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Entry Strategy Chapter 12. 14 - 2 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights.

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Presentation on theme: "Entry Strategy Chapter 12. 14 - 2 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights."— Presentation transcript:

1 Entry Strategy Chapter 12

2 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved.

3 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Key issues of entry strategy Any firm contemplating foreign expansion must struggle with several decisions -Which foreign market(s) to enter choose based on long-run profit potential -Market size -Growth rate -Political stability -Competition -When -On what scale -Which mode of entry

4 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. When to enter? Advantages associated with entering early are “first-mover advantages” -Ability to preempt rivals, establishing a strong brand name quickly -Ability to build sales volume -Ability of early entrants to create switching costs Disadvantages are “first-mover disadvantages” -Pioneering costs - costs only an early entrant has to bear -Possibility that regulations may change

5 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Scale of Entry Large scale entry -Strategic Commitments - decisions that have long-term impact and are difficult to reverse Local distributors, partners will take you seriously -May cause rivals to rethink market entry -But may lead local firms to attack aggressively Small scale entry -Time to learn about market -Reduces exposure risk -But fast-moving competitor may beat you

6 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved.

7 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Entry Modes Firms can use six different methods to enter a market -Exporting -Wholly Owned Subsidiaries (the most common kind of foreign direct investment) -Licensing -Franchising -Joint Ventures -Turnkey Projects

8 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved.

9 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Wholly Owned Subsidiary (i.e., Foreign Direct Investment) Advantages: -No risk of losing technical competence to a competitor -Tight control of operations -Realize learning curve and location economies Disadvantage: -Very expensive -Bear full cost and risk Subsidiaries could be greenfield investments or acquisitions

10 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Exporting Advantages: -Avoids cost of establishing manufacturing operations -May help achieve experience curve and location economies Disadvantages: -Possible high transportation costs -Tariff barriers -Possible lack of control over marketing reps

11 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Licensing and franchising Licensing -Reduces development costs and risks -Works in unfamiliar or politically volatile market -Overcomes investment barriers -Others can develop business applications of your know-how Franchising -Reduces costs and risk -May prohibit movement of profits from one country to support operations in another -Quality control Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties. Franchiser sells intagible property and insists on rules for operating business

12 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Joint Ventures Advantages: -Benefit from local partner’s knowledge -Shared costs/risks with partner -Reduced political risk Disadvantages: -Risk giving control of technology to partner -May not realize experience curve or location economies -Shared ownership can lead to conflict

13 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Turnkey projects Advantages: -Can earn a return on knowledge asset -Less risky than conventional FDI Disadvantages: -No long-term interest in the foreign country -May create a competitor -Selling process technology may be selling competitive advantage as well Contractor agrees to handle every detail of project for foreign client

14 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Core Competencies and Entry Mode Technological Know-How -Avoid licensing and joint- venture arrangements -Probably use a wholly owned subsidiary Exception: If the technological advantage is only transitory Management Know-How -The firm’s valuable assets include a brand name -Either franchising or wholly owned subsidiaries may work well -Often times a joint venture is politically more acceptable If what you are good at is…


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