Basic entry decisions include identifying which markets to enter, when to enter those markets, and on what scale.
The most attractive foreign markets tend to be found in politically stable, developed and developing nations that have free market systems and where there is not a dramatic upsurge in either inflation rates or privatesector debt.
Several advantages are associated with entering a national market early, before other international businesses have established themselves. These advantages must be balanced against the pioneering costs that early entrants often have to bear, including the greater risk of business failure.
Large-scale entry into a national market constitutes a major strategic commitment that is likely to change the nature of competition in that market and limit the entrant's future strategic flexibility. The firm needs to think through the implications of such commitments before embarking on a large-scale entry. Although making major strategic commitments can yield many benefits, risks are also associated with such a strategy.
There are six modes of entering a foreign market: exporting, creating turnkey projects, licensing, franchising, establishing joint ventures, and setting up a wholly owned subsidiary.
Exporting has the advantages of facilitating the realization of experience curve economies and of avoiding the costs of setting up manufacturing operations in another country. Disadvantages include high transport costs, trade barriers, and problems with local marketing agents. The latter can be overcome if the firm sets up a wholly owned marketing subsidiary in the host country.
Turnkey projects allow firms to export their process know-how to countries where FDI might be prohibited, thereby enabling the firm to earn a greater return from this asset. The disadvantage is that the firm may inadvertently create efficient global competitors in the process.
The main advantage of licensing is that the licensee bears the costs and risks of opening a foreign market. Disadvantages include the risk of losing technological know-how to the licensee and a lack of tight control over licensees.
The main advantage of franchising is that the franchisee bears the costs and risks of opening a foreign market. Disadvantages center on problems of quality control of distant franchisees.
Joint ventures have the advantages of sharing the costs and risks of opening a foreign market and of gaining local knowledge and political influence. Disadvantages include the risk of losing control over technology and a lack of tight control.
The advantages of wholly owned subsidiaries include tight control over technological know-how. The main disadvantage is that the firm must bear all the costs and risks of opening a foreign market.
The optimal choice of entry mode depends on the firm's strategy.
When technological know-how constitutes a firm's core competence, wholly owned subsidiaries are preferred, since they best control technology.
When management know-how constitutes a firm's core competence, foreign franchises controlled by joint ventures seem to be optimal. This gives the firm the cost and risk benefits associated with franchising, while enabling it to monitor and control franchisee quality effectively.
When the firm is pursuing a global or transnational strategy, the need for tight control over operations to realize location and experience curve economies suggests wholly owned subsidiaries are the best entry mode.
When establishing a wholly owned subsidiary in a country, a firm must decide whether to do so by building a subsidiary from the ground up, called the green-field venture strategy, or by acquiring an established enterprise in the target market.
Relative to green-field ventures, acquisitions are quick to execute, may enable a firm to preempt its global competitors, and involve buying a known revenue and profit stream.
Acquisitions may fail when the acquiring firm overpays for the target, when the culture of the acquiring and acquired firms clash, when there is a high level of management attrition after the acquisition, and when there is a failure to integrate the operations of the acquiring and acquired firm.
The advantage of establishing a green-field venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants. For example, it is much easier to build an organization culture from scratch than it is to change the culture of an acquired unit.
