Selecting and Managing Entry Modes: How To Internationalise?

Selecting and Managing Entry
Modes
How to internationalise?
Scale of entry?
• large scale entry

– strategic commitments - a decision that has a
long-term impact and is difficult to reverse.
– may cause rivals to rethink market entry.
– may lead to indigenous competitive response
• small scale entry:
– time to learn about market.
– reduces exposure risk.
Indirect Exporting
• selling to an intermediary, who in turn sells your
products either directly to customers or to
importing wholesalers.
• The easiest method of indirect exporting is to
sell to an intermediary in your own country.
Direct Exporting
• selling and shipping goods produced at home
to foreign country - a good way to minimise
risk and to experiment with a specific product
• the company could choose to handle all critical

functions itself (direct exporting) or it could
contract these functions to an export
management company (indirect exporting)
Exporting
• Advantages:
• avoids cost of establishing manufacturing operations
• may help achieve experience curve and location
economies
• Disadvantages:
• may compete with low-cost location manufacturers
• possible high transportation costs
• tariff and other trade barriers
• Possible local agent problems
• Lost learning opportunities
Licensing Agreement
HOME COUNTRY HOST COUNTRY
Licensing of Technology
MNE Local Firm

Fees and Royalties
Licensing
• the licensing firm grants a licence to a firm in
the host country to produce and/or sell a
product. The licensee will pay an initial fee
and/or a royalty
• a useful strategy if the trademark or brand
name is well known but the MNC, for whatever
reason, does not wish to enter a country
directly at that time
Licensing
• reduces development costs and risks of
establishing foreign enterprise
• overcomes lack capital for venture
• unfamiliar or politically volatile market
• overcomes restrictive investment barriers
• potential creation of long term business rivals
Joint ventures
• a joint venture enables an MNC to enter a
country that restricts foreign ownership
• joint ventures often formed to combine the
resources and expertise needed for the
development of new product or technologies
• corporation can enter another country with
fewe assets at stake and thus lower risk
Joint Venture
MNE Local Firm

Inputs Share of
Profit
Inputs Joint Venture
Company
Share of Profit
Joint Ventures
• Advantages:
– benefit from local partner’s knowledge
– shared costs/risks with partner
– reduced political risk
– Technology and knowledge transfer for local partner
• Disadvantages:
– risk giving control of technology to partner
– may not realise experience curve or location
economies
– shared ownership can lead to conflict
Mergers and acquisitions
• a relatively quick way to move into another
country
• synergistic benefits can result if MNC merges
with or acquires a firm with strong
complementary product lines and a good
distribution network
• cultural challenges
• results often disappointing
Foreign Acquisition
Investment
MNE Local Firm
Profit
Going it Alone: “Green Field” Entry
MNE
Profit
Investment New Subsidiary

Company
Greenfield investments
• if a corporation doesn’t want to obtain another firm’s
existing facilities through acquisition, it may choose
a greenfield development
• a far more complicated and expensive approach than
acquisition but allows more freedom in designing
the plant, choosing suppliers and hiring a work force
Wholly owned subsidiary
• subsidiaries could be greenfield investments or
acquisitions
• Advantages:
– no risk of losing technical competence to a
competitor
– tight control of operations.
– realise learning curve and location
economies
• Disadvantage:
– Bear full cost and risk
Acquisition and Greenfield- pros &
cons
Acquisition Greenfield
• Pros: • Pros:
– quick to execute – can build subsidiary
– pre-empts rivals it wants
– possibly less risky – easy to establish
• Cons: operating routines
– results often • Cons:
disappoint – slow to establish
– pay too much and – risky
over-optimistic – Pre-emption by
– culture clash. aggressive
– problems with competitors
proposed synergies

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Selecting and Managing Entry

• large scale entry

• the company could choose to handle all critical

MNE Local Firm

MNE Local Firm

HOME COUNTRY HOST COUNTRY

Investment New Subsidiary

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