CHAPTER 6 INTERNATIONAL MARKET ENTRY

Learning Objectives After studying this chapter, you should be able to explain: –Motivations for internationalization –Methods to internationalize –Typical pattern of internationalization –Transnational firms –Born global firms –Implementing international market entry

Several reasons for expanding internationally: –Increased market share: Can affect a firm in many ways, including offering new sales when its existing market is saturated. –Obtained economics of scale - A single market may not be large enough to support the capital outlay needed to conduct an activity; so a firm must consider international entry to obtain the necessary economies of scale. Motivations for International Market Entry

–Improve return on investment (ROI) - As firms expand internationally, the number of unfilled markets and the potential for greater profits increase. –Intellectual property concerns - Weak patent protection encourages firms to rapidly expand overseas in order to preempt imitators or secure patent protection in those major foreign markets. Motivations for International Market Entry

–Looking for favorable locations Types of location benefits: Cheaper inputs - A firm must carefully consider the product type, location of manufacture, shipping cost, and other benefits and costs. Secure inputs - Firms may expand internationally to secure access to crucial inputs.

Access a market –Firms may enter a foreign country to gain access to that market. –Such location choices can also be made to overcome trade barriers erected to imports. –Non-tariff trade barrier is a barrier to free trade that takes a form other than a tariff. –Indirect imports: Used occasionally to overcome trade barriers. Motivations for International Market Entry

Methods of Entering International Markets Export –Shipping of a good from the home market to markets outside the home country. –The dominant type of international activity for many firms because it requires the least investment overseas. –As a firm gains international experience, the business takes the help of a rep or dealer to handle promotion and sales in their local country.

Entering International Markets Export (cont.): –A rep often handles several firms’ products that typically do not compete with each other. –In a dealership, the relationship between two firms will be closer than with the manufacturer’s rep; a dealership could be an exclusive one, only selling one firm’s products.

Entering International Markets Alliances –In an alliance, a firm moves into a market in association with other firms. –The parties involved have less control, and also have less risk.

Entering International Markets Informal alliances –Is a statement by one firm to another indicating, ‘‘If you help me sell my product in your market, I will help you sell yours in my market.’’ –Does not involve equity investments by either party.

Entering International Markets Informal alliances (cont.): –Help emerging markets in trying to penetrate environments where the rule of law is still developing. –Allow a firm, as it begins to enter a market, to have connections with individuals that will advise the firm and support its efforts.

Entering International Markets Licensing –Is a more formal type of alliance. –Licensing agreement – An agreement where a company outside a particular country agrees to pay a firm within the country for the right to either manufacture or sell its product. –Alliance between two firms tends to be much less coordinated. –Can have strategic value to a firm as it seeks to enter a market.

Entering International Markets Joint venture –Are formal agreements between two or more firms where a new separate entity is created for the purpose of producing or distributing goods and services. –The level of commitment and risk is considerably higher than in informal alliances. –Firms can also enter into a short-term joint venture to learn a specific process, technology, or market from their partner.

Entering International Markets Franchising –A type of alliance where a contract is established between the parent (franchisor) and the individual who actually buys the business unit (franchisee) to sell a given product or conduct business under its trademark. –A franchisor provides the franchisee with extensive direction on how to operate the business.

Entering International Markets Franchising (cont.): –A franchise contract commonly sets standards for behavior by the franchisee that, if not followed, can result in the loss of the franchise. –The franchisor receives an initial fee and a continuing royalty from the franchisee.

Entering International Markets Franchising (cont.): –There are two types of businesses that franchise internationally: A firm that already franchises in a mature economy. A firm that prefers to franchise regionally and will not open many franchises in mature markets; this limits its international exposure, while allowing it to gain experience in smaller, less-lucrative, less- visible markets.

Entering International Markets Mergers and acquisitions –A merger is a transaction involving two or more corporations in which only one permanent corporation survives. –An acquisition is the purchase of a company that is completely absorbed as a subsidiary or division of the acquiring firm.

Entering International Markets Mergers and acquisitions (cont.): –Mergers and acquisitions create permanent changes to the structure of the firms involved. –An acquisition can act as a turnkey operation—that is, the firm can enter the market immediately with a ready-made operation.

Entering International Markets Greenfield ventures –A firm may choose to establish itself in a given country without the aid of a partner. –This type of venture is the most difficult to pursue, but gives a firm the greatest control.

Entering International Markets Greenfield ventures (cont.): –The cost of development is quite high and the venture also has greater risk since it must enter a country and build its brand and various stakeholder relationships. –The keys to success for a Greenfield venture are patience and adequate support by a corporation.

Entering International Markets Wholly owned subsidiary –An organization form where the parent owns the local firm completely; the organization would focus only on the country in which it has entered. –A firm may look to other economic concerns in making its decision about the nations to choose from. –The economic concerns being transportation costs, tax and government incentives, labor quality, and organizational learning.

International Entry Cycle Firm starts only in a domestic market. Firm becomes aware of international opportunities. Firm enters a market in a small way typically through licensing. Firm builds international confidence and commits more resources through joint venture.

International Entry Cycle Firm builds own international facilities. Firm becomes transnational – –In this type of firm, the business assets are highly specialized, but interdependent with the other assets of the firm. –The contribution of each nation is integrated with the worldwide network of businesses to provide benefits of that nation. –Knowledge developed in any unit is shared worldwide within the business.

Market Entry Execution Planning entry –Addresses what is needed to make the market entry successful, how market entry will be conducted, and why market entry is necessary. –Helps educate managers on why the venture is critical, how it will affect their given unit, and develop ways to ensure the venture’s success.

Market Entry Execution Planning entry (cont.): –Creates parameters that are the bases for judging the progress and success of a merger or acquisition. –Helps eliminate many potential problems that can arise in a merger or acquisition on both sides of the venture.

Market Entry Execution Key points in implementing a merger or acquisition can be summarized as: –Defining clear objectives. –Establishing an implementation team. –Establishing lines of authority for the implementation. –Identifying key employees and teams to ensure they are part of the transition and remain with the firm.

Market Entry Execution Key points in implementing a merger or acquisition can be summarized as (cont.): –Planning for information system integration. –Developing a plan for blending the cultures.

Market Entry Execution Joint venture implementation – Ensure that: –Parties to the joint venture have shared goals for the joint venture. –There are no ambiguities in the relationship. –Each firm’s strategic position is such that the firm can fulfill its commitment to the joint venture. –Intellectual property is protected because a partner today may be a competitor tomorrow.