Chapter 13 Notes on Entering Foreign Markets

Chapter 13: Entering Foreign Markets

Learning Objectives

• Basic Decisions for Foreign Expansion: Firms must make three critical decisions:

  • Which markets to enter

  • When to enter those markets

  • On what scale to enter

• Early Entry Advantage: Ability to capture demand, build sales volume, and create switching cost for customers

• Early Entry Disadvantage: Cost of business if major mistake is made, cost of start-up and establishing the brand

• Late Entry Advantage:

• Late Entry Disadvantage:

• Entry Modes: Understand different modes that firms can use for entering foreign markets.

• Entry Strategy Comparison: Understand the differences in strategies such as acquisitions versus greenfield ventures.

Introduction

• Methods of Entry into Foreign Markets:

  • Exporting: Selling products to foreign markets

  • Licensing/Franchising: Allowing host firms to use company assets

  • Joint Ventures: Collaborating with a local firm

  • Wholly Owned Subsidiaries: Full ownership of operations in a foreign market

• Determinants of Entry Mode:

  • Transport costs

  • Trade barriers

  • Political/economic risks

  • Firm strategy

Basic Entry Decisions

• Critical Choice Factors: Firms must determine:

  • Which markets to enter

  • Timing: when to enter those markets

  • Scale: the scale of entry (large vs. small)

Which Foreign Markets?

• Market Assessment: Evaluate the long-run profit potential:

  • Desirable Markets: Politically stable, free market systems, low inflation, low private sector debt

  • Undesirable Markets: Politically unstable, mixed/command economies, speculative financial bubbles

• Successful Entry: Offer products not widely available that meet unmet needs.

When to Enter

• Timing of Entry:

  • Early Entry: Entering before competitors, gaining market advantages.

  • Late Entry: Entering after competitors have established a presence.

Advantages of Early Entry:

• Pre-emption of rivals, capturing demand.

• Built-up sales volume and experience.

• Creation of customer switching costs.

Disadvantages of Early Entry:

• Potential for pioneering costs (initial failures).

• Costs for establishing and promoting products.

Scale of Entry

• Large Scale Entry: Significant commitment affecting competition.

• Small Scale Entry: Allows for gradual learning and risk management.

• Decision Making: There are no guaranteed 'right' decisions in foreign entries; weighs risk against reward.

How to Enter: Entry Modes

• Methods of Market Entry:

  • Exporting

  • Turnkey Projects

  • Licensing

  • Franchising

  • Joint Ventures

  • Wholly Owned Subsidiaries

Exporting

• Attractiveness: Low-cost entry and potential for experience curve economies.

• Limitations:

  • Not ideal with high transport costs/tariffs

  • Issues with foreign agents.

Turnkey Projects

• Definition: Contractors manage projects completely, later handing over operations to foreign clients.

• Advantages: Earn return on complex technologies, lower risk in uncertain markets.

• Disadvantages: Risk of revealing proprietary technology.

Licensing

• Description: Granting rights to intangible assets in exchange for royalties.

• Advantages: No development costs or investment barriers, controls costs.

• Disadvantages: Limited control over quality, potential loss of proprietary technology.

Franchising

• Characteristics: Franchisee follows strict business rules set by franchisor.

• Benefits: Avoids costs/risks of market entry.

• Challenges: May limit profit repatriation and quality control due to distance from franchisees.

Joint Ventures (JVs)

• Structure: A separate firm jointly owned by two or more entities.

• Benefits: Local partner's knowledge, shared costs/risks, reduced nationalization risks.

• Disadvantages: Risk of losing control over technology, potential for conflicts in goals.

Wholly Owned Subsidiaries

• Ownership Structure: Full ownership, either through new operations or acquisitions.

• Advantages: Full control over operations, strategic decision-making, and operational efficiency.

• Disadvantages: Total bearing of setup costs/risks.

Core Competencies and Entry Mode

• Technological Know-How: Avoid licensing/joint ventures for long-term advantages.

• Management Skills: Consider the risks of losing management control against branding benefits.

Greenfield or Acquisition?

• Options for Subsidiary Formation: Choose between acquiring an existing company or starting anew (greenfield).

• Acquisition Benefits: Quick execution and risk availability; potential to preempt competition.

• Acquisition Challenges: Risks of overpayment, cultural clashes, and lack of synergy.

Pros and Cons of Greenfield Ventures

• Advantages: Custom building of the subsidiary.

• Disadvantages: Slower to establish and greater risks due to unknowns. If competitors act quickly, market share can be lost.