Mc GrawHillIrwin 2004 The Mc GrawHill Companies Inc

Mc. Graw-Hill/Irwin © 2004 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

CHAPTER 11 Entering Foreign Markets Mc. Graw-Hill/Irwin © 2004 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Slide 11 -1 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? Mc. Graw-Hill/Irwin © 2004 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Slide 11 -2 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 Mc. Graw-Hill/Irwin © 2004 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Slide 11 -3 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 1 st mover’s products • Establish social ties ahead of following foreign competitors – important in high-context cultures Mc. Graw-Hill/Irwin © 2004 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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

Slide 11 -5 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 • 1 st 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 Mc. Graw-Hill/Irwin © 2004 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Slide 11 -6 External or “arms-length” Modes of Entry • Firm does business overseas without investing in assets and human resources in target market • 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 Mc. Graw-Hill/Irwin © 2004 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Slide 11 -7 External or “arms-length” Modes of Entry (Cont. ) – 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 Mc. Graw-Hill/Irwin © 2004 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Slide 11 -8 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 Mc. Graw-Hill/Irwin © 2004 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Slide 11 -9 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 Mc. Graw-Hill/Irwin © 2004 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

Slide 11 -10 “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 Mc. Graw-Hill/Irwin © 2004 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

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

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

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