12.2: Entry Modes

Question 1

What are the six different modes for a firm to enter foreign markets?

Answer 1

The six modes are

exporting,

turnkey projects,

licensing,

franchising,

establishing joint ventures with a host country firm,

or setting up a new wholly owned subsidiary in the host country.

Question 2

What are the two distinct advantages of exporting?

Answer 2

The advantages of exporting are that it avoids the costs of establishing manufacturing operations in the host country, and it may help a firm achieve experience curve and location economies.

Question 3

What are some disadvantages of exporting?

Answer 3

Disadvantages include the potential mismatch of the firm’s home base for cost-effective manufacturing,

high transportation costs,

tariff barriers,

risks in foreign market sales and service delegation,

and distribution issues through local agents or distributors.

Question 4

What is meant by ‘location economies’ in the context of exporting?

Answer 4

Location economies refer to the cost advantages a firm realizes through performing a business activity in a particular location due to factors like favorable logistics, lower labor costs, and other regional production efficiencies.

Question 5

How does exporting help a firm with the ‘experience curve’?

Answer 5

By centralizing manufacturing and exporting to other markets, a firm can increase its production volume, which often leads to reduced costs per unit as a result of gained efficiencies and experience over time.

Question 6

What are turnkey projects?

Answer 6

Turnkey projects involve a contractor agreeing to handle every detail of a project for a foreign client, including the construction and training of operating personnel.

Upon completion, the plant is turned over to the client, ready for full operation

Question 7

In which industries are turnkey projects most common?

Answer 7

Turnkey projects are most common in industries such as chemical, pharmaceutical, petroleum-refining, and metal-refining, which use complex and expensive production technologies.

Question 8

What are the advantages of turnkey projects?

Answer 8

Turnkey projects allow firms to earn economic returns from assembling and running technologically complex processes, which can be more lucrative and less risky than conventional FDI.

They are especially beneficial in countries with limited access to certain technologies or where FDI is restricted.

Question 9

Why might a turnkey strategy be less risky than conventional FDI?

Answer 9

A turnkey strategy might be less risky because it is time-bound and the selling firm is not exposed to long-term operational risks or political and economic instabilities in the client’s country.

Question 10

What is licensing as a foreign market entry strategy?

Answer 10

Licensing involves a firm (the licensor) granting the rights to intangible property to another entity (the licensee) for a specified period, and in return, receives a royalty fee from the licensee.

Question 11

What might be included in the intangible property in a licensing agreement?

Answer 11

Intangible property in a licensing agreement can include patents, inventions, formulas, processes, designs, trademarks, or company names.

Question 12

What are the advantages of licensing as a market entry strategy?

Answer 12

Licensing enables firms to enter foreign markets quickly with a limited degree of risk and capital investment.

It can be attractive in countries where the political and economic environment is such that the risks associated with direct investment are high.

Question 13

What are the potential downsides or disadvantages of licensing?

Answer 13

The disadvantages include risking giving away technological know-how to a potential foreign competitor, and not realizing location economies, experience curve economies, or control over manufacturing and marketing.

Question 14

Why might a firm have less control over manufacturing and marketing in licensing?

Answer 14

In licensing, because the licensee produces and markets the product, the original firm may have less control over these aspects, potentially affecting product quality and market reputation.

Question 15

What is a cross-licensing agreement and when might it be used?

Answer 15

A cross-licensing agreement is when two or more firms grant each other the rights to intangible property under defined conditions. It may be used when companies want to share technologies or conduct R&D collaboratively.

Question 16

What is franchising?

Answer 16

Franchising is a specialized form of licensing where the franchisor sells intangible property (usually a trademark) to the franchisee, who must follow strict business operation rules and receives ongoing support.

Question 17

How is franchising different from licensing?

Answer 17

Franchising involves longer-term commitments than licensing and includes not only the sale of intangible property but also strict operational guidelines and ongoing business support, whereas licensing typically involves less control over the business operations of the licensee.

Question 18

What type of payment structure is common in franchising?

Answer 18

In franchising, the franchisee typically pays the franchisor a royalty payment, which is a percentage of the franchisee’s revenues.

Question 19

Which sector primarily employs franchising?

Answer 19

Franchising is primarily employed by service firms, in contrast to licensing which is more common in manufacturing.

Question 20

What are some advantages of franchising for the franchisor?

Answer 20

Franchising offers branding, advertising, reputation, and headquarters support for the development of the business, along with the benefit of spreading costs and risks across franchisees.

Question 21

What are the disadvantages of franchising for the franchisor?

Answer 21

The disadvantages include restrictions on territory and pricing, the potential loss of control over quality, and the risk of franchisees not maintaining standards, which can affect the brand’s reputation worldwide.

Question 22

What is a significant challenge in franchising related to quality control?

Answer 22

A significant challenge in franchising is ensuring consistent quality across all franchise locations, as poor performance by one franchisee can impact the overall brand reputation.

Question 23

What is a master franchisee, and how does it help with franchising challenges?

Answer 23

A master franchisee is a main franchise holder in a particular country or region, who then sub-franchises to others within that territory.

This helps reduce quality control challenges by limiting the geographic spread and number of franchisees to oversee.

Question 24

What is a wholly owned subsidiary?

Answer 24

A wholly owned subsidiary is a firm that is 100 percent owned by the parent company.

Question 25

How can a firm establish a wholly owned subsidiary in a foreign market?

Answer 25

A firm can establish a wholly owned subsidiary either by setting up a new operation in that country (a greenfield venture) or by acquiring an established firm in that host nation.

Question 26

What are the advantages of wholly owned subsidiaries?

Answer 26

Advantages include protection of technological competence, control over operations for global strategic coordination, and retaining 100 percent of profits in a foreign market.

Question 27

Why might high-tech firms prefer wholly owned subsidiaries for overseas expansion?

Answer 27

High-tech firms may prefer wholly owned subsidiaries to reduce the risk of losing control over their technological competence.

Question 28

What strategic benefit does a wholly owned subsidiary provide in terms of global strategic coordination?

Answer 28

A wholly owned subsidiary gives a firm tight control over operations in different countries, which is necessary for engaging in global strategic coordination.

Question 29

What are the disadvantages of establishing a wholly owned subsidiary?

Answer 29

The disadvantages include high capital costs and risks, challenges of learning to do business in a new culture, and potential issues with marrying divergent corporate cultures.

Question 30

Why is establishing a wholly owned subsidiary considered the most costly method of serving a foreign market?

Answer 30

Because it requires bearing the full capital costs and risks of setting up overseas operations, as opposed to sharing these costs and risks with a local partner.

Question 31

How does a wholly owned subsidiary affect profit sharing in a foreign market?

Answer 31

Establishing a wholly owned subsidiary gives the parent firm a 100 percent share in the profits generated in a foreign market.