Foreign Market Entry Modes - Foreign Market Entry Modes...

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Unformatted text preview: 15/04/2016 Foreign Market Entry Modes QuiCkMBA Strategic Management meledgaumYmanmass QuickMBAl Strategy] Foreign Market Entry Copyrightifii lQQD-EDID QuickIvIEuflcom Foreign Market Entry Modes The decision of how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved via the following four mechanisms: Exporting Licensing Joint Venture Direct Investment Exporting Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses. Exporting commonly requires coordination among four players: . Exporter . Importer . Transport provider . Government Licensing Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance. Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost. ba.com/strategy/global/m arketentry/ 1/4 15/04/2016 Foreign Market Entry Modes Joint Venture There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships. Such alliances often are favorable when: . the partners' strategic goals converge while their competitive goals diverge; . the partners' size, market power, and resources are small compared to the industry leaders; and . partners' are able to learn from one another while limiting access to their own proprietary skills. The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include: conflict over asymmetric new investments mistrust over proprietary knowledge performance ambiguity - how to split the pie lack of parent firm support cultural clashes if, how, and when to terminate the relationship Joint ventures have conflicting pressures to cooperate and compete: . Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position. . The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources. . The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control. Foreign Direct Investment Foreign direct investment (FBI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment. ba.com/strategy/global/m arketentry/ 15/04/2016 Foreign Market Entry Modes The Case of EuroDisney Different modes of entry may be more appropriate under different circumstances, and the mode of entry is an important factor in the success of the project. Walt Disney Co. faced the challenge of building a theme park in Europe. Disney's mode of entry in Japan had been licensing. However, the firm chose direct investment in its European theme park, owning 49% with the remaining 51% held publicly. Besides the mode of entry, another important element in Disney's decision was exactly where in Europe to locate. There are many factors in the site selection decision, and a company carefully must define and evaluate the criteria for choosing a location. The problems with the EuroDisney project illustrate that even if a company has been successful in the past, as Disney had been with its California, Florida, and Tokyo theme parks, future success is not guaranteed, especially when moving into a different country and culture. The appropriate adjustments for national differences always should be made. Comparision of Market Entry Options The following table provides a summary of the possible modes of foreign market entry: Comparison of Foreign Market Entry Modes Conditionasgzorlng this Advantages Disadvantages Limited sales potential in target country; little product adaptation required Trade barriers & Minimizes risk and tariffs add to costs. Distribution channels close to investment. Transport costs plants Speed Of entry Limits access to EXporfing High target country production local information costs Maximizes scale; uses existing facilities. Company viewed as an outsider Liberal import policies High political risk Import and investment barriers Lack of control . . . . over use of assets. Legal protection possible in target msgg'rifitmk and environment. ' Licensee may become Low sales potential in target Speed Of entry competitor. Licensmg country. Able to circumvent Knowledge Large cultural distance trade barriers spillovers Licensee lacks ability to become a H'gh ROI License period is competitor. limited ba.com/strategy/global/m arketentry/ 3/4 15/04/2016 I—l Joint Ventures Import barriers Large cultural distance Assets cannot be fairly priced High sales potential Some political risk Government restrictions on foreign ownership Local company can provide skills, resources, distribution network, brand name, etc. Import barriers Small cultural distance Assets cannot be fairly priced High sales potential Low political risk Recommended Reading Foley, James F., The Global Entrepreneur: Taking Your Business lntemational QuickMBAl Strategy] Foreign Market Entry Foreign Market Entry Modes Overcomes ownership restrictions and cultural distance Combines resources of 2 companies. Potential for learning Viewed as insider Less investment required Greater knowledge of local market Can better apply specialized skills Minimizes knowledge spillover Can be viewed as an insider Difficult to manage Dilution of control Greater risk than exporting a & licensing Knowledge spillovers Partner may become a competitor. Higher risk than other modes Requires more resources and commitment May be difficult to manage the local resources. Home | Site Map | About | Contact | Privacy | Reprints | User Agreement Cepyright® 1999-2010 Quiekl‘thBAnern. All rights reserved. This web site is eperetedbgrflte Internet Center for Management and Business Adrninistrsiinn, Ins. The articles on this website are copyrighted material and may not be reproduced, stored on a computer disk, republished on another website, or distributed in any form without the prior express written permission of QuickMBA.com. ba.com/strategy/global/m arketentry/ 4/4 ...
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