Foreign Entry Decision And Global Export Business. Foreing Market Decisions

Abstract

This paper examined issues surrounding foreign entry decisions. Essentially, the paper determined why and how a company makes a decision to enter a foreign market. The study was descriptive and data were sourced from various books, trade journals, publications and internet sites etc. The study revealed that foreign market entry strategy is an important strategic decision for international business units. The choice of foreign market entry strategy is to be made very cautiously as it has long-term implications and it cannot be easily reversed. The study found that the future growth of international business unit depends upon the right mode of entry into foreign market. As revealed in the study there are three main modes of entry into foreign market namely: Trade mode, investment mode and contractual entry mode. In trade route, the entry in foreign market is made through exports. In investment mode, the subsidiary units are set up in the foreign market. This mode is also called foreign direct investment mode. In contractual entry mode, technological collaboration agreements are made with the business units of host nation. In this mode, technical skills/managerial skills are provided by business unit in parent country to business units in host country. Besides these three main strategies for entry into foreign markets. The choice of the appropriate strategy depends upon various factors like availability of resources, level of risk, tariff and non-tariff barriers imposed by other nations, transportation cost, infrastructure facilities, vision of management, restrictions on inflow/outflow of foreign investment. A key conclusion in the study is that there are different motives for an entry on a foreign market. The different motives that are stated in the study have common denominator which is that they can all lead to increased profit in the long run. The study suggests that in order to make an effective foreign market entry decision, firms and international business practitioners should apply the foreign- market-entry-model. They should also highlight those factors that have been found to be of most importance while entering a foreign market.

Keywords: Foreign Entry Decision, Foreign market, International Business, Mode of Entry, Timing and Scale

Introduction

In recent years, foreign market entry has become increasingly popular. Entry decisions are also gaining attention from researchers of international business. Entering into a foreign market can potentially offer a firm many benefits in the global marketing area. The primary obstacle encountered by a firm when entering a foreign market is the selection of an entry mode. There are many decisions that need to be made when choosing to enter a foreign market. These decisions include which foreign markets to enter, when to enter them, on what scale, and the choice of entry mode (Narula & Verbeke, 2015).

All comprehensive foreign market entry strategies offer unique benefits and costs and no two specific firm’s entry strategies and results are the same. This review will look at various cases of foreign market expansion and seek to find if there is a best entry strategy. When deciding which foreign markets to enter, the choice is based upon an analysis of a nation’s long-run profit potential. Not all nations can offer the same profit potential to a firm and the potential is based on factors such as the economic and political environment of the country (Kotabe & Kothari, 2016).

The economic attractiveness of a country is comprised of the size and demographics of the market, the present and future wealth of the country, the living standards, and potential economic growth. A country’s attractiveness can also depend on the benefits, costs, and risks associated with doing business in that country. Costs and risks involved with conducting business in a foreign country are generally lower in countries that are economically advanced and politically stable which have a free market system with little inflation or private sector debt. However, the potential for growth may be greater in an undeveloped country (Yayla et al., 2018).

Lastly, the value an international business can create in a foreign market is another important factor. This is dependent on how suitable the product offering would be to that market and the nature of competition in the country. Entry in a foreign market will be successful, if the international business can offer the market a product that is not readily available and satisfies an unmet need. That value will offer the business the opportunity to charge higher prices and rapidly increase sales. Taking all of these factors into consideration, a firm should then rank countries based on their long-run profit potential and attractiveness (Porter, 1980).

Literature Review

Timing and Scale

After a firm has chosen an attractive market, the next decision to be made is the timing of entry. Entry is considered early, when an international business enters the market prior to other foreign firms and late when it enters after other firms have already established themselves in the market. Entering the market early brings first mover advantages that include the opportunity to establish a strong brand name, acquire demand from the market, increase sales volume, and create switching costs that attach a customer to a given product or service (Kotabe & Kothari, 2016).

However, entering the market early can bring pioneering costs that a firm that enters the market later may be able to avoid. Pioneering costs include the costs of promoting and establishing the product. The probability of a firm surviving in a market increases, if they enter after several other firms have already established the market. Government regulations can also put an early entrant at a disadvantage, because laws can hinder the value of the early entrant’s investment (Hill, 2013).

The next decision that needs to be made is the scale of entry and strategic commitments. Significant assets and resources are needed for a large scale foreign market entry, which commits a firm to the market. Strategic commitments alter the competitive playing field for other firms and produce various changes and inflexibility for the firm. Large scale market entry implies rapid entry and offers the first mover advantages, such as demand acquisition, scale economies, and switching costs.

An entry on a smaller scale allows the firm to build themselves up gradually while becoming better acquainted with the market and limiting exposure to the market. Small scale market entry can also make it difficult for the firm to increase market share, because of their lack of commitment to the market. The small scale entrant reduces potential risk but also misses out on the opportunity for first mover advantages (Porter, 1980).

Taking all of these considerations into mind, there are not right or wrong decisions for a firm to make. Each series of decisions offers unique rewards and benefits and costs and risks.

Entry strategies that are associated with high risk include entering into a developing nation and entering on a large scale. Such entry strategies offer many benefits as well. Entering on a large scale can offer first mover advantage and long-run potential in the market (Yayla et al., 2018).

Modes of Foreign Entry

There are six different modes of foreign entry: exporting, turn-key projects, licensing, franchising, establishing a joint venture with a host country firm, or establishing a wholly owned subsidiary in the host country. Each mode of foreign market entry offers various advantages and disadvantages (Root, 1994). Companies make choice of their strategy of foreign market penetration. The objectives of any international business inclined firms is to identify exporting company profile, to highlight the organization of marketing activities for exporting enterprises, to identify the areas of activity for exporting enterprises, to identify the main export markets of the exporters, to identify the international experience of the exporting companies, and to identify the type of strategy used for entry into foreign markets by exporting firms and testing the model for grouping strategies on the proposed foreign market penetration (Harangus & Duda, 2009).

Different companies grow globally by adopting different types of strategies of entering into foreign markets. Some companies even adopt different strategies for different nations. Various strategies of entering into foreign markets are discussed as follows:

(1) Exporting: Exporting is the most traditional way of entering into foreign market. Initially, a domestic business unit starts its international business by exporting to one nation. Gradually, it expands its exports to various nations. Exporting is very useful when a country has surplus production capacity i.e., its domestic consumption is less than its production capacity (Yayla et al., 2018).

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Figure 1: Foreign Market Entry Strategies/Decisions

Source: Hill, C. W. I. (2013). International business: Competing in the global marketplace. New York: McGraw-Hill Irwin.

(2) licensing and Franchising: In licensing business unit of one country (Licensor) allows the business unit of other country (Licensee) to use its technical know-how (patents, trademarks, copyrights, etc.). For this, licensor charges royalty from license for a stipulated period of time. In most of the nations, the rate of royalty ranges from 5 per cent to 8 per cent of sales. Licensing agreements enable the licensor to make maximum utilization of its intellectual property. Licensee, too, can avail the benefits of modern technology by entering into licensing agreement. Under franchising, business unit of one nation (Franchiser) grants right to do business in a particular manner to the business unit of other nation (Franchisee). This right can be with regard to selling the goods under the brand name of franchiser. In some cases, the key components are provided by franchiser to franchisee. In another form of franchising, the manufacturer may appoint dealers in other nations. For example, soft drink manufacturers like Pepsi and Coca-Cola provide the key part of their product, Le. syrup to their franchisee in other nations. The franchisees have their own bottling plants where they make soft drinks but they sell the same under the brand name of franchiser (Popli & Sinha, 2014).
(3) Contract Manufacturing: In this agreement, business unit of one nation enters into agreement with manufacturers of other nations to allow them to manufacture the goods at their own, but right to market these goods is retained by the parent foreign enterprise. Under such agreement, the parent foreign enterprise can expand its business to other nations without setting up its own manufacturing plant in other nations. If the parent enterprise feels that marketing in a particular nation is not much profitable, it can have easy exit from that nation as it has not set up its own production plant in other nation (Hill, 2013).
(4) Joint Ventures: It is a common strategy for getting an entry into foreign market. In joint venture, foreign partner makes an arrangement with local unit of other country in which ownership and management are shared by iocal unit and foreign partner. Local unit has thorough knowledge of domestic conditions and it has its local set-up and infrastructure like manufacturing unit, distribution network, service centres, etc.
(5) Management Contracting: In this arrangement, parent enterprise of one nation sets up management agencies. Through these management agencies, business units of other nations are managed without any stake in ownership/capital. It means the parent enterprise simply provides its managerial expertise to business units of other nations. For this, some fees in the form of percentage of profit or lump sum fee is charged by parent enterprise.
(6) Wholly Owned Subsidiaries: Some companies open wholly owned manufacturing units in other nations. These subsidiary companies are wholly owned by their parent company. MNCs prefer this route for globalization when they want to have complete control over manufacturing activities in other nations. Instead of entering into joint ventures, licensing, franchising, exporting, etc., they set up their own subsidiary units in different nations. MNCs have full ownership and control over these subsidiary units. For example, LG Electronics has set up LG India as its wholly owned manufacturing subsidiary unit (Kotabe & Kothari, 2016).

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