International Market Entry

1. Chapter 6
International
Market Entry

2. Learning Objectives
• After studying this chapter, you should be
able to explain:
– Motivations for internationalization
– Methods to internationalize
– Typical pattern of internationalization
– Transnational firms
– Born global firms
– Implementing international market entry

3. • Increased market share: Can affect a firm
in many ways, including offering new sales
when its existing market is saturated.
• Economics of scale - A single market may
not be large enough to support the capital
outlay needed to conduct an activity; so a
firm must consider international entry to
obtain the necessary economies of scale.
Motivations for International Market
Entry

4. • Improve return on investment (ROI) - As
firms expand internationally, the number of
unfilled markets and the potential for
greater profits increase.
• Intellectual property concerns - Weak
patent protection encourages firms to
rapidly expand overseas in order to
preempt imitators or secure patent
protection in those major foreign markets.
Motivations for International Market
Entry

5. Motivations for International Market
Entry
• Types of location benefits:
– Cheaper inputs - A firm must carefully
consider the product type, location of
manufacture, shipping cost, and other
benefits and costs.
– Secure inputs - Firms may expand
internationally to secure access to crucial
inputs.

6. • Types of location benefits (cont.):
– Access a market
• Firms may enter a foreign country to gain access
to that market.
• Such location choices can also be made to
overcome trade barriers erected to imports.
• Non-tariff trade barrier is a barrier to free trade
that takes a form other than a tariff.
• Indirect imports: Used occasionally to overcome
trade barriers.
Motivations for International Market
Entry

7. Entering International Markets
• Export
– Shipping of a good from the home market to
markets outside the home country.
– The dominant type of international activity for
many firms because it requires the least
investment overseas.
– As a firm gains international experience, the
business takes the help of a rep or dealer to
handle promotion and sales in their local
country.

8. Entering International Markets
• Export (cont.):
– A rep often handles several firms’ products
that typically do not compete with each other.
– In a dealership, the relationship between two
firms will be closer than with the
manufacturer’s rep; a dealership could be an
exclusive one, only selling one firm’s
products.

9. Entering International Markets
• Alliances
– In an alliance, a firm moves into a market in
association with other firms.
– The parties involved have less control, and
also have less risk.

10. Entering International Markets
• Informal alliances
– Is a statement by one firm to another
indicating, ‘‘If you help me sell my product in
your market, I will help you sell yours in my
market.’’
– Does not involve equity investments by either
party.

11. Entering International Markets
• Informal alliances (cont.):
– Help emerging markets in trying to penetrate
environments where the rule of law is still
developing.
– Allow a firm, as it begins to enter a market, to
have connections with individuals that will
advise the firm and support its efforts.

12. Entering International Markets
• Licensing
– Is a more formal type of alliance.
– Licensing agreement – An agreement where
a company outside a particular country
agrees to pay a firm within the country for the
right to either manufacture or sell its product.
– Alliance between two firms tends to be much
less coordinated.
– Can have strategic value to a firm as it seeks
to enter a market.

13. Entering International Markets
• Joint venture
– Are formal agreements between two or more
firms where a new separate entity is created
for the purpose of producing or distributing
goods and services.
– The level of commitment and risk is
considerably higher than in informal alliances.
– Firms can also enter into a short-term joint
venture to learn a specific process,
technology, or market from their partner.

14. Entering International Markets
• Franchising
– A type of alliance where a contract is
established between the parent (franchisor)
and the individual who actually buys the
business unit (franchisee) to sell a given
product or conduct business under its
trademark.
– A franchisor provides the franchisee with
extensive direction on how to operate the
business.

15. Entering International Markets
• Franchising (cont.):
– A franchise contract commonly sets standards
for behavior by the franchisee that, if not
followed, can result in the loss of the
franchise.
– The franchisor receives an initial fee and a
continuing royalty from the franchisee.

16. Entering International Markets
• Franchising (cont.):
– There are two types of businesses that
franchise internationally:
• A firm that already franchises in a mature
economy.
• A firm that prefers to franchise regionally and will
not open many franchises in mature markets; this
limits its international exposure, while allowing it to
gain experience in smaller, less-lucrative, less-
visible markets.

17. Entering International Markets
• Mergers and acquisitions
– A merger is a transaction involving two or
more corporations in which only one
permanent corporation survives.
– An acquisition is the purchase of a company
that is completely absorbed as a subsidiary or
division of the acquiring firm.

18. Entering International Markets
• Mergers and acquisitions (cont.):
– Mergers and acquisitions create permanent
changes to the structure of the firms involved.
– An acquisition can act as a turnkey
operation—that is, the firm can enter the
market immediately with a ready-made
operation.

19. Entering International Markets
• Greenfield ventures
– A firm may choose to establish itself in a given
country without the aid of a partner.
– This type of venture is the most difficult to
pursue, but gives a firm the greatest control.

20. Entering International Markets
• Greenfield ventures (cont.):
– The cost of development is quite high and the
venture also has greater risk since it must
enter a country and build its brand and
various stakeholder relationships.
– The keys to success for a Greenfield venture
are patience and adequate support by a
corporation.

21. Entering International Markets
• Wholly owned subsidiary
– An organization form where the parent owns
the local firm completely; the organization
would focus only on the country in which it
has entered.
– A firm may look to other economic concerns in
making its decision about the nations to
choose from.
– The economic concerns being transportation
costs, tax and government incentives, labor
quality, and organizational learning.

22. International Entry Cycle
• Firm starts only in a domestic market.
• Firm becomes aware of international
opportunities.
• Firm enters a market in a small way
typically through licensing.
• Firm builds international confidence and
commits more resources through joint
venture.

23. International Entry Cycle
• Firm builds own international facilities.
• Firm becomes transnational –
– In this type of firm, the business assets are
highly specialized, but interdependent with the
other assets of the firm.
– The contribution of each nation is integrated
with the worldwide network of businesses to
provide benefits of that nation.
– Knowledge developed in any unit is shared
worldwide within the business.

25. Market Entry Execution
• Planning entry
– Addresses what is needed to make the
market entry successful, how market entry will
be conducted, and why market entry is
necessary.
– Helps educate managers on why the venture
is critical, how it will affect their given unit, and
develop ways to ensure the venture’s
success.

26. Market Entry Execution
• Planning entry (cont.):
– Creates parameters that are the bases for
judging the progress and success of a merger
or acquisition.
– Helps eliminate many potential problems that
can arise in a merger or acquisition on both
sides of the venture.

28. Market Entry Execution
• Key points in implementing a merger or
acquisition can be summarized as:
– Defining clear objectives.
– Establishing an implementation team.
– Establishing lines of authority for the
implementation.
– Identifying key employees and teams to
ensure they are part of the transition and
remain with the firm.

29. Market Entry Execution
• Key points in implementing a merger or
acquisition can be summarized as (cont.):
– Planning for information system integration.
– Developing a plan for blending the cultures.

30. Market Entry Execution
• Joint venture implementation – Ensure
that:
– Parties to the joint venture have shared goals
for the joint venture.
– There are no ambiguities in the relationship.
– Each firm’s strategic position is such that the
firm can fulfill its commitment to the joint
venture.
– Intellectual property is protected because a
partner today may be a competitor tomorrow.