FOREIGN MARKET ENTRY STRATEGIES

Dr. PRERNA KUMAR

DECISIONS?

How many resources and what investment are necessary to enter the market? To what extent can the manufacturer control corporate activities in the foreign market? How much knowledge can the manufacturer gain about the foreign market by this market entry alternative? (Keegan, 2001).

Market Entry Strategies

- Exporting - Licensing - Management Contract - Joint Venture - Turnkey Operations - Assembly Operations - Acquisition

Exporting, Licensing and Management Contract require no investment overseas. Others require varying degrees of FDI.

EXPORTING
The marketing and direct sales of a domestically made product in a foreign country

Does not require foreign investment in production facilities

Direct exports Indirect exports

Types of Exporting

Indirect

local intermediary knows the foreign market conditions

Direct

gives the company a greater degree of control over its distribution channels

Piggybacking

already modes of transport and distribution facilities set up and the newly exporting company chooses to use them

EXPORTING

Advantages Manufacturing is home-based Opportunity to learn overseas markets before investing in bricks and mortar Speed of entry because of its use of existing facilities . Min risk : simple export of excess production Cost effective

EXPORTING

Disadvantages overseas agents: exporter has a lack of control Limited information on the local market Logistics Problems with servicing exports Trade barriers Difficult when home currency is strong

Trade Barriers to imports

Indonesia, Malaysia, the Philippines & Thailand : domestic car industries are protected from foreign competition. Govt measures : import bans, price regulations, custom duties on imports of complete cars are 300%. BMW has local partners to sell cars.

LICENSING

An agreement that permits a foreign company to use industrial property (patents, trademarks, copyrights), technical knowhow and skills, architectural designs or any combination of these in a foreign market. Licensor issues a license to a foreign company (licensee), to use a manufacturing process, trademark, patent, or other item of value for a fee or royalty. CocaCola and Disney license logos to clothings, toys.

LICENSING

Advantages - quick expansion (entry) when capital is scarce - very low risk: capitalise technology and strong brand image - allows host country to gain technology and create jobs - allows host country and licensee to keep most profit - circumventing trade barriers

LICENSING

-

Disadvantages - very low profit licensee becoming future competitor

cross technology exchange

- licensee's poor performance - difficulty in terminating licensing agreement

LICENSING

Inconsistent product quality across countries due to licensees lax quality can injure reputation of product. McDonalds supervises operations to ensure product quality and consistency; discontinued license in France.

MANAGEMENT CONTRACT

To generate revenue by signing contracts with foreign govt or a new owner (who may lack technical and managerial expertise), to manage business in a foreign country.

MANAGEMENT CONTRACT

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

MANAGEMENT CONTRACT

Club Med, leader in international resort vacations. LDCs want tourism=>attractive financing options to Club Med Club Med has minority ownership; though it manages all resorts.

JOINT VENTURE

A partnership of two or more participating companies that have joined forces to create a separate legal entity (Cateora & Graham, 2002).

Features : They are established, separate, legal entities.

A joint venture acknowledges the intent of the partners to share in the management of the joint ventures. These partnerships are made between legally incorporated entities like companies; each party must have invested to some extent in the venture

JOINT VENTURE

Most American firms seek Saudi partners to establish JVs to deal effectively with Saudi Arabias political demands.

JOINT VENTURE

Disadvantages conflict: cultural problems, divergent goals, disagreements over production & marketing strategies loss of control of partner with < 50% ownership.

MANUFACTURING

A strategy involving all or some manufacturing in a foreign country, to set up a production base. Sourcing is a kind of manufacturing done in foreign country, for the purpose of exporting from that country to a companys home country or to other countries.

MANUFACTURING

Advantages - job creation for host country - host country gaining resources (capital and technology) - avoid or minimise import taxes -trade barriers. Honda set up plants in Ohio (43% exports from US market). - higher profit

MANUFACTURING

- utilization of local labor - host country's economic incentives viz., no control on dividend remittances, import duty concessions, guarantees against expropriation, tax holidays.

Assembly Operations
Parts or components are produced in various countries in order to gain each countrys comparative advantage. Capital intensive parts : advanced nations Labour intensive parts :developing economies.

Assembly Operations
Advantage Allows a co. to be price competitive against cheap imports. A defence strategy of US apparel makers sewing is labour-intensive; hence precut fabrics shipped to Costa Rica and Honduras.

Assembly Operations

Advantages
allows a companys product to enter many markets without being subject to tariffs and quotas (circumvent trade barriers).

utilization of local labor

Assembly Operations

Disadvantages
local product-content laws curb the extent of freedom and flexibility of such operations. Let us understand

Assembly Operations

South American laws: 50 to 95% components used in products be produced domestically. As % of required local content increases, the companys flexibility declines and erodes the price advantage.

Turnkey Operations

An agreement by the international co to supply a foreign buyer with a facility fully equipped and ready to be operated by the buyers personnel, who will be trained by the international co. Used in large-scale projects,cement, telecommunications

Turnkey Operations

Advantages
latest technology to LDCs Sale of technical and engineering skills to firms in LDC agreement factors: installation and testing of equipments, training of local personnel, contract for future maintenance of plant. Continuous profit through supply of materials and equipment for the operation once turned over to the owner

Turnkey Operations

Fiat in the 1960s effectively delivered producing plant to the USSR and Poland (rather than selling these countries vehicles).

Acquisition

To enter a foreign market rapidly and yet retain maximum control by direct investment.

Advantages - product/geographical diversification - acquisition of expertise(technology, marketing, management)

Acquisition
-

Disadvantages

host country's resentment exploitation, blow to national pride - Legal hurdles by host country : govts prohibit acquisition that create market domination. - high acquisition costs and acquisition debt
-

merging two management teams Employee resentment

Tata Steel's Acquisition of Corus

biggest overseas acquisition by an Indian company. Tata Steel emerged as the fifth largest steel producer in the world after the acquisition. acquisition gave Tata Steel access to Corus' strong distribution network in Europe. Corus benefits from Tata Steel's expertise in low cost manufacturing of steel.

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

Thank You