Module 4

Non Exports Foreign Market Entry Strategies

International Marketing
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Reasons for Foreign Entry
 Saturated and intensely competitive domestic
markets
 Diversification of risk on a geographical basis,
 Opportunity to realise economies of scale and scope,
 Entry of competitors into overseas markets,
 The need to follow customers going abroad
 Desire to compete and learn in a market with
sophisticated consumer tastes

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 MARKETING INCLUDES

 Market research.
 Concept & idea generation.
 Product design.
 Prototype development & test marketing
 Selection of packaging material, size and labelling
 Positioning
 Choice of brand name
 Choice of advertising agency
 Development of advertisement copy
 Execution of advertisements
 Recruitment and posting of sales force
 Pricing
 Sales Promotion
 Selection and management of distribution channels

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 Info required while entering foreign mkt

 Country: General information,

environmental factors
 Choices: Competition, strengths and
weaknesses of competitors
 Concentration: Structure of market
segments, geographical spread.
 Culture: Major characteristics, consumer
behaviour, decision making style.
 Consumption: Existing and future demand,
growth potential.

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 Capacity to pay: Pricing, prevailing payment terms.
 Currency: presence of exchange controls, degree of
convertibility.
 Channels: General behaviour, distribution costs and existing
distribution infrastructure.
 Commitment: Market access, tariff and non-tariff
barriers.
 Communication: Existing media infrastructure,
commonly used promotional techniques.
 Contractual obligations: Business practices, insurance, legal
obligations
 Caveats: Special precautions to be taken
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Political Risk Mgmt
 Equity restrictions
 Exchange controls
 Fiscal/monetary expansion
 Foreign currency debt burden
 Labour cost expansion
 Tariffs
 Non-tariff barriers
 Payment delays
 Interference in matters such as personnel, recruitments, etc.
 Political turmoil
 Restrictions on repatriation of dividends or capital
 Discriminatory taxation
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  The key questions while entering
overseas markets include:
 Which product line/lines should be used as
the launch vehicle for globalization?
 Which markets should be entered first?
 What would be the optimal mode of
market entry?
 How rapidly should the company expand
globally?

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 International Mode of Entry Mode
 Production in Foreign Country
 Contractual Mode ( Licencing, Franchising, Turnkey Project,
Management Contract, Strategic Alliance, Contract Manufacturing)

 Investment Mode ( Overseas Assembly, JV, Foreign Subsidiary,

Greenfield, Acquisition)

 Production in Home Country ( EXPORTS-----Direct, Indirect),

Piggybacking
 Production in Home Country- Providing Offshore Services

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Entry Strategies

FOREIGN MARKET
ENTRY

MANUFACTURING MANUFACTURING INVESTMENT

AT HOME ABROAD ENTRY

OVERSEAS
CONTRACTUAL ASSEMBLY/
EXPORTING MIXING

ACQUISITION/
LICENSING/ CONTRACT SELF-BUILT
DIRECT NDIRECT FRANCHISING MANUF. OTHER DIRECT
ENTRY
TURNKEY MGT
“PIGGY- PROJECTS CONTRACTS JOINT
BACKING” VENTURES
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 Non Export Entries

 Foreign Direct Investment (FDI)

 Licensing
 Management Contract
 Joint Venture
 Manufacturing
 Assembly operations
 Turnkey operations
 Mergers, Acquisitions, Strategic Alliances
 FTZs

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  ENTRY MODES IN ASIA PACIFIC

Developed-Japan JV/>>>>>EXPAND>>>>>GLOBAL OPERATIONS

MATURE MKT JV/Local Operations,>>>Expand>>>>Integrate inoto Global

Taiwan/Korea Oper.
Growth Mkt
China/India JV, Local Subsidiary >>>Multiple Presence >>>>>
Malysia/Thai RATIONALISE

EMERGING Agents rep>>>>>>>Initial

Vietnam investments thru JV or local subsidiary
Burma/Laos
Cambodia Establish Base to learn , collect info,
set up contacts>> Set up regional
office>>>Regional Officers for
PLATFORM synergies
Singapore
Hongkong ENTRY>>>>>>>DEVELOP>>>>>>CONSOLIDATE

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Determinants of Foreign Mode of Entry
 Firm Size
 Multinational Experience
 Industry Growth
 Global Industry Concentration
 Technical Intensity
 Advertising Intensity
 Country Risk
 Cultural Distance
 Market Potential…

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Determinants … (contd.)

 Market Knowledge
 Value of Firm Specific Assets
 Contractual Risk
 Tacit Nature of Know-How
 Venture Size
 Intent to Conduct Joint R&D
 Global Strategic Motivation
 Global Synergies…..

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Learning Objectives

 Understand the different modes of entry into foreign markets.

 The advantages, disadvantages, and risks in various entry modes.
 Explain why controlling of foreign operations is important for an
international company.
 Explain the equity based and non-equity based control
mechanisms.
 Understand the non-equity entry modes such as licensing,
franchising, and management service contracts, and their
differences.
 Explain the factors that influence the choice of entry modes---

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Contract Manufacturing and Licensing
Contract Manufacturing
 A contractual agreement between a company and a foreign
producer under which the foreign producer manufactures the
company’s product
Licensing
 The international company, or licensor, agrees to make available
to another company abroad, the licensee, use of its patents and
trademarks, its manufacturing processes and know-how, its
trade secrets, and its managerial and technical services. In
exchange, the foreign company agrees to pay the licensor a
royalty or other form of payment according to a schedule
agreed upon by the two parties

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Contractual Foreign Entry
 Contractual entry strategy in IM refers to cross border
exchanges in which relationship is governed by explicit
contract.
 Licensing
 Licensing is the arrangement in which owner of IPR grants
rights to use that property for a specific period of time in
exchange of royalties , licence fee or other compensation
 Franchising: is an arrangement in which the firm allows
another firm the right to use the entire business system
in exchange of fees, royalties or other form of
compensation.

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Management Contract
 Advantages
- minimum investment
- minimum political and economic risks
 Disadvantages
- low profit (management fee as compensation)

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Licensing
 Advantages
- quick expansion (entry) when capital is scarce
- very low risk
- allowing host country to gain technology and create jobs
- allowing host country and licensee to keep most profit
- circumventing trade barriers
 Disadvantages
- very low profit
- licensee becoming future competitor
- licensee's poor performance
- difficulty in terminating licensing agreement

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What the Licensor Delivers to the Licensee
in Complex Licensing Agreements
 A patented product or service
 A trademark or trade name
 Manufacturing techniques
 Proprietary rights generally referred to as company or
industry know-how
 Supply by the licensor to the licensee of components or
equipment
 Technical advice and services of various sorts
 Marketing advice and assistance of various sorts
 Capital and/or managerial personnel

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 Factors Leading to Success
 1. Choice of reliable and competent
partner
 2. Inherent value of patent,
trademark
 3. Goal congruence with partner
 4. Some participation in ownership
 5. Close personal contact with
licensee
 6. Appropriate level of control by
licensor
 7. Reputation of licensor and
licensed asset
 8. Sales assistance to licensee
 9. Support of licensor’s top
management
 10. Flexibility by both partners
 11. Correct timing and pacing of
activity
 12. Detailed spelling out of contract
obligations and responsibilities
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 Factors Leading to Failure
 1. Inadequate market analysis by
licensor
 2. Higher start-up costs than
anticipated by licensee
 3. Insufficient attention paid to
activity by top management of
licensor
 4. Poor timing
 5. Lack of goal congruence with
partner
 6. Unanticipated competition from
home, host an d third country
competitors
 7. Inadequate licensee after sales
effort
 8. Partner rigidity
 9. Insufficient marketing effort by
both licensor and licensee
 10. Weak licensee market research
1/1/2018
Areas Covered in a Franchise Agreement

1. A detailed list of issues to consider regarding the

cost of the franchise
2. A detailed list of issues to consider regarding the
location of the franchise
3. A detailed list of issues pertaining to the
buildings, equipment and supply terms
4. A detailed list of issues pertaining to the
operating practices terms

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Protectionism
 TARIFF BARRIERS
 Tariffs : Is simply defined as tax imposed by the government on
goods entering at its borders .
 It may be used to collect revenue or discourage the import or
both.
 Tariffs increase
 Inflationary pressures, govt control , political controls ,other tariffs in
reciprocity
 Tariffs decrease
 BOP positions
 Supply demand patterns
 International relations
 Restrict
 Manufacturers’ supply sources
 Choices to customers
 Competition
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BOP
 Defined as a summary of all economic transactions that
have taken place between country’s residents and
residents of other countries
 Computed on monthly, qtly or yearly basis
 Double entry book keeping system
 Trade Balance
 Current A/c Balance ( Invisibles, Income, Pvt Transfers,
Official Transfers)
 Capital A/C ( External Assistance, Commercial
Borrowings, IMF Net, NR Deposits ( Net), Rupee Debt
Service, FDI( Net), FIIs, Other Flows,)
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Non Tariffs Barriers
 SPECIFIC LIMITATIONS
 1) Quotas
 2) Import License Requirements
 3) Local Content requirements
 4) Minimum import price limits
 5) Embargoes

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Non Tariffs Barriers
 ADMINISTRATIVE PROCESSES
 Valuations
 Antidumping practices
 Tariff Classifications
 Documentations
 Fees

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Non Tariffs Barriers
 Standards
 Standards disparities
 Testing Methods & standards
 Packaging, labeling, marking standards

 Government Participation in Trade

 Procurement policies
 Export subsidies
 Countervailing duties
 Domestic Assistance Programme
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Non Tariffs Barriers
 Charges on Imports
 Prior import deposit requirements
 Fees
 Special supplementary duties

 VER
 Orderly Marketing Agreements

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Foreign Market Entry Strategies
 Foreign Direct Investment (FDI) Strategies
 Acquisition vs. Greenfield
 Assembly vs. Manufacturing
 Sole Venture vs. Joint Venture
 Vertical & Horizontal Integration
 FDI :It is an internationalization strategy in which firm
establishes a physical presence abroad through
ownership of productive assets like capital, technology,
labour, land , plant and equipment
 International Collaborative Venture : Cross Border
business alliance in which partnering firms pool their
resources and share cost & risk of venture.
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FDI
 Most advanced strategy
 Most complex strategy
 Involves manufacturing plants , marketing subsidiary and
other facilities abroad

 KEY FEATURES
 The degree of control wanted
 The degree of risk it is willing to tolerate
 Time frame with which returns are expected
 The organizational and financial resources it want to commit
 Availability & Capability of partners
 The long term strategic importance of the market

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 Motives for FDI
 Market seeking motives
 Resource or assets motives
 Efficiency seeking motives
 Expansion/ Furthering of brand , presence in new
markets
 Greater profitability & profits
 Invitation from other governments
 Political motives

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Additional features of FDI
 Greater resource commitment
 Local presence and operations
 Global scale efficiency
 FDI entails substantial risk and uncertainties
 FDI investors go in details with particular society,
culture
 MNCs investing go in greater depth for socially
responsible

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IPR
 A patent
 A trademark
 A copyright : Lead to trademark or copy right licensing

 Industrial design
 A trade secret
 Collective Mark : Know How Licensing

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Other types of contractual entry
 Turnkey contracting
 BOT
 Management Contracts
 Leasing
 Internationalization of professional service firms

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Joint Venture
 Advantages
- maximizing profit while minimizing risk
- sharing of resources
- allowing host country to gain technology and create jobs
- circumventing trade barriers
- local partner's market knowledge
- local partner's political connections
 Disadvantages
- conflict with partner
- sharing of profit
- loss of control
- difficulty in terminating relationship

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Local Manufacturing
 Advantages
- job creation for host country
- host country gaining resources (capital and
technology)
- low trade barriers
- higher profit
- utilization of local labor
- host country's economic incentives
 Disadvantages
- expropriation risk
- large capital investment

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 When local production is more appropriate
 The local market is larger than the minimum efficient scale
of production.
 Shipping and tariff costs associated with exporting to the
target market are high.
 The need for local customization of the product design is
high.
 Local content requirements are strong.
 The company is short of capital.
 The physical, linguistic and cultural distance between the
host and home country is great.
 The subsidiary needs to have low operational integration
with the rest of the multinational corporations.
 Government regulations require local equity participation.

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Assembly Operations
 Advantages
- circumventing trade barriers
- utilization of local labor
 Disadvantages
- local product-content laws

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Acquisition
 Advantages
- quick market penetration
- synergy
 Disadvantages
- host country's resentment
- high acquisition costs
- unforeseen problems

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Strategic Alliances
 Mergers and Acquisitions
 Licensing Agreements
 Joint Ventures
- all joint ventures are strategic alliances
- not all strategic alliances are joint ventures
- not necessary for strategic alliances to have equity investment
- not necessary for strategic alliances to form a new business
entity

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Free Trade Zones (FTZs)
 secured domestic area in international commerce
 legally outside a country's customs territory
 area designated by a government for duty-free entry
of goods not used basically for warehousing
 future: benefit derived from manufacturing, not
storing. Advantages
- job retention and creation
- facilitating imports
- facilitating exports

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How to manage JV/ St Alliance
 Top Mgmt must be continuously involved
 Meet Frequently
 Use a Matchmaker
 Maintain independence
 Allow “ NO” sacrifice deals
 Have a monitor
 Anticipate cultural differences

 Aren’t they quiet simple

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