Chapter Thirteen

Entering Foreign Markets /

Entry Strategies and Strategic Alliances

Contents
◦ Three Basic Entry Decisions
◦ Entry modes and Advantages and
Disadvantages of the Different Modes that
firms use to enter foreign markets
◦ Pros and Cons of Greenfield venture Vs.
Acquisition as an entry strategy
◦ Factors that influence a firm’s choice/
selection of an entry mode
◦ Pros and Cons of entering into Strategic
alliances
1. Three Basic Entry Decisions/
Foreign Expansion Decision
 Any firm contemplating foreign expansion must make the
following three basic decisions
◦ Which foreign market(s) to enter;
◦ When to enter the market; and
◦ On what scale to enter
After these
◦ Which mode of entry will be utilized need to be considered.
A. Which Foreign Markets to Enter
• The choice must be based on an assessment of a nation’s long-run
profit potential
• The attractiveness of a country depends upon balancing the
benefits, costs, and risks associated with doing business in that
country
• Market factors that can have impact -
– Size of market
– Present wealth of the consumers in the market
– Likely future wealth of consumers
– Economic growth rates
B. Timing the Entry
• Advantages frequently associated with entering a market early are
commonly known as first-mover advantages
– The ability to preempt rivals and capture demand by establishing a
strong brand name
– Ability to build sales volume
– Ability of early entrants to create switching costs
• Disadvantages associated with entering a foreign market before other
international businesses are referred to as first-mover disadvantages
– Pioneering Costs are costs that an early entrant has to bear
– Possibility that regulations may change
C. Scale of Entry
 Large scale entry
◦ Strategic Commitments - a decision that has a long-term impact
and is difficult to reverse
◦ May cause rivals to rethink market entry
◦ May lead to indigenous/local/native competitive response
 Small scale entry
◦ Time to learn about market
◦ Reduces exposure risk
2 . Entry Modes and Advantages and Disadvantages of the Different Modes that firms use to enter foreign
markets
3. Pros and Cons of Greenfield venture Vs. Acquisition as an entry strategy
4. Factors that influence a firm’s choice/ selection of an entry mode
5. Pros and Cons of entering into Strategic alliances

 Firms can use Six different methods to enter a market

◦ Exporting
◦ Turnkey Projects
◦ Licensing
◦ Franchising
◦ Joint Ventures
◦ Wholly Owned Subsidiaries- Acquired and Green field

Other forms utilized by firms to enter a market

◦ Mergers
◦ Strategic Alliance
◦ Management contracts
A. Exporting
• Manufacturing firms normally begin their global expansion as
exporters and later switch to other form.
• Advantages
– Avoids cost of establishing manufacturing operations
– May help achieve experience curve and location economies
• Disadvantages
– May compete with low-cost location manufacturers
– Possible high transportation costs
– Tariff barriers
– Possible lack of control over marketing representatives
 B. Turnkey Projects
• The Contractor agrees to handle every detail of project for foreign
client, including the training of operating personnel.
• The hi-tech industry of Walton was completely built by Gallant Equipment
Pvt. Ltd., a firm specialized in building industrial units for sponsoring firm.
• Advantages
– Can earn a return on knowledge asset
– Less risky than conventional FDI
• Disadvantages
– No long-term interest in the foreign country
– May create a competitor
– Selling process technology may be selling competitive advantage as well
 C. Licensing
• Agreement where licensor grants rights to intangible property to another
entity for a specified period of time in return for royalties.
• Advantages
– Reduces development costs and risks of establishing foreign enterprise
– Lack capital for venture
– Unfamiliar or politically volatile market
– Overcomes restrictive investment barriers
– Others can develop business applications of intangible property
• Disadvantages
– Not enough control over manufacturing, marketing and strategy
formulation to evolve experience and location economies
– Firms might have to invest in one country using the profits generated by
another country
– Loosing control over competitive advantage through licensing. For
instance, sharing technological know-how.
 D. Franchising
• Franchiser sells intangible property and insists on rules for operating business
• Franchising is a method of doing business where a franchisee is granted the
right to use intangible assets and engage in offering, selling, or distributing
goods or services under a marketing format designed by the franchisor.
• Advantages:
– Reduces costs and risk of establishing enterprise

• Disadvantages:
– May prohibit movement of profits from one country to support operations
in another country
– Quality control
 E. Joint Ventures

• Establishing a firm that is jointly owned by two or more

other-wise independent firms.

• Involves the joint ownership of a company to

produce/market into a host country.

• Joint ownership is the development of a new company where

both parties have a stake (equal or majority).

• Contributions do vary widely from R&D, know how,

financial, sales, or to whatever.

 Joint Ventures
• Advantages

– Benefit from local partner’s knowledge

– Shared costs/risks with partner

– Reduced political risk

• Disadvantages

– Risk giving control of technology to partner

– May not realize experience curve or location economies

– Shared ownership can lead to conflict

 F. Wholly Owned Subsidiary
 The firm owns 100 percent of the stock. Subsidiaries could
be Greenfield investments or full acquisitions (takeover).
 Advantages

◦ No risk of losing technical competence to a competitor

◦ Tight control of operations
◦ Realize learning curve and location economies
 Disadvantage

◦ Bear full cost and risk

Acquired vs. Greenfield Subsidiary

• When a firm uses its investments to take full control of another firm’s

assets and resources and becomes the owner of that organization, then

this falls under acquired subsidiary category.

• Greenfield Investments means the expansion of existing facilities or a

direct investment in new facilities (in an area where no previous

facilities exist). The name comes from the idea of building a facility

verbatim on a "green" field, such as farmland or a forest. Over time

the term has become more metaphoric.

Acquired vs. Greenfield

• Benefits • Benefits
– Quick to execute
– Can build subsidiary it wants
– Preempt competitors
– Possibly less risky – Easy to establish operating
• Costs routines
– Disappointing results
– Overpay for firm
• Costs
– Optimism about value creation – Slow to establish
(hubris) – Risky
– Culture clash
– Preemption by aggressive
– Problems with proposed
synergies competitors
 Acquire or Greenfield

 Acquisitions are attractive if

 Greenfield investments are

attractive if -
◦ There are well established
◦ There are no competitors
firms already in operation
◦ Competitors have a competitive
◦ Competitors want to enter the
advantage that consists of
region embedded competencies, skills,

routines, and culture

Pros and Cons of Greenfield venture Vs. Acquisition
as an entry strategy

Acquisitions Pros and Cons

Pro: Con:
Quick to execute Disappointing results
Preempt competitors Overpay for firm
Possibly less risky Optimism about value creation
(hubris)
Culture clash
Problems with proposed synergies
 Greenfield Ventures Pros and Cons

Pro: Con:
Can build subsidiary it wants Slow to establish
Easy to establish operating Risky
routines Preemption by aggressive
competitors
Management Contracts
• When equity participation is not feasible, many partners turn to
management contracts to participate in the venture.
• A management contract is an agreement for one company to
perform a specific function under a contract basis.
• Contractor supplies managerial know-how to operate a facility in
exchange for compensation.
• Specific functions may include:
 Organizational skills
 Specific expertise
 Management services
Management Contracts
• Airline and Hotel industry use it to a wide extent especially when
other entry methods are restricted.
• It is an alternative to Foreign Direct Investment. 
• The first recorded management contract was initiated by Qantas and
Mr. Duncan Upton in 1978.
• Advantages
– Client organization receives assistance in managing local operations
where they are not efficient
– Management company generates revenue without having to make a
capital investment
• Disadvantages
– The foreign firms that got trained may become future competitors
Mergers

 Mergers occur when the assets and operation different firms

are integrated to establish a new legal entity.

 Through Merger, two firms permanently integrates and

forms one single business entity and the previous separate

entities disappears.
4. Core Competencies and Entry Mode/
Factors that influence a firm’s choice or selection of an entry mode

 The optimal entry mode for firms depends to some degree on the nature
of their core competencies
 A distinction can be drawn between firms whose core competency is

◦ Technological know-how

◦ Management know-how
 The greater the pressures for cost reductions are, the more likely a firm
will want to pursue some combination of exporting and wholly owned
subsidiaries
 Core Competencies and Entry Mode
• Technological Know-How • Management Know-How
– Licensing and joint-venture
– The firms valuable asset is
arrangements should be avoided
if possible normally a brand name
– Should probably use a wholly – The result is that franchising
owned subsidiary
and subsidiaries are very
– Exceptions include
attractive
• An arrangement can be structured
to reduce the risk of licensees – Often times a joint venture is
• If the technological advantage is
politically more acceptable
only transitory
5. Strategic Alliances
•Cooperative agreements between potential or actual competitors
(Look back to your Marketing Management Course Chapter 2 for Strategic
Alliances- 4 types of Strategic Alliances
Product or Service Alliances

Promotional Alliances

Logistics Alliances

Pricing Collaborations)

• Advantages:
– Facilitate entry into market
– Share fixed costs
– Bring together skills and assets that neither company has or can develop
– Establish industry technology standards
• Disadvantages:
– Competitors get low cost route to technology and markets
 Strategic Alliances are Popular

 High cost of technology development

 Company may not have skill, money or people to go it alone

 Good way to learn

 Good way to secure access to foreign markets

 Host country may require some local ownership

 Global Alliances are Different

 Firms join to attain world leadership

 Each partner has significant strength to bring to the alliance

 A true global vision

 Relationship is horizontal not vertical

 When competing in markets not part of alliance, they retain

their own identity

 Strategic Alliances: Partner Selection

 Get as much information as possible on the potential partner

 Collect data from informed third parties

◦ Former partners

◦ Investment bankers

◦ Former employees

 Get to know the potential partner before committing

End of Chapter