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Topic 11 : Entering Foreign Markets - Coggle Diagram
Topic 11 : Entering Foreign Markets
Types of Entry Mode
Exporting
Advantages
avoids the costs of establishing local
manufacturing operations
helps the firm achieve experience
curve and location economies
Disadvantages
lower-cost manufacturing
in other locations
high transport costs and tariffs can make
it uneconomical
agents in a foreign country may not act in
exporter’s best interest
Turnkey Projects
Usually Performed By :
Industrial-equipment
Construction
Consulting Companies
Governmental Agencies
Advantages
One company contracts with another to build complete, ready to operate facilities
A way of earning economic returns from the know-how required to asssemble and run a technologically comple processes
Less risky than conventional FDI
Disadvantages
No long term interest in foreign country
Firm may create competitor
Selling techonolgy through a turnkey project equivalent to selling competitive advantage to competitors
Licensing
A licensor grants the rights to intagible property to the license for a specified time period, and in return, receives a royalty fee form the licenses
Advantages
Firms avoids development costs and risk associated
Firms avoid barriers to investment
Firm capitalize on market opportunities without developing those applications itself
Disadvantages
Firm doesn't have the tight control required for realizing experience curve and location economies
Firm's ability to coordinate straegic moves across country is limited
Possible lost of proprietary
Franchising
Specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists them to agree to strict rules imposed
Advantages
Avoides the costs and risks of opening up a foreign market
Firms can quickly build a global presence
Disadvantages
Inhibit firms ability to take profits out of oone country to support competitive attacks in another
DIstances problems leads to the difficulty to detect poor quality
Joint Ventures
Firm that is jointly owned by two or more independent firms
Advantages
Benefit from a local partners's knowledge of local conditions, culture and more
Costs and risks are shared
Satisfy political considerations for market entry
Disadvantages
Giving control of technology to partners
May not have tight control to experience curve and location economies
Conflicts and battles for control
Wholly Owned Subsidiary
Firm owns 100% of the stock
Advantages
Reduce the risk of losing control over core competencies
Tight control over operations in different countries
Required to realize location and experience curve economies
Disadvantages
Firm bears full cost and risk setting up overseas operations
Factors affecting choice of entry mode
• Transport costs
• Trade barriers
• Political risks
• Economic risks
• Costs
• Firm strategy
Markets to enter
Favorable market : 1. Politically stable, 2. Free market system, 3. Low inflation rates, 4. Low private sector debt
Less desirable markets : 1. Politcall unstable, 2. Mixed or command economies, 3. High inflation rates, 4. Excessive levels of borrowing
When to enter?
First mover
More time to accumulate and master technical knowledge
access to scarce
assets
inconvenient or costly to switch
Later Entrant
costs of business failure
costs of promoting and establishing
a product offering