Foreign Market Entry Strategies

Modes of Entry
EXPORTING
1. Indirect Exports2. Direct Exports3. Intra-corporate Transfers
LICENSING
4. International Licensing
FRANCHISING
5. International Franchising
SPECIAL MODES
6. Contract Manufacturing7. Business Process Outsourcing 8.
Management Contracts9. Turnkey Projects
FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES
10. Green Field Strategy
FOREIGN DIRECT INVESTMENT WITH ALLIANCES
11. Mergers and Acquisitions12. Joint Ventures

Value Chain of an MNE

Company Infrastructure
R&D

Innovative
Capabilities

Production

Marketing
and Sales

Advanced
Technology
& KnowHow

IndustrySpecific
Marketing
Expertise

Organization, Coordination & HRM

What additional resources may the MNE need to
enter a foreign market?
Local expertise: marketing, government relations, etc.

Principal Motives for Intl Expansion

World Market
Locations
Economies

To seek lower
production factor costs

Economies
of Scale

To expand sales and

production volume

Economies
of Scope

To exploit proprietary
assets

The Core Competencies

Dunnings

OLI theory stated in 1980s

Ownership advantages it consist of intangible assets

such as know-how.

Location advantages - it could be profitable for the

firms to continue these assets with factor endowment
( labor force, energy, materials, transport, and
communication channels) in foreign market.
Internationalization advantages it must more profitable
for the firms to use its advantages rather than selling
them, or the right to use them to a foreign firm.

Other Advantages

International modes of entry and value at risk

Choice of entry mode jointly determines
degree of control and extent of risk

M&A
Growth
Alliances/
Joint
Ventures
Licenses
Contract
Spot

Increase in
control,

Degree of commitment depends on

contractual duration and vertical
integration
With less knowledge of other countrys
market, choose lower degree of
commitment

Increase in
commitment
and risk
As knowledge increases over time, can
increase degree of commitment to get
closer to desired entry mode.
Contractual transactions may give
optimal mix of control and commitment
7

Mode of Entry in international Business

Indirect export modes
Manufacturer uses independent export organizations
located in its own country ( third country)

There are five main entry modes of indirect exporting.

Export buying agent A representative of foreign
buyers who is located in the exporters home country.
The agent offers services to the foreign buyers: such as
identifying potential sellers and negotiating prices.
Export management company/export house are
specialist companies set up to act as the export
department for a range of companies.

Mode of Entry in international Business

Direct export modes
Manufacturers sells directly to an importer, agent or
distributor located in the foreign target market.
Distributor (Importer) independent company that stocks
the manufacturers products. It will have substantial
freedom to choose own customers and price. It profits from
the difference between its selling price and its buying price
from the manufacturer.
Agent Independent company that sells on to customers
on behalf of the manufacture( exporter). Usually it will not
see or stock the product. It profits from a commission
(typically 5-10%) paid by the manufacturer on a pre-agreed
basis.

Case StudyHow to sale the Color TV Sets in USA market

CES is the worlds largest consumer electronics
exhibition, the mainstream of Chinese color TV
enterprises every year at this international fair. In
the year 2005, the achievements of Chinese TV
Legion is far beyond peoples expectations.
The Xiaxin Electronic exhibited a 30 variety of
digital high-definition plasma TVs and highdefinition LCD TV, the only orders signed at the
meeting had more than 100,000 units.
The same excited is Hisense Group, with the agent of the eight regions, including
North America, signed a $ 200 million flat-panel TV orders. In fact, in order to bypass
the high tax levy of anti-dumping restrictions in CRT television which United States
involved, the Chinese color TV providers exhibiting almost invariably played "high-end
brand, large-scale introduction of LCD and plasma flat-panel TVs.
"In addition, in order to meet the emerging trend by United States family to information
technology, many functions are added, such as access to the Internet, TV shopping,
home security control, remote video telephony and other functions." A participants of
Chinese business representatives said.
By the end of 2011, the LCD TV's overseas sales by TCL which is the top 4 biggest
color TV producer in China reached 3.73 million units.

Piggyback choosing a back to ride on. It is about the rider s

use of the carriers international distribution organizations.
The Strategy of Internationalization of Logitech - with the
technology and the product sets of Performance Mouse MX
and Anywhere Mouse MX, riding on IBM and Compaq, the
revenue of 2011 was $2.32 billion.

Going it Alone: Export

Advantages
Low initial investment
Reach customers quickly
Complete control over
production
Benefit of learning for
future expansion

Disadvantages
Potential costs of trade
barriers
Transportation cost
Tariffs and quotas

Foregoes potential
location economies
Difficult to respond to
customer needs well

When Is Export Appropriate?

Low trade barriers
Home location has cost advantage
Customization not crucial

Mode of Entry in international Business

Intermediate Entry modes
Contract manufacturing is outsourced to an external partner,
specialized in production and production technology.
Licensing the licensor gives a right to the licensee against
payment ,e.g. a right to manufacture a certain product based on a
patent against some agreed royalty.
Franchising the franchisor gives a right to the franchisee against
payment, e.g. a right to use a total business concept/ system.
Including use of trade marks (brands), against some agreed royalty.
There are two major types of franchising:
1, Product and trade name franchising. It is very similar to the trade
mark licensing

Mode of Entry in international Business

2, Business format package franchising.
International business format franchising is a market entry mode that
involves a relationship between the entrant ( the franchisor ) and a
host country entity.

The package can contain the following items:

Trade marks/trade names, Copyright, designs, patents, trade secrets;
Business know how; geographic exclusivity; design of the store;
market research for the are, location selection, and management
system
Start with a response to a perceived local business opportunity, the
franchisor will more rely on the knowledge and the flexible response to
the local market.
Franchisor will try to search a long term cooperation rather than a
conflict. How to develop a monitorial system, a training procedure and
adjustment mechanism is very important.

Mode of Entry in international Business

In the early days of the Walt Disney Company,
a man to find Walt, said: "I am a furniture
maker, I'll give you $ 300, you make me the
image of Mickey Mouse printed on my desk,
you can?. This was the first trademark user
fees received by the Walt Disney.

Since then, the Disney company created by a large number

of well-known animated characters such as Mickey Mouse,
Donald Duck, Snow White Princess, etc., are widely granted
a license, printed in a variety of goods such as clothing, toys,
purses, by the world consumption of especially childrens
love. Today, the Walt Disney Company has more than 4,000
trademark licensing in the world. its products, including from
the most ordinary ball-point pen to a watches, value of $
20,000. Use permit trade patterns, the business conduct of
the Walt Disney Company was a great success.

Licensing Agreement

Advantages
Low initial investment
Avoids trade barriers
Potential for utilizing
location economies
Access to local
knowledge
Easier to respond to
customer needs

Disadvantages
Lack of control over
operations
Difficulty in transferring tacit
knowledge
Negotiation of a transfer price
Monitoring transfer outcome

Potential for creating a

competitor

When Is Licensing Appropriate?

Well codified knowledge
Strong property rights regime
Location advantage

In November 2003, TCL, the top 6th Chinese

Electrical Appliances Producer costs 220 million
merged the television manufacturing business with
the French consumer electronics giant Thomson,
thus forming the world's largest color TV
enterprises of TTE Europe, with estimated annual
sales of $ 3.5 billion, TV shipments to more than 18
million units. TCL accounted for 67% of the shares
of the combined company.
Before the joint venture, Thomson loss of 100 million, For
answering the arguments, Mr. Li Dongsheng, TCL chairman
explained: if it is profitable, it will have no the TCL anything,
but this loss gave an opportunity to TCL for the European
market entrance. The Chinese market has long been open,
how to get the advantage of competition? The attack is the
best defense if the others use global resources to fight
you, it is difficult to defense with regional resources only.

Mode of Entry in international Business

Methods for FDI

1
Greenfield strategy:
building new facilities
;the word green-field
arises from the image of
starting new green site and
then building on it

Acquisition strategy:
buying existing assets
in a foreign country;
the purchaser quickly
obtains control over
the acquired firms
factories, employees,
technology, brand
names and distribution
networks

Joint Venture:
creating when two
or more firms agree
to work together
and create a jointly
owned separate firm
to promote their
mutual interests

Going it Alone: Green Field Entry

HOME COUNTRY

HOST COUNTRY

MNE
Profit

Investment

New Subsidiary
Company

Going it Alone: Green Field Entry

Advantages
Normally feasible
Avoids risk of
overpayment
Avoids problem of
integration
Still retains full control

Disadvantages
Slower startup
Requires knowledge of
foreign management
High risk and high
commitment

When Is Green Field Entry Appropriate?

Lack of proper acquisition target
In-house local expertise
Embedded competitive advantage

Foreign Acquisition
Advantages
Access to targets local
knowledge
Control over foreign
operations
Control over own
technology

Disadvantages
Uncertainty about targets
value
Difficulty in absorbing
acquired assets
Infeasible if local market for
corporate control is
underdeveloped

When Is Acquisition Appropriate?

Developed market for corporate control
Acquirer has high absorptive capacity
High synergy

As the big giant of the world's retail industry, Wal-Mart's

annual sales are four times the world's second largest
retailer Carrefour. Different with Carrefour to merge Costco
and opening his new branches of Costco in Japan grand
and lively,
After four years of study, Wal-Mart decided into Japan
through a partner. After the search, the target is Japan's
fourth largest retail - Seiyu Ltd.

Enter the Japanese market through cooperation with Seiyu

in 2002, Wal-Mart made a low profile, regardless of name
or store, do not have a local Wal-Mart's logo. In December
2003, Wal-Mart held the shares of Seiyu has reached 38%
(2002 entry only held 6%). In November 4, 2005, holding of
shares in Seiyu to 56.56%. Wal-Mart in 2007 spent $ 873
million to acquire of the remaining shares of Seiyu.

Joint Venture
HOME COUNTRY

HOST COUNTRY

MNE

Local Firm
Share of
Profit
Joint Venture
Company

Inputs
Inputs

Share of Profit

Joint Venture

Advantages
Access to partners local
knowledge
Reduction of concern about
overpayment
Both parties have some
performance incentives
Significant control over
operation

Disadvantages
Potential loss of
proprietary knowledge
Potential conflicts between
partners
Neither partner has full
performance incentive
Neither partner has full
control

When Is a Joint Venture Appropriate?

Both partners contribute hard-to-measure inputs
Large expected mutual gains in the long-run
Trade secrets can be walled off

Haier set up a joint venture with Jordan made his product into the U.S. market
Haier negotiated with the MEC of Jordan in
December 2001. Haier invested $ 5 million to set up
a joint venture Haier Middle East Trading Company
with MEC. the two sides began to the construction of
the Haier products manufacturing plant in 2002.
The mature sales network of Jordan MEC helps
Haier to quickly open up its business in the Middle
East market. At the same time, Haier Jordanian
exports their products to the U.S. market enjoys the
zero-tariff preferential policies. Haier products are
exported to the United States finally.

Springboard

The international Entrance by E-Commerce

B2B or B2C marketing

initially focused on
domestic sales, but
unexpectedly, the foreign
customer orders coming
and resulting in the
concept of Internet
marketing (IIM)
For instance: Dell
Amazon
Shipments through
international freight
services company or
express such
UPS,DHL,TNT,FEDEX,E
MS,NHK.

Xsdot is a web development company that occupies itself with the dev
elopment of internet, intranet, extranet, e-commerce and custom web
based applications.

Management Contract
HOME COUNTRY
HOST COUNTRY
Management Fees

MNE

Local Firm
Profit

Technological Inputs

Managerial
Service

Wholly-Owned
Subsidiary

Management Contract
Advantages
Access to local
management skills
Avoids buying unwanted
assets
Retains strategic control

How do you know the

competencies of the
manager?

When Is a Management Contract Appropriate?

Manager has a reputation to protect

Disadvantages
Potential incentive
problem
Potential adverse
selection problem

Hotels
Consulting companies

Performance-based contract provides no perverse

incentives

Mode of Entry in international Business

Foreign Direct Investment

Now many firms prefer to enter international market through
ownership and control of assets in host countries. Other firms
may first gain knowledge of and expertise in operation in the
host country, and then expand in the market through
ownership of production or distribution facilities.
FDI affords the firm increased control over its international
business operations, as well as increased profit potential.
FDI exposes the firm to greater economic and political risks
and operating complexity ,as well as the potential erosion of
the value of its foreign investment if exchange rates change
adversely.

Mode of Entry in international Business

Marketing factors
!. Size of Market

Major Determinants of
Foreign Direct Investment

2. Market growth
3. Desire to maintain share of market and to follow competition
4.Desire to advance exports of parent company
5. Need to maintain close customer contact and following them

Barriers to trade
1. Government-erected barriers to trade
2. Preference of local customers for local products

Cost factors
1.

Desire to near labor and lower labor cost

2.

Availability to raw materials/capital/technology

3.

Lower transport cost

Investment Climate
1.Political stability / Tax structure/ Currency exchange regulations
2. Limitations on ownership

(FDI)

Forms of FDI
Ownership
Wholly owned
operations
Green-field
investment
Full acquisition

Partially owned
operations
Partial acquisition
Joint venture

Relatedness
Horizontal FDI
Vertical FDI
Unrelated
diversification

Forms of FDI: Ownership

Home Country

Green Field
100% Owned

Host Country
New Entity

Full Acquisition
(i.e., 100%)

MNE

Local Firm
Partial Acquisition
(e.g., 50%)
Ownership = s%

Ownership = (1 - s)%

Joint Venture

Advantages of vertical FDI

Coordination advantages through the value chain
Access to production facilities, sourcing networks and
distribution networks

Keeping technology and intellectual property in-house

Substitution of internal transactions for market transactions

33

Advantages of Horizontal FDI

M&A acquisition of competitors for market power or
cost savings
M&A to achieve economies of scale and scope
(Daimler/Chrysler, VW)
M&A to purchase of technology
M&A to acquire brand names
Production avoids costs of trade relative to export
As hedge against demand and supply fluctuations -Cemex
Market power in international purchasing (e.g.
Vodaphone/Airtouch purchases wireless equipment
for its many operations)

34

Mode of Entry in international Business

Advantages and Disadvantages of Different Modes of Entry
Mode
Exporting

Primary Advantage

Primary Disadvantage

Relative low financial exposure

Vulnerability to tariffs and NTBs

Permit gradual market entry

Logistical complexities

Acquire knowledge about local market

Potential conflicts with distributors

Avoid restrictions on foreign investment

Licensing

Franchising

Low financial risk

Limited market opportunity/profits

Low-cost way to assess market potential

Dependence on licensee

Avoid tariffs NTBs restrictions on foreign

investment

Potential conflicts with licensee

Licensee provides knowledge of local market

Possibility of creating future

competitors

Low financial risk

Limited market opportunity/profits

Maintain more control than with licensing

Dependence on franchisee

Franchisee provides knowledge of local

market

May be creating future competitors

Low-cost way to assess market potential

Potential conflicts with franchisee

Avoid tariffs, NTBs, restrictions on foreign

investment

Mode of Entry in international Business

Advantages and Disadvantages of Different Modes of Entry
Mode

Primary Advantage

Primary Disadvantage

Contract
Manufacturing

Low financial risk

Reduced control (may affect quality,

delivery schedules, etc.)

Minimize resources devoted to

manufacturing

Reduce learning potential

Focus firms resources on other elements of

the value chain
Management
contract

Turnkey project

Foreign Direct
investment

Potential public relationship

problems-may need more
monitor working conditions, etc.

Focus firms resources on its area of expertise

Potential return limited by contract

conflicts with licensee

Minimal financial exposure

May unintentionally transfer

proprietary knowledge and
techniques to contractee

Focus firms resources on its area of expertise

Financial risk (cost over runs, etc.)

Avoid all long-term operational risk

Construction risks (delays, problems

with supplies, etc.)

High profit potential

Maintain control over operations

High financial and managerial

investments

Acquire knowledge of local market

Higher exposure to political risk

Avoid tariffs, NTBs

Vulnerability to restrictions on
foreign investment
Greater managerial complexity