Mode of Entry intoInternational BusinessCHAPTER 10
Foreign Market Analysis Assess alternative markets Evaluate the respective costs, benefits, and risks of entering each Select those that hold the most potential for entry or expansion
Factors in Assessing New Market Opportunities Product-market •Potential target dimensions markets Major product-market •Relevant trends differences •Explanation of Structural change characteristics of •Success factors national market •Strategic options Competitor analysis
Evaluating Costs, Benefits and Risks - Direct cost - Expected sales - Exchange rate BENEFITS RISKSCOSTS the Firm incurs in - Profits from the fluctuations entering a new market - Additional foreign market and - Lower acquisition operating included costs and manufacturing complexity associated with costs - Direct financial setting up a - Foreclosing of losses due to business operation markets to inaccurate - Opportunity cost competitors assessment of a firm has a limited - Competitive adv. market potential resources, entering - Access to new one market may technology preclude or delay its - Opportunity to entry into another achieve synergy with other operations
Choosing a Mode of Entry ExportDecision Factors:*Ownership Internationaladvantages Licensing*Location advantages*Internalizationadvantages International Franchising*Other factors: -Need for control -Resource Specialized modes availability -Global strategy Foreign Direct Investment (FDI)
Ownership • Resources owned by a firm that grant it a competitive adv. Advantage • Depends on the nature of the firm Location • Affect the desirability of the host country • Compares economic and non economic Advantages characteristics • Affect the desirability of a firm’s producing aInternalization good/services itself advantage • The amount of transaction costs is critical to any decision made • Control and availability of resourcesOther factors • Overall global strategy
ExportingAdvantages Disadvantages Relatively 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
Forms of Exporting Indirect Direct exporting exporting Intra-corporated transfer
Export ManagementCompanies(EMC) An export management company (EMC) is a firm that acts as its clients export department by managing the legal, financial, and logistical details of exporting, and providing advice about consumer needs and available distribution channels in the foreign markets the exporter wants to penetrate.
Webb-Pomerene Associations A Webb-Pomerene association is a group of U.S. firms that operate within the same industry and that are allowed by law to coordinate their export activities without fear of violating U.S. antitrust laws.
International TradingCompany Directly involved in importing and exporting a wide variety of goods for its own business. Provides the necessary exporting and importing services. (buying goods in one country and selling to another country).
Licensing Licensing is when a firm, called the licensor, leases the right to use its intellectual property—technology, work methods, patents, copyrights, brand names, or trademarks—to another firm, called the licensee, in return for a fee.
Basic Issues in International Licensing Specifying the boundaries of the agreement Determining compensation Establishing rights, privileges, and constraints Specifying the duration of the contract
Licensing Advantages Disadvantages• Low financial risks • Limited market• Low-cost way to assess opportunities/profits market potential • Dependence on• Avoid tariffs, NTBs, licensee restrictions on foreign • Potential conflicts with investment licensee• Licensee provides • Possibility of creating knowledge of local future competitor markets
International Franchising A franchising agreement allows an independent entrepreneur or organization, called the franchisee, to operate a business under the name of another, called the franchisor, in return for a fee.
Basic Issues inInternational Franchising Does a differential advantage exist in domestic market? Are these success factors transferable to foreign locations? Has franchising been a successful domestic strategy?
Franchising Advantages Disadvantages• Low financial risks • Limited market• Low-cost way to assess opportunities/profits market potential • Dependence on franchisee• Avoid tariffs, NTBs, • Potential conflicts with restrictions on foreign franchisee investment • Possibility of creating• Maintain more control future competitor than with licensing• Franchisee provides knowledge of local market
Contract Manufacturing Advantages Disadvantages• Low financial risks • Reduced control• Minimize resources (may affect quality, devoted to delivery schedules, manufacturing etc.)• Focus firm’s • Reduce learning resources on other potential elements of the • Potential public value chain relations problems
Management Contract • Focus firm’s resources on its area of contracts Advantages • Minimal financial exposure • Potential returns limited by contract expertiseDisadvantages • May unintentionally transfer proprietary knowledge and techniques to contractee
Foreign Direct Investment Entering international market through ownership of assets in host countries. A firm may first enter the foreign market through exporting, licensing or franchising.
Foreign Direct Investment • High profit potential • Maintain control over operations Advantages • Acquire knowledge of local market • Avoid tariffs and NTBs • High financial and managerial investments • Higher exposure to political riskDisadvantages • Vulnerability to restrictions on foreign investment • Greater managerial complexity
FDI Method Building new facilities (the Greenfield strategy) Buying existing assets in a foreign country (acquisition strategy) Participating in a joint venture
Greenfield Strategy • Best site • Modern facilities • Economic development incentives Advantages • Clean slate • Huge time and patience needed • Expensive • Comply with local and nationalDisadvantages regulation • Local workforce needed • Strongly perceived as a foreign worker
Acquisition StrategyAdvantages• Obtains control over the acquired firm such as factories and brand names• Integrate the mgt of the firm into its overall international strategyDisadvantages• Assumes all the liabilities such as financial and managerial
Joint Venture An arrangement, whereby a new enterprise is created by two or more firms working together for mutual benefit. Example:- IBM and Siemens- Motorola and Toshiba