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