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Foreign Market Entry Strategies

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    Using real-world examples, compare and contrast foreign market entry strategies used by different Multinational Enterprises. Evaluate the success of these entry strategies by referring to real-world examples. You may refer to cases discussed in seminars and also provide new examples.

    Multinational corporations are those with bases and production plants in several countries, usually but not always with headquarters in the more developed countries. Multinational enterprises invest overseas to expand their profit amongst several other reasons. Companies become multinational by making investments and expanding their ventures abroad, through exporting or foreign direct investment. There are several ways by which a firm can expand its horizons. I will be comparing these in my essay and will provide some real-world examples.

    A firm expanding internationally must decide which markets to enter, when to enter them, on what scale, and how to enter them (the choice of entry mode). Firms can enter foreign markets through exporting, turnkey projects, licensing, franchising, joint ventures, or wholly-owned subsidiaries. The central managerial trade-off between the alternative modes of market entry is that between risk and control. When choosing a foreign market entry strategy the firm must consider its goals and objectives, the degree of control they are after, the firm’s resources and capabilities, and the risks they face by taking on a foreign venture. Different modes of entry expose the firm to a different degree of risk.

    There are several successful multinational enterprises that benefit from investing abroad. Some move their production plants abroad where the labor and raw materials are cheaper in order to minimize production costs. This in turn increases their profit margins. Others reach a bigger consumer base by establishing their brand internationally, with branches abroad serving in the foreign country. Others choose to risk less and expand through exporting internationally.

    Licensing is an agreement where the licensor grants rights to intangible property to another entity for a specified period of time in return for royalties. Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks. Licensing is a common method of international market entry for companies with a distinctive and legally protected asset, which is a key differentiating element in their marketing offer. Under a licensing model, a company sells licenses to other (typically smaller) companies to use intellectual property, brand, design, or business programs. These licenses are usually non-exclusive, which means they can be sold to multiple competing companies serving the same market. In this arrangement, the licensing company may exercise control over how its intellectual property is used but does not control the business operations of the licensee.

    While cross-border licensing may be difficult and offers a lack of control, it eliminates a lot of risks and costs associated with expansion. An unfamiliar or politically volatile market may discourage a firm from entering a new market on its own, licensing budges that risk onto the licensee just like franchising too. Starbucks licenses abroad, it seems that international operations ‘require a higher degree of administrative support to be responsive to country-specific regulatory requirements. And so Starbucks passes the administrative responsibilities to their licensees, who bring in royalties.

    A similar mode of entry to licensing is franchising. This mode of entry minimizes entry risks faced by entering a foreign market by passing them on to the local franchisees that operate the business. This is a form of licensing in which the franchisor sells intangible property and requires the franchisee agree to abide by strict contract rules as to how it does business. Franchising is the practice of using another firm’s successful business model with an established brand name and operating structure. The franchiser maintains a considerable degree of control over the operations and processes used by the franchisee (unlike a licensor) but also helps with things like branding and marketing support that aid the franchise. The franchisee uses another firm’s successful business model and brand name to operate what is effectively an independent branch of the company.

    Established MNES such as McDonald’s and TGI Fridays have used this mode of entry to internationalize. This mode of entry is popular amongst the retail sector. Mainly because it is easier to inherit the know-how and abide by given contract rules in this sector. The main drawback of franchising is the difficulty of adapting the franchised asset or brand to local market tastes. One of the best-known franchisers is McDonald’s, it tries to adapt to the differing tastes across borders by diversifying its products and offering ‘different menus in different countries and even different regions of countries’. The French, the Spanish, the Portuguese, and German like beer with their burgers and are welcome to have some in their local McDonalds.

    Adapting to local market taste/culture is not always easy. Weight Watchers is a highly successful dieting business that franchises its programs to operators of local clubs and groups of people motivated to lose weight and maintain their new lighter shape. Its expansion into Mexico encountered some cultural differences compared with the United States or Canada. In some parts of the country, ‘the attitude still prevailed that being overweight was not bad because it indicated sufficient affluence to eat well’(Arnold 2003). In addition, ‘Mexican consumers were far less nutritionally aware than their northern counterparts, who encountered extensive nutritional information on all food products by law’ (Arnold 2003). Clearly, market development required heavy local investment in market education to establish the dieting club concept. Because it was a franchise organization, however, the local marketing funds held by the entrepreneurial and small-scale group operators were much below what was necessary.

    Before making the investment firms have to ‘test the waters and see if their investments would succeed. They use various marketing tools to examine this notion. The use of SWOT (strength weakness opportunity threat) analysis helps firms determine if the risk is worthwhile. And if it is then the firm must examine the extent of possible investment. Exporting is usually the firms’ first foreign entry strategy as it is so low risk, low cost, and flexible. Exporting does not require the expense of establishing local operations. However, exporters must establish some means of marketing and distributing their products at the local level. The disadvantages of exporting include high transportation costs, exchange rate fluctuations, and possible tariffs placed on imports into the local country. Exporting is available through two channels; the firm may hire an agent or have its own marketing subsidiary abroad. Exporting is one way to diversify the consumer base; there are 5 more ways to enter a foreign market when exporting is not as attractive. This is when lower-cost manufacturing locations exist when transport costs and tariff barriers are high and when the agent fails to act in the exporter’s best interests. Firms can test ‘the waters’ through exporting; it helps them understand the market needs before committing greater resources through FDI.

    Turnkey projects involve a contractor that agrees to handle every detail of the project for a foreign host country client, including the training of operating personnel. After the project is finished the investor is handed the ‘key’ to operate the business. In contrast with franchising, this is where the MNE delivers the whole ready-to-use operation to a contractor and lets them run it, rather than just the pass over of know-how in the contract. The risk here is passed on to the buyer of the operation and is common with chemical and pharmaceutical companies. Turnkey projects are also used in business and government-owned housing projects; in the latter, an outside developer does all the work to produce the end product including purchasing the land, getting the necessary building permits, hiring the plumbers, electricians, and other skilled tradespeople, building the housing units, and furnishing them with appliances. They then sell the project to the government entity.

    Joint ventures involve the establishment of a firm that is jointly owned by two or more otherwise independent firms. Joint ventures allow firms to share the risks and costs of international expansion, develop new capabilities, and gain access to important resources. Having an established foreign enterprise, as a partner is highly beneficial, mainly because they know their local markets and are aware of regulations imposed by the local governments and the local market demands. In addition, the investment is split and risks are shared, which allows them to focus more on running the business more efficiently and specialize in the fields they are best at. However, conflicts are common in these ventures as there is a fight for control and power for the business and who makes the decisions. This entry strategy combines the know-how of a local firm and an MNE to maximize potential gain. The joint venture has an advantage of local know-how and connections, a local partner that knows the market, the culture, and the local government regulatory requirements. These benefits and the first-mover advantage have made General Motors very successful. GM entered China in 1997, forming a joint venture with the state-owned Shanghai Automotive Industry Corporation (SAIC). As GM lacked connections and knowledge in China, and the government regulations made it hard for a foreign entity to enter the market, the joint venture was a great decision. In 2010 GM sold 2.35 million cars in China, more than the 2.2 million its sold in the US.

    Setting up a wholly-owned subsidiary is usually the last stage of FDI. It involves 100 percent ownership of the stock of the subsidiary and therefore is the riskiest type of entry mode. This is where the firm acquires an existing firm in a foreign market or sets up a new operation abroad (Greenfield investment). Greenfield ventures are attractive because they allow the firm to build the kind of subsidiary company that it wants, whereas acquisitions are quicker to carry out.

    As the firm has to bear the full costs and risks of the venture this type of entry mode is quite unappealing. However, it keeps the firm in full control and therefore allows for global strategic coordination. Global strategies require the firms to coordinate their product and pricing strategies tightly, across international markets and locations. Having a subsidiary may be important for a variety of tax and tariff reasons. Another reason may be to preserve the brand and identity of the firm. Wholly owned subsidiaries enable the parent company to maintain operations in diverse geographic areas, market areas, and even entirely separate industries, creating an important hedge against changes in the market, geopolitical and trade practice changes, and declines in industry sectors.

    When deciding to expand abroad firms have a lot to think about. In order to succeed abroad, they must investigate their potential market sufficiently and choose their entry mode according to their expansion ambitions. The method of market entry chosen by a firm reflects the firm’s risk tolerance, perceived risk, competitive conditions, and overall resources. Common entry strategies include greenfield or solo ventures, mergers and acquisitions, joint ventures, export, and licensing. Some entry strategies are more effective for different industry sectors, like franchises for known retail brands. Some strategies are more risk-averse than others, it all depends on what product is on offer and if the world wants to buy it.

    Bibliography

    1. David Arnold 2003 ‘strategies for entering and developing international markets
    2. S. Schifferes ‘Cracking chinas car market’ BBC news 2007

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    Foreign Market Entry Strategies. (2016, Aug 18). Retrieved from https://graduateway.com/foreign-market-entry-strategies/

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