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Entering the International Market - Coggle Diagram
Entering the International Market
Concerns and issues of going international
A business strategy, marketing strategy, and managerial considerations determine the factors a company examines when it decides to enter a new foreign market.
Motivation
Increasing international trade liberalization and the gradual decline of barriers to trade and investment have created a business environment where almost every firm is likely to be subject to international competition.
As a result the nature of international business has changed and many international firms have developed a home market on a broad multi-country regional basis, instead of a single national market.
Increased global competition through the expansion of many global firms throughout the world is a frequent factor that leads companies to counterattack by similar moves in other markets.
Another frequent phenomenon is that a company follows its clients when they expand abroad, especially in the case of service provision, while some of the latter greatly value the possibility of maintaining their preferred provider even at an international level.
Concerns, Risks, and Issues
A broad initial distinction should be made between the option just to export and distribute certain products or services
Foreign market
Alternative methods for foreign market entry:
Foreign production sources
Contract manufacture
Licensing
Assembly
Joint venture
Full ownership
Production in home market
Indirect export
Export management company
Piggyback
Trading company
Direct Export
Foreign distributor
Agent
Marketing subsidiary
International Business Research: Determining International Business Research Objectives
Decision making for the appropriate marketing mix that will subsequently allow the firm to build a competitive position within the targeted foreign market will have long-lasting consequences for the firm.
Therefore, careful market segmentation and selection constitutes the cornerstone of effective business and marketing planning allowing for an optimal market entry choice.
Important additional ways to estimate potential demand and market attractiveness/potential should be considered in the form of visiting major trade fairs, where all major firms active in the given sector participate, allow- ing for a fast overview of the competitive activities.
Distribution and Sales Channel Identification
In export marketing type of foreign market entry, firms are concerned about the degree of market coverage that agents, distributors, or export management companies (EMCs) claim they can achieve.
Market coverage and degree of market penetration are key factors for successful marketing performance in the foreign market.
Contractual Entry Modes
Licensing
This form of foreign market entry is based on a contractual relationship where the licensor is the firm that possesses an asset in the form of a patent (or the know-how to produce a product or provide a service) and the licensee is a firm in the host country that is willing to exchange the use of the foreign firm’s technology in the host market with a certain remuneration (generally the payment of royalties).
Advantages
Adequate marketing information and control through access to low- cost information about local market performance and competitive reactions, as soon as the licensed product enters the local market.
Fast market access and more importantly the ability to circumvent barriers to foreign entry that have been imposed through quotas, high tariffs, or limited licensing to local firms.
Appealing to small companies that lack resources due to low risk and capital commitment, while maintaining improved delivery and service levels in local markets.
Disadvantages
Limited flexibility to apply sophisticated technology and marketing advances at a later stage.
Licensee may not be committed to this particular product line, and thus possible marketing underperformance may not be controlled.
Limited profit potential in case the product is more successful than initially thought.
Franchising
The difference lies rather on the type of operations, with services being the favored area to develop a franchise type of activity. The firm that has developed the know-how about the provision of a certain service is thus called the franchisor, while the franchisee is the firm that agrees to use the trademark, brand name, and other product- or service-related technology against an agreed remuneration in the form of royalties.
Advantages
High franchisee motivation to achieve objectives, boosting profits as they are closely tied to their own efforts.
Rapid entry and expansion in the foreign market without any major risk assumption or capital investment requirements.
Disadvantages
Limited control over the franchisees’ operations, difficulty in supervising performance and high-quality standards.
Absence of a master franchisee in a certain country might cause entry delay.
Foreign Manufacturing
International firms engage in contract production or contract manufacturing either within a framework of allocating low-cost production facilities in many countries around the globe (depending mostly on the local labor market conditions prevailing at that period of time) or because this is the only market access possible due to government limitations and other local conditions.
Advantages
Labor cost advantages
Lower political and economic risk
Disadvantages
Backlash from the company’s home market employees and labor unions due to the loss of employment in the home country
Issues of quality and production standards (strict codes of ethical and total quality conduct should be imposed on subcontractors).
Investment Entry Modes
Mergers and Acquisitions
Acquisition refers to the purchase of sufficient stock of an already existing firm in order to gain control, whereas in a merger two or more firms might form a new company, by pooling resources and assets and sharing equity of the new firm according to the valuation of the resources each contributed.
Advantages
Acquisitions of assets, in the form of qualified personnel, management skills, clientele, providers, and possibly existing long-term contracts.
Quick foreign market access, sometimes even the only available way to access the market if there is either a government restriction or the market structure does not leave room for a new entrant
Disadvantages
Adaptation difficulties, delays, and increased cost in case of incompatible assets, resources, and tangible (location, infrastructure) and intangible (business culture) elements of the acquired firm.
Joint Ventures
Recent literature on IJVs summarizes the conditions conducive to IJVs as the possession of complementary assets, opportunities for collusion, and barriers to full integration economic, financial, legal, or political.
Advantages
Creation of synergy, through complementing assets and resources or
sharing costs and risks
Quick access to distribution network
Disadvantages
Lack of full control
Susceptibility to mistrust and culturally related conflicts
Greenfield Operations
A Greenfield investment entails building a subsidiary from scratch and usually targets local production and marketing in the host market
Advantages
Greater control, flexibility, and higher profits
Ability of the investor to manage and control marketing, production,
and sourcing decisions.
Disadvantages
Issues of cultural and economic sovereignty of the host country.
Higher risks due to full ownership
Foreign Direct Investment
Early literature on foreign market entry focused on the choice between exporting and foreign direct investment (FDI).
The cost-based view of this decision suggested that the firm must possess a certain advantage that would overcome the cost of “foreignness.”
Foreign market entry involves two interdependent decisions on location and mode of control but FDI is (by definition) foreign-located and administratively controlled.
Portfolio investments by multinational corporations
In order to maintain a balanced investment portfolio, MNCs regularly invest in foreign firms by acquiring a relatively small percentage of their equity capital.
MNCs are always alert about the option of proceeding to a more direct way for entering a foreign market through one of the following foreign market entry modes.
Foreign Market Entry Strategies
Export Marketing
Export and import activities lead the international economic development course of the modern era
Imposing market protection measures through various types of barriers to entering a specific market has been part of the economic policy of many national governments for a long time.
Tariffs and duties are the two main market protection instruments used in such policies, while non-tariff trade barriers of various types are also frequently practiced with results equal or similar to those obtained with market protection.
For various other reasons (safety, local traditions, convenience, special local conditions, etc.), governments may also adopt other restrictive administrative and technical regulations that effectively act as a barrier to international trade and exports to a certain market.
Export Market Entry Modes
Indirect exports
Export management companies (EMCs) undertake the full export department operations of a firm on its behalf, but without charging an equally high amount, as they simultaneously perform the same function for several firms.
Direct exporting is favored as an export market entry mode when the firm depends on its foreign market operations at a higher level and either wishes or needs to commit more resources in these operations
A key factor in an export plan is the selection of the level and the type of physical presence in the foreign market.
International logistics and transportation issues related to foreign market entry
The importance of selecting the foreign partner and the foreign firm that is going to be delivering to clients in the host country cannot be emphasized often enough.
When a firm is considering selecting a foreign distributor it is in most cases simultaneously selecting a market segment, due to the fact that supply chains tend to develop in a selective if not exclusive way.
Main Issues should be considered:
The level of infrastructure and IT integration for modern logistical applications
Key infrastructure (e.g., “hot” or “cool” network infrastructure is often of utmost importance for foreign expansion in the food and drink sector, just like the number of stores for other merchandise)
Personnel quality and competence