Chapter 12:

The Firms Market-Entry Strategies

EXPORTING ? FRANCHISING?

TURNKEY?

DIRECT

INVESTMENT

SUB-CONTRACTING
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 TOPIC PLAN
The firms foreign business strategy
Exporting
Contracting (licensing, leasing etc)
Joint ventures
Wholly-owned company
Advantages and disadvantages of various
market entries
Strategic FDI plan issues

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 Export-import Management

Company business strategies

Domestic strategies
Investment in product development
Expand domestic market share
Diversify into new industry.
Foreign business strategies
Exporting
International contracting
Foreign Direct Investment/Foreign production

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International Trade and Investment by John Gionea
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 The Firms Foreign Business
Strategy Steps(Figure 12.1)

1.The firms evaluation

Competitive advantages and disadvantages
2.Selection of a target (geographic) market.
3.Selection of product to make/sell in target market
4.Selection of market-entry mode:
Exporting/Contracting/Foreign Direct Investment
5.Business plan development and execution.
6.Monitoring and evaluation of results.
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 Exporting
World Exports of Goods (US $6,1862 billion in
2000) have declined in relative importance
compared to foreign production (US$ 15,680
billion in 2000)
Most likely mode for serving a foreign market
for a domestic firm starting in international
business.
The Business Plan (Export marketing plan)
Many global companies combine exports and FDI.
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 EXPORTS : Advantages

Least costly and risky

L/C payment
Specialisation, economies of scale.
Open to any size or kind of firm

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 EXPORTS :
Disadvantages

Production costs in the home country

may be HIGHER
Transport costs may make exporting
uneconomical.
Trade barriers in target markets.
Divided loyalties of O/S agents.

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 Types of International
Exporters

The Casual Exporter

Domestic firms that do not do international business on a
regular basis(< 5% of T/O)
The Small Scale Exporter
5-20% of turnover
The Experienced/Global Exporter
high ratio of its turnover through involvement in worldwide
business deals(Exports +FDI)

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 Licensing

Licensor grants rights to intangible property to a

Licensee in exchange for a royalty payment.
Time and territorial limits
Advantages:
Speed of execution.
Low risk/investment cost
Brand recognition
Preliminary cooperation which may be expanded into
FDI

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 Licensing : Disadvantages

Isolation from the market

Lack of managerial control
Limited life.
Risk of technology loss

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 Franchising

A Franchisor sells limited brand use rights,products and

services to a Franchisee in return for a lump sum
payment and a share of the Franchisees profits.
20% of US franchise systems have foreign operations
(Japan,Canada,UK,Australia)
-Domino vs.Pizza Haven(200 in 7 years);
-DunkinDonuts vs.Donut King
Low market entry costs and risks.
Quality control is difficult due to big number of
Franchisees and geographic location.
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 Subcontracting

Supply arrangement between a principal and

a subcontractor
Advantages:
Low investment cost
Speed
Stable processing cost and quality
Control of sales and marketing
Can become the basis for later alliance
Disadvantages:
Risk of non-delivery or late delivery
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 TURNKEY OPERATIONS

Contract for the Advantages :

construction of high economic returns
operating facilities that less risky than FDI
are transferred for a Disadvantages
fee to the owner after lack of long-term market
commissioning presence.
loss of control over
technology
the client may turn into a
competitor
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 JOINT VENTURES
A legal entity jointly owned by two or more
legally distinct organisations which share in
the J.V.s decision-making activities.
Various options
2 companies from the same country
Foreign/Local
2 or > companies setting a j.v. in a third country

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 JOINT VENTURES(cont.)
Advantages :
Partners local knowledge
Cost/risk sharing
Host government legislation
Low risk of nationalisation.
Disadvantages :
Technology control risk .
Less control over subsidiaries .
Management control conflicts
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 Wholly Owned subsidiaries

A firm owns 100 percent of the stock.

Trend in the motor-car sector(e.g.India,China)
Advantages :
complete management control.
Optimum security for technology.
Internalisation economies.
Disadvantages :
High costs and risks
Long lead time to first sale(especially for" Greenfield)
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Slides prepared by John Gionea
China:Joint ventures versus Wholly
Owned

25

20

15
US$ Bln
10

0
88 90 92 94 96 97
Joint Venture 2 1.7 6 17 21 18
Wholly Owned 0 1 4 8 12 16

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 Strategic FDI Plan Issues

Investment location evaluation

See Matrix on next slide
Strategic organisation
International group
Business/product units
Functional units
Global matrix

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 Investment Location
Evaluation

Variable 1 2 3 4 5
Weight CountryA CountryB 1x2 1x3

Political 1 9 4 9 4
Economic 3 5 6 15 18

Auto- 4 3 4 12 16
Motive
Personnel 2 2 3 4 6
TOTAL 10 19 17 40 44
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 Strategic FDI Plan Issues

Financial Management and Control

Investment decisions
Financing decisions
Global money management
Global Sourcing Strategy
Outsourcing
Global Human Resource Strategies
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea