SESSION SEVEN
FOREIGN ENTRY
AND
OPERATION
STRATEGIES

Introduction
 Once a firm decides to enter a foreign market, it
must also decide on the mode of entry and
operation in the market.
 Often firms fail in foreign markets because of
inappropriate entry and operation strategies.
 A wrong strategy can lead to a firm’s failure
abroad and at home as well.
 Research shows that a firm’s foreign market entry
strategy is directly related to the firm’s
performance.
 An appropriate strategy can be a source of
competitive advantage abroad.

 An inappropriate strategy, on the other hand, can
be a source of competitive liability leading to a
competitive disadvantage.
 Therefore, a firm should not just enter a market
by any strategy, but should consider carefully
how to enter a market.
 Entry and operation modes are strategic
decisions that must be made carefully.

Classification of Frameworks
 The modes of foreign market entry and operation
can be classified according to any one of the
three frameworks.
1. Level of involvement in foreign market
a) Exporting modes
 Products sold in a foreign market are produced in
other countries and exported to the foreign market
where they are sold.
b) Contractual modes
 Products sold in a foreign market are produced by
other firms on behalf of the international firm
through a contractual agreement.

c) Foreign direct investment (FDI) modes
 Products sold in a foreign market are produced
within the foreign market by branches owned by
the international firm.
2. Involvement in manufacturing for
foreign market
a) Indirect manufacturing modes
 Products sold in a foreign market are produced by
other firms on behalf of the international firm
through contractual agreements
b) Direct manufacturing modes
 Products sold in a foreign market, whether
produced within the market or produced elsewhere
but exported to the market, are produced by the
parent firm or its branches.

 Where production is done is immaterial, but the
firm is in charge of production.
3) Whether the modes involve
manufacturing in the foreign market
a) Exporting modes
 Products are manufactured elsewhere but
exported to the foreign market for sale.
b) Foreign market manufacturing modes
 Products sold in a foreign market are
manufactured within the foreign market.
 The products may be manufactured by the firm
itself (including its branches) or by other firms
through contractual arrangements.

 It is important to understand how an entry
mode fits into each of the classification
frameworks.
 This is important for understanding the
managerial and other implications of the entry
mode.

The Internalization Process
 The process is determined by product-market complexity in the foreign market
and starts from low to high level of commitment to international markets.
High
Low High
Productdiversity
Market complexity
Export
Licensing, contract
m
anufacturing, franchising
Joint venture
Foreign
branch
Private
equity
investm
ent
W
holly
ow
ned
foreign
subsidiary

Entry Mode Strategies
 Most of the entry mode strategies are engrained
within the internalization process.
 There are various modes that a firm can use to
enter and operate in foreign markets.
 For a given foreign market a firm can use different
modes for different products, depending on
competitive advantages that may be gained.
 Similarly, for a given product a firm can use
different modes in different countries depending
on the competitive advantages to be gained.
 The modes are as follows:

1. Exporting
 The products a firm sells in a foreign market are
not produced in the foreign market.
 Strategic options that may be adopted include:
 Exporting directly to the foreign buyer.
 Exporting through a domestic export intermediary
to the foreign buyer.
 Exporting through a foreign import intermediary to
the foreign buyer.
 Exporting through domestic export intermediary
and foreign import intermediary to the foreign
buyer.
 Exporting may be indirect or direct with different
degrees of involvement (experimental, active,
committed).

 In indirect exporting, the firm does not need to
undertake the export operations such as
documentation, freighting, and the like, within its
organization.
 The export operations are carried out by others,
and in many instances they take place without the
knowledge of the firm.
 Indirect exporting may occur through the following
ways:
 Export houses
 Export management companies (EMCs)
 Foreign firm’s overseas buying offices in the home
market.
 International trading companies
 Joint marketing

 In direct exporting, the firm performs the export
task by itself rather than delegating it to others.
 Such a firm will find it necessary to set up an
export department within its organization to carry
out the tasks of market contact, market research,
physical distribution, export documentation,
pricing and other marketing activities.
 Direct exporting may be done through the
following ways:
 Sales subsidiary abroad
 Local representative abroad
 In both indirect and direct exporting, a firm may
exhibit experimental, active or committed
involvement.

 In experimental involvement, the firm initiates
restricted export marketing activity.
 In active involvement, the firm systematically
explores a range of export market opportunities.
 In committed involvement, the firm allocates its
resources on the basis of international marketing
opportunities.
2. Assembly
 All or most of the product’s components or
ingredients are manufactured in domestic plants
or in other countries before they are transferred to
the particular foreign market for final assembly.
 Assembly operations are usually labour-intensive
rather than capital intensive.

 In pharmaceutical and chemical industries, these
are called mixing operations rather than
assembly.
 Mixing or assembly operations may be carried out
under any one of the major foreign market entry
and operation strategies such as contract
manufacturing, licensing, joint venture, and wholly
owned subsidiary.
3. Contract Manufacturing
 This is foreign manufacturing by proxy, that is, the
firm’s product is manufactured or assembled in
the foreign market by another producer under
contract.
 The contract covers only manufacturing or
assembly.

 Marketing and distribution are usually done by the
firm giving the contract or by its subsidiary in that
foreign country.
 Contract manufacturing works well if the firm’s
competitive advantage lies in marketing and
distribution rather than in manufacturing.
4. Management Service Contract
 Sometimes simply referred to as a management
contract.
 It is a long-term agreement of up to 10 or more
years to provide a management service to a firm.
 Such contracts are more suitable in service
businesses than in manufacturing businesses.

 The business is usually run under the
management service provider’s internationally
recognized name rather than the property
owner’s name.
 The management service provider earns
management fees often expressed as a % of
gross revenues.
 In addition, the service provider may earn extra
profits on any supplies and materials it sells to the
managed firm.
 Most of the middle management an staff usually
are local personnel.

5. Licensing
 Can be seen as an extension of contract
manufacturing since it covers a longer term and
involves the licensee in a wider sphere of
responsibility and activities e.g. the licensee
would be required not only to manufacture the
product, but also to market and distribute the
product in an assigned territory.
 It entails the sale of a patent, manufacturing
know-how, technical advice and assistance, or
the use of a trade mark or trade name on a
contractual basis.
 The licensor is paid royalties in return by the
licensee.

6. Franchising
 It is a particular form of licensing in which the
franchiser makes a total marketing programmes
available, including brand management advice.
 The franchise agreement tends to be more
comprehensive than a normal licensing
arrangement because the franchisee agrees to a
total operation being prescribed.
7. Joint Venture
 It is a project in which two or more parties invest.
 It differs from licensing because it affords the
international firm an equity position and
management voice in the foreign firm.
 Thus, the international firm shares both in
ownership and management of the foreign firm.

 A JV agreement results in the formation of a new
company in which the parties have shares.
 The international firm has enough equity to have
a voice in management but not enough to
completely dominate the venture.
 A foreign JV is similar to foreign licensing
because both usually involve foreign
manufacturing and marketing by the local foreign
firm rather than the international firm.
8. Strategic Alliance
 Used interchangeably with “corporate coalition”,
“strategic partnerships” or “competitive alliance”.
 It is a cooperative arrangement between two or
more companies.

 The partners in an alliance seek to add their
competencies by combining their resources with
those of other firms with a commitment to reach
an agreed goal.
 Partners tend to be of comparable strength and
resource base but this is not always the case.
 The alliance tends to be contractual rather than
equity arrangement.
 In JV, unlike SA, the underlying motivation for
cooperation may not be guided by strategic and
competitive considerations.
 In addition, the partners may not be of equal
strengths and resources.
 They may even have unbalanced contributions to
the joint venture.

9. Merger and Acquisition
 Merger is a combination of two firms in which only
one company survives and the merged firm goes
out of existence.
 In a statutory merger, the acquiring firm assumes
the assets and liabilities of the merged firm.
 In a subsidiary merger, the target firm becomes a
subsidiary or part of a subsidiary of the parent
company.
 Acquisition is taking over of local firm’s assets by
a foreign firm.
 A consolidation is often confused for a merger,
particularly if the two firms differ significantly in
size.
 The major types of M&As are: horizontal, vertical,
and conglomerate.

10. Consolidation
 It is a business combination where two or more
companies join to form an entity new company.
 All the combining companies are dissolved and
only the new entity continues to operate.
 In a consolidation, the original companies cease
to exist and their stockholders become
stockholders in the new company.
11. Wholly owned foreign subsidiary
 This represents the greatest commitment to
foreign markets.
 Shared ownership, as discussed earlier, is a JV.
 Ideally, wholly owned is 100% ownership by the
international firm.

 In practice, however, the firm usually achieves the
same results or power even by owning 95% or
slightly less.
 It is not the completeness of ownership that
matters but the completeness of control.
 A firm can obtain wholly owned foreign
subsidiaries in the following two ways:
 Acquisition i.e. by buying out an existing foreign
producer or JV.
 New investment, often referred to as green-field
investment. This occurs when the firm builds or
develops its own facilities from scratch.
 Acquisition is a quicker way of entering a foreign
market than starting from scratch.

Entry Modes and Risk Vs. Control
 Each of the entry modes has its advantages and
drawbacks.
 Therefore, MNCs have to make trade-offs when
they decide on the most suitable entry mode
strategy.
 Control- the desire to influence decisions,
systems, and operations in a foreign affiliate- and
risk are the two most important factors in the
decision formula when deciding on the type of
entry mode.
 To obtain control, the multinational firm must
commit resources to, and take responsibility for,
the management of its foreign operations.

 More control requires more risk and vice versa.
 When selecting the appropriate entry mode,
MNFs have to answer two questions:
 What level of resource commitment are they willing to
make? and
 What level of control over the operations do they
desire?
 The MNFs have to look at risks in the general
environment, risks in the industry, and firm-
specific risks.
 The lower the perceived risk, the more use of
entry strategies that involve high level of resource
commitment and vice versa.
 Study the illustration below.

High
HighLow
PERCEIVE
D RISK
CONTRO
L
Exporting
Licensing
Franchising
International Joint
Venture
Wholly
owned

Quizz.
 Identify and explain the advantages and
disadvantages of each of the entry mode
strategies.
 In the previous illustration, where would you
place the rest of entry mode strategies
covered previously?

Criteria for Choice of Entry Mode
 Factors influencing entry mode include:
 Corporate global strategy of a firm
 Country risk (e.g. political and operational)
 Opportunities
 Firm’s internal capabilities
 Time pressure
 Government requirements
 MNCs should consider the following criteria in
choosing an entry mode:
1. Firm-Specific Variables
 Firm’s objectives and policies
 Degree of control desired of a foreign market

 Firm’s resources
 Risk i.e. economic, financial, and political
 Flexibility
 Familiarity with the foreign market
 Corporate strategies e.g to source raw material for
worldwide activities requires high-control entry
modes
 Size of the firm
 Transferability of competitive advantage across
markets, both domestic and foreign
 Inter-firm transferability of resources.
2. Environmental Variables
 Market growth
 Intensity of competition

 Market infrastructure
 Production location
 Foreign market country risk
 Government policies and regulations of foreign
market and domestic market
 Local market conditions e.g. if these require
adaptation then licensing and FDI modes
may be most appropriate.
 Location specific advantages e.g foreign
investment modes may be most
appropriate where competitive advantages
are location specific.

Quiz:
 Think through each criterion and suggest
the most appropriate entry mode(s). Be
guided by the suggestions above.