foreign entry modes

7/30/2019 foreign entry modes

1/36

FOREIGN ENTRY

MODES


2/36

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)


3/36

Entry Decisions :Which market to enter?

Favourable Host country environment

Politically stable nations

Developed and developing economies

No dramatic upsurge in inflation or private sectordebt

Free market systems

Unfavourable Host country environment

Political unstable

Excess borrowing


4/36

ENTRY DECISIONS :WHENTOENTER?

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


5/36

ENTRY DECISIONS :SCALEOFENTRY?

Large scale entry Strategic Commitments - 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:

Time to learn about market.

Reduces exposure risk.


6/36

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, Samsungmemory chips


7/36

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


8/36

ENTRY MODE : EXPORT

Advantages: Avoids cost of establishing manufacturing

operations May help achieve experience curve and

location economiesDisadvantages:

May compete with low-cost locationmanufacturers

Possible high transportation costs Tariff barriers Possible lack of control over marketing

representatives


9/36

ENTRY MODE : FRANCHISING

Franchising is basically a specialized form of licensing inwhich the franchisor not only sells intangible property tothe franchisee, but also insists that the franchisee agreeto abide by strict rules as to how it does business

Example:

Sony Ericsson

Fuji Xerox


10/36

FRANCHISING

Franchisor sells intangible property and insists on rulesfor operating business

Low risk mode of entry in international market Franchise Agreement

Responsibility of Franchiseepayment of fee upfront and percentage of revenueGets 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 samequality of goods and services worldwide

Has new stream of income


11/36

ENTRY MODE : FRANCHISING

Advantages:

Reduces costs and risk of establishing enterprise

Disadvantages:

May prohibit movement of profits from one country to supportoperations in another country

Quality control


12/36

ENTRY MODE : LICENSING

Agreement where licensor grants rights to a firm (licensee)in host country to produce or sell a product for a specificperiod of time & receives royalty

Low cost way to exploit foreign market Licensing Arrangement

Responsibility of LicensorGives 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


13/36


Advantages

Reduces development costs and risks of establishingforeign 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


14/36


Disadvantages No tight control over manufacturing, marketing, and

strategy that is required for experience

Licensing limits a firms ability to coordinate strategic

moves across countries by using profits earned in onecountry to support competitive attacks in another

There is the potential for loss of proprietary (orintangible) technology or property

One way of reducing this risk is through the use ofcross-licensing agreements where a firm might licenseintangible property to a foreign partner, but requests thatthe foreign partner license some of its valuable know-how to the firm in addition to a royalty payment.


15/36

EXAMPLE

RCA Corporation licensed color TV technology toJapanese firms- Sony & Matsushita. The Japaneseassimilated the technology, improved on it and usedto enter the US market

US Biotechnology firm Amgen licensed Nuprogeneto Japanese pharmaceutical company, Kirin to sellit in Japan


16/36

ENTRY MODE : JOINT VENTURES

Joint Venture: two or more partners own orcontrol 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 inbusiness of local partner


17/36

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


18/36

ENTRY MODE : TURNKEYOPERATIONS

Contractor agrees to handle every detail ofproject for foreign client and handover thekey 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 sellingcompetitive advantage as well.


19/36


20/36

ENTRY MODE : WHOLLY OWNEDSUBSIDIARY

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


21/36

ENTRY MODE : MERGERS &ACQUISITIONS

Outright purchase of a running companyabroad or an amalgamation with a runningforeign company

Advantages Quick to execute instant presence in foreign

market

Preempt the competitors

Less risky than green field venturesDisadvantages

Clash of interest


22/36

GREENFIELD VENTURES OR ACQUISITIONS

Firms can establish a wholly owned subsidiary in acountry by:

Using a greenfield strategy - building a subsidiaryfrom the ground up

Using an acquisition strategy


23/36

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 greenfieldventures


24/36

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 roadblocksand take much longer than forecastthere 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 implementan integration plan


25/36

PROS AND CONS OF GREENFIELD VENTURES

The main advantage of a greenfield venture is that itgives the firm a greater ability to build the kind ofsubsidiary company that it wants

However, greenfield ventures are slower to establish

Greenfield ventures are also risky


26/36

GREENFIELD OR ACQUISITION?

The choice between a greenfield investment and anacquisition depends on the situation confronting thefirm

Acquisition may be better when the market already

has well-established competitors or when globalcompetitors are interested in building a marketpresence

A greenfield venture may be better when the firm

needs to transfer organizationally embeddedcompetencies, skills, routines, and culture


27/36

COUNTERTRADE

Countertrade is a sale that encompassesmore than an exchange of goods, services,or ideas for money.

Conditions that favor countertrade: lack ofmoney, lack of value or faith in money, lackof acceptability of money as an exchangemedium.

25% of the global trade is countertraderelated


28/36

FORMSOF COUNTERTRADEBarter

Counterpurchase

Offset agreement

Switch trading

Buyback

Direct exchange without money

Sale to a country in return for promise of future

purchase from it (reciprocal)

Offset a hard-currency sale to a nationwith future hard-currency purchase. (part ofexported good is produced in the importing country)

Sale by a company of an obligation to purchasefrom a country

Export of industrial equipment in return for productsthe equipment produces


29/36

EXAMPLEOF COUNTERTRADE

Malaysia and Indonesia are bartering palm oil in exchange for18 Russian SU-30 jet fighter planes. (According to theStockholm International Peace Research Institute, Russia wasthe most prolific exporter of armaments in 2002, racking up36% of all global deliveries.)

Indonesia is building and then bartering a $300 millionfertilizer plant in Vietnam, taking back rice and sugar in theexchange.

Oil-rich Libya is bartering fuel to Zimbabwe in exchange for

beef, coffee and tea.

Boeing used counterpurchase to sell aircraft to Saudi Arabiafor oil and to India for coffee, rice, castor oil and other goods


30/36

CHOICE OF ENTRY MODES

Choice of entrymode

Nonequitymodes

Equity (FDI)modes

Greenfieldinvestments

Minority JVsDirect exportsLicensing/franchising

Acquisition50/50 JVsIndirect exports Turnkey projects

OthersMajority JVsOthers Contracted R&D

Wholly ownedsubsidiaries

Alliances andjoint ventures (JVs)

ExportsContractualagreements

ComarketingStrategic alliances(within dotted areas)


31/36

VEHICLES FOR ENTERING FOREIGN MARKETS

100% Exports 100% Local

Exports versus local production

Degree ofownership controlover

activities per-formed in theforeign market

0%

100%

FDI

Exports

Alliance

ChampionInternationals paper

exports throughindependent brokers

Hondas initial

entry into theU.S. market FDI throughacquisition

Bridgestones

acquisition ofU.S.-basedFirestone

Ford-Mazda

Genentech-HoffmanLaRoche

Alliance and

exports

KFCs

franchiseesin India


32/36

MAKING ALLIANCES WORK

The success of an alliance is a function of:

partner selection

alliance structure

the manner in which the alliance is managed


33/36


A good partner:

helps the firm achieve its strategic goals and has thecapabilities the firm lacks and that it values

shares the firms vision for the purpose of the

alliance

is unlikely to try to opportunistically exploit thealliance for its own ends: that it, to expropriate thefirms technological know-how while giving away little

in return


34/36


Once a partner has been selected, the allianceshould be structured:

to make it difficult to transfer technology not meantto be transferred

with contractual safeguards written into the allianceagreement to guard against the risk of opportunismby a partner

to allow for skills and technology swaps with

equitable gains

to minimize the risk of opportunism by an alliancepartner


35/36


After selecting the partner and structuring thealliance, the alliance must be managed

Successfully managing an alliance requiresmanagers from both companies to build interpersonal

relationships

A major determinant of how much a company gainsfrom an alliance is its ability to learn from its alliancepartners


36/36

CHARACTERISTICSOFASTRATEGICALLIANCE

14-41

Independence ofParticipants

SharedBenefits

OngoingContributions

Markets

Benefits

Control Products

Technology

14 23

foreign entry modes

Documents