Entry Strategy for Internationalisation

Step 1

Why foreign firms enter/ Which foreign market(s) to enter?

This decision is a functions of (BCR)trade-off:

  • Size and growth of market
  • Market imperfections such as government intervention
  • Present and future wealth of the consumers in the market >Political stability
  • Type of economic system (i.e. market, command, mixed)

Timing of entry/ When to enter

first-mover advantages

  • Rapidly expand
  • Pre-empt rivals by establishing a strong brand name
  • Build up sales volume and ride down the experience curve
    ahead of rivals and gain a cost advantage over later entrants
  • Create switching costs that tie customers into products or services making it difficult for later entrants to win business
  • Pioneering costs due to the foreign business system being so different from that in a firm’s home market
  • 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

Scale of entry

Large scale entry

  • Strategic Commitments
  • May cause rivals to rethink market entry

Small scale entry

  • Time to learn about market
  • Reduces exposure risk

Step 2: Modes of entry

Exporting

Exporting is a way to increase market size and profits

  • Increasing due to lower trade barriers under the WTO and regional economic agreements such as the EU and NAFTA

Exporting firms need to:

  • Identify market opportunities
  • Deal with foreign exchange risk
  • Navigate import and export financing
  • Understand the challenges of doing business in a foreign market

Advantages

  • Avoids the costs of establishing local manufacturing
    operations
  • Helps the firm achieve experience curve and location
    economies

Disadvantages

  • 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

Licensing

An arrangement where a licensor grants the rights to intangible property (e.g. patents, inventions, formulas etc.) to another entity (i.e. licensee) for a specific period, and receives a royalty fee in return

Advantages

  • Avoids development costs and risks associated with opening a foreign market
  • Avoids barriers to investment
  • Capitalises on market opportunities without developing those applications itself
  • Minimal costs involved and allows the MNC to capitalise on the host country’s advantages

Disadvantages

  • Doesn’t allow tight control required for realising experience curve and location economies
  • Ability to coordinate strategic moves across countries is limited
  • Proprietary (or intangible) assets could be lost

Franchising

  • Specialised form of licensing
  • In addition to selling intangible property (e.g. trademark) to the franchisee, the franchiser insists on the franchisee agreeing to abide by strict rules on business operations
  • Primarily employed by service firms

Advantages

  • Avoids the costs and risks of opening up in a foreign market
  • Firms can quickly build a global presence

Disadvantages

  • 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 franchisees can make it difficult to detect poor quality
  • Quality control is difficult with a large number of franchisees

International Strategic alliances (ISAs)

cooperative agreements between potential or actual competitors

Advantages

  • 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

Disadvantages

  • Competitors get low cost route to technology and markets.
  • Therefore, firms need to be careful not to give away more than it receives

FDI: International Joint ventures (IJVs)

A new separate jointly owned firm is formed, but the original companies continue to exist on their own
50-50 joint venture (A+B=AB)

Advantages

  • Benefit from a local partner's knowledge of local conditions, culture, language, political systems, and business systems
  • The costs and risks of opening a foreign market are shared
  • Satisfy political considerations for market entry

Disadvantages

  • Risks giving control of its technology to its partner
  • May not have tight control to realise experience curve or location economies
  • Shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time

FDI: Wholly owned subsidiaries (WOS)

The firm owns 100% of the stock

greenfield investment (GFI)

where a firm sets up a new operation in a foreign country;

100% acquisition

where a firm (also may be eventually) acquires an established firm in the host nation and uses it to promote its products

Advantages

  • No risk of losing technical competence to a
    competitor
  • Tight control of operations
  • Realise learning curve and location economies

Disadvantages

  • Bear full cost and risk of setting up overseas
    operation

Mergers & Acquisitions (M&A)

When two firms merge, they cease to exist as
independent firms (Co-ownership: A+B=C)

  • U.S.-based Anheuser--Busch merged with Beligium's InBev

Acquisitions:

  • When more than 50% of the target firm is acquired

Advantages

  • Firms already in operation
  • Competitors want to enter the region
  • Quick to execute
  • Preempt competitors
  • Possibly less risky

Disadvantages

  • Disappointing results
  • Overpay for firm
  • inadequate pre-acquisition screening
  • Culture clash
  • Problems with synergies

Advantages

  • Maybe no competitors
  • Can build subsidiary it wants
  • Seeking to exploit ownership advantages
  • Easy to establish operating routines

Disadvantages

  • Slow to establish
  • Risky
  • Preemption by aggressive competitors

core competency

Core competencies allow significant profit growth and customer value through brand value and brand image

When competitive advantage is based on 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

A firm’s entry mode is shaped by its core competencies, pressures for cost reduction and risks i.e., BCR trade-off in general