Foreign Market Entry Strategies

Here the, managers have to make the decisions regarding Which foreign markets to enter, When to enter them And on what scale Which foreign markets to enter? The choice between foreign markets must be made on an assessment of their long-term profit potential. This is a function of a large number of factors like political, economic, legal and cultural differences. The attractiveness of a country as potential market for an international business depends on balancing the benefits, costs and risks associated with doing business in that country. The most attractive foreign markets tend to be found in politically stable developed and developing nations that have free market systems and where there is not a dramatic upsurge in either inflation rates or private sector debt. Other markets that do not fit this description may be attractive for other reasons. For example the size of the Chinese market certainly makes it attractive to firms with a long-term perspective. Timing of entry: Once attractive markets have been identified, it is important to consider the timing of entry. There are several advantages associated with entering a national market early, before other international businesses have established themselves. These advantages are called first mover advantages. These advantages must be balanced against the pioneering costs that early entrants often have to bear including the greater risk of business failure. There can also be disadvantages associated with entering a foreign market before other international business known as first mover disadvantages. These disadvantages may give rise to pioneering costs, or costs that an early entrant has to bear that a later entrant can avoid. Scale of entry: Large-scale entry into a national market constitutes a major strategic commitment (a decision that has a long-term impact and is difficult to reverse). That is likely to change the nature of competition in that market and limit the entrants future strategic flexibility. A firm needs to think through the implications of such a commitment before embarking on a large-scale entry. Introduction and Basic Entry Decisions

When a firm that wishes to enter a foreign market, it has several options, including exporting, licensing or franchising to host country firms, setting up a joint venture with a host country firm, or setting up a wholly owned subsidiary in the host country to serve that market. Each of these options has its advantages and each has its disadvantages. The magnitude of the advantages and disadvantages associated with each entry mode are determined by a number of different factors, including transport costs and trade barriers, political and economic risks, and firm strategy. The optimal choice of entry mode varies from situation to situation depending upon these various factors. Thus, while it may make sense for some firms to serve a given market by exporting, other firms might serve the same market by setting up a wholly owned subsidiary in that market, or by utilizing some other entry mode. Entry Modes The various modes of entry are: Exporting Turnkey projects Licensing Franchising Joint ventures Wholly owned subsidiaries Exporting: Many manufacturers begin their global expansion as exporters and later switch to another mode for serving a foreign market. Manufacturing in existing locations and transporting into new markets is called exporting. Advantages: Avoid costs of investing in new location. Realize experience curve and location economies. By manufacturing the product in a centralized location and exporting it to other national markets, the firm may be able to realize substantial sale economies from its global sales volume. Disadvantages: New locations may have lower manufacturing costs. High transport costs can make exporting uneconomical, particularly for bulk products. Tariff and non-tariff barriers by the host country government can make it risky and costly. Agents in the foreign country may not act in exporters best interest. Turnkey Projects: A project in which contractor handles every detail of the project for a foreign client, including the training of operating personnel, and then hands over the foreign clients the key to a plant that is ready for operation. (Setting up a new plant ready for operation). Turnkey projects are most common in the chemical, pharmaceutical, petroleum refining

and metal refining industries, all of which use complex, expensive production technologies. Advantages: This is the best way of earning greater economic returns from that asset. Obtain returns from know-how about a complex process. Government restrictions may limit other options therefore; this strategy is best in case where FDI is limited by government. Lower risk if unstable economic/political situation in country. Disadvantages: The firm that enters into the turnkey deal will have no long-term interest in the foreign country. Less potential to profit from success of plant. Creating a competitor by transferring the technical know-how to a foreign firm. Give away technological know-how to potential competitors. Licensing: Licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to the licensee for specified time in exchange for royalties. Foreign licensee buys rights to manufacture a firms product. Intangible property includes patents, inventions, formulations, processes, designs, copyrights and trademarks Advantages: The firm does not have to bear the costs and risks of investment, it is an attractive option for firms lacking capital to develop operations overseas. Avoid political/economic problems or restrictions in a country. This is used when a firm wishes to participate in a foreign market but is prohibited from doing so by barriers to investment. Disadvantages: Licensing does not give a firm tight control over manufacturing, marketing and strategy that is required for realizing experience curve and location economies. Loss of control over operations (marketing, manufacturing, strategy) Unable to realize experience curve and location economies Limited in coordinating international strategy against competitors Loss of technological know-how Franchising: Franchising is similar to licensing. This tends to involve longer-term commitments than licensing. Selling limited rights to use of a brand name and service know-how. Meaning: franchising is a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee (normally trademark) but also insists that the franchisee agree to abide strict rules

as to how to do the business. The franchiser will assist the franchisee to run the business on an ongoing basis. The franchiser in turn receives a royalty payment, which amounts to some percentage of the franchises revenues. Advantages: Franchisors do not bear the costs and risks of investment Avoid political/economic problems and restrictions in a country Quicker international expansion possible Disadvantages: Limited in coordinating international strategy against competitors Loss of control over quality and service Joint Ventures: A joint venture is an establishment of a firm that is jointly owned by tow or more otherwise independent firms. Work with a local partner and share in the costs/profits of an operation. The most typical joint venture is a 50/50 venture, in which there are tow parties, each of which holds a 50 percent ownership stake and contributes a team of managers to share operating control, however, there are joint ventures in which tone from has a majority share and thus tighter control. Advantages: Benefit from local firms knowledge about the host countrys competitive conditions, culture, language, political systems and business systems. shared costs/risks of development political constraints on other options Disadvantages: Loss of control over technology to its partner. JVs do not give the firm the tight control over subsidiaries that it might need to realize experience curve or location economies. Limited ability to realize experience curve and location economies limited ability to coordinate international strategy against competitors conflicts between partners over goals and objectives of the JV. Wholly Owned Subsidiaries: In wholly owned subsidiary, the firm owns 100 percent of the stock. Establishing a wholly owned subsidiary in a foreign market can be done in two ways. The firm can either set up a new operation in that country or it can acquire an established firm and use that firm to promote its products in the countrys market. Advantages: Control over technological know-how ensured, especially when a firms competitive advantage is based on technological competence. Many high tech firms prefer this entry mode for overseas expansion.(firms in semiconductor, electronics and pharmaceuticals). Control over ability to coordinate international strategy ability to realize location and experience economies ability to coordinate with other subsidiaries Disadvantages:

Most costly method of serving a foreign market. The firm entering through this mode must bear the full costs and risks of setting up overseas operations. Selecting an Entry Modes The optimal choice of entry mode for firms pursuing a multinational strategy depends to some degree on the nature of their core competency. If a firms competitive advantage (its core competence) is based upon control over proprietary technological know-how, licensing and joint venture arrangements should be avoided if possible in order to minimize the risk of losing control over that technology, unless the arrangement can be structured in a way where these risks can be reduced significantly. When a firm perceives its technological advantage as being only transitory, or the firm may be able to establish its technology as the dominant design in the industry, then licensing may be appropriate even if it does involve the loss of know-how. By licensing its technology to competitors, a firm may also deter them from developing their own, possibly superior, technology. The competitive advantage of many service firms is based upon management know-how. For such firms, the risk of loosing control over their management skills to franchisees or joint venture partners is not that great, and the benefits from getting greater use of their brand names can be significant. The greater the pressures for cost reductions, the more likely it is that a firm will want to pursue some combination of exporting and wholly owned subsidiaries. This will allow it to achieve location and scale economies as well as retain some degree of control over its worldwide product manufacturing and distribution.

Summary of modes of entry