How can firms enter foreign markets?
Exporting
Licensing or franchising to host country firms
A joint venture with a host country firm
A wholly owned subsidiary in the host country
The advantages and disadvantages of each entry mode is determined by:
Transport costs and trade barriers
Political and economic risks
Firm strategy
What are the basic entry decisions for firms expanding internationally?
A firm expanding internationally must decide:
Which markets to enter
When to enter them
Scale of entry
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The most favorable markets are politically stable developed and developing nations with free market systems, low inflation, and low private sector debt
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The less desirable markets are politically unstable developing nations with mixed or command economies, or developing nations where speculative financial bubbles have led to excess borrowing
timing of entry
Entry is early when a firm enters a foreign market before other foreign firms
Entry is late when a firm enters after other firms have already established themselves in the market
first mover advantages
The ability to pre-empt rivals and capture demand by establishing a strong brand name
The ability to build up sales volume in that country and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants
The ability to crea
First mover disadvantages
the disadvantages associated with entering a foreign market before other international businesses
pioneering costs
costs that an early entrant has to bear that a later entrant can avoid) such as:
The costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes
The costs of promoting and establishing a product offeri
Scale of Entry
Firms that enter foreign markets on a significant scale make a major strategic commitment that changes the competitive playing field
Involves decisions that have a long-term impact and are difficult to reverse
Small-scale entry can be attractive because i
What is the best way to enter a foreign market?
Firms can enter foreign market through:
Exporting
Turnkey projects
Licensing
Franchising
Joint ventures
Wholly owned subsidiaries
Exporting is often the first method firms use to enter foreign market
Advantages:
It is relatively low cost
Firms may achieve experience curve economies
Disadvantages:
Lower-cost manufacturing locations exist
Transport costs can be high
Tariff barriers can make it uneconomical
Foreign agents fail to act in the exporter's be
Turnkey projects
involve a contractor that agrees to handle every detail of the project for a foreign client, including the training of operating personnel
At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation
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Licensing
an arrangement whereby a licensor grants the rights to intangible property to another entity for a specified time period, and in return, receives a royalty fee
Intellectual property includes patents, inventions, formulas, processes, designs, copyrights, a
Franchising: a form of licensing in which the franchisor sells intangible property and requires the franchisee agree to abide by strict rules as to how it does business
Advantages:
It can avoid costs and risks of opening up a foreign market
Disadvantages:
It may inhibit 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 foreign fran
Joint ventures: the establishment of a firm that is jointly owned by two or more otherwise independent firms
Advantages:
A firm can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems
The costs and risks of opening a foreign market are shared with the partner
They can h
Wholly owned subsidiaries: 100% ownership of the subsidiary
Firms establishing a wholly owned subsidiary can:
Set up a new operation in that country
Acquire an established firm
Advantages:
They reduce the risk of losing control over core competencies
They allow for the tight control over operations in different countries that is necessary for engaging in global strategic coordination
They may be required if a firm is trying to r