10
Entering Foreign Markets
Some companies opt to purchase an existing company in the foreign country outright to get into a foreign market quickly. When acquiring, due diligence is important—not only on the financial side but also on the side of the country’s culture and business practices.
Cultural knowledge is very important for those companies that desired to do business outside their country. On the other hand, regardless what approach a company wants to take, relationships are primordial, and good training of employees, along with knowledge of political and economic issues.
Entering foreign markets (Economic development) and country attractiveness
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Entering foreign markets and selecting best markets
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Entering foreign markets and selecting best timing
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Entering foreign markets and selecting best level of commitment
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Six Modes of Entry
Exporting
Exporting is the selling of products produced in one country to customers in another country. Without exporting, we wouldn’t have the access we have currently to things like metals, computers, and electronics. Without exporting, you wouldn’t even dream of taking a road trip. The price of oil and gasoline would be out of your budget.
Pros: Avoids costs associated with setting up manufacturing facilities in another country. Less expensive way of gaining experience in a foreign market (reducing pioneering costs).
Cons: May miss out on efficiencies and economies of scale. High transport costs. Trade barriers such as tariffs.
Turnkey Projects
Turnkey project
s allow places like 7-eleven pop up almost everywhere. They make it easier to open up franchises, no matter your background. They give you all of the tools you need to successfully start a franchise, even if you’re lacking the knowledge and experience. A turnkey project is when a firm agrees to set up a plant for a foreign client and hand over the key when the plant is fully operation.
Pros: The contractor has the know-how necessary to set up a plant in the country.
Cons: The firm building the plant has little long-term commitment to the country. It may inadvertently create a competitor if the building firm sways
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Licensing
Licensing is a business arrangement in which one company gives another company permission to manufacture its product for a specified payment. Licensing generally involves allowing another company to use patents, trademarks, copyrights, designs, and other intellectual in exchange for a percentage of revenue or a fee. An international licensing agreement allows foreign firms, either exclusively or non-exclusively, to manufacture a proprietor’s product for a fixed term in a specific market. Licensing means that now that Disney has rights to Stars Wars and Marvel, you’re getting a whole new addition to Disneyland. With Disney as the licensor, they gain more publicity than they would without. Disney gas proven to be successful with their marketing strategies.
Pros: The licensee puts up most the operating capital so it’s an inexpensive way for a licensor to enter the market. Can allow the licensor to avoid trade barriers.
Cons: The licensor loses tight control over manufacturing, marketing, and strategy. Complicates the flow of money when investing in other countries.
Franchising
Franchising is purchasing the rights to use a trade mark, business model and processes. The purchaser does business under the franchisers name and has the benefit of operating as a company that has already developed a relationship with the public.
Pros: Similar to those of licensing: low cost for the franchisor and avoid trade barriers.
Cons: Challenges in maintaining quality standards (exasperated by physical distances).Must follow franchiser dress code and values. May inhibit the ability to take funds out of one country to enter another.
Joint Ventures
A joint venture is a business agreement in which parties agree to develop a new entity and new assets by contributing equity. They exercise control over the Enterprise
and consequently share revenues, expenses and assets. A consortium JV (also known as a cooperative agreement) is formed when one party seeks technological expertise, franchise and brand-use agreements, management contracts, and rental agreements for one-time contracts. The JV is dissolved when that goal is reached. Some major joint ventures include Dow Corning, MillerCoors, Sony Ericsson, Penske Truck Leasing, Norampac, and Owens-Corning.
Pros: Benefit from a local partner’s knowledge and expertise. Share costs and risks. Politically preferable in many countries.
Cons: May have to give up control of competitive advantage and technology to a partner. Lack of tight control over the newly-created company.
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Wholly-Owned Subsidiaries:
Lastly, wholly owned subsidiaries are when a firm owns 100 percent of the stock of a foreign entity by way for FDI, both greenfield and brownfield. Companies like Google and eBay are perfect examples. Google is one of the most common search engines everyone uses, so without this, how would you search for the answers to all of your questions?
Pros: Tight control of a firm’s competitive advantage and technology. Tight control over operations (quality, strategy, use of profits, etc.). Allows a firm to take advantage of economies of scale, comparative advantage, and other efficiencies.
Cons: The costliest option. Entails a great deal of risk.
Examples Here in Utah
There are many Utah companies that could be used as examples for the six modes of entry. For exports, as talked about before, Kennecott is the leading exporter for most of Utah’s metals, which is the number one good exported from Utah, bringing in over $8 billion. 7/11 and Ikea and examples of turn-key businesses. There are also many turn-key contractors here in Utah, who specialize in building turn-key businesses. The major colleges and universities here in Utah license other companies to make there fan base apparel. The Book of Mormon is also something that is also licensed to be made. KFC, Ikea, H&M, and ZARA are all international franchises that are here in Utah. The first KFC was actually here in Utah, not Kentucky believe it or not! Google maps is a joint venture of Google and NASA, and here in Utah we have IM Flash, which is a joint venture formed by Micron and Intel in 2006. There are many wholly owned subsidiaries, but one of the biggest ones in Utah right now is Vivint solar. Farr ice cream, a Utah ice cream company, is also a subsidiary of Nestle, an international brand.
References
The Wealth Of Nations, Book IV, Chapter III, Part II, p.495, para. c11.
https://www.economicshelp.org/trade2/benefits_free_trade/
https://fee.org/articles/some-pros-and-cons-of-protectionism/
LICENSES AND ATTRIBUTIONS
