4 foreign market entry modes and strategies

Back: Entry modes are different ways how multinational companies (MNCs) enter foreign markets and operate there.

Basic types:

1. Exporting –

   • Company sells to the foreign market from home country.

   • Value creation (production) and revenue (sales) happen in different countries.

2. Contractual modes –

   • Company works with a local partner through a contract for a limited time.

   • They share resources/know-how/rights, but the company usually does not own the local business.

3. FDI-centered modes – Holding full or partial ownership over a local entity that produces goods or services

The choice of entry mode is an important strategic decision.

Along entry modes, the following tend to increase:

• Resource commitment

• Organizational control

• Risk

• Expected returns

Typical pattern:

• Exporting → low control, low risk, low capital commitment

• Contractual entry modes → medium control, risk, and commitment

• Foreign Direct Investment (FDI) → high control, high risk, high capital commitment

• Simplest entry mode with high relevance

• Little to no capital investment required

• Difficulty in controlling sales

• Often starts with unsolicited orders

• Proactive motivations: exploiting opportunities or technological advantages

• Reactive motivations: improving capacity utilization or decreasing domestic demand

• Indirect exporting: firm exports via an intermediary

  • Export Management Companies act as sales agents or distributors (for a fee, taking little ownership of the product)

  • International Trading Companies handle both export and import

• Direct exporting: firm exports directly to foreign distributors or end-users

  • Requires more interaction and deeper understanding of the foreign market

  • Helps firms gain valuable expertise in operating internationally

Back:

1. Evaluate the level of control required

2. Evaluate financial and human resource capabilities

3. Assess the ability to design and execute effective international promotion activities

4. Consider whether extensive international travel or an expatriate sales force is feasible

5. Evaluate the ability to build overseas contacts and networks

Advantages:

• Cheap way to acquire new markets

• Testing markets

• Low capital investments

• Low risk

Disadvantages:

• Need of trust for business partners abroad

• Limited marketing possibilities

• Property theft

• Low amount of control

• Contractual agreements between a firm and a foreign partner

• Focus on the right to use certain assets

• Often used in technology-related or intellectual/industrial property transactions

• Flexible way to enter foreign markets

Forms of contractual modes:

• Contract manufacturing

• International licensing

• International franchising

• Turnkey projects

• Management contracts

Contract manufacturing

• Outsourcing manufacturing process

• Location advantages and cost savings

• Reduces financial and human resources

• Loss of control over production process

Advantages:

• Foreign know-how

• Focus on core activities (R&D, marketing)

• Reduced cost of production

Disadvantages:

• Low control over quality

• Intellectual property concerns

• Dependency on partner

• Different targets

International licensing

• Right to use intellectual property for a fee

• Little out-of-pocket costs

• May be affected by host country laws (weak property protection)

• Costs have already been incurred

Advantages:

• Relatively cost-efficient way to assess market potential

• Avoids trade barriers

Disadvantages:

• Lower profits

• Dependence on licensee

• Knowledge spillovers

International franchising

• Franchisee agrees to adhere to franchisor’s requirements for appearance, financial reporting, and operating procedures

• Fixed payment and royalty based on franchisee’s sales; franchisee is allowed to operate the business under the brand name

• Franchisor provides trademarks, operating systems, support services, and advertising

Advantages:

• Low-risk way to enter foreign markets

• Avoids trade barriers

• More control than licensing

Disadvantages:

• Dependence on franchisee

• Potential conflicts

• Can create future competition (knowledge spillovers)

Turnkey projects

• Firm fully designs, constructs, and equips a facility, then turns it over

• Often based on availability of government financing or political ties

• Mostly infrastructure projects like nuclear power plants, airports, or oil refineries

• Requires special expertise by large construction firms

Advantages:

• Companies can focus on their core competencies

• Avoid long-term operational risks

Disadvantages:

• Construction risks such as delays and cost overruns

Management contracts

• Used to transfer knowledge and expertise from multinational firms to local firms in foreign markets

• Low-risk means of entering new markets

• Include a range of services and are used in industries like hospitality, healthcare, and transportation

• Useful in countries with complex regulations or cultural differences, as the firm provides best practices

Advantages:

• Focus on core competencies

• Minimal financial exposure

Disadvantages:

• Returns may be limited by contract

• Unintentionally transfer knowledge to the contractee

Back: Foreign Direct Investments (FDI)

• Includes ownership and transfer of assets

• Firms own and control a foreign operation directly

• Complex and high risk with long-term commitments

• Can contribute to economic development in the host country

Forms of FDI:

• Partially owned: Merger, Joint Venture

• Wholly owned: Greenfield investment, Acquisition, Brownfield investment

Reasons for FDI:

• Access to new markets

• Resource acquisition

• Cost savings

• Risk diversification

• Strategic considerations (FDI as part of an overall growth strategy to gain competitive advantage)