15.2: Deciding How to Enter the Market

Question 1

What are the three market-entry strategies for selling in a foreign country?

Answer 1

Exporting, joint venturing, and direct investment.

Question 2

What does each succeeding market-entry strategy involve?

Answer 2

Each succeeding strategy involves more commitment and risk but also more control and potential profits.

Question 3

Figure 15.2: Market Entry Strategies

Answer 3

Question 4

How does the level of control differ between the three market-entry strategies?

Answer 4

The level of control increases as the market-entry strategy moves from exporting to joint venturing to direct investment.

Question 5

How does the potential profit differ between the three market-entry strategies?

Answer 5

The potential profit also increases as the market-entry strategy moves from exporting to joint venturing to direct investment.

Question 6

What is the simplest way for a company to enter a foreign market?

Answer 6

The simplest way is through exporting.

Question 7

How does exporting work?

Answer 7

The company produces all its goods in its home country and sells them in a foreign market, either by passively exporting surpluses or actively expanding exports to a particular market.

Question 8

What changes are involved in exporting?

Answer 8

Exporting involves the least change in the company’s product lines, organization, investments, or mission.

Question 9

What is indirect exporting?

Answer 9

Indirect exporting is when a company works through independent international marketing intermediaries to export its products to a foreign market.

Question 10

What are the advantages of indirect exporting?

Answer 10

Indirect exporting involves less investment and less risk, and the marketing intermediaries bring know-how and services to the relationship

Question 11

What is direct exporting?

Answer 11

Direct exporting is when a company handles its own exports to a foreign market.

Question 12

What are the advantages of direct exporting?

Answer 12

The potential return is higher, but the investment and risk are somewhat greater than with indirect exporting

Question 13

What is joint venturing as a method of entering a foreign market?

Answer 13

Joint venturing is when a company joins with a foreign company to produce or market products or services in a foreign market.

Question 14

How does joint venturing differ from exporting and direct investment?

Answer 14

Joint venturing differs from exporting in that it involves partnering with a host country partner to sell or market abroad.

Joint venturing differs from direct investment in that an association is formed with someone in the foreign country.

Question 15

What are the four types of joint ventures?

Answer 15

The four types of joint ventures are licensing, contract manufacturing, management contracting, and joint ownership.

Question 16

What is licensing as a type of joint venture?

Answer 16

Licensing is a simple way for a manufacturer to enter international marketing. The company enters into an agreement with a licensee in the foreign market to allow them to use the company’s manufacturing process, trademark, patent, trade secret, or other item of value for a fee or royalty payments.

Question 17

What are the advantages of licensing for a company?

Answer 17

Licensing allows a company to gain entry into a foreign market at little risk, while the licensee gains production expertise or a well-known product or name without having to start from scratch.

Question 18

What are some potential disadvantages of licensing?

Answer 18

The firm has less control over the licensee than it would over its own operations.

The firm gives up profits if the licensee is very successful.

The firm may create a competitor if and when the contract ends.

Question 19

What is contract manufacturing?

Answer 19

Contract manufacturing is when a company makes agreements with manufacturers in the foreign market to produce its product or provide its service.

Question 20

What are some examples of companies using contract manufacturing?

Answer 20

P&G serves 650 million consumers across India with the help of nine contract manufacturing sites there.
Volkswagen contracts with Russia’s largest auto manufacturer, GAZ Group, to make Volkswagen Jettas for the Russian market as well as its Škoda Octavia and Yeti models sold there.

Question 21

What are the drawbacks of contract manufacturing?

Answer 21

Decreased control over the manufacturing process and loss of potential profits on manufacturing.

Question 22

What are the benefits of contract manufacturing?

Answer 22

The chance to start faster with less risk and the later opportunity either to form a partnership with or buy out the local manufacturer.

Contract manufacturing can also reduce plant investment, transportation, and tariff costs while at the same time helping to meet the host country’s local manufacturing requirements.

Question 23

What is management contracting?

Answer 23

Management contracting is when a domestic firm provides management know-how to a foreign company that supplies the capital, exporting management services rather than products.

Question 24

What is an example of a company using management contracting?

Answer 24

Hilton uses management contracting to manage hotels around the world.

Question 25

How does management contracting work for Hilton?

Answer 25

Hilton operates DoubleTree by Hilton hotels in various countries, with the properties being locally owned but managed by Hilton with its hospitality expertise.

Question 26

What are the benefits of management contracting?

Answer 26

Management contracting is a low-risk method of getting into a foreign market and yields income from the beginning.

It can be even more attractive if the contracting firm has an option to buy some share in the managed company later on.

Question 27

What are some potential drawbacks of management contracting?

Answer 27

It may not be sensible if the company can put its scarce management talent to better uses or if it can make greater profits by undertaking the whole venture.

Management contracting also prevents the company from setting up its own operations for a period of time.

Question 28

What is joint ownership as a method of entering a foreign market?

Answer 28

Joint ownership is when one company joins forces with foreign investors to create a local business in which they share possession and control.

Question 29

What are some ways in which joint ownership ventures can be formed?

Answer 29

A company may buy an interest in a local firm, or the two parties may form a new business venture.

Question 30

Why might a company need joint ownership?

Answer 30

A company may lack the financial, physical, or managerial resources to undertake the venture alone.

A foreign government may require joint ownership as a condition for entry.

Question 31

What is an example of a joint ownership venture?

Answer 31

Disney’s Hong Kong Disneyland and Shanghai Disneyland are both joint ownership ventures with the Chinese government-owned Shanghai Shendi Group.

Question 32

Why do companies often form joint ownership ventures?

Answer 32

Companies form joint ownership ventures to merge their complementary strengths in developing a global marketing opportunity

Question 33

What is an example of a company forming a joint ownership venture?

Answer 33

Walmart purchased a 77 percent stake in Flipkart, India’s leading online marketplace, to help navigate India’s strict foreign investment restrictions and gain a head start over Amazon in market share and online retailing expertise in India

Question 34

What are the benefits of joint ownership ventures?

Answer 34

Joint ownership ventures help companies better understand local consumers and master complex distribution environments.

They allow companies to merge their strengths and gain a competitive advantage in a foreign market.

Question 35

What are some potential drawbacks of joint ownership ventures?

Answer 35

The partners may disagree over investment, marketing, or other policies.

There may be differences in how the partners prefer to use earnings, such as reinvesting for growth or taking out earnings.

Question 36

What is direct investment as a method of entering a foreign market?

Answer 36

Direct investment is the development of foreign-based assembly or manufacturing facilities.

Question 37

What are some examples of companies using direct investment?

Answer 37

Intel has made substantial investments in its own manufacturing and research facilities in China.

Question 38

What are some advantages of foreign production facilities?

Answer 38

Lower costs in the form of cheaper labor or raw materials, foreign government investment incentives, and freight savings.

Improved image in the host country because it creates jobs.

The firm develops a deeper relationship with the government, customers, local suppliers, and distributors, allowing it to adapt its products to the local market better.

The firm keeps full control over the investment and can develop manufacturing and marketing policies that serve its long-term international objectives.

Question 39

What is the main disadvantage of direct investment?

Answer 39

The firm faces many risks, such as restricted or devalued currencies, falling markets, or government changes.

In some cases, a firm has no choice but to accept these risks if it wants to operate in the host country.