Reviewer Chapter 13 Country Selection and Entry Mode

Deciding Which Foreign Markets to

Enter As these differences grow, and
particularly when working across very
An external analysis is an important first different languages and cultures, global
step in determining the attractiveness of companies are more likely to face novel
foreign markets, and any such analysis challenges in the foreign market, may
likely includes a full PEST make poorer decisions, and face
(political, economic, sociocultural, and increased costs to coordinate activities
technological) analysis. However, not all with the foreign division.
decisions are based solely on an
opportunity. Sometimes other forces and
resources at the company level may keep
firms out of or pull firms into specific
countries. These forces include the liability
of foreignness, first-mover advantages,
and the need to follow customers into
specific markets.
Customers often exhibit an ethnocentrism
bias - a bias indicating that customers
A.​ The Liability of Foreignness
prefer local brands over foreign brands
and are willing to pay more for local
The liability of foreignness describes the
brands even when the quality is inferior
challenges multinational companies face
when entering and competing in foreign
Foreign firms often face a bias in the
markets.
media. Local media out-lets often are more
negative in their coverage of foreign firms.
Liability of foreignness - a liability
This media slant against foreign firms is
foreign firms face as the geographic,
another part of the liability of
economic, cultural, or administrative
foreignness.
differences between the foreign market
and the domestic market increase
Finally, government officials are also likely
to discriminate against foreign firms.
Companies doing business in countries
Governments prefer that companies remain
that are geographically proximate, are
domestically owned rather than
economically similar, share a common
foreign-owned, and officials can take
cultural base, and have few administrative
actions that deter foreign firms from
differences— such as Thailand and Laos,
attempting to acquire local firms, such as
or the United States and Canada— face a
increasing regulations and proactively
small liability of foreignness. Those doing
looking for suitable domestic acquirers.
business in the presence of large
differences— such as Brazil and Saudi
Research suggests that minimizing the
Arabia, or Mexico and Turkey— are likely to
geographic, economic, cultural, or
face a large liability of foreignness.
administrative distances between a firm
and a foreign market can help foreign
firms succeed in new markets. Six entry modes

B.​ First-Mover Advantage 1.​ Exporting

A second force driving companies toward Exporting is the process of producing a

specific international markets is the desire good or service in one country and
to be the first company to move into selling it in another country.
those markets. In many cases, the first
entrant into a market captures a Advantages
leadership position, enabling it to control -​ the associated low-cost of
critical resources such as distribution entering a foreign market.
channels and to build up buyer-switching -​ requires little infrastructure
costs, particularly where network effects or investment,
branding are important. -​ needs to keep little to no inventory
in different locations around the
C.​ Following Clients Globally world.
-​ Reaching other markets via
Last, companies may expand not because exporting is also getting easier, with
they necessarily want to, but because their e-marketers such as Alibaba.com In
customers pressure them. China and Amazon.com in the
United States making it possible for
smaller producers to sell directly to
consumers around the globe.
Entry Modes -​ Its flexibility. If sales decline, an
export company like Samsung
Non Equity modes - typically carry less merely ships fewer products; if sales
risk but also bring fewer rewards. They increase, it ships more. Exporters
include the entry modes of exporting, are thus able to respond relatively
turnkey operations, licensing, and quickly to changes in global
franchising. demand. This flexibility also allows
firms to enter and exit markets
Equity modes - require a larger quickly.
investment and engage the foreign firm in -​ exporting enables firms to move
local operations. This increases the risk of quickly down the learning curve
the activity but also allows the firm to get and capture economies of scale.
close to customers and thus build better
products. Equity modes include joint Disadvantages
ventures and wholly owned subsidiaries, -​ exports of goods and services are
either greenfield projects or acquisitions" often subject to import tariffs.
-​ where production occurs may
have high relative costs, which can
cause the product to be
 comparatively expensive— perhaps are fully functional upon delivery,
prohibitively expensive— in other customers can sometimes begin
markets. competing with the original firm
-​ the time and money required to using the design and knowledge
transport goods, especially if items they gained from the turnkey
are heavy or bulky, or if their sale is company.
time-sensitive. As the costs of
transportation continue to fall, 3.​ Licensing
exporting is likely to continue to
increase. A license is a contractual agreement
between two parties, the licensor and the
licensee, that grants the licensee certain
rights, such as the right to produce or
sell the licensor's patented goods,
display the licensor's brand name or
trademark, or use the licensor's
intellectual property.

2.​ Turnkey Operations Advantages

-​ The licensing firm typically takes
In a turnkey project, a company builds a on very little risk in entering
facility in a foreign market for a client, foreign markets.
makes it operational, and then hands -​ Licensing allows a company to
over the "keys" to the client, which will grow quickly by leveraging its
own and operate the facility. Such brand or technology into new
projects are a way for firms to industries and new locations.
internationalize their process -​ licensing allows companies to
technologies, such as refining oil or enter geographic or product
building nuclear power stations, when markets that are out-side their
opportunities for equity entry are restricted. own strategic goals.
-​ Licensing can help solve the
Advantages problems of pricing a good
-​ they enable foreign firms to enter across markets.
technologically complex markets
and politically sensitive Disadvantages (threefold)
environments. -​ In licensing technology, brands, or
other intellectual property to firms, a
Disadvantages licensor becomes one step
-​ The major disadvantage of turnkey removed from customers and
operations is that once the firm loses the opportunity to get
hands over operations to the feedback directly from them. The
customer, it has no further licensor can also end up trapped
financial interest in the business. by the agreement.
-​ Can actually create potential
competitors. Because the projects
 -​ licensing agreements provide only -​ to build franchisee interest in
limited control over the way in foreign markets, businesses may
which the licensed brand, find they need to be the first
technology, or intellectual property is mover.
used.
-​ the licensor may risk a loss of
core capabilities.

4.​ Franchising

Franchising is a unique form of licensing

in which a partner, called the franchisee,
is given the right to use the franchisor's
brand and other intellectual property,
while the franchisor takes an active role in
the ongoing operations of the firm, such as 5.​ Joint Ventures
advertising, training staff, and managing
inventory. An international joint venture is a new legal
entity created and owned by two or more
Some franchisors provide a master existing companies from different
franchise arrangement rather than countries. The parent companies can have
contracting with franchisees on a very different degrees of ownership in the
store-by-store basis. This deal provides joint venture, ranging from a 50/50 split to a
the master franchisee the ability to 99/1 ownership structure or anything in
create sub franchises in a specific between, depending on their goals, their
geographic area. investments in the venture, and their
resources and capabilities. The more
Advantages (twofold) partners, the more complex the contract,
-​ The franchisor can seek global although many joint ventures are simple
growth with limited financial risk 50/50 arrangements between two parent
yet maintain direct involvement with companies.
the franchisees.
-​ The franchisor can benefit from Joint ventures can be an attractive entry
flexibility in a licensing mode when a company is concerned about
arrangement that enables a physically entering a new market. In some
franchisee to respond to local countries, foreign firms are required by
customers' needs. law to set up joint ventures if they want
to enter— encourage knowledge transfer
Disadvantages from the foreign firm to the domestic
-​ One of the key challenges of firm.
franchising is finding suitable
franchisees. focus on global Advantages
expansion with master -​ Reduced political risk (corruption,
expropriation, unfair regulation),
 the opportunity to leverage local -​ Enable parent firms to maintain
knowledge, and shared costs by tight control over their foreign
providing local partners. operations, opening the opportunity
for a high degree of coordination.
Disadvantages -​ Enables firms to gain firsthand
-​ The partners sometimes have experience with customers and
different goals. The lack of learn directly from the local
strategic alignment can lead to market.
serious problems in how these
firms allocate resources, market Disadvantages (twofold)
to customers, and price goods -​ It is an expensive undertaking.
and services. Companies must bear initial costs
-​ Can lead to the loss of intellectual such as purchasing retail or
property if the less manufacturing space, hiring staff,
technologically advanced partner and establishing distribution entirely
takes advantage of the by themselves, and that means
relationship. putting a large investment on the
line.
International joint venture a new legal -​ the company entering via a wholly
entity created and owned by two or more owned subsidiary bears the entire
existing companies from different risk of ongoing operations. If
countries things don't go well in the market,
there is no easy exit strategy
6.​ Wholly Owned Subsidiary other than giving up the entire
investment.
wholly owned subsidiary a new legal
entity set up for operation in a foreign Summary
market that is legally a separate Entry Mode Advantages Disadvantages

company but is fully owned by the parent Exporting Low cost, quick access, Tariffs, embedded
firm flexibility, economies of scale production costs,
transportation costs

Turnkey Entry into restricted highly Customers can

greenfield" operation - a process of technical markets become competitors

creating a subsidiary company from scratch.

Licensing Low risk, quick growth, Distance from the
growth outside strategic focus customer, limited
of the firm, differential pricing control of product
Advantages and brand, loss of
core capabilities
-​ By retaining ownership control of the
Franchising Limited financial risk, high Difficult to find
subsidiary, the parent company degree of response to local suitable franchisees,
needs need to build brand
protects its Intellectual property. in country prior to
franchising
Companies whose advantage
relies on their Intellectual Joint venture Reduced political risk,
increased local knowledge,
Different partner
goals/objectives,
loss of intellectual
property often enter new markets shared development costs
property

through a wholly owned Wholly owned Expensive, high risk

subsidiary. subsidiary Retain knowledge, full control
of foreign operations, direct
exposure to local customers
Make, Ally, or Buy In addition, a firm can "make" by developing
its own international franchise operations.
Compare making, allying, and buying
as entry tactics. Finally, a company may choose to enter a
market by creating a wholly owned
A company must consider its objectives, subsidiary and develop the subsidiary itself
its capabilities, and its resources— these through a greenfield venture.
will determine which entry tactic the
company should take to best achieve the Ally
desired entry mode. Allying with international partners requires
an alliance, which is a contractual
We can categorize entry tactics as make, relationship between two or more
ally, or buy, meaning the firm can make or companies. Firms often use allying as an
develop its own operations in the important tactic in their globalization efforts.
country (make), partner with existing
firms or firms that are adept in the local For instance, some companies wishing to
market (ally), or acquire a firm already export do not have the skills to do so, in
operating in the local market (buy). which case they can ally or partner with
other firms to help them. For example,
* Not all tactics are available for all entry many thousands of companies in countries
modes. For instance, a company cannot around the world have allied with Alibaba,
license or create a joint venture with itself. the giant Chinese e-commerce firm, which
helps them export their products to foreign
Make customers in China and other markets. In
Companies desiring to go global through an allying with Alibaba, a company shifts the
entry by mode of exporting, a turnkey job of developing technology to link buyers
project, franchise, or wholly owned and sellers and to run the payment and
subsidiary can "make" or develop its own delivery systems that ensure product
operations in a new market. delivery and payment. Alibaba provides an
export service in industries such as textiles
Firms that choose to export can establish from India and Pakistan, seafood from
their own supporting functions, such as Vietnam and Japan, and wine from Portugal
sales, distribution, lobbying, and trade, in and Argentina.
this case the firm can directly own the
exporting process. As another alternative, exporting firms can
offer their unbranded products to partners
SCAROSSO - an Italian handmade shoes in the local market. These products are
called "white-label goods" because they
Firms engaging in international business can easily be branded and sold under the
through turnkey projects are, by definition, partner's label.
developing infrastructure in foreign markets.
Hence, the most common entry mode for Alibaba - Unilever alliance - The Chinese
these types of firms is "make." firm Alibaba and European firm Unilever
formed an alliance in 2015 to sell Unilever's
products on the Alibaba platform. The ally strategy deserves special
attention because it can offer firms a
In some cases, firms will enter a hybrid mode of entry into foreign
consortium, an alliance of companies markets that combines a global
pooling their resources, to deliver a turnkey company's international efforts with
project. For instance, Effiage, a French contracts.
construction company; Schneider Electric, a
French energy company; and Krinner, a Buy
German solar support company, have Companies seeking to expand
teamed up to build the largest photovoltaic internationally by buying or acquiring access
plant in France for Neoen, a French can engage in several entry modes.
renewable energy company. Each company
will contribute its unique strengths to offer a A firm can buy existing franchisee
complete turnkey project. operations to enter a new international
market.
In addition, firms ally by forming license
agreements with licensees. In fact, allying is As another way to form a joint venture,
the only entry tactic available with a firms can buy into an existing company,
licensing entry mode. becoming a partner without purchasing the
company outright.
In many cases, firms choose the franchise
entry mode and elect to form an alliance
with a master franchisee. Chem-Dry, a
U.S.-based carpet-cleaning franchise,
recently expanded to India. Upon entering
the country in 2014, the company formed a
master franchise relationship in one key
market and began looking for partners in
other major markets. The master franchise
agreement enables the firm expanding
internationally to form partnerships with
investors who will further enlarge
operations in the country. Companies' internationalization efforts are
driven by several desires, such as the
Joint ventures for foreign entry are formed need to grow, to acquire resources, and
when two companies from the same or to reduce risk. In choosing which markets
different countries come together. In to enter, firms not only use a PEST analysis
addition, joint ventures can also be formed but also factor in the liability of
to enter the home market of one of the foreignness, the desire to be first into
parent companies. Last, a joint venture can markets, and the need to follow clients
be formed with the goal of helping two or globally. Once a company has chosen
more foreign firms enter an unrelated global which market to enter, it must determine the
market. preferred entry mode and decide which
entry tactic to take-whether to make, ally,
or buy its way into the market. These
efforts are often difficult, but doing them well
allows firms to succeed in the global market.