Chapter 9 Foreign Market Entry Strategies. Chapter Outline Foreign Direct Investment (FDI) Exporting Licensing Management Contract Joint Venture Manufacturing.

Chapter 9Foreign Market Entry Strategies

Chapter Outline

• Foreign Direct Investment (FDI)

• Exporting

• Licensing

• Management Contract

• Joint Venture

• Manufacturing

Chapter Outline

• Assembly Operations

• Turnkey Operations

• Acquisition

• Strategic Alliances

• Analysis of Entry Strategies

• Free Trade Zones (FTZs)

Which countries should it enter and in what sequence? What criteria should be used to select entry markets: proximity, stage of development, geographic region, cultural and linguistic criteria, the competitive situation, or other factors? How should it enter new markets?

PREFACE

In choosing a country for direct investment, a number of factors must be considered. Some of these factors are product image, competition, local resources (raw materials, manpower, infrastructure, etc.), labor costs, type of product, taxation, foreign exchange and investment climate. To take advantage of the global economy, companies have been cutting costs by moving jobs to lower-cost areas. Investment banks wonder why they should pay an analyst in London when they can employ an analyst in India to do the same kind of job at a much lower salary.

Foreign Market Entry Strategies

•Indirect Strategies- Exporting- Licensing- Management Contract - Turnkey Operations

Foreign Market Entry Strategies

•Foreign Direct Investment (FDI) Strategies- Acquisition vs. Greenfield - Assembly vs. Manufacturing- Sole Venture vs. Joint Venture

Foreign Market Entry Strategies

A Foreign direct investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country

A high share of FDI in a country’s total capital inflows may reflect its institutions’ weakness instead of its strengths. However, empirical evidence indicates that FDI benefits developing host countries. One indisputable fact is that developed countries are both the largest recipients and sources of FDI.

The phenomenon is dominated by the triad of the European Union, the USA, and Japan, accounting for 71

percent of inward flows and 82 percent of outward flows.

ACQUISITION

When a manufacturer wants to enter a foreign market rapidly and yet retain maximum control, direct investment through acquisition should be considered. The reasons for wanting to acquire a foreign company include product/geographical diversification, acquisition of expertise (technology, marketing, and management), and rapid entry. For example, Renault acquired a controlling interest in American Motors in order to gain the sales organization and distribution network that would otherwise have been very expensive and time-consuming to build from the ground up.

Acquisition

• Advantages

- quick market penetration

- synergy

• Disadvantages

- host country's resentment

- high acquisition costs

- unforeseen problems

GREENFIELD INVESTMENT

Acquisition is viewed in a different light from other kinds of foreign direct investment. A government generally welcomes foreign investment that starts up a new enterprise (called a greenfield enterprise), since that investment increases employment and enlarges the tax base. An acquisition, however, fails to do this since it displaces and replaces domestic ownership. Therefore, acquisition is very likely to be perceived as exploitation or a blow to national pride – on this basis, it stands a good chance of being turned down.

BROWNFIELD INVESTMENT

A special case of acquisition is the brownfield entry mode. This mode happens when an investor’s transferred resources dominate those provided by an acquired firm. In addition, this hybrid mode of entry requires the investor to extensively restructure the acquired company so as to assure fit between the two organizations. This is common in emerging markets, and the extensive restructuring may yield a new operation that resembles a greenfield investment. As such, integration costs can be high. However, brownfield is a worthwhile strategy to consider when neither pure acquisition nor greenfield is feasible.

MANUFACTURING

The manufacturing process may be employed as a strategy involving all or some manufacturing in a foreign country. One kind of manufacturing procedure, known as sourcing, involves manufacturing operations in a host country, not so much to sell there but for the purpose of exporting from that company’s home country to other countries. The goal of a manufacturing strategy may be to set up a production base inside a target market country as a means of invading it. There are several variations on this method, ranging from complete manufacturing to contract manufacturing (with a locals ) and partial manufacturing.

Manufacturing

•Advantages- job creation for host country- host country gaining resources (capital and technology)- low trade barriers- higher profit- utilization of local labor- host country's economic incentives•Disadvantages- expropriation risk- large capital investment

ASSEMBLY OPERATIONS

An assembly operation is a variation on a manufacturing strategy. “Assembly means the fitting or joining together of fabricated components.” The methods used to join or fit together solid components may be welding, soldering, riveting, gluing, laminating, and sewing. In this strategy, parts or components are produced in various countries in order to gain each country’s comparative advantage. Capital-intensive parts may be produced in advanced nations, and labor-intensive assemblies may be produced in a less developed country, where labor is abundant and labor costs low.

Assembly Operations

•Advantages- circumventing trade barriers- utilization of local labor•Disadvantages- local product-content laws

JOINT VENTURES

The joint venture is another alternative a firm may consider as a way of entering an overseas market. A joint venture is simply a partnership at corporate level, and it may be either domestic or international. For the discussion here, an international joint venture is one in which the partners are from more than one country. Much like a partnership formed by two or more individuals, a joint venture is an enterprise formed for a specific business purpose by two or more investors sharing ownership and control.

Joint Venture

• Advantages

- maximizing profit while minimizing risk

- sharing of resources

- allowing host country to gain technology and create jobs

- circumventing trade barriers

- local partner's market knowledge

- local partner's political connections

Joint Venture

•Disadvantages- conflict with partner- sharing of profit- loss of control- difficulty in terminating relationship

Exporting

Exporting is a strategy in which a company, without any marketing or production organization overseas, exports a product from its home base. Often, the exported product is fundamentally the same as the one marketed in the home market.

The main advantage of an exporting strategy is the ease in implementing the strategy. Risks are minimal because the company simply exports its excess production capacity when it receives orders from abroad. As a result, its international marketingeffort is casual at best.

Exporting

• Advantages

- simple

- low risk

• Disadvantages

- low profit

- trade barriers

- difficult when home currency is strong

Licensing

Licensing is a contractual arrangement whereby one company (the licensor) makes a legally protected asset available to another company (the licensee) in exchange for royalties, license fees, or some other form of compensation. The licensed asset may be a brand name, company name, patent, trademark, product formulation technical know-how and skills (e.g., feasibility studies, manuals, technical advice), architectural and engineering designs. Licensing is widely used in the fashion industry.

Licensing

Most French designers, for example, use licensing to avoid having to invest in a business. In another example, Disney obtains all of its royalties virtually risk-free from the $500 million Tokyo Disneyland theme park owned by Keisei Electric Railway and Mitsui. The licensing and royalty fees as arranged are very attractive: Disney receives 10 percent of the gate revenue and 5 percent of sales of all food and merchandise. Moreover, Disney, with its policy of using low-paid young adults as park employees, does not have to deal with the Japanese policy of lifetime employment.

Licensing

• Advantages

- quick expansion (entry) when capital is scarce

- very low risk

- allowing host country to gain technology and create jobs

- allowing host country and licensee to keep most profit

- circumventing trade barriers

Licensing

•Disadvantages- very low profit- licensee becoming future competitor- licensee's poor performance- difficulty in terminating licensing agreement

Management Contract

Management contract is a strategy used by a company with management experience with the idea of managing the business or investment of a foreign owner/government for a fee.

Management contracts may be used as a sound strategy for entering a market with a minimum investment and minimum political risks. Management contract is a common strategy in the hotel business and tourism.

Management Contract

Club Med, a leader in international resort vacations, is frequently wooed by developing countries with attractive financing options because these countries want tourism. Club Med is unlikely to be asked to leave a country where it has a resort.

Zenith Hotels International itself manages nine hotels in China and one hotel in Thailand without owning them, and most of its hotels do not carry the Zenith name.

Management Contract

•Advantages- minimum investment- minimum political and economic risks•Disadvantages- low profit (management fee as compensation)

TURNKEY OPERATIONS

A turnkey operation is an agreement by a seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer's personnel, who will be trained by the seller. The term is sometimes used in fast-food franchising when a franchisor agrees to select a store site, build the store, equip it, train the employees. In international marketing, the term is usually associated with giant projects that are sold to governments or government-run companies. Large-scale plants requiring technology and large-scale construction processes unavailable in local markets commonly use this strategy.

Strategic Alliances

A relatively new organizational form of market entry and competitive cooperation is strategic alliance. This form of corporate cooperation has been receiving a great deal of attention as large multinational firms still find it necessary to find strategic partners to penetrate a market. Strategic alliances may be the result of mergers, acquisitions, joint ventures, and licensing agreements. Joint ventures are naturally strategic alliances, but not all strategic alliances are joint ventures.

Airlines are a good example of the international nature of strategic alliances. Almost all major airlines have joined one of the three strategic groups: Star, SkyTeam, and Oneworld.

Strategic Alliances

• Mergers and Acquisitions

• Licensing Agreements

• Joint Ventures

- all joint ventures are strategic alliances- not all strategic alliances are joint ventures

- not necessary for strategic alliances to have equity investment

- not necessary for strategic alliances to form a new business entity

Free Trade Zones (FTZs)

An FTZ is a secured domestic area in international commerce, considered to be legally outside a country’s customs territory. It is an area designated by a government for the duty-free entry of goods. It is also a location where imports may be handled with few regulations, and little or no customs duties and excise taxes are collected. As such, goods enter the area without any duty being payable. The duty would be paid only when goods enter customs territory of the country where an FTZ is located.

Free Trade Zones (FTZs)

•secured domestic area in international commerce•legally outside a country's customs territory•area designated by a government for duty-free entry of goods

Free Trade Zones (FTZs)

• not used basically for warehousing

• future: benefit derived from manufacturing, not storing.

• Advantages

- job retention and creation

- facilitating imports

- facilitating exports