chapter 9 foreign market entry strategies. chapter outline foreign direct investment (fdi) exporting...
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- Chapter 9 Foreign Market Entry Strategies
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- Chapter Outline Foreign Direct Investment (FDI) Exporting Licensing Management Contract Joint Venture Manufacturing
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- Chapter Outline Assembly Operations Turnkey Operations Acquisition Strategic Alliances Analysis of Entry Strategies Free Trade Zones (FTZs)
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- Which countries should it enter and in what sequence? What criteria should be used to select entry markets: proximity, stage of development, geographic region, cultural and linguistic criteria, the competitive situation, or other factors? How should it enter new markets?
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- PREFACE In choosing a country for direct investment, a number of factors must be considered. Some of these factors are product image, competition, local resources (raw materials, manpower, infrastructure, etc.), labor costs, type of product, taxation, foreign exchange and investment climate. To take advantage of the global economy, companies have been cutting costs by moving jobs to lower-cost areas. Investment banks wonder why they should pay an analyst in London when they can employ an analyst in India to do the same kind of job at a much lower salary.
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- Foreign Market Entry Strategies Indirect Strategies - Exporting - Licensing - Management Contract - Turnkey Operations
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- Foreign Market Entry Strategies Foreign Direct Investment (FDI) Strategies - Acquisition vs. Greenfield - Assembly vs. Manufacturing - Sole Venture vs. Joint Venture
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- Foreign Market Entry Strategies A Foreign direct investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country A high share of FDI in a countrys total capital inflows may reflect its institutions weakness instead of its strengths. However, empirical evidence indicates that FDI benefits developing host countries. One indisputable fact is that developed countries are both the largest recipients and sources of FDI.
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- The phenomenon is dominated by the triad of the European Union, the USA, and Japan, accounting for 71 percent of inward flows and 82 percent of outward flows.
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- ACQUISITION When a manufacturer wants to enter a foreign market rapidly and yet retain maximum control, direct investment through acquisition should be considered. The reasons for wanting to acquire a foreign company include product/geographical diversification, acquisition of expertise (technology, marketing, and management), and rapid entry. For example, Renault acquired a controlling interest in American Motors in order to gain the sales organization and distribution network that would otherwise have been very expensive and time-consuming to build from the ground up.
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- Acquisition Advantages - quick market penetration - synergy Disadvantages - host country's resentment - high acquisition costs - unforeseen problems
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- GREENFIELD INVESTMENT Acquisition is viewed in a different light from other kinds of foreign direct investment. A government generally welcomes foreign investment that starts up a new enterprise (called a greenfield enterprise), since that investment increases employment and enlarges the tax base. An acquisition, however, fails to do this since it displaces and replaces domestic ownership. Therefore, acquisition is very likely to be perceived as exploitation or a blow to national pride on this basis, it stands a good chance of being turned down.
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- BROWNFIELD INVESTMENT A special case of acquisition is the brownfield entry mode. This mode happens when an investors transferred resources dominate those provided by an acquired firm. In addition, this hybrid mode of entry requires the investor to extensively restructure the acquired company so as to assure fit between the two organizations. This is common in emerging markets, and the extensive restructuring may yield a new operation that resembles a greenfield investment. As such, integration costs can be high. However, brownfield is a worthwhile strategy to consider when neither pure acquisition nor greenfield is feasible.
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- MANUFACTURING The manufacturing process may be employed as a strategy involving all or some manufacturing in a foreign country. One kind of manufacturing procedure, known as sourcing, involves manufacturing operations in a host country, not so much to sell there but for the purpose of exporting from that companys home country to other countries. The goal of a manufacturing strategy may be to set up a production base inside a target market country as a means of invading it. There are several variations on this method, ranging from complete manufacturing to contract manufacturing (with a locals ) and partial manufacturing.
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- Manufacturing Advantages - job creation for host country - host country gaining resources (capital and technology) - low trade barriers - higher profit - utilization of local labor - host country's economic incentives Disadvantages - expropriation risk - large capital investment
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- ASSEMBLY OPERATIONS An assembly operation is a variation on a manufacturing strategy. Assembly means the fitting or joining together of fabricated components. The methods used to join or fit together solid components may be welding, soldering, riveting, gluing, laminating, and sewing. In this strategy, parts or components are produced in various countries in order to gain each countrys comparative advantage. Capital-intensive parts may be produced in advanced nations, and labor-intensive assemblies may be produced in a less developed country, where labor is abundant and labor costs low.
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- Assembly Operations Advantages - circumventing trade barriers - utilization of local labor Disadvantages - local product-content laws
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- JOINT VENTURES The joint venture is another alternative a firm may consider as a way of entering an overseas market. A joint venture is simply a partnership at corporate level, and it may be either domestic or international. For the discussion here, an international joint venture is one in which the partners are from more than one country. Much like a partnership formed by two or more individuals, a joint venture is an enterprise formed for a specific business purpose by two or more investors sharing ownership and control.
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- Joint Venture Advantages - maximizing profit while minimizing risk - sharing of resources - allowing host country to gain technology and create jobs - circumventing trade barriers - local partner's market knowledge - local partner's political connections
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- Joint Venture Disadvantages - conflict with partner - sharing of profit - loss of control - difficulty in terminating relationship
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- Exporting Exporting is a strategy in which a company, without any marketing or production organization overseas, exports a product from its home base. Often, the exported product is fundamentally the same as the one marketed in the home market. The main advantage of an exporting strategy is the ease in implementing the strategy. Risks are minimal because the company simply exports its excess production capacity when it receives orders from abroad. As a result, its international marketing effort is casual at best.
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- Exporting Advantages - simple - low risk Disadvantages - low profit - trade barriers - difficult when home currency is strong
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- Licensing Licensing is a contractual arrangement whereby one company (the licensor) makes a legally protected asset available to another company (the licensee) in exchange for royalties, license fees, or some other form of compensation. The licensed asset may be a brand name, company name, patent, trademark, product formulation technical know-how and skills (e.g., feasibility studies, manuals, technical advice), architectural and engineering designs. Licensing is widely used in the fashion industry.
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- Licensing Most French designers, for example, use licensing to avoid having to invest in a business. In another example, Disney obtains all of its royalties virtually risk-free from the $500 million Tokyo Disneyland theme park owned by Keisei Electric Railway and Mitsui. The licensing and royalty fees as arranged are very attractive: Disney receives 10 percent of the gate revenue and 5 percent of sales of all food and merchandise. Moreover, Disney, with its policy of using low-paid young adults as park employees, does not have to deal with the Japanese policy of lifetime employment.
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- Licensing Advantages - quick expansion (entry) when capital is scarce - very low risk - allowing host country to gain technology and create jobs - allowing host country and licensee to keep most profit - circumventing trade barriers
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- Licensing Disadvantages - very low profit - licensee becoming future competitor - licensee's poor performance - difficulty in terminating licensing agreement
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- Management Contract Management contract is a strategy used by a company with management experience with the idea of managing the business or inv
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