Entering Foreign Markets
Jurusan ManajemenJurusan ManajemenGedung 2 Lt 1 Kampus Universitas Andalas Limau Manis Padang Sumatera Barat Indonesia 25163Telp +62 751 73530 +62 751 71088 Fax +62 751 71089 email mdfeuayahoocom
Entering Foreign Markets
Jurusan ManajemenJurusan ManajemenGedung 2 Lt 1 Kampus Universitas Andalas Limau Manis Padang Sumatera Barat Indonesia 25163Telp +62 751 73530 +62 751 71088 Fax +62 751 71089 email mdfeuayahoocom
International International BusinessBusinessWeek 7Week 7
International International BusinessBusinessWeek 7Week 7
School of Management Andalas University
School of Management Andalas University
School of Management Andalas University
Key Decisions before Internationalization
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
Which business(es) should be globalized All these decisions are interrelated
School of Management Andalas University
Why does a firm enter foreign markets
Factors influencing the decision to internationalize Objective
To achieve sales growth andor profitability Compete more effectively against local and foreign
competitors (in domestic and international markets) Managersrsquo interest and ability to
Leverage company resources and capabilities internationally to overcome local market saturation and tap global opportunities (customers)
Take advantage of foreign country (eg labor government incentives) to reduce costs
Enhance organisational learning via cross-border engagement
School of Management Andalas University
Why does a firm enter foreign markets (contd)
Foreign market entry is for marketing andor sourcing Basic factors of production
Raw materials labor capital Advanced factors
Technicalmanagerial knowledgeskills Parts and components Finished productsservices - consumerindustrial
Foreign market entry is a critical decision especially for small firms with limited resources
The decision influences the scope of the firmrsquos activities ie whether it remains a domestic firm or becomes an international firm
School of Management Andalas University
Where ndash Which foreign markets to enter
Country attractiveness criteria Population size versus market size Per capita income ndash PPP based vs currency translated Income growth rate Suitability of co products for foreign markets (B2B B2C)
Overall and by segments Language and culture
Competitive environment Countryrsquos political legal and regulatory environment
Examine overall costs benefits and risksCriteria may be weighted differently depending
on the importance of the factor for the businessdecision
School of Management Andalas University
Timing of entry When to enter
First mover advantages (FMAs) arise when a firm preempts rivals through the following factors Establish strong brand equity Capture demand
Build sales volume Move down experience curve ahead of competitors Gain cost advantage
Create switching costs for customers Tie customers to first moverrsquos productsservices
Become the industry normstandard Establish favorable relationships amp social ties
with customers amp government (important in high-context cultures)
School of Management Andalas University
Timing of entry First-mover Disadvantages
Incur cost of creating infrastructure for new industry (ex component suppliers for a new car industry)
Cost of training customers to use a new product (ex ATMs) Diffusion of innovation is slow in the beginning First mover incurs the cost of waiting and
training Followers can learn from the first moverrsquos
dos and donrsquots ndash by poaching employees and customers
Regulations may change in favor of followers (ex lower fees for mobile licenses)
School of Management Andalas University
What should be the scale of entry
What level of resources to commit Affordability ndash resources available internally amp
externally Alternative use of resources (ex Invest abroad
versus in the home country in the same or other businesses)
Large scale entry is a strategic commitment (a decision that has long-term impact and is difficult to reverse) Higher risks (large irreversible commitments) (-) Higher returns (signal commitment more FMAs)
(+) Small scale entry
Test market (+) Reveal strategy to rivals (-)
School of Management Andalas University
Six Modes of Foreign Market Entry
Entry modes can be classified into three groups Market modes
Exporting Turnkey projects (also executed in multiple modes)
Long-term contract modes Licensing Franchising
Ownership modes (FDI) International joint ventures (IJV) Wholly-owned subsidiaries (WOS)
School of Management Andalas University
Internationalization Strategies Grid
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
School of Management Andalas University
School of Management Andalas University
Key Decisions before Internationalization
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
Which business(es) should be globalized All these decisions are interrelated
School of Management Andalas University
Why does a firm enter foreign markets
Factors influencing the decision to internationalize Objective
To achieve sales growth andor profitability Compete more effectively against local and foreign
competitors (in domestic and international markets) Managersrsquo interest and ability to
Leverage company resources and capabilities internationally to overcome local market saturation and tap global opportunities (customers)
Take advantage of foreign country (eg labor government incentives) to reduce costs
Enhance organisational learning via cross-border engagement
School of Management Andalas University
Why does a firm enter foreign markets (contd)
Foreign market entry is for marketing andor sourcing Basic factors of production
Raw materials labor capital Advanced factors
Technicalmanagerial knowledgeskills Parts and components Finished productsservices - consumerindustrial
Foreign market entry is a critical decision especially for small firms with limited resources
The decision influences the scope of the firmrsquos activities ie whether it remains a domestic firm or becomes an international firm
School of Management Andalas University
Where ndash Which foreign markets to enter
Country attractiveness criteria Population size versus market size Per capita income ndash PPP based vs currency translated Income growth rate Suitability of co products for foreign markets (B2B B2C)
Overall and by segments Language and culture
Competitive environment Countryrsquos political legal and regulatory environment
Examine overall costs benefits and risksCriteria may be weighted differently depending
on the importance of the factor for the businessdecision
School of Management Andalas University
Timing of entry When to enter
First mover advantages (FMAs) arise when a firm preempts rivals through the following factors Establish strong brand equity Capture demand
Build sales volume Move down experience curve ahead of competitors Gain cost advantage
Create switching costs for customers Tie customers to first moverrsquos productsservices
Become the industry normstandard Establish favorable relationships amp social ties
with customers amp government (important in high-context cultures)
School of Management Andalas University
Timing of entry First-mover Disadvantages
Incur cost of creating infrastructure for new industry (ex component suppliers for a new car industry)
Cost of training customers to use a new product (ex ATMs) Diffusion of innovation is slow in the beginning First mover incurs the cost of waiting and
training Followers can learn from the first moverrsquos
dos and donrsquots ndash by poaching employees and customers
Regulations may change in favor of followers (ex lower fees for mobile licenses)
School of Management Andalas University
What should be the scale of entry
What level of resources to commit Affordability ndash resources available internally amp
externally Alternative use of resources (ex Invest abroad
versus in the home country in the same or other businesses)
Large scale entry is a strategic commitment (a decision that has long-term impact and is difficult to reverse) Higher risks (large irreversible commitments) (-) Higher returns (signal commitment more FMAs)
(+) Small scale entry
Test market (+) Reveal strategy to rivals (-)
School of Management Andalas University
Six Modes of Foreign Market Entry
Entry modes can be classified into three groups Market modes
Exporting Turnkey projects (also executed in multiple modes)
Long-term contract modes Licensing Franchising
Ownership modes (FDI) International joint ventures (IJV) Wholly-owned subsidiaries (WOS)
School of Management Andalas University
Internationalization Strategies Grid
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
School of Management Andalas University
Key Decisions before Internationalization
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
Which business(es) should be globalized All these decisions are interrelated
School of Management Andalas University
Why does a firm enter foreign markets
Factors influencing the decision to internationalize Objective
To achieve sales growth andor profitability Compete more effectively against local and foreign
competitors (in domestic and international markets) Managersrsquo interest and ability to
Leverage company resources and capabilities internationally to overcome local market saturation and tap global opportunities (customers)
Take advantage of foreign country (eg labor government incentives) to reduce costs
Enhance organisational learning via cross-border engagement
School of Management Andalas University
Why does a firm enter foreign markets (contd)
Foreign market entry is for marketing andor sourcing Basic factors of production
Raw materials labor capital Advanced factors
Technicalmanagerial knowledgeskills Parts and components Finished productsservices - consumerindustrial
Foreign market entry is a critical decision especially for small firms with limited resources
The decision influences the scope of the firmrsquos activities ie whether it remains a domestic firm or becomes an international firm
School of Management Andalas University
Where ndash Which foreign markets to enter
Country attractiveness criteria Population size versus market size Per capita income ndash PPP based vs currency translated Income growth rate Suitability of co products for foreign markets (B2B B2C)
Overall and by segments Language and culture
Competitive environment Countryrsquos political legal and regulatory environment
Examine overall costs benefits and risksCriteria may be weighted differently depending
on the importance of the factor for the businessdecision
School of Management Andalas University
Timing of entry When to enter
First mover advantages (FMAs) arise when a firm preempts rivals through the following factors Establish strong brand equity Capture demand
Build sales volume Move down experience curve ahead of competitors Gain cost advantage
Create switching costs for customers Tie customers to first moverrsquos productsservices
Become the industry normstandard Establish favorable relationships amp social ties
with customers amp government (important in high-context cultures)
School of Management Andalas University
Timing of entry First-mover Disadvantages
Incur cost of creating infrastructure for new industry (ex component suppliers for a new car industry)
Cost of training customers to use a new product (ex ATMs) Diffusion of innovation is slow in the beginning First mover incurs the cost of waiting and
training Followers can learn from the first moverrsquos
dos and donrsquots ndash by poaching employees and customers
Regulations may change in favor of followers (ex lower fees for mobile licenses)
School of Management Andalas University
What should be the scale of entry
What level of resources to commit Affordability ndash resources available internally amp
externally Alternative use of resources (ex Invest abroad
versus in the home country in the same or other businesses)
Large scale entry is a strategic commitment (a decision that has long-term impact and is difficult to reverse) Higher risks (large irreversible commitments) (-) Higher returns (signal commitment more FMAs)
(+) Small scale entry
Test market (+) Reveal strategy to rivals (-)
School of Management Andalas University
Six Modes of Foreign Market Entry
Entry modes can be classified into three groups Market modes
Exporting Turnkey projects (also executed in multiple modes)
Long-term contract modes Licensing Franchising
Ownership modes (FDI) International joint ventures (IJV) Wholly-owned subsidiaries (WOS)
School of Management Andalas University
Internationalization Strategies Grid
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Key Decisions before Internationalization
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
Which business(es) should be globalized All these decisions are interrelated
School of Management Andalas University
Why does a firm enter foreign markets
Factors influencing the decision to internationalize Objective
To achieve sales growth andor profitability Compete more effectively against local and foreign
competitors (in domestic and international markets) Managersrsquo interest and ability to
Leverage company resources and capabilities internationally to overcome local market saturation and tap global opportunities (customers)
Take advantage of foreign country (eg labor government incentives) to reduce costs
Enhance organisational learning via cross-border engagement
School of Management Andalas University
Why does a firm enter foreign markets (contd)
Foreign market entry is for marketing andor sourcing Basic factors of production
Raw materials labor capital Advanced factors
Technicalmanagerial knowledgeskills Parts and components Finished productsservices - consumerindustrial
Foreign market entry is a critical decision especially for small firms with limited resources
The decision influences the scope of the firmrsquos activities ie whether it remains a domestic firm or becomes an international firm
School of Management Andalas University
Where ndash Which foreign markets to enter
Country attractiveness criteria Population size versus market size Per capita income ndash PPP based vs currency translated Income growth rate Suitability of co products for foreign markets (B2B B2C)
Overall and by segments Language and culture
Competitive environment Countryrsquos political legal and regulatory environment
Examine overall costs benefits and risksCriteria may be weighted differently depending
on the importance of the factor for the businessdecision
School of Management Andalas University
Timing of entry When to enter
First mover advantages (FMAs) arise when a firm preempts rivals through the following factors Establish strong brand equity Capture demand
Build sales volume Move down experience curve ahead of competitors Gain cost advantage
Create switching costs for customers Tie customers to first moverrsquos productsservices
Become the industry normstandard Establish favorable relationships amp social ties
with customers amp government (important in high-context cultures)
School of Management Andalas University
Timing of entry First-mover Disadvantages
Incur cost of creating infrastructure for new industry (ex component suppliers for a new car industry)
Cost of training customers to use a new product (ex ATMs) Diffusion of innovation is slow in the beginning First mover incurs the cost of waiting and
training Followers can learn from the first moverrsquos
dos and donrsquots ndash by poaching employees and customers
Regulations may change in favor of followers (ex lower fees for mobile licenses)
School of Management Andalas University
What should be the scale of entry
What level of resources to commit Affordability ndash resources available internally amp
externally Alternative use of resources (ex Invest abroad
versus in the home country in the same or other businesses)
Large scale entry is a strategic commitment (a decision that has long-term impact and is difficult to reverse) Higher risks (large irreversible commitments) (-) Higher returns (signal commitment more FMAs)
(+) Small scale entry
Test market (+) Reveal strategy to rivals (-)
School of Management Andalas University
Six Modes of Foreign Market Entry
Entry modes can be classified into three groups Market modes
Exporting Turnkey projects (also executed in multiple modes)
Long-term contract modes Licensing Franchising
Ownership modes (FDI) International joint ventures (IJV) Wholly-owned subsidiaries (WOS)
School of Management Andalas University
Internationalization Strategies Grid
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Why does a firm enter foreign markets
Factors influencing the decision to internationalize Objective
To achieve sales growth andor profitability Compete more effectively against local and foreign
competitors (in domestic and international markets) Managersrsquo interest and ability to
Leverage company resources and capabilities internationally to overcome local market saturation and tap global opportunities (customers)
Take advantage of foreign country (eg labor government incentives) to reduce costs
Enhance organisational learning via cross-border engagement
School of Management Andalas University
Why does a firm enter foreign markets (contd)
Foreign market entry is for marketing andor sourcing Basic factors of production
Raw materials labor capital Advanced factors
Technicalmanagerial knowledgeskills Parts and components Finished productsservices - consumerindustrial
Foreign market entry is a critical decision especially for small firms with limited resources
The decision influences the scope of the firmrsquos activities ie whether it remains a domestic firm or becomes an international firm
School of Management Andalas University
Where ndash Which foreign markets to enter
Country attractiveness criteria Population size versus market size Per capita income ndash PPP based vs currency translated Income growth rate Suitability of co products for foreign markets (B2B B2C)
Overall and by segments Language and culture
Competitive environment Countryrsquos political legal and regulatory environment
Examine overall costs benefits and risksCriteria may be weighted differently depending
on the importance of the factor for the businessdecision
School of Management Andalas University
Timing of entry When to enter
First mover advantages (FMAs) arise when a firm preempts rivals through the following factors Establish strong brand equity Capture demand
Build sales volume Move down experience curve ahead of competitors Gain cost advantage
Create switching costs for customers Tie customers to first moverrsquos productsservices
Become the industry normstandard Establish favorable relationships amp social ties
with customers amp government (important in high-context cultures)
School of Management Andalas University
Timing of entry First-mover Disadvantages
Incur cost of creating infrastructure for new industry (ex component suppliers for a new car industry)
Cost of training customers to use a new product (ex ATMs) Diffusion of innovation is slow in the beginning First mover incurs the cost of waiting and
training Followers can learn from the first moverrsquos
dos and donrsquots ndash by poaching employees and customers
Regulations may change in favor of followers (ex lower fees for mobile licenses)
School of Management Andalas University
What should be the scale of entry
What level of resources to commit Affordability ndash resources available internally amp
externally Alternative use of resources (ex Invest abroad
versus in the home country in the same or other businesses)
Large scale entry is a strategic commitment (a decision that has long-term impact and is difficult to reverse) Higher risks (large irreversible commitments) (-) Higher returns (signal commitment more FMAs)
(+) Small scale entry
Test market (+) Reveal strategy to rivals (-)
School of Management Andalas University
Six Modes of Foreign Market Entry
Entry modes can be classified into three groups Market modes
Exporting Turnkey projects (also executed in multiple modes)
Long-term contract modes Licensing Franchising
Ownership modes (FDI) International joint ventures (IJV) Wholly-owned subsidiaries (WOS)
School of Management Andalas University
Internationalization Strategies Grid
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Why does a firm enter foreign markets (contd)
Foreign market entry is for marketing andor sourcing Basic factors of production
Raw materials labor capital Advanced factors
Technicalmanagerial knowledgeskills Parts and components Finished productsservices - consumerindustrial
Foreign market entry is a critical decision especially for small firms with limited resources
The decision influences the scope of the firmrsquos activities ie whether it remains a domestic firm or becomes an international firm
School of Management Andalas University
Where ndash Which foreign markets to enter
Country attractiveness criteria Population size versus market size Per capita income ndash PPP based vs currency translated Income growth rate Suitability of co products for foreign markets (B2B B2C)
Overall and by segments Language and culture
Competitive environment Countryrsquos political legal and regulatory environment
Examine overall costs benefits and risksCriteria may be weighted differently depending
on the importance of the factor for the businessdecision
School of Management Andalas University
Timing of entry When to enter
First mover advantages (FMAs) arise when a firm preempts rivals through the following factors Establish strong brand equity Capture demand
Build sales volume Move down experience curve ahead of competitors Gain cost advantage
Create switching costs for customers Tie customers to first moverrsquos productsservices
Become the industry normstandard Establish favorable relationships amp social ties
with customers amp government (important in high-context cultures)
School of Management Andalas University
Timing of entry First-mover Disadvantages
Incur cost of creating infrastructure for new industry (ex component suppliers for a new car industry)
Cost of training customers to use a new product (ex ATMs) Diffusion of innovation is slow in the beginning First mover incurs the cost of waiting and
training Followers can learn from the first moverrsquos
dos and donrsquots ndash by poaching employees and customers
Regulations may change in favor of followers (ex lower fees for mobile licenses)
School of Management Andalas University
What should be the scale of entry
What level of resources to commit Affordability ndash resources available internally amp
externally Alternative use of resources (ex Invest abroad
versus in the home country in the same or other businesses)
Large scale entry is a strategic commitment (a decision that has long-term impact and is difficult to reverse) Higher risks (large irreversible commitments) (-) Higher returns (signal commitment more FMAs)
(+) Small scale entry
Test market (+) Reveal strategy to rivals (-)
School of Management Andalas University
Six Modes of Foreign Market Entry
Entry modes can be classified into three groups Market modes
Exporting Turnkey projects (also executed in multiple modes)
Long-term contract modes Licensing Franchising
Ownership modes (FDI) International joint ventures (IJV) Wholly-owned subsidiaries (WOS)
School of Management Andalas University
Internationalization Strategies Grid
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Where ndash Which foreign markets to enter
Country attractiveness criteria Population size versus market size Per capita income ndash PPP based vs currency translated Income growth rate Suitability of co products for foreign markets (B2B B2C)
Overall and by segments Language and culture
Competitive environment Countryrsquos political legal and regulatory environment
Examine overall costs benefits and risksCriteria may be weighted differently depending
on the importance of the factor for the businessdecision
School of Management Andalas University
Timing of entry When to enter
First mover advantages (FMAs) arise when a firm preempts rivals through the following factors Establish strong brand equity Capture demand
Build sales volume Move down experience curve ahead of competitors Gain cost advantage
Create switching costs for customers Tie customers to first moverrsquos productsservices
Become the industry normstandard Establish favorable relationships amp social ties
with customers amp government (important in high-context cultures)
School of Management Andalas University
Timing of entry First-mover Disadvantages
Incur cost of creating infrastructure for new industry (ex component suppliers for a new car industry)
Cost of training customers to use a new product (ex ATMs) Diffusion of innovation is slow in the beginning First mover incurs the cost of waiting and
training Followers can learn from the first moverrsquos
dos and donrsquots ndash by poaching employees and customers
Regulations may change in favor of followers (ex lower fees for mobile licenses)
School of Management Andalas University
What should be the scale of entry
What level of resources to commit Affordability ndash resources available internally amp
externally Alternative use of resources (ex Invest abroad
versus in the home country in the same or other businesses)
Large scale entry is a strategic commitment (a decision that has long-term impact and is difficult to reverse) Higher risks (large irreversible commitments) (-) Higher returns (signal commitment more FMAs)
(+) Small scale entry
Test market (+) Reveal strategy to rivals (-)
School of Management Andalas University
Six Modes of Foreign Market Entry
Entry modes can be classified into three groups Market modes
Exporting Turnkey projects (also executed in multiple modes)
Long-term contract modes Licensing Franchising
Ownership modes (FDI) International joint ventures (IJV) Wholly-owned subsidiaries (WOS)
School of Management Andalas University
Internationalization Strategies Grid
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Timing of entry When to enter
First mover advantages (FMAs) arise when a firm preempts rivals through the following factors Establish strong brand equity Capture demand
Build sales volume Move down experience curve ahead of competitors Gain cost advantage
Create switching costs for customers Tie customers to first moverrsquos productsservices
Become the industry normstandard Establish favorable relationships amp social ties
with customers amp government (important in high-context cultures)
School of Management Andalas University
Timing of entry First-mover Disadvantages
Incur cost of creating infrastructure for new industry (ex component suppliers for a new car industry)
Cost of training customers to use a new product (ex ATMs) Diffusion of innovation is slow in the beginning First mover incurs the cost of waiting and
training Followers can learn from the first moverrsquos
dos and donrsquots ndash by poaching employees and customers
Regulations may change in favor of followers (ex lower fees for mobile licenses)
School of Management Andalas University
What should be the scale of entry
What level of resources to commit Affordability ndash resources available internally amp
externally Alternative use of resources (ex Invest abroad
versus in the home country in the same or other businesses)
Large scale entry is a strategic commitment (a decision that has long-term impact and is difficult to reverse) Higher risks (large irreversible commitments) (-) Higher returns (signal commitment more FMAs)
(+) Small scale entry
Test market (+) Reveal strategy to rivals (-)
School of Management Andalas University
Six Modes of Foreign Market Entry
Entry modes can be classified into three groups Market modes
Exporting Turnkey projects (also executed in multiple modes)
Long-term contract modes Licensing Franchising
Ownership modes (FDI) International joint ventures (IJV) Wholly-owned subsidiaries (WOS)
School of Management Andalas University
Internationalization Strategies Grid
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Timing of entry First-mover Disadvantages
Incur cost of creating infrastructure for new industry (ex component suppliers for a new car industry)
Cost of training customers to use a new product (ex ATMs) Diffusion of innovation is slow in the beginning First mover incurs the cost of waiting and
training Followers can learn from the first moverrsquos
dos and donrsquots ndash by poaching employees and customers
Regulations may change in favor of followers (ex lower fees for mobile licenses)
School of Management Andalas University
What should be the scale of entry
What level of resources to commit Affordability ndash resources available internally amp
externally Alternative use of resources (ex Invest abroad
versus in the home country in the same or other businesses)
Large scale entry is a strategic commitment (a decision that has long-term impact and is difficult to reverse) Higher risks (large irreversible commitments) (-) Higher returns (signal commitment more FMAs)
(+) Small scale entry
Test market (+) Reveal strategy to rivals (-)
School of Management Andalas University
Six Modes of Foreign Market Entry
Entry modes can be classified into three groups Market modes
Exporting Turnkey projects (also executed in multiple modes)
Long-term contract modes Licensing Franchising
Ownership modes (FDI) International joint ventures (IJV) Wholly-owned subsidiaries (WOS)
School of Management Andalas University
Internationalization Strategies Grid
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
What should be the scale of entry
What level of resources to commit Affordability ndash resources available internally amp
externally Alternative use of resources (ex Invest abroad
versus in the home country in the same or other businesses)
Large scale entry is a strategic commitment (a decision that has long-term impact and is difficult to reverse) Higher risks (large irreversible commitments) (-) Higher returns (signal commitment more FMAs)
(+) Small scale entry
Test market (+) Reveal strategy to rivals (-)
School of Management Andalas University
Six Modes of Foreign Market Entry
Entry modes can be classified into three groups Market modes
Exporting Turnkey projects (also executed in multiple modes)
Long-term contract modes Licensing Franchising
Ownership modes (FDI) International joint ventures (IJV) Wholly-owned subsidiaries (WOS)
School of Management Andalas University
Internationalization Strategies Grid
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Six Modes of Foreign Market Entry
Entry modes can be classified into three groups Market modes
Exporting Turnkey projects (also executed in multiple modes)
Long-term contract modes Licensing Franchising
Ownership modes (FDI) International joint ventures (IJV) Wholly-owned subsidiaries (WOS)
School of Management Andalas University
Internationalization Strategies Grid
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Internationalization Strategies Grid
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Exporting
Sell ldquodomesticallyrdquo produced goods in foreign markets Alternatives in exporting
Direct to customers From home country (ex Orders by phone fax
email website) Indirect via agents or distributors
In home country In foreign country
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Turnkey projects
Export know-how embedded in process plants Build the facility Train personnel to operate the facilities Start and operate the plant for sometime Handover the keys to the importer Examples ndash Oil refinery steel plant chemical plant
Alternatives Percent inputs sourced from home host or third
countries Newmix modes ndash BOT BOOT BOLT
Build operate own lease transfer These are PPPs ndash Public Private Partnerships Examples infrastructure eg roads airports power
plants
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Licensing
Involves two entities Licensor = ownerseller of knowledgeintangible
property Licensee = buyer of knowledgeintangible property
Licensor (license ownerseller) grants rights to licensee (buyer) for use of intangible property over a specified period for a fee
Examples of intangible property Chemical formula for a drug or a drink ex Coca
cola Designs and drawings for a car or an air
conditioner Copyrights for software music and Disney
characters Brand names ex Barbie Billabong
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Franchising
Licensing of technology plus business systems Franchising = technology + management
Additional condition Franchisee must follow strict rules of
operating the business as laid out by the franchisor
Examples ndash McDonaldrsquos Kwik Kopy Bakerrsquos Delight Boost Juice
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
LicensingFranchising
Payment alternatives Fixed fee Variable fee Combination of fixed and variable fees
Useful under the following situations Proprietary (= not public) technology Licensor can get returns with little additional cost or effort Present value of future returns should exceed profits
through exports or FDI (if these two are competing options)
To protect against technological obsolescence agreements include sharing improvements between licensor amp licensee
Cross-licensing Two-way licensing Mutual hostage
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
FDI modes IJV and WOS
International joint ventures (IJV) Firm owns the foreign company jointly with one or more
partners (domestic or foreign) Most IJVs are between two firms one domestic and one
foreign Alternatives
Majority minority or equal foreign ownership Example ndash BHPrsquos coal mining joint venture in India
Wholly-owned subsidiary (WOS) Firm owns 100 of the company in the foreign country Alternatives (discussed in FDI)
Acquisition or Greenfield Vertical horizontal or diversified FDI
Example ndash Toyota in Australia
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Relative advantages and disadvantages of
foreign entry modes (contd)
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Decision Framework for Entry Mode Choice
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Addl factors influencing entry mode choice
INTERNAL Company objectivescriteria Long-term versus short-term orientation to ROI
Long-term sales and market share versus short-term profits Company size resources and capabilities
Resource commitment ndash financialmanagerial 1048774 control risk Time for implementation
EXTERNAL Country attractiveness factors ndash distance (geog amp
psychic) costs infrastructure regulations Product-market factors
bull Competition bull Customer needs
Overall FIT among business country mode timing scale
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Country Attractiveness Matrix
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated
School of Management Andalas University
Summary What we learnt today
Why - Should a firm enter foreign markets Driven by company objectives
Where ndash Which markets should the firm enter Choice of countries AND market segments
When should it enter the selected market(s) Timing ndash now or later
What should be the scale of foreign market entry Enter on a smalltrial scale or on a large scale
How should the firm enter foreign market(s) What mode should the firm use to enter a foreign market
bull Which business(es) should be globalized bull All these decisions are interrelated