1. Entrymodes by Bhoomika

International Market Entry ModesandBarriers in International Business

Presented by :-BhoomikaMBA 3rd Semester02911403913

MeaningEntry mode is an institutional arrangement necessary for the entry of a company's products and services into a new foreign market.Trade barriers are government-induced restrictions on international trade.

Entry StrategyEntry strategy for international markets is a comprehensive plan, which sets forth the objectives, goals, resources, and policies that will guide a company's international business operations over a future periodlongenough to achieve sustainable growth in worldmarkets.

Principal Motives for International ExpansionTo seek lower production factor costsTo expand sales and production volumeTo exploit proprietary assets

Entry Decision depends upon Timing: When is a good time to enter?Potential gain from waitingCost of delay

Scale of entrySmall scale: Establish a foothold to learnLarge scale: Acquire first mover advantage

Entry Decision depends upon Speed of expansion: How fast to grow?Value of learning Preemption of competitorsConstraints of internal resources

ModeSome modes have more flexibility embeddedSome modes reduce resource requirements

Pioneers vs. Fast FollowersPioneersCan gain and maintain competitive edge in new marketOverall pioneers may not perform as well in the long run as followers

Most successful whenHigh entry barriers existFirm has sufficient size, resources, and competencies

Pioneers vs. Fast FollowersFollowersMany become followers by defaultMay be advantage to let pioneer take initial risks

Most successful whenFew legal, technological, cultural, or financial barriersSufficient resources or competencies to overwhelm the pioneers early advantage

Entry modes

Choice of Market Entry ModeExportsLicensing FranchisingWholly Owned 1) Acquisition 2) Green Field Turnkey ProjectsJoint Ventures

ExportsExport of GoodsMNERevenuesCustomers

ExportsAdvantagesLow initial investmentReach customers quicklyComplete control over productionBenefit of learning for future expansionDisadvantagesPotential costs of trade barriersTransportation costTariffs and quotasForegoes potential location economiesDifficult to respond to customer needs wellWhen is Export Appropriate?Low trade barriersHome location has cost advantageCustomization not crucial

Licensing Local FirmHOME COUNTRYHOST COUNTRYMNE

Licensing AdvantagesLow initial investment Avoids trade barriersPotential for utilizing location economiesAccess to local knowledgeEasier to respond to customer needsDisadvantagesLack of control over operationsDifficulty in transferring tacit knowledgeNegotiation of a transfer priceMonitoring transfer outcomePotential for creating a competitorWhen Is Licensing Appropriate?Well codified knowledgeStrong property rights regimeLocation advantage

Examples Arvind Brandsrepresent Wrangler, Arrow, Nautica, Jansport and Kipling.

TheMurjani Groupis the licensee for FCUK and Tommy Hilfiger.

Beverly Hills Polo Club (BHPC) is licensed to Spencers Retail.

Franchising Local FirmHOME COUNTRYHOST COUNTRYMNELocal FirmLocal FirmBrand Name, Strategies, Advertising and Training

Franchising AdvantagesInternational standardization Reduces riskRecognized brand name and trade markRecognized relationship with suppliers

DisadvantagesRestriction on running a businessOther franchises might give the brand a bad name Initial cost is high When Is Franchising Appropriate?First time business ownerCost is affordable by the Franchisee

Franchising IFA - IFAs mission is to protect, enhance and promote franchising through government relations, public relations and educational programs.

FDD - Franchise Disclosure Document Revenue and profit calculation

Wholly Owned SubsidiariesA wholly owned subsidiary includes two types of strategies:-Acquisition Greenfield Investments

To decide which entry modes to use is depending on situations.

AcquisitionLocal FirmHOME COUNTRYHOST COUNTRYMNE

AcquisitionAdvantagesAccess to targets local knowledgeControl over foreign operationsControl over own technologyDisadvantagesUncertainty about targets valueDifficulty in absorbing acquired assets Infeasible if local market for corporate control is underdeveloped When Is Acquisition Appropriate?Developed market for corporate controlAcquirer has high absorptive capacityHigh synergy

Examples Bharti Airtel to acquire Warid Telecom Uganda April 2013

ONGC acquired Kashagan Oilfields, November 2012 Deal size: $5 billion, Country: Kazakhstan

Indian Hotels Co acquired Orient-Express Hotels, October 2012 Deal size: $1.67 billion, Country: Bermuda

ONGC acquired Kashagan Oilfields, November 2012 Deal size: $5 billion, Country: Kazakhstan

Green Field InvestmentsNew Subsidiary CompanyHOME COUNTRYHOST COUNTRYMNE

Green Field InvestmentsAdvantagesNormally feasibleAvoids risk of overpaymentAvoids problem of integration Still retains full controlDisadvantagesSlower startupRequires knowledge of foreign managementHigh risk and high commitmentWhen Is Green Field Entry Appropriate?Lack of proper acquisition targetIn-house local expertiseEmbedded competitive advantage

Example

ARS Software Engineering Private Limited

Hindustan Unilever Limited (FMCG) (Anglo Dutch )

Coca Cola India Pvt. Ltd. ( Atlanta USA)

Turnkey ProjectsLocal FirmHOME COUNTRYHOST COUNTRYMNETurnkey ProjectAcquire

Turnkey ProjectsAdvantagesThey allow firms to earn great economic returns from the know-how required to assemble and run a technologically complex process.They are less risky in short term

DisadvantagesSelling competitive advantageNo long term interest in the foreign countrycreate competitorsWhen is a Turnkey Project Appropriate? Turnkey projects are most appropriate for companies that specialize in expensive, complex production technologies, such as the chemical, pharmaceutical, petroleum refining, and metal refining industries

Examples Gactel Turnkey Projects Limitied 1) North Delhi Power Limited - RCC Induced Draft Cooling Tower 2) Indian Oil Corporation Limited - Cooling Water System (EPCC - 5)Novatech Projects India Pvt. Ltd. - Process Equipment Manufacturer 1) Asian Paints 2) BELGIUM (Petrochemical) - DOW Chemical Intl. Ltd.

Joint VentureJoint Venture CompanyMNELocal FirmHOME COUNTRYHOST COUNTRYInputsShare of Profit

Joint VentureAdvantagesAccess to partners local knowledgeReduction of concern about overpaymentBoth parties have some performance incentivesSignificant control over operationDisadvantagesPotential loss of proprietary knowledgePotential conflicts between partnersNeither partner has full performance incentiveNeither partner has full controlWhen Is a Joint Venture Appropriate?Both partners contribute hard-to-measure inputsLarge expected mutual gains in the long-runTrade secrets can be walled off

Examples

AUTOMOBILES COMPANIES AND THEIR MODE OF ENTRY IN INDIA

Acloselook at theentrystrategiesofthe multinational companies in theIndian automobile industry points tosome distinct patterns.Except forAudi,whichistargeting a premium market niche, and Hyundai,Therest of thecompanieshavesetupjoint ventures with Indian partners.

Data to support the statement

Kumar & Subramaniam (1997)A Contingency Framework for the Mode of Entry DecisionRiskReturn Control

Modes of entryExportingContractualAgreementJoint VentureAcquisitionGreenfield InvestmentsRiskLowLowModerateHighHighReturnLowLowModerateHighHighControlModerateLowModerateHighHighIntegrationNegligibleNegligibleLowModerateHigh

Trade Barriers

Tariff

Non TariffTrade barriersare government-induced restrictions oninternational trade. There are two types of trade barriers: Trade Barriers

Tariff Taxes and duties imposed on goods and services imported and exported Home currency, which is collected by the government from the owner of the goods, when he/she is passing the national borders (Trot, 1998)

Tariff barriersTaxes and duties imposed on the goods and services imported and exportedCustom dutiesImport dutySpecific duty- per unit of the productValorem duty- % of the value of the productCompound duty- combines both

Types of Tariff Barriers Quantity of goods ImportExportTransitVolume of goodsValueQuantity Combined

Advantages

Protect domestic industryRevenue for governmentJobs are saved in homeDemand for domestic products

Disadvantages

High price for imported productsLoss of demand in exporting countryCrashes between import and export country

Non Tariff Barriers Certain measures other than import duties that country adopts for restrict of foreign trade either directly or indirectly

Although it boost up the export of the country but reduces revenue of government and they are hidden devices which its effect is not visible

Types of Non-Tariff Barriers Quantitative restrictionImported quota (maximum limited)VER (bilateral agreement b/w two country)For-ex controlBlocked a/c Payments to foreign country is given to the government of that country and cant be changed to other currency but can purchase from home country

Multiple exchange rates To restrict the import of a specific commodity high rate of exchange rate is set for buying the product

Dirty float system or managed float system

Exchange clearing arrangements Trade settled by central banks rather then direct payment to buyers or sellers like RBI opens a/c in bank of England

Fiscal barriersAnti-dumping duties Dumping selling the product to host country cheaper then the price of home country to capture the marketCountervailing duties Products exported to host country very cheaper due to subsidies provided by exporting countries Subsidies Like low rate of interest on financing and raw materials

Technical Barriers Like trade in health and safety regulations, sanitary regulations ,quality standards and packing and labeling and technical standards. Government puts certain standards to delay and increase the cost of those products.State Trading Government only accepts suppliers or provides tenders to domestic firms even though the tender rate of domestic firm is high relatively then foreign firm.

Why Are Tariffs and Trade Barriers Used?Protecting Domestic Employment The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can threaten domestic industries. These domestic companies may fire workers or shift production abroad to cut costs, which means higherunemploymentand a less happy electorate.Protecting Consumers A government may levy a tariff on products that it feels could endanger its population. For example,South Koreamay place a tariff on imported beef from theUnited Statesif it thinks that the goods could be tainted with disease.

Infant Industries The use of tariffs to protect infant industries can be seen by the Import Substitution Industrialization (ISI) strategy employed by many developing nations. The government of a developing economy will levy tariffs on imported goods in industries in which it wants to foster growth.

National Security Barriersare also employed by developed countries to protect certain industries that are deemed strategically important, such as those supporting national security. Defence industries are often viewed as vital to state interests, and often enjoy significant levels of protection.

Retaliation Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the rules. For example, ifFrancebelieves that theUnited Stateshas allowed its wine producers to call its domestically produced sparkling wines "Champagne" (a name specific to the Champagne region of France)for too long, it may levy a tariff on imported meat from the United States. If theU.S.agrees to crack down on the improper labelling,Franceis likely to stop its retaliation. Retaliation can also be employed if a trading partner goes against the government's foreign policy objectives.

Barriers hindering export initiationInsufficient financesInsufficient knowledgeLack of foreign market connectionsLack of export commitmentLack of capitalLack of productive capacityLack of foreign channels of distributionManagement emphasis on developing domestic marketsCost escalation

Thank You!

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