• Any firm contemplating foreign expansion
must struggle with the following decisions
– Which foreign market(s) to enter??
– When to enter them??
– On what scale??
– Which mode of entry will be utilized??
Which Foreign Markets
• The firm has alternative foreign markets to
enter. In order to achieve their goals
successfully, the firms have to,
Analyse alternative foreign market
Evaluate the respective costs, benefits and risks
Analyse Alternative Foreign markets
o Current and Potential Size of Market
o Level of Competition
o Political & Legal Environments
o Socio-cultural Background
o Size of the Population
o Economic Growth rate
o Urban areas/Rural areas
o Purchasing Power
o Availability of Technical and Non technical work force
Assessing Costs, Benefits & Risks
o Costs :
High Sales, Profits
Economies of Scale
Power & Prestige
Exchange rate fluctuations
Direct Financial losses due to misassessment of
Timing the Entry
• Another important decision to make, is when to
enter a foreign market??
Whether to be a first entrant in the market or,
to be a late entrant??
• Advantages frequently associated with entering a
market early are commonly known as first-mover
– The ability to preempt rivals and capture demand by establishing
a strong brand name
– Significant & Sustained market share
– Ability to build sales volume
• Disadvantages associated with entering a foreign
market before other international businesses are
referred to as first-mover disadvantages
– Pioneering costs are costs that an early entrant has to bear
– Time & effort in learning the rules
– Mistakes due to ignorance
– Higher investment in R&D
• Late Entrant Strategies
Reduce price to penetrate an existing market
Improve a product or service with focus on niche
Develop new channels of distribution
Scale of Entry
• Large scale entry
– Requires commitment of significant resources & implies rapid
• Strategic commitment
– Decision that has long term impact & is difficult to reverse
(entering market on large scale)
– Change the competitive playing field & unleash number of
changes – e.g. how competitors might react
– Can limit strategic flexibility
• Small scale entry
– Allows firm to learn about a foreign market while limiting the firm’s
exposure -> limits risks
– May be more difficulty to build market share & capture early
– Can use MNEs to learn & bench mark against
– Can focus on niches the MNE ignores or can’t serve
MODES OF ENTRY IN FOREIGN
• A company has three different modes of foreign
EXPORT ENTRY MODE
CONTRACTUAL ENTRY MODE
INVESTMENT ENTRY MODE
3. Investment Entry Mode
- Foreign Direct Investment
- Mergers and Acquisition
- Joint Venture
Characteristics of Modes of Entry
• The characteristics of export, contractual and
investment entry modes are analysed on the
basis of five aspects
ii. Dissemination Risks
iii. Resource Commitment
i. Control refers to that the extent of a firm in
governs the production process, co-ordinate
activities, logistical and marketing and so on.
ii. Dissemination risk refers to the extent to which a
firm’s know-how will be expropriated by a
iii. Resource commitment refers to the financial,
physical and human resources that firms commit
to a host market
iv. Flexibility assesses that whether a firm can
change the entry modes quickly and with low cost
in the face of evolving circumstances.
v. Ownership refers to the extent of a firms equity
participation in an entry mode.
High Low High Low High
Contracts Medium Med-High Med-High Medium Med-High
Exports Low Low Low High Low
EXPORT ENTRY MODEEXPORT ENTRY MODE
• Export deals with physical movement of
goods & services from one destination to
another through a customs port following
the rules of both the country of origin and
the country of destination.
• Exporting is the appropriate strategy when one or more
of the following conditions prevail :
The volume of foreign business is not large enough to
justify production in the foreign market.
Cost of production is high
There are political or other risks of investment in that
country. The market may not big enough in the long
Exporting is attractive when the concerned company has
Also exports ensure that the company has other markets
to cater when faced with stiff competition in home
market or when home market reaches saturation levels.
Depending upon the involvement of the
exporter, exports can be classified as direct or
Direct exporters export their goods and
services in their own name and all proceeds are
directly remitted by the buyer in the proper
manner through the proper channel.
Indirect exporters supply goods to direct
exporters. Indirect exporting usually means that
the company sells to a buyer (importer or
distributor) in the home country who in turn exports
• Lack of expertise, international contacts and
manpower cause them to depend upon direct
• Farmers rarely export grains on their own.
Artisans cannot develop international contacts
to clinch deals. Therefore, they become indirect
exporters. Their products are going to other
countries but not in their names
• Exporters can be classified in various ways :
Depending upon the size of the business, they are
classified as small or large exporters.
Depending upon the product lines exported, they
are classified as single or multi-product exporters
Depending upon the destination of their exports,
they are classified as single destination exporters
or multi destination exporters.
Depending upon the frequency of their exports
they are classified as occasional exporters and
Need for limited finance
Avoids the often substantial
cost of establishing
Ideal for companies starting
exporting for the first time
Also ideal for small sized
Not appropriate if lower cost
High transport costs can
Tariff barriers can make
CONTRACTUAL ENTRY MODE
• Contractual Agreements
Contractual agreements are long-term, non-equity
associations between a company and another in a
Contractual agreements generally involve the
transfer of technology, processes, trademarks, or
• Contractual forms of market entry include:
- International Licensing
- International Franchising
- Contract Manufacturing
- Management Contracts
- Turnkey Projects
1) International Licensing
• In this mode of entry, the domestic
manufacturer leases the right to use its
intellectual property, i.e., technology, work
method, patents, copy rights, brand names,
trademarks etc. to a manufacturer in a foreign
country for a fee.
• Here the manufacturer in the domestic country
is called ‘licensor’ and the manufacturer in the
foreign country is called ‘licensee’
• For example, British American Tobacco Company (BATS)
has given licenses in many countries for manufacture of
their brand of cigarettes “555”. In India, ITC is the
licensed producer of”555”.
• Another example, Pepsi Cola granted license to Heineken
of the Netherlands giving them the exclusive right to
produce and sell Pepsi Cola in the Netherlands.
• Nike International ltd entered India by licensing to Sierra
Industrial Enterprises. The licensee would take care of
quality control, marketing and distribution operation and
would pay Nike 5% royalty on ex-factory price on both
footwear and apparel.
• Arvind Mills owns Indian marketing rights for leading US
brands like Arrow, Lee and Wrangler.
Licensing mode carries
relatively low investment on
the part of licensor
Licensing mode carries low
financial risk to the licensor
Licensing can investigate
the foreign market without
much efforts on his part
Licensee gets the benefits
with less investment on
Licensee escapes himself
from the risk of product
reduce the market
opportunities for both the
licensor and licensee.
2) International Franchising
• A contractual entry mode in which one company
(the franchiser) supplies another (the franchisee)
with intangible property and other assistance over
an extended period is called franchising
• Franchising is a form of licensing wherein the
franchiser exercises more control over the
• The franchisee invests the money and pays certain
fees to the franchiser.
• The franchiser supplies the main part of the product and
provides the following services to the franchisee :
- Trade marks, operating systems, product and brand
- Company support systems like advertising, training of
employees, quality assurance are also involved in
• Fast food companies like McDonalds, Domino’s, Pizza
Hut, KFC have franchised restaurants worldwide.
• NIIT & Aptech have appointed franchisees in Africa,
South East Asia, Gulf countries and China.
Franchisor can enter global
markets with low
investment and low risks
Franchisor can get the
information regarding the
market, culture, customs
and environment of the host
Franchisor learns more
lessons from the
experiences of the
franchisees, which he could
not experience from the
home country’s market
Franchiser may find it
cumbersome to manage a
large no. of franchisees in a
variety of national markets.
experience a loss of
organizational flexibility in
Both the parties have the
responsibilities to maintain
product quality and product
There is a scope for
Franchisee can early start a
business with low risk as he
selects an established and
proven product and
Franchisee escapes from
the risk of product failure
There is a problem of
leakage of trade secrets.
Franchising is based on
if one takes up franchising
as a means of expanding a
business, then compliance
with the franchise laws, like
the securities laws, requires
registration of the franchise
in the applicable
More expensive and time
Licensing is a form of
licensing is merely a
contract between two
and franchise registration is
Less expensive and quick
Difference Between Franchising andDifference Between Franchising and
Franchising is primarly
used in service industries
such as auto dealerships,
restaurants, and business
The franchise agreement
covers obligations on both
parties and includes a
training, mentoring and
component for the
ongoing assistance from
Licensing is fairly common
in manufacturing industries
There is usually no training
development strategy and
limited marketing support
Licensing normally involves
a one-time transfer of
If you become a franchisor,
you generally have to give
up the operations of your
own business and enter the
full time business of being a
There is substantial and
regulation in franchising.
Existing businesses often
buy a license and add the
product or service to that
existing business; this
allows the licensee to keep
his “bread winner” business
going while he tests the
There is little or no
government regulation in
• Many companies outsource their part of or entire
products and concentrate mainly on marketing
• Contract manufacturing is the strategy of identifying
a manufacturing unit to produce items at a
competitive price in any part of the world.
• E.g.: Nike has contracted with a number of factories
in South-east Asia to produce its athletic footware
and it concentrates on marketing
- Bata also contracted with a no. of cobblers in India
to produce its footware and concentrate on
• Mega Toys – Los Angeles based company
contracts with Chinese plants to produce Toys and
Mega toys concentrates on marketing
• There are a number of multinationals which employ
this strategy in India.
• The company doesn’t have to commit resource for
setting up production facilities.
• It frees the company from the risks of investing in
• If idle production capacity is readily available in
foreign country, it enables the marketer to get
• In many cases the cost of the product obtained by
contract manufacturing is lower than if it were
manufactured by the international firm.
• It’s a less risky way to start by CM. If the business
does not pick up sufficiently, dropping it is easy. But
when you have your own production facility , the
exit is difficult.
e.g For many years Godrej Soaps manufactured
Dettol for Reckitt and Coleman, Johnson’s Baby
soap for J& J and Ponds Dreamflower and Cold
cream for Ponds (HUL)
– Less control on manufacturing so quality could
– Big risk of developing potential competitors
• Companies with a level of technology and
managerial expertise may seek the assistance of
• A management contract is an agreement between
two companies whereby one company provides
managerial and technical assistance and
specialized services to the second company for a
certain period in return for monetary compensation
in the form of either a flat lump sum fee or a
percentage on the sales or a share in the profits.
• Management contracts have been used to a wide
extent in the airline industry, Delta airlines, Air
France and KLM offer such services in developing
• In Asia, many hotels operate under management
contract arrangements, as they can more easily
obtain economies of scale, a global reservation
systems, brand recognition etc. It is not unusual for
contracts to be signed for 25 years, and having a
fee as high as 3.5% of total revenues and 6-10% of
gross operating profit. The Marriott International
Corporation operates solely on management
• A turnkey project is a contract under which a firm
agrees to fully design, construct and equip a
manufacturing/business/service facility and turn the
project over to the purchaser when it is ready for
operation for a remuneration.
• The forms of remuneration includes:
- A fixed price (firm plans to implement the project
below this price)
- payment on cost plus basis (i.e. total cost incurred
• The recent approach of turnkey projects is Build,
Operate and Transfer (BOT) and BOOT (build,
own, operate and transfer) depending upon the
level of involvement and contract obligations
• To-day infrastructure projects like power plants,
airports, refineries, railway lines, highways, and
dams are undertaken on a turnkey basis.
• Hyundai, Mitsubishi, L&T, Daewoo are turnkey
contractors for international projects.
INVESTMENT ENTRY MODE
• Investment entry modes entail direct investment in
plant and equipment in a country coupled with
ongoing involvement in the local operation.
• The investment entry mode includes
- Foreign Direct Investment
- Mergers and Acquisition
- Joint Venture
• A merger occurs when two or more companies
combines and the resulting firm maintains the
identity of one of the firms. One or more companies
may merger with an existing company or they may
merge to form a new company.
• Usually the assets and liabilities of the smaller firms
are merged into those of larger firms. Merger may
take two forms-
1. Merger through absorption
2. Merger through consolidation.
• Merger through Absorption:- An absorption is a
combination of two or more companies into an
'existing company'. All companies except one lose
their identity in such a merger.
• For example, absorption of Tata Fertilisers Ltd
(TFL) by Tata Chemicals Ltd (TCL). TCL, an
acquiring company(a buyer), survived after merger
while TFL, an acquired company (a seller), ceased
to exist. TFL transferred its assets, liabilities and
shares to TCL.
• Merger through Consolidation:- A consolidation
is a combination of two or more companies into a
'new company'. In this form of merger, all
companies are legally dissolved and a new entity is
created . Here, the acquired company transfers its
assets, liabilities and shares to the acquiring
company for cash or exchange of shares.
• For example, merger of Hindustan Computers Ltd,
Hindustan Instruments Ltd, Indian Software
Company Ltd and Indian Reprographics Ltd into an
entirely new company called HCL Ltd.
• Acquisitions and Takeovers
• An acquisition may be defined as an act of
acquiring effective control by one company over
assets or management of another company without
any combination of companies.
• Thus, in an acquisition two or more companies may
remain independent, separate legal entities, but
there may be a change in control of the companies.
• When an acquisition is 'forced' or 'unwilling', it is
called a takeover. In an unwilling acquisition, the
management of 'target' company would oppose a
move of being taken over. But, when managements
of acquiring and target companies mutually and
willingly agree for the takeover, it is called
acquisition or friendly takeover.
Tata Steel Corus
UK 12,000 Steel
Hindalco Novelis Canada 5982 Steel
Korea 729 Electronics
Betapharm Germany 592 Pharmaceu
Kenya 500 Oil and
Terapia SA Romania 324 Pharmaceu
• Joint Ventures tend to be equity-based i.e. a new
company is set up with parties owning a proportion
of the new business. There are many reasons why
companies set up Joint Ventures to assist them to
enter a new international market:
• Access to technology, core competences or
management skills. For example, Honda's
relationship with Rover in the 1980's.
• To gain entry to a foreign market. For example, any
business wishing to enter China needs to source
local Chinese partners.
• Access to distribution channels, manufacturing and
R&D are most common forms of Joint Venture.
• While a joint venture deals with the project in
totality, in financial terms and the proportionate
partnership commitments, collaboration deals with
only a part of the functions. For example , Bajaj Auto
has a technological collaboration with Kawasaki of
Japan, who offer technology for two wheelers. Other
well known technological collaborations in India are
Ind-Suzuki, Kinetic-Honda and Hero-Honda.
• The world famous Kellogg business school has
collaborated with Indian Business School (IBS) by
offering teaching technology. Likewise, there may
be financial collaborations, human resource
collaborations, systems collaborations and strategic
FOREIGN DIRECT INVESTMENT
The flow of funds from one destination to another is
called investment. Companies which are constantly
involved in international business, invest their money in
manufacturing and marketing bases through ownership
and control. KELLOGG, PEPSI, COCA COLA AND
HYATT GROUP OF HOTELS are willing to invest even if
the profits are returned after a long gestation period.
Foreign firms adopt certain methods as mentioned
They control the operations through subsidiaries to
achieve strategic synergies.
They haver control through technology, manufacturing
expertise, intellectual property rights and brand name.
One permanent person in the country of operation is
appointed to monitor day to day operations.
• The most attractive part of the operation is the
direct investment, which contributes to
optimization of resources in the host country,
generating employment opportunities and
enhancing the standard of living.
• The other major development which have taken
place during the past two decades are
exposure of the host countries to advance
technology and quality products. It is a boon to
the host country since capital is a great
resource and it is coming through investment.
• The main disadvantages are lack of clarity of
repatriation of profit, imposition of restrictions by host
countries and elimination of small and medium
industries due to the financial power of the investor. A
number of south American countries like Argentina
and few south east Asian countries like Indonesia fell
prey to the dominant forces of overseas investors.
They feel that old colonialism may re-emerge through
• Generally foreign investments took place on full swing
in developing countries only in the past two decades.
China, Taiwan, India, Brazil, Argentina and other
developing countries have started attracting huge
foreign investments . If it takes place in specific
sectors like infrastructure , mining, marine technology
and agro –processing it is highly beneficial to both the
host country and investor.
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