Foreign Market Entry Strategies Overview

Hello everyone, welcome to Business School 101. I'm Dr. Yang. Once a firm decides to enter a foreign market, the question regarding the best strategy of entry inevitably arises. Generally, firms can use one of six different modes to enter foreign markets. Exporting, turnkey projects, licensing, franchising, establishing joint ventures with the host country firm, or setting up a new wholly owned subsidiary in the host country. Each entry strategy has its own advantages and disadvantages, and managers need to consider these pros and cons carefully when deciding which strategy to use. In this video, I will explain these various entry strategies along with their respective advantages and disadvantages. I will also provide some real-world examples for you. Let's begin by discussing exporting. Exporting refers to the selling and sending of goods and services to another country. Exporting is a traditional and well-established method of reaching foreign markets. Since it does not require that the goods be produced in the target country, no investments in foreign production facilities are needed. Exporting does have three distinct advantages. First, low cost. Exporting avoids the substantial cost of establishing manufacturing or other deeply ingrained operations in the host country. All you need is the right product at a competitive price. Second, high efficiency. Exporting may help a firm achieve experience curve and location economies. By manufacturing a product in a centralized location and exporting it to other national markets, a firm may realize substantial-scale economies from its global sales volume. Third, favorable government policies. Exporting goods or services abroad is one of the key activities that brings foreign currency into home countries and helps create foreign currency reserves. That's why some governments give many incentives and benefits, such as tax rebates, to exporters. Some financial institutions offer special loans to exporters as well. However, exporting also has a few disadvantages. First, it can be expensive. Exporting from a firm's home base may not be appropriate if lower-cost locations for manufacturing the product can be found abroad. This is particularly evident if the labor cost in the home country is high. Here's a real world example. Many Fortune 500 companies such as 3M, Texas Instruments, Samsung, LG, Sony, and Panasonic have built multiple manufacturing facilities all over the world to take advantage of the cheap, yet highly skilled labor in developing countries. Second, high transportation costs and long lead time. High transportation costs can make exporting uneconomical, particularly for bulk products such as agricultural and mineral items. Additionally, delivering products overseas could take anywhere from weeks to months. Third, tariff barriers can make exporting risky. The threat of tariff barriers by the government of the host country can make exporting very hazardous. Consider the trade war between the U.S. and China, for instance. The average U.S. tariffs on imports from China remain elevated at 19.3%, while the average Chinese tariffs on imports from the U.S. persist at 20.7%. Fourth, foreign exchange risks. The exchange rate is the value of one currency for the purpose of conversion to another. For companies that want to export products to the U.S., export activities are encouraged if the value of their local currency decreases against the U.S. dollar. Conversely, if the value of their domestic currency increases, then the development of export activities is inhibited. Fifth, foreign agents'loyalty concerns. Local agents often carry products from multiple different suppliers which could include competitors in the same industry. Therefore, they may have divided loyalties. In such cases, the local agents may not do as good of a job as the firm would if it managed its own marketing and sales from the beginning. The second entry strategy is the utilization of turnkey projects. Firms that specialize in the design, construction, and startup of turnkey plants are common in some industries. In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the key to a plant that is ready for full operation, hence the term turnkey. This is a means of exporting process technology to other countries. Turnkey projects are most commonly used in the chemical, pharmaceutical, petroleum refining, and metal refining industries, all of which use complex and expensive production technologies. Turnkey projects have two major benefits. First, more revenue in the short term. The know-how required to assemble and run a technologically complex process, such as refining petroleum or steel, is a big asset and turnkey projects are a way of earning great economic returns from that asset. This strategy is particularly useful in areas where FDI, or Foreign Direct Investment, is limited by host government regulations. For example, the governments of many oil-rich countries have set out to build their own petroleum refining industries. so they restrict FDI in their oil refining sectors. Because many of these countries lack petroleum refining technology, they then join turnkey projects with foreign firms that have the technology that they need. Second, less risk. The turnkey strategy can also be less risky than conventional FDI. In a country with unstable political and economic environments, a long-term investment might expose the firm to unacceptable political and economic risks. However, there are also three main drawbacks that are associated with the turnkey project strategy. First, possible revenue loss in the long term. A firm that enters into a turnkey deal will have no long-term interest in the foreign country. This can be a downside if that country subsequently proves to be a major market for the output of the process that has been exported. Second, unintended competition. A firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor. For example, many of the Western firms that sold oil refining technologies to firms in Saudi Arabia, Kuwait, and other Gulf states now find themselves competing with those firms in the global oil market. Third, the potential loss of a competitive advantage. If a firm's process technology is the source of a competitive advantage, then selling this technology through a turnkey project is also selling the competitive advantage to rivals. The third entry strategy is licensing. A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to the licensee for a specified period, and in return, the licensor receives a royalty fee from the licensee. Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks. Here are two real-world examples of licensing. Calvin Klein works with a number of manufacturers under licensing agreements. This means that Calvin Klein has licensed the brand to sell their products. Calvin Klein products such as underwear, perfume, and jeans are all produced and branded under licensing agreements. Similarly, when you purchase items emblazoned with Disney characters, that product was likely not manufactured by Disney itself. Instead, Disney usually signs licensing agreements with certain producers to use their characters and images which is why you find Disney characters on everything from soap and sleeping bags to t-shirts and other types of clothing. Licensing has four clear advantages. First, income without overhead. Licensing often allows licensers to generate income without taking on heavy overhead and production costs. Normally, companies need to invest considerable resources into stimulating income from their intellectual property, or IP. However, allowing someone else to use it essentially passes the burden onto them while allowing licensors to collect royalties. Second, potentially better marketing. Licensing can also help improve the way that a licensor's intangible property is marketed. For instance, a local business will likely have a better sense of how to reach their market than a national chain will. By licensing intangible property to local firms, a licensor could benefit from more targeted marketing. without having to conduct individualized market research. Third, the ability to enter foreign markets more easily. Intangible property has an easier time crossing national borders than physical products do, which makes licensing a great way to enter foreign markets. The licensors don't need to worry about tariffs or other barriers since they are not shipping products overseas. Fourth, the diffusion of conflicts. One benefit of licensing that is often overlooked is its usefulness in diffusing conflicts between businesses. For example, if someone uses your intellectual property, then it's often advantageous to create a licensing agreement with them rather than to sue them outright. This way, both parties can make a profit and an expensive dispute is avoided. Licensing has four serious disadvantages as well. First, risk of IP theft. One risk of licensing stems from the fact that the licensor has little control over the way that the licensee conducts their operations. That means that the licensor's intellectual property may be more exposed to theft. Second, no guarantee of revenue. The licensor also has no guarantee of revenue from the agreement since royalties are typically based on a percentage of the profits. If the licensee fails to generate any profit from the IP, then the licensor will get no revenue. Third, risk of diminished reputation. If the licensee doesn't conduct business in an ethical manner, then the licensor may take a hit to their reputation even though the licensor is not technically liable for the licensee's actions. Fourth, potential conflicts. Licensing also exposes the licensor to potential conflicts with their licensees. particularly if those licensees try withholding revenue from the licensor. The licensor would likely be entitled to take legal action in this type of situation, but that can become expensive. The fourth entry strategy is franchising. Although franchising is similar to licensing, it tends to involve longer-term commitments. Franchising is basically a specialized form of licensing in which the franchisor not only sells intellectual property to the franchisee, but also insists that the franchisee agree to abide by strict rules regarding how they do business. The franchisor will often assist the franchisee in running the business on a regular basis. As with licensing, the franchisor typically receives a royalty payment, which amounts to some percentage of the franchisee's revenue. Whereas licensing is primarily pursued by manufacturing firms, franchising is mainly employed by service firms. McDonald's is a good example of a firm that has grown by using a franchising strategy. The strict rules of McDonald's as to how franchisees should operate a restaurant extend to control over the menu, cooking methods, and staffing policies, as well as the design and location. McDonald's also organizes the supply chain for its franchisees, and it provides management training and financial assistance. Other famous franchise businesses include Burger King, 7-Eleven, Marriott International, Ace Hardware Corporation, Great Clips, Jiffy Lube, and the UPS store. The advantages of franchising as an entry mode are very similar to those of licensing. For example, a participating firm is relieved of many of the costs and risks of opening a foreign market on its own. Instead, the franchisee typically assumes those costs and risks. This creates a good incentive for the franchisee to build a profitable operation as quickly as possible. Thus, by using a franchising strategy, a service firm can build a global presence quickly, cheaply, and safely. The disadvantages of franchising are less pronounced than those of licensing. Since franchising is often used in service industries, there is no reason for firms to consider the need for coordination of manufacturing to achieve experience curve and location economies. However, franchising may inhibit a firm's ability to take profits out of one country to support competitive attacks in another. A more significant downside of franchising is quality control. The foundation of franchising arrangements is that the firm's brand name conveys a message to consumers about the quality of the firm's product. For example, a business traveler checking in at a Four Seasons hotel in India can reasonably expect the same quality of room, food, and service that they would receive in New York. The Four Seasons name is supposed to guarantee consistent product quality. This presents a problem in that foreign franchisees may not be as concerned about quality as they should be, and the result of poor quality can extend beyond lost sales in a particular foreign market to a decline in firms worldwide reputation. The fifth entry strategy is the establishment joint ventures. A joint venture is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing specific tasks. This task can be a new project or any other business activity. In a joint venture, each of the participants is responsible for the profits, losses, and costs associated with it. However, the venture is its own entity. In other words, it is separate from the participants'other business interests. Here's a real-world example of an international joint venture. In 2016, the Swedish automaker Volvo Car Group and the American ride-sharing service provider Uber entered into a $300 million joint venture. to develop autonomous driving vehicles. The ratio of ownership is 50-50. The Volvo-Uber joint venture allows both companies to combine their resources with the aim of capitalizing on each other's strengths. Joint ventures have three major benefits. First, gaining support from a local partner. A firm benefits from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems. For many U.S. firms, joint ventures have involved the U.S. company providing technological know-how and products, while the local partner provides the marketing expertise and the local knowledge necessary for competing in that country. Second, sharing risks and costs. When the development risks and costs of opening a foreign market are high, a firm might do good by facing these obstacles with a local partner. Third, less government intervention. In many countries, political considerations make joint ventures the only feasible entry mode. Research suggests that joint ventures with local partners face a low risk of being subject to nationalization or other firms of adverse government interference. Despite these benefits, there are still some considerable drawbacks that accompany joint ventures. First, the risk of losing core technology. As with licensing, a firm that enters into a joint venture risks giving control of its technology to its partner. However, joint venture agreements can be constructed to minimize the risk. One option is to hold majority ownership in the venture. This allows the dominant partner to exercise greater control over their own technology. Another option is to wall off a partner's technology that's central to the core competence of the firm while also sharing other technology. Second, not having total control. A joint venture does not give a firm the tight control over subsidiaries that it might need to realize experience curve or location economies. Additionally, it does not give a firm the jurisdiction over a foreign subsidiary that may be required to engage in coordinated global attacks against its rivals. Third, A Possible Clash Between Partners A shared ownership arrangement can lead to battles for control between partners if either of their objectives change or if they hold different views regarding what the strategy should be. For example, in the case of ventures between a foreign firm and a local firm, as a foreign partner's knowledge about local market conditions rises, it depends less on the expertise of a local partner. This increases the bargaining power of the foreign partner and ultimately leads to conflicts over control of the venture's strategy and goals. The final interest strategy is the construction of wholly owned subsidiaries. In a wholly owned subsidiary, the firm owns 100% of the stock. Establishing a wholly owned subsidiary in a foreign market can be done two ways. The firm can either set up a new operation in a foreign country, which is often referred to as a greenfield venture, or acquire an established firm in the host nation, and use that firm to promote its products. There are several advantages of wholly owned subsidiaries. First, less risk of losing core technology. When a firm's competitive advantage is based on technological competence, a wholly owned subsidiary is often the preferred entry mode because it reduces the risk of losing control over that competence. Many high-tech firms prefer this strategy for overseas expansion. Second, tight control. A wholly owned subsidiary gives firms secure control over operations in different countries. This is necessary for engaging in global strategic coordination. Third, attaining an economy of scale. A wholly owned subsidiary may be required if a firm is trying to realize location and experience curve economies. Additionally, it gives the firm a 100% share of the profits generated in a foreign market. On the other hand, wholly owned subsidiaries have two serious disadvantages. First, huge sunk costs and big risks. Establishing this type of business can eat up the financial resources of a parent company. Therefore, the parent company must conduct feasibility studies to determine not only what the costs will be to get the subsidiary up and running, but also what it will cost within the next five years to sustain that subsidiary. These numbers are based on various economic factors. Second, a lack of local support. There are cultural and political challenges that may negatively affect the performance of a firm's wholly owned subsidiary. For example, it is very difficult to conduct business in China without local wangji, otherwise known as a strong, trustful relationship with someone who has authority. As we have just learned, a firm can establish a wholly owned subsidiary in a country by building a subsidiary from the ground up, which is known as the Greenfield Strategy. or by acquiring an enterprise in the target market. The choice between acquisitions and greenfield ventures is not an easy one. As always, both modes have pros and cons. Let's start by discussing acquisition. An acquisition is defined as a corporate transaction in which one company purchases either a portion or all of another company's shares or assets. Acquisitions are typically made in order to take control of and build on the target company's strengths and to capture synergies. Acquisitions have the following three points in their favor. First, they are quick to execute. By acquiring an established enterprise, a firm can rapidly build its presence in the target foreign market. For example, in both the automobile industry or telecommunications service industry, it can take years to construct a new facility or network. In these cases, the firms might prefer acquisitions because it's the quickest way to establish a sizable presence in the target market. Second, they allow a firm to preempt competitors. The need for preemption is particularly great in markets that are rapidly globalizing. A combination of the deregulation within countries and the liberalization of regulations that govern cross-border FDI has made it much easier for enterprises to move into foreign markets through acquisitions. Third, they are less risky than greenfield ventures. When a firm makes an acquisition, it buys a set of assets that are producing a known revenue and profit stream. In contrast, the revenue and profit stream that a greenfield venture might generate is uncertain because it does not exist yet. When a firm makes an acquisition in a foreign market, It not only obtains a set of tangible assets such as factories, logistics systems, and customer service systems, but it also acquires valuable intangible assets including a local brand name and manager's knowledge of the business environment in that nation. Such knowledge can reduce the risk of mistakes caused by ignorance of the national culture. Despite the arguments for making acquisitions, they often produce disappointing results. Here are some major reasons why. First, Firms may overpay for the acquisition. The acquiring firms often overpay for the assets of the acquired firm. The price of the target firm can get bid up if more than one firm is interested in its purchase, as is often the case. Additionally, the management of the acquiring firm is often too optimistic about the value that can be created via an acquisition, and is thus willing to pay a significant premium over a target firm's market capitalization. Second, there may be a cultural clash. Many acquisitions fail because there is a clash between the cultures of the acquiring and acquired firms. After an acquisition, many acquired companies experience high management turnover. This is possibly because the employees do not like the acquiring company's way of doing things. Third, the challenges are underestimated. Many acquisitions fail because attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than expected. Differences in management philosophy and company culture can slow the integration of operations. Differences in national culture may exacerbate these problems. So what about greenfield ventures? A greenfield venture refers to when a company creates a subsidiary in a different country, building its operations from the ground up. In addition to the construction of new production facilities, these projects can sometimes include the building of new distribution hubs, offices, and living quarters. Establishing greenfield ventures are quite common in the automobile industry. Here are a few real-world examples. In 2007, Mercedes-Benz entered the Indian market by purchasing 100 acres of land in Pune, Mahasrata for establishing its new manufacturing unit. In 2015, Toyota Motors decided to set up its new plant in Mexico under greenfield investment. The total cost of establishing the facility was around $1.5 billion. In 2018, U.S. electric vehicle maker Tesla set up its wholly owned subsidiary in Shanghai, and it aimed to penetrate the fast-growing Chinese market. The big advantage of establishing a greenfield venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants. For example, it is much easier to build an organization culture from scratch than it is to change the culture of an acquired unit. Similarly, it is simpler to establish a set of operating routines in a new subsidiary than it is to convert the operating routines of an acquired unit. This is a very important advantage for many international businesses. Transferring products, competencies, skills, and know-how from the established operations of the firm to the new subsidiary are principal ways of creating value. The disadvantages of establishing a greenfield venture include the following. First, it comes at a high cost and requires a long-term commitment. Greenfield ventures require a huge amount of capital expenditure, which could call for a large number of borrowings and loans, so the financial burden can be very high. Additionally, it could take years to build all the necessary facilities from scratch before they can even begin generating revenue. Second, it is more vulnerable to political risk. If there are discouraging government policies in the country that a Greenfield investment is supposed to take place, then the foreign investor may decide not to put money into that company because the government policies could hinder them from achieving their goals. In general, the choice between an acquisition or agreeing to a venture depends on the circumstances that the firm is facing. If the firm is seeking to enter a market where there are already well-established incumbent enterprises and where global competitors are also interested in establishing a presence, then it may benefit the firm to enter via an acquisition. In such cases, a greenfield venture may be too slow to form a significant presence. Conversely, if the firm is considering entering a country where there are no incumbent competitors to be acquired, then a greenfield venture may be the only sensible mode. In fact, If the competitive advantage of the firm is based on the transfer of organizationally embedded competencies, skills, routines, and culture, then it may still be preferable to enter via a greenfield venture, even when incumbents exist. Things like skills and organizational culture, which are based on significant knowledge that is difficult to articulate and codify, are much easier to embed in a new venture than they are in an acquired entity, in which the firm may have to overcome the established routines and culture of the acquired firm. Now, let's wrap up today's topic with a brief summary. In this video, we discuss six significant entry strategies. Exporting, turnkey projects, licensing, franchising, joint ventures, and wholly owned subsidiaries. Under a wholly owned subsidiary, a firm has two options. Acquisition or the establishment of a greenfield venture. Each entry strategy has its own advantages and limitations. When deciding which mode of entry to choose, companies should ask themselves two questions. First. How much of our resources, such as money, time, and personnel, are we willing to commit? The fewer the resources the company wants to devote, the better it is for the company to enter the foreign market on a contractual basis like exporting, licensing, franchising, or turnkey projects. Second, how much control do we wish to retain? The more control a company wants, the better off it is either establishing or buying a wholly owned subsidiary or constructing a joint venture with carefully delineated responsibilities. and accountabilities between the partner companies. So, do you have any questions or thoughts about firms'entry strategies? Please leave your comments below. Thanks for watching and I will see you next time.

In this video, I will explain these various entry strategies along with their respective advantages and disadvantages. I will also provide some real-world examples for you. Let's begin by discussing exporting.

Exporting refers to the selling and sending of goods and services to another country. Exporting is a traditional and well-established method of reaching foreign markets. Since it does not require that the goods be produced in the target country, no investments in foreign production facilities are needed.

Exporting does have three distinct advantages. First, low cost. Exporting avoids the substantial cost of establishing manufacturing or other deeply ingrained operations in the host country. All you need is the right product at a competitive price.

Second, high efficiency. Exporting may help a firm achieve experience curve and location economies. By manufacturing a product in a centralized location and exporting it to other national markets, a firm may realize substantial-scale economies from its global sales volume.

Third, favorable government policies. Exporting goods or services abroad is one of the key activities that brings foreign currency into home countries and helps create foreign currency reserves. That's why some governments give many incentives and benefits, such as tax rebates, to exporters.

Some financial institutions offer special loans to exporters as well. However, exporting also has a few disadvantages. First, it can be expensive.

Exporting from a firm's home base may not be appropriate if lower-cost locations for manufacturing the product can be found abroad. This is particularly evident if the labor cost in the home country is high. Here's a real world example.

Many Fortune 500 companies such as 3M, Texas Instruments, Samsung, LG, Sony, and Panasonic have built multiple manufacturing facilities all over the world to take advantage of the cheap, yet highly skilled labor in developing countries. Second, high transportation costs and long lead time. High transportation costs can make exporting uneconomical, particularly for bulk products such as agricultural and mineral items.

Additionally, delivering products overseas could take anywhere from weeks to months. Third, tariff barriers can make exporting risky. The threat of tariff barriers by the government of the host country can make exporting very hazardous. Consider the trade war between the U.S. and China, for instance. The average U.S. tariffs on imports from China remain elevated at 19.3%, while the average Chinese tariffs on imports from the U.S. persist at 20.7%.

Fourth, foreign exchange risks. The exchange rate is the value of one currency for the purpose of conversion to another. For companies that want to export products to the U.S., export activities are encouraged if the value of their local currency decreases against the U.S. dollar.

Conversely, if the value of their domestic currency increases, then the development of export activities is inhibited. Fifth, foreign agents'loyalty concerns. Local agents often carry products from multiple different suppliers which could include competitors in the same industry.

Therefore, they may have divided loyalties. In such cases, the local agents may not do as good of a job as the firm would if it managed its own marketing and sales from the beginning. The second entry strategy is the utilization of turnkey projects.

Firms that specialize in the design, construction, and startup of turnkey plants are common in some industries. In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the key to a plant that is ready for full operation, hence the term turnkey.

This is a means of exporting process technology to other countries. Turnkey projects are most commonly used in the chemical, pharmaceutical, petroleum refining, and metal refining industries, all of which use complex and expensive production technologies. Turnkey projects have two major benefits. First, more revenue in the short term.

The know-how required to assemble and run a technologically complex process, such as refining petroleum or steel, is a big asset and turnkey projects are a way of earning great economic returns from that asset. This strategy is particularly useful in areas where FDI, or Foreign Direct Investment, is limited by host government regulations. For example, the governments of many oil-rich countries have set out to build their own petroleum refining industries.

so they restrict FDI in their oil refining sectors. Because many of these countries lack petroleum refining technology, they then join turnkey projects with foreign firms that have the technology that they need. Second, less risk.

The turnkey strategy can also be less risky than conventional FDI. In a country with unstable political and economic environments, a long-term investment might expose the firm to unacceptable political and economic risks. However, there are also three main drawbacks that are associated with the turnkey project strategy. First, possible revenue loss in the long term.

A firm that enters into a turnkey deal will have no long-term interest in the foreign country. This can be a downside if that country subsequently proves to be a major market for the output of the process that has been exported. Second, unintended competition.

A firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor. For example, many of the Western firms that sold oil refining technologies to firms in Saudi Arabia, Kuwait, and other Gulf states now find themselves competing with those firms in the global oil market. Third, the potential loss of a competitive advantage.

If a firm's process technology is the source of a competitive advantage, then selling this technology through a turnkey project is also selling the competitive advantage to rivals. The third entry strategy is licensing. A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to the licensee for a specified period, and in return, the licensor receives a royalty fee from the licensee. Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks.

Here are two real-world examples of licensing. Calvin Klein works with a number of manufacturers under licensing agreements. This means that Calvin Klein has licensed the brand to sell their products. Calvin Klein products such as underwear, perfume, and jeans are all produced and branded under licensing agreements.

Similarly, when you purchase items emblazoned with Disney characters, that product was likely not manufactured by Disney itself. Instead, Disney usually signs licensing agreements with certain producers to use their characters and images which is why you find Disney characters on everything from soap and sleeping bags to t-shirts and other types of clothing. Licensing has four clear advantages.

First, income without overhead. Licensing often allows licensers to generate income without taking on heavy overhead and production costs. Normally, companies need to invest considerable resources into stimulating income from their intellectual property, or IP. However, allowing someone else to use it essentially passes the burden onto them while allowing licensors to collect royalties.

Second, potentially better marketing. Licensing can also help improve the way that a licensor's intangible property is marketed. For instance, a local business will likely have a better sense of how to reach their market than a national chain will. By licensing intangible property to local firms, a licensor could benefit from more targeted marketing.

without having to conduct individualized market research. Third, the ability to enter foreign markets more easily. Intangible property has an easier time crossing national borders than physical products do, which makes licensing a great way to enter foreign markets. The licensors don't need to worry about tariffs or other barriers since they are not shipping products overseas.

Fourth, the diffusion of conflicts. One benefit of licensing that is often overlooked is its usefulness in diffusing conflicts between businesses. For example, if someone uses your intellectual property, then it's often advantageous to create a licensing agreement with them rather than to sue them outright. This way, both parties can make a profit and an expensive dispute is avoided. Licensing has four serious disadvantages as well.

First, risk of IP theft. One risk of licensing stems from the fact that the licensor has little control over the way that the licensee conducts their operations. That means that the licensor's intellectual property may be more exposed to theft. Second, no guarantee of revenue. The licensor also has no guarantee of revenue from the agreement since royalties are typically based on a percentage of the profits.

If the licensee fails to generate any profit from the IP, then the licensor will get no revenue. Third, risk of diminished reputation. If the licensee doesn't conduct business in an ethical manner, then the licensor may take a hit to their reputation even though the licensor is not technically liable for the licensee's actions.

Fourth, potential conflicts. Licensing also exposes the licensor to potential conflicts with their licensees. particularly if those licensees try withholding revenue from the licensor.

The licensor would likely be entitled to take legal action in this type of situation, but that can become expensive. The fourth entry strategy is franchising. Although franchising is similar to licensing, it tends to involve longer-term commitments.

Franchising is basically a specialized form of licensing in which the franchisor not only sells intellectual property to the franchisee, but also insists that the franchisee agree to abide by strict rules regarding how they do business. The franchisor will often assist the franchisee in running the business on a regular basis. As with licensing, the franchisor typically receives a royalty payment, which amounts to some percentage of the franchisee's revenue. Whereas licensing is primarily pursued by manufacturing firms, franchising is mainly employed by service firms. McDonald's is a good example of a firm that has grown by using a franchising strategy.

The strict rules of McDonald's as to how franchisees should operate a restaurant extend to control over the menu, cooking methods, and staffing policies, as well as the design and location. McDonald's also organizes the supply chain for its franchisees, and it provides management training and financial assistance. Other famous franchise businesses include Burger King, 7-Eleven, Marriott International, Ace Hardware Corporation, Great Clips, Jiffy Lube, and the UPS store. The advantages of franchising as an entry mode are very similar to those of licensing.

For example, a participating firm is relieved of many of the costs and risks of opening a foreign market on its own. Instead, the franchisee typically assumes those costs and risks. This creates a good incentive for the franchisee to build a profitable operation as quickly as possible. Thus, by using a franchising strategy, a service firm can build a global presence quickly, cheaply, and safely.

The disadvantages of franchising are less pronounced than those of licensing. Since franchising is often used in service industries, there is no reason for firms to consider the need for coordination of manufacturing to achieve experience curve and location economies. However, franchising may inhibit a firm's ability to take profits out of one country to support competitive attacks in another. A more significant downside of franchising is quality control.

The foundation of franchising arrangements is that the firm's brand name conveys a message to consumers about the quality of the firm's product. For example, a business traveler checking in at a Four Seasons hotel in India can reasonably expect the same quality of room, food, and service that they would receive in New York. The Four Seasons name is supposed to guarantee consistent product quality.

This presents a problem in that foreign franchisees may not be as concerned about quality as they should be, and the result of poor quality can extend beyond lost sales in a particular foreign market to a decline in firms worldwide reputation. The fifth entry strategy is the establishment joint ventures. A joint venture is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing specific tasks. This task can be a new project or any other business activity. In a joint venture, each of the participants is responsible for the profits, losses, and costs associated with it.

However, the venture is its own entity. In other words, it is separate from the participants'other business interests. Here's a real-world example of an international joint venture.

In 2016, the Swedish automaker Volvo Car Group and the American ride-sharing service provider Uber entered into a $300 million joint venture. to develop autonomous driving vehicles. The ratio of ownership is 50-50.

The Volvo-Uber joint venture allows both companies to combine their resources with the aim of capitalizing on each other's strengths. Joint ventures have three major benefits. First, gaining support from a local partner.

A firm benefits from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems. For many U.S. firms, joint ventures have involved the U.S. company providing technological know-how and products, while the local partner provides the marketing expertise and the local knowledge necessary for competing in that country. Second, sharing risks and costs. When the development risks and costs of opening a foreign market are high, a firm might do good by facing these obstacles with a local partner. Third, less government intervention.

In many countries, political considerations make joint ventures the only feasible entry mode. Research suggests that joint ventures with local partners face a low risk of being subject to nationalization or other firms of adverse government interference. Despite these benefits, there are still some considerable drawbacks that accompany joint ventures.

First, the risk of losing core technology. As with licensing, a firm that enters into a joint venture risks giving control of its technology to its partner. However, joint venture agreements can be constructed to minimize the risk.

One option is to hold majority ownership in the venture. This allows the dominant partner to exercise greater control over their own technology. Another option is to wall off a partner's technology that's central to the core competence of the firm while also sharing other technology.

Second, not having total control. A joint venture does not give a firm the tight control over subsidiaries that it might need to realize experience curve or location economies. Additionally, it does not give a firm the jurisdiction over a foreign subsidiary that may be required to engage in coordinated global attacks against its rivals. Third, A Possible Clash Between Partners A shared ownership arrangement can lead to battles for control between partners if either of their objectives change or if they hold different views regarding what the strategy should be.

For example, in the case of ventures between a foreign firm and a local firm, as a foreign partner's knowledge about local market conditions rises, it depends less on the expertise of a local partner. This increases the bargaining power of the foreign partner and ultimately leads to conflicts over control of the venture's strategy and goals. The final interest strategy is the construction of wholly owned subsidiaries. In a wholly owned subsidiary, the firm owns 100% of the stock. Establishing a wholly owned subsidiary in a foreign market can be done two ways.

The firm can either set up a new operation in a foreign country, which is often referred to as a greenfield venture, or acquire an established firm in the host nation, and use that firm to promote its products. There are several advantages of wholly owned subsidiaries. First, less risk of losing core technology.

When a firm's competitive advantage is based on technological competence, a wholly owned subsidiary is often the preferred entry mode because it reduces the risk of losing control over that competence. Many high-tech firms prefer this strategy for overseas expansion. Second, tight control. A wholly owned subsidiary gives firms secure control over operations in different countries. This is necessary for engaging in global strategic coordination.

Third, attaining an economy of scale. A wholly owned subsidiary may be required if a firm is trying to realize location and experience curve economies. Additionally, it gives the firm a 100% share of the profits generated in a foreign market. On the other hand, wholly owned subsidiaries have two serious disadvantages.

First, huge sunk costs and big risks. Establishing this type of business can eat up the financial resources of a parent company. Therefore, the parent company must conduct feasibility studies to determine not only what the costs will be to get the subsidiary up and running, but also what it will cost within the next five years to sustain that subsidiary. These numbers are based on various economic factors. Second, a lack of local support.

There are cultural and political challenges that may negatively affect the performance of a firm's wholly owned subsidiary. For example, it is very difficult to conduct business in China without local wangji, otherwise known as a strong, trustful relationship with someone who has authority. As we have just learned, a firm can establish a wholly owned subsidiary in a country by building a subsidiary from the ground up, which is known as the Greenfield Strategy. or by acquiring an enterprise in the target market.

The choice between acquisitions and greenfield ventures is not an easy one. As always, both modes have pros and cons. Let's start by discussing acquisition. An acquisition is defined as a corporate transaction in which one company purchases either a portion or all of another company's shares or assets. Acquisitions are typically made in order to take control of and build on the target company's strengths and to capture synergies.

Acquisitions have the following three points in their favor. First, they are quick to execute. By acquiring an established enterprise, a firm can rapidly build its presence in the target foreign market.

For example, in both the automobile industry or telecommunications service industry, it can take years to construct a new facility or network. In these cases, the firms might prefer acquisitions because it's the quickest way to establish a sizable presence in the target market. Second, they allow a firm to preempt competitors. The need for preemption is particularly great in markets that are rapidly globalizing. A combination of the deregulation within countries and the liberalization of regulations that govern cross-border FDI has made it much easier for enterprises to move into foreign markets through acquisitions.

Third, they are less risky than greenfield ventures. When a firm makes an acquisition, it buys a set of assets that are producing a known revenue and profit stream. In contrast, the revenue and profit stream that a greenfield venture might generate is uncertain because it does not exist yet. When a firm makes an acquisition in a foreign market, It not only obtains a set of tangible assets such as factories, logistics systems, and customer service systems, but it also acquires valuable intangible assets including a local brand name and manager's knowledge of the business environment in that nation. Such knowledge can reduce the risk of mistakes caused by ignorance of the national culture.

Despite the arguments for making acquisitions, they often produce disappointing results. Here are some major reasons why. First, Firms may overpay for the acquisition.

The acquiring firms often overpay for the assets of the acquired firm. The price of the target firm can get bid up if more than one firm is interested in its purchase, as is often the case. Additionally, the management of the acquiring firm is often too optimistic about the value that can be created via an acquisition, and is thus willing to pay a significant premium over a target firm's market capitalization. Second, there may be a cultural clash.

Many acquisitions fail because there is a clash between the cultures of the acquiring and acquired firms. After an acquisition, many acquired companies experience high management turnover. This is possibly because the employees do not like the acquiring company's way of doing things.

Third, the challenges are underestimated. Many acquisitions fail because attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than expected. Differences in management philosophy and company culture can slow the integration of operations. Differences in national culture may exacerbate these problems.

So what about greenfield ventures? A greenfield venture refers to when a company creates a subsidiary in a different country, building its operations from the ground up. In addition to the construction of new production facilities, these projects can sometimes include the building of new distribution hubs, offices, and living quarters.

Establishing greenfield ventures are quite common in the automobile industry. Here are a few real-world examples. In 2007, Mercedes-Benz entered the Indian market by purchasing 100 acres of land in Pune, Mahasrata for establishing its new manufacturing unit. In 2015, Toyota Motors decided to set up its new plant in Mexico under greenfield investment. The total cost of establishing the facility was around $1.5 billion.

In 2018, U.S. electric vehicle maker Tesla set up its wholly owned subsidiary in Shanghai, and it aimed to penetrate the fast-growing Chinese market. The big advantage of establishing a greenfield venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants. For example, it is much easier to build an organization culture from scratch than it is to change the culture of an acquired unit.

Similarly, it is simpler to establish a set of operating routines in a new subsidiary than it is to convert the operating routines of an acquired unit. This is a very important advantage for many international businesses. Transferring products, competencies, skills, and know-how from the established operations of the firm to the new subsidiary are principal ways of creating value.

The disadvantages of establishing a greenfield venture include the following. First, it comes at a high cost and requires a long-term commitment. Greenfield ventures require a huge amount of capital expenditure, which could call for a large number of borrowings and loans, so the financial burden can be very high. Additionally, it could take years to build all the necessary facilities from scratch before they can even begin generating revenue. Second, it is more vulnerable to political risk.

If there are discouraging government policies in the country that a Greenfield investment is supposed to take place, then the foreign investor may decide not to put money into that company because the government policies could hinder them from achieving their goals. In general, the choice between an acquisition or agreeing to a venture depends on the circumstances that the firm is facing. If the firm is seeking to enter a market where there are already well-established incumbent enterprises and where global competitors are also interested in establishing a presence, then it may benefit the firm to enter via an acquisition. In such cases, a greenfield venture may be too slow to form a significant presence. Conversely, if the firm is considering entering a country where there are no incumbent competitors to be acquired, then a greenfield venture may be the only sensible mode.

In fact, If the competitive advantage of the firm is based on the transfer of organizationally embedded competencies, skills, routines, and culture, then it may still be preferable to enter via a greenfield venture, even when incumbents exist. Things like skills and organizational culture, which are based on significant knowledge that is difficult to articulate and codify, are much easier to embed in a new venture than they are in an acquired entity, in which the firm may have to overcome the established routines and culture of the acquired firm. Now, let's wrap up today's topic with a brief summary.

In this video, we discuss six significant entry strategies. Exporting, turnkey projects, licensing, franchising, joint ventures, and wholly owned subsidiaries. Under a wholly owned subsidiary, a firm has two options. Acquisition or the establishment of a greenfield venture. Each entry strategy has its own advantages and limitations.

When deciding which mode of entry to choose, companies should ask themselves two questions. First. How much of our resources, such as money, time, and personnel, are we willing to commit? The fewer the resources the company wants to devote, the better it is for the company to enter the foreign market on a contractual basis like exporting, licensing, franchising, or turnkey projects. Second, how much control do we wish to retain?

The more control a company wants, the better off it is either establishing or buying a wholly owned subsidiary or constructing a joint venture with carefully delineated responsibilities. and accountabilities between the partner companies. So, do you have any questions or thoughts about firms'entry strategies? Please leave your comments below.

Thanks for watching and I will see you next time.

Transcript for:Foreign Market Entry Strategies Overview

Transcript for:
Foreign Market Entry Strategies Overview