Modes of Entry to

International
Markets
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Introduction
 The need for a solid market entry decision is an
integral part of a global market entry strategy.
 Entry decisions will heavily influence the firm’s
other marketing-mix decisions.
 There are two major entry Modes: PRODUCTION
IN HOME COUNTRY & PRODUCTION IN
FOREIGN COUNTRY.

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Introduction Cont…

 International Marketers have to make a

multitude of decisions regarding the entry
mode which may include:
 the target product/market
 the goals of the target markets
 the mode of entry
 the time of entry
 a marketing-mix plan
 a control system to check the performance in
the entered markets
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 Target Market Selection
 A crucial step in developing a global expansion
strategy is the selection of potential target
markets.
 A four-step procedure for the initial screening
process:
1. Select indicators and collect data
2. Determine importance of country indicators
3. Rate the countries on each indicator
4. Compute overall score for each country..

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 Choosing the Mode of Entry
 Decision Criteria for Mode of Entry
 Market Size and Growth
 Risk
 Government Regulations
 Competitive Environment
 Local Infrastructure
 Company Objectives
 Need for Control
 Internal Resources, Assets and Capabilities
 Flexibility
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Choosing the Mode of Entry…

 Mode of Entry Choice: A Transaction Cost

Explanation
 Regarding entry modes, companies normally
face a tradeoff between the benefits of increased
control and the costs of resource commitment
and risk…

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 Principal Motives for Int’l Expansion

World Market
Locations To seek lower
Economies production factor
costs

Economies To expand sales

of Scale and production
volume

Economies To exploit
of Scope proprietary assets

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Entry Decision Making Under Uncertainty: Trade-off
Between Flexibility and Commitment

 Timing: When is a good  Speed of expansion: How fast

time to enter? to grow?
 Potential gain from  Value of learning
waiting  Preemption of competitors
 Cost of delay  Constraints of internal
 Scale of entry resources
 Small scale: Establish a  Mode
foothold to learn  Some modes have more
 Large scale: Acquire first flexibility embedded
mover advantage  Some modes reduce resource
requirements
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 Value Chain of an MNE

Company Infrastructure
Marketing and
R&D Production
Sales

Innovative Advanced Industry-

Technology Specific
Capabilities
& Know- Marketing
How Expertise

Organization, Coordination & HRM

 What additional resources may the MNE need to enter a
foreign market?
 Local
7/15/2023 expertise: marketing, government relations, etc.
9
Typical Value Chain of a Local Firm
Company Infrastructure
Marketing and
R&D Production
Sales

Older Country-
Imitative Technology Specific
Capabilities and Know- Marketing
How Expertise

Organization, Coordination & HRM

What may the MNE desire from a local firm?
 Complementary resources

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 Not necessarily strength in every area 10
 Complementarity of Resources
MNE’s Resources Local Firm’s Resources

 Innovative capabilities  Imitating capabilities

 Advanced technology  Older technology and
and know-how know-how
 Industry-specific  Country-specific
marketing expertise marketing expertise
 Organization structure  Country specific
and systems organization skills..

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 Export
HOME COUNTRY HOST COUNTRY

Revenues

MNE Customers

Export of Goods

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Export…
Disadvantages
Advantages  Potential costs of trade
 Low initial investment barriers
 Reach customers  Transportation cost
quickly  Tariffs and quotas

 Complete control over  Foregoes potential location

economies
production
 Difficult to respond to
 Benefit of learning for customer needs well
future expansion
When Is Export Appropriate?
 Low trade barriers

 Home location has cost advantage

 Customization not crucial

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 Licensing Agreement
HOME COUNTRY HOST COUNTRY
Licensing of
Technology

MNE Local Firm

Fees and
Royalties

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Licensing…
 Licensor and the licensee
 Benefits:
 Appealing to small companies that lack
resources
 Faster access to the market
 Rapid penetration of the global
markets

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Licensing …
 Licensing/management contracts versus control of
assets abroad
 Licensing is a popular method for domestic firms to
profit from foreign markets without the need to
commit sizable funds
 Disadvantages of licensing are
 License fees are likely lower than FDI profits
although ROI may be higher
 Possible loss of quality control

 Establishment of potential competitor

 Possible improvement of technology by local

license which then enters firm’s original home
7/15/2023 market 16
Licensing ..
 Caveats (Alerts/warning signals):
 Other entry mode choices may be affected
 Licensee may not be committed
 Lack of enthusiasm on the part of a
licensee
 Biggest danger is the risk of opportunism
 Licensee may become a future competitor

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Licensing …
 How to seek a good licensing agreement:
 Seek patent or trademark protection
 Thorough profitability analysis
 Careful selection of prospective licensees
 Contract parameter (technology package,
use conditions, compensation, and
provisions for the settlement of disputes)

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Licensing …
Advantages Disadvantages
 Low initial investment  Lack of control over operations
 Avoids trade barriers  Difficulty in transferring tacit
 Potential for utilizing knowledge
location economies  Negotiation of a transfer price
 Monitoring transfer outcome
 Access to local knowledge
 Easier to respond to  Potential for creating a
customer needs competitor

When Is Licensing Appropriate?

 Well codified knowledge

 Strong property rights regime

 Location advantage…
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 Forms of FDI

 Ownership  Relatedness
 Wholly owned  Horizontal FDI
operations  Vertical FDI
 Green-field  Unrelated
investment
diversification
 Full acquisition
 Partially owned
operations
 Partial acquisition
 Joint venture

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Forms of FDI: Ownership
Home Country Host Country
Green Field
100% Owned
New Entity

Full Acquisition
(i.e., 100%)

MNE Local Firm

Partial Acquisition
(e.g., 50%) Ownership = (1 - s)%

Ownership = s%
Joint Venture

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 The Form of FDI:
Acquisitions versus Green-Fields
 The majority of  Why the preference
investments is in the for mergers and
form of mergers and acquisitions?
acquisitions:  Quicker to execute.
 Represents about 77%  Foreign firms have
of all flows in valuable strategic
developed countries. assets.
 Represent about 33%  Believe they can
of all flows in increase the efficiency
developing countries. of the acquired firm.
 Fewer target firms.
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 Foreign Acquisition
HOME COUNTRY HOST COUNTRY

Investment
MNE Local Firm
Profit

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Foreign Acquisition
Advantages Disadvantages
 Access to target’s local  Uncertainty about target’s
knowledge value
 Control over foreign  Difficulty in “absorbing”
operations acquired assets
 Control over own  Infeasible if local market for
technology corporate control is
underdeveloped

When Is Acquisition Appropriate?

 Developed market for corporate control
 Acquirer has high “absorptive” capacity
 High synergy
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 “Green Field” Entry
HOME COUNTRY HOST COUNTRY

MNE
Profit

Investment New Subsidiary

Company

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“Green Field” Entry…
Advantages Disadvantages
 Normally feasible  Slower startup
 Avoids risk of  Requires knowledge of
overpayment foreign management
 Avoids problem of  High risk and high
integration commitment
 Still retains full control

When Is “Green Field” Entry Appropriate?

 Lack of proper acquisition target
 In-house local expertise
 Embedded competitive advantage
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Green Field” Entry…
 Greenfield investment versus acquisition
 A greenfield investment is establishing a facility
“starting from the ground up”
 Usually require extended periods of physical
construction and organizational development
 Here, a cross-border acquisition may be better
because the physical assets already exist, shorter
time frame and financing exposure
 However, problems with integration, paying
too much for acquisition, post-merger
management, and realization of synergies all
exist…
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 Management Contract
HOME COUNTRY HOST COUNTRY
Management
Fees

MNE Local Firm

Managerial
Profit Service

Technological
Inputs Wholly-Owned
Subsidiary
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 Management Contract
Advantages Disadvantages
 Access to local  Potential incentive
management skills problem
 Avoids buying unwanted  Potential adverse selection
assets problem
 Retains strategic control  How do you know the
competencies of the
manager?

When Is a Management Contract Appropriate?

 Manager has a reputation to protect Cos
 Performance-based contract provides no perverse
incentives…

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 Joint Venture
HOME COUNTRY HOST COUNTRY

MNE Local Firm

Share of
Inputs
Profit
Input Joint Venture
s Company
Share of
Profit

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Joint Venture
 Joint ventures versus wholly owned subsidiary
 A joint venture is a shared ownership in a foreign
business
 This is a viable strategy if the MNE finds the
right local partner
 Some advantages include
 The local partner understands the market
 The local partner can provide competent
management at all levels
 Some host countries require that foreign firms
share ownership with local partner
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Joint Ventures Cont …
 Caveats:
 Lack of control
 Lack of trust
 Conflicts arising over matters such as
strategies, resource allocation, transfer
pricing, ownership of critical assets like
technologies and brand names

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 Joint Ventures Cont …
 Drivers Behind Successful International Joint
Ventures :
 Pick the right partner
 Establish clear objectives from the
beginning
 Bridge cultural gaps
 Gain top managerial commitment and
respect
 Use incremental approach

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Joint Venture
Advantages Disadvantages
 Access to partner’s local  Potential loss of proprietary
knowledge knowledge
 Reduction of concern about  Potential conflicts between
overpayment partners
 Both parties have some  Neither partner has full
performance incentives performance incentive
 Significant control over  Neither partner has full
operation control
When Is a Joint Venture Appropriate?
 Both partners contribute hard-to-measure inputs
 Large expected mutual gains in the long-run
 Trade secrets can be walled off..
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 Common Market Entry Modes
HOME COUNTRY HOST COUNTRY
Licensing

Acquisition
MNE Local Firm
Export

Joint Joint Venture

Venturing Company
“Green Field”
Entry New Subsidiary
Company
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 Modes of entry

Exporting Contractual Joint Acquisition Greenfield

Agreeme Venture Investm
nt ent
Risk Low Low Moderate High High

Return Low Low Moderate High High

Control Moderate Low Moderate High High

Integration Negligible Negligible Low Moderate High

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 Factors Affecting the Choice of
Investments
 Safety and risk.
 Safety in any investment means minimal risk
of loss.
 Risk means a measure of uncertainty about the
outcome.
 Investments range from very safe to very risky.
 The potential return on any investment should
be directly related to the risk the investor
assumes.
 Speculative investments are high risk.

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 Five Components of the Risk Factor
 Inflation risk - during periods of high inflation
your investment return may not keep pace with
the inflation rate.
 Interest rate risk
 Business failure risk
 Market risk - prices fluctuate because of
behaviors of investors.
 Global investment risk - changes in currency
affect the return on your investment…

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 Timing of Entry

 International market entry decisions should also

cover the following timing-of-entry issues:
 When should the firm enter a foreign market?
 Other important factors include: level of
international experience, firm size
 Mode of entry issues, market knowledge,
various economic attractiveness variables, etc.

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 Exiting a Market

 Reasons for exit:

 Sustained losses
 Volatility
 Premature entry
 Ethical reasons
 Intense competition
 Resource reallocation

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 Exit Strategies
 Assess the Risks of exit:
 Fixed costs of exit
 Disposition of assets
 Signal to other markets
 Long-term opportunities
 Guidelines:
 Contemplate and assess all options to salvage the
foreign business
 Incremental exit
 Migrate customers

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 Think Global act Local =
GLOCALIZATION !!!

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 Cases to be performed at Individual Level
 Should Ethiopia be a member of WTO?
 Should our country’s trade and investment policy be
develop on a free trade or protective bases?
 Should we give priority to Export promotion or Import
substitution strategy?
 Should we encourage Free trade Zones for our country?
 Should we Encourage FDI?
 Investigate Promotion strategies of International Trade of
our country?
 Evaluate the mode of entries to international market from
the perspective of our country?
 Evaluate the Chanel of Distribution in our country?
 Chamber of Commerce & International Trade, Investment
in Ethiopia

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