Mode of Entry
Once a firm decides to enter a particular foreign market, time and level of commitment, it must decide on the best mode of entry.
Mode of entry strategy refers to the organizational structure used by the firm to enter the foreign market
Types of Entry Modes
-Wholly owned subsidiaries
Mode of Entry: Exporting
– Practice by which a company sells its products directly to buyers in a target market. Company may use:
– A person who represents the products of the exporting company in overseas markets. Works for the exporting company.
Firms that take ownership of an export company’s products and then attempt to sell the product in the foreign market. Distributors buy the product and then resell it in the foreign market.
-Many Japanese Distributors that handle foreign company products in Japan.
– Practice by which a company sells its products through intermediaries in a target market. Export companies may use:
Represent the export company on a commission basis. Agents receive a percent of their sales.
Export Management Companies
Companies that export products on behalf of an export company. These companies generally possess a good working knowledge of the target countries.
Export Trading Companies
Companies that provide a wide range of services to export companies, in addition to exporting their products.
Storage facilities, financing trade, importing for company.
Mode of Entry: Turnkey projects
In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel.
At completion of the contract, the foreign client is handed the “key” to a plant that is ready for full operation – hence the term turnkey.
This is actually a means of exporting process technology to another country.
Turnkey projects are most common in the chemical, pharmaceutical, petroleum refining and metal processing industries. Why??
Advantages of Turnkey Projects
Firms with technological know-how can earn great economic returns through overseas turnkey projects
Turnkey projects may also make sense in a country where the political and economic environment is such that a longer-term investment might expose the firm to unacceptable political and/or economic risk
Disadvantages of Turnkey Projects
May miss the long term opportunity of the market as turnkey projects are short termed.
How can a firm may ensure a long term involvement through a turnkey project?
Firms may sell its source of competitive advantage,
Western firms that sold oil refining technology to firms in Saudi Arabia, Kuwait and other Gulf states now find themselves competing with these firms in the world oil markets
Mode of Entry: Licensing
A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified time period, and in return, the licensor receives a royalty fee from the licensee.
Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks.
Example: Xerox licensed xerographic know-how to Fuji-Xerox ( a joint venture between Xerox and Fuji, Japan)
Advantages of Licensing
Low /no investment required
Licensee bears the risk and development costs
Maybe the only way a firms can benefit from an overseas market (Xerox )
A firm may not be interested in commercial production aspect of a technology that it invents (Bell Laboratory)
Disadvantages of Licensing
does not give the firm tight control over manufacturing, market and strategy that maybe required to gain from a foreign market
potential loss of proprietary (or intangible) technology or property.
Mode of Entry: Franchising
Franchising is basically a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business.
Mostly in service firms use franchising as a mode of entry into a foreign market
Franchisor typically receives royalty ( a portion of revenue ) plus may also receive an onetime initial fee
Example : McDonald’s, Seven Eleven Japan etc.
Advantages of Franchising
Similar to licensing
Through franchising a firm can quickly expand to global market (Starbucks)
Disadvantages of Franchising
Franchising may inhibit the firm’s ability to take profits out of one country to support competitive attacks in another.
Quality control -> the geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect
Mode of Entry: Joint Ventures
A joint venture entails establishment of a firm that is jointly owned by two or more otherwise independent firms.
Fuji-Xerox, for example, was set up as a joint venture between Xerox (USA) and Fuji Photo (Japan)
Shanghai Volkswagen: a joint venture between Volkswagen (Germany) and Shanghai Automotive Industry Corporation(China)
Reasons for Collaboration
Vertical and horizontal links
Gain new market knowledge
Types of International Joint Ventures
Traditional equity joint-venture
Two parents from two different countries
Two parents from two different countries, set up a venture in a third country
Two foreign subsidiaries of the same MNE
Two parents of same nationality, venture located in a different country
Greenfield (new) vs. merging existing operations
Joint Ventures as ‘Mode of Choice’
35% of U.S. multinationals and 40-45% of Japanese multinationals form international joint ventures when they enter into a new market
Duration varies; tendency to last longer
Performance varies (often measured as partners’ satisfaction with how the venture meets their own objectives)
Considered successful in about 50% of the cases
IJV were initially used to exploit North American MNE’s existing competencies in new markets. While learning through joint-ventures has become an increasingly important objective.
Mode of Entry:
Wholly Owned Subsidiaries
In a wholly owned subsidiary, the firm owns 100% of the stock of the foreign operation.
Establishing a wholly owned subsidiary in a foreign market can be done two ways.
Green Field Venture – set up its own operation
Acquisition – acquire a foreign firm