Modes of Entry into National Markets. Comparing the Different Modes of Entering and Serving National Markets. Lesson Outline (key points). Entry modes Comparisons of strengths and weaknesses of different entry modes
Comparing the Different Modes of Entering and Serving National Markets
Usually requires up-front research and commitment of resources to cultivate relationships abroad.
Maximizes the firm’s margin on product sales.
More risk than indirect exporting, more knowledge required and more “hassle costs”.
Can learn about foreign markets by getting feedback from abroad.
Often happens unconsciously.
Often realize lower margins on product sales, especially when product is re-sold abroad “as is”.
Requires less knowledge about how to carry out export transactions, about foreign markets.
Firm will generally learn nothing, or at most very little, about foreign markets.Direct vs Indirect Exports
No large up-front investment, low financial risk
Can be relatively quickly implemented
Can enter a new market gradually, if desired
Can learn about a new environment at a comfortable pace and at little expense
Possible trade barriers
May not maximize overseas salesExporting (vs licensing, FDI)
Licensor: Low financial risk
Licensor: Can learn about foreign market with low resource commitment
Licensor: Little effort required once agreement negotiated, beyond monitoring of partner
Licensee: Acquire access to valuable intellectual property with little or no R&D cost
Must share gains, limits market opportunities for licensor and licensee
Negotiations can take many months
Agreements must be drawn up with great care to avoid misunderstandings and to allow for many contingencies
May lead to costly, tedious litigation
Licensor: May create future competitorLicensing (vs Exporting, FDI)
Maximizes share of margin on sale of products
Maximizes control over foreign operations, facilitating coordination across national subsidiaries
Maximizes learning about and from foreign market
Sidesteps trade barriers and possible hostility of host nation governments towards imports
If products are built locally, sold locally, then foreign exchange risk is eliminated
Maximum financial risk
High commitment of resources needed
Can face expropriation, confiscation of foreign assets by host nation governments
National governments may be hostile to certain kinds of FDIForeign Direct Investment (FDI), Wholly Owned (vs licensing, exports)
Involves buying or leasing land, building a new facility from scratch, and training and hiring a brand new work force.
Involves buying a pre-existing firm (usually) or pre-existing assets (possibly), then using the newly purchased firm and/or assets to operate.FDI, Wholly Owned
Start with a clean slate, no inherited problems
Can pick best location for firm’s needs, may have a much wider array of sites to choose from
Can often negotiate substantial financial and other incentives from host nation governments, regional and local officials
Can expend resources and acclimate to the new national business culture at firm’s own pace
A lot of time and patience needed (ie: up to several years)
Desired locations may be unavailable or very expensive
Firm most likely to be perceived as “foreign” and unwelcome (EuroDisney)
Many local and national regulations to comply with while building factory
Must recruit and train workforceFDI, Wholly Owned: Greenfield (vs Acquisition)
“Buy today, operate tomorrow”. Quickly gain control over foreign operations, employees, technology, brand names, and a distribution network
Buy liabilities and weaknesses, along with assets
Potential clash between corporate and national cultures
Usually must pay a substantial sum up front, often at a hefty premium over “market value” as suggested by stock priceFDI, Wholly Owned:Acquisition (vs Greenfield)
Profit Sanctuaries & “Black Holes”
Relating strategy for the firm, and for lines of business, to specific modes of serving national markets