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Foreign Market Entry Modes

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last update Friday, February 21, 2020
  

 



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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.

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 the 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 (FDI) 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.

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.


Comparison of Market Entry Options

The following table provides a summary of the possible modes of foreign market entry:


Comparison of Foreign Market Entry Modes

Mode Conditions Favoring this Mode Advantages Disadvantages
Exporting Limited sales potential in the target country; little product adaptation required

Distribution channels close to plants

High target country production costs

Liberal import policies

High political risk

Minimizes risk and investment.

Speed of entry

Maximizes scale; uses existing facilities.

Trade barriers & tariffs add to costs.

Transport costs

Limits access to local information

The company viewed as an outsider

Licensing Import and investment barriers

Legal protection is possible in the target environment.

Low sales potential in the target country.

Large cultural distance

The licensee lacks the ability to become a competitor.

Minimizes risk and investment.

Speed of entry

Able to circumvent trade barriers

High ROI

Lack of control over the use of assets.

The licensee may become a competitor.

Knowledge spillovers

The license period is limited

Joint Ventures Import barriers

Large cultural distance

Assets cannot be fairly priced

High sales potential

Some political risk

Government restrictions on foreign ownership

Local companies can provide skills, resources, distribution network, brand name, etc.

Overcomes ownership restrictions and cultural distance

Combines resources of 2 companies.

Potential for learning

Viewed as insider

Less investment required

Difficult to manage

Dilution of control

A greater risk than exporting a & licensing

Knowledge spillovers

Partner may become a competitor.

Direct Investment Import barriers

Small cultural distance

Assets cannot be fairly priced

High sales potential

Low political risk

Greater knowledge of the local market

Can better apply specialized skills

Minimizes knowledge spillover

Can be viewed as an insider

Higher risk than other modes

Requires more resources and commitment

It may be difficult to manage the local resources.



       
 

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