XI. Entering Foreign Markets

Which foreign markets to enter

The choice must be based on an assessment of a nation’s long-run profit potential based on:

Size of the market
Present and likely future wealth of consumers: purchasing power
Costs and risks
Suitability of firm’s products to that market
Nature of indigenous competition

Overall, determine which are the most attractive markets

Considerations when entering foreign markets

Timing of Entry
Scale of Entry
Strategic Commitments

Timing of entry

Early: entera a foreign market before other foreign firms (first-movers)

Late: enters after other IBs have already established in a market

First mover advantages

Ability to preempt rivals and capture demand

Build sales volume - ride down the experience curve

Create switching costs: make it difficult for others to enter & tie clients

First mover disadvantages

Learning the rules of the game
Costs of business failure
Costs of promoting and establishing a product offering
Regulations may change
Educate customers

Strategic commitment

Use when the entry is of large-scale
It has a long-term impact and is difficult to reverse
Must demonstrate aggressive competition
If it is not credible/feasible it will benefit competitors

Large-scale market entry considerations

Important influence on competition market nature
It is costly, risky, and lacks of flexibility (investments cannot be reallocated in the future)

Small-scale market entry considerations

Adv. you can learn about a foreign market without risking resources
Disadv. it limits the firms’ exposure to the market

Entering in Foreign Markets modes

Exporting
Turnkey projects
Licensing
Franchising
Joint ventures
Subsidiaries
Acquisitions
Greenfield ventures

** apartir de joint ventures, hay más inversión y presencia *

Exporting advantages and disadvantages

Advantages: avoid costs of establishing
achieve experience curve and location economies

Disadvantages: high transport costs & trade barriers can make exporting uneconomical
May lose control when important decisions are delegated

Turnkey project def.

When the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel

Used for large projects that often include the construction of big plants

Contratistas

Adv. of turnkey project

earning great economic returns from an asset

useful where FDI is limited by host-government regulations

less risky than conventional FDI (i.e. if there is political instability, better to use it)

Disadv of turnkey project

No long-term interest

Selling competitive advantage to potential and/or actual competitors

Creating new competitors

Licensing def.

Grant the rights to intangible property to another entity for a specified period in change of royalty fee

Employed by manufacturing firms

Franchising def.

A type of license
Longer-term commitments
Strict rules on how to do business
Employed primarily by service firms
Transfer or practices- standarization

Advantages of licensing/franchising

don’t deal with the development costs and risks

Overcome barriers to investment

Build global presence quickle

Used when the firm has intangible property but does not want to develop the product

Disadvantages of licensing/franchising

No tight control

Limits the ability pf using profits in country A to country B

Lose tech control

Depends on local property rights legislations

** franchising has a bit more control than licensing *

Def. Joint venture

Establishing a firm that is jointly owned by two or more otherwise independent firms

Adv. of Joint Venture

Local partner’s knowledge of the host country

Shared costs and risks

In some countries, due to political considerations it’s the only feasible entry mode

Disadv. of Joint venture

Giving control of its technology

Lose of tight control over subsidiaries

Conflicts for control between the investing firms

Def. of Subsidiaries

A firm that you own 100%

Can be done through two ways:
greenfield ventures: start a firm from 0
acquisitions: buy a firm

pressures for cost reduction >, more likely to pursue subsidiaries (also exports)

Adv. of subsidiaries

Control over technology and operations

100% of the profit

Location and experience curve economies

Tight control that might be required for coordinating a globally dispersed value chain

Use profits in one market to improve in other market

Disadv. of subsidiaries

It is costly and risky

Adv. of acquisitions

Quick to execute
May help preempt competitors

Disadv. of acquisition

Risk of overpaying
Culture clash
Integration often takes longer than expected
Inadequate preacquisition screening of potential targets
Inability to predict possible failure scenarios

Adv. of greenfield ventures

Greater ability to build the kind of subsidiary the company wants
Risky (but may be less risky than acquisitions)

Disadv. of greenfield ventures

Slower to establish

Preemption by global competitors

Select an entry mode based on core competences

Technological know-how: Subsidiaries & exports (licensing and joint-venture may be avoided)

Management know-how: licensing/ franchising or joint ventures (more complicated to imitate)

Process of making alliances

Select a strategic partner

Contracts: specify the structure of the alliance, decreese the risk of opportunism by a partner

After it is done, you have to manage it: learning from both experiencies, applying it to the company. Maximize benefits from the alliance

Advantages of alliances

Facilitate entry into a foreign market

Share fixed costs and risks

Combine complementary skills and assets: i.e. development of covid vaccines (bion tech & pfizer)

echnological standards: coordinate with other firms to set up new standards

Disadv. of alliances

Unless a firm is careful, may give away more than it receives