Entering Foreign Markets

1. Schedule
12 - Entering Foreign Markets
13 - Exporting, Importing, and Countertrade
14 - Global Production, Outsourcing, and Logistics
15 - Global Marketing and R&D
16 - Global Human Resource Management
Presentations
Final Exam - Tentative January 5, 2012

2. International
Economics
Chapter 12
Entering Foreign Markets

3. Chapter 12
Entering Foreign Markets
Key Table page 432

4. Key Terms
Timing of Entry Turnkey Project
First-Mover Advantages Licensing
First-Mover Franchising
Disadvantages Joint-Venture
Pioneering Costs Wholly-Owned
Exporting Subsidiary

5. Four Questions
• Which market?
• When to enter?
• What scale?
• Mode of entry?

6. GM-SAIC China
Wuling Sunshine Auto
$3,700 Market
14,000 SAR
1997
400,000
2009
13,800,000
34.5 x

7. Mode of Entry

8. Mode of Entry
• Export
• Licensing or franchising
• Joint venture
• Wholly-owned subsidiary

9. Factors to Consider

10. Factors to Consider
• Transportation costs
• Trade barriers
• Political risks
• Economic risks
• Business risks

11. Basic Entry Decisions

12. Basic Entry Decisions
• 200+ nations
• Profit potential
• Demographics
• Purchasing power

13. Timing of Entry

14. Timing of Entry
• Early versus Late
• First-Mover

15. First-Mover Advantages

16. First-Mover Advantages
• Preempt rivals
• Build volume
• Create high switching costs

17. First-Mover Disadvantages

18. First-Mover Disadvantages
• Pioneering costs

19. Most Profitable?

20. Most Profitable?
• 2nd and 3rd entrants

21. Scale of Entry

22. Scale of Entry
• Large scale - strategic commitment
• Tells customers you are serious
• Risky if it fails
• Small scale - lack commitment
• Balance

24. Summary

25. Summary
• Balance Risks

27. Mode of Entry

28. Mode of Entry
• Export
• Licensing or franchising
• Joint venture
• Wholly-owned subsidiary

29. Exporting Advantages

30. Exporting Advantages
• Avoids costs of creating
• May lower costs
One manufacturer for the planet

31. Exporting Disadvantages

32. Exporting Disadvantages
• Misses lower costs
• High transportation costs
• Tariffs
• Lose control - loyalty

33. Turn-Key Project

34. Turn-Key Project
Set up a plant and turn over the
keys when it is fully operational.

35. Turn-Key Projects

36. Turn-Key Projects
Chemical
Pharmaceutical
Petroleum refining
Metal refining.

37. Turn-Key Projects Advantages

38. Turn-Key Projects Advantages
Less risky than FDI
Unstable countries

39. Turn-Key Projects Disadvantages

40. Turn-Key Projects Disadvantages
No long-term interest
Create a competitor
Selling your competitive advantage

41. Licensing Advantages

42. Licensing Advantages
No long-term interest
Create a competitor
Selling your competitive advantage

43. Licensing

44. Licensing
License the right to produce its
product, its process, or its brand
name or trademark to another firm

45. Licensing

46. Licensing
Licensor - owns the asset
Licensee - renting the asset
Pays a royalty fee

47. Licensing Advantages

48. Licensing Advantages
Less capital
Less risk
Overcome prohibitions
Technology but not manufacturing

49. Licensing Disadvantages

50. Licensing Disadvantages
Lose control over quality
Limits on what profits can do
Lose control over technology

51. Reduce Risk in Licensing

52. Reduce Risk in Licensing
Cross-Licensing: both hostages
Joint Venture: align interest

53. Franchising

54. Franchising

55. Franchising
Special form of licensing.
Franchisor - Seller - Trademark
Franchisee - Buyer - pays royalty
Intangible property
Rules of conduct

56. Franchising Advantages

57. Franchising Advantages
Like licensing
Grow big at low cost

58. Franchising Disadvantages

59. Franchising Disadvantages
Quality control
Master franchise for each country

60. Joint Venture

61. Joint Venture
A firm owned by two or more
independent firms.

62. Joint Venture Advantages

63. Joint Venture Advantages
Get local partner knowledge
Share risks and costs
Only way into some countries

64. Joint Venture Disadvantages

65. Joint Venture Disadvantages
Lose knowledge to partner
Lose control
Conflicts over management and
objectives

66. Joint Venture Disadvantages

67. Joint Venture Disadvantages
Lose knowledge to partner
Lose control
Conflicts over management and
objectives

68. Wholly-owned Subsidiary

69. Wholly-owned Subsidiary
A subsidiary in which the firm owns
100 percent of the stock
Greenfield - Set up new
Acquisition - Buy existing firms

70. Wholly-owned Subsidiary
Advantages

71. Wholly-owned Subsidiary
Advantages
Protect knowledge
Control operations
Learning curve advantages
100% of profits

72. Wholly-owned Subsidiary
Disadvantages

73. Wholly-owned Subsidiary
Disadvantages
Costly - Money and knowledge

74. Core Competencies
and Entry Mode

75. Core Competencies
and Entry Mode
Technological Know-How - Product
Avoid joint-ventures or licensing
Management Know-How - Service
Pursue joint-ventures or licensing

76. Greenfield or
Acquisition?

77. Acquisition Advantages

78. Acquisition Advantages
Quick
Preempt competitors
Less risk

80. Acquisition Disadvantages

81. Acquisition Disadvantages
Too costly
Hubris Hypothesis - overestimate
Culture clash
Integration difficult
Fail to pre-screen

82. Reducing Acquisition Failure

83. Reducing Acquisition Failure
Pre-Screen
Move fast
Power issues

84. Greenfield Advantages

85. Greenfield Advantages
Easier to build than to change
Fewer surprises

86. Greenfield Disadvantages

87. Greenfield Disadvantages
Slow
Risky
Competitor preemption

88. Acquisition or Greenfield?

89. Acquisition or Greenfield?
If lots of competition - Acquisition
If little competition - Greenfield