The firms have alternative foreign markets to enter. In order to achieve these goals successfully, the firm have to:
Analyse Alternative foreign markets-
Current & potential size of alternative markets
Level of competition
Legal and Political environment
GDP and Per Capita
Urban areas/Rural areas
Assessing Costs, Benefits and Risks-
Cost: consider Direct cost and Opportunity cost
Direct cost - co incurs in entering and setting up of operations in the global market.
Opportunity cost - is the profits that the co would have earned by entering the alternative market.
Risks: exchange rate fluctuation, operating complexity, direct financial loss, Government seizure the property.
MOTIVATIONS FOR INTERNATIONAL EXPANSION :
PROACTIVE (pulled by good foreign markets)
Firm specific advantage
Economies of scale
Economic and political factors
REACTIVE (pushed by bad domestic markets)
Poor domestic market
CHOOSING A MODE OF ENTRY: (DUNNING’S ECLECTIC THEORY)
OTHER FACTORS AFFECTING MODE OF ENTRY
Need for control (desire to reduce uncertainty and maintain full control over the foreign operation)
Resource availability (lack of access to financial capital may mean that entry by ownership is impossible so that non-equity or partial equity modes are preferable; most likely for small firms)
Global strategy (global integration vs. national responsiveness; if the former, more likely to use ownership routes since EOS and scope & synergies are better achieved through internal market/hierarchy)
external licensing equity joint wholly owned
market venture subsidiary
low control <---------------------------> high control
low resource cost high resource cost
INDIRECT EXPORTING: is exporting the products either in their original form or ion the modified form to a foreign country through another domestic country.
DIRECT EXPORTING: is selling the products in a foreign country directly through its distribution arrangement or through a host country’s company.
INTRACORPORATE TRANSFER: are selling of products by a company to its affiliation company in host country (or another country). E.g. HLL in India to UNILEVER in USA
Advantages of Exporting as Mode of Entry
low financial cost (but have start up costs)
risk limited to value of exports
can enter foreign market gradually (ease of start up, less chance of mistakes, gain experience)
gain information about and expertise in foreign market
export success breeds more export success
Disadvantages of Exporting
Difficulty in identifying customer needs
Potential problems with local distributors
Selecting the local distributor, how to split the profits with the local firm, differences in motivation, and time horizon
Logistical considerations (costs of warehousing, transport, distribution, longer supply lines, difficulties in communication)
The advantage of licensing is that the company does not have to bear the development costs and risks associated with opening up a foreign market. Also, licensing may be an attractive option for companies that are unwilling to commit financial resources to an unfamiliar or politically volatile foreign market.
A firm might license some valuable intangible property to a foreign partner, but in addition to a royalty payment, the firm might also request that the foreign partner license some of its valuable know-how to the firm. Such agreements are designed to reduce the risks associated with licensing technological know-how, since the licensee realizes that if it violates the spirit of a licensing contract (by using the knowledge obtained to compete directly with the licensor), the licensor can do the same to it.
low financial cost and risks
can learn about foreign market potential
access to foreign markets
foreign market access is constrained by contract
licensee may not perform up to expectations
may be creating a future competitor
When franchising, the company sells limited rights to franchisees to use its brand name in return for a lump sum payment and a share of the franchisee’s profits. However, in contrast to most licensing agreements, the franchisee has to agree to abide by strict rules as to how it does business. Whereas licensing is a strategy pursued primarily by manufacturing companies, franchising is a strategy employed chiefly by service companies.
Advantages of Franchising:
expand into foreign markets with low risk and low cost
more control than under licensing or exporting with distributor
obtain key information about the foreign market more easily than under licensing/exports
lessons learned can be applied at home
Disadvantages of Franchising:
must share profits with franchisee
probable greater financial commitment than under licensing or exports
more complicated (more responsibilities, greater commitment to foreign firm) than licensing or exports)
do not have tight control over foreign partner (but better than under licensing or exports through distributor)
quality control ( franchisees concerned is less than franchiser)
FOREIGN DIRECT INVESTMENT
Foreign Direct Investment (FDI):
Acquisition of foreign assets for the purpose of control. US FDI = “ownership or control of 10%+ of an enterprise’s voting securities…”.
Methods for FDI:
Greenfield entry (start from scratch, with clean slate)
Brownfield entry (acquisition of existing firm)
Joint venture (go with a partner)
Advantages of FDI as Mode of Entry:
provides more control over foreign operations
offers better protection for the firm’s FSAs
better understanding of host market, easier and quicker to adapt products for market and respond to market changes
Disadvantages of FDI:
high cost route (financial & personnel commitment)
more exposure to economic and political risks
problems of managing the subsidiary at a distance
JOINT VENTURES :
Multinational may feel that it can benefit from a local partner’s knowledge of a host country’s competitive conditions, culture, language, political systems, and business systems.
Company can share the costs and risk of setting up business with a local partner; and in many countries political considerations make joint ventures the only feasible entry mode.
As the case of licensing, a company that enters into a joint venture runs the risk of losing control over its technology to its venture partner.
Joint venture does not give a company the tight control over different subsidiaries that it might need if it wishes to pursue a global strategy.
WHOLLY OWNED SUBSIDIES:
A wholly owned subsidiary is the most costly method of serving a foreign market. Companies taking this approach have to bear the full costs and risks associated with setting up overseas operations.
When a company’s competitive advantage is based on control over a technological competency, a wholly owned subsidiary will normally be the preferred entry mode, since it reduces the risk of losing control over that competency.
wholly owned subsidiary gives a company the kind of tight control over operations in different countries that is necessary for pursuing a global strategy
Global Strategic Alliances
Strategic alliances are cooperative agreements between companies that may also be competitors. In this section, we are concerned specifically with strategic alliances between companies from different countries. Strategic alliances run the range from formal joint ventures, where two or more companies have an equity stake, to short-term contractual agreements between two companies to cooperate on a particular problem.
Advantages of strategic alliances
Companies enter into strategic alliances with actual or potential competitors in order to achieve certain strategic objectives.
Strategic alliances may facilitate entry into a foreign market.
Many companies have entered into strategic alliances in order to share the fixed costs (and associated risks) that arise from the development of new products or processes.
Alliances may be a way of bringing together complementary skills and assets that neither company could easily develop on its own.
Alliances may be useful if they help a company set technological standards for its industry and if those standards benefit the company.
Disadvantages of Strategic Alliances
Commentators have criticized strategic alliances on the grounds that they give competitors a low-cost route to gaining new technology and market access. Unless it is careful, a company can give away more than it gets in return. This raises the question, why do some alliances benefit a company, while others can end up with the firm giving away technology and market access and getting very little in return?
SPECIALIZED ENTRY MODES
One firm provides managerial assistance, technical advice or specialized services to another firm for an agreed time period in return for a fee (flat fee or percent of revenues).
One firm (or firms) agrees to fully design, construct and equip a facility and then “turn the key” over to the purchaser when the plant is ready for operation. May be a fixed price or a cost plus contract. Often done with large construction projects in developing countries.