Strategies to Enter Global Markets

Objectives • Understand different factors

influencing choice of particular mode of entry into a global market

• Describe various modes of entry into international market

Internationalization Decisions

How to Enter?(Entry mode

selection)

When to

Enter?(Timing

of entry)

Where to Enter?(location

)

Basic Entry Decisions

• Which market to enter?- Look at growth potential, profit

potential, size of market- Consumerism grows with large

market size- Growth potential is important for long

term investment- Economic and political factors to be

considered

Contd.• When to Enter those market?-Are we the first ones to enter those

market; FIRST MOVER ADVANTAGE- Grab larger share in market Untapped market Develop brand loyalty

• First mover has disadvantages:-risk about customer reaction-pioneering cost-competitors are aware of market

conditions-disadvantage of first mover becomes

advantage for the competitor

Different modes of entry to IB

EXPORTING

LICENSING/ FRANCHISING

CONTRACT MANUFACTURING

MANAGEMENT CONTRACTING

TURNKEY CONTRACTS

MERGERS AND ACQUITIONS

STRATEGIC ALLIANCE

FOREIGN DIRECT INVESTMENT(WITH ALLIANCES)

EXPORTING

DIRECT EXPORTS INDIRECT EXPORTS

EXPORTING• It is the marketing and direct sale of

domestically produced goods in another country.

• It is a traditional and most common mode of entry.

• Small firms with limited financial and other resources find exports most suitable form of expansion

DIRECT EXPORTING• It is selling the products in a foreign

country directly through its distribution arrangements or through a host country’s company.

• Firm is directly involved in marketing its products in foreign markets.

• To implement direct exporting a firm must have representations in foreign market

direct exporting includes:

• Market Contact• Market Research • Physical Distribution• Export documentation• Pricing

INDIRECT EXPORTING

• Indirect Exporting is exporting the products either in their original form or in the modified form to a foreign country through another domestic company. Eg. Various publishers in India sell their books in India which in turn export to various foreign countries.

Exporting ADVANTAGES DISADVANTAGES

Less costly than setting up production abroad

Countries which ban certain products to be imported are discouraging exports

Exporting proves to be very profitable when there is a sudden decline of the product in home country

Does not lead to profits always

LICENSING • In this mode the domestic

manufacturer leases the right to use its intellectual property i.e technology, work methods, patents, copyright, brand names, trade marks etc to a manufacturer in a foreign country for a fee.

• Domestic Manufacturer- Licensor• Manufacturer in Foreign country -

Licensee

LICENSING • Licensing may be attractive when

host countries restrict imports or FDI or when the market is small.

Exclusive License

Cross LicenseNon- Exclusive License

• Exclusive License- arrangement provides exclusive rights to produce and market an intangible property in specific geographic region.

• Non- Exclusive License- does not grant a firm sole access to market. Other companies of same region may be granted license to use technical skills

• Cross Licensing-give one party a licence to use (patented or copyright material) in return for a similar licence.

LICENSINGLICENSOR

Leases the right to use intellectual

property

LICENSEEUses property to

produce products for sale in his country

LICENSEEPays royalty to

licensor

LICENSORReceiver of

royalty

LICENSING ADVANTAGES DISADVANTAGES

It carries low investment on part of licensor

Licensing agreements reduce the market opportunities for both licensor and licensee

It carries low financial risk to licensor Both parties have responsibilities to maintain product quality and promoting product.

Licensor can investigate foreign market without much efforts

Costly and tedious litigation may crop up

Licensee gets the benefit with less investment on R&D.

Problem of leakage of trade secrets of the licensor. Licensee may develop his reputation.

FRANCHISING• Franchising is a form of licensing.

Under franchising, an independent organisation called the franchisee operates the business under the name of another company called the franchisor.

• Franchisor can exercise more control over franchisee than licensing.

FRANCHISING• Under this agreement franchisee

pays a fee to the franchisor. Franchisor provides following services to the franchisee:

- Trademarks- Operating systems- Product reputations

FRANCHISINGADVANTAGES DISADVANTAGES

Franchisor can enter global markets with low investment and low risks

Difficult to control international franchisee.

Franchisor can get the information regarding markets, culture, customs and environment of host country.

Franchising agents reduce the market opportunities for both franchisor and franchisee.

Franchisee gets benefits R&D with low cost

There is scope for misunderstanding between the parties

Franchisee escapes risk of product failure Problem of leakage of trade secrets

CONTRACT MANUFACTURING

• It is outsourcing entire or part of manufacturing operations

Example- nike has contracted with a no. Of factories in South East Asia to produce its athletic footwear and it concentrates on marketing.

CONTRACT MANUFACTURING

ADVANATGES DISADVANTAGES

International company gets the locational benefits by host country’s production

Poor working conditions in host country companies affect the company image.

Small and medium industrial units in host country can also develop as most of production activities take in these units.

Host country companies may not strictly adhere to production design, quality, design problems

It reduces cost of production as host country companies with their relatives cost advantage produce at low cost.

MANAGEMENT CONTRACTS

• It is an agreement between 2 companies, whereby one company provides managerial assistance, technical expertise and specialised services to the second company of the agreement for a certain agreed period in return for monetary compensation.

MANAGEMENT CONTRACTS

• According to Kotler, Management contracting is a low risk method of getting into a foreign market and it starts yielding income right from the beginning. Such a contracted agreement becomes fruitful if contracting firm is given an option to purchase some shares in managed company within stated period.

MANAGEMENT CONTRACTS

• Monetary Compensation may be- -a flat fee- Percentage over sales- Performance bonus based on

profitability, sales growth, production- Example- Hotel Industry

MANAGEMENT CONTRACTS

ADVANATGES DISADVANATGES

Foreign company earns additional income without any additional investment, risks

Sometimes the companies allow the companies in the host country even to use their trade marks and brand name. Host country’s companies spoil the brand name if they do not keep up the quality of product service.

Helps to enter other business areas in host country

Host country companies may leak secrets of technology

Countries with abundant skilled and semi-skilled labor like India have privilege of producing products at desired time in international markets

Over dependence on contracting firm and loss of control on operations

Developing country is able to utilize specialised expertise in different areas in their economy.

There may be misunderstanding between foreign managers and local managers often affecting productivity.

TURNKEY PROJECT• “Turning” the key when plant is fully

operational. • It is a contract under which a firm

agrees to fully design, construct and equip a manufacturing/ business/service facility and turn the project over to purchaser when it is ready for operation for a remuneration.

TURNKEY PROJECT• In this agreement seller provides a

ready to use facility to the buyer in a foreign country.

• In other words, seller firm constructs a facility, starts operations, trains local personnel, and then transfers the facility to foreign owner.

TURNKEY PROJECT• Forms of remuneration- - A fixed price(firm plans to implement

project below this price)- Payment on cost+basis (total

cost+profit)

TURNKEY PROJECT• Recent approach to turnkey projects

is BOT(Build-Operate-Transfer)• Mega projects like International

turnkey project include nuclear power plants, air ports, oil refinery, national highways, railways lines.

• They are large and multi year projects

TURNKEY PROJECTADVANTAGES DISADVANATGES

Helps firm in specialising key competencies.

A rival firm is created for the firm entering into project with a foreign country firm.

For big infrastructural projects like railways airports, dams, etc host country is in a position to obtain top class design.

These deals are short term role of firm gets over once it hands over the (key) technology to foreign enterprise

JOINT VENTURE• 2 or more firms join together to

create a new business entity which is legally separate from its parent company

• In this form of entry a firm enters into a partnership agreement with one or more local companies in the target country or with firms either from third country or home country.

JOINT VENTURE• Partnership agreement includes: Sharing of equityMarket know howTechnology skillsAn imp feature of this form is contracting

firm maintain their separate and independent legal entities. This is welcomed by countries where restrictions on investment are imposed

JOINT VENTUREADVANTAGES DISADVANTAGES

Firm with limited resources can also enter foreign market through joint venture

There could be conflict among corporate objectives of partners

Less political risk Cultural differences can lead to management problems

Share the cost of administration and also risk of failure

Staff might be overburdened with JV

If the firm has entered into a joint venture with local partner, then it has an advantage of getting first hand information about culture, language, political, competitive conditions.

Freedom to act independently is missing in JV. Problems of co-ordination may arise

MERGERS AND ACQUISITIONS

• When 2 firms completely lose their individual identity and amalgamate into a new firm representing the interests of the 2, it is known as ”merger”

• When a firm acquires or purchases the other firm, acquisition is said to have taken place. In a cross border acquisition, management control of assets and operations of a domestic company to a foreign company takes place.

MERGERS AND ACQUISITIONS

ADVANTAGES DISADVANTAGES

Benefits from economies of scale Acquiring form should be in same field as old firm, otherwise on account of lack of experience and expertise the business of acquired firm may suffer.

Capturing a large market Loss of talented managerial staff can affect performance of acquired unit thus lead to losses

Tapping the underutilised resources Acquiring firm may have to overpay for assets of acquired firm

Reducing financial risk Sometimes, new firm does not weigh pros and cons of acquired firm and later realise that more than potential benefits there are losses from acquired firm.

Reduced risk of competition

Reduced cost of capital

STRATEGIC ALLIANCE

• Strategic Alliance b/w 2 countries means that they have mutually agreed to contribute their capabilities and strengths so that alliance could be a strong competitive firm in the world.

Motive behind strategic alliance

• Join hands with prospective or actual competitors

• Increasing size of market• Develop new technology• Achieve economies of scale• Synergetic effects in the partner

firms

STRATEGIC ALLIANCE

ADVANTAGES DISADVANTAGES

Potential competitors can be eliminated Sharing resources may breed future competitors for firms

No loss of individual identity for participating firms belonging to different countries

Different goals of firms may lead to conflicts

Individual risks of running the firms alone gets reducedParticipating firms agree to share the investment costFirms forming strategic alliance have access to each other’s tangible and intangible resources

COUNTER-TRADE• In this mode of entry, firms do away

with currency transactions. On the contrary, they export certain items in return of items imported (of same value) from the same country.

COUNTER-TRADEIt can be any of the following forms: • Barter- goods exchanged for goods• Buyback- supplier of plant & machinery agrees

to buy goods manufactured with that P&M• Compensation deal- part payment in cash and

rest in products• Counter purchase- seller initially receives full

payment in cash, but agrees to spend an amount in that country within the stipulated time period.

COUNTER-TRADEADVANTAGES DISADVANTAGES

Developing countries resort to this mode of entry due to foreign exchange problems faced by them.

Development of export market is affected

Suitable for firms need to fully export their plant capabilities and want to enter difficult foreign markets

Bilateralism is given importance instead of multilateralism

Preferred by many firms to dispose off their obsolete products and also increase sale of capital goods

FOREIGN DIRECT INVESTMENT(FDI)

• According to IMF, FDI is defined as investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of investor.

• It is a long term international capital movement, made for the purpose of productive activity with the intention of managerial control of foreign firm

FOREIGN DIRECT INVESTMENT(FDI)

Motives for FDI• Managerial skill• Technical knowledge• Capital and technology

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