ENTERING FOREIGN MARKETS

FRANCHISING

LICENSING

EXPORTIN

G

MANAGEMENT

CONTRACTS FOREIGN DIRECT

INVESTEMENT

CHAPTER 10:Strategies for Entering Foreign Markets

LEARNING OBJECTIVES

• To examine the role of certain factors in the entry mode decision

• To understand the importance of selecting the right mode for entering a foreign market

• To describe the various modes of entry in foreign markets:

* Exporting * Licensing * Franchising

* Management Contracts * Foreign Direct Investment

THE DECISION

Of great importance to the success of our plans is the implementation of the international strategy

At the implementation phase we have to select the appropriate mode of entry in the market(s) we have decided to enter

The decision of home country production (exporting), host country production in firm-owned factories (FDI and Joint Venture), or host country production performed by others (licensing, franchising, and contract manufacturing) depends on several factors.

Importance of Selecting the Right Mode of Entry

• Our competitive advantage (so nicely thought at the formulation stage) might be lost. (Image might deteriorate, cost leadership might be lost…)

• High costs might affect our profitability (Tariffs, administrative costs, corporate taxes…)

• Control might be lost. (Distance, different mentality and work methods…)

Exporting

Sending of goods or services from one country to another for use or sale. Most common means.

Forms of exporting

• Indirect (setting to a domestic customer who then exports the product)

• Direct (selling to distributors or end-users outside the firm´s home country)

• Intracorporate transfers (selling to an affiliate in another country)

Factors favoring exporting

• Capital investment (expansion without heavy costs)

• Experience gained (Testing of market without heavy risk)

• Reduced political risk (Risk of confiscation is reduced)

Considerations before exporting

• Government policies (Tariffs, NTBs, subsidies, programs)

• Marketing concerns (will the image of the product change with other means?)

• Costs (Distribution costs, warehousing, special packaging, transportation)

Licensing

An arrangement whereby a firm grants rights of intellectual property to an independent organization for a specified period

and for a fee (royalty). Rights might be exclusive or nonexclusive.

Select for the following reasons

• Not justified sales volume for establishing manufacturing facilities (FDI is costly)• For strategic reasons (a decision to go into new operations (lines) but still make profit from old ones by licensing them)•For product/image protection (some countries provide protection of a registered product only if the international company has exploited it locally within a specified period. If not, it is given to the first one that exploits it. Will the product be the same?•Stage of technology development (When the firm changed its technology and licenses the old one (no waste) to a LDC or when you want to transfer technology abroad so that the new product is introduced home and away simultaneously.

Franchising

A specialized form of licensing in which the franchisor not only sells an independent franchisee the use of a trademark (for a fee) but also assists on a continuing basis in the operation of the business. Franchisor has more control

and might provided training, shop designs, marketing expertise, etc.

Advantages

• Low risk in expansion (capital investment in mainly on the franchisee´s side)

• Market information is gained (customs, laws, competitors…)

Disadvantages

• Shared profits (Profits go to the franchisee also)

• More difficulties (in teaching foreigners to produce and service according to company´s standards)

Succeed when:

• Domestic success

• Transferable Success Factors

• Interested foreign Investors

Turnkey Operations

Contract for construction of operating facilities that are transferred for a fee to the owner upon completion.

• The contract may be for a fixed price or it may provide for payment on a cost plus basis

• They often involve large, complex, multiyear projects such as construction of a nuclear power plant, an airport, an oil refinery, highways, mails…

Management Contracts

An agreement whereby a firm provides managerial assistance, technical expertise, or specialized services to a second firm for some agreed-upon

time in return for a fee or a percentage of sales.

• Additional revenues are earned (with no heavy investment)

• Standards are kept high when the name of the company is used but the company belongs to a government

Note: Provided often to LDCs that lack the technical expertise in running airports, oil companies, nuclear plants…

Foreign Direct Investment

Establishing operations in a foreign country.

Accompanied with ownership and controlMethods

Greenfield strategy: Building it from scratch. It involves many headaches in construction and it takes time but it is build according to the company´s plans and standards with new equipment and up-to-date facilities. Gives management time to acclimate to the new culture.

Acquisition strategy: Buying another company. It might be used to eliminate competitors. A going concern has its clients and employees there. However, it has its financial and managerial liabilities.

Joint Venture: A type of ownership sharing (very popular). When it is more than two companies it is called a consortium.