International Market

Entry Modes
and
Barriers in
International
Business
Presented by :Bhoomika
MBA 3rd Semester
02911403913

Meaning

Entry mode is an institutional arrangement

necessary for the entry of a company's
products and services into a new foreign
market.
Trade barriers are government-induced
restrictions on international trade.

Entry Strategy

Entry strategy for international markets is a

comprehensive plan, which sets forth the objectives,
goals, resources, and policies that will guide a
company's international business operations over a
future period long enough to achieve sustainable
growth in world markets.

Principal Motives for

International
Expansion
World Market
Locations
Economies

To seek lower
production factor costs

Economies
of Scale

To expand sales and

production volume

Economies
of Scope

To exploit proprietary
assets

Entry Decision depends

upon

Timing: When is a good time to enter?

Potential gain from waiting
Cost of delay

Scale of entry
Small scale: Establish a foothold to learn
Large scale: Acquire first mover advantage

Entry Decision
depends upon

Speed of expansion: How fast to grow?

Value of learning
Preemption of competitors
Constraints of internal resources

Mode
Some modes have more flexibility embedded
Some modes reduce resource requirements

Pioneers vs. Fast

Followers

Pioneers
Can gain and maintain competitive edge in
new market
Overall pioneers may not perform as well in
the long run as followers

Most successful when

High entry barriers exist
Firm has sufficient size, resources, and
competencies

Pioneers vs. Fast

Followers

Followers
Many become followers by default
May be advantage to let pioneer take initial risks

Most successful when

Few legal, technological, cultural, or financial barriers
Sufficient resources or competencies to overwhelm
the pioneers early advantage

Entry modes

Choice of Market
Entry Mode
Exports
Licensing
Franchising
Wholly Owned
1) Acquisition
2) Green Field
Turnkey Projects
Joint Ventures

Exports
HOME COUNTRY

HOST COUNTRY
Revenues

MNE

Customers

Export of Goods

Exports

Advantages
Low initial investment
Reach customers quickly
Complete control over
production
Benefit of learning for
future expansion

Disadvantages
Potential costs of trade
barriers

Transportation cost
Tariffs and quotas

Foregoes potential location

economies
Difficult to respond to
customer needs well

When is Export Appropriate?

Low trade barriers
Home location has cost advantage
Customization not crucial

Licensing
HOME COUNTRY
HOST COUNTRY
Licensing of Technology

MNE

Local Firm
Fees and Royalties

Licensing

Advantages
Low initial investment
Avoids trade barriers
Potential for utilizing
location economies
Access to local knowledge
Easier to respond to
customer needs

Disadvantages
Lack of control over operations
Difficulty in transferring tacit
knowledge

Negotiation of a transfer price

Monitoring transfer outcome

Potential for creating a

competitor

When Is Licensing Appropriate?

Well codified knowledge
Strong property rights regime
Location advantage

Examples

Arvind Brandsrepresent Wrangler, Arrow,

Nautica, Jansport and Kipling.

TheMurjani Groupis the licensee for FCUK

and Tommy Hilfiger.

Beverly Hills Polo Club (BHPC) is licensed

to Spencers Retail.

Franchising
HOME COUNTRY
HOST COUNTRY
Brand Name, Strategies,
Advertising and Training

MNE

Local Firm
Initial Fees
and Royalties

Local Firm
Local Firm

Franchising

Advantages
International standardization
Reduces risk
Recognized brand name and
trade mark
Recognized relationship
with suppliers

Disadvantages
Restriction on running a
business
Other franchises might give the
brand a bad name
Initial cost is high

When Is Franchising Appropriate?

First time business owner
Cost is affordable by the Franchisee

Franchising

IFA - IFAs mission is to protect, enhance and promote

franchising through government relations, public relations and
educational programs.

FDD - Franchise Disclosure Document

Revenue and profit calculation

Wholly Owned
Subsidiaries
A wholly owned subsidiary includes two types of
strategies:Acquisition
Greenfield Investments
To decide which entry modes to use is depending on
situations.

Acquisition
HOME COUNTRY

MNE

HOST COUNTRY

100%
Investment
Profit

Local Firm

Acquisition

Advantages
Access to targets local
knowledge
Control over foreign
operations
Control over own
technology

Disadvantages
Uncertainty about targets
value
Difficulty in absorbing
acquired assets
Infeasible if local market for
corporate control is
underdeveloped

When Is Acquisition Appropriate?

Developed market for corporate control
Acquirer has high absorptive capacity
High synergy

Examples

Bharti Airtel to acquire Warid Telecom Uganda April 2013

ONGC acquired Kashagan Oilfields, November 2012

Deal size: $5 billion, Country: Kazakhstan

Indian Hotels Co acquired Orient-Express Hotels, October 2012

Deal size: $1.67 billion, Country: Bermuda

ONGC acquired Kashagan Oilfields, November 2012

Deal size: $5 billion, Country: Kazakhstan

Green Field
Investments
HOME COUNTRY
HOST COUNTRY
MNE
Profit

Investment

New Subsidiary
Company

Green Field
Advantages Investments
Disadvantages

Normally feasible
Avoids risk of
overpayment
Avoids problem of
integration
Still retains full control

Slower startup
Requires knowledge of
foreign management
High risk and high
commitment

When Is Green Field Entry Appropriate?

Lack of proper acquisition target
In-house local expertise
Embedded competitive advantage

Example

ARS Software Engineering Private Limited

Hindustan Unilever Limited (FMCG)

(Anglo Dutch )

Coca Cola India Pvt. Ltd.

( Atlanta USA)

Turnkey Projects
HOME COUNTRY
HOST COUNTRY
Contractor Fees

MNE

Local Firm
Profit

Technological Inputs
and Training
Personnel

Acquire

Turnkey
Project

Turnkey Projects

Advantages
They allow firms to earn great
economic returns from the
know-how required to assemble
and run a technologically
complex process.
They are less risky in short
term

Disadvantages
Selling competitive
advantage
No long term interest in the
foreign country
create competitors

When is a Turnkey Project Appropriate?

Turnkey projects are most appropriate for companies that
specialize in expensive, complex production technologies, such as
the chemical, pharmaceutical, petroleum refining, and metal
refining industries

Examples
Gactel Turnkey Projects Limitied
1) North Delhi Power Limited - RCC Induced Draft Cooling
Tower
2) Indian Oil Corporation Limited - Cooling Water System
(EPCC - 5)
Novatech Projects India Pvt. Ltd. - Process Equipment
Manufacturer
1) Asian Paints
2) BELGIUM (Petrochemical) - DOW Chemical Intl. Ltd.

Joint Venture
HOME COUNTRY

HOST COUNTRY

MNE

Local Firm
Share of
Profit
Joint Venture
Company

Inputs
Inputs
Share of Profit

Joint Venture
Advantages
Disadvantages

Access to partners local

knowledge
Reduction of concern about
overpayment
Both parties have some
performance incentives
Significant control over
operation

Potential loss of proprietary

knowledge
Potential conflicts between
partners
Neither partner has full
performance incentive
Neither partner has full
control

When Is a Joint Venture Appropriate?

Both partners contribute hard-to-measure inputs
Large expected mutual gains in the long-run
Trade secrets can be walled off

Examples

AUTOMOBILES
COMPANIES AND THEIR
MODE OF ENTRY IN
A close look at the entryINDIA
strategies of the multinational
companies in the Indian automobile industry points to some

distinct patterns.
Except for Audi, which is targeting a premium market niche,
and Hyundai,
The rest of the companies have set up joint ventures with
Indian partners.

Data to support the

statement

Kumar & Subramaniam

(1997)
A Contingency Framework
for the Mode of Entry
Decision

Risk
Return
Control

Modes of entry
Exporting

Contractual
Agreement

Joint
Venture

Acquisition

Greenfield
Investments

Risk

Low

Low

Moderate

High

High

Return

Low

Low

Moderate

High

High

Control

Moderate

Low

Moderate

High

High

Integration

Negligible

Negligible

Low

Moderate

High

Trade Barriers
Trade barriers are government-induced restrictions
on international trade.
There are two types of trade barriers:

Trade Barriers

Tarif

Non
Tarif

Tarif

Taxes and duties imposed on goods and services

imported and exported

Home currency, which is collected by the

government from the owner of the goods, when
he/she is passing the national borders (Trot,
1998)

Tarif barriers
Taxes and duties imposed on the goods and
services imported and exported
Custom duties
Import duty
Specific duty- per unit of the product
Valorem duty- % of the value of the product
Compound duty- combines both

Types of Tarif Barriers

Quantity of goods
Import
Export
Transit

Volume of goods
Value
Quantity
Combined

Advantages
Protect

domestic

industry
Revenue for
government
Jobs are saved in
home
Demand for domestic
products

Disadvantages
High

price for
imported products
Loss of demand in
exporting country
Crashes between
import and export
country

Non Tarif Barriers

Certain measures other than import duties that

country adopts for restrict of foreign trade
either directly or indirectly

Although it boost up the export of the country

but reduces revenue of government and they
are hidden devices which its effect is not
visible

Types of Non-Tarif
Barriers
1.

Quantitative restriction
Imported quota (maximum limited)
VER (bilateral agreement b/w two country)

2.

For-ex control

Blocked a/c
Payments to foreign country is given to the
government of that country and cant be changed to other
currency but can purchase from
home country

Multiple exchange rates

To restrict the import of a specific commodity high

rate of exchange rate is set for buying the product

Dirty float system or managed float system

Exchange clearing arrangements

Trade settled by central banks rather then direct

payment to buyers or sellers like RBI opens a/c in
bank of England

3.

Fiscal barriers
Anti-dumping duties
Dumping selling the product to host country cheaper

then the price of home country to capture the market

Countervailing duties
Products exported to host country very cheaper due
to subsidies provided by exporting countries

4.

Subsidies
Like low rate of interest on financing and raw materials

5.

Technical Barriers
Like trade in health and safety regulations, sanitary
regulations ,quality standards and packing and labeling
and technical standards. Government puts certain
standards to delay and increase the cost of those
products.

6.

State Trading
Government only accepts suppliers or provides tenders
to domestic firms even though the tender rate of
domestic firm is high relatively then foreign firm.

Why Are Tariffs and

Trade Barriers
Used?
Protecting Domestic Employment

The levying of tariffs is often highly politicized. The possibility of increased

competition from imported goods can threaten domestic industries. These
domestic companies may fire workers or shift production abroad to cut costs,
which means higher unemployment and a less happy electorate.

Protecting Consumers
A government may levy a tariff on products that it feels could endanger its
population. For example, South Korea may place a tariff on imported beef
from the United States if it thinks that the goods could be tainted with
disease.

Infant Industries
The use of tariffs to protect infant industries can be seen by the
Import Substitution Industrialization (ISI) strategy employed by
many developing nations. The government of a developing economy
will levy tariffs on imported goods in industries in which it wants to
foster growth.

National Security
Barriers are also employed by developed countries to protect certain
industries that are deemed strategically important, such as those
supporting national security. Defence industries are often viewed as
vital to state interests, and often enjoy significant levels of
protection.

Retaliation
Countries may also set tariffs as a retaliation technique if they
think that a trading partner has not played by the rules. For
example, if France believes that the United States has allowed
its wine producers to call its domestically produced sparkling
wines "Champagne" (a name specific to the Champagne
region of France) for too long, it may levy a tariff on imported
meat from the United States. If the U.S. agrees to crack down
on the improper labelling, France is likely to stop its
retaliation. Retaliation can also be employed if a trading
partner goes against the government's foreign policy
objectives.

Barriers hindering
export
initiation
Insufficient finances
Lack of productive

Insufficient knowledge
Lack of foreign market
connections
Lack of export
commitment
Lack of capital

capacity
Lack of foreign channels
of distribution
Management emphasis
on developing domestic
markets
Cost escalation

Thank You!