considerable time, effort and expense to learning the rules of the game, and include:
the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes
the costs of promoting and establishing a product offering, including the cost of educating the customers

11. Entering Foreign Markets
Summary
It is important to realize that there are no “right” decisions here, just decisions that are associated with different levels of risk and reward
Management Focus: The Jollibee Phenomenon—A Philippine Multinational
Summary
This feature describes the remarkable success story of Jollibee. Jollibee, a fast food chain from the Philippines, not only stood its ground when McDonald’s invaded its market in 1981, but also managed to find the weaknesses in the larger company’s global strategy and capitalize on them. Jollibee, unlike McDonald’s, tailored its menu to the local market. The company was able to build on this localization strategy as it expanded into neighboring Asian countries and the Middle East. Today, Jollibee has even managed to find success in the U.S. market where it is being hailed as a strong niche player.

12. Entering Foreign Markets
Scale of Entry and Strategic Commitments
The consequences of entering a market on a significant scale are associated with the value of the resulting strategic commitments (decisions that have a long term impact and are difficult to reverse)
Deciding to enter a foreign market on a significant scale is a major strategic commitment that changes the competitive playing field
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

13. Entering Foreign Markets
ENTRY MODES
These are six different ways to enter a foreign market.
Exporting
Most manufacturing firms begin their global expansion as exporters and only later switch to another mode for servicing a foreign market

14. Entering Foreign Markets
Advantages
Exporting avoids the substantial cost of establishing manufacturing operations in the host country
Exporting may also help a firm achieve experience curve location economies

15. Entering Foreign Markets
Disadvantages
There may be lower-cost locations for manufacturing abroad
High transport costs can make exporting uneconomical
Tariff barriers can make exporting uneconomical
Agents in a foreign country may not act in exporter’s best interest

16. Entering Foreign Markets
Turnkey Projects
In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel
At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation

17. Entering Foreign Markets
Advantages
Turnkey projects are a way of earning great economic returns from the know-how required to assemble and run a technologically complex process
Turnkey projects make sense in a country where the political and economic environment is such that a longer-term investment might expose the firm to unacceptable political and/or economic risk

18. Entering Foreign Markets
Disadvantages
By definition, the firm that enters into a turnkey deal will have no long-term interest in the foreign country
The firm that enters into a turnkey project may create a competitor
If the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors

19. Entering Foreign Markets
Licensing
A licensing agreement 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 includes patents, inventions, formulas, processes, designs, copyrights, and trademarks

20. Entering Foreign Markets
Advantages
The firm does not have to bear the development costs and risks associated with opening a foreign market
The firm avoids barriers to investment
It allows a firm with intangible property that might have business applications, but which doesn’t want to develop those applications itself, to capitalize on market opportunities

21. Entering Foreign Markets
Disadvantages
The firm doesn’t have the tight control over manufacturing, marketing, and strategy that is required for realizing experience curve and location economies
Licensing limits a firm’s ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another
There is the potential for loss of proprietary (or intangible) technology or property
One way of reducing this risk is through the use of cross-licensing agreements where a firm might license intangible property to a foreign partner, but requests that the foreign partner license some of its valuable know-how to the firm in addition to a royalty payment

22. Entering Foreign Markets
Franchising
Franchising is basically 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

23. Entering Foreign Markets
Advantages
The firm avoids many costs and risks of opening up a foreign market

24. Entering Foreign Markets
Disadvantages
Franchising may inhibit the firm's ability to take profits out of one country to support competitive attacks in another
The geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect

25. Entering Foreign Markets
Joint Ventures
A joint venture is the establishment of a firm that is jointly owned by two or more otherwise independent firms

26. Entering Foreign Markets
Advantages
A firm can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems
The costs and risks of opening a foreign market are shared with the partner
Political considerations may make joint ventures the only feasible entry mode

27. Entering Foreign Markets
Disadvantages
A firm risks giving control of its technology to its partner
The firm may not have the tight control over subsidiaries that it might need to realize experience curve or location economies
Shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time

28. Entering Foreign Markets
Wholly Owned Subsidiaries
In a wholly owned subsidiary, the firm owns 100 percent of the stock.
Establishing a wholly owned subsidiary in a foreign market can be done two ways:
the firm can set up a new operation in that country
the firm can acquire an established firm

29. Entering Foreign Markets
Advantages
A wholly owned subsidiary reduces the risk of losing control over core competencies
A wholly owned subsidiary gives a firm the tight control over operations in different countries that is necessary for engaging in global strategic coordination (i.e., using profits from one country to support competitive attacks in another)
A wholly owned subsidiary maybe required if a firm is trying to realize location and experience curve economies

30. Entering Foreign Markets
Disadvantage
Firms bear the full costs and risks of setting up overseas operations

31. Entering Foreign Markets
SELECTING AN ENTRY MODE
The optimal choice of entry mode involves trade-offs.
Core Competencies and Entry Mode
The optimal entry mode depends to some degree on the nature of a firm’s core competencies

32. Entering Foreign Markets
Advantages and disadvantages of the various entry modes

33. Entering Foreign Markets
Technological Know-How
A firm with a competitive advantage based on proprietary technological know-how should avoid licensing and joint venture arrangements in order to minimize the risk of losing control over the technology
If a firm believes its technological advantage is only transitory, or the firm can establish its technology as the dominant design in the industry, then licensing may be appropriate even if it does involve the loss of know-how

34. Entering Foreign Markets
Management Know-How
The competitive advantage of many service firms is based upon management know-how
The risk of losing control over the management skills to franchisees or joint venture partners is not high, and the benefits from getting greater use of brand names is significant

35. Entering Foreign Markets
Pressures for Cost Reductions and Entry Mode
The greater the pressures for cost reductions, the more likely a firm will want to pursue some combination of exporting and wholly owned subsidiaries
This will allow it to achieve location and scale economies as well as retain some degree of control over its worldwide product manufacturing and distribution

36. Entering Foreign Markets
GREENFIELD VENTURE OR ACQUISITION?
Should a firm establish a wholly owned subsidiary in a country by building a subsidiary from the ground up (greenfield strategy), or should it acquire an established enterprise in the target market (acquisition strategy)?

37. Entering Foreign Markets
Pros and Cons of Acquisition
Benefits of Acquisitions
Acquisitions have three major points in their favor:
they are quick to execute
acquisitions enable firms to preempt their competitors
managers may believe acquisitions are less risky than green-field ventures

38. Entering Foreign Markets
Why Do Acquisitions Fail?
Acquisitions fail for several reasons:
the acquiring firms often overpay for the assets of the acquired firm
there may be a clash between the cultures of the acquiring and acquired firm
attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast
there is inadequate pre-acquisition screening

39. Entering Foreign Markets
Reducing the Risks of Failure
Problems can minimized:
through careful screening of the firm to be acquired
by moving rapidly once the firm is acquired to implement an integration plan

40. Entering Foreign Markets
Pros and Cons of Greenfield Ventures
The main advantage of a greenfield venture is that it gives the firm a greater ability to build the kind of subsidiary company that it wants
However, greenfield ventures are slower to establish
Greenfield ventures are also risky