Chapter IV

Modes of Entry
to
International
02/05/2025 1
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.

02/05/2025 2
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 Speed of expansion:

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

Company Infrastructure
Marketing
R&D Production
and Sales

Innovative Advanced Industry-

Technolo Specific
Capabilities gy & Marketing
Know- Expertise
How

Organization, Coordination &

 What additional HRM
resources may the MNE need
to enter a foreign market?
 Local
02/05/2025 expertise: marketing, government 9
Typical Value Chain of a Local Firm
Company Infrastructure
Marketing
R&D Production
and Sales

Older Country-
Imitative Technolo Specific
Capabilitie gy and Marketing
s Know- Expertise
How

Organization, Coordination &

HRM
What may the MNE desire from a
local firm?
02/05/2025
 Complementary resources 10
 Complementarity of Resources
MNE’s Resources Local Firm’s
Innovative
Resources
capabilities Imitating
Advanced capabilities
technology and Older technology
know-how and know-how
Industry-specific Country-specific
marketing expertise marketing
Organization expertise
structure and Country specific
systems organization skills..
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 Export
HOME HOST COUNTRY
COUNTRY
Revenue
s
MNE Custome
rs

Export of
Goods

02/05/2025 12
Export…
Disadvantages
Advantages Potential costs of trade
Low initial barriers
investment Transportation cost
Reach customers Tariffs and quotas

quickly Foregoes potential

Complete control location economies
Difficult to respond to
over production customer needs well
Benefit of learning
When Is Export Appropriate?
for future
 expansion
Low trade barriers
 Home location has cost advantage

 Customization not crucial

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 Licensing Agreement
HOME HOST COUNTRY
COUNTRY Licensing of
Technology

MNE Local
Fees and Firm
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

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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
02/05/2025 18
Licensing …
Advantages Disadvantages
Low initial investment Lack of control over
Avoids trade barriers operations
Potential for utilizing Difficulty in transferring
location economies tacit knowledge
 Negotiation of a transfer
Access to local
price
knowledge  Monitoring transfer
Easier to respond to outcome
customer needs Potential for creating a
When Is Licensing Appropriate?
competitor
 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
 Full acquisition
diversification
Partially owned
operations
 Partial acquisition
 Joint venture

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Forms of FDI: Ownership
Home Green Field
Host
Country 100% Country
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 Foreign firms have
77% of all flows in valuable strategic
developed countries. assets.
Represent about 33% Believe they can
of all flows in increase the
developing countries. efficiency of the
 Fewer target firms. acquired firm.
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 Foreign Acquisition
HOME HOST COUNTRY
COUNTRY

Investme
MNE nt Local
Profit Firm

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

MNE
Profit

Investment New
Subsidiary
Company
02/05/2025 25
“Green Field” Entry…
Advantages Disadvantages
Normally feasible Slower startup
Avoids risk of Requires knowledge
overpayment of foreign
Avoids problem of management
integration High risk and high
Still retains full commitment
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-

02/05/2025
merger management, and realization 27
 Management Contract
HOME HOST COUNTRY
COUNTRY Management
Fees

MNE Local
Firm
Manageri
Profit al Service

Technological
Inputs Wholly-
Owned
02/05/2025 Subsidiary 28
 Management Contract
Advantages Disadvantages
Access to local Potential incentive
management skills problem
Avoids buying Potential adverse
unwanted assets selection problem
Retains strategic  How do you know the

control 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 HOST COUNTRY
COUNTRY

MNE Local
Share
Input
s
Firm of
Inpu Profit
Joint Venture
ts 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
02/05/2025 foreign firms share ownership with 31
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
knowledge proprietary knowledge
Reduction of concern Potential conflicts
about overpayment between 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
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 Common Market Entry Modes
HOME HOST COUNTRY
COUNTRY Licensi
ng
Acquisiti
MNE on Local
Expor
t Firm
Joint
Joint Venture
Venturing
Company
“Green Field”
Entry New
Subsidiary
02/05/2025 Company 35
 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.
02/05/2025 39
 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
!!!
02/05/2025 42
 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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