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Entry Strategy
Chapter 12
14 - 2
McGraw-Hill/Irwin
International Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 3
Key issues of entry strategy
• Any firm contemplating foreign expansion must
struggle with several decisions
- Which foreign market(s) to enter
• choose based on long-run profit potential
-
Market size
Growth rate
Political stability
Competition
- When
- On what scale
- Which mode of entry
McGraw-Hill/Irwin
International Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 4
When to enter?
• Advantages associated with entering early are
“first-mover advantages”
- Ability to preempt rivals, establishing a strong brand name
quickly
- Ability to build sales volume
- Ability of early entrants to create switching costs
• Disadvantages are “first-mover disadvantages”
- Pioneering costs - costs only an early entrant has to bear
- Possibility that regulations may change
McGraw-Hill/Irwin
International Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 5
Scale of Entry
• Large scale entry
- Strategic Commitments - decisions that have long-term
impact and are difficult to reverse
• Local distributors, partners will take you seriously
- May cause rivals to rethink market entry
- But may lead local firms to attack aggressively
• Small scale entry
- Time to learn about market
- Reduces exposure risk
- But fast-moving competitor may beat you
McGraw-Hill/Irwin
International Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 6
McGraw-Hill/Irwin
International Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 7
Entry Modes
• Firms can use six different methods to enter a market
- Exporting
- Wholly Owned Subsidiaries (the most common kind of
foreign direct investment)
-
Licensing
Franchising
Joint Ventures
Turnkey Projects
McGraw-Hill/Irwin
International Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 8
McGraw-Hill/Irwin
International Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 9
Wholly Owned Subsidiary
(i.e., Foreign Direct Investment)
• Advantages:
- No risk of losing technical competence to a competitor
- Tight control of operations
- Realize learning curve and location economies
• Disadvantage:
- Very expensive
- Bear full cost and risk
• Subsidiaries could be greenfield investments or
acquisitions
McGraw-Hill/Irwin
International Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 10
Exporting
• Advantages:
- Avoids cost of establishing manufacturing operations
- May help achieve experience curve and location
economies
• Disadvantages:
- Possible high transportation costs
- Tariff barriers
- Possible lack of control over marketing reps
McGraw-Hill/Irwin
International Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 11
Licensing and franchising
• Licensing
Agreement where
licensor grants rights to
intangible property to another
entity for a specified period
of time in return
for royalties.
- Reduces development costs and risks
- Works in unfamiliar or politically
volatile market
- Overcomes investment barriers
- Others can develop business applications of your know-how
• Franchising
- Reduces costs and risk
- May prohibit movement of profits from
one country to support operations in another
- Quality control
McGraw-Hill/Irwin
International Business, 6/e & 7e
Franchiser sells
intagible property
and insists on rules
for operating business
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 12
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
McGraw-Hill/Irwin
International Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 13
Turnkey projects
• Advantages:
- Can earn a return on knowledge asset
- Less risky than conventional FDI
• Disadvantages:
Contractor agrees
to handle every
detail of project
for foreign client
- No long-term interest in the foreign country
- May create a competitor
- Selling process technology may be selling competitive
advantage as well
McGraw-Hill/Irwin
International Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 14
Core Competencies and
Entry Mode
If what you are good at is…
• Technological Know-How
- Avoid licensing and jointventure arrangements
- Probably use a wholly
owned subsidiary
• Exception: If the
technological advantage is
only transitory
McGraw-Hill/Irwin
International Business, 6/e & 7e
• Management Know-How
- The firm’s valuable assets
include a brand name
- Either franchising or
wholly owned
subsidiaries may work
well
- Often times a joint venture
is politically more
acceptable
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.