MODE OF ENTRY

SESSION 6

15-1
WHAT ARE THE BASIC
DECISIONS FIRMS MAKE WHEN
EXPANDING GLOBALLY?
• Firms expanding internationally must decide
1. Which markets to enter
2. When to enter them and on what scale
3. Which entry mode to use
• exporting
• licensing or franchising to a company in the host
nation
• establishing a joint venture with a local company
• establishing a new wholly owned subsidiary
• acquiring an established enterprise

15-2
WHAT INFLUENCES
THE CHOICE OF ENTRY MODE?
• Several factors affect the choice of
entry mode including
• transport costs
• trade barriers
• political risks
• economic risks
• costs
• firm strategy
• The optimal mode varies by situation
– what makes sense for one company
might not make sense for another

15-3
WHICH FOREIGN MARKETS
SHOULD FIRMS ENTER?
• The choice of foreign markets will depend on
their long run profit potential
• Favorable markets
• are politically stable
• have free market systems
• have relatively low inflation rates
• have low private sector debt

15-4
WHICH FOREIGN MARKETS
SHOULD FIRMS ENTER?

• Less desirable markets

• are politically unstable
• have mixed or command economies
• have excessive levels of borrowing

• Markets are also more attractive when the

product in question is not widely available and
satisfies an unmet need

15-5
WHEN SHOULD A FIRM
ENTER A FOREIGN MARKET?
• Once attractive markets are identified, the
firm must consider the timing of entry
1. Entry is early when the firm enters a foreign
market before other foreign firms
2. Entry is late when the firm enters the market
after firms have already established
themselves in the market

15-6
WHY ENTER A
FOREIGN MARKET EARLY?
• First mover advantages include
• the ability to pre-empt rivals by establishing a strong
brand name
• the ability to build up sales volume and ride down
the experience curve ahead of rivals and gain a cost
advantage over later entrants
• the ability to create switching costs that tie
customers into products or services making it
difficult for later entrants to win business

15-7
WHY ENTER A
FOREIGN MARKET LATE?
• First mover disadvantages include
• pioneering costs - arise when the foreign business
system is so different from that in the home market that
the firm must devote considerable time, effort and
expense to learning the rules of the game
• 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
offering, including the cost of
educating customers

15-8
ON WHAT SCALE SHOULD A FIRM
ENTER FOREIGN MARKETS?
• After choosing which market to enter and
the timing of entry, firms need to decide on
the scale of market entry
• firms that enter a market on a significant scale
make a strategic commitment to the market
• the decision has a long term impact and is difficult to reverse

• small-scale entry has the advantage of allowing

a firm to learn about a foreign market while
simultaneously limiting the firm’s exposure to
that market

15-9
IS THERE A “RIGHT” WAY TO
ENTER FOREIGN MARKETS?
• No, there are no “right” decisions when
deciding which markets to enter, and the timing
and scale of entry - just decisions that are
associated with different levels of risk and
reward

15-10
HOW CAN FIRMS
ENTER FOREIGN MARKETS?
• These are six different ways to enter a
foreign market
1. Exporting – a common first step for
many manufacturing firms
• later, firms may switch to another mode
2. Turnkey projects - the contractor
handles 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

15-11
HOW CAN FIRMS
ENTER FOREIGN MARKETS?
3. Licensing - a licensor grants the
rights to intangible property to the
licensee for a specified time period,
and in return, receives a royalty fee
from the licensee
• patents, inventions, formulas, processes,
designs, copyrights, trademarks
4. Franchising - a specialized form of
licensing in which the franchisor not
only sells intangible property to the
franchisee, but also insists that the
franchisee agree to abide by strict
rules as to how it does business
• used primarily by service firms

15-12
HOW CAN FIRMS
ENTER FOREIGN MARKETS?

5. Joint ventures with a host country firm - a

firm that is jointly owned by two or more
otherwise independent firms
• most joint ventures are 50:50 partnerships

6. Wholly owned subsidiary - the firm owns 100

percent of the stock
• set up a new operation
• acquire an established firm

15-13
WHY CHOOSE
EXPORTING?
• Exporting is attractive because
• it avoids the costs of establishing local
manufacturing operations
• it helps the firm achieve experience
curve and location economies
• Exporting is unattractive because
• there may be lower-cost manufacturing
locations
• high transport costs and tariffs can
make it uneconomical
• agents in a foreign country may not act
in exporter’s best interest

15-14
WHY CHOOSE A
TURNKEY ARRANGEMENT?
• Turnkey projects are attractive because
• they are a way of earning economic returns
from the know-how required to assemble
and run a technologically complex process
• they can be less risky than conventional FDI
• Turnkey projects are unattractive
because
• the firm has no long-term interest in the
foreign country
• the firm may create a competitor
• if the firm's process technology is a source
of competitive advantage, then selling this
technology through a turnkey project is also
selling competitive advantage to potential
and/or actual competitors

15-15
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
• proprietary (or intangible) assets could be
lost
• to reduce this risk, use cross-licensing agreements

15-16
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

15-17
WHY CHOOSE JOINT
VENTURES?
• Joint ventures are attractive because
• firms benefit from a local partner's knowledge of the
local market, culture, language, political systems, and
business systems
• the costs and risks of opening a foreign market are
shared
• they satisfy political considerations for market entry

15-18
WHY CHOOSE JOINT
VENTURES?
• Joint ventures are unattractive because
• the firm risks giving control of its technology to its
partner
• the firm may not have the tight control to realize
experience curve or location economies
• shared ownership can lead to conflicts and battles for
control if goals and objectives differ or change over
time

15-19
WHY CHOOSE A
WHOLLY OWNED SUBSIDIARY?
• Wholly owned subsidiaries are
attractive because
• they reduce the risk of losing control
over core competencies
• they give a firm the tight control in
different countries necessary for global
strategic coordination
• they may be required in order to realize
location and experience curve
economies
• Wholly owned subsidiaries are
unattractive because
• the firm bears the full cost and risk of
setting up overseas operations

15-20
WHICH ENTRY MODE IS BEST?

Advantages and Disadvantages of Entry Modes

15-21
HOW DO CORE COMPETENCIES
INFLUENCE ENTRY MODE?

• The optimal entry mode depends on

the nature of a firm’s core
competencies
• When competitive advantage is based
on proprietary technological know-how
• avoid licensing and joint ventures unless
the technological advantage is only
transitory, or can be established as the
dominant design
• When competitive advantage is based
on management know-how
• the risk of losing control over the
management skills is not high, and the
benefits from getting greater use of brand
names is significant

15-22
HOW DO PRESSURES FOR COST
REDUCTIONS INFLUENCE ENTRY MODE?

• When pressure for cost reductions is high, firms

are more likely to pursue some combination of
exporting and wholly owned subsidiaries
• allows the firm to achieve location and scale economies
and retain some control over product manufacturing
and distribution
• firms pursuing global standardization or transnational
strategies prefer wholly owned subsidiaries

15-23
WHICH IS BETTER –
GREENFIELD OR ACQUISITION?
• The choice depends on the situation
confronting the firm
1. A greenfield strategy - build a subsidiary
from the ground up
• a greenfield venture may be better when the firm
needs to transfer organizationally embedded
competencies, skills, routines, and culture

15-24
WHICH IS BETTER –
GREENFIELD OR ACQUISITION?
2. An acquisition strategy – acquire an existing
company
• acquisition may be better when there are well-
established competitors or global competitors
interested in expanding

• The volume of cross-border acquisitions has

been rising for the last two decades

15-25
WHY CHOOSE ACQUISITION?

• Acquisitions are attractive because

• they are quick to execute
• they enable firms to preempt their competitors
• they may be less risky than greenfield ventures
• Acquisitions can fail when
• the acquiring firm overpays for the acquired
firm
• the cultures of the acquiring and acquired firm
clash
• anticipated synergies are slow and difficult to
achieve
• there is inadequate pre-acquisition screening
• To avoid these problems, firms should
• carefully screen the firm to be acquired
• move rapidly to implement an integration plan

15-26
WHY CHOOSE GREENFIELD?

• The main advantage of a greenfield venture is

that it gives the firm a greater ability to build
the kind of subsidiary company that it wants
• But, greenfield ventures are slower to establish
• Greenfield ventures are also risky

15-27
WHAT ARE STRATEGIC ALLIANCES?

• Strategic alliances refer to cooperative

agreements between potential or actual
competitors
• range from formal joint ventures to short-term
contractual agreements
• the number of strategic alliances has exploded in
recent decades

15-28
WHY CHOOSE
STRATEGIC ALLIANCES?
• Strategic alliances are attractive because they
• facilitate entry into a foreign market
• allow firms to share the fixed costs and risks of
developing new products or processes
• bring together complementary skills and assets that
neither partner could easily develop on its own
• help a firm establish technological standards for the
industry that will benefit the firm
• But, the firm needs to be careful not to give
away more than it receives

15-29
WHAT MAKES
STRATEGIC ALLIANCES SUCCESSFUL?

• The success of an alliance is a function of

1. Partner selection
• A good partner
• helps the firm achieve its strategic goals and has the
capabilities the firm lacks and that it values
• shares the firm’s vision for the purpose of the
alliance
• will not exploit the alliance for its own ends

15-30
WHAT MAKES
STRATEGIC ALLIANCES SUCCESSFUL?
2. Alliance structure
• The alliance should
• make it difficult to transfer technology not meant to
be transferred
• have contractual safeguards to guard against the
risk of opportunism by a partner
• allow for skills and technology swaps with equitable
gains
• minimize the risk of opportunism by an alliance
partner

15-31
WHAT MAKES
STRATEGIC ALLIANCES SUCCESSFUL?
3. The manner in which the alliance is managed
• Requires
• interpersonal relationships between managers
• cultural sensitivity is
important
• learning from alliance partners
• knowledge must then be
diffused through the
organization

15-32