Business School 101: Entry Strategies into Foreign Markets

Introduction

Definition: Selling and sending goods/services to another country.
Advantages:
- Low Cost: No need for foreign production facilities.
- High Efficiency: Centralized production can achieve scale economies.
- Favorable Government Policies: Incentives like tax rebates for exporters.
Disadvantages:
- High Expenses: Not suitable if cheaper production locations are available.
- Transportation Costs & Long Lead Time: High costs for bulk products, delivery takes time.
- Tariff Barriers: Risks due to tariffs (e.g., U.S.-China trade war).
- Foreign Exchange Risks: Currency fluctuations affect export viability.
- Loyalty Concerns: Local agents may not prioritize the firm’s products.

Definition: Contractor manages all details of a project for a foreign client.
Advantages:
- Short-term Revenue: Especially in industries with limited FDI.
- Less Risk: Suitable in unstable political/economic environments.
Disadvantages:
- Long-term Revenue Loss: No ongoing interest in the market.
- Unintended Competition: May create competitors in the global market.
- Loss of Competitive Advantage: Technology sold may benefit rivals.

Definition: Agreement granting rights to intangible property in return for royalties.
Real-World Examples: Calvin Klein, Disney.
Advantages:
- Income Without Overhead: Generating income without heavy costs.
- Better Marketing: Local firms can market better.
- Easier Market Entry: No tariffs for intangible goods.
- Conflict Diffusion: Licensing can prevent legal disputes.
Disadvantages:
- IP Theft Risk: Little control over licensee operations.
- No Revenue Guarantee: Royalties depend on licensee profits.
- Reputation Risks: Licensee behavior can affect licensor’s reputation.
- Potential Conflicts: Revenue disputes can arise.

Definition: A specialized form of licensing with strict operational rules.
Example: McDonald's.
Advantages:
- Cost and Risk Sharing: Franchisee assumes many risks.
- Quick Global Expansion: Build a global presence rapidly.
Disadvantages:
- Challenges in Profit Transfer: Limits repatriation of profits.
- Quality Control Issues: Inconsistent quality from franchisees can harm brand.

Definition: Business arrangement pooling resources for specific tasks.
Real-World Example: Volvo and Uber.
Advantages:
- Local Partner Support: Knowledge of local markets.
- Shared Risks and Costs: Helps mitigate financial risks.
- Less Government Intervention: Often required in certain markets.
Disadvantages:
- Technology Loss Risk: Risk of sharing core technologies.
- Lack of Control: Less control over operations.
- Potential Partner Conflicts: Disagreements over strategy may arise.

Definition: A firm owns 100% of the stock, can be established via greenfield ventures or acquisitions.
Advantages:
- Control Over Technology: Reduces risks of losing core technology.
- Tight Control: Better strategic coordination.
- Economies of Scale: Full profits realized from operations.
Disadvantages:
- High Costs and Risks: Significant financial resources needed.
- Lack of Local Support: Cultural/political challenges can affect operations.

Acquisition:
- Pros: Quick market entry, preemption of competitors, known revenue streams.
- Cons: Risk of overpayment, cultural clashes, underestimated challenges.
Greenfield Ventures:
- Pros: Build desired culture and operations from scratch.
- Cons: High costs and long commitment; vulnerable to political risks.

Key Questions for Firms:
1. How much resource commitment?
2. How much control desired?
Recap: Six entry strategies each with advantages and limitations.