Lecture 11 Entering Foreign MarketBM0472 International Trade Management

Lesson Objectives Compare and contrast the advantages and

disadvantages of the different modes that firms use to enter foreign markets.

Identify the factors that influence a firms choice of entry mode.

Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy.

Understand parallel imports & counterfeit goods

Entry ModesQuestion: What is the best way to enter a foreign

market?

Answer:Firms can enter foreign market through

Exporting Turnkey projects Licensing Franchising Joint ventures Wholly owned subsidiaries

Each mode has advantages and disadvantages

Selecting an Entry Mode

Question: How should a firm choose a specific entry mode?

Answer: All entry modes have advantages and

disadvantages The optimal choice of entry mode involves trade-

offs

Selecting an Entry ModeAdvantages and Disadvantages of Entry Modes

Core Competencies and Entry Mode

The optimal entry mode depends to some degree on the nature of a firms core competencies

Core competencies can involve1. technological know-how

2. management know-how

1. Technological Know-How

When competitive advantage is based on proprietary technological know-how, firms should avoid licensing and joint venture arrangements in order to minimize the risk of losing control over the technology

However, if a technological advantage is only transitory, or the firm can establish its technology as the dominant design in the industry, then licensing may be attractive

Core Competencies and Entry Mode

2. Management Know-How

The competitive advantage of many service firms is based upon management know-how

o international trademark laws are generally effective for protecting trademarks

Since the risk of losing control over management skills to franchisees or joint venture partners is not high, the benefits from getting greater use of brand names is significant

Core Competencies and Entry Mode

Pressures for Cost Reductions

Firms facing strong pressures for cost reductions are likely to pursue some combination of exporting and wholly owned subsidiaries

this will allow the firms to achieve location and scale economies as well as retain some degree of control over worldwide product manufacturing and distribution

Greenfield or Acquisition?

Question: Should a firm establish a wholly owned subsidiary in a country by building a subsidiary from the ground up (greenfield strategy), or by acquiring an established enterprise in the target market (acquisition strategy)?

Answer:

The number of cross border acquisitions are increasing

Pros and Cons of Acquisitions

Acquisitions are quick to execute enable firms to preempt their competitors can be less risky than green-field ventures

However, many acquisitions are not successful

Pros and Cons of AcquisitionsQuestion: Why do acquisitions fail?

Answer:Acquisitions fail when

the firm overpays for the assets of the acquired firm there is a clash between the cultures of the acquiring

and acquired firm attempts to realize synergies by integrating the

operations of the acquired and acquiring entities run into roadblocks and take much longer than forecast

there is inadequate pre-acquisition screening

Pros and Cons of Acquisitions

Question: How can firms reduce the problems associated with acquisitions?

Answer:Firms can reduce the problems associated with acquisitions

through careful screening of the firm to be acquired by moving rapidly once the firm is acquired to

implement an integration plan

Pros and Cons of Greenfield Ventures

Question: Why are greenfield ventures attractive?

Answer: Greenfield ventures are attractive because they allow

the firm to build the kind of subsidiary company that it wants

However, greenfield ventures are slower to establish are risky because they have no proven track record can be problematic if a competitor enters via

acquisition and quickly builds market share

For a variety of reasons firms will sell goods in different markets at different prices: different methods of entry, characteristics of the market, varying exchange rates.

Entrepreneurs will often buy the goods in the country with the lowest price, and then sell them in the country with the highest price. In order to do that, they buy from the normal distribution channel, but sell through alternative channels of distribution that are not the ones that the exporter would normally use.

This phenomenon is called parallel imports, or gray market.

It is difficult for companies to fight these parallel imports, as they are due to market characteristics rather than strategic choices.

Parallel Imports

Parallel imports occur in all sorts of product lines, from shampoo to cars to spare parts; however, it is a particularly sensitive issue in luxury goods, such as watches, electronics, and high-end automobiles.

There is no legal recourse possible, as the product is a legitimate product, manufactured by an authorized plant.

Parallel Imports

Parallel Imports

Exporter

Normal Distribution Channels

Normal Distribution Channels

Parallel Importer

Consumers

Country A Country B

Buys

SellsAlternative Distribution Channels

Counterfeit Goods

A counterfeit good is a copy of a legitimate good. The product is being produced to imitate a genuine good and deceive consumers. It is almost always of much lower quality and costs less than the genuine good.

Counterfeit goods can be tangible goods like watches, clothing, or car parts, but also intellectual property like films and software.

Western countries often accuse developing countries like China and India of ignoring blatant counterfeiting, but counterfeits can be found in every country.

Counterfeit Goods

Counterfeiting generally happen when there is a substantial discrepancy between the variable cost of manufacturing the product and the price at which it sells i.e. low manufacturing costs and high selling prices

Probability further increases if the product is physically small and light enough that it can be sold easily and discreetly

Not dependent on the method of entry strategy Generally present in countries in which the

authorities have other priorities than defending the intellectual property rights of (foreign) firms

Reference

Chapter 13 Entering Foreign Markets

Global Business Today (Global Edition), 8th edition, Charles W.L. Hill, Rumintha Wickramasekera, McGraw-Hill 2011.

Parallel Imports and Counterfeit Goods:

Chapter 4 Methods of Entry into Foreign Markets

International Logistics The Management of International Trade Operations, 3rd edition, Pierre David, Richard Stewart.