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MARKET ENTRY MODES FOR INTERNATIONAL BUSINESS international-market-entry…
MARKET ENTRY MODES FOR INTERNATIONAL BUSINESS
TYPES
CONTRACTUAL
MODES
TURNKEY
OPERATIONS
Advantages
Potential higher profit
Chance of a permanent presence on the foreign market(s) after the completion of the investment
Ability to earn returns from technology in countries where
FDI
is restricted
Disadvantages
Require high costs
Difficult to implement
High financial risks
Any complete construction of any industrial plant abroad
SUBCONTRACTING - ASSEMBLY OPERATIONS
Part fit-up & shimming operations
Drilling operations
Fastener operations
Repair and overhaul operations
Advantages
Low capital commitment
Low risks
Disadvantages
Relatively low profitability
Inability to gain international experience
Weak positions of the exporter in negotiations with the consignee
The foreign counterpart shall have a domestic manufacturing company to execute a specific order (components or semi-finished products)
MANAGEMENT
CONTRACTS
Advantages
Low capital commitment
Low risks
Gaining experience on the foreign market (s) by domestic managers
Can be regarded as a
"substitute"
form of foreign market entry
Disadvantages
Relatively low profitability
An exporter provides management services for a company that is owned by the importer
LICENSING
Advantages
Low entry costs
Low financial risk
Ensuring a steady income
Strong presence in foreign markets by commercial brand and logo
The licensee knows the local conditions
Does not require a large commitment of staffing
Disadvantages
Possibility to lose control over technology and know-how
Lack of control over the maintenance of the quality on the foreign markets
Threat of disloyalty of the licensee
Relatively low income (royalties) compared to other modes
Sales abroad of rights covered by a patent or design or any intellectual property to be used for commercial purposes
FRANCHISING
Sales of the rights by the domestic franchisor to conduct commercial activity by a foreign franchisee
Advantages
Low entry costs
Possibility of rapid foreign expansion
Possibility of a simple expansion of both the large and distant market
Disadvantages
Requires some control costs
Sharing profits gaining from foreign markets between the foreign franchisee(s) and a domestic franchisor
Requires appropriate qualifications of franchisees
Possibility of difficulties in maintaining uniform standards & quality
Possibility of franchisee(s) disloyalty
INVESTMENT
MODES
JOINT VENTURE SUBSIDIARY
WHOLLY-OWNED SUBSIDIARY
BRANCH
Disadvantages
Relatively complicated registration procedures
The creation of an organizational unit of the parent company on a foreign market, which is an organizational and legal part of the company
Advantages
Full control - holding centralized control
Relatively good image of the branch on the local market
EXPORTING
MODES
DIRECT EXPORT
International representative office
Foreign agent
Foreign distributor
Own distribution network
Direct export through a
foreign distributor
(as a foreign intermediary) -->
Direct export through a
representative office
-->
Direct export through a
foreign agent
(as a foreign intermediary). -->
Direct export through a
own foreign distribution network
-->
COOPERATIVE EXPORT
Export grouping (consortia)
Piggybacking
Advantages
Distribution of costs for partners
Synergy effect
Disadvantages
Dependency on the export partner(s)
INDIRECT EXPORT
ECH: export commission housing
Export / Import broker
EMC: Export management company
ETC: Export trading company
Advantages
Low entry costs
Low financial risks
Entry difficulties are lied on the domestic intermediary
Low staffing requirements
Lack of marketing costs
Least complicated mode
-Relatively simple extension of sales markets
Disadvantages
Low profitability of the transactions
Full dependency on the domestic intermediary
Lack of knowledge on the foreign markets (s)
Inability to gain international experience
The domestic intermediary can find a better provider
-An intermediary may itself start the production in the country
The sales of goods or services through the domestic intermediary
CRITERIA
FOR
SELECTION
HOLLENSEN
Country risk and/or demand uncertainty
Market size & Growth
Sociocultural distance between home country and host country
direct and Indirect trade barriers
Transaction-
Specific costs
Tactic nature of know-how
Opportunistic behavior
Transaction costs
Intensity of competition
Desired Model
Characteristics
Risk averse
Control
Flexability
Small number of relevant export intermediaries available
Internal Factors Product
Firm size
International experience
Product complexity
Product differentiation advantage
CULLEN
&
PARBOTEEAH
<-- Product
<-- Transport
<-- Company resource
<-- Local government
<-- Need for control
<-- Geography
<-- Strategic Intent
<-- Culture
BAORAKIS,
KATSIOLOUDES
& HADJIDAKIS
Scope of risk
Scope of management commitment
Scope of potential profit
Scope of capital commitment
Scope of input cost
Scope of control
References
Krzysztof, W.(2014).
Market entry modes for international business
. Retrieved from
https://e-aulas.urosario.edu.co/pluginfile.php/2049058/mod_resource/content/1/Market-entry-modes-for-international-businesses.pdf
Exporter's situation
Immediate profit
vs
Learn the market
High
vs.
Low
International Expertise
vs
Strong financial position
Easy to adopt
vs
Difficult to adopt
Easy to transport
vs
Difficult to transport
Large cultural distance
vs
Small cultural distance
Long distance
vs
Short distance
Favorable regulations
vs
Unfavorable regulations
-
JOINT
VENTURE
Advantages
Synergy effect
Combination of knowledge of the exporter and a local partner
Spreading risk
Good image of such a company on the local market (politically acceptable)
Disadvantages
High entry costs
High risk
Potential conflicts of the exporter and the partner
Complicated registration procedures
The creation of a foreign subsidiary jointly controlled (minority & majority interests) by the parent company and the foreign partner
WHOLLY-
OWNED
Advantages
Full control - holding centralized control
Good image of such a company on the local market
Potentially the highest profitability
Disadvantages
High entry costs
High risks
Complicated registration procedures
The creation of a foreign subsidiary wholly owned (100%) by a parent company
Subsidiaries can be
Mixed subsidiary
miniature replicate
strategic independent
Production subsidiary
rationalized manufacturer
product specialist
Trading subsidiary
Market satellite
.
.
the investments can be:
brownfield (Mergers & Acquisitions)
greenfield (investing from the beginning)
-
Disadvantages
Low profitability of transactions
High dependence on the foreign agent
Inability to gain international experience
Advantages
Low entry costs
Moderate financial risk
The agent overcomes the difficulties
of entry
-
Disadvantages
An agent can find a better provider
High transport costs
Potential trade barriers
Advantages
Relatively los staffing requirements
Lack of marketing costs
-
Disadvantages
Relatively high costs of maintaining a representative office
High transport costs
Potential trade barriers
Advantages
Physical presence on the foreign markets
Direct contact with foreign customer
Permanent possibility to respond to foreign markets
-
Disadvantages
High entry costs
High cost of maintaining the own distribution network
Time-consuming of building up their own distribution network
Advantages
Physical presence on foreign markets
Very good direct contact with foreign customer
Full control over the sales process
Relatively high profitability compared with other modes
