7.3 Market Entry Modes and Strategies

Companies have various ways to enter foreign markets, from low-risk exporting to high-commitment wholly owned subsidiaries. Each mode offers different levels of control, resource commitment, and potential returns. Understanding these options helps firms choose the best entry strategy.

Market entry also involves crucial decisions on investment type, timing, and risk assessment. Firms must weigh factors like first-mover advantages, entry barriers, and potential risks against the opportunities in each market to determine their optimal global expansion approach.

Market Entry Modes

Exporting and Licensing

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• Exporting involves selling goods or services produced in one country to customers in another country
• Can be direct exporting where the company sells directly to the end customer or indirect exporting where the company sells through an intermediary (distributor or agent)
• Licensing is a contractual agreement where a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee
• Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks

Franchising and Joint Ventures

• Franchising is 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
• The franchisor will also often assist the franchisee to run the business on an ongoing basis
• Joint ventures involve establishing a firm that is jointly owned by two or more otherwise independent firms
• Typically, the local firm provides knowledge about the local market, while the foreign firm provides general business know-how and products

Wholly Owned Subsidiaries

• Wholly owned subsidiary is a company that is completely owned by another company
• Can be established through a greenfield venture, which involves constructing a subsidiary from the ground up in a foreign country (Honda building a new factory in the US)
• Alternatively, a wholly owned subsidiary can be acquired through the acquisition of an established firm in the target market (Tata Motors acquiring Jaguar)
• Allows for tight control and coordination of the subsidiary's operations, but requires a large capital investment and entails high risk

Investment Strategies

Greenfield Investments and Acquisitions

• Greenfield investments involve establishing a new operation in a foreign country
• Entails constructing new production facilities from the ground up
• Mergers and acquisitions involve acquiring an existing firm in a foreign country
• Can be a full acquisition where the acquirer buys 100% of the target or a partial acquisition where the acquirer buys a stake in the target
• Acquisitions provide rapid entry into a foreign market and access to an established customer base, but can be expensive and difficult to integrate into the acquirer's operations

Strategic Alliances

• Strategic alliances are agreements between firms to cooperate in some way to achieve strategically significant objectives that are mutually beneficial
• Can involve cross-shareholding agreements where each firm takes a minority stake in the other to cement the relationship (GM and Isuzu)
• Other types include joint R&D projects, joint manufacturing, joint marketing, shared distribution, and cross-licensing of intellectual property
• Allow firms to share the costs and risks of new ventures, gain access to each other's resources and capabilities, and learn from each other

Entry Considerations

Born Global Firms and Market Entry Timing

• Born global firms are companies that from inception seek to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries
• These firms often have innovative products or services that have a global market from day one (Skype, Uber)
• Market entry timing refers to when a firm should enter a foreign market
• First-mover advantages include the ability to preempt rivals and capture demand by establishing a strong brand name and locking in key suppliers and channels
• Late-mover advantages arise from the ability to free-ride on first-mover investments, avoid their mistakes, and exploit technological discontinuities

Entry Barriers and Risk Assessment

• Entry barriers are factors that make it costly for companies to enter a particular market
• Can be created by government policies (tariffs, regulations), economies of scale, product differentiation, capital requirements, switching costs, distribution access, and incumbency advantages
• Risk assessment involves evaluating the potential risks associated with entering a foreign market
• Types of risks include political risk (war, terrorism, expropriation), economic risk (recessions, currency fluctuations), and competitive risk (reactions from local competitors)
• Firms need to carefully weigh the potential rewards of entering a market against these risks before making the decision to invest