INTERNATIONAL ENTRY

MODES
SHIKHA SHARMA

Basic Foreign Entry

Decisions
Which foreign markets to enter?

When to enter them?

What scale?
Which entry mode?
There are no right decisions.just
decisions that are associated with
different levels of risk and reward

Basic Foreign Entry

Decisions
Which foreign markets to
enter?
When to enter them?
What scale?
Which entry mode?

Which Foreign Markets

With over 200 nations in the world.
and they do not all hold the same profit
potential
The decision to enter which market will be based on
the assessment of the nations long-run profit
potential
The firm needs to consider the benefits, costs and
risks of doing business in that country
But be careful of this generalization..a firm may
enter a market due to multi-point competition and
may not be seeking profits in this specific market

Which Foreign Markets

Long-run economic benefits of doing
business in a country are a function of:
size of the market
purchasing power of consumers
future wealth of consumers
future economic growth rates
suitability of the product for the market
indigenous competition
political stability

Which Foreign Markets

Favorable
Politically stable developed and
developing nations
Free market systems
No dramatic upsurge in inflation or
private-sector debt
Unfavorable
Politically unstable developing nations
with a mixed or command economy
Where speculative financial bubbles have

Entry Modes
Exporting
Turnkey Projects
Licensing
Franchising
Joint Ventures
Wholly Owned Subsidiaries

Determinants of Which
Mode
The optimalEntry
mode varies
for each market
situation depending on the:
transportation costs
trade barriers
political risks
economic risks
business risks
costs and required investment
firms strategy

Different firms may enter the same

market with different entry modes

Exporting
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 and non-tariff barriers
Possible lack of control over marketing

Turnkey Project

Allows a firm to export process

technology

Contractor agrees to handle every detail

of project for
foreign client

design
construction
training
consultation and technical support

At completion of contract, the foreign

client is handed
the key to the project

Most common in process technology

Turnkey Projects
Advantages
A means of exporting process
technologies
Can earn a return on valuable knowledge
assets
Can overcome FDI restrictions
Less risky than conventional FDI
Disadvantages
No long-term interest in the foreign
country
May create a competitor

Licensing
Agreement where licensor grants rights
to intangible property to another entity
(licensee) for a specified period, in
return for a royalty fee
Intangible property may be:
patents,
inventions
formulas
processes
designs,
copyrights
trademarks

Advantages of Licensing
Reduces development costs and risks of
opening a foreign market
Attractive for firms that:
lack capital
are unwilling to take financial risk in an
unfamiliar or politically volatile foreign
market
must overcome restrictive investment
barriers
does not want to develop the business
applications of an intangible property

Disadvantages of Licensing
Limits the firms control over production,
marketing and strategy to required to
realize experience curve and location
economies
Limits the firms ability to coordinate
strategic moves across countries (crosssubsidization)
Loss of technology and the creation of a
potential competitor

Reducing the Risk of

Cross-LicensingLicensing
An agreement in which a company licenses
valuable
intangible property to a foreign partner
and also receives
a license for the partners valuable
knowledge
allows firms to hold each other hostage

Joint Venture
License technology through a joint venture
where the

Franchising
A specialized form of licensing in which
the franchiser sells intangible property
to the franchisee and insists on rules for
operating the business
Tends to involve longer term
commitments than licensing
Franchisor often assists the franchisee
to run the business on an ongoing basis
Primarily in the service sector

Franchising
Advantages
Reduces costs and risk of opening
foreign market
Allows a firm to rapidly and
inexpensively build a global presence
Disadvantages
May inhibit taking profits from one
country to support competitive attacks
in another country
Quality control and protecting brand
equity

Joint Venture
Establishing a firm that is jointly owned
by two or more otherwise independent
firms
Typical ownership is 50/50but not
always
Having 50% or more does not necessarily
mean that you have control of the
joint venture

Joint Ventures
Advantages
Benefit from local partners knowledge of
market
Share costs and risks with partner
Reduce political risk
Overcome investment barriers
Disadvantages
Risk giving control of technology to
partner
May not have the necessary control to
realize experience curve or location
economies
Limits ability to engage in coordinated

Wholly Owned Subsidiary

The firm owns 100 percent of the stock
and establishes their presence via a
greenfield venture or an acquisition of
an existing firm

Wholly Owned Subsidiary

Advantages
No risk of losing control of core competency or
technology to a competitor
Tight control over operations in different
countries
Helps realize learning curve and location
economies
Disadvantages
Bear full cost and risk of foreign market entry
Lack of local knowledge
culture and consumer
competition and consumers
politics and laws

Acquisitions
Advantages
Quick to execute
Preempt competitors
Possibly less risky than greenfield
ventures because the firm is buying
assets that are producing revenue and
local knowledge
Disadvantages
Often produce poor results due to

overpayment for acquired firms assets

overestimate of the potential for value
creation (hubris)
culture clash between firms
problems with proposed operational

Reducing the Risk of

Acquisition Failure
Carefully screen the targeted foreign firm
and audit
operations and true value of technology
and/brand
financial and market position
management culture

Reduce local management attrition from

acquired firm
Quickly implement an integration plan

Greenfield Venture
Advantages
Can build subsidiary it designs--not
acquires
Easier to establish own operating
routines
Avoids the unknown surprises with an
acquisition
Disadvantages
Slow to establish
Uncertainty and risky
Preemption by aggressive competitor via

Acquisition or Green-Field
Venture?
Well-established,
incumbent firms
Competitors also
interested in entry

Embedded skills,
routines, culture
No competitors

Acquisition

Green-Field
Venture

Strategic Alliances
Cooperative agreements between
potential or actual competitors
Includes the range from joint ventures
to short-term contractual agreements
on specific tasks
Contentious debate if they
create any value
only overcome short-term weaknesses
competitively weaken a firm in the

Strategic Alliances
Advantages
Facilitate entry and gain access into
market
Overcome local ownership regulations
Learn about the market or technology
Share fixed costs and risks (especially in
R & D)
Bring together complimentary skills and
assets that neither firm has or can
develop

Strategic Alliances
Disadvantages
Provides potential competitors a lowcost route to technology and markets
Limits strategic degrees of freedom
Often is difficult and ends in divorce

Comparison Of Entry Modes

Disadvantages

Advantages

Exporting

Licensing

Franchising

Joint
Venture

Wholly
owned
subsidiary

Scale
economies

Lower
development
costs

Lower
development
costs

Local
knowledge

Consistent
with pure
global strategy

Lower political
risk

Lower political
risk

Shared costs Maintains

and risks
control over
operations
May be the
only option

Loss of control
over technology

Loss of control Loss of control

over quality
over technology

No low-cost
sites
High transportation costs
Tariff barriers

Maintains
control over
technology

High cost

Conflict between High risk

partners