Final: Entering Foreign Markets Flashcards
A firm expanding internationally must decide:
- Which markets to enter
- When to enter them
- Which entry mode to use
Firms can enter foreign markets through:
- Exporting
- Licensing or franchising to host country firms
- A joint venture with a host country firm
- A wholly-owned subsidiary in the host country
What are the characteristics of a favorable foreign market?
- Are politically stable
- Have free-market systems
- Have relatively low inflation rates
- Have low private sector debt
- When the product in question is not widely available and satisfies an unmet need
What are the characteristics of a less desirable foreign market?
- Are politically unstable
- Have mixed or command economies
- Have excessive levels of borrowing
What are some first-mover advantages?
• The ability to preempt rivals by establishing a
strong brand name
• The ability to build up sales volume and ride
down the experience curve ahead of rivals and gain a cost advantage over later entrants
• The ability to create switching costs that tie
customers into products or services making it difficult for later entrants to win business
What are some first-mover disadvantages?
- Pioneering costs
- The costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes
- The costs of promoting and establishing a product offering, including the cost of educating customers
What are Pioneering Costs?
Costs that arise when the foreign business system is so different from that in the home market that the firm must devote considerable time, effort, and expense to learning the rules of the game.
What factors affect the choice of entry mode?
- Transport costs
- Trade barriers
- Political risks
- Economic risks
- Costs
- Firm strategy
What are the six ways a firm can enter a foreign market?
- Exporting
- Turnkey projects
- Licensing
- Franchising
- Joint ventures with a host country firm
- Wholly owned subsidiary
Explain exporting as a way to enter a foreign market.
A common first step for many manufacturing firms and later, firms tend to switch to another mode.
What are Turnkey Projects?
The contractor handles every detail of the project for a foreign client, including the training of operating personnel. At the completion of the contract, the foreign client is handed the “key” to a plant that is ready for full operation.
What is Licensing?
A licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee.
This includes patents, inventions, formulas, processes, designs, copyrights, and trademarks.
What is Franchising?
A specialized form of licensing in which the franchisor not only sells an intangible property to the franchisee but also insists that the franchisee agree to abide by strict rules as to how it does business. Primarily used by service firms.
What are joint ventures with a host country firm?
A firm that is jointly owned by two or more otherwise
independent firms. Most joint ventures are 50–50 partnerships.
What is a Wholly owned subsidiary?
The firm owns 100 percent of the stock to set up a new operation and acquire an established firm.
Why is exporting attractive?
• It avoids the costs of establishing local manufacturing
operations
• It helps the firm achieve experience curve and
location economies
Why is exporting unattractive?
• There may be lower-cost manufacturing locations
• High transport costs and tariffs can make it
uneconomical
• Agents in a foreign country may not act in exporter’s best interest
Why are Turnkey Projects attractive?
- They are a way of earning economic returns from the know-how required to assemble and run a technologically complex process
- They can be less risky than conventional FDI
Why are Turnkey Projects unattractive?
- The firm has no long-term interest in the foreign country
- The firm may create a competitor
- If the firm’s process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors
Why is Licensing attractive?
- The firm avoids development costs and risks associated with opening a foreign market
- The firm avoids barriers to investment
- The firm can capitalize on market opportunities without developing those applications itself
Why is Licensing unattractive?
- The firm doesn’t have the tight control required for realizing experience curve and location economies
- The firm’s ability to coordinate strategic moves across countries is limited
- Proprietary (or intangible) assets could be lost. To reduce this risk, use a cross-licensing agreement.
Why is Franchising attractive?
• It avoids the costs and risks of opening up a foreign
market
• Firms can quickly build a global presence
Why is Franchising unattractive?
• It inhibits the firm’s ability to take profits out of one
country to support competitive attacks in another
• The geographic distance of the firm from its franchisees can make it difficult to detect poor quality
Why are Joint Ventures attractive?
- Firms benefit from a local partner’s knowledge of the local market, culture, language, political systems, and business systems
- The costs and risks of opening a foreign market are shared
- They satisfy political considerations for market entry
