PANT

594

ANTRODUCTION
his chapter is concerned with two closely related topiCs: (1) the decision of which fa
cnter. when to enter them, and on what scale: and (2) the choice of entry mode. Any firma ign marku
foreign expansion must first struggle with the issue of which foreign markets to enter
scale of entry. The choice of which markets to enter should bedriven
by
and the
ne ntetiin
inplminaginaynd
protit potential. In the opening case. for example. we saw assessment
an
of relati
run growth and

2000s, the British grocer Tesco decided to enter a number ol that in the 1990 ative long
lon
Asia, because it concluded that these markets ofteredemerging markets in Eastern E
primarily and earhy
given demand trends in those nations and the lack of strong
the best opportunities
for
profit
Europe and
The choice of mode for
entering foreign market is another
a
indigenous competitors. profit grow
businesses must wrestle. The various modes for major issue with which internas
franchising to host-country firms, establishing serving foreign markets are exporting, licensi nternationg
wholly owned
the host
subsidiary in a
joint ventures with a
host
country to serve its market. or host-country firm, settineicensina
in

these options has acquiring established enternrica

nation to serve
that market. Each of an

magnitude of the advantages and advantages and ein

disadvantaves
number of factors, disadvantages
associated with each T
risks, costs, and firm
including transport costs, trade barriers, entry mode is determined
hu
strategy. The political
optimal entry risks, economic
mode varies by situation, risks, businee
Thus, whereas some firms may best
market by setting up a given market by exporting, otherdepending
serve a on these
firms may better
factors
As
new
wholy owned subsidiary or by serve the
opening case. in Asia Tesco has chosen toacquiring
in the
we saw an established enterprise.
with local
enterprises. The logic is that local enter new markets
through joint ventures
that Tesco can use as a enterprises already have an infrastructure
with a good springboard for growth. These venture of stores in place
its financial understanding of local conditions, including. most
partners have been well-run companies
resources and
to increase the retailing capabilities with the local importantly, customer needs. By matching
probability of success. So far. this knowledge of its partners, Tesco has tried
Tesco has
displayed a preference for joint venturesapproach
in
appears to have served the
company well.
control. An which it has a
exception is its recent joint venture in majority
China, but even here.
stake. and thus ultimate
keeping wvith its standard practice. Tesco will observers speculate that in
stake, Tesco has increase its ownership stake
perhaps avoided some of the over time.
By taking a majoity
problems
divergent goals and battles for control ean lead to that can
emerge in 50/50 joint ventures, where
failure.
BASIC ENTRY DECISIONS
There are three basic decisions that a firm
to
[Link] to enter those nmarkets. and contemplating foreign expansion must make: which markets
on what scale.
Which Foreign Markets?
There are more than 200 nation-states in the world.
firm contemplating foreign expansion. Ultimately, They do not all hold the same
profit potential for a
the choice
must be based on an
nation's long-run protit potential. This potential is a function of assessment of a
studied in earlier several factors, many of which we have
chapters. In Chapter 2, we looked in detail at the economic
intluence the potential attractiveness and political factors that
of a foreign
market. There we noted that the
attractiveness ot
country as a potential market for
international business depends on
an
risks associated with doing business in that balancing benefits, costs, anu
the
country.
 ENTRY STRATEGY AND STRATEGIC ALLIANCES 595

that the function

Chapter 2 aso noted long-run economic benefits of doing business in a country are a
af factors such as the SIZe of the market (in terms of demographics), the present wealth (purchasing
er) of consumers in that market, and the likely future wealth of consumers, which depends upon
po
economic growth rates. While some markets are very large when measured by number of consumers
eChina. India, and Indonesia) one must also look at living standards andeconomic growth. On this
hasis. China and, to a lesser extent, India, while relatively poor, are growing so rapidly that they are
tractive targets for inward investment. A Iternatively, weak growth in Indonesia implies that this populous
nation is a far less attractive target for inward investment. As we saw in Chapter 2, likely future economic
orowth rates appear to be a function ofa free market system and a country's capacity for growth (which
may be greater in less developed nations). We also argued in Chapter 2 that the costs and risks associated
with doing business in a foreign country are typically lower in economically advanced and politically
stable democratic nations, and they are greater in less developed and politically unstable nations.
The discussion in Chapter 2 suggests that, other things being equal, thebenefit-cost-risk trade-offis
likely to be most favorable in politically stable developed and developingnations that have free market
Systems, and where there is not a dramatic upsurge in either inflation rates or private-sector debt. The
trade-off is likely to be least favorable in politically unstable developing nàtions that operate with a
mised or command economy or in developing nations where speculative financial bubbles have led to
excess borrowing (see Chapter 2 for [Link]).
Another important factor is the value an interhational business can create in a foreign market. This
dependsonthesuitabilty ofits productoffering to that market and the nature of indigenouscompetition.
Iftheinternational business can offer a product that has not been widely available in that market and
that satisfies an unmet need, the value of that product to consumers is likely to be much greater than if
the international business simply offers the same type of product that indigenous competitors and other
foreign entrants are already offering. Greater value translates into an ability to charge higher prices and/
or to build sales volume more rapidly.
By considering such façtors, a firm ean rank countries in terms of their attractiveness and long-run
profit potential. Preference is then given to entering markets that rank highly. For example, in the case
of Tesco, entering emerging markets in Eastern Europe and Asia made sense given the lack of strong
local competitors in these markets, the strong underlying growth trends, and Tesco's ability to add value
by transferring its core competencies in retailing to those markets (see the opening case)..

Timing ofEntry
Once attractive markets have been identified, it is important to consider the timing of entry. We say that
entry is early when an international business enters a foreign market before other foreign firms and late
when it enters after other international businesses have already established themselves. The advantages
frequently associated with enterjnRg a market early are commgnly known as first-mover advantages.
One first-mover advantage is the'ábility to preemptrivalsandcapture demand by establishing a strong
brand name. A second advantage is theability tobuild sales volume in that country andtide down
the
experience curve ahead of rivals, givingthe early entrant a cost advantage over later entrants. This cost
advantage may enable the early entrant to cut prices below that of later entrants, thereby driving them
out of the market. Adthird
advantage is the ability of early entrants to create switchingcoststhat tie
Customers into their products orservices. Such switching costs make itdifficult for later entrants to win
business.
 There canalso be disadvantages associated with entering a foreign market before other international
inesses. These are often referred to as first-mover disadvantages. These disadvantages may give
ri se
nioneering costs, costs that an early entrant has to bear that a later entrant can avoid. Pioneering
cOsts arise
when the business system in a foreign country is so different from that in a firm's home
market that the enterprise has to devote considerable effort, time, and expense to learning therules of
he 0ame, Pioneering costs include the costs of business failure if the firm, due to its ignorance of the
foreign environment, makes some major mistakes. A certain liability is associatedwith being a foreigner,
and this liability is greater for foreign firms that enter a national market early. Research seems to
confirm that the probability of survival increases if an international business enters a national market
after several other foreign firms have already done so.° The late entrant may benefit by observing and
learning from the mistakes made by early entrants.
Pioneering costs also include the costs of promoting and establishing a product offering. including
the costs of educating customers. These can be significant when the product being promoted is unfamiliar
to local consumers. In contrast, later entrants may be able to ride on an early entrant's investments in
learning and customer education by watching how the early entrant proceeded in the market, by avoiding
costly mistakes made by the early entrant, and by exploiting the market potential created by the early
entrant's investments in customer education. For example, KFC introduced the Chinese to American-
style fast food, but a later entrant, McDonald's, has capitalized on the market in China.
 SIRATEGI AN RE OF NIERNAtiO
PART FIVE THE
IONAL BUSINE SSs

An early entrant may be put at a severe disaavantgc. Teiave lo a later entrant. if repulations change
in a way that diminishes the value o f an carly entrant s nvestments. This is a serious risk in many

developing nations where the rules that govern business practicesare still evolving. Iarly entrants can
find themselves at a disadvantage if a subsequent change m regulations invalidates prior assumptions
about the best business model for operating in that country. J

Scale ofEntry and Strategic Commitments

Another ISsue that an international business needs to consider when contemplating market entry js tha
ol Significant res0urce
Cale ol entry. Entering a market on a large scale involves thie coImmilmenl
Eneringanarket on a large scale implies rapid entry. Consider the entry of the Dulch insurance comDan
ING into the U.S. insurance market in 1999 (described in detail in the accompanying Managemen
Focus). ING had to spend several billion dollars to acquire its U.S. operations. Not all firms have the
resources necessary to enter on a large scale, and even some large firms preter to enter foreign markets
on a small scale and then build slowly as they become more familiar with the market.
The consequences of entering on a significant scale-entering rapidly areassociated withthevalue
of the resulting strategic commiments. A srategic commitment has a long-term impactand is difficult
o reverse Deciding to enter a foreign market on a significant scale is a major strategic commitmen
Strategic commitments, such as rapid large-scalémarketentry, canhave an important intluence on the
nature of competition in a market. For example, by entering the U.S. financial services market on a
STgmiicant scale. ING has signaled its commitment to the market (see the Management Focus). This will
haveseveral efects. On the positive side. it will make it easier for the company to attract customers and
distributors (such as insurance agents). The scale of entry gives both customers and distributors reasons
for believing that ING will remain in the market forthe Tong
run. The scale of entry may also give other
foreigninstitutions considering entry intothe United States [Link] will have to compete not
only aganst mdigenous insttutionsin the United States. but also against an aggressive and successful
European institution. On the negative side, by committing itself heavily to the United States. ING mav
have fewer resources available to support
expansion in other desirable markets, such as Japan. The
commitment to the United States limits the company's strategic
flexibility.
As suggested by the ING example, significant strategic commitments are neither unambiguously
good nor bad. Rather, they tend to change the competitive playing field and unleash a number of
some of which may be desirable and some of which will not be. It is
changes
important for a firm to think
through the implications of large-scale entry into a market and act accordingly. Of particular relevance
is trying to identify how actual and
potential competitors might react to large-scale entry into a market.
A lso, the large-scale entrant is more
likely than the small-scale entrant to be able to capture first-mover
advantages associated with demand preemption, scale economies, and switching costs.
The value of the commitments that flow from
rapid large-scale entry into a foreign market must be
balanced against the resulting risks and lack of
flexibility associated with significant commitments. But
strategic inflexibility can also have value. A famous example from military history illustrates the value
of inflexibility. When Hernán Cortés landed in Mexico. he
ordered his men to burn all but one his
ships. Cortés reasoned that by eliminating their only method of retreat, of
his men had no choice but to
fight hard to win against the Aztecs-and ultimately they did.
Balanced against the value and risks of the
commitments associated with large-seale entry are the
benefits of a small-scale entry. Small-scale learn about
entry allows a firm to a
foreign market while
limiting the firm s exposuretothat market. Small-scale entry
isa way to gather information
about a foreign market before
deciding whether
t o enter on a signiticant scale and how
hestto enter. Bygiving the firm time to collect information,
small-scale entry reduces the risks associated with a
subsequent large-scale entry. But the lack of commitment
associated with small-scale entry may make it more difficult
for the small-scale entrant to build market share and to
capture first-mover or early-mover advantages. The risk-
averse frm that enters a foreign market on a small scale
may limit its potential losses, but it may also miss the chance Being the first in an industry to enter a developing
to capture first-mover advantages. nation such as India is risky, but potentially
1 rewarding.
Summarv
 ENTRY MODES

e afirm decides to enter a Ioreign market, the question arises as to the best mode of entry. Firms can
six different modes to enter foreign markets: exporting, turnkey projects, licensing, franchising,
use sIX different

lishing joint ventures with a host-country firm, or setting up a new wholly owned subsidiary in the
stablishing joint
host ctcOuntry. Each entry mode has
advantages and disadvantages. Managers need to consider these
when deciding which to use
carefully

0 Exporting
Many manufacturing irms begin their global expansion as exporters and only later switch to another
mode for serving a foreign market. We take a close look at the mechanics of exporting in the next
hanter. Here we focus on the advantages and disadvantages of exporting as an entry mode.

Advantages Exporting has two distinct advantages. First avoids the often substantial costs_of

establishing manutacturingsoperationsinhe host country, Seppnd, exporting may help afirm achiev(2)
experience curve and location economies (see Chapter 12). By manufacturing the product in a centralized
TOcation and exporting it to other national markets, the firm may realize substantial scale economies
from itsglobalsales volume. This is how Sony came to dominate the global TV market, how Matsushita
came to dominate the VCR market, how many Japanese automakers made inroads into the U.S. market,
and how South Korean firms such as Samsung gained market share in computer memory chips.

Disadvantages Exporting has a number of drawbacks. First, exporting from thefirm's home base may
not be appropriate if lower-cost locations for manufacturing the productcan be found abroad (i.e., if the
firm can realize location economies by moving production elsewhere). Thus, particularly for firms
pursuing global or transnational strategies, it may be preferable to manutacture where the mix of factor
conditions is most favorable from a value creation perspective and to export to the rest ofthe world from
that location. This is not so much an argument against exporting as an argument against exporting from
the fim's home country. Many U.S. electronics firms have moved some of their manufacturing to the
Far Fast because of the availability of low-cost, highly skilled labor there. They then export from that
location to the rest of the world, including the United States
A second drawback to exporting is that high transportcosts can make exporting uneconomical,
particularly for bulk products. One way of getting around this is tomanufacture bulk products regionally.
This strategy enables the firm to realize some economies from large-scale production and at the same
time to limit its transport costs. For example, many multinational chemical firms manufacture their
products regionally, serving several countries from one facility.
Another drawback is that tariff barriersan make exporting unecongmical. Similarly, thethreat of
tarifbarriers by the host-country government can make it very risky. Afourth drawback to éxporting
arises when a firm delegatesits marketing,sales, and ser vice in each countrywhere it doesbusinessto
anothercompany. This is a common approach for manufacturing firms that are just beginning to expand
internationally. The other company may be a local agent, or it may be another multinational with extensive
international distribution operations. Local agents often carry the products of competing firms and so
have divided loyalties. In such cases, the local agent may not do as good a job as the firm would if it
managed its marketing itself. Similar problems can occur when another multinational takes on distribution.
he way around such problems is to set up wholly owned subsidiaries in foreign nations to handle
cal marketing, sales, and service. By doing this, the firm can exercise tight control over marketing and
 sales in the country while reaping the cost advantages of manufacturing the produet in a single locati.
ation,
or a few choice locations.

Turnkey Projects
Firms that specialize in the design. construction. and start-up of turnkey plants are common in soma
industries. In a turnkey project. the contractor agrees to handle every detail ofthe project for a foreion
Clhent, including the training of operating personnel. At completion of the contract, the foreign clientis
handed the for full the term turnkey. This is a means
"key" to a plant that is ready operation hence. of
exporting process technology to other countries. Turnkey projects are most common in the chemical
pharmaceutical, petroleum refining. and metal refining industries, all of which use complex. expensive
production technologies.
Advantages 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. The
strategy is particularly useful where FDI is limited by host-government
regulations. For example. the governments of many oil-rich countries have set out to build their own
petroleum refining industries. so they restrict FDI in their oil and refining sectors. But because
these countries lack many of
petroleum-refining technology. they gain by entering
it into turnkey projects with
foreign firms that have the technology. Such deals are often attractive to the selling firm because without
them, they would have no way to earn a return on their valuable know-how in that
country. A turnkey
strategy can also be less risky than conventional FDI. In a country with unstable political and economie
environments, longer-term investment might expose the firm to
a
risks (e.g., the risk of nationalization or of economic
unacceptable political and/or economie
collapse).
Disadvantages Three main drawbacks are associated with a turnkey strategy. First. the firm that enters
into a turnkey deal will have no
long-term interest in the foreign country. This can be a disadvantage if
that country subsequently proves be a major market for the output of the
to
process that has been
exported. One way around this is to take a minority
equity interest in the operation. Second. the firm that
enters intoa turnkey project with a foreign
enterprise may inadvertently create a competitor. For example.
many of the Western firms that sold oil-retining technology to firms in Saudi Arabia.
Kuwait, and other
Gulf states now find themselves competing with these firms in the world oil
market. Third. if the firm's
process technology is a source of competitive advantage. then selling this technology through a turmkey
project is, also selling competitive advantage to potential and/or actual competitors.

lcensing (U
Alicensing agreement is an arrangement whereby a licensor grants the rights to intangible property t0
another entity (the licensee) for a specified period, and in return. the licensor receives a royalty fee from
the licensee. Intangible property includes patents, inventions, formulas,
processes, designs. copyrighis
and trademarks. For example, to enter the Japanese market. Xerox. inventor of the
photocopier, established
a joint venture with Fuji Photo that is known as Fuji Xerox. Xerox then licensed its
how to Fuji Xerox. In return. Fuji XerOx paid Xerox a royalty fee equal to 5 percent of the net sales
xerographic kno
revenue that Fuji XerON earned trom the sales of photocopiers based on Xerox's patented know-how.
the Fuji Xerox case, the license was originally granted tor 10 years, and it has been renegotiated
extended several times since. The licensing agreement between Xerox and Fuji Xeror alsolimited Fui
a
 dIRAIEGIC ALLIANCE* bU3

Verox's direct sales to the Asian Pacific region

hat are sold in North America under the Xerox (although Fuii Xerox does supply Xerox with photocopiers
label).3
Advantages_ln the typical international licensing deal, the licensee puts up most
To get the overseas operation going. Thus, a primary advantage of licensing is thatof the capital necessary
to bear the development costs and risks associated with the firm does not have
opening a foreign marketicensing is Very
attractive for firms lacking the capital to develop operations overseas. In additionlicensing can be
attractive when a tirm is unWilling to commit substantial financial resources to an unfamiliar or
volatile foreign marketiLicensing is also often used when a firm wishes to politicaly
market but is prohibited from doing so by barriers to investment. This was one participate in a reasons
of the original foreign
for the formation of the Fuji-Xerox joint venture
in 1962. Xerox wanted to participate
in the Japanese
market but was prohibited from setting up a wholly owned subsidiary by the Japanese government. So
Xerox set up the joint venture with Fuji and then licensed its know-how to the joint venture.
Finally, licensing is frequently used when a firm possesses some intangible property that might have
business applications, but it does not want to develop those applications itself. For example, Bell
Laboratories at Al&| originally invented the transistor circuit in the 1950s, but AT&T decided it did
not want to produce transistors, so it licensed the technology to a number of other companies, such asS
Texas Instruments. Similarly, Coca-Cola has licensed its famous trademark to clothing manufacturers,
whichave incorporated the
design into clothing.
Dsadvantages Licensing has three serious drawbacks. First, it does not give a firm the tight control
over manufacturing. marketing, and strategy that is required for realizing experience curve and location
economies. Licensing typically involves each licensee setting up its own production operations. This
severely limits the firm's ability to realize experience curve and location economies by producing its
product in a centralized location. When these economies are important, licensing may not be the best
way to expand overseas.
Second, competing in a global market may require a firm to coordinate strategic moves across countries
by using profits earned in one country to support competitive attacks in another. By its very nature,
licensing limits a firm's ability to do this. A licensee is unlikely to allow a multinational firm to use its
profits (beyond those due in the form of royalty payments) to support a different licensee operating in
another country.
A third problem with licensing is one that we encountered in Chapter 7 when we reviewed the economic
theory of FDI. This is the risk associated with licensingtehnalogical know-how to foreign companies.
Technological know-how constitutes the basis of many multinational fims' competitive advantage.
Most firms wish to maintain control over how their know-how is used, and a firm can quickly lose
control over its technology by licensing it. Many firms have made the mistake of thinking they could
maintain control over their know-how within the framework of a licensing agreement. RCA Corporation,
for example, once licensed its color TV technology to Japanese firms including Matsushita and Sony.
The Japanese firms quickly assimilated the technology, improved on it, and used it to enter the U.S.
market, taking substantial market share away from RCA.
There are ways of reducing this risk. One way is by entering into a cross-licensing agreement with a
Toreign firm. Under a cross-licensing agreement, a firm might license some valuable intangible property
to a foreign partner, but in addition to a royalty payment, the firm might also request that the foreign
partner license some of its valuable know-how to the firm. Such agreements are believed to reduce the
Tisks associated with licensing technological know-how, since the licensee realizes that if it violates the
 604

the knowledge obtained to compete directly with the licensor), the licenso.
licensing contract (by using enable firms to hold each other hostage,
which reduc
can do the same to it. Cross-licensing agreements toward each other." Such cross-licensino
the probability that they will behave opportunistically
industries. For example, the U.S. biotechnology
common in high-technology
agreements are increasingly to Kirin, the Japanese pharmaceutical company
firm Amgen licensed one of its key drugs, Nuprogene,
in Japan. In return, Amgen receives royalty payment
a
The license gives Kirin the right to sell Nuprogene
in the United
gained the right to sell some of Kirin's products
and, through licensing
a agreement,
States.
Another way of reducing the risk associated with licensing
is to follow the Fuji Xerox model and link
formation of a joint venture in which the licensor and
an agreement to license know-how with the interests of licensor and licensee
licensee take important equity stakes. Such an approach aligns the
because both have a stake in ensuring that the venture is successful. Thus, the risk that Fuji Photo might
appropriate Xerox's technological know-how, and then compete directly against Xerox in the global
in which both Xerox and Fuji
reduced by the establishment of a joint venture
Copier market, was
Photo had an important stake.

Franchising
Franchising is similar to icensing, although franchising tends to involve longer-term commitments than
licensing. Franchising is basically specialized form of licensing in which the franchiser not only sels
a
intangible property (normally a trademark) to the franchisee, but also insists that the franchisee agree to
abide by strict rules as to how it does business. The franchiser will also often assist the franchisee to run
the business on an ongoing basis. As with licensing, the franchiser typically receives a royalty payment
which amounts to some percentage of the franchisee's revenues. Whereas licensing is pursued primarily
by manufacturing firms, franchising is employed primarily by service firms. McDonald's is a good
example of a firm that hás grown by using a franchising strategy. McDonald's strict rules as to how
franchisees should operate a restaurant extend to control over the menu, cooking methods, staffing
policies, and design and location. McDonald's also organizes the supply chain for its franchisees and
ppovides management training and financial assistance.
Advantages The advantages of franchising as an entry mode are very similar to those of licensing. The
firm is relieved of many ofthe costs and risks of opening a foreign market on its own. Instead, the
franchisee typically assumes those costs and risks. This creates a good incentive for the franchisee to
build a profitable operation as quickly as possible. Thus, using a franchising strategy, a service firm can
buikl a global presence quickly and at a relatively low cost and risk, as McDonald's has.

Disadvantages The disadvantages are less pronounced than in the case of licensing. Since franchising
Vis often used by service companies, there is no reason to consider the need for coordination of
manufacturing to achieve experience curve and location economies.\But franchising may inhibit the
firm's ability to take profits out ofone country to support competitive attacks in anotherA more significant
disadvantage of franchising is quality control. The foundation of franchising arrangements is that the
firm's brand name conveys a message to consumers about the quality of the firm's product. Thus,
business traveler checking in at a Four Seasons hotel in Hong Kong can reasonably expect the same
quality of room, food, and service that she would receive in New York. The Four Seasons name
supposed to guarantee consistent product quality. This presents a problem in that foreign franchisee
 may not be as concerncd about quality as thes are uppred tes h
the result of poor quality can estend hesond lost ale na partie ular
foreign market to a dechne in the fim lidwad ptatnt
eample. ifthebusiness Iravclerha a badepeic cat the upr Sraes
in Hong Kong. she nay hevei go fo another | nr Scaso fevtel arhd ua
unge her colleagucs to do likew ise The gcugtaphi al destak r of the fim
from its foreign tranchisees can make poor qualty dif ut toed teet ls
addition, the sheer numbers of tran hisee the ae ot Manalad
tensofthousands can make quahts control ditic ult Due t thee tax tu
quality problems may perist
h One way around this disadsantage is lo set upa subsadiar im cah
Ountry in which the lim espands Ihe subsdiary mnght be wholly ouried
by the company or a jont v enture with a foreign company Ihe suhvidar
assumes the rights and obligations to establsh franchise s thrvughout the
particularcountry or region MelDonald's. for example estahishes
master franchisee in many countries. Ty pically. this master tranc hisee Isurtvene iargest fing
a joint venture between MeDonald s and a local firm The provimity and un h n theuorid, uth fime
the smaller number of franchises to oversee reduce the quality ceontrolnter- tm the Ueitrd Stat
challenge. n addition. because the subsidiary (or master Iranchisee 1sd ungy Metar end (amada ani
us rankrd the mu mb f
least partly owned by the firn. the tim can place its own managers in the
fran hre n 2104 y Entrepermr
subsidiar to help ensure that it is doing a good job of monitoring the
franchises. This organizational arrangement has proven very satistactor
forMeDonald's, KFC. and others.

Joint Ventures
A joint venture entails establishing a firm that is jointly owned by two or more otherwise independen
venture between Xerox and Fu1 Photo Establishung
[Link] Xerox. for [Link] set
upasajoint
a joint venture with a foreign firm has long been a popular mode for entering a new market As we sa
in the opening case. Tesco has used joint ventures to erpand into foreign markets The most typical poent
venture is a 50.50 venture. in which there are two parties. each of which holds a 50 percent ownershap
stake and contributes a team of managers to share operating control (this was the casc with the Fu
Xerox joint venture until 2001: it is now a 25/75 venture with Xerox holding 2 percent Some firms
however. havesought joint ventures in which they have a majority share and thus tighter contro! Th

has been the case w ith Tesco.

Joint ventures have a number of adv antages FinI, fim benefits trom a ixai partner
Advantages
knowledgeofthe host country 's competitive conditions, culture. language. poiltial ystcrms, and buue
systems. Thus, for many U.S. tirms, joint ventures have invoived the company prusidg
technological know-how and products and the local partner prosng the marketimg engertiwe ad the
local knowledge necessary for competing in that country SeconhAs hcn the devekrpetnent vumis arndr
risks ofopening a foreign market afe , a im might gan by sharuty thee ists and or ttsk with a
local patner. Third, in many countrieiolitual considetatus makr jont ventures the onl feanstle
joint enture ith loxal partners Iat a los sh uf beng subieut to
entry mode. Research suggests
nationalization or other forms of adverse govemnient nletfefene Tbi appe ars l be beaust kasi
 BUSINESS

INTERNATIONAL

OF
606 AND
STRUCTURE

interet
STRATEGY

FIVE THE vested

ART
have a
policy, n
host-government

cyuity partners, who

no may have
may have some

s
influence
on
interference. ()
First
speaking snst
nationalization or
government
with joint ventures.
technology to its par
disadvantages
major rtner,
Disadvantages
with
Despite t
spite these advantages,
there are

venture
riskS giving
control of its

M i t s u b i s h i Heavy
I n d u s t r i e s to builda.

licensing, a tirm thate

Thus, a
t enters into a joint
between Boeing and its
commercial
airline technalo
proposed joint enture in 2002
unwittingly give
away
this risk. Oneon
wide-body jet sed fears that Boeing might c a n be
constructed to
minimize

greater cont
the Japanese. However,
wever,
joint-venture agreements
This allows
the
dominant partner to
exerCise

for
tro
Is to hold
majority ownership the v e n t u r e .
ership in the ventu find a foreign
partner
who is willing
to
to settle
the core
minority
competena.
Over its technology. But it can be ditficult to technology
that is central e
from a partner
option isto "wall off"
of firm, n
of the fir e rsharing other technology
while f+rm the tight control over
subsidiaries
does not give a firm the tiok
A second disadvantage that a joint venture
is location
economies. Nor
does it give a
hát i or attacks againsti
in coordinated global
curve
t0 realize experience
s eed that it might need for engaging
semiconductor market. When T
egn subsidiary
rivals Consider into the Japanese
the entry of Texas Instruments (T) of checking Japanese
vis. did so for the dual purpose
ished semiconductor facilities in Japan, it Ti's global market. In other
available for invading
acturers market share and limiting their cash IIs subsidiary in
To implement this strategy,
Tl was engaging in global strategic coordination.
ords, headquarters regarding Competitive strategy
nad to be prepared to take instructions from corporate
pan to run at a loss if necessary.
Few if any potential
Srategy also required the Japanese subsidiary would have necessitated
such conditions, since it
JOnt-venture partners would have been willing to accept
on investment. Indeed, many joint
ventures establish a degree
aWilingness to accept a negative return decisions all but impossible to establish 9
of autonomy that would make such direct control over strategic
owned subsidiary in Japan.
hus, to implement this strategy, TI set up a wholly arrangement can lead to conflicts
third ventures is that the shared ownership
disadvantage with joint
(2A if they take
md battles for control between the investing firms if their goals and objectives change or

different views as to what the strategy should be. This was apparently not a problem with the Fuji-
Xerox joint venture. According to Yotaro Kobayashi, currently the chairman of Fuji Xerox, a primay
reason is that both Xerox and Fuji Photo adopted an arm's-length relationship with Fuji Xerox, giving
much research
the venture's management considerable freedom to determine its own strategy. However,
indicates that conflicts of interest over strategy and goals often arise in joint ventures. These conflict
tend to be greater when the venture is between f+rms of different nationalities, and they often end in the
dissolution of the venture.2 Such conflicts tend to be triggered by shifts in the relative bargaining
ventures between a foreign firm and a local fim
power of venture partners. For example, in the case of
as a foreign partner's knowledge about local market conditions increases, it depends less on the expertise
of a local partner. This increases the bargaining power of the foreign partner and ultimately leads
t0
conflicts over control ofthe venture's strategy and goals Some firms have sought to limit such problems
by entering into joint ventures in which one partner has a controlling interest. Forexample, when tu
entered South Korea. Tesco set up a joint venture with Samsung under which it had a 5l percent stakc
and thuscontrol (see the opening case).

Whelly Owned Subsidiaries

In a wholly owned subsidiary, the firm owns 100 percent of the stock. Establishing a wholy o
subsidiary in a foreign market can be done two ways. The firm either can set up a new operationu
ntry, often referred to as a greenlicld venture, or it can acquire an established firm in that host nation
d 1Se that firm to promote its products." For example, as we saw in the Management Focus, ING's
crategyfor entering the U.S. market was to acquire established U.S. enterprises. rather than try to build
the ground floor
anoperation from

Advantages
There are several clear advantages of wholly owned subsidiaries. First. when a firm's
eompetitive advantage is based on technological competence, a wholly owned subsidiary will often be
the preferred entry mode because it reduces the risk of losing control over that competence. (See Chapter
7 for more details.) Many high-tech firms prefer this entry mode for overgças expansion (e.g.. firms in
the semiconductor, electronics, and pharmaceutical industries). Seconda wholly owned subsidiary
oives a firm tight eontrol over operations in different countries. This is necessary for engaging in global
strategic coordination (i.e., using profits from one country to support competitive attacks in another).
Third, a wholly owned subsidiary may be required ifa firm is trying to realize location and experience
curve economies (as firms pursuing global and transnational strategies try to do). As we saw in Chapter
11. when cost pressures are intense, it may pay a firm to configure its value chain in such a way that the
value added at each stage is maximized. Thus, a national subsidiary may specialize in manufacturing
only part of the product line or certain components of the end product, exchanging parts and products
with other subsidiaries in the firm's global system. Establishing such a global production system requires
a high degree of control over the operations ofeach affiliate. The various operations must be prepared to
accept centrally determined decisions as to how they will produce. how much they will produce. and
how their output will be priced for transfer to the next operation. Because licensees or joint-venture
partners are unlikely to accept such a subservient role. establishing wholly owned subsidiaries may be
necessary. Finally{tèstablishing a wholly owed subsidiary gives the firm a 100_percent share in the
profits generated in a foreign market.
Disadvantages Establishing a wholly owned subsidiary is generally the most costly method of serving
a foreign market from a capital investment standpoint. Firms doing thia must bear the full capital costs
and-fisksofsetting up overseas operaions. Therisks associated with learning to do business in a new
cultufeare less if the firm acquires an established host-Tountry enterprise. However. acquisitions raise
additional problems, including those associated with trying to marry divergent corporate cultures. These
problems may more than offset any benefits derived by acquiring an established operation. Because the
choice between greenfield ventures apd acquisitions is such an important one. we shall discuss it in
more detail later in the chapter.