International Business

1. International Business Lecture 8 Foreign Market Entry Strategies Dr. Andrew G. Ross

2. Learning outcomes • Identify and analyse the factors on the basis of which firms make entry decisions: • Where to enter? (choice of country) • When to enter? (timing of entry) • How to enter? (modes of entry) • Compare and contrast different market entry modes in respect to prevailing business environment, risks and commitment involved • Understand the theoretical background of the internationalisation process/strategy 2

3. Internationalisation is the decision to enter foreign markets; which involves upstream and/or downstream cross-border activities. 3

4. Where to enter? 4

5. Political Risk Model High Low 5

6. Country Attractiveness Costs Corruption Lack of infrastructure Legal Costs Benefits Size of economy Likely economic growth • It’s not just about political risk • Economic and legal risks are also important in the assessment of countries Overall Country Attractiveness Risks Political Risks: Unrest/Anti-Business Trends Economic Risks: Economic Mismanagement Legal Risks: Failure to Safeguard property rights Hill (2014) p.83 6

7. Where to Enter? • Location-specific advantages: • Advantages associated with operating in a specific location • Matching strategic goals with location: • Natural resource seeking goals • Market seeking goals • Efficiency seeking goals • Innovation seeking goals 7

8. Where to enter? 8

9. When to Enter • First-Mover Advantage • The advantages that first movers enjoy and later movers do not • Technological leadership – Apple’s iPod, iPhone and iPad • Branding / loyalty – Tesco’s early entry into Asia and Eastern Europe • Cost advantage – General Motors early entry into China in the 1990’s 9

10. First-mover disadvantages http://www.bbc.co.uk/news/technology-24108532 http://www.bbc.co.uk/news/technology-29136063 10

11. When to Enter? – Timing of Entry • Late-Mover Advantages • The advantages associated with being a later mover. • Free rider effect – A late-mover may be able to ‘free-ride’ on pioneering firms in areas of R&D, • Less risk and uncertainty – Late movers have the advantage of avoiding the first-movers mistakes 11

12. Are Apple Really a First-Mover? 12

13. How to Enter? – Choice of Entry Mode ‘An international market entry mode is an institutional arrangement that makes possible the entry of a company’s products, technology, human skills, management, or other resources into a foreign country’ Root (1994) 13

14. Foreign Market Entry Modes Indirect Export Direct Export Licensing Franchising Turnkey projects International Joint Ventures Wholly Owned Subsidiaries 14

15. Choice of entry modes Equity (FDI) modes Non-Equity Modes (trade) Exports Contractual Agreements Joint ventures (JVs) Wholly owned subsidiaries (WOS) Direct export Licensing / franchising Minority JVs Greenfields Indirect export Turnkey projects 50/50 JVs Acquisitions Others Others R&D contracts Majority JVs Strategic alliances (within dotted area) Co-marketing 15 Peng (2009) pg. 162

16. Non-Equity Modes of Entry – Exporting • Indirect exporting – domestic goods or services are sold through a domestically based export intermediary. • Direct exporting – domestic goods or services are sold by foreign agents, distributors or through establishing a foreign sales subsidiary 16

17. Non-Equity Entry Modes – Exporting 17

18. Licensing / franchising – the licensor / franchisor sells the rights to intellectual property such as patents and know-how to the licensee / franchisee. • Turnkey projects – projects in which clients pay contractors to design and construct new facilities and train personnel. • Research and development (R&D) contracts – outsourcing agreements in R&D between firms (that is, Firm A agrees to perform certain R&D work for Firm B) • Co-marketing – agreements among a number of firms to jointly market their products and services Non-Equity Entry Modes – Contractual Agreements 18

19. Non-Equity Entry Modes – Contractual Agreements 19

20. Equity Entry Modes - FDI • Joint-venture (JV) – a ‘corporate child’ that is a new entity given birth and jointly owned by two companies. • Wholly owned subsidiary (WOS) – subsidiary located in a foreign country that is entirely owned by the MNE • Greenfield operation – Building factories and offices from scratch • Acquisition strategy – acquiring an existing company 20

21. Equity Entry Modes - FDI 21

22. Question Time / Break Level of Involvement 22

23. Question Time / Break Sector Activity 23

24. Evaluation of Entry Modes Root’s Model - Foreign Market Entry and Expansion • Root argues managers should decide on the choice of entry mode based on three factors: • How much control do we need? • How much risk are we willing to take? • How much time do we have? 24

25. Root’s Model - Foreign Market Entry and Expansion Time Direct exports – branch export subsidiary Wholly owned subsidiary Joint venture Control Licensing Agent / Distributor Export Indirect Exports 25 Risk

26. Selecting an Entry Mode • Internal Factors • Financial resources • Product characteristics • Extent of marketing presence • Degree of market penetration • Firms knowledge/experience • Speed of market entry 26

27. Selecting an Entry Mode • External Factors • Level of demand • Commercial infrastructure • Communication with intermediaries • Investment climate • Licensing regulations • Tariff levels • Political risk • Competition • Protection of Intellectual property rights • Availability of personnel 27

28. Theories of internationalisation • Internalisation theory (Buckley & Casson 1976) • Eclectic paradigm theory (Dunning 1980, 1988) • Product life cycle theory (Vernon 1966) • The Uppsala model (Johnson & Vahlne 1977) • Network Model of Internationalisation (Johanson & Mattson, 1988) • Born global (Rennie, 1991; Madsen and Servais, 1997) • International New Ventures (Oviatt and McDougall, 1994) 28

29. Theories of internationalisation • Evolutionary/Behavioural Approaches • These theories view internationalisation as an incremental, stepwise development process. • Bilkey and Tesar (1977); Cavusgil (1984) and Johanson and Valhne (1990) are the most well known contributions • http://www.youtube.com/watch?v=gjXz9x7S2PQ • Firms commence internationalisation through trade related activities (exporting) and commence more complex and risk intensive modes as they build experience • Firms also choose to do international business in markets they feel culturally close and then venture into more ‘physically distant’ markets as they build foreign market experience. 29

30. Gradual Internationalisation – From Trade to FDI FDI Contractual Trade Wholly-owned subsidiary Acquisitions Franchising Export JVs Partly-owned subsidiary Licensing 30 Equity participation

31. Early and Rapid Internationalisation How about born-global firms? 31

32. Early and Rapid Internationalisation • Born-globals or International New Ventures (INVs) are different from MNEs. • International new ventures are “a business organization that from inception, seeks to derive significant competitive advantage from the use of resources and the sale of output in multiple countries.” (Oviatt and McDougall, 1994) • Here the view is entrepreneurial firms do business in multiple foreign markets, by using multiple modes of foreign market entry opposed to progressing in an incremental step wise manner (Jones, 1999) • These theories recognise that resource constrained firms can use networks to help leverage their limited resources to accelerate internationalisation. 32

33. Early and Rapid Internationalisation • Reasons for Early and Rapid Internationalisation • New market conditions – use of strategic alliances using multiple modes • Technological advances – Increased use and reduction of ICT cost • Reduced cost of travel • Increased access to foreign market knowledge through networks. 33

34. Early and Rapid Internationalisation • Enablers of Early and Rapid Internationalisation • Global mindset / international experience of founders • Knowledge intensity / Technology start-ups • Costly to imitate technology • Compete through innovation rather than cost 34

35. Summary • When formulating a foreign market entry strategy we must consider the foreign location advantages (where), the timing of entry (when) and the choice of entry mode (how). • Collectively considering the where, when and how allows managers to formulate a more effective internationalisation strategy. • It is important to understand the advantages and disadvantages of foreign market entry modes to implement an internationalisation strategy. • Root’s model is a useful framework to evaluate how a manager decides on choice of entry mode. The level of control, risk and timing are all important in this decision making process. • Internationalisation theory seeks to explain foreign market entry as either a gradual or rapid expansion process. 35

36. Reading List • Hill, C. W. (2017): International Business: Competing in the Global Marketplace, 11th Edition, McGraw-Hill, Chapter 15 • Root, F.R. (1994) Entry Strategies for International Markets. New York: Lexington Books. 36