{"id":99,"date":"2015-07-29T21:06:32","date_gmt":"2015-07-29T21:06:32","guid":{"rendered":"https:\/\/courses.candelalearning.com\/intlbusx1xmaster\/?post_type=chapter&p=99"},"modified":"2017-01-09T19:18:17","modified_gmt":"2017-01-09T19:18:17","slug":"international-expansion-entry-modes","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/cerritos-internationalbusiness\/chapter\/international-expansion-entry-modes\/","title":{"raw":"Reading: International-Expansion Entry Modes","rendered":"Reading: International-Expansion Entry Modes"},"content":{"raw":"
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Learning Objectives<\/h3>\r\n
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  1. Describe the five common international-expansion entry modes.<\/li>\r\n\t
  2. Know the advantages and disadvantages of each entry mode.<\/li>\r\n\t
  3. Understand the dynamics among the choice of different entry modes.<\/li>\r\n<\/ol>\r\n<\/div>\r\n
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    The Five Common International-Expansion Entry Modes<\/h2>\r\nIn 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<\/span><\/span>, acquisitions, and establishing new, wholly owned subsidiaries, also known as greenfield ventures<\/span><\/span>. These modes of entering international markets and their characteristics are shown in Table 8.1 \"International-Expansion Entry Modes.\"[footnote]Shaker A. Zahra, R. Duane Ireland, and Michael A. Hitt, \u201cInternational Expansion by New Venture Firms: International Diversity, Mode of Market Entry, Technological Learning, and Performance,\u201d Academy of Management Journal<\/em> 43, no. 5 (October 2000): 925\u201350.[\/footnote]<\/span> 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.\r\n
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    Table 8.1 International-Expansion Entry Modes<\/th>\r\n<\/tr>\r\n
    Type of Entry<\/th>\r\nAdvantages<\/th>\r\nDisadvantages<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
    Exporting<\/td>\r\nFast entry, low risk<\/td>\r\nLow control, low local knowledge, potential negative environmental impact of transportation<\/td>\r\n<\/tr>\r\n
    Licensing and Franchising<\/td>\r\nFast entry, low cost, low risk<\/td>\r\nLess control, licensee may become a competitor, legal and regulatory environment (IP and contract law) must be sound<\/td>\r\n<\/tr>\r\n
    Partnering and Strategic Alliance<\/td>\r\nShared costs reduce investment needed, reduced risk, seen as local entity<\/td>\r\nHigher cost than exporting, licensing, or franchising; integration problems between two corporate cultures<\/td>\r\n<\/tr>\r\n
    Acquisition<\/td>\r\nFast entry; known, established operations<\/td>\r\nHigh cost, integration issues with home office<\/td>\r\n<\/tr>\r\n
    Greenfield Venture (Launch of a new, wholly owned subsidiary)<\/td>\r\nGain local market knowledge; can be seen as insider who employs locals; maximum control<\/td>\r\nHigh cost, high risk due to unknowns, slow entry due to setup time<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n
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    Exporting<\/h2>\r\nExporting 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.\r\n
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    Amusing Anecdotes<\/h3>\r\nOne 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\u2019s wish to market the product or service in a locally friendly fashion. While this may seem to be a simple task, it\u2019s often a source of embarrassment for the company and humor for competitors. David Ricks\u2019s 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<\/em>, which translates to \u201cused fresh milk,\u201d when it meant to brag of lait frais employ\u00e9<\/em>, or \u201cfresh milk used.\u201d The \u201cterrific\u201d pens sold by another company were instead promoted as terrifiantes<\/em>, or terrifying. In another example, a company intending to say that its appliance could use \u201cany kind of electrical current,\u201d actually stated that the appliance \u201cwore out any kind of liquid.\u201d And imagine how one company felt when its product to \u201creduce heartburn\u201d was advertised as one that reduced \u201cthe warmth of heart\u201d![footnote]David A. Ricks, Blunders in International Business<\/em> (Hoboken, NJ: Wiley-Blackwell, 1999), 101.[\/footnote]<\/span>\r\n\r\n<\/div>\r\nAmong 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\u2019s 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.\r\n
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    Ethics in Action<\/h3>\r\nCompanies 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.[footnote]Michael E. Porter and Mark R. Kramer, \u201cThe Big Idea: Creating Shared Value,\u201d Harvard Business Review<\/em>, January\u2013February 2011, accessed January 23, 2011, http:\/\/hbr.org\/2011\/01\/the-big-idea-creating-shared-value\/ar\/pr<\/a>.[\/footnote]<\/span>\r\n\r\nLikewise, 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.[footnote]Michael E. Porter and Mark R. Kramer, \u201cThe Big Idea: Creating Shared Value,\u201d Harvard Business Review<\/em>, January\u2013February 2011, accessed January 23, 2011, http:\/\/hbr.org\/2011\/01\/the-big-idea-creating-shared-value\/ar\/pr<\/a>.[\/footnote]<\/span>\r\n\r\n<\/div>\r\nFirms 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.[footnote]Andrew J. Cassey, \u201cAnalyzing the Export Flow from Texas to Mexico,\u201d StaffPAPERS: Federal Reserve Bank of Dallas<\/em>, No. 11, October 2010, accessed February 14, 2011, http:\/\/www.dallasfed.org\/research\/staff\/2010\/staff1003.pdf<\/a>.[\/footnote]<\/span> 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.\r\n\r\nBecause 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.[footnote]\u201cThe Euro,\u201d European Commission, accessed February 11, 2011, http:\/\/ec.europa.eu\/euro\/index_en.html<\/a>.[\/footnote]<\/span>\r\n\r\n<\/div>\r\n
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    Licensing and Franchising<\/h2>\r\nLicensing<\/span><\/span> 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.\"\r\n\r\n<\/div>\r\n
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    Partnerships and Strategic Alliances<\/h2>\r\nAnother 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\u2019s reputation in Japan for IT equipment and solutions while still retaining the Cisco name to benefit from Cisco\u2019s global reputation for switches and routers.[footnote]Steve Steinhilber, Strategic Alliances<\/em> (Cambridge, MA: Harvard Business School Press, 2008), 113.[\/footnote]<\/span> Similarly, Xerox launched signed strategic alliances to grow sales in emerging markets such as Central and Eastern Europe, India, and Brazil.[footnote]\u201cASAP Releases Winners of 2010 Alliance Excellence Awards,\u201d 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<\/a>.[\/footnote]<\/span>\r\n\r\nStrategic 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.\r\n\r\nThe disadvantages of partnering, on the other hand, are lack of direct control and the possibility that the partner\u2019s goals differ from the firm\u2019s 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: \u201cIt 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\u2019s profit by approximately half a million dollars over the life of the agreement.\u201d[footnote]David A. Ricks, Blunders in International Business<\/em> (Hoboken, NJ: Wiley-Blackwell, 1999), 101.[\/footnote]<\/span> Failing to consider the values or reliability of a potential partner can be costly, if not disastrous.\r\n\r\nTo 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.[footnote]Steve Steinhilber, Strategic Alliances<\/em> (Cambridge, MA: Harvard Business School Press, 2008), 125.[\/footnote]<\/span>\r\n\r\nJoint ventures are discussed in depth in Chapter 9 \"Exporting, Importing, and Global Sourcing.\"\r\n
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    Did You Know?<\/h3>\r\nPartnerships 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\u2019s 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.[footnote]\u201cASAP Releases Winners of 2010 Alliance Excellence Awards,\u201d 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<\/a>.[\/footnote]<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n
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    Acquisitions<\/h2>\r\nAn acquisition<\/span><\/span> 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, \u201cMergers fail because people pay too much of a premium. If your currency is strong, you can get a bargain.\u201d[footnote]\u201cPlaying on a Global Stage: Asian Firms See a New Strategy in Acquisitions Abroad and at Home,\u201d Knowledge@Wharton<\/em>, April 28, 2010, accessed January 15, 2011, http:\/\/knowledge.wharton.upenn.edu\/article.cfm?articleid=2473<\/a>.[\/footnote]<\/span>\r\n\r\nWhen 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.[footnote]\u201cPlaying on a Global Stage: Asian Firms See a New Strategy in Acquisitions Abroad and at Home,\u201d Knowledge@Wharton<\/em>, April 28, 2010, accessed January 15, 2011, http:\/\/knowledge.wharton.upenn.edu\/article.cfm?articleid=2473<\/a>.[\/footnote]<\/span>\r\n\r\nAcquisition 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.[footnote]\u201cPlaying on a Global Stage: Asian Firms See a New Strategy in Acquisitions Abroad and at Home,\u201d Knowledge@Wharton<\/em>, April 28, 2010, accessed January 15, 2011, http:\/\/knowledge.wharton.upenn.edu\/article.cfm?articleid=2473<\/a>.[\/footnote]<\/span> Additional risks of acquisitions are discussed in Chapter 9 \"Exporting, Importing, and Global Sourcing.\"\r\n\r\n<\/div>\r\n
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    New, Wholly Owned Subsidiary<\/h2>\r\nThe 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\u2014possibly from competitive firms\u2014or 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.\"\r\n
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    Entrepreneurship and Strategy<\/h3>\r\nThe Chinese have a \u201cWhy not me?\u201d attitude. As Edward Tse, author of The China Strategy: Harnessing the Power of the World\u2019s Fastest-Growing Economy<\/em>, explains, this means that \u201cin all corners of China, there will be people asking, \u2018If 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?\u2019 This cuts across China\u2019s 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.\u201d[footnote]Art Kleiner, \u201cGetting China Right,\u201d Strategy and Business<\/em>, March 22, 2010, accessed January 23, 2011, http:\/\/www.strategy-business.com\/article\/00026?pg=al<\/a>.[\/footnote]<\/span> Tse sees entrepreneurial China as \u201centrepreneurial people at the grassroots level who are very independent-minded. They\u2019re very quick on their feet. They\u2019re prone to fearless experimentation: imitating other companies here and there, trying new ideas, and then, if they fail, rapidly adapting and moving on.\u201d 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, \u201cCompanies 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.\u201d[footnote]Art Kleiner, \u201cGetting China Right,\u201d Strategy and Business<\/em>, March 22, 2010, accessed January 23, 2011, http:\/\/www.strategy-business.com\/article\/00026?pg=al<\/a>.[\/footnote]<\/span>\r\n\r\n<\/div>\r\n
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    Key Takeaways<\/h3>\r\n