FOREIGN ENTRY MODES

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)

Entry Decisions : Which market to enter?

Favourable Host country environment
Politically stable nations Developed and developing economies No dramatic upsurge in inflation or private sector debt Free market systems

Unfavourable Host country environment

Political unstable Excess borrowing

ENTRY DECISIONS : WHEN TO ENTER?

Advantages

of early market entry:

First-mover advantage. Build sales volume. Move down experience curve and achieve cost advantage. Create switching costs. First mover disadvantage - pioneering costs Changes in government policy

Disadvantages:

ENTRY DECISIONS : SCALE OF ENTRY?

Large scale entry

Strategic Commitments - a decision that has a longterm impact and is difficult to reverse. May cause rivals to rethink market entry. May lead to indigenous competitive response.

Small scale entry:

Time to learn about market. Reduces exposure risk.

ENTRY MODE : EXPORT / IMPORT

Export

Selling products and services in other markets of the world

Buying products and services from other markets of the world

Import

Eg: Sony TV, Matsushita VCR, Samsung memory chips

ENTRY MODE : EXPORT

Appropriate when

Volume of business not large Cost of production in foreign market high Political or other risk of investment in foreign market Production bottlenecks in foreign market Company has no permanent interest in foreign market Foreign investment not favoured by the government

ENTRY MODE : EXPORT

Advantages:

Avoids cost of establishing manufacturing operations May help achieve experience curve and location economies
May compete with low-cost location manufacturers Possible high transportation costs Tariff barriers Possible lack of control over marketing representatives

Disadvantages:

ENTRY MODE : 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 Example: Sony Ericsson Fuji Xerox

FRANCHISING

Franchisor sells intangible property and insists on rules for operating business Low risk mode of entry in international market Franchise Agreement Responsibility of Franchisee payment of fee upfront and percentage of revenue Gets time proven concept and products and services that can be brought to the market instantly Responsibility of Franchisor provides managerial and technical assistance, support and ongoing training to ensure same quality of goods and services worldwide Has new stream of income

ENTRY MODE : FRANCHISING

Advantages:

Reduces costs and risk of establishing enterprise

Disadvantages:
May prohibit movement of profits from one country to support operations in another country Quality control

ENTRY MODE : LICENSING

Agreement where licensor grants rights to a firm (licensee) in host country to produce or sell a product for a specific period of time & receives royalty Low cost way to exploit foreign market Licensing Arrangement Responsibility of Licensor

Gives the license to use a patent, trademark or proprietary information

Responsibility of Licensee

Pays royalty Fuji-Xerox Coca Cola-Logos on garments AT&T licensed the technology to produce circuits to Texas Instruments

ENTRY MODE : LICENSING

Advantages

Reduces development costs and risks of establishing foreign enterprise. Lack capital for venture. Unfamiliar or politically volatile market. Overcomes restrictive investment barriers.
Others can develop business applications of intangible property, to capitalize on market opportunities

ENTRY MODE : LICENSING

Disadvantages
No tight control over manufacturing, marketing, and strategy that is required for experience Licensing limits a firms 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 knowhow to the firm in addition to a royalty payment.

EXAMPLE
RCA Corporation licensed color TV technology to Japanese firms- Sony & Matsushita. The Japanese assimilated the technology, improved on it and used to enter the US market US Biotechnology firm Amgen licensed Nuprogene to Japanese pharmaceutical company, Kirin to sell it in Japan

ENTRY MODE : JOINT VENTURES

Joint

Venture: two or more partners own or control a business

Cross marketing arrangements Technology sharing agreements Production contracting deals Equity arrangements

Types

of Joint ventures

Non equity venture : one group providing service for another Equity Venture : financial investment by MNC in business of local partner

ENTRY MODE : JOINT VENTURES

Advantages :

Improvement of efficiency
economies of scale Spread the risk / cost

Access to knowledge

e.g pool financial and technological resources

Political Factors

Local partner can manage political risk better

Collusion or restrictions in competition

Partner with competitors Face competition effectively

Disadvantages:

Risk giving control of technology to partner. May not realize experience curve or location economies. Shared ownership can lead to conflict

ENTRY MODE : TURNKEY OPERATIONS

Contractor

agrees to handle every detail of project for foreign client and handover the key when ready for operation Advantages:

Can earn a return on knowledge asset. Less risky than conventional FDI.

Disadvantages:

No long-term interest in the foreign country. May create a competitor. Selling process technology may be selling competitive advantage as well.

ENTRY MODE : WHOLLY OWNED SUBSIDIARY

In

a wholly owned subsidiary, the firm owns 100 percent of the stock Firms can establish a wholly owned subsidiary in a foreign market: setting up a new operation in the host country acquiring an established firm in the host country

ENTRY MODE : WHOLLY OWNED SUBSIDIARY

Advantages:

No risk of losing technical competence to a competitor Tight control of operations. Realize learning curve and location economies.
Bear full cost and risk

Disadvantage:

ENTRY MODE : MERGERS & ACQUISITIONS

Outright

purchase of a running company abroad or an amalgamation with a running foreign company Advantages

Quick to execute instant presence in foreign market Preempt the competitors Less risky than green field ventures Clash of interest

Disadvantages

GREENFIELD VENTURES OR ACQUISITIONS

Firms can establish a wholly owned subsidiary in a country by: Using a greenfield strategy - building a subsidiary from the ground up Using an acquisition strategy

PROS AND CONS OF ACQUISITION

Acquisitions are attractive because: they are quick to execute they enable firms to preempt their competitors acquisitions may be less risky than greenfield ventures

PROS AND CONS OF ACQUISITION

Acquisitions can fail when: the acquiring firm overpays for the acquired firm the cultures of the acquiring and acquired firm clash attempts to realize synergies run into roadblocks and take much longer than forecast there is inadequate pre-acquisition screening To avoid these problems, firms should: carefully screening the firm to be acquired move rapidly once the firm is acquired to implement an integration plan

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

GREENFIELD OR ACQUISITION?
The

choice between a greenfield investment and an acquisition depends on the situation confronting the firm Acquisition may be better when the market already has well-established competitors or when global competitors are interested in building a market presence A greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture

COUNTERTRADE
Countertrade

is a sale that encompasses more than an exchange of goods, services, or ideas for money. Conditions that favor countertrade: lack of money, lack of value or faith in money, lack of acceptability of money as an exchange medium. 25% of the global trade is countertrade related

FORMS OF COUNTERTRADE
Barter Direct exchange without money Counterpurchase Sale to a country in return for promise of future purchase from it (reciprocal) Offset agreement Offset a hard-currency sale to a nation with future hard-currency purchase. (part of exported good is produced in the importing country) Switch trading Sale by a company of an obligation to purchase from a country Buyback Export of industrial equipment in return for products the equipment produces

EXAMPLE OF COUNTERTRADE

Malaysia and Indonesia are bartering palm oil in exchange for 18 Russian SU-30 jet fighter planes. (According to the Stockholm International Peace Research Institute, Russia was the most prolific exporter of armaments in 2002, racking up 36% of all global deliveries.)

Indonesia is building and then bartering a $300 million fertilizer plant in Vietnam, taking back rice and sugar in the exchange.
Oil-rich Libya is bartering fuel to Zimbabwe in exchange for beef, coffee and tea. Boeing used counterpurchase to sell aircraft to Saudi Arabia for oil and to India for coffee, rice, castor oil and other goods

CHOICE OF ENTRY MODES

Choice of entry mode

Nonequity modes

Equity (FDI) modes

Exports

Contractual agreements

Alliances and joint ventures (JVs)

Wholly owned subsidiaries

Direct exports

Licensing/ franchising

Minority JVs

Greenfield investments

Indirect exports

Turnkey projects

50/50 JVs

Acquisition

Others

Contracted R&D

Majority JVs

Others

Comarketing

Strategic alliances (within dotted areas)

VEHICLES FOR ENTERING FOREIGN MARKETS

100% Hondas initial entry into the U.S. market Bridgestones acquisition of U.S.-based Firestone FDI through acquisition

FDI Degree of ownership control over activities performed in the foreign market Ford-Mazda Genentech-Hoffman LaRoche Exports Champion Internationals paper exports through independent brokers 0% 100% Exports Exports versus local production 100% Local

Alliance

KFCs franchisees in India

Alliance and exports

MAKING ALLIANCES WORK

The success of an alliance is a function of: partner selection alliance structure the manner in which the alliance is managed

MAKING ALLIANCES WORK

A good partner: helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values shares the firms vision for the purpose of the alliance is unlikely to try to opportunistically exploit the alliance for its own ends: that it, to expropriate the firms technological know-how while giving away little in return

MAKING ALLIANCES WORK

Once a partner has been selected, the alliance should be structured: to make it difficult to transfer technology not meant to be transferred with contractual safeguards written into the alliance agreement to guard against the risk of opportunism by a partner to allow for skills and technology swaps with equitable gains to minimize the risk of opportunism by an alliance partner

MAKING ALLIANCES WORK

After

selecting the partner and structuring the alliance, the alliance must be managed Successfully managing an alliance requires managers from both companies to build interpersonal relationships A major determinant of how much a company gains from an alliance is its ability to learn from its alliance partners

CHARACTERISTICS OF A STRATEGIC
ALLIANCE

Benefits Control

Independence of Participants

Technology Products

Shared Benefits

Ongoing Contributions

Markets 14-23

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