Report

Previous Section Next Section

Previous Section Next Section

This is “International-Expansion Entry Modes”, section 8.3 from the book Challenges and Opportunities in International Business (v. 1.0). For details on it (including licensing), click here.

For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. To download a .zip file containing this book to use offline, simply click here.

Has this book helped you? Consider passing it on:

Help Creative Commons Creative Commons supports free culture from

music to education. Their licenses helped make this book available to you.

Help a Public School DonorsChoose.org helps people like you help

teachers fund their classroom projects, from art supplies to books to calculators.

Table of Contents

Table of Contents

8.3 International-Expansion Entry Modes

L E A R N I N G O B J E C T I V E S

1. Describe the five common international-expansion entry modes.

2. Know the advantages and disadvantages of each entry mode.

3. Understand the dynamics among the choice of different entry modes.

The Five Common International-Expansion Entry Modes

In this section, we will explore the traditional international-expansion entry modes. Beyond importing,

international expansion is achieved through exporting, licensing arrangements, partnering and

strategic alliances, acquisitions, and establishing new, wholly owned subsidiaries, also known as

greenfield ventures. These modes of entering international markets and their characteristics are

shown in Table 8.1 "International-Expansion Entry Modes".Shaker A. Zahra, R. Duane Ireland, and

Michael A. Hitt, “International Expansion by New Venture Firms: International Diversity, Mode of

Market Entry, Technological Learning, and Performance,” Academy of Management Journal 43, no. 5

(October 2000): 925–50. Each mode of market entry has advantages and disadvantages. Firms need to

evaluate their options to choose the entry mode that best suits their strategy and goals.

Table 8.1 International-Expansion Entry Modes

Type of Entry Advantages Disadvantages

Exporting Fast entry, low risk Low control, low local knowledge, potential negative environmental impact of transportation

Licensing and Franchising Fast entry, low cost, low risk

Less control, licensee may become a competitor, legal and regulatory environment (IP and contract law) must be sound

Partnering and Strategic Alliance

Shared costs reduce investment needed, reduced risk, seen as local entity

Higher cost than exporting, licensing, or franchising; integration problems between two corporate cultures

Acquisition Fast entry; known, establishedoperations High cost, integration issues with home office

Greenfield Venture (Launch of a new, wholly owned subsidiary)

Gain local market knowledge; can be seen as insider who employs locals; maximum control

High cost, high risk due to unknowns, slow entry due to setup time

Exporting

Exporting is a typically the easiest way to enter an international market, and therefore most firms begin

their international expansion using this model of entry. Exporting is the sale of products and services in

foreign countries that are sourced from the home country. The advantage of this mode of entry is that

firms avoid the expense of establishing operations in the new country. Firms must, however, have a way

to distribute and market their products in the new country, which they typically do through contractual

agreements with a local company or distributor. When exporting, the firm must give thought to

labeling, packaging, and pricing the offering appropriately for the market. In terms of marketing and

promotion, the firm will need to let potential buyers know of its offerings, be it through advertising,

trade shows, or a local sales force.

Amusing Anecdotes

One common factor in exporting is the need to translate something about a product or service into

the language of the target country. This requirement may be driven by local regulations or by the

company’s wish to market the product or service in a locally friendly fashion. While this may seem

to be a simple task, it’s often a source of embarrassment for the company and humor for

competitors. David Ricks’s book on international business blunders relates the following anecdote

for US companies doing business in the neighboring French-speaking Canadian province of

Quebec. A company boasted of lait frais usage, which translates to “used fresh milk,” when it

meant to brag of lait frais employé, or “fresh milk used.” The “terrific” pens sold by another

company were instead promoted as terrifiantes, or terrifying. In another example, a company

intending to say that its appliance could use “any kind of electrical current,” actually stated that the

appliance “wore out any kind of liquid.” And imagine how one company felt when its product to

“reduce heartburn” was advertised as one that reduced “the warmth of heart”!David A. Ricks,

Blunders in International Business (Hoboken, NJ: Wiley-Blackwell, 1999), 101.

Among the disadvantages of exporting are the costs of transporting goods to the country, which can be

high and can have a negative impact on the environment. In addition, some countries impose tariffs on

incoming goods, which will impact the firm’s profits. In addition, firms that market and distribute

products through a contractual agreement have less control over those operations and, naturally, must

pay their distribution partner a fee for those services.

Ethics in Action

Companies are starting to consider the environmental impact of where they locate their

manufacturing facilities. For example, Olam International, a cashew producer, originally shipped

nuts grown in Africa to Asia for processing. Now, however, Olam has opened processing plants in

Tanzania, Mozambique, and Nigeria. These locations are close to where the nuts are grown. The

result? Olam has lowered its processing and shipping costs by 25 percent while greatly reducing

carbon emissions.Michael E. Porter and Mark R. Kramer, “The Big Idea: Creating Shared Value,”

Harvard Business Review, January–February 2011, accessed January 23, 2011,

http://hbr.org/2011/01/the-big-idea-creating-shared-value/ar/pr.

Likewise, when Walmart enters a new market, it seeks to source produce for its food sections from

local farms that are near its warehouses. Walmart has learned that the savings it gets from lower

transportation costs and the benefit of being able to restock in smaller quantities more than offset

the lower prices it was getting from industrial farms located farther away. This practice is also a

win-win for locals, who have the opportunity to sell to Walmart, which can increase their profits

and let them grow and hire more people and pay better wages. This, in turn, helps all the

businesses in the local community.Michael E. Porter and Mark R. Kramer, “The Big Idea: Creating

Shared Value,” Harvard Business Review, January–February 2011, accessed January 23, 2011,

http://hbr.org/2011/01/the-big-idea-creating-shared-value/ar/pr.

Firms export mostly to countries that are close to their facilities because of the lower transportation

costs and the often greater similarity between geographic neighbors. For example, Mexico accounts for

40 percent of the goods exported from Texas.Andrew J. Cassey, “Analyzing the Export Flow from Texas

to Mexico,” StaffPAPERS: Federal Reserve Bank of Dallas, No. 11, October 2010, accessed February 14,

2011, http://www.dallasfed.org/research/staff/2010/staff1003.pdf. The Internet has also made

exporting easier. Even small firms can access critical information about foreign markets, examine a

target market, research the competition, and create lists of potential customers. Even applying for

export and import licenses is becoming easier as more governments use the Internet to facilitate these

processes.

Because the cost of exporting is lower than that of the other entry modes, entrepreneurs and small

businesses are most likely to use exporting as a way to get their products into markets around the globe.

Even with exporting, firms still face the challenges of currency exchange rates. While larger firms have

specialists that manage the exchange rates, small businesses rarely have this expertise. One factor that

has helped reduce the number of currencies that firms must deal with was the formation of the

European Union (EU) and the move to a single currency, the euro, for the first time. As of 2011,

seventeen of the twenty-seven EU members use the euro, giving businesses access to 331 million people

with that single currency.“The Euro,” European Commission, accessed February 11, 2011,

http://ec.europa.eu/euro/index_en.html.

Licensing and Franchising

Licensing and franchising are two specialized modes of entry that are discussed in more detail in

Chapter 9 "Exporting, Importing, and Global Sourcing". The intellectual property aspects of licensing

new technology or patents is discussed in Chapter 13 "Harnessing the Engine of Global Innovation".

Partnerships and Strategic Alliances

Another way to enter a new market is through a strategic alliance with a local partner. A strategic

alliance involves a contractual agreement between two or more enterprises stipulating that the involved

parties will cooperate in a certain way for a certain time to achieve a common purpose. To determine if

the alliance approach is suitable for the firm, the firm must decide what value the partner could bring to

the venture in terms of both tangible and intangible aspects. The advantages of partnering with a local

firm are that the local firm likely understands the local culture, market, and ways of doing business

better than an outside firm. Partners are especially valuable if they have a recognized, reputable brand

name in the country or have existing relationships with customers that the firm might want to access.

For example, Cisco formed a strategic alliance with Fujitsu to develop routers for Japan. In the alliance,

Cisco decided to co-brand with the Fujitsu name so that it could leverage Fujitsu’s reputation in Japan

for IT equipment and solutions while still retaining the Cisco name to benefit from Cisco’s global

reputation for switches and routers.Steve Steinhilber, Strategic Alliances (Cambridge, MA: Harvard

Business School Press, 2008), 113. Similarly, Xerox launched signed strategic alliances to grow sales in

emerging markets such as Central and Eastern Europe, India, and Brazil. “ASAP Releases Winners of

2010 Alliance Excellence Awards,” Association for Strategic Alliance Professionals, September 2, 2010,

accessed February 12, 2011, http://newslife.us/technology/mobile/ASAP-Releases-Winners-of-2010-

Alliance-Excellence-Awards.

Strategic alliances are also advantageous for small entrepreneurial firms that may be too small to make

the needed investments to enter the new market themselves. In addition, some countries require

foreign-owned companies to partner with a local firm if they want to enter the market. For example, in

Saudi Arabia, non-Saudi companies looking to do business in the country are required by law to have a

Saudi partner. This requirement is common in many Middle Eastern countries. Even without this type

of regulation, a local partner often helps foreign firms bridge the differences that otherwise make doing

business locally impossible. Walmart, for example, failed several times over nearly a decade to

effectively grow its business in Mexico, until it found a strong domestic partner with similar business

values.

The disadvantages of partnering, on the other hand, are lack of direct control and the possibility that

the partner’s goals differ from the firm’s goals. David Ricks, who has written a book on blunders in

international business, describes the case of a US company eager to enter the Indian market: “It quickly

negotiated terms and completed arrangements with its local partners. Certain required documents,

however, such as the industrial license, foreign collaboration agreements, capital issues permit, import

licenses for machinery and equipment, etc., were slow in being issued. Trying to expedite governmental

approval of these items, the US firm agreed to accept a lower royalty fee than originally stipulated.

Despite all of this extra effort, the project was not greatly expedited, and the lower royalty fee reduced

the firm’s profit by approximately half a million dollars over the life of the agreement.”David A. Ricks,

Blunders in International Business (Hoboken, NJ: Wiley-Blackwell, 1999), 101. Failing to consider the

values or reliability of a potential partner can be costly, if not disastrous.

To avoid these missteps, Cisco created one globally integrated team to oversee its alliances in emerging

markets. Having a dedicated team allows Cisco to invest in training the managers how to manage the

complex relationships involved in alliances. The team follows a consistent model, using and sharing

best practices for the benefit of all its alliances.Steve Steinhilber, Strategic Alliances (Cambridge, MA:

Harvard Business School Press, 2008), 125.

Joint ventures are discussed in depth in Chapter 9 "Exporting, Importing, and Global Sourcing".

Did You Know?

Partnerships in emerging markets can be used for social good as well. For example, pharmaceutical

company Novartis crafted multiple partnerships with suppliers and manufacturers to develop, test,

and produce antimalaria medicine on a nonprofit basis. The partners included several Chinese

suppliers and manufacturing partners as well as a farm in Kenya that grows the medication’s key

raw ingredient. To date, the partnership, called the Novartis Malaria Initiative, has saved an

estimated 750,000 lives through the delivery of 300 million doses of the medication.“ASAP

Releases Winners of 2010 Alliance Excellence Awards,” Association for Strategic Alliance

Professionals, September 2, 2010, accessed September 20, 2010,

http://newslife.us/technology/mobile/ASAP-Releases-Winners-of-2010-Alliance-Excellence-

Awards.

Acquisitions

An acquisition is a transaction in which a firm gains control of another firm by purchasing its stock,

exchanging the stock for its own, or, in the case of a private firm, paying the owners a purchase price. In

our increasingly flat world, cross-border acquisitions have risen dramatically. In recent years, cross-

border acquisitions have made up over 60 percent of all acquisitions completed worldwide.

Acquisitions are appealing because they give the company quick, established access to a new market.

However, they are expensive, which in the past had put them out of reach as a strategy for companies in

the undeveloped world to pursue. What has changed over the years is the strength of different

currencies. The higher interest rates in developing nations has strengthened their currencies relative to

the dollar or euro. If the acquiring firm is in a country with a strong currency, the acquisition is

comparatively cheaper to make. As Wharton professor Lawrence G. Hrebiniak explains, “Mergers fail

because people pay too much of a premium. If your currency is strong, you can get a bargain.”“Playing

on a Global Stage: Asian Firms See a New Strategy in Acquisitions Abroad and at Home,”

Knowledge@Wharton, April 28, 2010, accessed January 15, 2011,

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2473.

When deciding whether to pursue an acquisition strategy, firms examine the laws in the target country.

China has many restrictions on foreign ownership, for example, but even a developed-world country

like the United States has laws addressing acquisitions. For example, you must be an American citizen

to own a TV station in the United States. Likewise, a foreign firm is not allowed to own more than 25

percent of a US airline.“Playing on a Global Stage: Asian Firms See a New Strategy in Acquisitions

Abroad and at Home,” Knowledge@Wharton, April 28, 2010, accessed January 15, 2011,

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2473.

Acquisition is a good entry strategy to choose when scale is needed, which is particularly the case in

certain industries (e.g., wireless telecommunications). Acquisition is also a good strategy when an

industry is consolidating. Nonetheless, acquisitions are risky. Many studies have shown that between

40 percent and 60 percent of all acquisitions fail to increase the market value of the acquired company

by more than the amount invested.“Playing on a Global Stage: Asian Firms See a New Strategy in

Acquisitions Abroad and at Home,” Knowledge@Wharton, April 28, 2010, accessed January 15, 2011,

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2473. Additional risks of acquisitions are

discussed in Chapter 9 "Exporting, Importing, and Global Sourcing".

New, Wholly Owned Subsidiary

The proess of establishing of a new, wholly owned subsidiary (also called a greenfield venture) is often

complex and potentially costly, but it affords the firm maximum control and has the most potential to

provide above-average returns. The costs and risks are high given the costs of establishing a new

business operation in a new country. The firm may have to acquire the knowledge and expertise of the

existing market by hiring either host-country nationals—possibly from competitive firms—or costly

consultants. An advantage is that the firm retains control of all its operations. Wholly owned

subsidiaries are discussed further in Chapter 9 "Exporting, Importing, and Global Sourcing".

Entrepreneurship and Strategy

The Chinese have a “Why not me?” attitude. As Edward Tse, author of The China Strategy:

Harnessing the Power of the World’s Fastest-Growing Economy, explains, this means that “in all

corners of China, there will be people asking, ‘If Li Ka-shing [the chairman of Cheung Kong

Holdings] can be so wealthy, if Bill Gates or Warren Buffett can be so successful, why not me?’ This

cuts across China’s demographic profiles: from people in big cities to people in smaller cities or

rural areas, from older to younger people. There is a huge dynamism among them.”Art Kleiner,

“Getting China Right,” Strategy and Business, March 22, 2010, accessed January 23, 2011,

http://www.strategy-business.com/article/00026?pg=al. Tse sees entrepreneurial China as

“entrepreneurial people at the grassroots level who are very independent-minded. They’re very

quick on their feet. They’re prone to fearless experimentation: imitating other companies here and

there, trying new ideas, and then, if they fail, rapidly adapting and moving on.” As a result, he sees

China becoming not only a very large consumer market but also a strong innovator. Therefore, he

advises US firms to enter China sooner rather than later so that they can take advantage of the

opportunities there. Tse says, “Companies are coming to realize that they need to integrate more

and more of their value chains into China and India. They need to be close to these markets,

because of their size. They need the ability to understand the needs of their customers in emerging

markets, and turn them into product and service offerings quickly.”Art Kleiner, “Getting China

Right,” Strategy and Business, March 22, 2010, accessed January 23, 2011, http://www.strategy-

business.com/article/00026?pg=al.

K E Y TA K E AWAY S

The five most common modes of international-market entry are exporting, licensing,

partnering, acquisition, and greenfield venturing.

Each of these entry vehicles has its own particular set of advantages and disadvantages.

By choosing to export, a company can avoid the substantial costs of establishing its own

operations in the new country, but it must find a way to market and distribute its goods in

that country. By choosing to license or franchise its offerings, a firm lowers its financial risks

but also gives up control over the manufacturing and marketing of its products in the new

country. Partnerships and strategic alliances reduce the amount of investment that a

company needs to make because the costs are shared with the partner. Partnerships are

also helpful to make the new entrant appear to be more local because it enters the market

with a local partner. But the overall costs of partnerships and alliances are higher than

exporting, licensing, or franchising, and there is a potential for integration problems between

the corporate cultures of the partners. Acquisitions enable fast entry and less risk from the

standpoint that the operations are established and known, but they can be expensive and

may result in integration issues of the acquired firm to the home office. Greenfield ventures

give the firm the best opportunity to retain full control of operations, gain local market

knowledge, and be seen as an insider that employs locals. The disadvantages of greenfield

ventures are the slow time to enter the market because the firm must set up operations and

the high costs of establishing operations from scratch.

Which entry mode a firm chooses also depends on the firm’s size, financial strength, and

the economic and regulatory conditions of the target country. A small firm will likely begin

with an export strategy. Large firms or firms with deep pockets might begin with an

acquisition to gain quick access or to achieve economies of scale. If the target country has

sound rule of law and strong adherence to business contracts, licensing, franchising, or

partnerships may be middle-of-the-road approaches that are neither riskier nor more

expensive than the other options.

E X E R C I S E S

(AACSB: Reflective Thinking, Analytical Skills)

1. What are five common international entry modes?

2. What are the advantages of exporting?

3. What is the difference between a strategic alliance and an acquisition?

4. What would influence a firm’s choice of the five entry modes?

5. What is the possible relationship among the different entry modes?