CHAPTER 7

International Entry Strategies

LEARNING OBJECTIVES
At the end of this chapter, the reader should be able to:

1. Explain the three basic decisions before entering a foreign

market
2. Explain the different mode of entry and its advantages and
disadvantages.
3. Identify which mode of entry suits the best for a firm
WHERE To ENTER
the long-run profit potential of the firm

gain location advantage via demand and factor

condition of that selected country

firm's assessment on attractiveness of the market

(political, economy and technology environment, etc)

the related and supporting industries (supply chain

process: supplier, vendor, producer & customer)
WHEN To ENTER
also known as timing of entry

is the next step for a firm after it has identified the
attractive market

two significant issues:

1. becomes the first mover or
2. the late mover.
First Mover
Advantages:
1. first capture the demand
2. could gain cost advantage
3. retain the business due to the existing of the loyalty customers

Disadvantages:
1. cost that relate to the failure of the business
2. Unfamiliar of the market
3. business failure
4. marketing expenses to educate and to promote the products
5. change in the government policy on the foreign investment
HOW To ENTER
There are five different mode of entry to be chosen by
a firm:
1. Exporting
2. Licensing
3. Franchising
4. Joint ventures or strategic alliances
5. Wholly Owned Subsidiary
1. Exporting
Advantages of Exporting
1. A firm needs no substantial investment such as to set up
manufacturing plant in the foreign market.

2. Exporting is one the approach that can be used by a firm

evaluate the market and part of learning process to achieve
economies of scale.
1. Exporting (cont…)
Disadvantages of Exporting
1. Tariff barriers (i.e. import tax) and transportation costs increase
the price of the products into the foreign market.
2. Exporting is inappropriate when firm can identify low-cost
location to manufacture the product.
3. A firm needs to hire third party who act as the distributor to sell
the product and it may not perform the task efficiently as the
firm does at home country.
2. Licensing
is an agreement whereby a firm (i.e. licensor) grants the
intangible property rights to another parties (i.e. licensee) for a
specified period
includes patents, inventions, formulas, processes, designs,
copyrights, and trademarks.
Advantages of Licensing
1. A firm could minimize the cost and risk associated with foreign
market.
2. Suitable for a firm that is unwilling to commit substantial
investment into the foreign market.
3. Licensing is attractive for a firm that lacking of capital to
venture into foreign market.
2. Licensing (cont…)
Disadvantages of Licensing
1. A firm does not have the tight control over
manufacturing, marketing because the processes run
by the licensee.
2. The licensee could become the firm's competitor by
setting up its own operations.
3. Licensing limits a firm's ability to coordinate strategic
moves as it could be done if the firm has direct control
over the investment in the foreign market.
4. Licensing could result to potential loss of proprietary
or intangible property and technology and know-how
3. Franchising
is an extension of licensing
where a firm (franchiser) grants intangible property
rights to a local firm (franchisee)
Franchiser tightly controls the business system to
guarantee the customer a uniform and consistent
customer experience and product quality
E.g. KFC, McD, 7 Eleven, Secret Recipe etc.
3. Franchising (cont…)
 Advantages of Franchising
1. The costs of setting up business in foreign market
assume by the franchisee.
2. A firm can build a global recognition quickly and
assume low costs and risks.

 Disadvantages of Franchising
1. Franchising could jeopardize the quality standard
created by the franchiser and this could result to lost
sales.
2. Franchising inhibit the firm's ability to take profits out
of the host country.
4. Joint ventures or strategic
Alliances
the collaborative venture between firms, or
sometimes competitors across borders.

Strategic alliance: Two or more organizations

collaborate on a project for mutual gain

Joint venture: Partners share ownership of a new

enterprise
Joint ventures or strategic
Alliances (cont…)
 Advantages of Joint Ventures
1. Joint ventures could ease the process to enter
new market by collaborating with an established local
partner.
2. Firms that involve in joint ventures could share costs and
risks (i.e. minimize the business risks in new market).
3. Joint ventures develop complementary skills, whereby
firms can share their technology and know-how in order
to produce product that suit with the new market.
4. One could leverage on the local partner in creating brand
awareness among the consumers in the foreign market.
5. Partners could access the resources (i.e. tech, product,
capital), and this will result to economies of scale (i.e.
mass production with low production costs).
Joint ventures or strategic
Alliances (cont…)
 Disadvantages of Joint Ventures
1. Joint ventures creating the risks giving control of
technology to the partner.
2. Firms may not have the tight control over
subsidiaries.
3. Shared ownership can lead to conflicts due to
different views among the partners.
5. Wholly Owned Subsidiary
 is a traditional foreign direct investment
 a firm commits capital investment in plant and
related facilities in foreign market
 There have 2 ways set up of wholly owned
subsidiary:
1. Greenfield operation
2. acquisition
5. Wholly Owned Subsidiary
(cont…)
 Advantages of Greenfield operation
1. A firm acquires host country's resources in producing
its product
2. will result to economies of scale due increase in
production volume.
3. can protect firm's know-how and technology.
4. provides firm with learning effect in which
products would adapt to local taste and preference

 Disadvantages of Greenfield operation

1. sometimes slower to establish because the learning
process is time consuming.
2. bear the risks similar to the first mover
5. Wholly Owned Subsidiary
(cont…)
 Advantages of Acquisition
1. Acquisition provides firm with speedy market
penetration.
2. Gain access to existing market share.

 Disadvantages of Acquisition
1. A firm (i.e. acquiring firm) might pay the acquisition
transaction higher than acquired firm's fair value.
2. Acquisition will result to clash of cultures between the
acquiring and acquired firm.