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Entry Modes
and
Barriers in
International
Business
Presented by :Bhoomika
MBA 3rd Semester
02911403913
Meaning
Entry Strategy
To seek lower
production factor costs
Economies
of Scale
Economies
of Scope
To exploit proprietary
assets
Scale of entry
Small scale: Establish a foothold to learn
Large scale: Acquire first mover advantage
Entry Decision
depends upon
Mode
Some modes have more flexibility embedded
Some modes reduce resource requirements
Pioneers
Can gain and maintain competitive edge in
new market
Overall pioneers may not perform as well in
the long run as followers
Followers
Many become followers by default
May be advantage to let pioneer take initial risks
Entry modes
Choice of Market
Entry Mode
Exports
Licensing
Franchising
Wholly Owned
1) Acquisition
2) Green Field
Turnkey Projects
Joint Ventures
Exports
HOME COUNTRY
HOST COUNTRY
Revenues
MNE
Customers
Export of Goods
Exports
Advantages
Low initial investment
Reach customers quickly
Complete control over
production
Benefit of learning for
future expansion
Disadvantages
Potential costs of trade
barriers
Transportation cost
Tariffs and quotas
Licensing
HOME COUNTRY
HOST COUNTRY
Licensing of Technology
MNE
Local Firm
Fees and Royalties
Licensing
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
Examples
Franchising
HOME COUNTRY
HOST COUNTRY
Brand Name, Strategies,
Advertising and Training
MNE
Local Firm
Initial Fees
and Royalties
Local Firm
Local Firm
Franchising
Advantages
International standardization
Reduces risk
Recognized brand name and
trade mark
Recognized relationship
with suppliers
Disadvantages
Restriction on running a
business
Other franchises might give the
brand a bad name
Initial cost is high
Franchising
Wholly Owned
Subsidiaries
A wholly owned subsidiary includes two types of
strategies:Acquisition
Greenfield Investments
To decide which entry modes to use is depending on
situations.
Acquisition
HOME COUNTRY
MNE
HOST COUNTRY
100%
Investment
Profit
Local Firm
Acquisition
Advantages
Access to targets local
knowledge
Control over foreign
operations
Control over own
technology
Disadvantages
Uncertainty about targets
value
Difficulty in absorbing
acquired assets
Infeasible if local market for
corporate control is
underdeveloped
Examples
Green Field
Investments
HOME COUNTRY
HOST COUNTRY
MNE
Profit
Investment
New Subsidiary
Company
Green Field
Advantages Investments
Disadvantages
Normally feasible
Avoids risk of
overpayment
Avoids problem of
integration
Still retains full control
Slower startup
Requires knowledge of
foreign management
High risk and high
commitment
Example
Turnkey Projects
HOME COUNTRY
HOST COUNTRY
Contractor Fees
MNE
Local Firm
Profit
Technological Inputs
and Training
Personnel
Acquire
Turnkey
Project
Turnkey Projects
Advantages
They allow firms to earn great
economic returns from the
know-how required to assemble
and run a technologically
complex process.
They are less risky in short
term
Disadvantages
Selling competitive
advantage
No long term interest in the
foreign country
create competitors
Examples
Gactel Turnkey Projects Limitied
1) North Delhi Power Limited - RCC Induced Draft Cooling
Tower
2) Indian Oil Corporation Limited - Cooling Water System
(EPCC - 5)
Novatech Projects India Pvt. Ltd. - Process Equipment
Manufacturer
1) Asian Paints
2) BELGIUM (Petrochemical) - DOW Chemical Intl. Ltd.
Joint Venture
HOME COUNTRY
HOST COUNTRY
MNE
Local Firm
Share of
Profit
Joint Venture
Company
Inputs
Inputs
Share of Profit
Joint Venture
Advantages
Disadvantages
Examples
AUTOMOBILES
COMPANIES AND THEIR
MODE OF ENTRY IN
A close look at the entryINDIA
strategies of the multinational
companies in the Indian automobile industry points to some
distinct patterns.
Except for Audi, which is targeting a premium market niche,
and Hyundai,
The rest of the companies have set up joint ventures with
Indian partners.
Risk
Return
Control
Modes of entry
Exporting
Contractual
Agreement
Joint
Venture
Acquisition
Greenfield
Investments
Risk
Low
Low
Moderate
High
High
Return
Low
Low
Moderate
High
High
Control
Moderate
Low
Moderate
High
High
Integration
Negligible
Negligible
Low
Moderate
High
Trade Barriers
Trade barriers are government-induced restrictions
on international trade.
There are two types of trade barriers:
Trade Barriers
Tarif
Non
Tarif
Tarif
Tarif barriers
Taxes and duties imposed on the goods and
services imported and exported
Custom duties
Import duty
Specific duty- per unit of the product
Valorem duty- % of the value of the product
Compound duty- combines both
Quantity of goods
Import
Export
Transit
Volume of goods
Value
Quantity
Combined
Advantages
Protect
domestic
industry
Revenue for
government
Jobs are saved in
home
Demand for domestic
products
Disadvantages
High
price for
imported products
Loss of demand in
exporting country
Crashes between
import and export
country
Types of Non-Tarif
Barriers
1.
Quantitative restriction
Imported quota (maximum limited)
VER (bilateral agreement b/w two country)
2.
For-ex control
Blocked a/c
Payments to foreign country is given to the
government of that country and cant be changed to other
currency but can purchase from
home country
3.
Fiscal barriers
Anti-dumping duties
Dumping selling the product to host country cheaper
Countervailing duties
Products exported to host country very cheaper due
to subsidies provided by exporting countries
4.
Subsidies
Like low rate of interest on financing and raw materials
5.
Technical Barriers
Like trade in health and safety regulations, sanitary
regulations ,quality standards and packing and labeling
and technical standards. Government puts certain
standards to delay and increase the cost of those
products.
6.
State Trading
Government only accepts suppliers or provides tenders
to domestic firms even though the tender rate of
domestic firm is high relatively then foreign firm.
Protecting Consumers
A government may levy a tariff on products that it feels could endanger its
population. For example, South Korea may place a tariff on imported beef
from the United States if it thinks that the goods could be tainted with
disease.
Infant Industries
The use of tariffs to protect infant industries can be seen by the
Import Substitution Industrialization (ISI) strategy employed by
many developing nations. The government of a developing economy
will levy tariffs on imported goods in industries in which it wants to
foster growth.
National Security
Barriers are also employed by developed countries to protect certain
industries that are deemed strategically important, such as those
supporting national security. Defence industries are often viewed as
vital to state interests, and often enjoy significant levels of
protection.
Retaliation
Countries may also set tariffs as a retaliation technique if they
think that a trading partner has not played by the rules. For
example, if France believes that the United States has allowed
its wine producers to call its domestically produced sparkling
wines "Champagne" (a name specific to the Champagne
region of France) for too long, it may levy a tariff on imported
meat from the United States. If the U.S. agrees to crack down
on the improper labelling, France is likely to stop its
retaliation. Retaliation can also be employed if a trading
partner goes against the government's foreign policy
objectives.
Barriers hindering
export
initiation
Insufficient finances
Lack of productive
Insufficient knowledge
Lack of foreign market
connections
Lack of export
commitment
Lack of capital
capacity
Lack of foreign channels
of distribution
Management emphasis
on developing domestic
markets
Cost escalation
Thank You!