CHAPTER FOUR

FOREIGN MARKET ENTRY STRATEGIES

4.1. Analyzing International Marketing
Why Businesses Enter International Markets? There are a number of factors that increasingly
drive international trade and marketing efforts.
Proactive Market Entry Reactive Market Entry

Ä Competitive advantage  Competitive pressure & survival

Ä Profit advantage /sales profit growth  Overproduction

Ä Technological advantage  Excess capacity

Ä Exclusive information  Declining domestic sales

Ä Economies of scale  Saturated domestic markets

Ä Market size  Proximity to customers and ports

Ä Low cost production & tax benefits

4.2. Selecting A Market Entry Mode

Several decision criteria will influence the choice of entry mode. Roughly speaking, three classes
of decision criteria can be distinguished: internal (firm specific) criteria, external (environment-
specific) criteria, and desired mode characteristics.
Internal Factors
@ Firm size @ Product/service
@ International experience @ Company Objectives
External Factors
@ Market Size and Growth @ Competitive Environment
@ Risk/ Demand and uncertainty @ Local Infrastructure
@ Government Regulations (Openness)
@ Socio-cultural distance between home country and host country
Desired Mode Characteristics
© Need for Control © Flexibility © Risk averse
Although some of the factors listed above favor high-control entry modes, other criteria suggest a

low-control mode. The different entry modes can be classified according to the degree of control

they offer to the entrant from low-control (e.g., indirect exporting, licensing) to high-control modes

(e.g., wholly owned subsidiary). To some extent, the appropriate entry-mode decision boils down

to the issue of how much control is desirable. Ideally, the entrant would like to have as much

control as possible. However, entry modes that offer a large degree of control also impose

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 substantial resource commitments and huge amounts of risk. Therefore, the entrant faces a tradeoff

between the benefits of increased control and the costs of resource commitment and risk.

High involvement, risk, cost & return

Degree of Involvement &Risk

Joint Direct
Contract Venture Investment
Manufacturing
Licensing
Export

Low involvement, risk, cost &return

Cost
4.3. Indirect and Direct Exporting Activities, Agents, Distributors, Franchising,
and Licensing
Most companies start their international expansion by exporting. For many small businesses,

exporting is very often the sole alternative for selling their goods in foreign markets. Exporting

is a strategy in which a company, without any marketing or production

organization overseas, exports a product from its home base.

4.3.1. Indirect Exporting

Ü Occurs when the exporting manufacturer uses independent organizations located in the

producer’s country to sell its products in the foreign market.

Ü It is the sale is like a domestic sale.

Ü Sales are viewed primarily as a means of disposing of surplus production.

Ü Adopted by a firm with minimal resources and limited expansion objectives to devote to

international expansion.

There are six main entry modes of indirect exporting:

1. Export Buying Agent (Export Commission House)

♪ It is a representative of foreign buyers who is located in the exporter’s home country.

♪ Offers services to the foreign buyers: such as identifying potential sellers and negotiating
prices.
♪ Acts in the interests of the buyer, it is the buyer that pays a commission.
♪ The export commission house essentially becomes a domestic buyer. It scans the market for the
particular merchandise it has been requested to buy. It sends out specifications to
manufacturers inviting bids.

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2. Broker

 Another type of agent based in the home country is the export/import broker.
 The chief function of a broker is to bring a buyer and a seller together.
 Thus the broker is a specialist in performing the contractual function, and does not actually
handle the products sold or bought.
 Paid a commission (about 5 percent)
 Export brokers are that they may act as the agent for either the seller or the buyer.
3. Export Management Company/Export House

 Export houses or export management companies (EMCs) are specialist companies set up to act
as the ‘export department’ for a range of companies.
 It conducts business in the name of each manufacturer it represents.
 All correspondence with buyers and contracts are negotiated in the name of the manufacturer,
and all quotations and orders are subject to confirmation by the manufacturer.
4. Trading Company

Trading companies are part of the historical legacy from colonial days and, although different in

nature now, they are still important trading forces in Africa and the Far East.

Trading companies play a central role in such diverse areas as shipping, warehousing, finance,

technology transfer, planning resource development, construction and regional development (e.g.

turnkey projects), insurance, consulting, real estate and deal making in general (including

facilitating investment and joint ventures). In fact it is the range of financial services offered that is

a major factor distinguishing general trading companies from others.

5. Piggybacking

A strategy where by a firm’s new product uses the existing distribution and logistics of another

business. Piggyback exporting, in which one manufacturer (carrier) that has export facilities and

overseas channels of distribution handles the exporting of another firm’s (rider) noncompeting but

complementary products. With piggybacking, the company uses the overseas distribution network

of another company (local or foreign) for selling its goods in the foreign market.

6. Consortia are groups of small or medium-sized organizations that group together to market

related or sometimes unrelated products in international markets.

4.3.2. Direct Exporting

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Direct exporting occurs when a manufacturer or exporter sells directly to an importer or buyer

located in a foreign market area. Direct export modes include export through foreign-based agents

and distributors (independent intermediaries).

Distinct differences

The terms ‘distributor’ and ‘agent’ are often used synonymously.

 Distributors, unlike agents, take title to the goods, finance the inventories and bear the risk of
their operations, whereas agents do not.
 Distributors are paid according to the difference between the buying and selling prices rather
than by commission (agents).
 Distributors are often appointed when after-sales service is required, as they are more likely
than agents to possess the necessary resources.
a. Distributors (importers)

 Distributors are the exclusive representatives of the company and are generally the sole
importers of the company’s product in their markets.
 Independent company that stocks the manufacturer’s product.
 It will have substantial freedom to choose own customers and price.
 It profits from the difference between its selling price and its buying price from the
manufacturer.
b. Agents

♣ Agents are may be exclusive, where the agent has exclusive rights to specified sales territories;
semi-exclusive, where the agent handles the exporter’s goods along with other non-competing
goods from other companies; or non-exclusive, where the agent handles a variety of goods,
including some that may compete with the exporter’s products.
♣ It is independent company that sells to customers on behalf of the manufacturer (exporter).
Usually it will not see or stock the product. It profits from a commission (typically 5–10
percent) paid by the manufacturer on a pre-agreed basis.
Export Mode Advantages Disadvantages
Indirect exporting @ Limited commitment and @ No control over marketing mix
(e.g. export buying investment required. elements other than the product.
agent, broker or @ High degree of market @ An additional domestic member
export management diversification is possible in the distribution chain may add
company) as the firm utilizes the costs, leaving smaller profit to
internationalization of an the producer.
experienced exporter. @ Lack of contact with the market
@ Minimal risk (market and (no market knowledge acquired).
political). @ Limited product experience

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 @ No export experience (based on commercial selling).
required.
Direct exporting  Access to local market  Little control over market price
(e.g. distributor or experience and contacts because of tariffs and lack of
agent) with potential customers. distribution control (especially
 Shorter distribution chain with distributors).
(compared to indirect  Some investment in sales
exporting). organization required (contact
 Market knowledge from home base with distributors
acquired. or agents).
 More control over  Cultural differences, providing
marketing mix (especially communication problems and
with agents). information filtering (transaction
 Local selling support and costs occur).
services available.  Possible trade restrictions.
4.3.3. Licensing

Companies can also penetrate foreign markets via a licensing strategy. Licensing is a strategy of

marketing where a firm charges a fee and/or royalty for the use of its technology, brand and/or

expertise. A licensing agreement is an arrangement wherein the licensor gives something of value

to the licensee in exchange for certain performance and payments from the licensee. Examples of

assets that can be part of a licensing agreement include trademarks, technology know-how,

production processes, and patents.

Benefits

 Very profitable means for penetrating foreign markets.

 Low initial investment as the firm does not have to set up operation facilities in the host

country. The setting up of the operation facilities is the responsibility of the licensee;

 Overcomes restrictive investment barriers.

 Develop business applications of intangible property.

Caveats (Disadvantage)

 The risk of not getting paid.

 Lack of control.
 Cross-border licensing may be difficult.

 The licensee may not be fully committed to the licensor’s product or technology.

 Creating a competitor.

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4.3.4. Franchising

Franchising is a rapidly growing form of licensing. It is a contract between a parent company

(franchisor) and franchisee, which allows the franchisee to operate a business developed by the

franchisor in return for a fee and adherence to franchise-wide policies and practices. This is an

appropriate entry strategy when barriers to entry are low yet the market is culturally distant in

terms of consumer behavior or retailing structures.

It is an arrangement whereby the franchisor gives the franchisee the right to use the franchisor’s

trade names, trademarks, business models, and/or know-how in a given territory for a specific time

period, normally 10 years. In exchange, the franchisor gets royalty payments and other fees. The

package could include the marketing plan, operating manuals, standards, training, and quality

monitoring.

Advantages Disadvantages
 Greater degree of control  The search for competent franchisees
Franchising compared to licensing. can be expensive and time consuming.
(seen from  Low-risk, low-cost entry  Lack of full control over franchisee’s
franchisor’s mode (the franchisees are the operations, resulting in problems with
viewpoint) ones investing in the cooperation, communications, quality
necessary equipment and control, etc.
know-how).  Costs of creating and marketing a
 Using highly motivated unique package of products and
business contacts with services recognized internationally.
money, local market  Costs of protecting goodwill and brand
knowledge and experience. name.
 Ability to develop new and  Problems with local legislation,
distant international markets, including transfers of money,
relatively quickly and on a payments of franchise fees and
larger scale than otherwise government-imposed restrictions on
possible. franchise agreements.
 Generating economies of  Opening up internal business
scale in marketing to knowledge may create potential future
international customers. competitor.
 Precursor to possible future  Risk to the company’s international
direct investment in foreign profile and reputation if some
market. franchisees underperform (‘free riding’
on valuable brand names).
Licensing Vs. Franchising

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 Licensing Franchising
• The relationship between licensees and  Franchisees can expect to have a much

the licensing company is looser. closer relationship with their parent

• The licensee does not retain rights to company.

use the company’s trademark.  Franchisees retain rights to the parent

• The licensee is expected to establish its company’s trademark and logo.

own identity in the marketplace.  Franchisees can expect to pay royalties

• Once the licensee launches the operation, on a go-forward basis.

the relationship with the licensing

company is frequently limited to

purchasing products.

4.4. Direct Investment Activities, Wholly Owned Subsidiaries,

Mergers/Acquisitions and Joint Ventures Intermediate Entry Mode

4.4.1. Direct Investment

Foreign direct investment (FDI) –is the market entry strategy in which companies invest in or

acquire plants, equipment, or other assets outside the home country. FDI represents international

investment flows which acquire properties and plants. The international marketer makes such

investments to create or expand a long-term interest in an enterprise with some degree of control.

Portfolio investment in turn focuses on the purchase of stocks and bonds internationally. Portfolio

investment is of primary concern to the international financial community.

The ultimate form of foreign involvement is direct ownership of foreign-based assembly or

manufacturing facilities. The foreign company can buy part or full interest in a local company or

build its own facilities. As a company gains experience in export, and if the foreign market appears

large enough.

Advantages

 The firm could secure cost economies in the form of cheaper labor or raw materials, foreign

government incentives, freight savings, to avoid high import taxes, to reduce the high costs of

transportation to market, and so on.

 The firm will gain a better image in the host country because it creates jobs.

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 The firm develops a deeper relationship with government, customers, local suppliers, and

distributors, enabling it to adapt its products better to the local marketing environment.

Disadvantages
 A firm exposes its large investment to risks such as blocked or devalued currencies, worsening
markets, or expropriation.
 The firm will find it expensive to reduce or close down its operations, since the best country

might require substantial severance pay to the employees.

4.4.2. Wholly Owned Subsidiaries

In a wholly owned subsidiary, the firm owns 100 percent of the subsidiary. Establishing a wholly

owned subsidiary in a foreign market can be done in two ways. The firm can either setup a new

operation in that country or it can acquire an established firm or use that firm to promote its products in

the country’s market.

Advantages:

 No risk of losing technical competence to a competitor.

 Tight control over operations in different countries (i.e., using profits from one country to support

competitive attacks in another).

 Realize location and experience curve economies (as firms pursuing global and transnational

strategies try to do).

Disadvantages:
 Firms doing this must bear the full costs and risks of setting up overseas operations.

4.4.3. Mergers/Acquisitions

A cross-border merger is a transaction in which two firms with their home operations in different

countries agree to an integration of the companies on a relatively equal basis. These companies

take decision to combine their individual operations on a relatively equal basis to create combined

competitive advantage that will contribute to success in the global marketplace.

A cross-border acquisition is a transaction in which an expanding firm buys either a controlling

interest or all of an existing company in a foreign country. Often, the acquired firm becomes a

business unit within the acquiring firm’s portfolio of businesses. Typically, managers in the

acquired firm then report to the acquiring firm’s management team. The aim of the mergers and

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acquisitions is generally to create synergy i.e. to create value that is more than the combined value

of the individual firms (Hit, et al., 2001).

Acquisitions take many forms. According to Root (1987) acquisition may be horizontal (the

product lines and markets of the acquired and acquiring firms are similar), vertical (the acquired

firm becomes supplier or customer of the acquiring firm), concentric (the acquired firm has the

same market but different technology, or the same technology but different markets) or

conglomerate (the acquired firm is in a different industry from that of the acquiring firm). No

matter what form the acquisition takes, coordination and styles of management between the

foreign investor and the local management team may cause problems.

Advantages Disadvantages
Acquisition  Full control @ Usually an expensive option.
 Rapid entry to new markets. @ High risk (taking over companies that are
 Gaining quick access to: regarded as part of a country’s heritage
can raise considerable national
@ Distribution channels;
resentment if it seems that they are being
@ A qualified labor force;
taken over by foreign interests).
@ Existing management
Possible threats:
experience;
@ Lack of integration with existing
@ Local knowledge;
operation.
@ Contacts with local market
@ Communication and coordination
and government;
problems between acquired firm and
@ Established brand names
acquirer.
or reputation.
[Link] Ventures

A joint venture is a partnership between a domestic firm and a foreign firm. Both partners invest

money and share ownership and control of partnership. Joint ventures require a greater

commitment from firms than licensing or the various other exporting methods. The most typical

joint venture is a 50/50 arrangement in which there are two parties, each of which holds a 50

percent ownership stake and contributes a team of managers to share operating control. Some

firms however, have sought joint ventures in which they have a majority share and thus tighter

control.

Advantages

 Benefit from local partner’s knowledge.

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 Shared costs/risks with partner.

 Reduced political risk.

 The firm is able to have significant input and control over the operation and management of the

joint venture.

Disadvantages

 Risk giving control of technology to partner.

 May not realize experience curve or location economies.

 Shared ownership can lead to conflict.

 They have more risk and less flexibility.

 The firm may lose competitive advantage as a result of imitation.

4.4.5. Contract Manufacturing

Contract manufacturing is a joint venture that enables the firm to have foreign sourcing

(production) without making a final commitment. If management may lack resources or be

unwilling to invest equity to establish and complete manufacturing and selling operations,

manufacturing is outsourced to an external partner, specialized in production and production

technology. Yet contract manufacturing keeps the way open for implementing a long-term foreign

development policy when the time is right. Contract manufacturing enables the firm to develop and

control R&D, marketing, distribution, sales and servicing of its products in international markets,

while handing over responsibility for production to a local firm.

Advantages Disadvantages
© Permits low-risk market entry. © Transfer of production know-how
Contract © No local investment (cash, is difficult.
Manufacturing time and executive talent) © Contract manufacture is only
(seen from the with no risk of nationalization possible when a satisfactory and
contractor’s or expropriation. reliable manufacturer can be
viewpoint) © Retention of control over found – not always an easy task.
R&D, marketing and sales or © Extensive technical training will
after-sales service. often have to be given to the local
© Avoids currency risks and manufacturer’s staff.
financing problems. © As a result, at the end of the
© A locally made image, which contract, the subcontractor could
may assist in sales, especially become a formidable competitor.
to government or official © Control over manufacturing

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 bodies. quality is difficult to achieve
© Entry into markets otherwise despite the ultimate sanction of
protected by tariffs or other refusal to accept substandard
barriers. goods.
© Possible cost advantage if © Possible supply limitation if the
local costs (primarily labor production is taking place in
costs) are lower. developing countries.
© Avoids intra-corporate
transfer-pricing problems that
can arise with a subsidiary.

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