V

FOREGIN MARKET ENTRY MODES

The use of one strategy in one market does not rule out the use of the other strategies elsewhere. The
methods vary in terms of risk accepted and to a certain extent, the degree of commitment to the
foreign market. Here are the popular modes of entry to the international market.

1. EXPORTING
Exporting is a strategy in which a company without any marketing or production organization
overseas, exports a product from its home base. Often, the exported product is fundamentally the
same as the one marketed in the home market. Most manufacturing firms begin their global
expansion as exporters and only later switch to another mode for serving a foreign market. Here are
the advantages and disadvantages of exporting.
Advantages of exporting:
 Ease in implementing the strategy
 Risks are minimal because the company simply exports its products when it receives orders
 The most common overseas entry approach for small firms
 It avoids the costs of manufacturing, operations in the host country.

Disadvantagesof exporting:
 High transportation costs which are uneconomical, particularly for bulky products.
 The existence of tariff barriers
2. LICENSING
Licensing is an agreement that permits a foreign company to use industrial property
like patents, trademarks, copyrights, technical know-how and skills (e.g., feasibility studies,
manuals, and technical advice), architectural and engineering designs, or any combination of these in
a foreign market.A licensor allows a foreign company tomanufacture product for sale in the
licensee’s country and sometimes in other specified markets. A licensing agreement is an
arrangement whereby a licensor grants the rights to intangible property to another entity (the
licensee) for a specified period of time, and in return, The licensor receives a royalty fee from the
licensee. Intangible property includes patents, inventions, formulas, processes, designs, copyrights,
and trademarks.
Advantages of licensing:
 The firm doesn’t development costs and risks with opening a foreign market.

INT’L MKT SEM II/2012Page 1

  It is a great option for firms lacking the capital to develop operations overseas.
 It became attractive when a firm is unwilling to commit substantial financial resources to
an unfamiliar or politically volatile foreign market.
 It’s a simple means when a firm wishes to participate in ainternational market.
 Licensing is frequently used when a firm possesses some intangible property that might
have business applications, but when it does not want to develop those applications itself.
Coca-cola has licensed its famous trademark to different manufacturers, who have
incorporated the design to their product.

Disadvantages of licensing
 The danger of the licensee running short of funds, especially if considerable plant
expansion is involved or an injection of capital is required to sustain the project. This
danger can be turned to advantage if the licensor has funds available by a general
expansion of the business through a partnership.

 The licensee may prove less competent than expected at marketing or other management
activities; hence the licensor may find the commitment is greater than expected even may
find costs grow faster than income.

 Opposition is encountered in some less developed countries to royalty payments on the

grounds and a high price is being charged for the knowledge provided.

 Negotiations with the licensee, and sometimes with the local government, are costly and
often prolonged.
3. FRANCHISING
Franchising is basically a specialized form of licensing in which the franchiser not only sells
intangible property to the franchisee (normally a trademark) also insists the franchisee agree to abide
by strict rules as to how it does business. The franchiser will also often assist the franchisee to run
this business on an ongoing basis. As with licensing the franchiser typically receives a royalty
payment that 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
provides us with a good example of a firm that has grown by using a franchising strategy.
McDonald’s has set down strict rules as to how franchisees should operate a restaurant. These rules

INT’L MKT SEM II/2012Page 2

extended to control over the menu, cooking methods, staffing policies, and the design and location of
a restaurant. McDonald’s also organizes the supply chain for its franchisees and provided
management training and financial assistance for franchisees.
Advantages of franchising
 The firm is relieved fromdifferent costs and risks of operating in a foreign market by itself.
Instead, the franchisee typically assumes those costs and risks.
 This creates a good incentive for the franchisee to build up a profitable operation as quickly as
possible.
 A service giving firm can build a global presence quickly with low cost and risk.
Disadvantageof franchising:
 A 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, a business traveler checking in at a Hilton International hotel in
Addis Ababa can reasonably expect the same quality of room food, and service that she would
receive in New York. The Hilton name, is supposed to guarantee consistent product quality.
This presents a problem in that foreign franchisees may not be as concerned about quality as
they are supposed to be, and the result of poor quality can extend beyond lost sales in a
particular foreign marketer to a decline in the firm’s worldwide reputation.

4. MANAGEMENT CONTRACTS
An arrangement whereby a company operates a foreign firm for a client who retains the ownership is
known as management contract. There are a number of variations but a broad distinction between
foreign management and local ownership is a characteristic feature, and the management typically
extends to all functions. In the management contract, the principal (the contractor) operates a
complete management [Link] method of conducting business has only gradually emerged. It
can be said to carry the separation between ownership and management that has been a feature of the
business scene for many years. In a basic management contract the local (host country) company
holds all the equity, but in practice the contractor often takes a small amount.
The holding of equity makes it easier to negotiate the other terms; the contractor company does not
feel so encouraged to provide for an increasing royalty in the event of success as it knows that it will
share anyway. On the other hand the holding of equity may bias the advice the contractor gives,
especially when it’s not managing all the functions.

INT’L MKT SEM II/2012Page 3

Advantages of management contracts:
1. The expropriation or nationalization of a subsidiary where the parent company's commercial
expertise is still required.
2. The development of a consultancy or technical aid contract into a total management contract.
3. Fees for management services may be easier to transfer, and subject to less tax than royalties or
dividends.
4. Under-employed- skills and resources are common factor in deciding to opt for management
contracts. The licensing specialist may have in a position to negotiate the contracts and employ a
number of other experts available at head office on the project. An airline, for instance, may have
a depth of expertise which is under-employed managing the number of aircrafts the company
owns. In these circumstances, managing another airline can bring in extra revenue with little
extra expenditure.
5. The contracts provide a useful contribution to a global strategy. They are particularly appropriate
to the more difficult markets in the less developed countries.
6. Management contracts can provide support to other business arrangements, tike technical
agreements and joint ventures, and general support for existing markets where domestication or
expropriation are likely. Minority equity holdings are also safeguarded in this way.
7. For countries, this method brings the advantages of foreign expertise without the drawbacks of
foreign ownership. There are advantages when funding is sought; the existence of a contract is
likely to give extra confidence to the bankers.

Disadvantages of management contracts:

The disadvantages are similar to those for licenses and franchises. From the principal's point of view,
direct export or investment might have been more lucrative. From the point of view of some
countries, contracts are still regarded as the intervention of a foreign authority- and the issue of
foreign management remains delicate, however badly it may be needed. This is the principal
reasonwhy management contracts are often called by other names (such as technical cooperation
agreements’ which usually include a management element).

5. JOINT VENTURES
A, joint venture entails establishing a firm that is jointly owned by two or more otherwise
independent [Link] a joint venture with a foreign firm has long been a popular mode for
entering a new market.

INT’L MKT SEM II/2012Page 4

The most typical joint venture is a 50/50 arrangement in which there are two parties, each of which
holds a 50% ownership stake and contributes a team of managers to share operating control. Some
firms, however, have sought oint ventures in which they have a majority share and thus tighter
control.

Advantages of joint ventures:

 First, a firm is able to benefit from a local partner's knowledge of the host country's
competitive conditions, culture, language, political systems, and business systems.

 Second, when the development costs and/or risks of opening a foreign market are high, a
firm might gain by sharing these costs and/or risks with a local partner.

 Third, in many countries political considerations, make joint ventures the only feasible entry
mode.

 Furthermore, research suggests that Joint ventures with local partners face a low risk of being
subject to nationalization or other forms of government interference. This appears to be
because local equity partners, who may have some influence on host-government policy,
have a vested interest in speaking out against nationalization or government interference.

Disadvantagesof joint ventures:

 First, just as with licensing, a firm that enters into a joint venture risks giving control of its
technology to its partner. However, joint-venture agreements can be constructed to minimize
this risk. One option is to hold majority ownership in the venture. This allows the dominant
partner to exercise greater control over its technology. The drawback with this is that it can
be difficult to find a foreign partner who is willing to settle for minority ownership.

 A second disadvantage is that a joint venture does not give a firm the tight control over
subsidiaries that it might need to realize experience curve or location

INT’L MKT SEM II/2012Page 5

 economies. Nor does it give a firm the tight control over a foreign subsidiary that it might
need for engaging coordinated global attacks against its rivals.

 A third disadvantage with joint ventures is that the shared ownership arrangement can lead
to, conflicts and battles for control between the investing firms if their goals and objectives
change over time, or if they take different views as to what the strategy of the venture should
be.

6. MANUFACTURING
The manufacturing process may be employed as a strategy involving all or some manufacturing in a
foreign country.
One kind of manufacturing procedure, known as sourcing, involves manufacturing operations in a
host country, not so much to sell there but for the purpose of exporting from that company’s home
country to other countries. This chapter is concerned more with another manufacturing objective: the
goal of a manufacturing strategy may be to setup a production base inside a target market country as
a means of invading it. There are several variations on this method, ranging from complete
manufacturing to contract manufacturing (with a local manufacturer) and partial manufacturing.

From the perspective of the host countries, it is obvious as to why they want to attract foreign
capital.

 Although job creation is the main reason, there are several other benefits for the host country
as well. Foreign direct investment, unlike other forms of capital inflows, almost always
Brings additional resources that are very desirable to developing economies. Theseresources
include technology, management expertise, and access to export markets.
There are several reasons why a company chooses to invest in manufacturing facilities abroad.

 One reason may involve gaining access either to raw materials or to take advantage of
resources for its manufacturing operations. As such, this process is known as backward
vertical integration.

INT’L MKT SEM II/2012Page 6

  Another reason may be to take advantage of lower labor costs or other abundant factors of
production (e.g., labor, energy, and other inputs). Hoover was able to cut its high British
manufacturing costs by shifting some of its production to France.

 A manufacturer interested in manufacturing abroad should consider a number of significant

factors. One study investigated the incentive preferences of MNCs and found absence of
restrictions on intercompany payments to be the most important determinant. The
otherimportant incentives include: no controls on dividend remittances, import duty
concessions, guarantees against expropriation, and tax holidays.

From the marketing standpoint,

 Product image deserves attention. Although Winston cigarettes are made in Venezuela with
the same tobaccos and formula as the Winston cigarettes in the USA, Venezuelans still prefer
the more expensive US made Winston. Philip Morris and R.J. Reynolds face this same
problem in Russia when setting up manufacturing plants there. Unilever had a similar
problem when it began manufacturing locally in Nepal where people prefer Indian-made
products.

 Competition is an important factor, since to a great extent competition determines potential

profit.
 Another factor is resources of various countries, which should be compared to determine
each country’s comparative advantage. The comparison should also include production
considerations, including production facilities, raw materials, equipment, real estate, water,
power, and transport. Human resources, an integral part of the production factor, must be
available at reasonable cost.

 Manufacturers should pay attention to absolute as well as relative changes in labor costs. A
particular country is more attractive as a plant’s location if the wages there increase more
slowly than those in other countries. The increase in labor costs in Germany led GM’s Opel
to switch its production facilities to Japan and led Rollei to move its production to Singapore.

Several Japanese firms have been attracted by the $1 hourly wage rate in Mexico, a rate even
lower than the hourly pay in Singapore and South Korea.

INT’L MKT SEM II/2012Page 7

 A manufacturer must keep in mind, however, that labor costs are determined not only by
compensation but also by productivity and exchange rates. Mexico’s labor costs, already
absolutely low, become even lower because of the country’s falling exchange rate, but this
advantage is offset somewhat because Mexican workers are relatively unskilled and thus
produce more defective products.

 The type of product made is another factor that determines whether foreign manufacturing is
an economical and effective venture. A manufacturer must weigh the economies of exporting
a standardized product against the flexibility of having a local manufacturing plant that is
capable of tailoring the product for local preferences.

 Taxation is another important consideration. Countries commonly offer tax advantages,

among other incentives, to lure foreign investment. Puerto Rico does well on this score. In
addition, there are no exchange problems since the currency is the US dollar.

Just as important as other factors is the investment climate for foreign capital. The
investment climate is determined by geographic and climatic conditions, market size, and
growth potential, as well as by the political atmosphere. As mentioned above, political,
economic, and social motives are highly related, and it is hardly surprising that countries,
states, and cities compete fiercely to attract foreign investment and manufacturing plants.
 Multinational corporations have been investing more and more overseas, with Asia and Latin
America as their prime targets. It should be pointed out that the importance of cheap,
unskilled labor in attracting manufacturing investment has diminished in recent years and is
likely to continue. Because of technology development in products and processes, there is a
greater need for human skill in product manufacturing. Therefore, developing countries that
can successfully influence plant location decisions will be those that have more highly skilled
labor at relatively low wages.

7. ASSEMBLY OPERATIONS

An assembly operation is a variation on a manufacturing strategy. According to the US Customs

Service, “Assembly means the fitting or joining together of fabricatedcomponents.” The methods
used to join or fit together solid components maybe welding,

INT’L MKT SEM II/2012Page 8

soldering, riveting, gluing, laminating, and sewing. In this strategy, parts or components are
produced in various countries in order to gain each country’s comparative advantage.

Capital-intensive parts may be produced in advanced nations, and labor-intensive assemblies may be
produced in a less developed country, where labor is abundant and labor costs low. This strategy is
common among manufacturers of consumer electronics.
When a product becomes mature and faces intense price competition, it may be necessary to shift all
of the labor-intensive operations to less developed countries.
An assembly operation also allows a company to be price-competitive against cheap imports, and
this is a defense strategy employed by US apparel makers against such imports. As far as pattern
design and fabric cutting are concerned, a US firm can compete by using automated machines, but
sewing is another matter altogether, since sewing is labor-intensive and the least automated aspect of
making the product. To solve this problem, precut fabrics can be shipped to a low-wage country for
sewing before bringing them back for finishing and packaging. Warnaco and Interco save on
aggregate labor costs by cutting fabrics in the USA and shipping them to plants in Costa Rica and
Honduras to be sewn. The duties collected on finished products brought back are low.

 Assembly operations also allow a company’s product to enter many markets without being
subject to tariffs and quotas. The extent of freedom and flexibility, however, is limited by
local product- content laws. South American countries usually require that 50–95 percent of
components used in products be produced domestically. Note that as the percentage of
required local content increases, the company’s flexibility declines and the price advantage is
eroded. This is so because domestic products can be sheltered behind tariff walls, and higher
prices must be expected for products with a low percentage of local content. In general, a
host country objects to the establishment of a screwdriver assembly that merely assembles
imported parts. If a product’s local content is less than half of all the components used, the
product may be viewed as imported, subjected to tariffs and quota restrictions. The Japanese,
even with joint ventures and assembly operations in Europe, keep local content in foreign
production facilities to a minimum while maximizing the use of low-cost Japanese
components. British Leyland’s Triumph Acclaim is one such example. Made in the United
Kingdom under license from Honda, Acclaim contained over 55 percent Japanese parts. Italy
considered Acclaim as a Japanese, not a European, car. Since the EU’s rule of thumb seemed
to be at least 45 percent local content, Italy asked the European Commission to decide what

INT’L MKT SEM II/2012Page 9

 percentage of local content a product must have to be considered “made in Europe.” An
assembly manufacturing operator must therefore carefully evaluate the trade-off between
low-cost production and the process of circumventing trade barriers.

8. TURNKEY PROJECTS
A turnkey project refers to a project when clients pay contractors to design and construct new
facilities and train personnel. A turnkey project is a way for a foreign company to export its process
and technology to other countries by building a plant in that country. Industrial companies that
specialize in complex production technologies normally use turnkey projects as an entry strategy.
Firms that specialize in the design, construction, and start-up of turnkey plants are common in some
industries. In a turnkey project, the contractor agrees to handle every detail of the project for a
foreign client including the training of operation personnel. At completion of the contract, the
foreign client is handled the “key“ to a plant that is ready for full operation- hence the term turnkey.
This is actually a means of exporting process of technology to other countries, in a sense it is just a
very specialized kind of exporting. Turnkey projects are most common in the chemical,
pharmaceutical, petroleum refining, and metal refining industries, all of which use complex,
expensive production-process technologies.

Advantages of turnkey projects:

The know-how required to assemble and run a technologically complex process, suchas refining
petroleum or steel, is a valuable asset. The main advantage of turnkey project is that they are a way
of earning great economic returns from that asset.
 The possibility for a company to establish a plant and earn profits in a foreign country
especially in which foreign direct investment opportunities are limited and lack of expertise
in a specific area exists.
 The strategy is particularly useful in cases where foreign direct investment (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 and, a step toward that goal,
have restricted FDI in their oil and refining sectors. Since many of these countries lacked
petroleum-refining technology, however, they had to gain it by entering into turnkey projects
with foreign firms that had the technology. Such deals are often attractive to selling firm
because they would probably have no other way to earn a return on their valuable know-how
in that country.

INT’L MKT SEM II/2012Page 10

  A turnkey strategy, as opposed to a more conventional type of FDI, may make sense in a
country were the political and economic environment is such that a longer-term investment
might expose the firm to unacceptable political and/or economic risks (e.g., the risk of
nationalization or of economic collapse)
Disadvantage of turnkey projects:
First, by definition, 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 to be a major market for the
output of the process that has been exported. One way around this is to take a minority equity interest in
the operation set up by the turnkey project.
 The firm that enters into a turnkey projects with a foreign enterprise may inadvertently create
a competitor. For example, many of the Western firms that sold oil-refining technology to
firms in Saudi Arabia, Kuwait, and other Persian Gulf stages now find themselves competing
head to head with those firms in the world oil market.
 Third and related to the second point, if the firm’s technology is a source of competitive
advantage, then selling this technology through a turnkey project is also selling competitive
advantage to potential and/or actual competition.
A company includes risk of revealing companies secrets to rivals, and takeover of their plant
by the host country.
9. ACQUISITION
When a manufacturer wants to enter a foreign market rapidly and yet retain maximum control, direct
investment through acquisition should be considered.

The reasons for wanting to acquire a foreign company include;

 Product/geographical diversification,
 Acquisition of expertise (technology, marketing, and management) Rapid entry. For
example, Renault acquired a controlling interest in American Motors in order to gain the
sales organization and distribution network that would otherwise have been very expensive
and time-consuming to build from the ground up.
Acquisition is viewed in a different light from other kinds of foreign direct investment. A
government generally welcomes foreign investment that starts up a new enterprise (called a
Greenfield enterprise), since that investment increases employment and enlarges the tax base. An
acquisition, however, fails to do this since it displaces and replaces domestic ownership. Therefore,
acquisition is very likely to be perceived as exploitation or a blow to national pride – on this basis, it

INT’L MKT SEM II/2012Page 11

stands a good chance of being turned down. There was a heated debate before the United Kingdom
allowed Sikorsky, a US firm, to acquire Westland, a failing British manufacturer of military
helicopters. That episode caused the Thatcher government to halt its negotiation with Ford
concerning the acquisition of British Leyland’s Austin–Rover passenger-car division. A Greenfield
project, while embraced by the host country, implies gradual market entry.
International mergers and acquisitions are complex, expensive, and risky. The problems are
numerous such as;
 finding a suitable company,
 determining a fair price,
 acquisition debt,
 merging two management teams, language and cultural differences,
 employee resentment
STRATEGIC ALLIANCES
As discussed, to gain access to new markets and technologies while achieving economies of scale,
international marketers have a number of organization forms to choose from.
A relatively new organizational form of market entry and competitive cooperation is strategic
alliance. This form of corporate cooperation has been receiving a great deal of attention as large
multinational firms still find it necessary to find strategic partners to penetrate a market. Strategic
alliance/ this is a type of cooperative agreements between different firms, such as shared research,
formal joint ventures, orminority equity participation. A strategic alliance will usually fall short of a
legal partnership entity, agency, or corporate affiliate relationship. Typically, two companies form a
strategic alliance when each possesses one or more business assets or have expertise that will help
the other by enhancing their businesses. Strategic alliances can develop in outsourcing relationships
where the parties desire to achieve long-term win-win benefits and innovation based on mutually
desired outcomes.
The characteristics of strategic alliances:
 They are frequently between firms in industrialized nations.
 The focus is often on creating new products and/or technologies rather than distributing
existing ones.
 They are often only created for short term durations.

Advantages of strategic alliances:

INT’L MKT SEM II/2012Page 12

  Technology exchange This is a major objective for many strategic alliances. The reason
forthis is that many breakthroughs and major technological innovations are based on
interdisciplinary and/or inter-industrial advances.
 Global competition There is a growing perception that global battles between
corporationsbe fought between teams of players aligned in strategic partnerships. Strategic
alliances will become key tools for companies if they want to remain competitive in this
globalized environment, particularly in industries that have dominant leaders, such as cell
phone manufactures, where smaller companies need to ally in order to remain competitive.
 Industry convergence As industries converge and the traditional lines between
differentindustrial sectors blur, strategic alliances are sometimes the only way to develop the
complex skills necessary in the time frame required. Alliances become a way of shaping
competition by decreasing competitive intensity, excluding potential entrants, and isolating
players, and building complex value chains that can act as barriers.
 Economies of scale and reduction of risk Pooling resources can contribute greatly
toeconomies of scale, and smaller companies especially can benefit greatly from strategic
alliances in terms of cost reduction because of increased economies of scale. In terms on risk
reduction, in strategic alliances no one firm bears the full risk, and cost of, a joint activity.
This is extremely advantageous to businesses involved in high risk / cost activities such as
R&D. This is also advantageous to smaller organizations which are more affected by risky
activities.
 Alliance as an alternative to merger Some industry sectors have constraints to cross-border
mergers and acquisitions, strategic alliances prove to be an excellent alternative to bypass
these constraints. Alliances often lead to full-scale integration if restrictions are lifted by one
or both countries.
Disadvantages of strategic alliances:
 Difficult to find a good partner
 Risk of unequal partnership ,
 Loss of control andRelationship management across border

INT’L MKT SEM II/2012Page 13