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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1

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

• Slide 1