Foreign market entry modes

src: i.ytimg.com

Foreign market entry mode or participatory strategies differ in the level of risk they represent, the control and resource commitments they require, and the return on investment they promise.

There are two main types of market entry modes: equity and non-equity mode. Non-equity mode categories include export and contract agreements. The equity mode categories include: joint ventures and wholly owned subsidiaries.

Video Foreign market entry modes

Exporting

Exporting is the process of selling goods and services produced in one country to another.

There are two types of exports: direct and indirect.

Direct Export

Direct export is the most basic exporting mode made by a holding company, utilizing economies of scale in concentrated production in the home country and providing better control over distribution. Direct export works best when the volume is small. Exports in large quantities can trigger protectionism. The main characteristic of the direct export entry model is that there is no intermediary.

Passive exports represent the treatment and filling of overseas orders such as domestic orders.

Type

Sales representative

Sales representatives represent foreign suppliers/manufacturers in their local markets for established sales commissions. Provide support services to local advertising-related manufacturers, local sales presentations, customs formalities, legal requirements. Highly technical service or product manufacturers such as production machines, most benefit from sales representatives.

Import distributor

Import distributors buy products with their own rights and resell them in their local market to wholesalers, retailers, or both. Importing a distributor is a good market entry strategy for products brought in inventory, such as toys, equipment, prepared food.

Benefits

• Control of foreign market selection and choice of foreign representative company
• Feedback good information from target market, develop better relationship with buyer
• Better trademark protection, patents, goodwill, and other intangible properties
• Potentially larger sales, and therefore more profits, than indirect exports.

Losses

• Higher start-up costs and higher risks compared to indirect exports
• Requires higher time, resources, and personnel investment and organizational changes
• Larger information requirements
• Longer time to market compared to indirect exports.

Indirect exports

Indirect exports are the export process through export intermediaries based in the country. Exporters have no control over their products in overseas markets.

Type

Export trading company (ETC)

It provides support services from the entire export process to one or more suppliers. Interesting for suppliers who are not familiar with exporting because the ETC usually does all the necessary work: looking for trading partners abroad, presenting products, citing special requests, etc.

Export management company (EMC)

This is similar to ETC in the way they usually export to manufacturers. Unlike ETCs, they rarely take credit of export credits and carry one type of product, not representing the competition. Typically, EMC trades on behalf of their suppliers as their export department.

Export merchant

Export sellers are wholesalers who purchase packaged products from suppliers/producers for resale overseas under their own brand name. The advantage of an export merchant is promotion. One of the disadvantages of using an export merchant resulted in the presence of identical products with different brand names and prices in the market, which means that export traders' activities can hamper the efforts of exporting producers.

Confirm home

This is a middle seller who works for foreign buyers. They accept product requirements from their clients, negotiate purchases, make deliveries, and pay suppliers/producers. An opportunity here arises in the fact that if the client likes the product, then he can become a trade representative. Potential losses include supplier uncertainty and a lack of control over what the company is confirming their product.

An inappropriate purchasing agent

This is similar to confirming the home with the exception that they are not paying the supplier directly - the payment is made between the supplier/producer and the foreign buyer.

Benefits

• Fast market access
• Resource concentration to production
• Little or no financial commitment because the client's exports usually cover most of the expenses associated with international sales.
• Low risk exists for companies that consider their domestic market more important and for companies that still develop R & D strategies D, marketing, and selling them.
• Export management is outsourced, reducing pressure from the management team
• Not directly handle export process.

Disadvantages

• Little or no control over distribution, sales, marketing, etc. as opposed to direct export
• The wrong distributor selection, and consequently, the market, may cause inadequate market feedback affecting the company's international success
• Sales are potentially lower than direct exports (though low volume can be a key aspect of successfully exporting directly). Incorrect export partners selecting a particular distributor/market may hamper the company's functional capabilities.

Companies that seriously consider the international market as an important part of their success are likely to consider direct exports as a market entry tool. Indirect exports are preferred by companies seeking to avoid financial risk as a threat to their other goals.

Maps Foreign market entry modes

License

International licensing agreements allow foreign companies, either exclusively or non-exclusively to produce owner products for a fixed period of time in a particular market.

In this mode of foreign market entry, the licensor in the country of origin makes limited rights or resources available to the licensee in the host country. Rights or resources may include patents, trademarks, managerial skills, technology, etc. that may enable the licensee to produce and sell in the host country a product similar to a product that has been manufactured and sold by a licensor in a country house without requiring the licensor to open new operations abroad. Licensor's earnings usually take the form of one-off payments, technical fees and royalty payments are usually calculated as a percentage of sales.

As in this entry mode, the transfer of knowledge between parent companies and licensees is very strong, the decision to enter into an international licensing agreement depends on the respect shown by the host government for intellectual property and on the licensing ability to select the right partner and avoid it to compete in every other market. Licensing is a relatively flexible work agreement that can be customized to suit the needs and interests of both licensors and licensors.

The following are the main advantages and reasons for using international licenses to expand internationally:

• Earn additional revenue for technical knowledge and services
• Reach new markets that can not be accessed by exporting from existing facilities
• Expands quickly without much risk and big capital investment
• Pave the way for future investments in the market
• Keep established markets closed by trade restrictions
• Political risk is minimized because license holders are usually 100% locally owned
• Very interesting for new companies in international business.

On the other hand, an international license is a foreign market entry mode that presents some of the disadvantages and reasons why a company should not use it as:

• Income is lower than in other entry mode
• Loss of control over licensing and operation and marketing practices leading to loss of quality
• The risk of owning a trademark and reputation is damaged by an incompetent partner
• Foreign partners can also be competitors by selling their products in places where the parent company already exists.

src: slideplayer.com

Franchise

The franchise system may be defined as: "A system in which the semi-independent business owner (franchisee) pays fees and royalties to the franchisor in exchange for the right to be identified with his trademark, to sell his products or services, and often uses the format and business systems. "

Compared with licenses, franchising agreements tend to be longer and franchisors offer a wider set of rights and resources that typically include: equipment, managerial systems, operating manuals, initial training, site approval and all the support necessary for the franchisee to run his business. in the same way as the franchisor does. In addition, while licensing agreements involve matters such as intellectual property, trade secrets and others while in the franchise it is limited to the trademark and knowledge of business operations.

Advantages of international franchising mode:

• Political risk is low
• Low cost
• Allows simultaneous expansion into different regions of the world
• Well-chosen partners bring financial investment as well as managerial capabilities for operations.

Lack of franchise to the franchisor:

• Maintaining control over the franchisee may be difficult
• Conflicts with franchise holders are likely, including legal disputes
• Maintaining a franchisor's image in an overseas market may be challenging
• Requires monitoring and evaluation of franchise performance, and provides ongoing assistance
• Franchisee can take advantage of acquired knowledge and become a competitor in the future

src: emerhub.com

Turnkey project

Turnkey projects refer to projects when clients pay contractors to design and build new facilities and train personnel. Turnkey projects are a way for foreign companies to export their processes and technologies to other countries by building factories in the country. Industrial companies specializing in complex production technologies typically use turnkey projects as an entry strategy.

One of the main advantages of turnkey projects is the possibility for companies to set up factories and earn profits in foreign countries especially where foreign direct investment opportunities are limited and lack of expertise in certain areas exist.

Potential losses from turnkey projects to companies include the risk of disclosing company secrets to competitors, and expropriation of their factories by host countries. Entering a market with a BISA turnkey project proves that the company has no long-term interest in the country that could be a disadvantage if the country proves to be a major market for the output of the exported process.

src: emerhub.com

A wholly owned subsidiary (WOS)

A wholly owned subsidiary includes two types of strategies: Greenfield Investments and Acquisitions. The investment and acquisition of Greenfield includes advantages and disadvantages. To decide which entry mode to use depends on the situation.

Greenfield Investment is the establishment of a wholly owned new subsidiary. It is often complex and potentially costly, but is capable of giving full control to the company and has the potential to provide an above-average return. "Wholly owned subsidiaries and foreign staff are preferred in the service industry where close contact with end customers and high-level professional skills, specifically know how, and customization are required." Greenfield investments are preferred where physical capital-intensive plants are planned. This strategy is interesting if there is no competitor to buy or transfer a competitive advantage consisting of embedded competencies, skills, routines and cultures.

Greenfield investments are at high risk because of the cost of setting up a new business in a new country. Companies may need to acquire knowledge and expertise from existing markets by third parties, consultants, competitors, or business partners. This entry strategy takes a lot of time because of the need to build new operations, distribution networks, and the need to learn and apply the right marketing strategy to compete with competitors in new markets.

The acquisition has become a popular way to enter overseas markets largely because of its fast access acquisition strategy offering the fastest and largest initial international expansion of all alternatives.

The acquisition has increased because it is a way to achieve greater market power. Market share is usually influenced by market forces. Therefore, many multinational companies apply acquisitions to achieve their larger market forces, requiring the purchase of competitors, suppliers, distributors, or businesses in highly related industries to enable the exercise of core competencies and capture competitive advantage in the marketplace.

The acquisition of risk is lower than the Greenfield investment because the results of the acquisition can be estimated more easily and accurately. Overall, acquisitions are attractive if there are already established companies in operations or competitors who want to enter the region.

On the other hand, there are many disadvantages and problems in achieving the success of the acquisition.

• Integrating two organizations can be very difficult because of different organizational cultures, control systems, and relationships. Integration is a complex issue, but it is one of the most important things for an organization.
• By applying the acquisition, some companies increase their debt levels significantly which can have a negative effect on the company because high debt can lead to bankruptcy.
• Too much diversification can cause problems. Even when companies are not very diversified, high levels of diversification can negatively impact companies in long-term performance due to lack of diversified management.

src: slideplayer.com

The difference between an international strategy and a global strategy

However, some industries benefit more from globalization than others, and some countries have comparative advantages over other countries in certain industries. To create a successful global strategy, managers must first understand the nature of the global industry and the dynamics of global competition, international strategy (ie subsidiaries spread across the globe acting independently and operating as if they were local firms, with minimum coordination from parent companies) and global strategy (leading to a variety of business strategies, and a high level of adaptation to the local business environment). There are basically three major differences between them. First, it relates to the degree of involvement and coordination of the Center. In addition, the difference is related to the level of product standardization and responsiveness to the local business environment. The latter is that the difference has to do with integration strategy and competitive movement.

src: 1.bp.blogspot.com

Joint ventures

There are five common goals in joint ventures: market entry, risk sharing, technology sharing and joint product development, and in accordance with government regulations. Other benefits include political connections and access to distribution channels that may depend on the relationship. Such an alliance is often beneficial when:

• The strategic goals of these partners are fused while their competitive goals are deviating
• Smaller market size, market power and resources compared to Industry leaders
• Partners can learn from each other while restricting access to their own ownership skills

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, capability and resources of local companies, and government intentions. Potential issues include:

• Conflict over asymmetric new investment
• Distrust of exclusive knowledge
• Confusion in performance - how to split the cake
• Lack of parent company support
• Cultural clash
• If, how, and when to terminate the relationship

Joint ventures have conflicting pressures to work together and compete:

• Strategically important: partners want to maximize the profits gained for joint ventures, but they also want to maximize their own competitive position.
• Joint ventures try to develop shared resources, but every company wants to develop and protect its own resources.
• Joint ventures are controlled through a process of negotiation and coordination, while each company wants to have hierarchical control.

src: slideplayer.com

Strategic alliance

Strategic alliances are types of cooperative agreements between different companies, such as joint research, formal joint ventures, or minority equity participation. The modern form of strategic alliances is becoming increasingly popular and has three distinct characteristics:

1. They are often among companies in industrialized countries.
2. The focus is often on creating new products and/or technologies rather than distributing existing ones.
3. They are often only created for short-term, non-equity-based agreements in which companies are separated and independent.

Benefits

Some of the advantages of a strategic alliance include:

Technology exchange

This is the main goal for many strategic alliances. The reason for this is that many major technological breakthroughs and innovations are based on interdisciplinary and/or inter-industry progress. Therefore, it is increasingly difficult for a company to have the resources or capabilities necessary to make an R & amp; It is also perpetuated by the shorter product life cycle and the need for many companies to remain competitive through innovation. Some industries that have become the center for broad cooperation agreements are:

• Telecommunications
• Electronics
• Pharmacy
• Information technology
• Special chemicals

Global competition

There is a growing perception that a global battle between companies will occur between the players teams that are aligned in strategic partnerships. Strategic alliances will be a key tool for companies if they want to remain competitive in this global environment, especially in industries that have dominant leaders, such as mobile manufacturing, where smaller companies need to ally to stay competitive.

Industrial convergence

When industry meets and traditional lines between different industry sectors become blurred, strategic alliances are sometimes the only way to develop the necessary complex skills within the required time frame. Alliances are a way of shaping competition by reducing the intensity of competition, excluding potential entrants, and isolating players, and building complex value chains that can act as a barrier.

Economies of scale and risk reduction

Pooling resources can contribute substantially to economies of scale, and small firms can especially benefit greatly from strategic alliances in terms of cost reductions due to increased economies of scale.

In terms of risk reduction, in strategic alliances no companies bear the full risk, and the costs of, joint activities. This is highly profitable for businesses engaged in high risk/cost activities such as R & D. This is also beneficial for smaller organizations that are more affected by risky activities.

Alliance as an alternative to merger

Some industry sectors have constraints for cross-border mergers and acquisitions, strategic alliances prove to be an excellent alternative to overcome these limitations. Alliances often lead to full-scale integration if restrictions are lifted by one or both countries.

The risk of competitive collaboration

Some strategic alliances involve firms that are in fierce competition beyond the special scope of the alliance. This creates the risk that one or both partners will try to use the alliance to create an advantage over another. The benefits of this alliance can cause an imbalance between the parties, there are several factors that can cause this asymmetry:

• Partnerships can be forged to exchange resources and capabilities such as technology. This can cause one partner to get the desired technology and ignore the other partner, effectively taking all the benefits of the alliance.
• Use investment initiatives to erode other partners' competitive positions. This is a situation where one partner creates and controls an important resource. This creates a threat that a stronger partner can remove the other from the necessary infrastructure.
• The power gained by learning from one company can be used against another. When companies learn from others, usually by division of tasks, their abilities become strengthened, sometimes this power exceeds the scope of business and companies can use it to gain a competitive edge over the company they may be working on.
• The company may use the alliance to acquire its partners. One company can target companies and allied with them to use the acquired knowledge and trust built in the alliance to take over others.

Losses

1. It's hard to find a good partner
2. Unequal partnership risk
3. Loss of control
4. Management of cross-border relationships

src: slideplayer.com

Choosing a Partner for an International Strategic Alliance

1. Strategic compatibility

   Partners should have common goals and common understanding in establishing joint ventures. Differences in strategy result in more conflicts of interest in later partnerships (Lilley and Willianms, 1991).

2. Additional skills and resources

   Another important criterion is that partners need to contribute more than money for business (Geringer and Michael, 1988). Each partner must contribute some skills and resources that complement each other.

3. Relative company size

   Different company sizes can lead to the dominance of a firm or unequal agreement that is not profitable for the long term (Lilley and Willianms, 1991)

4. Financial ability

   Partners can generate sufficient financial resources to sustain business efforts, which are also important for long-term partnerships (Lilley and Willianms, 1991)

Some more like compatibility between operating policies (Lilley and Willianms, 1991), trust and commitment (Lilley and Willianms, 1991), compatible management styles (Geringer and Michael, 1988), interdependence (Lilley and Willianms, 1991), communication barriers (Lilley and Willianms, 1991) and avoiding anchor partners (Geringer and Michael, 1988) are also important for partner selection but less important than the first four.

src: cdn.yourarticlelibrary.com

Political Problems

Political problems will be faced largely by companies seeking to enter a country with an unsustainable political environment (Parboteeah and Cullen, 2011). Political decisions will affect the business environment in a country and affect the profitability of businesses in the country (Click, 2005). Organizations with investments in opaque countries such as Zimbabwe, Myanmar, and Vietnam have long-term experience of how political risks affect their business behavior (Harvard Business Review, 2014).

Here is an example of a political problem:

1. To imprison the politics of Mikhail Khodorkovsky, the business giant, in Russia (Wade, 2005); China's "Open Door" Policy (Deng, 2001); 3. Dispute elections Ukraine produced an uncertain president in recent years (Harvard Business Review, 2014); 4. The legal system is corrupt in many countries, such as Russia (Samara, 2008)

src: slideplayer.com

Three rules are different from the entry mode selection

The following introduction is based on Hollensen's statement:

1. Naïve rules. Decision makers use the same entry mode for all overseas markets. Companies use this rule because the entry mode selection ignores the differences in individual foreign markets. The performance of this election can not be calculated, because it depends on the luck of the manager.
2. Pragmatic rules. Decision-makers use entry modes that can be applied to any foreign market, which means that managers use different entry modes depending on the stage of time or business stage. For example, as a first step into international business, firms tend to use exports.
3. Strategy rules. This approach means that companies systematically compare all entry modes and evaluate values ​​before any choice is made. This approach is common in large companies, because research requires resources, capital, and time. It is rare to see small or medium-sized companies using this approach.

In addition to these three rules, managers have their own way of choosing entry mode. If a company can not produce mature market research, managers tend to choose the most suitable entry mode for the industry or make decisions with intuition.

src: slideplayer.com

Analysis of Foreign Direct Investment case of Telecommunication Company in Albania

Foreign Direct Investment (FDI) is an important factor for a country's economic growth, especially in its impact on technology transmission and development in management and marketing strategies. FDI occurs when a company acquires control of ownership of a production unit in a foreign country.

According to the content there are basically three forms of FDI: establishing new branches, acquiring control shares of existing companies, and participating jointly in domestic companies. As the Albanian economy has changed from centrally planned to market-oriented, FDI is seen as an important component of the transition to a market-led economic system, as it contributes to the development of a country through multiple channels (Kukeli, et al., 2006; , 2007). In their study, a number of successful cellular network entry cases have been selected for in-depth investigation of entry models in Albania, to determine the most important and efficient determinants of foreign cellular networks entering the Albanian telecom market in the future as well. It provides a successful Albanian business experience for newcomers in the mobile telecommunications industry. With its emerging market economy, Albania offers many opportunities for investor property because of low labor costs, a young and educated population is ready to work, and other legal tariffs and restrictions are low in many cases and are being eliminated in some others (Albinvest, 2010). The Albanian location itself offers an important trading potential, especially with the EU market, as it borders Greece and Italy. In recent years, Albania has entered into free trade agreements with Balkan States that create opportunities for trade across the region. As the Albanian economy tends to grow, the prospects and opportunities of multinationals (MNEs) to invest in Albania for longer periods also increase. However, after the transition to democracy since 1992, the state has taken a long way in terms of economic, political and social life (Ministry of Economic 2004, p.Ã, 9-10). Demirel (2008) found all these changes to establish Albanian strength in FDI. In his study Demirel (2008) emphasized that Albania has one of the most friendly investment environments in the region of Southeast European Countries (SEECs) with impressive economic performance in the last decade, liberal economic laws, the rapid privatization process and the state. specific benefits. Taking into account all these factors, the purpose of this study is to offer a new perspective by case studies of foreign telecommunication companies, which form the majority of MNEs in this field, finding the most significant determinants before entering Albania, with successful entry strategies and important FDI considerations in Albania. It is important to find the deciding factors and factors that affect multinational companies when deciding on their entry mode, in order to successfully compete in the Albanian cellular telecommunications industry. There are four operators in this industry; two leading companies are thriving in Albania by leveraging successful and aggressive entry strategies, and others are new entries in the Albanian market. Lin (2008) emphasizes that evaluation of the determinants of entry modes is better to apply in some major theories and models such as transaction cost theory, eclectic theory and internationalization model, which serves as the theoretical foundation in such studies, where the host-state conditions, politics and economics, and organizational capability is an important factor and requires major consideration.

src: slideplayer.com

References

Further reading

Source of the article : Wikipedia