International Market Entry Strategies: A Detailed Analysis
International Market Entry Strategies
Exporting
This is the first method firms use to enter a foreign market.
Advantages:
- Relatively low cost
- Firms may achieve experience curve economies
Disadvantages:
- Lower-cost manufacturing locations may exist elsewhere
- High transport costs and tariff barriers
- Potential issues with foreign agents
Turnkey Projects
These involve a contractor that agrees to handle every detail of a project for a foreign client, including the training of operating personnel. When the contract is completed, the foreign client is handed the key to a plant that is ready for full operation.
Advantages:
- Less risky in countries where the political and economic environment is such that a longer-term investment might expose the firm to unacceptable economic risk
Disadvantages:
- Not advantageous when the firm’s process technology is a source of competitive advantage
Licensing
This is an arrangement where a licensor grants the rights to intangible property to the licensee for a specified time period and receives a royalty fee from them. Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks.
Advantages:
- The firm does not have to bear development costs and risks when opening a foreign market
- Avoids barriers to investment
- Allows a firm with intangible property to capitalize on market opportunities
Disadvantages:
- The firm does not have tight control over manufacturing and marketing needed to realize experience curve and location economies
- Inability to coordinate strategic moves using profits earned in one country
- Potential for loss of technology (to reduce this, firms can use cross-licensing agreements or form a joint venture)
Franchising
This is a form of licensing where the franchisor sells intangible property to the franchisee.
Advantages:
- Firms avoid the costs and risks of opening up a foreign market
Disadvantages:
- May inhibit the firm’s ability to take profits from one country to support competitive attacks in another
- The geographic distance from its foreign franchisees can make poor quality hard to detect
Joint Ventures
These involve the establishment of a firm that is jointly owned by two or more independent firms.
Advantages:
- A firm benefits from a local partner’s knowledge
- Costs and risks of opening a foreign market are shared with the partner
- Can help firms avoid the risk of nationalization
Disadvantages:
- The firm risks giving control of its technology to its partner
- The firm may not have tight control over subsidiaries to realize the experience curve
- Shared ownership can lead to conflicts for control
Wholly Owned Subsidiaries
These involve 100% ownership of the subsidiary’s stock. A firm establishing a wholly-owned subsidiary can set up a new operation in that country or acquire an established firm.
Advantages:
- Reduce the risk of losing control over core competencies
- May be required if a firm is trying to realize location and experience curve economies
Disadvantages:
- Firms bear the full costs and risks of setting up overseas operations
Pros and Cons of Acquisitions
Advantages:
- Quick to execute
- Enable firms to preempt competitors
- Less risky than greenfield ventures
Disadvantages:
- Many acquisitions are not successful
Acquisitions fail when:
- The firm overpays for the acquired firm’s assets
- There is a conflict between the acquiring and acquired firm cultures
- There is inadequate pre-acquisition screening
How to reduce acquisition problems:
- Careful screening of the firm to be acquired
- Moving rapidly to implement an integration plan
Pros and Cons of Greenfield Ventures
Advantages:
- Allow the firm to build the kind of subsidiary company that it wants
Disadvantages:
- Slower to establish
- Risky
- Problematic if a competitor enters via acquisition and quickly builds market share