Entry and Expansion

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 Learning Objectives
To learn how firms gradually progress
through an internationalization process.
To understand the strategic effects of
internationalization.
To study the various modes of entering
international markets.
To understand the role and functions of
international intermediaries.
To learn about the opportunities and
challenges of cooperative market
development.
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 International
Management
Successful international managers tend
to:
Be active
Be aggressive
Display a high degree of international orientation

Managerial commitment is critical

because foreign market penetration
requires a vast amount of market
development activity, sensitivity toward
foreign environments, research, and
innovation.
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 The Steps to Developing
International Commitment
Become aware of
international business
opportunities.
Determine the degree of the
firm’s internationalization.
Decide the timing of when
to start the
internationalization process
and how quickly it should
progress.
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 Motivations for Going
International
Proactive Reactive Motivations
Motivations Competitive
Profit advantage pressures
Unique products Overproduction
Technological Declining domestic
advantage sales
Exclusive Excess capacity
information Saturated domestic
Tax benefit markets
Economies of scale Proximity to
customers and ports
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Psychological Distance
Sometimes cultural variables, legal
factors, and other societal norms
make a foreign market that is
geographically close seem
psychologically distant.
The two major issues of
psychological distance are:
Some of the distance seen by firms is
based on perception rather than reality.
Closer psychological proximity makes it
easier for firms to enter markets.
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 Profit Risk During Early
Internationalization
In the short term, firms may experience
increased risk and decreasing profits
when going international.
Market
Profit Gap
International
Before
Going

Risk
International Experience

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 The Keys to Successful
International Performance
Effectiveness

Efficiency Competitive
Strength

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International Entry
Strategies
Exporting
Importing

Licensing

Franchising

Foreign Direct Interfirm

Investment Cooperation
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Exporting and Importing
Firms can export and import using two
methods:
Indirect involvement means that the firm
participates in international business
through an intermediary and does not deal
with foreign customers or markets.
Direct involvement means that the firm
works with foreign customers or markets
with the opportunity to develop a
relationship.
Firms decide on the desired method by
implementing transaction cost theory.
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 International
Intermediaries
Importers and exporters often use
international intermediaries who
provide assistance in:
Documentation
Financing
Transportation
Identification of foreign suppliers and
trading companies
Providing business contacts

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 Export Management
Companies
Firms that specialize in
performing international
business services for other
companies are known as
export management
companies (EMCs)
The two primary roles of
EMCs are:
Agents
Distributors

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 Trading Companies
Trading companies help firms by importing,
exporting, countertrading, investing, and
manufacturing.
The sogashosha of Japan are the most
powerful trading companies in the world for
four reasons:
They efficiently gather, evaluate, and translate market
information into business opportunities.
Economies of scale give them preferential treatment.
They operate around the world, not just Japan.
They have vast quantities of capital.
In the U.S., export trading company legislation
is designed to improve the export performance
of small and medium-sized firms.
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 Facilitators
Facilitators are entities outside the
firm that assist in the process of going
international by supplying knowledge
and information.
Private sector facilitators include:
Banks
Accounting firms
Consulting firms
Public sector facilitators include:
Departments of commerce
Export-Import Banks
Educational Institutions
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 Licensing
Under a licensing agreement, one firm
permits another to use its intellectual
property for compensation designated
as royalty.
The property licensed may include:
Patents
Trademarks
Copyrights
Technology
Technical know-how
Specific business skills
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 Benefits and Costs of
Licensing
Benefits Costs
It requires neither It is a very limited form
capital investment nor of foreign market
detailed involvement participation.
with foreign customers. It does not guarantee a
It capitalizes on basis for future
research and expansion.
development already The licensor may create
conducted. its own competitor.
It helps avoid host
country regulations
applicable to equity
ventures.
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 Franchising
Franchising is the granting of the right by a
parent company to another independent
entity to do business in a prescribed manner.
The major forms of franchising are:
Manufacturer-retailer systems such as car
dealerships,
Manufacturer-wholesaler systems such as soft drink,
companies
Service-firm retailer systems such as fast-food
outlets.
To be successful, the firm must offer unique
products or propositions, and a high degree
of standardization.
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 Key Reasons for
Franchising
Market Potential

Financial Gain Saturated Domestic

Markets

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 Interfirm Cooperation
A strategic alliance is an arrangement
between two or more companies with a
common business objective.
To better compete, many companies form
strategic alliances with suppliers,
customers, competitors, and companies
in other industries to achieve goals.
Reasons for interfirm cooperation
include:
Market development
To share risk or resources
To block and co-opt competitors
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 Types of Interfirm
Competition
Number of Partners
Equity 2 More than 2
Informal Cooperation
None
(no binding agreement)

None Contractual
Agreement
Consortia
New Joint Venture

Equity
Some Participation

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 Contractual
Agreements
Strategic alliance partners may join forces
for R&D, marketing, production, licensing,
cross-licensing, cross-market activities, or
outsourcing.
Contract manufacturing allows the
corporation to separate the physical
production of goods from the R&D and
marketing stages.
Management contracts involve selling one’s
expertise in running a company while
avoiding the risk or benefit of ownership.
A turnkey operation is a contractual
agreement that permits a client to acquire a
complete system following its completion.
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 Equity Participation
Some companies have
acquired minority ownerships
in companies that have
strategic importance for them.
Reasons for engaging in
equity participation include:
It ensures supplier ability
It builds working relationships
It creates market entry and
support of global operations
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 Joint Ventures
A joint venture involves the participation
of two or more companies in an
enterprise in which each party
contributes assets, has some equity, and
shares risk.
The 3 reasons for establishing a joint
venture are:
Government policy or legislation.
One partner’s needs for another partner’s skills.
One partner’s needs for another partner’s
attributes or assets.
The key to a joint venture is the sharing
of a common business objective.
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 Managerial
Considerations
Issues to address before the formation of a venture include:

1. clear definition of the venture 7. government assistance,

and its duration, 8. transfer of technology,
2. ownership, control, and 9. marketing arrangements,
management, 10. environmental protection,
3. financial structure and policies, 11. record keeping and
4. taxation and fiscal obligation, inspection, and
5. employment and training, 12. settlement of disputes.
6. production,

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 Full Ownership
For some firms, foreign direct investment
requires full ownership. Reasons include:
An ethnocentric approach
Financial concerns
In order to make a rational decision
about the extent of ownership,
management must evaluate the extent to
which total control is important to the
success of its international marketing
activities.
Increasingly, the international
environment is hostile to full ownership
by multinational firms.
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 International Market
Entry and Development
Model
Domestic
Focus

Alternative Level of Motivations

Strategies Management Concerns
•Proactive
•Trading Commitment •Information
•Aware •Reactive
Export/Import •Mechanics
Multination
•Licensing/ •Interested •Communication
al Franchising •Trial •Sales Effort
Focus
•Local •Evaluation Inter- •Service
presence mediaries
•Adaptation •EMC •Regulations
alliances
full ownership •Trading Co.
•Facilitators
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