Entry Mode

Analysis
Lecture -1
Samira Rahman

LEARNING OUTCOMES
After this lecture you should be
able to:
Understand where, when and how to
enter a foreign country or region
Understand the Uppsala model of
internationalization.
Understand the different modes of
entry strategies employed by
multinational firms.
Understand the de-internationalisation
process.

Choosing a Mode of Entry

Having decided which markets to enter,
the firm is now faced with another
decision:
how it should enter?
which mode of entry should it use?

Exporting
Exporting is the action by the
firm to send produced goods
and services from the home
country to other countries

Additional Considerations
In considering exporting as its entry mode, a
firm must consider many factors besides
which form of exporting to use:
Government policies: Home country export
promotion policies, host country tariffs on imported
goods

Marketing concerns: image of home country,

distribution, responsiveness to customers,

Logistical considerations: physical distribution

cost of warehousing, packaging, ..

Distribution

issues:

distribution networks,
network, etc..

cost
control

of
establishing
over distribution

Advantages and Disadvantages of the Different

Modes of Entry
Mode
of
Entry

Advantages

Disadvantages

Export

Does not require a high

resource commitment in
the targeted country
Inexpensive way to gain
experiential knowledge in
foreign markets
Low cost strategy to
expand sales in order to
achieve economies of
scale

Hard to control operations

abroad
very
small
Provides
experiential knowledge in
foreign markets

Export Documentation
Documentation refers to the official forms and
other paperwork that are required for export
sales to transport goods and clear customs.
A quotation or pro forma invoice is issued
upon a request by potential customers. This
can be structured as a standard form, which
informs the potential buyer about the price and
description of the exporters product or service.
The commercial invoice is the actual demand
for payment issued by the exporter when a sale
is concluded. It includes a description of the
goods, the exporters address, delivery address,
and payment terms.
A packing list, particularly for shipments that
involve numerous goods, indicates the exact
contents of the shipment.

Export Documentation (cont.)

The bill of lading is the basic contract
between exporter and shipper. It authorizes a
shipping company to transport the goods to
the buyers destination.
The shipper's export declaration
(sometimes called "ex-dec) lists the contact
information of the exporter and the buyer (or
importer), as well as a full description,
declared value, and destination of the
products being shipped.
The certificate of origin is the "birth
certificate" of the goods being shipped and
indicates the country where the product
originates.
Exporters usually purchase an insurance
certificate to protect the exported goods
against damage, loss, pilferage (theft) and, in

Incoterms (International Commerce Terms)

A system of universal, standard terms of sale and
delivery, developed by the International Chamber
of Commerce.
Commonly used in international sales contracts,
Incoterms specify how the buyer and the seller
share the cost of freight and insurance, and at
which point the buyer takes title to the goods.

International Licensing
Another means of entering a foreign market is
licensing, in which a firm, called the licensor,
leases the right to use its intellectual property
technology, work methods, patents, copyrights,
brand names, or trademarksto another firm,
called the licensee, in return for a fee.

Licensing is used to:

Obtain extra income from technical expertise and
service
Spread around the cost of R&D
Retain established markets that have been closed
or threatened by trade restrictions
Reach new markets not accessible by export from
existing facilities

Basic Issues in International

Licensing
Normally the terms of a licensing agreement
are specified in a detailed legal contract, which
addresses such issues as:
Specifying the boundaries of the agreement: PepsiCola Heineken

Determining compensation: Royalty of 3-5% of sales

is typical.
Establishing rights, privileges, and constraints: quality
of materials to be used, quality process, divulging info
- of technology and knowledge, methods of resolving
disputes.
Specifying the duration of the contract: the higher the
investment the longer the duration: e.g. Tokyo
Disneyland The Walt Disney Company-100 year
licensing agreement.

International Licensing
Risks

Sub-optimal choice
Risk of opportunism
Quality risks
Production risks
Payment risks
Contract enforcement risk
Marketing control risk

Advantages and Disadvantages of the Different

Modes of Entry
Licensing

Speedy entry to foreign

market
Does not require a high
resource commitment in
the targeted country
Can be used as a step
towards a more
committed mode of entry
Low cost strategy to
expand sales in order to
achieve economies of
scale.

Hard to monitor
partners in foreign
markets
High potential for
opportunism
Hard to enforce
agreements
Provides a small
experiential
knowledge in foreign
markets

International Franchising
Another popular strategy for internationalizing a
business is franchising. Franchising allows the
franchisor more control over the franchisee and
provides for more support from the franchisor to
the franchisee than is the case in the licensorlicensee relationship.

International Franchising
International franchising is a contract-based
organisational structure for entering new markets.
It involves a franchisor firm that undertakes to
transfer a business concept that it has developed,
with corresponding operational guidelines, to nondomestic parties for a fee.

Basic Issues in International

Franchising
International franchising is likely to
succeed when certain market
conditions exist:
The franchisor has been successful
domestically because of unique products
and advantageous operating procedures
and systems.
The factors that contributed to domestic
success are transferable to foreign
locations.
The franchisor has already achieved
considerable success in franchising in its
domestic market.
Foreign investors must be interested in

International Franchising
Risks
Potential risk of free- ride by franchisee believing
that franchisors efforts are sufficient for the
franchise to succeed
A franchise may damage the franchisor image
and reputation in the host country, because
customers often can not distinguish between
franchised and company-owned outlets.

Wholly Owned Ventures

Multinational
firms
have
two
options:
Greenfield - investment in a completely new
facility- , or Acquire or Merge with an already
established local firm.
A Greenfield strategy entails building an
entirely new subsidiary in a foreign country
from scratch to enable foreign sale and or
production
An international Merger or Acquisition is a
transaction that combines two companies from
different countries to establish a new legal
entity.

Wholly Owned Ventures

Risks of Greenfield strategy
The risk of building relationships with customers,
suppliers and government officials in the new
country
The risk of recruiting managers and employees
familiar with local market conditions
The risk of being seen as a foreign firm by local
stakeholders.

Wholly Owned Ventures

The Mergers and Acquisitions (M&As) Strategy
Types of M&As
Horizontal M&As: involve two competing firms in the
same industry
Vertical M&As : involve a merger between firms in the
supply chain.
Conglomerate M&As: involve a merger of two companies
from two unrelated industries.

Wholly Owned Ventures

The Mergers and Acquisitions (M&As) Strategy
Motives

Strategic motives
Economic motives
Personal motives

Wholly Owned Ventures

The Mergers and Acquisitions (M&As) Strategy
Risks
Corporate and national cultures fit
Managers of the acquired foreign subsidiary may not
accept the parent company.

Reasons for
Acquisitions

Problems in
Achieving Success

Increased
market power

Integration
difficulties

Overcome
entry barriers

Inadequate
evaluation of target

Cost of new
product development

Large or
extraordinary debt

Increased speed
to market

Int M&As

Inability to
achieve synergy

Lower risk
compared to
developing new
products
Increased
diversification

Managers overly
focused on acquisitions

Avoid excessive
competition

Too large

Too much
diversification

Advantages and Disadvantages of the Different Modes of Entry

Low risks of technology
appropriation(attack)
Able to control operations abroad
Provides high experiential
Greenfield knowledge in foreign markets
Low level of conflict between the
subsidiary and the parent firm
Does not have a problem of
integrating different cultures,
structures, procedures and
technologies
Managers of foreign subsidiaries
have a strong attachment to the
parent firm
WhollyOwned
Ventures

Could not rely on preexisting relationships with

customers, suppliers and
government officials
Potential difficulty in
accessing to existing
managers and employees
familiar with local market
conditions
Adds extra capacity to
the existing market
The firm is seen as a
foreign firm by local
stakeholders

Advantages and Disadvantages of the Different Modes of Entry

Low risks of technology
appropriation
Able to control operations
Mergers and abroad
Acquisitions Provides high experiential
knowledge in foreign markets
Could rely on pre-existing
relationships with customers,
suppliers and government
officials
Access to existing managers
and employees familiar with
local market conditions
Does not add extra capacity to
the market
Wholly
-Owned

Problem of integrating
foreign subsidiaries into the
parents system
Managers of acquired
foreign subsidiaries may
have a weak attachment to
the parent firm

End Game: Deinternationalisation

De-internationalisation refers to any voluntary or
forced actions that reduce a company's
engagement in or exposure to current crossborder activities."
When to exit
How to exit