1. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

2. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. CHAPTER Entering Foreign Markets

3. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Key Issues Which markets to enter? When? What scale? What ways (modes) do firms use to enter foreign markets? What are their advantages/disadvantages? What is the relationship between strategy and the choice of entry mode? Slide 11-1

4. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Enter Which Foreign Markets? There are 191 member-nations of the UN… (11/02) –Switzerland joined last in 2002 Each one’s attractiveness to a particular firm as a particular market depends on: –The firm’s objectives –A balance of benefits, costs, and risks Slide 11-2

5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Timing of entry: First Mover Advantages Preempt rivals; establish strong brand name; capture demand Build sales volume; ride down experience curve ahead of competitors; cost advantage Create switching costs for that tie customers to 1st mover’s products Establish social ties ahead of following foreign competitors –important in high-context cultures Slide 11-3

6. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Timing of entry: First-mover disadvantages; pioneering costs Time spent to learn dos-don’ts; competitors can learn from 1st mover If 1st mover introducing a new industry, it builds infrastructure 1st mover “trains” customers for followers Break through host country’s adjustment to “foreignness” issues –Regulations may change as a result of 1st mover’s entry Slide 11-4

7. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Scale of entry What level of resources to commit? What level of resources can firm afford to commit? A strategic commitment is difficult to reverse –Has a long-term impact –Means that the resources cannot be used elsewhere 1st mover advantages and large scale linked Small scale entry allows learning at low risk Entry in small or large potential market may require the same level of initial resources Slide 11-5

8. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. External or “arms-length” Modes of Entry Exports –Sell “domestically” produced products into foreign markets through local independent agents or directly to customers –Eliminates costs of establishing manufacturing operations in a host country –Helps firm learn and achieve economies of scale –May not be economically sound if manufacturing location is not “lowest cost producing” –Transportation, tariffs may be problematic Slide 11-6 Firm does business overseas without investing in assets and human resources in target market

9. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. –Turnkey projects Special case of exporting for firms that set up production plants or build facilities for others The “exporting firm” builds the facility overseas, starts it up, turns it over to the host country owner, and then departs Oil firms, construction firms, manufacturers External or “arms-length” Modes of Entry (Cont.) Slide 11-7

10. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. External or “arms-length” Modes (cont.) Licensing –Licensor grants rights to licensee for use of intangible property over a specified period in return for a fee –Intangible property: patents, inventions, formulas, processes, designs, copyrights, trademarks –Licensing agreement likely allows licensor quality assurance rights over actual use of intangible asset –If licensee sells to consumers using the licensor’s brand name, the license may also give the licensor rights to strategic brand control Slide 11-8

11. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. External or “arms-length” Modes (cont.) Franchising –Franchisor, grants franchisee use of intangibles under the condition that franchisee follow strict rules of operating the business –Mode of operation is part of the brand image International strategic alliances Slide 11-9

12. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. “Internal” Modes of Entry: FDI Wholly owned subsidiaries –Firms owned 100% by a company in a foreign country International joint ventures –Firms that are owned jointly by two or more otherwise independent firms; most IJVs are between two firms –One (or more) parent firms are non-resident in the host market –Ownership % may vary from majority foreign owned, to 50%-50% owned, to minority owned by the foreign firm Slide 11-10

13. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Slide 11-11

14. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Slide 11-12

15. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Decision Framework for FDI Are transportation costs high? Is know-how easy to license? Tight control over foreign ops required? Is know-how valuable and is protection possible? Export FDI License No Yes No Yes Import Barriers? No Yes Slide 6-15