CHAPTER 4

FOREIGN MARKET ENTRY

STRATEGIES

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 Contents
• International Market Entry Modes
• Selecting an entry mode
• Export documents and procedures

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 4.1 International Market Entry Modes
• When a company makes the commitment to go
international and market in foreign nations, it must choose
an entry strategy.
• The decision should reflect an analysis of market potential,
company capabilities, and the degree of marketing
involvement and commitment management is prepared to
make
• There are various formats of entering into international
market. It ranges from the simplest export to foreign
direct investment which is more complex and risky to
enter in foreign market.
• The risk of entering in international market comes from the
capital requirement to enter, the control it provides to
operation of parent firm and the political risks.
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 Cont’d…..
• experience and expansion into larger numbers of foreign markets
increase the number of entry strategies used
• a company in various country markets may employ a variety of
entry modes since each country market poses a different set of
conditions
• The firm can either export the product from home market to
international market or the firm might invest in foreign market
on facility, raw material, and other factor of production and
make the product and offer to the foreign market.
• We can divide entry modes into three broad category, these are:
• Export
• Contract based
• Non Contract based(FDI)

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 Cont’d
• The different modes of entry can be further classified on the
basis of the equity or non equity requirements of each mode.
• The amount of equity required by the company to use different
modes affects the risk, return, and control that it will have in
each mode.
• For example, indirect exporting requires no equity investment
and thus has a low risk, low rate of return, and moderate
control,
• whereas direct foreign investment requires the most equity of
the three modes and creates the greatest potential for risk.
• While direct foreign investment is the riskiest of the three
modes, it has the potential for the highest return and affords
the greatest control over all activities 5
 Exporting
• simplest and easiest way to meet the needs of foreign markets
• Firms have two alternatives in exporting products to
international market. These are: direct and, indirect exporting.
• In indirect involvement firms participate in international
businesses through an intermediary.
• In direct exporting firms are in interrelationships with foreign
customers and markets.
• firms taking their first international step because the risks of
financial loss can be minimized
– Firms use own exporting when there is no domestic or
foreign middleman between the producer and end
customer.

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 Exporting strategies benefits
• The rapidity of international market entry, and not
required investment in establishing operations in the host
country
• Offers for a firm a low risk and simple way to begin its
international process and meet the demand and
challenges.
• Exporting is usually small company and management
commitment.
• It avoids the costs of establishing manufacturing
operations in the host country, which are often substantial.
• Able to realize substantial scale of economies from its
global sales volume.

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 Disadvantages of Exporting

• High cost of transportation and possible tariffs

placed on incoming goods.
• The exporter has less control over the marketing
and distribution of its products in the target country
• The distributor takes part of the profits either in the
form of pay or adding extra to the price.

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 Cont’d….

• There are various reasons for firms to just take other

alternatives than exporting.
• Reasons that might force for looking beyond exporting.
– Overcoming trade barriers
– Reducing tariffs by having local content
– Reducing transport and production costs
– Utilizing more favorable production conditions
– Being closer to your market reduce transportation
cost
– Better market credibility
– Achieving better market penetration
– Reaching more markets 9
 Contract based
• Contractual entry modes are long-term non-equity
associations between an international company and
entity in a foreign target country.
• The primarily difference between a contractual entry
mode and an export entry is that contractual entry
modes are vehicles for the transfer of knowledge and
skills.
• Contractual entry modes are distinguished from the
entry modes that need investment, because there is
no equity investment by the international company.
• There exist many different contractual entry modes,
such as licensing, franchising, and numerous contract
based entry modes 10
 Licensing
• Licensing is one way a firm can establish local
production in foreign markets without capital
investment.
• Licensing is a form of contractual agreement in
which the licensor permits the licensee to use its
intellectual property (such as patents, trademarks,
copyrights, technology, technical know-how,
marketing skill or some other specific skill).
• In return, the licensee usually promises (1) to
produce the products covered by the rights, (2) to
market these products in an assigned territory, and
(3) to pay the licensor some amount of fee or royalty.
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• The monetary benefit to the licensor is the
royalty or fees which licensee pays.
• In many countries, such fees or royalties are
regulated by the government; it does not
exceed five per cent of the sales in many
developing countries.
• Licensing agreements can harness(restrict)
the production and financial strength of well-
established companies to the innovative
flair(good method) of small and medium-
sized organizations.
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 The advantages of licensing
• The risk of expropriation decreases because the
licensee is a local company that can provide leverage
against government action.
• Provide a method by which foreign markets can be
tested without major involvement of capital or
company commitment.
• The evasion of import barriers that increase the cost
(tariffs) or quotas of exports on the target market.
• Licensing is a lower political risk than with an equity
investment.
• Expand returns based on previous innovations
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 Disadvantages of Licensing
• The licensor’s lack of control over the marketing plan
and program in the target country.
• Licensing entry mode includes most limited amount of
foreign market participation and does not in any way
guarantee a basis for future expansion.
• Licensing contains also the risk that in exchange of
royalty. Licensing provides limited returns. Licensing
returns are limited primarily to a percentage of
licensee sales, commonly 3 to 5 percent.
• Create some inflexibility, if a firm wants to move to a
different ownership arrangement.

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 Franchising
• Franchising is a form of licensing in which a parent company
(the franchiser) grants another independent entity (the
franchisee) the right to do business in a prescribed manner.
• This right can take the form of selling the franchisor’s products,
‘using its name, production and marketing techniques, or
general business approach.
• One of the common forms of franchising involves the franchisor
supplying an important ingredient (part, material etc.) for the
finished product, like the Coca Cola supplying the syrup to the
bottlers.

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 Cont’d…..
• The major forms of franchising are manufacturer-retailer
systems (such as automobile dealership), manufacturer
wholesaler systems (such as soft drink companies), and
service firm-retailer systems (such as lodging services and fast
food outlets).
• When franchiser sells the concept, it has set standards to
ensure consistency of the product, service delivery, branding
and marketing.
• A franchise allows a rapid internationalization of the
product, as the capital costs are normally covered by the
Franchisee

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 Advantages Franchising

1. Entry mode are very similar to those of licensing.

2. using franchising strategy, a service firm can build a global
presence quickly and at a relatively low cost and risk.
Disadvantage of Franchising
1. less pronounced that in the case of licensing. Since
franchising is often used by service companies, there is not
reason to consider the need for coordination of
manufacturing to achieve experience curve and location
economies.
2. may constrain the firm’s ability to take profits out of one
country to support competitive attacks in another.
 Cont’d

3. A more significant disadvantage of franchising is quality control. The

foundation of franchising arrangements is that the firm’s brand name conveys
a message to consumers about the quality of the firm’s product.
Thus, a business traveler checking in at a Hilton International hotel in Addis
Ababa can reasonably expect the same quality of room food, and service that
she would receive in New York.
The Hilton name, is supposed to guarantee consistent product quality. This
presents a problem in that foreign franchisees may not be as concerned about
quality as they are supposed to be, and the result of poor quality can extend
beyond lost sales in a particular foreign marketer to a decline in the firm’s
worldwide reputation.
For example, if the business traveler has a bad experience at the Addis Ababa
Hilton, he may never to another Hilton hotel and may urge his colleagues to
do likewise.
The geographical distance of the firm from its foreign franchisees, however,
can make poor quality difficult for the franchisor to detect. In addition to sheer
number of franchisees can make quality control difficult. Due to these factors,
quality problems may persist.
 Contract Manufacturing
• Contract manufacturing involves hiring local manufacturers to
produce the product or assembling it, but still retain the
responsibility for marketing.
• The firm’s product is produced in the foreign market by
another producer under contract with the firm
• The sale and marketing of the finished product remain your
responsibility, not the manufacturers.
• Contract manufacturing may be attractive if the firm's
competitive advantage lies in marketing rather than in
production
• Sometimes it includes final assembly and packaging of the
product, as well as delivery to the point of distribution or
sale.

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• Contract manufacturing is feasible when the firm can locate
foreign producers with the capability of manufacturing the
product in satisfactory quantity and quality.
• Contract manufacturing obviates the need for plant
investment, something the firm may wish to avoid if the
market is politically uncertain or if the firm is short of capital.
• This manufacturing arrangement enables the firm to avoid
labor and other problems that may arise from its lack of
familiarity with the country. At the same time, the firm gets
the advantage of advertising its product as being locally made
• If a market proves too small or risky, it is easier and less costly
to terminate a manufacturing contract than to shut down the
firm’s own plant. Other advantages include transportation
savings

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 Strategic alliances
• It is a specific form of collaboration between two or more
companies.
• Can provide a means of overcoming the problems of small size
and lack of resources faced by some companies.
• All organizations are not strong in all function of business. To
offset their shortcoming they collaborate with other firms.
• It can apply to virtually any form of collaboration between two
or more firms, for the following activities:
– Design contracts
– Technology transfer agreements
– Joint product development
– Purchasing agreements
– Distribution agreements
– Marketing collaboration
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 Cont’d……
• Generally, each company involved in the strategic alliance will
benefit by working together.
• The arrangement they enter into may not be as formal as a
joint venture agreement.
• Alliances are usually accomplished with a written contract,
often with agreed termination points, and do not result in
the creation of an independent business organization.

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 Characteristics of a Strategic Alliance
• Usually a non-equity, loosely structured relationship
• Each partner retains its business independence
• The alliance can be between companies competitors
• The relative size of the partners is not a significant factor
• Each partner must contribute distinctive “core strengths”
e.g. technology

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 Benefits of strategic alliance:
• Increased leverage
• Risk sharing
• Opportunities for growth
• Greater responsiveness

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 Disadvantages of a Strategic Alliance
• High commitment – time, people
• Difficulty of identifying a compatible partner
• Potential for conflict
• A small company risks being subsumed by a larger partner
• Strategic priorities change over time
• Payment difficulties
• Political risk in the country where the strategic alliance is based
• If the relationship breaks down, the cost/ownership of market
information, market intelligence and jointly developed
products can be an issue.

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 Turnkey Projects
• A project in which contractor handles every detail of the
project for a foreign client, including the training of
operating personnel, and then hands over the foreign
clients the “key” to a plant that is ready for
operation.
• Setting up a new plant ready for operation.
• Turnkey projects are most common in the chemical,
pharmaceutical, petroleum refining and metal refining
industries, all of which use complex, expensive production
technologies.

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 Advantages
• This is the best way of earning greater economic returns
from that asset.
• Obtain returns from know-how about a complex process.
• Government restrictions may limit other options therefore;
this strategy is best in case where FDI is limited by
government.
• Lower risk if unstable economic/political situation in country

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 Disadvantages:
• The firm that enters into the turnkey deal will have no long-
term interest in the foreign country.
• Less potential to profit from success of plant.
• Creating a competitor by transferring the technical know-
how to a foreign firm.
• Give away technological know-how to potential competitor

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 Non Contract based :

a. Wholly Owned Subsidiaries

• In wholly owned subsidiary, the firm owns 100 percent
of the stock.
• Establishing a wholly owned subsidiary in a foreign
market can be done in two ways.
– The firm can either set up a new operation in host country or it
can acquire an established firm and use that firm to promote its
products in the country’s market.

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 Acquisitions
• Acquisition is transferring the local company to foreign
owner. In this the foreign company invests in local firm for
100 percent ownership on the existing facility.
Advantages of Acquisitions
• It may provide a resource that is scarce (human or managerial
skill) in the target country
• Rapid access to new markets
• Is a good method for a firm to gain market specific
experience quickly
• Favorable in situations with less need for strategic flexibility
and when the transaction is used to maintain economies of
scale or scope.
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 Disadvantages of Acquisitions
• Costs and multiple risks come with an acquisition entry
mode.
• Complex international negotiations, the problems dealing
with the legal and regulatory requirements in the target firm’s
country, and problems of merging the new firm into the
acquiring firm.
• High financial commitment, and thus demands more stable
political and commercial climate than those with a smaller
financial commitments.

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 Greenfield investments

• Greenfield investment is investing from scratch. The company

entering in international market will buy land, construct building
and hire people to run the business.
Advantages of the Greenfield investment
• The firm is the maintained control over the technology,
marketing, and distribution of its products.
• High returns can be generated especially by firms with strong
intangible capabilities that are possible to generate through a
Greenfield investment.
• Setting up from scratch the production site comes due to the
latest production technologies and opportunity to build the site
to match the company’s exact production requirements.
• This is usually only true for firms exploiting the low cost
locations. 32
 The disadvantages of the Greenfield investment

• Are usually often complex establishing process and potential

high costs.
• Establishing new wholly owned subsidiary takes a lot of time,
and thus is not appropriate for rapid entering in foreign
markets.
• Establishing the Greenfield investment needs also the
greatest contribution of know-how of all the international
market entry alternatives.

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 b. Joint Venture
• A joint ownership venture is an arrangement whereby the
foreign firm and local firm have share in this new firm.
• A joint venture is the long-term commitment of funds, facilities
and services by two or more legally separate interests, to a
combined enterprise for their mutual benefits.
• In a joint venture the participating partners share assets,
ownership, control, risks, and profits. Equality of partners is not
necessary
• A joint venture need not be a separate legal entity or company.
• The essential feature of a joint ownership venture is that the
ownership and management are shared between a
foreign firm and a local firm.

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 The Benefits of a Joint Venture
• Benefit from local firm’s knowledge about the host country’s
competitive conditions, culture, language, political systems
and business systems.
• shared costs/risks of development of product
• political constraints on other options by host government will
be minimized

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The Disadvantages of a Joint Venture
• Potentially high capital cost required to establish JV
• It might take much time to get profit
• Difficult to get out of quickly if a partner find the venture
infeasible later
• Working in a different legal and cultural system might be
source of conflict among partners
• Political risks in the country where the joint venture is based

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As compared with a lesser commitment, joint ventures have
the following advantages:
 
– Potentially greater returns from equity
participation as opposed to royalties,
– Greater control over production and marketing,
– Better market feedback, and
– More experience in international marketing
Disadvantages include a need for greater investment
of capital and management resources, and a
potentially greater risk than with a non equity
approach

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• When joint ventures are compared with wholly owned
foreign production, a different picture emerges:
– A joint venture requires less capital and fewer management
resources and thus is more open to smaller companies.
– A given amount of capital can cover more countries.
• Many governments prefer or even demand joint
ventures because they believe that their nations get
more of the profits and technological benefit if
nationals have a share. Also, finding a national partner
may be the only way to invest in some markets that
are too competitive or crowded to admit a new
operation.

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 4.2 Selecting an entry mode
Factors Influencing To the Entry Mode Choice
Target country market factors
Target country production factors
Target country environmental factors
Home country’s factors
Product factors
Resource and commitment factors

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 4.3 Export documents and procedures
4.3.1 Export documents
1) Shipping Documents- Shipping documents are prepared by exporters or their
freight forwarders so that the shipment may pass through customs, be loaded on
the carrier, and sent to its destination
• Export Licenses
• Bill of Lading- legal ownership and facilitating financial transactions.
• Insurance Certificate
2) Collection Documents- Collection documents are all documents submitted to the buyer for the purpose
of receiving payment for a shipment.
• Commercial Invoices- bill for goods stating basic information about the transaction,
merchandise description, cost of goods, shipper and seller addresses, delivery and payment
terms.
• Consular Invoice- issued by the consul.
• Certificates of Product Origin
• Inspection Certificates

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