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Entry Modes
These are seven different ways to enter a foreign market: 1. Exporting 2. Acquisition 3. Licensing 4. Franchising 5. Establishing joint ventures with a host country firm 6. Setting up a new wholly owned subsidiary in the host country 7. Trunkey Project
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Export
HOME COUNTRY Revenues HOST COUNTRY
MNE
Customers
Export of Goods
Export
Merits Low initial investment Reach customers quickly Complete control over production Benefit of learning for future expansion Demerits Potential costs of trade barriers
Transportation cost Tariffs and quotas
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Licensing Agreement
HOME COUNTRY HOST COUNTRY Licensing of Technology
MNE
Local Firm
Fees and Royalties
Licensing
Merits Low initial investment Avoids trade barriers Potential for utilizing location economies Access to local knowledge Easier to respond to customer needs Demerits Lack of control over operations Difficulty in transferring tacit knowledge Negotiation of a transfer price Monitoring transfer outcome Potential for creating a competitor
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Acquisition
HOME COUNTRY HOST COUNTRY
Investment
MNE
Profit
Local Firm
Acquisition
Merits Access to targets local knowledge Control over foreign operations Control over own technology Demerits Uncertainty about targets value Difficulty in absorbing acquired assets Infeasible if local market for corporate control is underdeveloped
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Joint Venture
HOME COUNTRY HOST COUNTRY
MNE
Inputs
Local Firm
Inputs
Share of Profit
Joint Venture
Merits Access to partners local knowledge Reduction of concern about overpayment Both parties have some performance incentives Significant control over operation
Demerits Potential loss of proprietary knowledge Potential conflicts between partners Neither partner has full performance incentive Neither partner has full control
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Merits
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Management Contract
HOME COUNTRY HOST COUNTRY Management Fees
MNE
Profit
Local Firm
Managerial Service
Technological Inputs
Wholly-Owned Subsidiary
Management Contract
Merits Normally feasible Avoids risk of overpayment Avoids problem of integration Still retains full control Demerits Slower startup Requires knowledge of foreign management High risk and high commitment
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Turnkey Projects
Merits They are a way of earning economic returns from the know-how required to assemble and run a technologically complex process they can be less risky than conventional FDI
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Demerits The firm that enters into this deal will have no longterm interest in the foreign country
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Franchising
Merits Firms avoid many costs and risks of opening up a foreign market Firms can quickly build a global presence Demerits It may inhibit the firm's ability to take profits out of one country to support competitive attacks in another the geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect MGM INSTITUTE OF HEALTH SCIENCES,
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