Presentation on theme: "LEARNING OBJECTIVES At the end of this chapter, the reader should be able to: Explain the three basic decisions before entering a foreign market Explain."— Presentation transcript:
1 INTERNATIONAL BUSINESS An Introduction CHAPTER 7 International Entry Strategies
2 LEARNING OBJECTIVESAt the end of this chapter, the reader should be able to:Explain the three basic decisions before entering aforeign marketExplain the different mode of entry and its advantages and disadvantages.Identify which mode of entry suits the best for a firm
3 BASIC CONCEPTS AND DEFINITION In order to enter into foreign market, a firm needs to justify the three basic decisions; where to enter, when to enter, and how to enter. Entering foreign market is one of the strategic decisions of a firm because it is must be in line with firm’s strategy and nature of business.
4 WHERE TO ENTERWhere to enter relates to the location of foreign expansion. Right locations will realize the long-run profit potential of the firm. A firm can gain location advantage via demand and factor condition of that selected country.● Demand conditions arise from consumer base and growth of the market● Factor conditions are referred to availability of resources such as labor, raw material and land in that country.
5 WHEN TO ENTERThe timing of entry usually produces two significant issues, whether the firm becomes the first mover or the late mover.A firm who enters foreign market earlier than its competitors is said to gain the first mover advantages.A firm who gain the first mover advantages could first capture the demand due to the strong demand established.First mover will be also associated to some disadvantages which also known as the pioneering costs. They also needs to allocate a substantial amount of marketing expenses.
6 HOW TO ENTER Exporting Advantages of Exporting a) A firm needs no substantial investmentb) Exporting is can be used by a firm to evaluate the market and achieve economies of scale.Disadvantages of Exportinga) Tariff barriers (i.e. import tax) and transportation costs b) Exporting is inappropriate when firm can identify low- cost location to manufacture the productc) A firm needs to hire third party who act as the distributor to sell the product and it may not perform the task efficiently as the firm does at home country.
7 HOW TO ENTER Licensing Advantages of Licensing a) minimize the cost and risk associated with foreign market.b) Suitable for a firm that is unwilling to commit substantial investment into the foreign market.c) Licensing is attractive for a firm that lacking of capital to venture into foreign market.Disadvantages of Licensinga) A firm does not have the tight control over manufacturing and marketingb) The licensee could become the firm’s competitor by setting up its own operations.c) Licensing limits a firm’s ability to coordinate strategic moves d) Licensing could result to potential loss of proprietary or intangible property and technology and know-how.
8 HOW TO ENTER Franchising Advantages of Franchising a) The costs of setting up business in foreign market assume by the franchisee.b) A firm can build a global recognition quickly and assume low costs and risks.Disadvantages of Franchisinga) Franchising could jeopardize the quality standard created by the franchiser and this could result to lost sales.b) Franchising inhibit the firm's ability to take profits out of the host country.
9 HOW TO ENTER Joint Ventures or Strategic Alliances Advantages of Joint Ventures or Strategic Alliancesa) ease the process to enter new market by collaborating with an established local partner.b) share costs and risksc) develop complementary skillsd) creating brand awareness among the consumers in the foreign market.e) partners could access the resources and this will result to economies of scaleDisadvantages of Joint Ventures or Strategic Alliancesa) risks giving control of the technology to the partner.b) Firms may not have the tight control over subsidiaries.c) Shared ownership can lead to conflicts due to different views among the partners.
10 HOW TO ENTER Wholly Owned Subsidiary Wholly owned subsidiary is a traditional foreign direct investment (FDI), The set up ofwholly owned subsidiary could be done in two ways.Greenfield Operation, whereby a firm invests directly in manufacturing operations or other facilities.Acquisition is when a firm acquires existing or local firms in the foreign market.
11 HOW TO ENTERAdvantages of Wholly owned Subsidiary (Greenfield operation) a) A firm acquires host country’s resources in producing its product International b) Greenfield operations will result to economies of scale c) The ultimate control over investment can protect firm’s know- how and technology d) Greenfield operation provides firm with learning effect in which products would adapt to local taste and preference Disadvantages of Wholly owned Subsidiary (Greenfield operation) a) Greenfield ventures are sometimes slower to establish because the learning process is time consuming b) Greenfield ventures bear risks similar to the first mover
12 HOW TO ENTER Advantages of Wholly owned Subsidiary (Acquisition) a) Acquisition provides firm with speedy market penetration.b) Gain access to existing market share.Disadvantages of Wholly owned Subsidiary (Acquisition)a) A firm (i.e. acquiring firm) might pay the acquisition transaction higher than acquired firm’s fair value.b) Acquisition will result to clash of cultures between the acquiring and acquired firm.