Basic Foreign Entry Decisions

Which foreign markets to enter?

When to enter them?

What scale?

Which entry mode?

1here are no "r|ght" dec|s|ons.[ust dec|s|ons that are
associated with different levels of risk and reward
Basic Foreign Entry Decisions

Which foreign markets to enter?

When to enter them?

What scale?

Which entry mode?
Which Foreign Markets
W|th over 200 nat|ons |n the wor|d.
and they do not all hold the same profit potential

The decision to enter which market will be based on the
assessment of the nat|ons long-run profit potential

The firm needs to consider the benefits, costs and risks of
doing business in that country

8ut be carefu| of th|s genera||zat|on..a f|rm may enter a
market due to multi-point competition and may not be
seeking profits in this specific market
Which Foreign Markets
Long-run economic benefits of doing business in a country
are a function of:
size of the market
purchasing power of consumers
future wealth of consumers
future economic growth rates
suitability of the product for the market
indigenous competition
political stability

Which Foreign Markets
Favorable
Politically stable developed and developing nations
Free market systems
No dramatic upsurge in inflation or private-sector debt

Unfavorable
Politically unstable developing nations with a mixed or
command economy
Where speculative financial bubbles have led to excess
borrowing

Entry Modes
Exporting

Turnkey Projects

Licensing

Franchising

Joint Ventures

Wholly Owned Subsidiaries


Determinants of Which Entry Mode
The optimal mode varies for each market situation
depending on the:
transportation costs
trade barriers
political risks
economic risks
business risks
costs and required investment
f|rms strategy

Different firms may enter the same market with
different entry modes
Exporting
Advantages
Avoids cost of establishing manufacturing operations
May help achieve experience curve and location
economies

Disadvantages
May compete with low-cost location manufacturers
Possible high transportation costs
Tariff and non-tariff barriers
Possible lack of control over marketing and sales by
delegating to agents
Turnkey Project
Allows a firm to export process technology

Contractor agrees to handle every detail of project for
foreign client
design
construction
training
consultation and technical support


At completion of contract, the foreign client is handed
the "key" to the pro[ect

Most common in process technology industries
chemical
pharmaceutical
petroleum refining
metal refining

Turnkey Projects
Advantages
A means of exporting process technologies
Can earn a return on valuable knowledge assets
Can overcome FDI restrictions
Less risky than conventional FDI

Disadvantages
No long-term interest in the foreign country
May create a competitor
e|||ng process techno|ogy may be se|||ng the f|rms core
competency and competitive advantage
Licensing
Agreement where licensor grants rights to intangible
property to another entity (licensee) for a specified
period, in return for a royalty fee

Intangible property may be:
patents,
inventions
formulas
processes
designs,
copyrights
trademarks

Advantages of Licensing
Reduces development costs and risks of opening a
foreign market

Attractive for firms that:
lack capital
are unwilling to take financial risk in an unfamiliar or
politically volatile foreign market
must overcome restrictive investment barriers
does not want to develop the business applications of
an intangible property

Disadvantages of Licensing
L|m|ts the f|rms contro| over product|on, market|ng and
strategy to required to realize experience curve and
location economies

L|m|ts the f|rms ab|||ty to coord|nate strateg|c moves
across countries (cross-subsidization)

Loss of technology and the creation of a potential
competitor


Reducing the Risk of Licensing
Cross-Licensing
An agreement in which a company licenses valuable
intangible property to a foreign partner and also receives
a ||cense for the partners va|uab|e know|edge
allows firms to hold each other hostage

Joint Venture
License technology through a joint venture where the
licensor and licensee have important equity stakes and
aligns the interests of both firms

Franchising
A specialized form of licensing in which the franchiser
sells intangible property to the franchisee and insists on
rules for operating the business

Tends to involve longer term commitments than
licensing

Franchisor often assists the franchisee to run the
business on an ongoing basis

Primarily in the service sector

Franchising
Advantages
Reduces costs and risk of opening foreign market
Allows a firm to rapidly and inexpensively build a global
presence

Disadvantages
May inhibit taking profits from one country to support
competitive attacks in another country
Quality control and protecting brand equity

Joint Venture
Establishing a firm that is jointly owned
by two or more otherwise independent firms

1yp|ca| ownersh|p |s S0]S0but not a|ways

Having 50% or more does not necessarily mean that you
have "contro|" of the [o|nt venture
Joint Ventures
Advantages
8enef|t from |oca| partners know|edge of market
Share costs and risks with partner
Reduce political risk
Overcome investment barriers

Disadvantages
Risk giving control of technology to partner
May not have the necessary control to realize experience
curve or location economies
Limits ability to engage in coordinated global strategy
Shared ownership can lead to conflict over goals and
control
Wholly Owned Subsidiary
The firm owns 100 percent of the stock and establishes
their presence via a greenfield venture or an
acquisition of an existing firm
Wholly Owned Subsidiary
Advantages
No risk of losing control of core competency or
technology to a competitor
Tight control over operations in different countries
Helps realize learning curve and location economies

Disadvantages
Bear full cost and risk of foreign market entry
Lack of local knowledge
culture and consumer
competition and consumers
politics and laws
Acquisitions
Advantages
Quick to execute
Preempt competitors
Possibly less risky than greenfield ventures because
the firm is buying assets that are producing revenue
and local knowledge

Disadvantages
Often produce poor results due to
overpayment for acqu|red f|rms assets
overestimate of the potential for value creation (hubris)
culture clash between firms
problems with proposed operational synergies
inadequate pre-acquisition screening
Reducing the Risk of Acquisition Failure
Carefully screen the targeted foreign firm and audit
operations and true value of technology and/brand
financial and market position
management culture

Reduce local management attrition from acquired firm

Quickly implement an integration plan
Greenfield Venture
Advantages
Can build subsidiary it designs--not acquires
Easier to establish own operating routines
Avo|ds the "unknown surpr|ses" w|th an acqu|s|t|on

Disadvantages
Slow to establish
Uncertainty and risky
Preemption by aggressive competitor via acquisition
Adds new capacity to industry

Acquisition or Green-Field Venture?
Well-established,
incumbent firms
Competitors also
interested in entry

Embedded skills,
routines, culture

No competitors

Acquisition


Green-Field
Venture

Strategic Alliances
Cooperative agreements between
potential or actual competitors

Includes the range from joint ventures to short-term
contractual agreements on specific tasks

Contentious debate if they
create any value
only overcome short-term weaknesses
competitively weaken a firm in the long term
Strategic Alliances
Advantages

Facilitate entry and gain access into market
Overcome local ownership regulations
Learn about the market or technology
Share fixed costs and risks (especially in R & D)
Bring together complimentary skills and assets that
neither firm has or can develop
Establish industry technological standards

Strategic Alliances
Disadvantages

Provides potential competitors a low-cost route to
technology and markets

L|m|ts strateg|c "degrees of freedom"

Cften |s d|ff|cu|t and ends |n "d|vorce"


Exporting Licensing Franchising
Joint
Venture
Wholly
owned
subsidiary
Loss of control
over technology
Loss of control
over quality
Loss of control
over technology

Conflict between
partners
High cost


High risk
No low-cost
sites

High trans-
portation costs

Tariff barriers D
i
s
a
d
v
a
n
t
a
g
e
s

Maintains
control over
technology

Maintains
control over
operations
Local
knowledge


Shared costs
and risks


May be the
only option
Lower
development
costs

Lower political
risk
Lower
development
costs

Lower political
risk
Scale
economies


Consistent
with pure
global strategy
A
d
v
a
n
t
a
g
e
s

Comparison Of Entry Modes