1. Global Business Today 6e
by Charles W.L. Hill
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Entering Foreign Markets
Chapter 12
Entering Foreign Markets

3. Introduction Firms can enter foreign markets through exporting
Question: How can firms enter foreign markets?
Firms can enter foreign markets through
exporting
licensing or franchising to host country firms
a joint venture with a host country firm
a wholly owned subsidiary in the host country to serve that market
The advantages and disadvantages of each entry mode is determined by
transport costs and trade barriers
political and economic risks
firm strategy

4. Basic Entry Decisions
Question: What are the basic entry decisions for firms expanding internationally?
A firm expanding internationally must decide
which markets to enter
when to enter them and on what scale
how to enter them (the choice of entry mode)

5. Which Foreign Markets?
Firms need to assess the long run profit potential of each market
The most favorable markets are politically stable developed and developing nations with free market systems, low inflation, and low private sector debt
The less desirable markets are politically unstable developing nations with mixed or command economies, or developing nations where speculative financial bubbles have led to excess borrowing
Success firms usually offer products that have not been widely available in the market and that satisfy an unmet need
Management Focus: Tesco’s International Growth Strategy
Summary
This feature describes Tesco’s international expansion strategy. Tesco, the British grocer, has established operations in a number of foreign countries. Typically, the company seeks underdeveloped markets in developing nations where it can avoid the head-to-head competition that goes on in more crowded markets, and then enters those markets via joint ventures where the local partner provides knowledge of the market while Tesco provides retailing expertise. Discussion of the feature can revolve around the following questions:
Suggested Discussion Questions
1. Reflect on Tesco’s decision to expand internationally primarily through establishing operations in developing countries. What makes these countries attractive to Tesco?
Discussion Points: When companies make the decision to expand into new markets, they must balance the benefits, costs, and risks of doing business in each market. In Tesco’s case, developing markets were attractive not only because of their size, but also because of the likely future wealth of customers. To increase its chances for success, Tesco has focused on those markets where there are few capable indigenous competitors. Today, Tesco has more than 800 stores outside its home country of the United Kingdom, which generate £7.6 in annually revenues.
2. Why does Tesco believe it is important to transfer its core capabilities to new ventures? How have the company’s partners helped it find success in foreign locations?
Discussion Points: Tesco’s success in international markets is remarkable. In 2005, every one of the company’s foreign ventures was profitable. The company attributes its success to the transfer of its core competencies to each location. At the same time, the company believes that local management is important, and so it hires locally, but provides oversight from the United Kingdom. Tesco also feels that its partners in Asia, and their deep knowledge of the local market have played a significant role in its success in the region.
Teaching Tip: To learn more about Tesco’s international operations, go to {

6. Timing of Entry
After a firm identifies which market to enter, it must determine the timing of entry
Entry is early when an international business enters a foreign market before other foreign firms
Entry is late when a firm enters after other international businesses have already established themselves in the market

7. Timing of Entry
Firms entering a market early can gain first mover advantages including
the ability to pre-empt rivals and capture demand by establishing a strong brand name
the ability to build up sales volume in that country and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants
the ability to create switching costs that tie customers into their products or services making it difficult for later entrants to win business

8. Timing of Entry
First mover disadvantages are the disadvantages associated with entering a foreign market before other international businesses
These may result in pioneering costs (costs that an early entrant has to bear that a later entrant can avoid) such as
the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes
the costs of promoting and establishing a product offering, including the cost of educating the customers

9. Scale of Entry and Strategic Commitments
Firms that enter foreign markets on a significant scale make a major strategic commitment that changes the competitive playing field
This involves decisions that have a long term impact and are difficult to reverse
Small-scale entry can be attractive because it allows the firm to learn about a foreign market, but at the same time it limits the firm’s exposure to that market

10. Summary
There are no “right” decisions with foreign market entry, just decisions that are associated with different levels of risk and reward
Firms in developing countries can learn from the experiences of firms in developed countries
Management Focus: The Jollibee Phenomenon—A Philippine Multinational
Summary
This feature describes the remarkable success story of Jollibee. Jollibee, a fast food chain from the Philippines, not only stood its ground when McDonald’s invaded its market in 1981, but also managed to find the weaknesses in the larger company’s global strategy and capitalize on them. Jollibee, unlike McDonald’s, tailored its menu to the local market. The company was able to build on this localization strategy as it expanded into neighboring Asian countries and the Middle East. Today, Jollibee has even managed to find success in the United States where it is being hailed as a strong niche player. Discussion of the feature can begin with the following questions:
Suggested Discussion Questions
1. How would Christopher Bartlett and Sumantra Ghoshal view Jollibee’s performance to date?
Discussion Points: Many students will probably suggest that Bartlett and Ghoshal would have a positive view of Jollibee’s performance so far. Jollibee has managed to survive McDonald’s push into the Philippines, learn from the company, and even capitalize on gaps in McDonald’s strategy of having an essentially standardized marketing approach. Now, Jollibee has successfully entered McDonald’s home market, and become a niche player in the fast food industry, and is making plans to expand into India.
2. A key difference between McDonald’s global strategy and that of Jollibee is that McDonald’s sees its path to success as offering a fairly standardized menu everywhere whereas Jollibee views localization as its ticket to success. In your opinion, would Jollibee have achieved its current position in the market if the company had standardized its menu like McDonald’s?
Discussion Points: Most students will probably argue that Jollibee’s competitive advantage is that it offers fast food tailored to local tastes, and that if the company pursued a standardized approach it would have failed. Students might note that McDonald’s global success with this strategy is due in part to the fact that it is a symbol of America, and as such offers an American experience in other markets. Because Jollibee does not have this type of global reputation, it must look for alternative ways to compete.
Teaching Tip: It is worth visiting Jollibee’s web page to see the American influence on the company. Go to { and click on “International” to explore some of the company’s foreign locations.

11. Classroom Performance System
The time and effort in learning the rules of a new market, failure due to ignorance, and the liability of being a foreigner are all examples of
First mover advantages
Strategic commitments
Pioneering costs
Market entry costs
Classroom Performance System Answer: c

12. Entry Modes Question: What is the best way to enter a foreign market?
Firms can enter foreign market through
Exporting
Turnkey projects
Licensing
Franchising
Joint ventures
Wholly owned subsidiaries
Each mode has advantages and disadvantages

13. Exporting
1. Exporting is often the first method firms use to enter foreign market
Exporting is attractive because
it is relatively low cost
firms may achieve experience curve economies
Exporting is not attractive when
lower-cost manufacturing locations exist
transport costs are high
tariff barriers are high
foreign agents fail to in the exporter’s best interest
Internet Extra: Developing an export plan is a first step for any company that is preparing to expand internationally via exports. The Business Link offers a great site where companies can get started on the process. Go to the site { and click on 10 Steps to Successful Exporting. One of the key elements in a successful strategy is the export plan.
Click on Export Plan, and download the file Writing an Export Plan. To better understand the process for companies, go through the plan and sketch out your own business plan.

14. Turnkey Projects
2. Turnkey projects involve a contractor that agrees to handle every detail of the project for a foreign client, including the training of operating personnel
At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation

15. Turnkey Projects Turnkey projects are attractive because
They allow firms to earn great economic returns from the know-how required to assemble and run a technologically complex process
They are less risky in countries where the political and economic environment is such that a longer-term investment might expose the firm to unacceptable political and/or economic risk
Turnkey projects are not attractive when
The firm's process technology is a source of competitive advantage

16. Licensing
3. Licensing is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified time period, and in return, the licensor receives a royalty fee from the licensee
Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks
Licensing is attractive when
The firm does not have to bear the development costs and risks associated with opening a foreign market
The firm avoids barriers to investment
It allows a firm with intangible property that might have business applications, but which doesn’t want to develop those applications itself, to capitalize on market opportunities

17. Licensing Licensing is unattractive when
the firm doesn’t have the tight control over manufacturing, marketing, and strategy necessary to realize experience curve and location economies
the firm’s ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another is compromised
There is the potential for loss of proprietary (or intangible) technology or property
To reduce this risk, firms can use cross-licensing agreements or link the agreement with the decision to form a joint venture

18. Franchising
4. Franchising is a form of licensing in which the franchisor sells intangible property to the franchisee, and requires the franchisee agree to abide by strict rules as to how it does business
Franchising is attractive because
firms avoid many costs and risks of opening up a foreign market
Franchising is unattractive because
It may inhibit the firm's ability to take profits out of one country to support competitive attacks in another
the geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect

19. Joint Ventures
5. Joint ventures involve the establishment of a firm that is jointly owned by two or more otherwise independent firms
Joint ventures are attractive because
a firm can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems
the costs and risks of opening a foreign market are shared with the partner
they can help firms avoid the risk of nationalization or other adverse government interference

20. Joint Ventures Joint ventures can be unattractive because
the firm risks giving control of its technology to its partner
the firm may not have the tight control over subsidiaries that it might need to realize experience curve or location economies
shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time

21. Wholly Owned Subsidiaries
6. Wholly owned subsidiaries involve 100 percent ownership of the stock of the subsidiary
Firms establishing a wholly owned subsidiary can
set up a new operation in that country
acquire an established firm

22. Wholly Owned Subsidiaries
Wholly owned subsidiaries are attractive because
they reduce the risk of losing control over core competencies
they gives the firm the tight control over operations in different countries that is necessary for engaging in global strategic coordination
they may be required if a firm is trying to realize location and experience curve economies
Wholly owned subsidiaries are unattractive because firms bear the full costs and risks of setting up overseas operations

23. Classroom Performance System
Most firms begin their foreign expansion with
Exporting
Joint ventures
Licensing or franchising
Wholly owned subsidiaries
Classroom Performance System Answer: a

24. Selecting an Entry Mode
Question: How should a firm choose a specific entry mode?
All entry modes have advantages and disadvantages
The optimal choice of entry mode involves trade-offs

25. Selecting an Entry Mode
Advantages and Disadvantages of Entry Modes

26. Core Competencies and Entry Mode
The optimal entry mode depends to some degree on the nature of a firm’s core competencies
Core competencies can involve
technological know-how
management know-how

27. Core Competencies and Entry Mode
1. Technological Know-How
When competitive advantage is based on proprietary technological know-how, firms should avoid licensing and joint venture arrangements in order to minimize the risk of losing control over the technology
However, if a technological advantage is only transitory, or the firm can establish its technology as the dominant design in the industry, then licensing may be attractive

28. Core Competencies and Entry Mode
2. Management Know-How
The competitive advantage of many service firms is based upon management know-how
International trademark laws are generally effective for protecting trademarks
Since the risk of losing control over management skills to franchisees or joint venture partners is not high, the benefits from getting greater use of brand names is significant

29. Pressures for Cost Reductions and Entry Mode
Firms facing strong pressures for cost reductions are likely to pursue some combination of exporting and wholly owned subsidiaries
This will allow the firms to achieve location and scale economies as well as retain some degree of control over worldwide product manufacturing and distribution

30. Classroom Performance System
A firm that wants the ability to engage in global strategic coordination should choose
Franchising
Joint ventures
Licensing
Wholly owned subsidiaries
Classroom Performance System Answer: d

31. Greenfield or Acquisition?
Question: Should a firm establish a wholly owned subsidiary in a country by building a subsidiary from the ground up (greenfield strategy), or by acquiring an established enterprise in the target market (acquisition strategy)?
The number of cross border acquisitions are increasing
Over the last decade, percent of all FDI inflows have been mergers and acquisitions

32. Pros and Cons of Acquisitions
are quick to execute
enable firms to preempt their competitors
can be less risky than green-field ventures
However, many acquisitions are not successful

33. Pros and Cons of Acquisitions
Question: Why do acquisitions fail?
Acquisitions fail when
the firm overpays for the assets of the acquired firm
there is a clash between the cultures of the acquiring and acquired firm
attempts to realize synergies by integrating the operations of the acquired and acquiring entities run into roadblocks and take much longer than forecast
there is inadequate pre-acquisition screening

34. Pros and Cons of Acquisitions
Question: How can firms reduce the problems associated with acquisitions?
Firms can reduce the problems associated with acquisitions
through careful screening of the firm to be acquired
by moving rapidly once the firm is acquired to implement an integration plan

35. Pros and Cons of Greenfield Ventures
Question: Why are greenfield ventures attractive?
Greenfield ventures are attractive because they allow the firm to build the kind of subsidiary company that it wants
However, greenfield ventures
are slower to establish
are risky because they have no proven track record
can be problematic if a competitor enters via acquisition and quickly builds market share

36. Classroom Performance System
Which of the following is not an advantage of acquisitions as compared to greenfield investments?
They are quicker to execute
Attempts to realize synergies by integrating the operations of the acquired entities can be challenging and take time
They enable firms to preempt their competitors
They may be less risky
Classroom Performance System Answer: b

37. Critical Discussion Question
1. Review the Management Focus on Tesco. Then answer the following questions:
a) Why did Tesco’s initial international expansion strategy focus on developing nations?
b) How does Tesco create value in its international operations?
c) In Asia, Tesco has a long history of entering into joint venture agreements with local partners. What are the benefits of doing this for Tesco? What are the risks? How are those risks mitigated?
d) In March 2006, Tesco announced that it would enter the United States. This represents a departure from its historic strategy of focusing on developing nations. Why do you think Tesco made this decision? How is the U.S. market different from others Tesco has entered? What are the risks here? How do you think Tesco will do?
Answer:
a) Tesco’s global expansion strategy has been rather unique in the grocery industry. Rather than competing head-to-head with established retailers in developed markets like the United States and Western Europe, Tesco chose to pursue markets with strong growth potential, but little current competition. The strategy allows the company to use its expertise to grow international market share, without incurring the costs of establishing itself in already crowded markets.
b) The keys to Tesco’s success in its international operations is its ability to spot markets with strong underlying growth trends, identify existing companies in those locations that have a deep understanding of the local market, form a joint venture with those companies and transfer its expertise in the industry to the venture, and later buy the partner out. The strategy is highly successful, supplementing the company’s United Kingdom earnings with an additional ₤7.6 billion in revenues in Tesco is now the number four company in the global grocery industry.
c) Tesco’s strategy of entering foreign markets via joint ventures has proven to be highly successful. The company is able to bring its expertise in retailing as well as its financial strength to the venture where it is paired with the partner’s knowledge of the local market. Local managers are hired to run the operations, with only support coming from expatriate managers. This format allows Tesco to use its core strengths to get into the market, and then later, after the ventures have become established, buy out its partner.
d) Most students will probably agree that while Tesco’s entry into the crowded market in the United States represents a departure from its traditional strategy of focusing on developing nations with little existing competition, the strategy still reflects the company’s traditional strategy in that the format the company has chosen to use, Tesco Express, still avoids the head-to-head competition that the company has steered clear of in developing markets. In that sense, the strategy could prove to be highly successful. The company can enter the market using its Tesco Express format, avoid major competition while it gains brand recognition and experience in the market, and then later, expand into the traditional grocery business.

38. Critical Discussion Question
2. Licensing propriety technology to foreign competitors is the best way to give up a firm's competitive advantage. Discuss.
Answer: The statement is basically correct - licensing proprietary technology to foreign competitors does significantly increase the risk of losing the technology. Therefore, licensing should generally be avoided in these situations. Yet licensing still may be a good choice in some instances. When a licensing arrangement can be structured in such a way as to reduce the risks of a firm's technological know-how being expropriated by licensees, then licensing may be appropriate. A further example is when a firm perceives its technological advantage as being only transitory, and it considers rapid imitation of its core technology by competitors to be likely. In such a case, the firm might want to license its technology as rapidly as possible to foreign firms in order to gain global acceptance for its technology before imitation occurs. Such a strategy has some advantages. By licensing its technology to competitors, the firm may deter them from developing their own, possibly superior, technology. And by licensing its technology the firm may be able to establish its technology as the dominant design in the industry. In turn, this may ensure a steady stream of royalty payments. Such situations apart, however, the attractions of licensing are probably outweighed by the risks of losing control over technology, and licensing should be avoided.

39. Critical Discussion Question
3. Discuss how the need for control over foreign operations varies with firms’ strategies and core competencies. What are the implications for the choice of entry mode?
Answer: If a firm’s competitive advantage (its core competence) is based on control over proprietary technological know-how, licensing and joint venture arrangements should be avoided if possible so that the risk of losing control over that technology is minimized. For firms with a competitive advantage based on management know-how, the risk of losing control over the management skills to franchisees or joint venture partners is not that great. Consequently, many service firms favor a combination of franchising and subsidiaries to control the franchises within particular countries or regions. The subsidiaries may be wholly owned or joint ventures, but most service firms have found that joint ventures with local partners work best for controlling subsidiaries.

40. Critical Discussion Question
4. A small Canadian firm that has developed some valuable new medical products using its unique biotechnology know-how is trying to decide how best to serve the European Community market. Its choices are given below. The cost of investment in manufacturing facilities will be a major one for the Canadian firm, but it is not outside its reach. If these are the firm’s only options, which one would you advise it to choose? Why?
Manufacture the product at home and let foreign sales agents handle marketing.
Manufacture the products at home but set up a wholly owned subsidiary in Europe to handle marketing.
Enter into a strategic alliance with a large European pharmaceutical firm. The product would be manufactured in Europe by a 50/50 joint venture, and marketed by the European firm.
Answer: If there were no significant barriers to exporting, then option (iii) would seem unnecessarily risky and expensive. After all, the transportation costs required to ship drugs are small relative to the value of the product. Both options (i) and (ii) would expose the firm to less risk of technological loss, and would allow the firm to maintain much tighter control over the quality and costs of the drug. The only other reason to consider option (iii) would be if an existing pharmaceutical firm could also give it much better access to the market and potentially access to its products and technology, and that this same firm would insist on the 50/50 manufacturing joint venture rather than agreeing to be a foreign sales agent. The choice between (i) and (ii) boils down to a question of which way will be the most effective in attacking the market. If a foreign sales agent can be found that is already quite familiar with the market and who will agree to aggressively market the product, the agent may be able to increase market share more quickly than a wholly owned marketing subsidiary that will take some time to get going. On the other hand, in the long run the firm will learn a great deal more about the market and will likely earn greater profits if sets up its own sales force.