4.1 Market entry methods4.1.1 Indirect strategies4.1.2 Foreign Direct Investment (FDI) Strategies

4.1.3 Other IM strategies4.2 Criteria in selecting

market entry methods

4.1.1 Indirect strategya)Exportingb)Licensingc) Management Contract d)Turnkey Operation

a) Direct and Indirect Exporting Exporting of goods and services by the

producing firm Sales company option

Business established to market goods and services Internet has made direct exporting much

easier Cost of trial low

Exporting of goods and services through various home-based exporters◦Manufacturers’ export agents sell for manufacturer

◦Export commission agents buy for overseas customers

◦Export merchants purchase and sell for own accounts

◦International firms use the goods overseas

Advantages:◦Avoids cost of establishing manufacturing

operations◦May help achieve experience curve and location economies

Disadvantages◦Commission to export agents, export

merchants◦Foreign business can be lost if exporters

decide to change their sources and supply◦Firm gains little experience from

transactions

b) Licensing A company in one country (licensor)

enters into a contractual agreement with a company or person in another country (licensee) whereby the licensee is given the right to use something owned by the licensor.

Advantages Reduces development costs and risks

of establishing foreign enterprise Fast market access Gain local market knowledge

Disadvantages Less control over market and revenues IP concerns Potential problems with licensees

d) Management ContractThe local investor provides the capital for

enterprise, while the international marketer provides the necessary know-how to manage the company.

Ex: Hilton hotel

Advantages: Reduces costs and risk of establishing

enterpriseEmphasis on firm’s expertise

Disadvantages: Limited profits and market access Potential copyright and IP issues

e) Turnkey operation• Contractor agrees to

handle every detail of project for foreign client• Technology• Management expertise• Capital equipment (some

cases)• After trial run, facility is

turned over to purchaser

Advantages: Can earn a return on knowledge asset Emphasis on firm’s expertise Less risky than conventional FDI

Disadvantages:No long-term interest in the foreign

countryMay create a competitorSelling process technology may be

selling competitive advantage as well

4.1.2 Foreign Direct Investment (FDI) strategiesa) Acquisition vs Greenfieldb) Assembly vs Manufacturingc) Sole venture vs Joint venture

a) Acquisition vs Greenfield Acquisition

◦ a form of investment where an already existing company is taken over by an investing firm

◦ takes over the assets of the existing company

◦ may redesign if necessary

“purchase of stock in an already existing company in an amount sufficient to confer

control”[Kogut & Singh 1988]

Greenfield Greenfield is the

process of expanding operations in foreign market from ground zero. It requires purchase of local property and local man power.

Greenfield

Benefits - can build subsidiary it want - relatively easy to establish operating routine - new jobs are created in local market

Drawbacks - Lengthy process - competition before sets up - research – time consuming - unstable – emerging market - legal issue

b) Assembly vs Manufacturing Assembly

Manufacturer exports all or most of its products in a “knocked-down” condition. These parts are put together to form the complete product.

These parts are put together to form the complete product in a one location / country for host or other countries

can be a new-build, or the company might acquire a current business that has suitable plant

Manufacturing◦ organization invests in plant,

machinery and labor in the overseas market

◦ process begins with acquiring raw materials and transform it into finish product

◦ can be a new-build, or the company might acquire a current business that has suitable plant

c) Sole venture vs Joint venture Sole venture 100% ownership Ethnocentric consideration not necessary for international success

Joint Venture Company

Inputs

MNE Local Firm

HOME COUNTRY HOST COUNTRY

Inputs

Share of Profit

Share of Profit

Joint Venture◦ collaboration of two or more organization◦ share assets, risks and profits◦ equality of partners is not necessary◦Foster + Partners and Buro Happold joint

venture to design four stations for Saudi Arabia’s new Haramain High-speed Railway

Disadvantages Potential loss of proprietary knowledge Potential conflicts between partners Neither partner has full performance incentive Neither partner has full control

4.1.3 IM Strategies

1. Strategic Alliances Strategic alliances are

co-operative relationships between two or more independent organizations, designed to achieve mutually beneficial goals for as long as is economically viable.

Early Alliances: Responding to Japan IBM’s Initiatives During the 1990s:

Rebuilding Competitiveness

4.1.3 IM Strategies2. Analysis of Entry Strategies

3. Free Trade ZonesFTZ are geographical areas defined within the national territory, for the development of industrial goods and services or commercial activities under a special tax, customs and foreign trade regime

Joint Venture Company

Licensing

Acquisition

Joint Venturing

Local Firm

New Subsidiary Company

“Green Field” Entry

HOME COUNTRY HOST COUNTRY

ExportMNE

Decision Criteria for Mode of Entry: Market Size and Growth Risk Government Regulations Competitive Environment/Cultural Distance Local Infrastructure(See Exhibits 4-2 and 4-3)

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Classification of Markets:i. Platform Countries (Singapore & Hong

Kong)ii. Emerging Countries (Vietnam & the

Philippines)iii. Growth Countries (China & India)iv. Maturing and established countries

(examples: South Korea, Taiwan & Japan)

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Mode of Entry Choice: A Transaction Cost Explanation

Regarding entry modes, companies normally face a tradeoff between the benefits of increased control and the costs of resource commitment and risk

Transaction Cost Analysis (TCA) perspective

Transaction-Specific Assets (assets valuable for a very narrow range of applications)

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• Criteria for Selecting Appropriate Market Entry Method• The company objectives and

expectations relating to the size and value of anticipated business• The size and financial resources of the

company• Existing foreign market involvement• The skills, abilities and attitudes of the

company management towards international marketing

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The nature and power of the competition with the market

The nature of existing and anticipated tariff and non-tariff barriers

The nature of the product itself, particularly any areas of competitive advantage, such as trademark or patent protection

The timing of the move in relation to the market and competitive situation

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Control

Risk

Indirect exportingComplementary marketing

Trading companiesExport management companies

Domestic purchasing

Co-operation strategies

Joint venturesStrategic alliancesDirect exporting

DistributorsAgents

Direct marketingFranchising

Management contracts

ManufacturingOwn subsidiary

AcquisitionAssembly

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Wholly-owned subsidiaryCompany acquisitionAssembly operationsJoint ventureStrategic allianceLicensingContract manufactureDirect marketingFranchisingDistributors and agentsSales forceTrading companiesExport management companiesPiggyback operationsDomestic purchasing

Levels of

involvement