International Business Class 4 ENTRY STRATEGIES and STRATEGIC ALLIANCES

Fundamental Entry Decisions Scale of Entry & Strategic Commitments Timing of Entry Which Foreign Markets?

Cost / Tax Factors: transportation costs, the wage rate, availability and cost of land, as well as construction costs. Tax rates Investment incentives Demand Factors: market size and growth, presence of customers, as well as local competition Strategic Factors: investment infrastructure (e.g. transportation, telecommunications) as well as the manufacturing The presence of complementary industries and special services such as auditing, banking, insurance are also important to a foreign operation. Levels of workforce productivity and the effectiveness of inbound/outbound logistics Regulatory / Economic Factors potential host country’s industrial policies, which may control new entrants and the degree of competition.. The availability of “special economic zones” (e.g. free trade zones), Socio-Political Factors: the degree of political stability, cultural barriers, local business practices, government efficiency and corruption, attitudes towards foreign businesses, community characteristics as well as pollution control measures

Timing of Entry  The advantages of early entry into a foreign market - “first-mover advantages” : Pre-empting rivals and securing demand through establishing a strong brand name; Building sales volumes prior to rivals and gaining experience in servicing the customer over time Tying customers into their products and services

Timing of Entry The disadvantages of early entry into a foreign market (“first-mover disadvantages” ): primarily pioneering costs. - costs which a later entrant would be able to avoid (such costs include costs associated with ‘learning the rules of the game’ in the foreign market, educating foreign consumers about the product, etc.)

Scale of Entry and Strategic Commitments large scale, - rapid, involves the commitment of significant resources - is a considerable strategic commitment and can impact the nature of competition within the market, making it easier for the firm to attract customers and distributors, could also deter other foreign entities from entering the market. potential disadvantage of the strategic commitment of a large scale entry - it may leave the firm with insufficient resources to enter into other attractive foreign markets, thereby limiting the firm’s strategic flexibility the small scale entry - less risky as it provides the firm with an opportunity to learn and adjust to the foreign market.

Foreign Market Entry Modes

FOREIGN MARKET ENTRY MODES Exporting Turnkey Projects Turnkey Projects Licensing Joint Ventures Joint Ventures Franchising Wholly Owned Subsidiaries Wholly Owned Subsidiaries

Exporting Occurs when a firm maintains its production facilities in its home country and sells its products. A firm can export goods directly to foreign customers or through export intermediaries + Avoids considerable costs of setting up manufacturing operations in a foreign country +May assist a firm to realise experience curve economies as well as location economies - may not be the most profitable option if there are lower cost locations for manufacturing the goods abroad. -may not be economical due to high transportation costs and tariff barriers. -Export intermediaries, contracted by the firm to market and sell their goods abroad, may have divided loyalties (e.g. through selling a competitor’s product as well)

Turnkey Projects “contractor agrees to handle every detail of the project for a foreign client, including the training of operation personnel” Common in chemical, pharmaceutical, petroleum refining and metal refining industries +. A means to earn significant economic gains from process technology skills in foreign markets where FDI is restricted Potentially not as risky as conventional FDI. - Firm entering in turnkey project has no long-term interest in the foreign country, which is a weakness if the country proves to be a major market for the product/service. The foreign entity may become a competitor. Firm’s process technology is a source of competitive advantage

Licensing A licensing agreement is where a firm (licensor) “grants specified intangible property rights to the local licensee for a specified period of time in exchange for a royalty fee”. Intangible property includes patents, formulas, processes, designs, copyrights, trademarks and inventions. These allow the licensee to manufacture and sell a product similar to the one which the licensor has been producing in its home country + The firm (licensor) does not have to carry the risks and costs associated with setting up a foreign operation - The firm does not have tight control over manufacturing, marketing and strategy necessary for achieving experience curve economies and location economies. Limits a firm’s ability to implement a coordinated strategy to facilitate entry into multiple foreign markets. Firms potentially could lose control of their technological know-how

Franchising Franchising involves a foreign franchisor in granting “specified intangible property rights to the local franchisee, which must abide by strict and detailed rules as to how it does business” Franchising involves longer commitments than licensing and provides greater control. + Little political risk and low cost involved. Fast and easy avenue for leveraging assets such as a brand name - Franchisor’s image may be tarnished due to franchisee not upholding standards. Limits a firm’s ability to implement a coordinated strategy to facilitate entry into multiple foreign markets

Joint Ventures Involves “establishing a firm that is jointly owned by two or more otherwise independent firms.” Joint ventures are usually 50 / 50 arrangements where the two parties (firms) share ownership and management control. + Firm benefits from partner’s knowledge of host country’s market. When costs and risks of entering a foreign market are high, it is beneficial to share these costs with a partner firm. In certain countries, joint ventures are the only feasible entry mode - Risk of giving control of firm’s technology to partner. Firm does not have tight control over subsidiaries necessary to attain experience curve economies and location economies. Inability to engage in global strategic coordination. Shared ownership arrangement could result in conflicts and battles for control

Wholly Owned Subsidiaries Involves the investing firm in owning 100% of the new entity in the host country. The subsidiary may be an acquired local business in the host country, or may be a greenfield investment + Maintain control over technological know-how and therefore the firm’s competitive advantage Able to engage in strategic global coordination. Able to realise experience curve economies and location economies - Most costly method of entering into and serving a foreign market. High risk involved where firm needs to learn how to do business in a new culture