Basic foreign expansion entry decisions

A firm contemplating foreign expansion must make three decisions Which markets to enter? When to enter these markets? What is the scale of entry?

Which foreign markets

Favorable
Politically stable developed and developing nations Free market systems No dramatic upsurge in inflation or privatesector debt

Unfavorable
Politically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing
14-3

Timing of entry
Advantages in early market entry:
First-mover advantage. Build sales volume. Move down experience curve and achieve cost advantage. Create switching costs.
Tie customers to your product.

Disadvantages:
First mover disadvantage - pioneering costs. Changes in government policy.
14-4

Scale of entry
Large scale entry
Strategic Commitments - a decision that has a longterm impact and is difficult to reverse. May cause rivals to rethink market entry. May lead to indigenous competitive response
Jollibee Example

? Good or Bad? .

Small scale entry:

Time to learn about market. Reduces exposure risk.
Lack of Commitment problems
14-5

Entry modes
Exporting Turnkey Projects Licensing Franchising Joint Ventures Wholly Owned Subsidiaries
14-6

Exporting
Advantages:
Avoids cost of establishing manufacturing operations May help achieve experience curve and location economies

Disadvantages:
May compete with low-cost location manufacturers Possible high transportation costs Tariff barriers Possible lack of control over marketing reps
Local Agent Problems
14-7

Turnkey projects
Advantages:
Contractor agrees to handle every Less risky than conventional FDI detail of project for foreign client Disadvantages: No long-term interest in the foreign country May create a competitor Selling process technology may be selling competitive advantage as well An example would be the creation of a "turnkey hospital" which would be building a complete medical center with installed high-tech medical equipment.
Earn $ on Know How
14-8

Can earn a return on knowledge asset

Licensing: Advantages
Reduces development costs and risks of establishing foreign enterprise. Lack capital for venture. Unfamiliar or politically volatile market. Overcomes restrictive
investment barriers.

Others can develop business applications of intangible property.

14-9

Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties.

Franchising
Advantages:
Reduces costs and risk of establishing enterprise

Disadvantages:
May prohibit movement of profits from one country to support operations in another country Franchiser sells intangible property Quality control

and insists on rules for operating business

14-10

Joint Ventures
Advantages:
Benefit from local partners knowledge. Shared costs/risks with partner. Reduced political risk. Risk giving control of technology to partner. May not realize experience curve or location economies. Shared ownership can lead to conflict Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. The stated reason for this venture is to combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector. Both companies have stopped making their own mobile phones.
14-11

Disadvantages:

Wholly owned subsidiary

Subsidiaries could be Greenfield investments or acquisitions Advantages:
No risk of losing technical competence to a competitor Tight control of operations. Realize learning curve and location economies.

Disadvantage:
Bear full cost and risk For example, American Broadcasting Company (better known as ABC TV) is a wholly owned subsidiary of The Walt Disney Company since Walt Disney is the sole 14-12 owner of ABC

Selecting an entry modeowned subsidiary, except: Wholly Technological Know-How

1. Venture is structured to reduce risk of loss of technology. 2. Technology advantage is transitory. Then licensing or joint venture OK

Management Know-How

Franchising, subsidiaries (wholly owned or joint venture) Combination of exporting and wholly owned subsidiary
14-13

Pressure for Cost Reduction

14-14