INTERNATIONAL BUSINESS - Sogang

INTERNATIONAL

BUSINESS

Ch. 14 Entry Strategies

Int’l Business Strategies

1. Which markets to enter

2. When to enter and on what scale

Early entry vs. Late entry

Large scale vs. Small scale

3. How (which entry mode) to enter

Exporting

Licensing

Joint venture

Wholly-owned subsidiary

Turnkey project

2. Timing of Entry

Early Entry

(+) Early entry capitalize on first mover advantages

- Capture market share

- get an experience curve

- Create switching costs that tie customers to their products

Example) LG in India, Samsung in Russia, Daewoo in Africa

Entered into those countries earlier than other MNCs

(-) Pioneering costs

Early entry must devote considerable time, effort and capital

to learning the rules of the game.

2. Timing of Entry (continued)

Once a target country is identified,

then the firm must consider the timing of entry.

Late Entry

(+) Minimize Pioneering Costs:

Pioneering costs: early entry must devote considerable time,

effort and capital to learning the rules of the game.

Reduce Probability of Failure:

Safer if a firm enters a market following several other firms

(-) Low risk, low return

3. Scale of Market Entry

After choosing 1) which market to enter and 2) the timing of entry, firms decide on the scale of market entry

Large Scale Entry

Changes the playing field

Difficult to reverse

Small Scale Entry

Learn about a foreign market before it’s exposed to significant levels of risks

But, low risk, low return



- Attractiveness of a nation (benefits, costs, risks)


- Early entry vs. Late entry

- Large scale vs. Small scale


Exporting

Turnkey projects

Licensing (franchising)

Joint venture


4. How to Enter (Entry Mode)

1. Exporting

2. Licensing

3. Joint Venture

4. Wholly-owned subsidiary

- Greenfield strategy vs. Acquisition strategy

5. Turnkey project


1. Exporting

Definition: A strategy whereby a company, without any marketing or production entities overseas, deliver a product from its home base.

Most traditional and well-known form of operation in foreign markets.


1. Exporting

Advantages

1) Simple 2) Safe 3) Low costs

So, often used for the first entry method to learn about foreign market.

Disadvantages (higher costs and/ or slow response to locals)

1) High transportation costs (in case of high gas price)

2) Trade barriers (in case that higher tariff imposed)

3) More production costs (in case of high costs in home country)

3) Slow to meet local requirements (little customization)


1. Exporting

When appropriate?

1) Low trade barriers

2) Low transportation costs

3) Marketing Customization not crucial


1. Exporting

Korea’s fast development (1960-present):

Well-organized exporting systems (especially critical for small&mid-sized firms)

1) KOTRA http://english.kotra.or.kr (emails..) Organization: facilitate, act as intermediaries

2) Korea’s EXIM bank & other national banks http://www.koreaexim.go.kr/small/general/seas.jsp

3) KIEP (Korea Institute for Int’l Economy Policy) http://www.kiep.go.kr/

4) Trade Companies

Daewoo International http://www.daewoo.com/kor/

Hyundai Kolon

Samsung C&T Lotte Hyosung

http://english.kotra.or.kr/

http://english.kotra.or.kr/

http://www.koreaexim.go.kr/small/general/seas.jsp



http://www.kiep.go.kr/

http://www.kiep.go.kr/

http://www.daewoo.com/kor/

http://www.daewoo.com/kor/


2. Licensing

A company gives 1) the licensee 2) the rights to intangible property 3) for a specified period of time 4) in exchange for royalties.

Intangible property includes:

Patents, inventions, formulas, processes, designs, copyrights etc..

Common method for

1) companies with a distinctive and legally protected asset

2) in a country with well-developed societal system


2. Licensing

Advantages

1) Avoids costs and risks associated with opening a foreign market

2) Quick (rapid entry into foreign markets)

Disadvantages

1) May lose the control of licensee

2) Run the risk of damage to brand image& product quality

3) Run the risk of creating future local competitors

Worst scenario: local partner may compete against the very licensor

So, recommendable in legally developed foreign markets


2. Licensing

When is appropriate? (in terms of company, country, partner)

- 1) When a company has well codified, managed knowledge

- 2) In a strong property rights country

- 3) When trustable local partners are available

KFC/Burger King & Doosan


3. Joint Venture

Definition: joint-ownership by both sides (foreign entrant and local collaborators)

Examples:

LG-Otis, LG-IBM, LG-Philips LCD, Fuji-Xerox

Hyundai-Beijing Motors

Samsung-Corning, Toshiba-Samsung

GS-Caltex

Sony-Ericsson, Sony-Samsung LCD

………

*China: JV is a must in some industries (nationally important)


3. Joint Venture

Advantages

1) Reduce the capital risk

2) Can benefit from a local partner’s knowledge, network, know-how, capabilities, and govt. relationship

Disadvantages

COMPLEXITIES and DIFFICULTIES in dealing with a local partner

This issue is more serious due to

differences in culture, managerial styles, motivation, communication



Definition: 100% ownership

(* Many prefer to establish, due to complexities of JV)

Advantages

1) Easy to control its facilities

2) Gain high profits (not splitting profits with local partner)

Disadvantages

1) Higher risks (e.g. becoming an easy target in a foreign country)

2) Little knowledge about local culture, norms, systems


Liability (disadvantages) of being foreign (Zaheer 1995):

An additional costs that foreign companies face in host country

1) Lack of local knowledge

2) Lack of understanding of local norms and culture

3) Lack of local networks & resources

4) Differentiated standards on foreign firms (higher standards)

In case of wholly-owned subsidiary,

are more likely to suffer from liability (disadvantages) of foreignness.



Definition: 100% sole investment

1) Greenfield strategy

Build a subsidiary from scratch

- better when transferring home policies etc…

2) Acquisition strategy

acquire an existing company

- quick

- better when entry barriers exist


5. Turnkey project

A means of exporting ‘process technology’ to other countries by building a plant

A contractor handles every detail of the project for a foreign client, and when the contract is completed, a contractor turns the key to a plant to the foreign client.

Common in: chemical, pharmaceutical, petroleum refining industries.


5. Turnkey project

A means of exporting ‘process technology’ to other countries

Advantage:

- Useful where FDI is limited by host-country regulation

- Less risky

Disadvantage:

- Will have no long-term interest in a foreign country

- May create a potential competitor




Early entry vs. Late entry

Large scale vs. Small scale


Exporting

Turnkey project

Licensing

Joint venture


- Greenfield strategy vs. Acquisition strategy

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