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.

 Disadvantages:
 First
mover disadvantage - pioneering costs
 Changes in government policy
ENTRY DECISIONS :
SCALE OF ENTRY?
 Large scale entry
 StrategicCommitments - a decision that has a long-term
impact and is difficult to reverse.
 May cause rivals to rethink market entry.
 May lead to indigenous competitive response.
 Small scale entry:
 Timeto learn about market.
 Reduces exposure risk.
ENTRY MODE : EXPORT / IMPORT
 Export
 Selling products and services in other markets of the
world
 Import
 Buying products and services from other markets of
the world

 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
 Disadvantages:
 May compete with low-cost location
manufacturers
 Possible high transportation costs
 Tariff barriers
 Possible lack of control over marketing
representatives
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 firm’s 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 know-how 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.

 Disadvantage:
 Bear full cost and risk
ENTRY MODE : MERGERS &
ACQUISITIONS
 Outrightpurchase 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

 Disadvantages
 Clash of interest
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

Equity (FDI)
Nonequity
modes
modes

Contractual Alliances and Wholly owned

Exports
agreements joint ventures (JVs) subsidiaries

Licensing/ Greenfield
Direct exports Minority JVs
franchising investments

Indirect exports Turnkey projects 50/50 JVs Acquisition

Others Contracted R&D Majority JVs Others

Strategic
Strategic alliances
alliances
Comarketing
(within
(within dotted areas)
dotted areas)
 VEHICLES FOR ENTERING FOREIGN MARKETS

100%
Honda’s initial Bridgestone’s
entry into the acquisition of FDI through
U.S. market U.S.-based acquisition
Firestone

FDI
Degree of
ownership control
over Ford-Mazda
activities per- Genentech-Hoffman Alliance
formed in the LaRoche
foreign market
Exports

Champion International’s
KFC’s
paper exports through Alliance and
franchisees in
independent brokers exports
India

0%
100% Exports 100% Local

Exports versus local production

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 firm’s 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 firm’s
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

Independence of
Benefits Participants Technology

Control Products

Ongoing
Shared Contributions
Benefits
Markets
14-41
Cooperation
14-23