Chapter 7 MODES OF ENTRY

LEARNING OUTCOMES:
- Understand three basic entry decisions
- Learn of the four steps in screening potential markets and sites
- Explain the six entry modes

1. BASIC ENTRY DECISIONS

- Technological advances in communication and transportation open national markets around the globe.
- Managers screen and analyze locations as potential markets and as potential sites for operations.
- The attraction to distant markets and the integrated nature of location decisions demand that the location
decision be made in a systematic manner.

There are 3 basic decisions that firms must make when they decide on foreign expansion:
- Which markets to enter? (Analyzing international markets)
- When to enter those markets? (Timing of entry)
- What scale of penetration? (scale of entry and strategic commitment)

OBJECTIVES:
- The three basic decisions that firms must make when they decide on foreign expansion
- Compare the different modes firms use to enter foreign markets
- Identify the factors that influence a firm’s choice of entry mode

1.1. ANALYZING INTERNATIONAL MARKETS

1.1.1 Types of market
Developed Market
- Have more advanced economies, better developed infrastructure, more mature capital markets, and higher
standards of living
- E.g.: United States, Canada, Germany, the United Kingdom, Australia, New Zealand and Japan
Emerging markets
- The process of rapid growth and development but they have lower household incomes and capital markets
that are less mature than developed countries.
- E.g.: Brazil, Russia, India, China, Portugal, Ireland, Italy, Greece and Spain.

The choice of foreign markets will depend on their long run profit potential
- Favorable markets: are politically stable developed and developing nations with free market systems
and relatively low inflation rates and private sector debt.
- Less desirable markets: are politically unstable developing nations with mixed or command economies,
or developing nations with excessive levels of borrowing.
- Markets are also more attractive when the product in question is not widely available and satisfies an
unmet need.

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1.1.2 Timing of entry
- Once attractive markets are identified, the firm must consider the timing of entry
- Entry is early: when the firm enters a foreign market before other foreign firms
- Entry is late: when the firm enters the market after firms have already established themselves in the
market.
1.1.3. Scale of entry and strategic commitments
(Quy mô gia nhập và cam kết chiến lược)
There are two common levels of foreign market entry:
- Large scale: involves the commitment of significant resources and implies rapid entry.
- Small scale entry: gradual penetration.

The advantages of large scale entry:

- Create trust for customers and partners in new markets.
- May make other MNCs hesitant to enter this target market.
The disadvantages of small scale entry:
- MNCs may have fewer resources available to support expansion in other desirable markets.
- Limit the company’s strategic flexibility.

1.2. SCREENING POTENTIAL MARKETS AND SITES

- Two important issues concern managers when screening potential markets and sites: keeping the cost of
the search down and examining every potential market and location.
- The screening process has four steps: (1) identify basic appeal, (2) assess the national business
environment , (3) measure market or site potential, and (4) select the market or site
1.2.1 Identify basic appeal
- The first step in determining basic appeal of a potential market is to estimate demand for a product.
- Determining basic appeal of a potential site involves assessing the availability of required resources.
Determining basic demand:
- Find out if there is a demand for a company’s product
- The suitability of a nation’s climate is essential in determining demand.
- Are there bans on a product such as alcohol in Islamic nations?
Determining availability of resources
- Raw materials for manufacturing must be found in either the national market or imported. Imports may
have high tariffs, quotas, or other government barriers placed upon them.
- The availability of labor is essential to production in any country. Many companies relocate to lower-
wage countries, especially those with labor-intensive products.
- Financing is an important impetus for production abroad, especially if financing is not available at home
or when interest rates are high.
- Markets and sites not meeting requirements are no longer considered.
1.2.2 Assess the national business environment
03 factors: Cultural, Political and Legal factors and Economic & Financial factors
(i) Cultural factor:
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- Countries differ in language, attitudes towards business, religious beliefs, traditions, and customs. –
- Cultural elements can influence what kinds of products are sold and how (e.g., Coca-Cola in China had to
overcome an aversion because it tastes similar to a traditional medicine).
- Culture affects site-selection decisions; companies sometimes locate production in the local market when
changes must be made to a product’s physical features for cultural reasons.
- Cultural elements such as work ethic, educational attainment, or the level of managerial skills of the local
people affect site-selection decisions.
(ii) Political and Legal factors
- Government regulation
- Government bureaucracy
- Political stability
(iii) Economic and Financial factors
- Poor fiscal and monetary policies can cause high rates of inflation, increasing budget deficits, a
depreciating currency, falling productivity levels, and flagging innovation.
- Currency and liquidity problems pose special challenges for international companies. Volatile currency
values make it difficult for firms to predict future earnings in terms of the home-country currency.
(v) Other factors: country image, cost of transporting materials and goods…

1.2.3 Measure market potential

[Link] Measuring market potential
Measuring Developed Markets:
- Names, production volumes, and market shares of the largest competitors.
- Volume of exports and imports of the product.
- Structure of the wholesale and retail distribution networks.
- Background on the market, including population figures, social trends, and kinds of marketing approaches
used.
- Total expenditure on the product (and similar products).
- Retail sales volume and market prices of the product.
- Future outlook for the market and potential opportunities.
Measuring Emerging Markets
- Market size, which provides a snapshot (hiện trạng) of the size of a market at any point in time.
- Market growth rate, which helps to avoid markets that are large (but shrinking) and targets those that are
small (but expanding).
- Market intensity, which estimates the wealth or buying power of a market from the expenditures of both
individuals and businesses.
- Market consumption capacity, which estimates spending capacity.
- Commercial infrastructure, which assesses channels of distribution and communication.
- Economic freedom, which estimates the extent that free-market principles predominate.
- Market receptivity, which attempts to estimate market “openness.”
- Country risk, which estimates the risk of doing business, including political, economic, and financial
risks.

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[Link] Selecting the market
Field Trips
- Managers should take trips to each remaining site to experience the culture, observe the workforce, or
make personal contact with potential new customers and distributors.
- Top executives often return to the location for signing contracts and a more formal gathering among
partners.
Competitor analysis:
- Number of competitors in each market (domestic and international).
- Market share of each competitor
- Whether each competitor’s product appeals to a small market segment or has mass appeal
- Whether each competitor focuses on high quality or low price
- Whether competitors tightly control channels of distribution
- Customer loyalty commanded by competitors
- Potential threat from substitute products
- Potential entry of new competitors into the market
- Competitors’ control of production inputs (labor, capital, raw materials, etc.)

2. ENTRY MODES
06 basic methods of market entry include:
- Exporting
- Turnkey projects
- Licensing
- Franchising
- Joint ventures
- Wholly owned subsidiaries

2.1. Exporting
- The most common method of buying and selling goods internationally is exporting and importing.
- Exporting is the act of sending goods and services from a nation and importing brings goods and services
to a nation.
- Exporting is a common first step in the international expansion process for many manufacturing firms
- Later, many firms switch to another mode to serve the foreign market.

2.1.1 Reasons for exporting

- Expand Sales: Most large companies export to expand total sales when the domestic market is saturated.
- Diversify Sales: Diversifying sales levels off cash flow—making it easier to coordinate payments to
creditors with receipts from customers.
- Gain Experience: Owners and managers with little or no knowledge of how to conduct business in other
cultures, use exporting as a low-cost, low-risk way of gaining valuable international experience.

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2.1.2 Advantages and disadvantages of exporting
Advantages
- Avoid the often substantial costs of establishing manufacturing.
- Low investment and risk.
- Flexibility to enter multiple markets simultaneously.
- Allows for testing the market before committing to more significant investments.
Disadvantages
- Limited control over distribution and marketing in the foreign market.
- Potential trade barriers, such as tariffs, quotas, and import restrictions.
- Higher transportation costs and longer delivery times compared to local production.
- Not be appropriate if lower-cost locations for manufacturing the product can be found.
2.1.3 Degree of Export Involvement
Direct Exporting
Direct exporting occurs when a company sells directly to buyers in a target market. Direct exporters need
not sell directly to end-users; they can rely on local sales representatives or distributors.
Indirect Exporting (Brokerage)
Indirect exporting occurs when a company sells its products to intermediaries who resell them to buyers in
a target market. The choice of intermediary depends on the ratio of international sales to total sales,
available resources, and the growth rate of the target market.
Agents
Agents are individuals or organizations that represent one or more indirect exporters in a target market.
Agents receive compensation in the form of commissions on the value of sales.
Countertrade
Countertrade is the practice of selling goods or services that are paid for, in whole or part, with other goods
or services.
Other forms: Barter, Counterpurchase, Buyback

2.1.4 Developing an Export Strategy: A Four-Step Model

Step 1: Identify a Potential Market
- To identify clearly whether demand exists in a target market, market research should be performed and
results interpreted.
- New exporters should focus on one or a few markets (e.g., first-time Brazilian exporter should not export
to Argentina, Britain, and Greece; a better strategy is to focus on Argentina because of similarities).
- A new exporter should seek advice on regulations, exporting in general and to a target market in
particular.
Step 2: Match Needs to Abilities
- Assess a company’s ability to satisfy market needs (e.g., Suppose a market needs air-conditioning
equipment; if a company makes only industrial-sized equipment, it cannot satisfy the demand).
Step 3: Initiate Meetings
- Early meetings with potential distributors, buyers, and others are key. Initial contact should focus on
building trust and a cooperative climate.
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- Beyond building trust, successive meetings can estimate the potential success of any agreement; cultural
differences between the parties will appear at this stage.
- In the most advanced stage, negotiations take place and details of agreements are finalized.
Step 4: Commit Resources
- After all the meetings, negotiations, and contract signings, it is time to put the company’s human,
financial, and physical resources to work.
- The objectives of the export program must be clearly stated and extend at least 3 to 5 years.
- As companies expand activities, they discover the need for an export department or division.

2.2. Turnkey projects

- In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client,
including the training of operating personnel.
- At completion of the contract, the foreign client is handed the “key” to a plant that is ready for full
operation.
2.2.1 Key issues of turnkey projects
- The know-how required to assemble and run a technologically complex process, such as refining
petroleum or steel, is a valuable asset. Turnkey projects are a way of earning great economic returns from
that asset.
- A turnkey project is the practice of designing, constructing, and testing a production facility for a client.
- Turnkey projects are large-scale and often involve government agencies.
- Turnkey projects transfer special process technologies or production-facility designs to the client (e.g.,
Construction of power plants, airports, seaports, telecommunication systems, and petrochemical facilities
are turned over to the client).
2.2.2 Advantages and disadvatages of turn-key projects
Advantages of Turn-Key Projects:
- Ease of Execution: Turn-key projects allow the buying party to avoid the complexities involved in the
construction and commissioning of a facility. This is especially beneficial in countries where the technical
expertise may be lacking.
- Fixed Costs: The contractor agrees to complete the project within a set budget, which helps the client
avoid cost overruns.
- Speed: Since the contractor handles all aspects of the project from start to finish, these projects can often
be completed faster compared to projects managed by the client.
- Risk Transfer: Most of the project risks are transferred from the client to the contractor, as the contractor
is responsible for delivering the project as per agreed specifications.
- High Quality: Contractors who undertake turn-key projects usually have extensive experience and can
deliver high-quality outcomes consistent with international standards.
Disadvantages of Turn-Key Projects:
- Limited Control: The client has very limited control over the construction and operational processes once
the contract is awarded.
- Dependence on Contractor: The success of the project heavily relies on the contractor's ability to deliver
as promised, making the client heavily dependent on the contractor’s expertise and financial stability.

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- Cultural and Operational Misalignments: If the contractor and the client are from different cultural or
operational backgrounds, misunderstandings can occur, potentially impacting the project's success.
- Inflexibility: Once a contract is signed, making changes to the project scope or design can be difficult and
costly, as it might require renegotiation and could lead to delays.
2.3. Licensing
- Licensing relates to the rights granted by a licensor (bên cấp bản quyền) to a licensee (bên nhận bản
quyền) to use intangible property.
- A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to
another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the
licensee.
- Intangible assets include: patents, inventions, formulas, processes, designs, copyrights, trademarks.
- Licensing is often used by companies in the machinery and pharmaceutical sectors.
Cases used:
- Used when a firm wishes to participate in a foreign market but is prohibited from doing so by barriers to
investment.
- Used when a firm possesses some intangible property that might have business applications, but it does
not want to develop those applications itself.

2.3.1 The key issues of licensing

- Control Over Technology: Licensing often involves giving another company the rights to use proprietary
technology or intellectual property, which can lead to difficulties in maintaining control over how the
technology is used or modified.
- Risk of Intellectual Property Infringement: There is always a risk that the licensee may not adhere strictly
to the terms of the agreement, potentially leading to unauthorized use or distribution of the licensed
technology or products.
- Quality Control: Ensuring that the licensee maintains the licensor’s quality standards can be challenging,
especially when the licensee operates in a different cultural or regulatory environment.
- Dependency: The licensor may become dependent on the licensee for significant revenues, which can be
risky if the licensee fails to perform as expected or encounters financial difficulties.
- Limited Market Control: The licensor has limited control over the market and marketing strategies, which
can affect the overall brand positioning and reputation if the licensee does not align with the licensor’s
standards.

2.3.2 The advantages and disadvantages of licensing

Advantages
- Moderate involvement and commitment
- Low capital investment and reduced financial risk, as the licensee bears the costs and risks of
manufacturing and marketing.
- Access to local market knowledge and established distribution networks through the licensee.
- Quick market entry and expansion possibilities.
- Licensor does not have to bear the development costs and risks.
- Attractive for firms lacking the capital to develop operations overseas.
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- Attractive when a firm is unwilling to commit substantial financial resources.
Disadvantages
- Lack of control over technology
- Inability to realize location and experience curve economies
- Inability to engage in global strategic coordination
- Limited control over the licensee's operations, including product quality and marketing strategies.
- Licensor can lose control over its technology by licensing it. Dependence on the licensee's capabilities and
commitment.
- Potential risks of intellectual property infringement or loss of proprietary technology.

2.4. Franchising
- Franchising tends to involve longer-term commitments than licensing.
- Franchising is basically a specialized form of licensing in which the franchiser (bên nhượng quyền) not
only sells intangible property (normally a trademark) to the franchisee (bên nhận nhượng quyền), but also
insists that the franchisee agree to abide by strict rules as to how it does business.
- The franchiser typically receives a royalty payment, which amounts to some percentage of the
franchisee’s revenues.

2.4.1 Key issues of franchising

Cultural Differences: Cultural misunderstandings can affect product offerings, marketing strategies, and
customer service practices.
Quality Control: Ensuring consistent quality across international locations is difficult, especially when
local franchisees may have different standards or interpretations of the brand’s specifications.
Regulatory Compliance: Franchisees must navigate and comply with local regulations, which can vary
significantly from one country to another. This includes employment laws, health and safety standards, and
business operation regulations.
Brand Consistency: Discrepancies can dilute the brand’s identity and harm its reputation globally.
Training and Support: Providing adequate training and ongoing support to international franchisees is vital
to ensure they operate in line with the franchise system. Distance, language barriers, and different
educational backgrounds can complicate these efforts.
Dispute Resolution: Establishing clear and effective mechanisms for resolving disputes between franchisors
and franchisees is necessary to avoid prolonged conflicts that can be costly and damaging to the brand.
Repatriation of Profits: Transferring profits back to the franchisor’s home country can be complicated by
foreign exchange regulations and tax laws.

2.4.2 The advantages and disadvantages of franchising

Advantages
- Rapid expansion with low capital investment, as franchisees fund and operate their own businesses.
- Benefit from the franchisee's local market knowledge and established customer base.
- Shared risks with franchisees
- Low development costs and risks
- Avoid possible circumvention of import barriers
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- Strong sales potential
- Franchisers do not bear many risks and costs when entering foreign markets.
- Franchisers can quickly build and expand their presence in many different countries.
Disadvantages
- Less control over franchisee operations, including quality standards and customer experience.
- Potential challenges in maintaining consistent brand image and customer satisfaction across different
locations.
- Franchisee conflicts or disputes that may harm the overall brand reputation.
- Lack of control over quality. The franchisees do not comply with the quality policy of the product or
service.
- Inability to engage in global strategic coordination
- Franchisers may not use profits from franchising to support new franchisees.

2.5.2 The advantages and advantages of joint ventures

Advantages
- Access to local partner's knowledge, resources, market insights, and established networks.
- Shared investment costs, risks, and operational responsibilities.
- Enhanced understanding of the local market and cultural nuances.
- Politically acceptable
- Typically no ownership restrictions
- Get benefits from a local partner’s knowledge about competitive condition, culture, language, political
systems, and business
- Avoid being nationalized or subject to adverse interference by local authorities.
- Gaining access to another company’s international distribution network through joint ventures.
Disadvantages
- Complex negotiations and potential conflicts with the joint venture partner.
- Loss of full control over the operations and decision-making process.
- Challenges in aligning business strategies, goals, and cultural differences between partners.
- Difficult to dominate joint ventures to serve global goals. Inability to engage in global strategic
coordination
- Inability to realize location and experience economies
- Face the risk of having their technological know-how stolen through joint ventures.
- MNCs and local partners are prone to power struggles and conflicts of interest in joint ventures.
- Joint venture ownership can result in conflict between partners.

2.6. Wholly owned subsidiaries

- A wholly owned subsidiary is a facility entirely owned and controlled by a single parent company. –
- Companies can establish a wholly owned subsidiary by purchasing an existing company or by forming a
new company from the ground up.
- MNCs set up a subsidiary with 100% of their capital in a foreign country.

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2.6.1 Key issues of wholly owned subsidiaries
- High Costs and Investment: Establishing a wholly owned subsidiary requires significant capital
investment.
- Regulatory Compliance: Navigating the legal and regulatory environment of a foreign country can be
complex and costly. The subsidiary must comply with local laws, including employment, taxation,
environmental standards, and industry-specific regulations.
- Cultural Differences: Misunderstandings or misalignments in cultural values and communication styles
can lead to inefficiency and conflict within the organization.
- Resource Allocation: The parent company must manage how resources are allocated and controlled
between the headquarters and the subsidiary.
- Market Knowledge: Understanding local consumer behavior, competition, and market dynamics often
requires local insight that the parent company may not initially possess.
2.6.2 The advatages and disadvantages of wholly owned subsidiaries
Advantages
- Full control over operations, decision-making, and brand image.
- Easier transfer of technology, knowledge, and management practices within the organization.
- Greater potential for long-term profitability and strategic flexibility.
- Ability to engage in global strategic coordination
- Do not bear the risk of having their technological know-how stolen.
- Use subsidiaries to take advantage of location and experience curve effects.
Disadvantages
- High initial investment and financial risk. MNCs must bear all costs and risks associated with establishing
a subsidiary in a new market.
- Potential challenges in navigating local laws, regulations, and cultural differences.
- Longer timeframes for market entry and establishment compared to other modes.
- Need for more human and nonhuman resources; interaction and integration with local employees
- They can be expensive undertakings—making it difficult for many small and medium-size firms.
- Risk exposure is high because a wholly owned subsidiary requires substantial company resources.

3. SELECTING AN ENTRY MODE

3.1. Base on the company’s competencies
- If the company's core competence is technological know-how, then the company should make new market
entry by establishing a wholly owned subsidiary.
- If the company's core competence is management know-how, the company can make the entry through
franchising or joint venture.
3.2. Base on cost pressure
- If MNCs are under great cost pressure, they should choose the combination of exporting and wholly
owned branches. MNCs concentrate production in a suitable location to take advantage of local advantages,
economies of scale, or experience effects.
- The company then exports products to wholly owned subsidiaries in new markets.
- Enterprises can strictly control and dominate all distribution activities and product marketing strategies in
foreign markets.
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