Chapter 9
Foreign Market Entry Strategies
Chapter Outline
• Foreign Direct Investment (FDI)
• Exporting
• Licensing
• Management Contract
• Joint Venture
• Manufacturing
Chapter Outline
• Assembly Operations
• Turnkey Operations
• Acquisition
• Strategic Alliances
• Analysis of Entry Strategies
• Free Trade Zones (FTZs)
Which countries should it enter and in what sequence? What
criteria should be used to select entry markets: proximity, stage of
development, geographic region, cultural and linguistic criteria, the
competitive situation, or other factors? How should it enter new
markets?
PREFACE
In choosing a country for direct investment, a number of factors
must be considered. Some of these factors are product image,
competition, local resources (raw materials, manpower,
infrastructure, etc.), labor costs, type of product, taxation, foreign
exchange and investment climate.
To take advantage of the global economy, companies have been
cutting costs by moving jobs to lower-cost areas. Investment banks
wonder why they should pay an analyst in London when they can
employ an analyst in India to do the same kind of job at a much
lower salary.
Foreign Market Entry Strategies
•Indirect Strategies
- Exporting
- Licensing
- Management Contract
- Turnkey Operations
Foreign Market Entry Strategies
•Foreign Direct Investment (FDI) Strategies
- Acquisition vs. Greenfield
- Assembly vs. Manufacturing
- Sole Venture vs. Joint Venture
Foreign Market Entry Strategies
A Foreign direct investment (FDI) is a controlling
ownership in a business enterprise in one country by an
entity based in another country
A high share of FDI in a country’s total capital inflows
may reflect its institutions’ weakness instead of its
strengths. However, empirical evidence indicates that FDI
benefits developing host countries. One indisputable fact
is that developed countries are both the largest recipients
and sources of FDI.
The phenomenon is dominated by the triad of the European Union, the
USA, and Japan, accounting for 71 percent of inward flows and 82
percent of outward flows.
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), and 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
• Advantages
- quick market penetration
- synergy
• Disadvantages
- host country's resentment
- high acquisition costs
- unforeseen problems
GREENFIELD INVESTMENT
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 stands a good
chance of being turned down.
BROWNFIELD INVESTMENT
A special case of acquisition is the brownfield entry
mode. This mode happens when an investor’s transferred
resources dominate those provided by an acquired firm. In
addition, this hybrid mode of entry requires the investor to
extensively restructure the acquired company so as to assure
fit between the two organizations. This is common in
emerging markets, and the extensive restructuring may yield a
new operation that resembles a greenfield investment. As
such, integration costs can be high. However, brownfield is a
worthwhile strategy to consider when neither pure acquisition
nor greenfield is feasible.
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. The goal of a manufacturing
strategy may be to set up 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 locals ) and partial
manufacturing.
Manufacturing
• Advantages
- job creation for host country
- host country gaining resources (capital and technology)
- low trade barriers
- higher profit
- utilization of local labor
- host country's economic incentives
• Disadvantages
- expropriation risk
- large capital investment
ASSEMBLY OPERATIONS
An assembly operation is a variation on a manufacturing
strategy. “Assembly means the fitting or joining together of
fabricated components.” The methods used to join or fit
together solid components may be welding, 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.
Assembly Operations
•Advantages
- circumventing trade barriers
- utilization of local labor
•Disadvantages
- local product-content laws
JOINT VENTURES
The joint venture is another alternative a firm may
consider as a way of entering an overseas market. A joint
venture is simply a partnership at corporate level, and it may
be either domestic or international. For the discussion here,
an international joint venture is one in which the partners
are from more than one country. Much like a partnership
formed by two or more individuals, a joint venture is an
enterprise formed for a specific business purpose by two or
more investors sharing ownership and control.
Joint Venture
• Advantages
- maximizing profit while minimizing risk
- sharing of resources
- allowing host country to gain technology and create jobs
- circumventing trade barriers
- local partner's market knowledge
- local partner's political connections
Joint Venture
•Disadvantages
- conflict with partner
- sharing of profit
- loss of control
- difficulty in terminating relationship
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.
The main advantage of an exporting strategy is the ease
in implementing the strategy. Risks are minimal because the
company simply exports its excess production capacity when
it receives orders from abroad. As a result, its international
marketing
effort is casual at best.
Exporting
• Advantages
- simple
- low risk
• Disadvantages
- low profit
- trade barriers
- difficult when home currency is strong
Licensing
Licensing is a contractual arrangement whereby one
company (the licensor) makes a legally protected asset
available to another company (the licensee) in exchange for
royalties, license fees, or some other form of compensation.
The licensed asset may be a brand name, company name,
patent, trademark, product formulation technical know-how
and skills (e.g., feasibility studies, manuals, technical advice),
architectural and engineering designs. Licensing is widely
used in the fashion industry.
Licensing
Most French designers, for example, use licensing to avoid
having to invest in a business. In another example, Disney
obtains all of its royalties virtually risk-free from the $500
million Tokyo Disneyland theme park owned by Keisei Electric
Railway and Mitsui. The licensing and royalty fees as arranged
are very attractive: Disney receives 10 percent of the gate
revenue and 5 percent of sales of all food and merchandise.
Moreover, Disney, with its policy of using low-paid young
adults as park employees, does not have to deal with the
Japanese policy of lifetime employment.
Licensing
• Advantages
- quick expansion (entry) when capital is scarce
- very low risk
- allowing host country to gain technology and create jobs
- allowing host country and licensee to keep most profit
- circumventing trade barriers
Licensing
•Disadvantages
- very low profit
- licensee becoming future competitor
- licensee's poor performance
- difficulty in terminating licensing agreement
Management Contract
Management contract is a strategy used by a
company with management experience with the idea of
managing the business or investment of a foreign
owner/government for a fee.
Management contracts may be used as a sound
strategy for entering a market with a minimum
investment and minimum political risks. Management
contract is a common strategy in the hotel business and
tourism.
Management Contract
Club Med, a leader in international resort vacations,
is frequently wooed by developing countries with
attractive financing options because these countries want
tourism. Club Med is unlikely to be asked to leave a
country where it has a resort.
Zenith Hotels International itself manages nine hotels
in China and one hotel in Thailand without owning them,
and most of its hotels do not carry the Zenith name.
Management Contract
•Advantages
- minimum investment
- minimum political and economic risks
•Disadvantages
- low profit (management fee as compensation)
TURNKEY OPERATIONS
A turnkey operation is an agreement by a seller to supply
a buyer with a facility fully equipped and ready to be operated
by the buyer's personnel, who will be trained by the seller. The
term is sometimes used in fast-food franchising when a
franchisor agrees to select a store site, build the store, equip it,
train the employees. In international marketing, the term is
usually associated with giant projects that are sold to
governments or government-run companies. Large-scale plants
requiring technology and large-scale construction processes
unavailable in local markets commonly use this strategy.
Strategic Alliances
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
alliances may be the result of mergers, acquisitions, joint
ventures, and licensing agreements. Joint ventures are
naturally strategic alliances, but not all strategic alliances are
joint ventures.
Airlines are a good example of the international nature of
strategic alliances. Almost all major airlines have joined one of the
three strategic groups: Star, SkyTeam, and Oneworld.
Strategic Alliances
• Mergers and Acquisitions
• Licensing Agreements
• Joint Ventures
- all joint ventures are strategic alliances
- not all strategic alliances are joint ventures
- not necessary for strategic alliances to have equity investment
- not necessary for strategic alliances to form a new business entity
Free Trade Zones (FTZs)
An FTZ is a secured domestic area in international
commerce, considered to be legally outside a country’s
customs territory. It is an area designated by a government
for the duty-free entry of goods. It is also a location where
imports may be handled with few regulations, and little or
no customs duties and excise taxes are collected. As such,
goods enter the area without any duty being payable. The
duty would be paid only when goods enter customs territory
of the country where an FTZ is located.
Free Trade Zones (FTZs)
•secured domestic area in international
commerce
•legally outside a country's customs territory
•area designated by a government for duty-free
entry of goods
Free Trade Zones (FTZs)
• not used basically for warehousing
• future: benefit derived from manufacturing, not storing.
• Advantages
- job retention and creation
- facilitating imports
- facilitating exports