Chapter Three International markets selection and entry mode

We have been presenting so far the macro-environment of foreign markets and the variables that a firm would be interested to study in order to know the foreign macro-environment. Further on we will see how the aspects discussed so far (meaning all aspects of the foreign environment: economic, political, cultural and legislative) are used to assess market opportunities and to select markets. The external market selection process is very important for the company that is willing to internationalize for a number of reasons: The errors that occur in an international environment are more expensive than the errors that take place in the internal market By choosing wrongly a foreign market, the company pays two types of costs: a) The effective cost of the unsuccessful try to enter the foreign market and b) The cost of the lost opportunity, by loosing the occasion to enter a market in which the company could have been successful. This chapter discusses The possible approaches that a company can adopt when going international, The market selection process and market selection methods and techniques. Market selection approaches A company may use one of the following approaches to market selection: The systematic approach, The non-systematic approach and The relational approach. The systematic approach Is encountered when the selection of markets takes place based on a planned and well structured process through which countries are compared and then selected. The systematic approach compares in a systematic way and prospects markets by setting market selection criteria based on which the foreign markets potentials are searched, countries are classified and grouped and are selected those countries with the highest market potential that correspond to the strategies and future intentions of the company. The systematic approach is a rational decision making process that has a normative nature; it prescribes how things should be done in order to select a market. A systematic approach to market selection is recommended in order to diminish the risks of errors. The non-systematic approach that is also called the opportunistic approach Depicts the situation when a company internationalises because receives some external stimuli that indicate some opportunities abroad: such stimuli are orders for the companys products or requests for information about the companys product from foreign potential

clients, clients with which the company does not cooperate at present. The relational approach Is the approach in which the company bases its internationalisation process on the relationship it has with companies or partners from foreign countries. The market selection process As part of the systematic approach, the market selection process has been defined as a process of gathering information and screening countries by collecting data about countries and passing them through a number of filters in order to eliminate the less promising opportunities. The first stage of the market selection process uses Macro variables in order to filter the countries. At this stage the general market potentials are evaluated in terms of economic activity, social forces and political structure. The macro indicators used to assess the general market potential are: economic indicators, political indicators, geographical indicators and demographic indicators. The macro indicators generally show what the general potential of the market is. They are used in the first stage of the market selection as data are readily available and can be used to quickly eliminate countries with little or no potential demand and with excessive risks. The economic indicators such as total GNP, GNP/capita show us what the wealth of a country is. The wealth of a country determines the purchasing power and the consumption patterns that are of primary interest for the international marketer. Per capita income is an indicator of peoples earnings in that country, but the income distribution is another very important indicator, as it shows the number of persons who actually earn much enough to buy the companys product. If available, the household or personal disposable income is another valuable indicator that shows how much on average may a household spend. It is the income after tax. The indicator discretionary income shows how much is left after they fulfill the current necessities. These indicators are available mainly in developed countries. The macroeconomic indicators will indicate if the country is too small, to be considered (GNP may be large enough but disposable income too low). Geographic characteristics, such as size of the country, the climate conditions and topographical characteristics are taken into consideration in order to evaluate the possibility to serve the market segment. Also characteristics such as natural resources and energy are of interest in the case the company wishes to produce locally. Political indicators try to measure the political risk, as political instability can remove a country from the screening process right from the first stages. The political risk tends to be more subjective than the quantitative indicators of the market size. However, marketers can use a number of indicators to assess the political risk: the probability of nationalization, the number of expropriations, the political executions, government interventions, and limits on foreign property, restrictions on capital movement and others, industrial disputes. Demographic characteristics. Demographic statistics will show the market potential as population is an indicator for market potential for many consumer goods; age structure will also show the size of the market taking into account the age market segment we are willing to serve.

Again countries that do not have a largely enough population potential can be eliminated market. The second stage is the Evaluation of the general potential of the market related to the product (industry level research). Through this filter all the countries that passed the previous filter, the ones that had a large enough general market potential, are evaluated further in order to evaluate the potential market size for that particular type of product. The stage is also called the evaluation of the potential in the industry and will show the marketer how many products of that type the market can absorb. At this stage micro indicators are used to estimate the market size for that particular type of product. The micro indicators are specific to the product and they indicate the actual consumption of that type of product in the country. When consumption figures are not available the marketer can evaluate the market size by looking to local production as well as the imports of that specific product. Therefore, micro-indicators to be looked at can be the consumption or the production and imports of radios, passenger cars, coffee, rice, alcohol beverages, etc or the consumption of electricity, of gasoline, or the number of hospital beds, the number of farms, the number of tourist arrivals etc. These indicators are specific to the companys product. By looking at the consumption figures, the company will have an indication over the perceived need. The countries that do not have market potential for that type of product are rejected and the remaining countries after this second filter are possible opportunities and are studied further. Stage tree is the evaluation of the companys sales potential (micro level research). In the third stage of the selection process, The potential sales of a companys product in a foreign market are evaluated. After the general market potential of a number of countries was evaluated and the attractive ones have been retained and have been evaluated from the industry potential point of view, At this stage, the evaluation shifts from the evaluation of the market potential towards the potential profitability of the company and the size of the market for the specific product of the company. In order to evaluate how much the company can sell on the respective market, aspects such as the competitors, the ease of entry, the cost of entry will be considered. At this stage the company tries to forecast the sales and the potential profits. Given the cost of entry and the expected sales, the company will try to forecast what the expected profit is. Both quantitative and judgmental ways to evaluate the expected profits can be used. The countries where the company does not expect to sell enough are rejected and the countries considered to have sales potential for the company represent the probable opportunities and will be further researched.

Stage four The last stage of the selection process It takes into consideration the corporate factors influencing the decision (the compatibility with the strategy of the company). At this stage countries are ranked based on corporate: resources, objectives, strategies. For instance if, South Africa has an expected potential equal to Venezuela, Venezuela may be given priority if the companys strategy is to enter later Columbia and Bolivia. After the last filter a list of country priorities results and this is used to make the final decision. International Market selection methods International market selection methods are those methods that the company can use in order to systematically select markets: 1. The listing of selection criteria, 2. The scoring market selection model and the 3. Compensatory model. 1. The listing of selection criteria The listing of selection criteria method consists of: Developing a set of criteria and certain level limits (minimum or maximum) for these criteria required for a country to move through the stages of the screening process. The levels (limits) for each criterion will be established by the management according to what they consider acceptable or not in respect of a certain aspect. At the first stage minimum levels of the GDP ($15 billion) and the per capita GDP ($1500) are established by the management, levels considered to be large enough to allow governmental expenses for dialysis equipment. The lower the GDP/capita in a country, the lower are the expected governmental expenditures for the health system and consequently for dialysis equipment. 2. The scoring market selection model The scoring model or the scoring technique consists Using a number of indicators that are compiled in a final score and that are given different percentages according to the degrees of importance assigned to each of them. In order to use this selection model, the marketer has to follow a number of steps: 1. The first step is to set the criteria based on which the selection will take place. The criteria can be grouped in broad categories, such as Market characteristics (market size, buying behavior) or Entry barriers (tariff barriers, non-tariff barriers). 2. Set the ranking procedure. For instance, on a scale from 1 to 10, where 1 is the lowest and 10 is the highest. 3. Set weights of selection criteria. At this stage each indicator will be given a percentage according to its importance in the selection process.

4. Gather data concerning indicators. At this stage data will be collected for all countries of interest that are included in the selection process, according to the criteria set. 5. Calculate scores for each country. Based on all indicators, their ranking (based on their sizes) and the importance given to them, the marketer will calculate for each country scores for each indicator that will be added up in a final score. See table no. 7.1. 6. The final stage will be to select the country/countries based on the rankings of the final scores. Table no. 7.1 presents a hypothetical scoring market selection model for Europe. Based on this principle different scoring models can be constructed and used. We have here an example of a scoring selection model used by an USA can producer in 1980s for external market selection. The model was called the customized weighted multivariate technique and it is presented in table no. 7.2. In the hypothetical model presented in figure no. 7.1., there were six criteria used to select markets, namely the market potential, tariffs, non-tariff barriers, the product fit, the competitive intensity and the shipping costs. For each of them there have been established weights (W = 15%, 5% etc). E represents the estimates used for the ranking procedure, where 0 = very bad conditions, 1 = bad conditions, 2 = acceptable conditions, 3 = favourable conditions, 4 = very favourable conditions and W x E represents the weighted estimate for each indicator. At the end all weighted estimates for all indicators are added up in a final score for each country. Then the countries are ranked according to the size of the final score. When the differences between the final scores are higher, the selection decision is easier. When there are very close final scores (for instance 202 with 208), the company might take a multiple entry decision or it can group countries in groups with similar scores. Further on, the countries can be treated as a group or the selection process can be continued by introducing more criteria, in order to

differentiate the countries.We have here the example of an USA company that developed in 1980s two customized indices in order to evaluate and select markets: & the index of desirability, & the payback index (risk). Each index comprises a number of indicators that have different weights according to the importance given to them by management. A number of factors are used in both the risk and the desirability index, as they can represent both a risk factor External markets selection and market entry and a desirable factor according to their evolution. But they have different weights in the two indices according to the contribution they bring to the country risk or country desirability. For instance, the quality of infrastructure is the most important variable (13.6% degree of importance) in considering the desirability of one country (as they are going to have an extensive distribution), meaning that a good infrastructure of a country will increase its desirability index, while in the risk index, there are other variables more important in evaluating the country risk, meaning that a bad infrastructure will affect less the risk (payback) index. The higher the desirability index, the more desirable is the country. The higher the risk/payback index, the less desirable and the more risky a country is. Obviously the most developed countries will always score the highest, therefore is recommended that the method to be used on groups of countries, in order to differentiate them within the group. 3. The compensatory model This is a new model that proposes the use of two key constructs, a trade-off between demand

potential and trade barriers in the context of the firm strategy. Through this model the company will screen many markets directly at industry level. It is a compensatory model because is trying to compensate, to express a trade-off between pluses and minuses, in our case between the demand potential as a plus and the trade barriers (as a minus) for the countries under review. The model is suitable to systematically screen markets in order to internationalise by exporting. The two constructs used by the compensatory industry model are the demand potential and the trade barriers, each of them being formed of four variables. The two constructs are built for each country and are evaluated in the context of the companys strategy. Figure no. 7.3 presents the synthesis of the compensatory model. The demand potential construct will be built based on four variables, namely the apparent consumption, the import penetration, the origin advantage and the market similarity. The apparent consumption refers to how much a country consumes from a certain product. The consumption of a product is a good indication for the market potential in that country, as it can be sold on the market according to how much they consume. A country will consume from a product how much it produces locally to which will be added how much it imports from that product and will be deducted how much it exports towards other countries. Therefore, the apparent consumption is calculated as the domestic production plus the imports minus the exports of that product. The import penetration is the second variable included in the demand potential construct. Import penetration shows how much from the apparent consumption comes from imports. A high percentage of imported goods will show an openness of the market toward foreign products. On the other hand it can also indicate a low competitiveness of the domestic producers, signalling an attractive target market. Further on, the origin advantage variable will show how much from the imported goods originated in the country of origin of my product. A high share of the country of origin in the total imports of the targeted country shows that the company has a number of advantages in that country. Such possible advantages are: other exporters from the country of origin can help with market information there is already a favourable image of the products coming from the country of origin (in a given industry), There are strong trade relations between the exporting and the importing countries that result in a greater trade promotion effort at local foreign level.

Market similarity is the last variable of the demand potential construct, the one that shows the pluses of the external markets. Market similarity is considered based on the idea that demand tends to be higher in markets that are similar to the market

where the product was initially developed. High similarity between markets reduces usually the risk and the uncertainty. It is calculated as a compilation of a number of indicators such as life expectancy, GDP/capita, electricity production, percentage of imports in GDP. The trade barriers construct is also formed of four variables: the tariff barriers, the non-tariff barriers, the geographic distance and the exchange rate. Tariff barriers can influence market selection either positively or negatively. The lower the tariff barriers, the more attractive the market is. Tariffs influence the exporters prices and the pricing strategy of the company on that market. In this model tariff barriers are measured by the weighted mean annual tariff rate over the studied period. The non-tariff barriers are in many cases more important than the tariff barriers in exporting. They refer to: / Quotas. Governments can impose limits or restrict the number of units or the total value of a product or product category that can be imported in the country. / Trade control. The state can control the trade with certain commodities when monopolizes it. It is the case of Sweden, where the Swedish government controls the import of all alcoholic beverages and tobacco products. / Voluntary quotas. These are encountered when exporters voluntary agree to restrict its exports to a certain amount or quantity. Japan voluntary restrained its exports of cars to EU and USA and its exports

of TVs to USA. / Other non-tariff barriers such as custom procedures, administrative and technical regulations. The larger such non-tariff barriers are the less attractive the market becomes. And the low overall incidence of non-tariff barriers suggests an openness of the market. As we have seen most of the non-tariff barriers are qualitative and it is needed a quantification scheme in order to include them in the compensatory market selection model. Papadopoulus et al. suggest the quantification of the non-tariff barriers by developing a composite index that consists of the 20 barriers items International Marketing in the World Trade Organizations Trade Policy Review, by weighting each item by its frequency of occurrence in the target market. The geographic distance is directly related to the transportation costs and can act as a major barrier through its effect on the export price. The higher the geographic distance is the higher the cost of transportation and the less attractive the market is. In the barrier construct it will be included as the mileage between exporting and targeted countries. The exchange rate is the last variable in the trade barrier construct of the compensatory model. Exchange rates are volatile and currency exchange rates between exporting and importing countries represent a major risk element in exporting as they can have a major impact on pricing strategies and the overall strategy of the company in the market. As measurement for the compensatory model it was considered the change in the official exchange rate as compared to the

previous year. The two constructs that compensate one another will be used for market selection differently by different companies, in concordance with the strategy they follow, either an offensive or a defensive strategy. The companies that will follow an offensive strategy will seek growth at the expense of the competitors and will value opportunities more than being concerned by risks. The companies that will follow a defensive strategy will concentrate more on preventing competitors from grabbing their market share. Each construct will be given a mark and for each country will be two scores, one for the market potential and one for the trade barriers. A matrix will be formed (see figure no. 7.4) and based on this matrix information the company will select the countries with the high market potential and the low trade barriers for its particular product. Talking about the systematic approach for market selection we have to mention that there are syndicated sources that evaluate country risks and offer country indices. Such sources are BERI- Business Environmental Risk Intelligence, The Economists (EIU), the Moodys, Standard and Poors and others. Such sources evaluate the country risk with its components: political, economic, financial. Table no. 7.5 shows some of the types of variables that are used when calculating different country risk indices. When using such country indices the company has to bear in mind that many of them are calculated in order to evaluate the financing risk 2 and not the investment risk 3 . The type of information needed when evaluating the two types of risks is different and most of the country risks indices calculated by different agencies

envisage the financing risk and not the business risk or the risk of investment. One agency that also develops market indices for market selection is the Economic Intelligence Unit (EIU). The EIU published for the last thirty-seven years market indicators that allow managers to quickly compare country opportunities. EIU combines statistical data by using a large number of variables in three main indices: market size, market growth and market intensity. The market size index measures the total potential of a market based on a number of indicators such as population (double weighted), urban population, private consumption expenditure, steel consumption, cement and electricity production, ownership of telephones, cars and televisions, buses, trucks, etc. The market growth is an indicator of the rate of increase of the market size. Is calculated by averaging the above mentioned indicators over five years. The market intensity is an index that measures the concentration of the purchasing power in a country or the richness of the country. It is calculated by averaging per capita consumption of different products (above mentioned) and the percentage of urban population double weighted. The average world intensity is considered to be 1 and each country index is calculated in proportion with the world intensity. At the beginning of years 2000, according to EIU market indices, USA, most of Europe and Japan were countries with large market sizes, low growth and high intensity, while countries such as China, Indonesia and Germany had high market growth and low market intensities. When selecting market opportunities, every company has specific needs and interests. The syndicated sources of information are not usually relevant to the companys product. They offer information about the general market potential, but

not about the market potential for the companys specific product. That is why there are firms that develop their own systems of country evaluation and selection based on a number of variables weighted specifically for that firm according to the importance given by management to each criterion. This is the approach that we recommend, to develop specific market selection models that will illustrate the market potential for the companys specific product. Syndicated sources can be used in the primary phases of the screening process, when evaluating the general market potential. The systematic approach has a normative character, as it shows what companies have to do in order to select markets. 7.1.2 The non-systematic approach to market selection The non-systematic approach, also called the opportunistic approach occurs when a company enters in a foreign market as: A consequence of receiving orders from abroad. In this case the selection of the foreign market is given by chance, not by an organized selection process. There is little or no information search, as firms are expanding internationally on an opportunistic basis. Or when markets are selected by rules of thumb. There were studies that showed that many, companies do not have a systematic approach to market selection, the explanations varying from the limited capacity of companies to collect the numerous necessary statistical data to the fact that companies generally use a more opportunistic manner when internationalising. The criteria used when selecting markets through the opportunistic approach are subjective. One of these criteria is the psychic distance. Many firms expand internationally at the very first stage based on the psychic distance. The psychic

distance refers to those factors that are preventing or disturbing the flow of information between firms and the market and include aspects such as differences in language, in culture, in the level of education, in political systems or the level of industrial development. The smaller is the psychic distance the more attractive is the market and vice-versa.

This method is used by small companies at their first stages of internationalisation when they tend to approach the neighbouring countries, rather than large companies that usually search more thoroughly external markets before making the entry decision. However, generally speaking firms start their internationalisation process by entering those markets that they can understand more easily, meaning those with a small psychic distance, leaving the more distant markets for a later stage. While the systematic approach has a normative nature, as it tells how to select markets, the non-systematic approach has a descriptive nature, as it tells what companies have done when going internationally. Sometimes companies use a mixed approach to market selection. The mixed approach combines the two approaches discussed previously by transforming a non-systematic approach, an opportunistic approach into a systematic one. Once the order comes from abroad, the company realizes that there are opportunities abroad and starts searching for the best options. 7.1.3 The relational approach to market selection More recently, as more importance is given to customer satisfaction and to relationship marketing,

the relationship approach to market selection started to develop. In contrast to the other selection approaches that were focusing on selecting countries, the relational approach focuses on the business relationship and the foreign customer as the unit of analysis. Using this approach the company will focus on the decision process through which it identifies and selects exchange partners. In other words through this approach it takes place the assessment of potential international exchange partners and the screening process involves gathering information about each partner and filtering out the less desirable partners. Figure no. 7. 4 presents the model for choosing an international partner through the relational approach. The exchange partner screening process has three stages: 1. Awareness. At this stage the company searches in order to identify a number of feasible international partners. It uses many information sources, including the firms network. It will start by looking at those with which it has direct relations (customers, suppliers) and will continue later with those with which it has indirect relations (customers of customers and suppliers of suppliers). The company envisages to identify the skills and the qualifications of potential partners. 2. Exploration. At this stage the company tries to identify which of the potential partners are attractive. The attractiveness of one partner depends a lot on his willingness to negotiate further. If the potential partner perceives as beneficial a future collaboration with the company, as the benefits of such a relationship exceed the costs of the relationship, this is a signal of attractiveness and further communication and bargaining is likely to occur. At this stage are considered obligations, benefits, burdens, attitudes and standards of conduct. There are also taking place trial purchases. The exploration stage can be very short, when one of the partners does not find

attractive such a collaboration and prefers an alternative partner. 3. The choice of partner(s). This is the last phase when the company will select one or more partners by choosing among the existing alternatives. The company will use criteria such as goal compatibility and performance to make the decision. Usually these criteria are appreciated based on direct experience and each such screening process brings more experiential knowledge to the company. International Marketing This approach is usually used in the case of industrial markets and of institutional markets. Also, where the uncertainty of the environment is perceived as being high, it is more probable the use of a relational method for market selection rather than a traditional method. Among the market selection approaches, the systematic approach is usually used by large MNCs that are screening a large number of markets based on a large number of variables. The approach is used in case of non-contractual entry modes, such as export or investment. The relational approach is suggested in case of organizational customers, when there are envisaged high risk countries and when the company uses contractual entry modes such as licensing, franchising, production management. 7.2 Market entry strategies The company that goes international has also to decide on the market entry strategy. The decision can take place prior to market selection and the selection process is done starting from the chosen market entry mode, or the market entry

mode is decided according to the condition of each market. There are a number of aspects a company has to take into consideration when deciding on the entry mode: the internal or the firm-specific criteria and the external or the environment specific criteria. Table no. 7.6 presents the two categories of criteria. External criteria Market size and growth: large markets (current size and potential future size given by the growth rate) justify major commitments. Risk: the greater the risk factor, the less resources are recommended to be committed in the country concerned. Table no. 7.6 Decision criteria for mode of entry Internal firm-specific criteria Company objectives Need for control Internal resources, assets and capabilities Flexibility External environment specific criteria Market size and growth Risk Government regulations Competitive environment Local infrastructure Source: Kotabe M. and Helsen K., 1998, Global Marketing Management, John Wiley and Sons,

p. 246-249.

Government regulations: such as trade barriers or local content laws can constrain the available options for the company. Local infrastructure: the poorer the local infrastructure is, the more reluctant the company is to commit major human and monetary resources. The external factors determine the overall attractiveness of the country. Internal criteria Company objectives: companies that have limited aspirations usually chose an entry mode that require a minimum amount of commitment (such as licensing). Proactive companies with more ambitious objectives usually choose an entry mode that gives them more flexibility and control. Need for control. The level of control is directly related with the amount of resource commitment, the smaller the commitment, the lower the control. Most firms decide based on a trade off between the degree of control desired and the level of resources committed. Internal resources, assets and capabilities: the tighter the resources are, the less commitment the company will have for foreign markets (such as exports and licensing). Flexibility. To cope with market environmental changes, international companies need a minimum of flexibility. Contractual arrangements such as joint ventures and licensing provide very little flexibility, while wholly owned subsidiaries, again offer little flexibility when the company takes a market exit decision.

The different modes of entry can be classified according to the degree of control the company can have over marketing activities from low control entry modes (indirect exporting) to high control entry modes (wholly owned subsidiary). International Marketing There are three major strategies the company can adopt in order to entry in a foreign market, as presented in table no. 7.7. Table no. 7.7 Type of market entry strategies Type of strategy Export entry modes Contractual modes entry Investment entry modes Strategies Indirect exporting Direct exporting (agent/distributor) Direct exporting (branch/subsidiary) Cooperative exporting (piggybacking) Licensing Franchising Technical agreements Service contracts Management contracts

Construction/turn key contracts Contract manufacture Co-production agreements Strategic alliances Sole venture/wholly owned subsidiary (new establishment) Sole venture/wholly owned subsidiary (acquisition) Joint venture (new establishment/acquisition) Source: Root F.R., Foreign Market Entry Strategies, 1982, Amacom, p. 7; Kotabe M. and Helsen K., 1998, Global Marketing Management, John Wiley and Sons, p. 250-266. We will present some of them in the coming section. Export entry modes are used by companies that first internationalise and by companies that are not willing to commit a lot of resources in that particular market. Indirect exporting takes place when the company used domestic intermediaries (such as brokers, export agents) to go abroad. It is suitable for companies with little or no experience abroad and it has the advantage that the company can use the intermediarys experience of foreign markets. External markets selection and market entry Direct exporting takes place when the company exports through intermediaries located in foreign markets. This export method requires higher level of expertise from the manufacturer than the previous one, but at the same time allows for larger control over its distribution channel.

Cooperative exporting or piggyback exporting takes place when the company uses the overseas distribution network of another company (domestic or foreign) to sell goods in the foreign market. Contractual entry modes consist of forming non-equity contractual associations with foreign entities. Licensing involves an agreement of a company (licensor) that grants rights under a contract to another company (licensee) from overseas. In a licensing agreement rights are granted over intangible property such as patents, copyrights, trademarks, procedures in exchange of a fee or royalty. Such contracts are signed for different periods of time. Using licensing as a market entry method, the company can gain market presence without any equity investment. Usually companies use licensing when they do not have the time and the knowledge to engage in international markets. Having a foreign partner offers the advantage as no investment is necessary and better knowledge about the foreign market is available. The disadvantage is that the company depends on the foreign licensee to produce sales, from which it receives a percentage. So, the companys revenues depend on the capacity of the licensee to produce sales. Franchising is a form of licensing through which the franchiser makes a total marketing program (including brand name, logo, products and methods of operations) available to the foreign franchisee. Franchising is prevalent in industries such as services and retail. Contract manufacturing takes place when a company arranges its products to be produced by an independent foreign company on a contractual basis. The

manufacturers responsibility is restricted only to production, then products are given to the international company and that usually takes over the marketing responsibilities. Contract manufacturing is usually chosen for countries with a low volume market potential combined with high tariff protection: the local production is advantageous to avoid high tariffs, but the foreign market does not support the volume to justify the building of a plant. International Marketing Investment entry modes involve ownership of production units or other facilities in the overseas market. Joint ventures (equity based) involve the creation of a new separate business entity under the joint ownership and control of two or more partners. The major advantage of joint ventures as compared to lesser forms of resource commitment is the return potential. Then is a possible high commitment entry mode, where foreign governments discourage wholly owned ventures. For most joint ventures control is the biggest shortcoming along with the lack of trust and the raise of mutual conflicts. Wholly owned subsidiary consists in 100 percent owned companies. Fully ownership strategies can take two routes: acquisitions (when an existing foreign company is bought) or green-field (a new plant is built from scratch). The main benefit consists of full control over all operations, as well as getting all profits. The disadvantages are that is expensive and demanding for the companys resources and the company bears the whole risk in case of failure.