foreign market modes

1. Foreignmarketentrymodes
There are twomajor typesof entrymodes:equityandnon-equitymodes.The non-equitymodes
categoryincludesexportandcontractual agreements.The equitymodescategoryincludes:jointventure
and whollyownedsubsidieresis
Exporting
Exportingisthe processof sellingof goodsandservicesproducedinone countrytoothercountries.[4]
There are twotypesof exporting:directandindirect.
 DirectExports
Directexportsrepresentthe mostbasicmode of exportingmade bya(holding) company,capitalizingon
economiesof scale inproductionconcentratedinthe home countryandaffordingbettercontrol over
distribution.Directexportworksthe bestif the volumesare small.Large volumesof exportmaytrigger
protectionism.The maincharacteristicof directexportsentrymodel isthatthere are nointermediaries.
Passive exportsrepresentthe treatingandfillingoverseasorderslike domesticorders.[5]
Types
Salesrepresentatives
Salesrepresentativessilas
representforeignsuppliers/manufacturersintheirlocal marketsforanestablishedcommissiononsales.
Provide supportservicestoa manufacturerregardinglocal advertising,local salespresentations,
customsclearance formalities,legal requirements.Manufacturersof highlytechnical servicesor
productssuch as productionmachinery,benefitthe mostfromsalesrepresentation.
Importingdistributors
Importingdistributorspurchase productintheirownrightandresell itintheirlocal marketsto
wholesalers,retailers,orboth.Importingdistributorsare agood marketentrystrategyforproductsthat
are carriedininventory,suchastoys,appliances,preparedfood.[6]
Advantages[edit]
• Control overselectionof foreignmarketsandchoice of foreignrepresentative companies
• Good informationfeedbackfromtargetmarket,developingbetterrelationshipswiththe buyers
• Betterprotectionof trademarks,patents,goodwill,andotherintangibleproperty
• Potentiallygreatersales,andthereforegreaterprofit,thanwithindirectexporting.[7]

2. Disadvantages[edit]
• Higherstart-upcostsand higherrisksas opposedtoindirectexporting
• Requireshigherinvestmentsof time,resourcesandpersonnelandalsoorganizationalchanges
• Greaterinformationrequirements
• Longertime-to-marketasopposedtoindirectexporting.[8]
 Indirectexports
Indirectexportsisthe processof exportingthroughdomesticallybasedexportintermediaries.The
exporterhasnocontrol overitsproductsin the foreignmarket.
 Types[edit]
1. Exporttradingcompanies(ETCs)
These provide supportservicesof the entire exportprocessforone ormore suppliers.Attractiveto
suppliersthatare notfamiliarwithexportingasETCs usuallyperformall the necessarywork:locate
overseastradingpartners,presentthe product,quote onspecificenquiries,etc.
2. Exportmanagementcompanies(EMCs)
These are similartoETCs in the way thattheyusuallyexportforproducers.Unlike ETCs,theyrarelytake
on exportcreditrisksandcarry one type of product,not representingcompetingones.Usually,EMCs
trade on behalf of theirsuppliersastheirexportdepartments.[9]
3. Exportmerchants
Exportmerchantsare wholesalecompaniesthatbuyunpackagedproductsfrom
suppliers/manufacturersforresale overseasundertheirownbrandnames.The advantage of export
merchantsispromotion.One of the disadvantagesforusingexportmerchantsresultinpresence of
identical productsunderdifferentbrandnamesandpricingonthe market,meaningthatexport
merchant’sactivitiesmayhindermanufacturer’sexportingefforts.
4. Confirminghouses
These are intermediatesellersthatworkforforeignbuyers.Theyreceivethe productrequirements
fromtheirclients,negotiatepurchases,make delivery,andpaythe suppliers/manufacturers.An
opportunityhere arisesinthe factthatif the clientlikesthe productitmaybecome atrade
representative.A potential disadvantage includessupplier’sunawarenessandlackof control overwhat
a confirminghouse doeswiththeirproduct.
5. Nonconformingpurchasingagents

3. These are similartoconfirminghouseswiththe exceptionthattheydonotpay the suppliersdirectly –
paymentstake place betweenasupplier/manufactureranda foreignbuyer.[10]
Advantages[edi
• Fast marketaccess
• Concentrationof resources towardsproduction
• Little or nofinancial commitmentasthe clients'exportsusuallycoversmostexpenses
associatedwithinternationalsales.
• Low riskexistsforcompanieswhoconsidertheirdomesticmarkettobe more importantandfor
companiesthatare still developingtheirR&D,marketing,andsalesstrategies.
• Exportmanagementisoutsourced,alleviatingpressure frommanagementteam
• No directhandle of exportprocesses.[11]
Disadvantages[edit]
• Little or nocontrol overdistribution,sales, marketing,etc.asopposedtodirectexporting
• Wrong choice of distributor,andbyeffect,market,mayleadtoinadequate marketfeedback
affectingthe international successof the company
• Potentiallylowersalesascomparedtodirectexporting(althoughlow volume canbe a key
aspectof successfullyexportingdirectly).Exportpartnersthatincorrectlyselectaspecific
distributor/marketmayhinderafirm'sfunctional ability.[12]
Those companiesthatseriouslyconsiderinternational marketsasa crucial part of theirsuccesswould
likelyconsiderdirectexportingasthe marketentrytool.Indirectexportingispreferredbycompanies
whowouldwantto avoidfinancial riskasa threatto theirothergoals.
Licensing
An international licensingagreement allowsforeignfirms,eitherexclusivelyornon-exclusivelyto
manufacture a proprietor’sproductfora fixedterminaspecificmarket.
Summarizing,inthisforeignmarketentrymode,alicensorinthe home countrymakeslimitedrightsor
resourcesavailabletothe licenseeinthe hostcountry.The rightsor resourcesmayinclude patents,
trademarks,managerial skills,technology,andothersthatcanmake it possible forthe licensee to
manufacture andsell inthe hostcountry a similarproducttothe one the licensorhasalreadybeen
producingandsellinginthe home countrywithoutrequiringthe licensortoopenanew operation
overseas.The licensorearningsusuallytake formsof one time payments,technicalfeesandroyalty
paymentsusuallycalculatedasa percentage of sales.

4. As inthismode of entrythe transference of knowledge betweenthe parental companyandthe licensee
isstronglypresent,the decisionof makinganinternationallicense agreementdependonthe respect
the host governmentshowfor intellectual propertyandonthe abilityof the licensortochoose the right
partnersand avoidthemtocompete ineach othermarket.Licensingisarelativelyflexible work
agreementthatcan be customizedtofitthe needsandinterestsof both,licensor andlicensee.
Followingare the mainadvantagesandreasonstouse an internationallicensingforexpanding
internationally:
• Obtainextraincome fortechnical know-how andservices
• Reach newmarketsnotaccessible byexportfromexistingfacilities
• Quicklyexpandwithoutmuchriskandlarge capital investment
• Pave the way forfuture investmentsinthe market
• Retainestablishedmarketsclosedbytrade restrictions
• Political riskisminimizedasthe licenseeisusually100% locallyowned
• Is highlyattractive forcompaniesthatare new ininternationalbusiness.
On the otherhand,international licensingisaforeignmarketentrymode thatpresentssome
disadvantagesandreasonswhycompaniesshouldnotuse itas:
• Lowerincome thanin otherentrymodes
• Loss of control of the licensee manufacture andmarketingoperationsandpracticesleadingto
lossof quality
• Riskof havingthe trademarkandreputationruinedbyanincompetentpartner
• The foreignpartnercan alsobecome a competitorbysellingitsproductioninplaceswherethe
parental companyisalreadyin.
Franchising[edit]
The by the franchisor.Inadditiontothat, while alicensingagreementinvolvesthingssuchasintellectual
property,trade secretsandotherswhile infranchising itislimitedtotrademarksandoperatingknow-
howof the business.[13]
Advantagesof the international franchisingmode:
• Low political risk
• Low cost

5. • Allowssimultaneousexpansionintodifferentregionsof the world
• Well selectedpartnersbringfinancialinvestmentaswell asmanagerial capabilitiestothe
operation.
Disadvantagesof franchisingtothe franchisor:[14]
• Maintainingcontrol overfranchiseemaybe difficult
• Conflictswithfranchisee are likely,includinglegal disputes
• Preservingfranchisor'simage inthe foreignmarketmaybe challenging
• Requiresmonitoringandevaluatingperformance of franchisees,andprovidingongoing
assistance
• Franchiseesmaytake advantage of acquiredknowledgeandbecome competitorsinthe future
Turnkeyprojects[edit]
A turnkeyprojectreferstoa projectwhenclientspaycontractorstodesignandconstruct new facilities
and trainpersonnel.A turnkeyprojectisa wayfor a foreigncompanytoexportitsprocessand
technologytoothercountriesbybuildingaplantinthat country.Industrial companiesthatspecializein
complex productiontechnologiesnormallyuse turnkeyprojectsasanentrystrategy.[15]
One of the majoradvantagesof turnkeyprojectsisthe possibilityforacompanyto establishaplantand
earnprofitsina foreigncountryespeciallyinwhichforeigndirectinvestmentopportunitiesare limited
and lackof expertiseinaspecificareaexists.
Potential disadvantagesof aturnkeyprojectfora company include riskof revealing companiessecrets
to rivals,andtakeoverof theirplantbythe host country.Enteringa marketwitha turnkeyprojectCAN
prove that a companyhas no long-terminterestinthe countrywhichcanbecome a disadvantage if the
countryprovesto be the main marketforthe outputof the exportedprocess.[16]
Whollyownedsubsidiaries(WOS)[edit]
A whollyownedsubsidiaryincludestwotypesof strategies:GreenfieldinvestmentandAcquisitions.
Greenfieldinvestmentandacquisitionincludebothadvantagesanddisadvantages.Todecide which
entrymodestouse isdependingonsituations.
Greenfieldinvestmentisthe establishmentof anew whollyownedsubsidiary.Itisoftencomplex and
potentiallycostly,butitisable toprovide full control tothe firmand hasthe mostpotential toprovide
above average return.[17] “Whollyownedsubsidiariesandexpatriate staff are preferredinservice
industrieswhere close contactwithendcustomersandhighlevelsof professional skills,specialized
knowhow,and customizationare required.”[18] Greenfieldinvestmentismore likelypreferredwhere
physical capital intensiveplantsare planned.[19] Thisstrategyisattractive if there are nocompetitorsto

6. buyor the transfercompetitive advantagesthatconsistsof embeddedcompetencies,skills,routines,
and culture.[20]
Greenfieldinvestmentishighriskdue tothe costsof establishinganew businessinanew country.[21] A
firmmay needtoacquire knowledgeandexpertiseof the existingmarketbythirdparties,such
consultant,competitors,orbusinesspartners.Thisentrystrategytakesmuchtime due tothe needof
establishingnewoperations,distributionnetworks,andthe necessitytolearnandimplement
appropriate marketingstrategiestocompete withrivalsinanew market.[22]
Acquisitionhasbecome apopularmode of enteringforeignmarketsmainlydue toitsquickaccess[23]
Acquisitionstrategyoffersthe fastest,andthe largest,initial internationalexpansionof anyof the
alternative.
Acquisitionhasbeenincreasingbecause itisaway to achieve greatermarketpower.The marketshare
usuallyisaffectedbymarketpower.Therefore,manymultinational corporationsapplyacquisitionsto
achieve theirgreatermarketpower,whichrequire buyingacompetitor,asupplier, adistributor,ora
businessinhighlyrelatedindustrytoallow exerciseof acore competencyandcapture competitive
advantage inthe market.[24]
AcquisitionislowerriskthanGreenfieldinvestmentbecauseof the outcomesof anacquisitioncanbe
estimatedmore easilyandaccurately.[25] Inoverall,acquisitionisattractive if there are wellestablished
firmsalreadyinoperationsorcompetitorswanttoenterthe region.
On the otherhand,there are manydisadvantagesandproblemsinachievingacquisitionsuccess.
• Integratingtwoorganizationscanbe quite difficultdue todifferentorganizationcultures,
control system,andrelationships.[26] Integrationisacomplex issue,butitisone of the most important
thingsfororganizations.
• By applyingacquisitions,some companiessignificantlyincreasedtheirlevelsof debtwhichcan
have negative effectsonthe firmsbecause highdebtmaycause bankruptcy.[27]
• Too much diversificationmaycause problems.[28] Evenwhenafirmisnottoo overdiversified,a
highlevel of diversificationcanhave a negative effectonthe firminthe long-termperformance due toa
lack of managementof diversification.
Difference betweeninternationalstrategyandglobal strategy[edit]
However,some industriesbenefitmore fromglobalizationthandoothers,andsome nationshave a
comparative advantage overothernationsincertainindustries.Tocreate a successful global strategy,
managersfirstmustunderstandthe nature of global industriesandthe dynamicsof global competition,
international strategy(i.e.internationallyscatteredsubsidiariesactindependentlyandoperate asif they
were local companies,withminimumcoordinationfromthe parentcompany) andglobal strategy(leads
to a wide varietyof businessstrategies,andahighlevel of adaptationtothe local business
environment).Basicallythereare three keydifferencesbetweenthem.Firstly,itrelatestothe degree of

7. involvementandcoordinationfromthe Centre.Moreover,the difference relatestothe degree of
productstandardizationandresponsivenesstolocal businessenvironment.The lastisthatdifference
has to do withstrategyintegrationandcompetitive moves.
Jointventure[edit]
There are five commonobjectivesinajointventure:marketentry,risk/rewardsharing,technology
sharingand jointproductdevelopment,andconformingtogovernmentregulations.Otherbenefits
include political connectionsanddistributionchannel accessthatmaydependonrelationships.[29] Such
alliancesoftenare favourable when:
• The partners' strategicgoalsconverge whiletheircompetitive goalsdiverge
• The partners' size,marketpower,andresourcesare small comparedtothe Industryleaders
• Partnersare able tolearnfromone anotherwhile limitingaccesstotheirownproprietaryskills
The keyissuestoconsiderina jointventure are ownership,control,lengthof agreement,pricing,
technologytransfer,local firmcapabilitiesandresources,andgovernmentintentions.Potential
problemsinclude:[30]
• Conflictoverasymmetricnewinvestments
• Mistrustoverproprietaryknowledge
• Performance ambiguity - howtosplitthe pie
• Lack of parentfirmsupport
• Cultural clashes
• If,how,and whentoterminate the relationship
Jointventureshave conflictingpressurestocooperate andcompete:[31]
• Strategicimperative:the partnerswanttomaximize the advantage gainedforthe jointventure,
but theyalsowantto maximize theirowncompetitive position.
• The jointventure attemptstodevelopsharedresources,but eachfirmwantstodevelopand
protectits ownproprietaryresources.
• The jointventure iscontrolledthroughnegotiationsandcoordinationprocesses,whileeachfirm
wouldlike tohave hierarchical control.
Strategicalliance[edit]

8. A strategicalliance isatype of cooperative agreementsbetweendifferentfirms,suchasshared
research,formal jointventures,orminorityequityparticipation.[32]Themodernformof strategic
alliancesisbecomingincreasinglypopularandhasthree distinguishingcharacteristics:[33]
1. Theyare frequentlybetweenfirmsinindustrializednations.
2. The focus isoftenoncreatingnew productsand/ortechnologiesratherthandistributing
existingones.
3. Theyare oftenonlycreatedforshortterm durations.
Advantages[edit]
Some advantagesof a strategicalliance include:[34]
Technologyexchange
Thisis a majorobjective formanystrategicalliances.The reasonforthisisthat manybreakthroughsand
majortechnological innovationsare basedoninterdisciplinaryand/orinter-industrial advances.Because
of this,itisincreasinglydifficultforasingle firmtopossessthe necessaryresourcesorcapabilitiesto
conduct theirowneffective R&Defforts.Thisisalsoperpetuatedbyshorterproductlife cyclesandthe
needformanycompaniestostay competitivethroughinnovation.Some industriesthathave become
centersforextensivecooperative agreementsare:
• Telecommunications
• Electronics
• Pharmaceuticals
• Informationtechnology
• Specialtychemicals
Global competition
There isa growingperceptionthatglobal battlesbetweencorporationsbe foughtbetweenteamsof
playersalignedinstrategicpartnerships.[35] Strategicallianceswillbecome keytoolsforcompaniesif
theywantto remaincompetitiveinthisglobalizedenvironment,particularlyinindustriesthathave
dominantleaders,suchascell phone manufactures,wheresmallercompaniesneedtoallyinorderto
remaincompetitive.
Industryconvergence
As industriesconverge andthe traditionallinesbetweendifferent industrialsectorsblur,strategic
alliancesare sometimesthe onlywaytodevelopthe complex skillsnecessaryinthe time frame

9. required.Alliancesbecome awayof shapingcompetitionbydecreasingcompetitiveintensity,excluding
potential entrants,and isolatingplayers,andbuildingcomplex value chainsthatcanact as barriers.[36]
Economiesof scale andreductionof risk
Poolingresourcescancontribute greatlytoeconomiesof scale,andsmallercompaniesespeciallycan
benefitgreatlyfromstrategicalliancesintermsof costreductionbecause of increasedeconomiesof
scale.
In termson riskreduction,instrategicalliancesnoone firmbearsthe full risk,andcostof,a joint
activity.Thisisextremelyadvantageoustobusinessesinvolvedinhigh risk/cost activitiessuchasR&D.
Thisis alsoadvantageoustosmallerorganizationswhichare more affectedbyriskyactivities.
Alliance asanalternative tomerger
Some industrysectorshave constraintstocross-bordermergersandacquisitions,strategicalliances
prove to be an excellentalternativetobypassthese constraints.Alliancesoftenleadtofull-scale
integrationif restrictionsare liftedbyone orboth countries.
Risksof competitive collaboration[edit]
Some strategicalliancesinvolvefirmsthatare infierce competitionoutside the specificscope of the
alliance.Thiscreatesthe riskthatone or both partnerswill trytouse the alliance tocreate an advantage
overthe other.The benefitsof thisalliance maycause unbalance betweenthe parties,there are several
factors thatmay cause thisasymmetry:[37]
• The partnershipmaybe forgedto exchange resourcesandcapabilitiessuchastechnology.This
may cause one partnerto obtainthe desiredtechnologyandabandonthe otherpartner,effectively
appropriatingall the benefitsof the alliance.
• Usinginvestmentinitiativetoerode the otherpartnerscompetitive position.Thisisasituation
where one partnermakesandkeepscontrol of critical resources.Thiscreatesthe threatthatthe
strongerpartnermay stripthe otherof the necessaryinfrastructure.
• Strengthsgainedbylearningfromone companycanbe usedagainstthe other.As companies
learnfromthe other,usuallybytasksharing,theircapabilitiesbecomestrengthened,sometimesthis
strengthexceedsthe scope of the venture andacompanycan use it to gaina competitiveadvantage
againstthe companytheymay be workingwith.
• Firmsmay use alliancestoacquire itspartner.One firmmaytargeta firmand allywiththemto
use the knowledge gainedandtrustbuiltinthe alliance totake overthe other.
Disadvantages[edit]
1. Difficulttofindagood partner
2. Riskof unequal partnership

10. 3. Loss of control
4. Relationshipmanagementacrossborders
ChoosingaPartnerfor International StrategicAlliances[edit]
1. Strategiccompatibility
The partnersneedto have same general goal andunderstandinginformingajointventure.The
differencesinstrategyproducesmore conflictsof interestinthe laterpartnership(LilleyandWillianms,
1991).
2. Complementaryskillsandresources
Anotherimportantcriterionisthatthe partnersneedtocontribute more thanjustmoneytothe venture
(GeringerandMichael,1988). Each partnermustcontribute some skillsandresourcesthatcomplement
for another.
3. Relative companysize
Differentsize of companiesmaycause dominationof one firmorunequal agreement,whichisnot
favourable forlong-termrunning(LilleyandWillianms,1991)
4. Financial capability
The partnerscan generate sufficient financial resourcestomaintainthe venture’sefforts,whichisalso
importantforlong-termpartnership(LilleyandWillianms,1991)
Some more like compatibilitybetweenoperatingpolicies(LilleyandWillianms,1991),trust and
commitment(LilleyandWillianms,1991),compatible managementstyles(GeringerandMichael,1988),
mutual dependency(LilleyandWillianms,1991),communicationsbarriers(LilleyandWillianms,1991)
and avoidanchorpartners(GeringerandMichael,1988) are alsoimportantforpartnerselectionbutless
importantthanthe firstfour.
Political Issues[edit]
Political issueswill be facedmostlybythe companieswhowanttoenteracountry that with
unsustainablepolitical environment(ParboteeahandCullen,2011). A political decisionswill affectthe
businessenvironmentinacountryand affectthe profitabilityof the businessinthe country(Click,
2005). Organizationswithinvestmentsinsuchopaque countriesasZimbabwe,Myanmar,andVietnam
have long-termexperiencesabouthowthe political riskaffectstheirbusinessbehaviors(Harvard
BusinessReview,2014).
The followingare the examplesof political issues:
1. The politicallyjailingof Mikhail Khodorkovsky,the businessgiant,inRussia(Wade,2005);2. The
“Open-door”policyof China(Deng,2001);3. The Ukraine disputedelectionsresultinginthe uncertain

11. presidentrecentyears(HarvardBusinessReview,2014); 4. The corrupt legal systeminmanycountries,
such as Russia(Samara,2008)
Three differentrulesof entrymode selection[edit]
The followingintroductionswere basedonthe statementof Hollensen:[38]
1. Naïve rule.The decisionmakerusesthe same entrymode forall foreignmarkets.The
companiesuse thisrule asthe entrymode selectionignorethe differencesof individualforeignmarkets.
The performance of thisselectioncouldnotbe calculated,because ithighlydependsonthe luckof the
manager.
2. Pragmaticrule.The decisionmakerusesaworkable entrymode foreachforeignmarket,which
meansthat the manageruse differententrymodesdependonthe time stage orthe businessstage.For
example,asthe firststeptointernational business,companiestendtouse exporting.
3. Strategyrules.Thisapproachmeansthat the companysystematicallycomparedall of the entry
modesandevaluatedthe value before anychoice ismade.Thisapproachiscommonin large firms,
because the researchrequiresresources,capital andtime.Itisrarelytosee a small or mediumsized
companyuse thisapproach.