Modes of Entry

Sunanda Regmi
KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT

04/10/2023
Why do companies enter into foreign markets?
Objectives
To expand sales
To acquire resources

04/10/2023
Motives for going International
Certainmotivational factors make domestic firms to go international.
These motivations can be proactive or reactive.

Proactive motivations are initiated by the aggressive management. Such

motivations may result from the internal strengths.

Whereasthe Reactive motivations are initiated by defensive

management as response to the environmental changes and pressures.

The firms going international with proactive motivations are likely to get
success in International market.
04/10/2023
Why go international? Motives for going
International
Major Motivation for Firms to Go International
Proactive Motivations Reactive Motivations
 Profit Advantage  Competitive pressures
 Unique products  Overproduction
 Technological advantages  Declining domestic sales
 Exclusive Information  Excess capacity

 Tax benefits  Saturated domestic markets

 Economies of Scale  Proximity to customers and ports

04/10/2023
Modes of Entry into Foreign Market
Non Equity Based Modes of Entry Equity Based modes of Entry
Export Joint Venture
◦ Direct Strategic Alliance
◦ Indirect
Wholly Owned Subsidiary
Licensing
◦ Merger and Acquisition
Franchising
◦ Greenfield Investment
Contract Manufacturing
Foreign Assembly Operation
Management Contract
Trunkey Operation

04/10/2023
Export
Direct Exports –
◦ Sole agents (appointing the sole agents by giving exclusive right to distribute in
foreign market through wholesalers and retailers)
◦ Dealers (appointing them in various territories. They carry out wholesale and
retail operations)

Indirect exports – through

◦ Export management companies – they are smaller companies and acts as export
arm of manufacturer.
◦ Piggybacking – one firm may use the international distribution channel of another
firm for export

04/10/2023
Exporting

Advantages Disadvantages

Relatively low
financial exposure Vulnerability to
tariffs and NTBs

Permit gradual
market entry
Logistical
complexities

Acquire knowledge
about local market
Potential conflicts
with distributors
Avoid restrictions
on foreign
investment

04/10/2023
Licensing
Licensing occurs when a firm (the licensor) licenses the right
to produce its products, use its productions processes or uses
its brand name or trademark to another firm (the licensee). In
return for giving the licensee these rights, the licensor
collects the royalty fee.
◦ Licensing agreement is a contractual agreement between licensor
and licensee in which licensor grants the permission to licensee to
use intellectual property under specific conditions.
 Patents grant the inventor of new product or process exclusive rights for a
defined period to manufacture, sale or use of that invention.
 Copyright are the exclusive legal rights of authors, composers, playwrights,
artists and publishers to publish and dispersed their work as they see fit.
 Trademarks are design or the name, often officially registered, by which
merchants or manufacturer designate or differentiate their product.

04/10/2023
◦ Pays a fixed royalty: It depends on the amount of assistance
given and the relative bargaining power of two parties.
◦ Royalty of 2 to 5 percent of sales.
◦ It has become one of the major sources of revenue for
international firms.
◦ It can be associated with technological product and fashion
brands.

04/10/2023
Why Choose Licensing?
 Licensing is attractive because
◦ the firm avoids development costs and risks associated with opening a foreign market
◦ the firm avoids barriers to investment
◦ the firm can capitalize on market opportunities without developing those applications
itself
 Licensing is unattractive because
◦ the firm doesn’t have the tight control required for realizing experience curve and
location economies
◦ the firm’s ability to coordinate strategic moves across countries is limited

04/10/2023
Franchising
◦ Franchising is a specialized form of licensing in which the
franchiser sells intangible property to the franchisee and insists
on rules to conduct the business.

◦ Franchising is a method of doing business wherein a franchiser

licenses trademarks and methods of doing business to a
franchisee in exchange for a recurring royalty fee.

04/10/2023
Franchising
Itis a very successful and expanding method of marketing, selling and
distributing goods and services.

Itcombines the skills and experience of the franchiser and the goodwill created by
the brand.

Itis a continuing relationship in which the franchiser provides a licensed privilege

to the franchisee to do business and offers assistance in organizing, training,
merchandising, marketing, and managing in return for a consideration.

McDonald operation in many parts of the world is example of franchising.

 McDonald’s, KFC, subway etc are the well known franchising company of US.
 McDonald alone has 34,000 restaurants in 118 countries outside the US.
 Other example could be, Hotel Hilton, UPS store etc.

04/10/2023
Why Choose Franchising?
 Franchising is attractive because
◦ it avoids the costs and risks of opening up a foreign market
◦ firms can quickly build a global presence

 Franchising is unattractive because

◦ it inhibits the firm's ability to take profits out of one country to support
competitive attacks in another
◦ the geographic distance of the firm from its franchisees can make it
difficult to detect poor quality

04/10/2023
Contract Manufacturing
◦ Under this method firm’s product is produced in foreign market
by foreign manufacturer under specially a short term contract.
◦ It involves only manufacturing. The marketing of the product is
done by other subsidiary.
◦ It avoids the labor and other problem in the home country
 Low costs advantage
 Foreign market advantage
◦ However there are certain disadvantages
 Profit goes to local firms
 Sometime difficult to find the manufacturer
 Quality issues

04/10/2023
Foreign Assembly
◦ The firm produces all or most of the parts and components of
the product domestically and ships these components or parts to
the foreign market to be put together as finished products. The
examples are pharmaceutical, motor and vehicle, computers and
etc.

◦ This kind of operation reduces the prices of product by saving

expensive labor costs in home countries. The tariff also may be
favorable in parts than in finished products

◦ Firm itself engages in production and distribution

04/10/2023
Management Contract
◦ Management contract is a contractual arrangement under which a company
provides managerial know how in some or all functional areas to another party
for a fee that is typically ranges from 2 to 5% of the sales.

◦ A firm agrees to manage the business of its client for a specified time period
and for specified amount of management remuneration.

◦ It is an International business alternative in which the firm sells its expertise in

running a company while avoiding the risks and benefits of ownership.

04/10/2023
Turnkey
A turnkey project is a contract under which a firm agrees
to fully design, construct and equip a
manufacturing/business/service facility and turn the
project over to the purchaser when its ready for
operation, for a remuneration.

04/10/2023