Foreign market

entry strategies
By Ali Shams

Foreign direct investment

(FDI)

Exporting

Licensing

Management contract

Joint venture

Manufacturing

Assembly operations

Turnkey operations

Acquisition

Strategic alliances

Analysis of entry strategies

Free trade zones (FTZs)

The Foreign Market Entry Menu

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Kenneth A. Reinert, Cambridge University Press 2012

Foreign direct investment (FDI)

For some reason, one noticeable feature of FDI flows is that their share in

total inflows is higher in countries where the quality of institutions is

lower.
One indisputable fact is that developed countries are both the largest

recipients and sources of FDI.

the countries that are successful in attracting FDI have certain traits:

political and macroeconomic stability and structural reforms

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 the countries that are successful in attracting FDI have certain traits:

political and macroeconomic stability and structural reforms

Corruption has a negative impact on FDI. From the ethics standpoint,

foreign investors generally avoid corruption because it is morally wrong

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Forms of FDI
Ownership
Wholly owned operations
Green-field investment
Full acquisition

Partially owned operations

Relatedness
Horizontal FDI
Vertical FDI
Unrelated diversification

Partial acquisition
Joint venture

Ruth V. Aguilera

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Home
Country

Green Field
100% Owned

Host Country
New
Entity

Full Acquisition
(i.e., 100%)

MNE

Local Firm
Partial Acquisition
(e.g., 50%)
Ownership = s%
Ruth V. Aguilera

Ownership = (1 - s)%

Joint Venture
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Exporting
Exporting is a strategy in which a company, without any marketing or production

organization overseas, exports a product from its home base.

product is fundamentally the same as the one marketed in the home market.
The main advantage of an exporting strategy is the ease in implementing the strategy.
Risks are minimal because the company simply exports its excess production capacity

when it receives orders from abroad.

The exporting strategy functions poorly when the companys home-country currency is

strong.

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HOME COUNTRY

HOST COUNTRY
Revenues

MNE

Customers

Export of Goods

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Ruth V. Aguilera

Licensing
Licensing is an agreement that permits a foreign company to use

industrial property (i.e., patents, trademarks, and copyrights), technical

know-how and skills (e.g., feasibility studies, manuals, technical advice),
architectural and engineering designs, or any combination of these in a
foreign market.

Essentially, a licensor allows a foreign company to manufacture a product

for sale in the licensees country and sometimes in other specified

markets.

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HOME COUNTRY
HOST COUNTRY
Licensing of Technology

MNE

Local Firm
Fees and Royalties

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Ruth V. Aguilera

Licensing Agreement
Advantages
Low initial investment
Avoids trade barriers
Potential for utilizing

location economies

Access to local knowledge

Easier to respond to

customer needs

Disadvantages
Lack of control over

operations

Difficulty in transferring

tacit knowledge

Negotiation of a transfer price

Monitoring transfer outcome

Potential for creating a

competitor

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Management contract
In some cases, government pressure and restrictions force a foreign

company either to sell its domestic operations or to relinquish control. In

other cases, the company may prefer not to have any FDI.

One way to generate revenue is to sign a management contract with the

government or the new owner in order to manage the business for the
new owner

Management contracts may be used as a sound strategy for entering a

market with a minimum investment and minimum political risks.

Accor SA, a French hotel giant, for example, has purchased a large stake

in Zenith Hotels International. Zenith itself manages nine hotels in China

and one hotel in Thailand without owning them, and most of its hotels do
not carry the Zenith name.
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HOME COUNTRY
HOST COUNTRY
Management Fees

MNE

Local Firm
Profit

Technological Inputs

Ruth V. Aguilera

Managerial
Service

Wholly-Owned
Subsidiary
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Joint venture
A joint venture is simply a partnership at corporate level, and it can be

domestic or international. For the discussion here, an international joint

venture is one in which the partners are from more than one country.

One recent joint venture involves Advanced Micro Devices (AMD) and

Fujitsu to replace a previous joint venture (FujitsuAMD Semiconductor

Ltd.).

There are two separate overseas investment processes that describe how

joint ventures tend to evolve:

1.

the natural, nonpolitical investment process

2.

The second investment process occurs when the local firms political
leverage, through government persuasion, halts or reverses the natural
economic process
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HOME COUNTRY

HOST COUNTRY

MNE

Local Firm
Share of
Profit
Joint Venture
Company

Inputs
Inputs
Share of Profit

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Ruth V. Aguilera

Joint venture
Advantages

Disadvantages

Access to partners local

Potential loss of

Reduction of concern about

Potential conflicts

knowledge

overpayment

Both parties have some

performance incentives

Significant control over

operation

proprietary knowledge
between partners

Neither partner has full

performance incentive

Neither partner has full

control

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Manufacturing
The manufacturing process may be employed as a strategy involving all or

some manufacturing in a foreign country.

One kind of manufacturing procedure, known as sourcing, involves

manufacturing operations in a host country, not so much to sell there but

for the purpose of exporting from that companys home country to other
countries.

another manufacturing objective: the goal of a manufacturing strategy

may be to set up a production base inside a target market country as a

means of invading it. There are several variations on this method,
ranging from complete manufacturing to contract manufacturing (with a
local manufacturer) and partial manufacturing.

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Host country Reasons

job creation
Technology
management expertise
access to export markets

MNEs Reasons
gaining access either to

raw materials or to take

advantage of resources

take advantage of lower

labor costs or other

abundant factors of
production (e.g., labor,
energy, and other inputs)

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Assembly operations
An assembly operation is a variation on a manufacturing strategy.
According to the U.S. Customs Service, Assembly means the fitting or

joining together of fabricated components.

In this strategy, parts or components are produced in various countries in

order to gain each countrys comparative advantage. Capital-intensive

parts may be produced in advanced nations, and labor-intensive
assemblies may be produced in a less developed country, where labor is
abundant and labor costs are low

In general, a host country objects to the establishment of a screwdriver

assembly that merely assembles imported parts. If a products local

content is less than half of all the components used, the product may be
viewed as imported, subjected to tariffs and quota restrictions.
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Turnkey operations
A turnkey operation is an agreement by the seller to supply a buyer with

a facility fully equipped and ready to be operated by the buyers

personnel, who will be trained by the seller.

the term is usually associated with giant projects that are sold to

governments or government-run companies.

Large-scale plants requiring technology and large-scale construction

processes unavailable in local markets commonly use this strategy.

Such large-scale projects include building steel mills; cement, fertilizer,

and chemical plants; and those related to such advanced technologies as

telecommunications.

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Acquisition
When a manufacturer wants to enter a foreign market rapidly and yet

retain maximum control, direct investment through acquisition should be

considered.

The reasons for wanting to acquire a foreign company include:

1.

product/geographical diversification

2.

acquisition of expertise (technology, marketing, and management)

3.

and rapid entry

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HOME COUNTRY

MNE

HOST COUNTRY

Investment

Local Firm

Profit

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Acquisition
Advantages

Disadvantages

Access to targets local

Uncertainty about targets

Control over foreign

Difficulty in absorbing

Control over own

Infeasible if local market for

knowledge
operations

technology

value

acquired assets

corporate control is
underdeveloped

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How to make a successful acquisition

Jack Welch, the highly successful and former CEO of General Electric, lists the six

sins of mergers and acquisitions:

1.

First, any merger of equals sounds good in theory but is a mess in practice.

2.

Second, the cultural fit of the two partners is as important as (if not more so than) a
strategic fit.

3.

Third, run away from a reverse hostage situation when an acquirer makes so many
concessions to the point that the acquired company will be in charge.

4.

Fourth, be not afraid as boldness is necessary and sensible for integration.

5.

Fifth, avoid the conqueror syndrome by installing own people everywhere in the new
territory.

6.

Sixth and finally, dont pay too much.

Source: Jack Welch and Suzy Welch, The Six Sins of M&A, Business Week, October 23, 2006, 148.

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Green Field Entry

A government generally welcomes foreign investment that starts up a

new enterprise (called a greenfield enterprise), since that investment

increases employment and enlarges the tax base.

A special case of acquisition is the brownfield entry mode. This mode

occurs when an investors transferred resources dominate over those

provided by an acquired firm.

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HOME COUNTRY

HOST COUNTRY

MNE
Profit

Investment

New Subsidiary
Company
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Ruth V. Aguilera

Strategic alliances
There is no clear and precise definition of strategic alliance. There is no

one way to form a strategic alliance. An alliance may be in the areas of

production, distribution, marketing, and research and development.

Strategic alliances may be the result of mergers, acquisitions, joint

ventures, and licensing agreements.

Joint ventures are naturally strategic alliances, but not all strategic

alliances are joint ventures.

Unlike joint ventures which require two or more partners to create a

separate entity, a strategic alliance does not necessarily require a new

legal entity.

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Analysis of entry strategies

To enter a foreign market, a manufacturer has a number of strategic

options, each with its own strengths and weaknesses.

Many companies employ multiple strategies.

IBM has employed strategies ranging from licensing, joint ventures, and

strategic alliances on the one hand to local manufacturing and

subsidiaries on the other hand

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Analysis of entry strategies

There are a number of characteristics that determine the appropriateness

of entry strategies, and many variables affect which strategy is chosen.

These characteristics include:
1. political risks,
2. regulations,
3. type of country,
4. type of product,
5. and other competitive and market characteristics.
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Free trade zones (FTZs)

An FTZ is a secured domestic area in international commerce, considered

to be legally outside a countrys customs territory.

It is an area designated by a government for the duty-free entry of goods.
It is also a location where imports can be handled with few regulations,

and little or no customs duties and excise taxes are collected

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Variations among FTZs

1.

freeports,

2.

tariff-free trade zones,

3.

airport duty-free arcades,

4.

export-processing zones,

5.

and other foreign grade zones.

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 China has set up special economic zones (SEZs) for manufacturing,

banking, exporting and importing, and foreign investment.

Some countries, for political reasons, are not able to open up their

economies completely. Instead they have set up export-processing

zones, a special type of FTZ, in order to attract foreign capital for
manufacturing for export.

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The benefits of FTZ

country-specific in the sense that some countries offer superior facilities

for lower costs (e.g., utilities and telecommunications).

Other benefits are zone-specific in that certain zones may be better than

others within the same country in terms of tax and transportation

facilities.

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From the eighth chapter of the

book

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