Chapter 13 – Entry Modes
CHAPTER 13
Entry Modes
Learning Objectives
LO 13-1 Explain the pros and cons of entering markets as a “market pioneer” versus being a “fast
follower.”
LO 13-2 Explain the international market entry methods.
LO 13-3 Identify why firms export and the options available for indirect and direct exporting.
LO 13-4 Explain the potential benefits and disadvantages of joint ventures and how a company might
exercise control over a joint venture, even as a minority shareholder.
NOTE:
International business statistics, data, and facts about countries, regions, governments, and companies can
change rapidly and dramatically. We recommend that you update this information regularly.
As an adopter of this text, McGraw-Hill offers you a complementary online resource each month, the
International Business Newsletter. The IB Newsletter gives you an array of timely and relevant articles,
videos, country profiles, teaching suggestions, and data resources to add breadth, depth, and richness to
the ever-changing topic of international business.
iGlobe is also a way to keep your courses current. In partnership with PBS, iGlobe is a free video
service for McGraw-Hill adopters that allows you to download breaking news videos onto your desktop
to show in class or online. Updated monthly, these streaming videos are complete with teaching notes and
discussion questions. Key concepts for each video are identified to save you time! Visit
www.mhhe.com/ball13e, or talk to your McGraw-Hill sales representative for more information about
iGlobe or the IB Newsletter.
Overview
This chapter explores market entry methods available to management when considering international
business. The reasons a firm goes abroad are linked to the desire to increase profit and sales or for other
competitive reasons, such as to attack a competitor in the competitor’s home market or to protect existing
13-1
Chapter 13 – Entry Modes
markets. Some companies begin their foreign entry by first exporting, then setting up foreign sales
companies and finally, when sales volume warrants, establishing foreign manufacturing. This incremental
approach is proactive yet cautious, requiring additional resources as the firm increases its level of
commitment.
The chapter opens with a discussion on how early entrants are not guaranteed success. A market pioneer
firm stands the best chance for long-term success in market-share leadership and profitability when: (1)
the new market is insulated due to high entry barriers and (2) the firm has sufficient size, resources and
competencies to take full advantage of its pioneering position. Fast followers that have larger resources
than pioneers can quickly reduce unit costs to offer lower prices.
There are times when a business may bypass exporting and become involved in foreign manufacturing.
When a business uses this approach, the alternatives available are establishing a wholly owned subsidiary,
joint ventures and strategic alliances.
Suggestions and Comments
1. This chapter is quite straightforward and descriptive.
2. Robert F. Hartley’s Marketing Mistakes and Successes and David Ricks’ Blunders in International
Business provide examples of marketing errors when firms have attempted to enter markets in the
international forum.
Student Involvement Exercises
1. If you have foreign students you can ask them to comment the ways a specific foreign product
entered their respective markets.
2. Franchising is a popular market entry mode for American chains. Ask students to compare foreign
franchised operations they may have visited with U.S. operations and comment on any observed
localization.
Guest Lecturers
1. A member of a multinational marketing team can provide some insight as to what mode the firm
decides to use when it enters new markets.
2. A member of the headquarters marketing staff can discuss the company policy with respect to
market entry.
Worldview
The focus of this Worldview explores “Joint Venture Challenges: Danone and Wahaha in China.”
The French multinational Group Danone SA entered China in the 1990s via a joint venture with the local
company Wahaha. Danone remained the majority owner in the relationship, which ultimately expanded to
a network of 39 different joint ventures between these two partners, but Danone had limited involvement
in day-to-day activities of the ventures. The ventures grew impressively, generating annual revenues of $2
billion after the initial 10 years of existence. Yet this partnership also evidenced challenges that ultimately
created a very negative relationship between the partners, created a very public level of acrimony, and
impacted Danone’s efforts to compete in the large and growing Chinese market. This excellent example of
some of the challenges of forming and running successful international joint ventures provides a very
13-2
Chapter 13 – Entry Modes
valuable foundation for classroom discussion. A vigorous discussion can ensue by asking questions such
as, “Why do you think the problems arose between Danone and Zong?,” “What are the implications of the
actions that each partner took after their agreement collapsed in 2007? What could the companies have
done to better manage their disagreements,” and “What might Danone have done to either avoid or reduce
the problems that occurred over the live of the JVs?”
Global Debate
The focus of this Global Debate explores the use of piracy as a means of entering foreign markets. While
piracy is usually viewed as something that companies will vigorously oppose in order to protect their
intellectual property, this Global Debate discusses how piracy can also positively impact the global
expansion of demand for a product, focusing specifically on the example of Japanese anime and
supplementing this discussion with examples of computer software and movies. The discussion suggests
that piracy may help to diffuse new products or technologies. Because this perspective of piracy as an
enabler of foreign market entry is a sharp contrast from typical discussions of piracy, an interesting
classroom debate can be facilitated by beginning with such questions as, “How can piracy help a
company to successfully, and profitably, enter foreign markets?” and “Consider the case of a small or
medium-sized company that was producing software or applications for use on cell phones. If you were
asked by this company to assist them in developing a strategy for using piracy as a means of entering
foreign markets, what advice would you give them regarding how to successfully develop and implement
such a strategy?” Further discussion may result from exploring the circumstances in which piracy would
inhibit, rather than help promote, the entry of products into foreign markets.
The Global Path Ahead
The focus of this The Global Path Ahead explores a student’s decision to pursue an active, international
career while still residing in a small rural town. It discusses Mark Haupt’s decision to maintain his home
base in the rural community that he had grown to love, yet to identify and exploit opportunities for
international travel and for extensive interaction with a network of international customers. The
discussion examines the approach that he has used to help enhance his international success, including
how he prepares in advance through research, how he alters his work hours in order to overlap with those
of his foreign clients, and how he addresses problems that have arisen. He provides several valuable
insights regarding how students might proceed in their own efforts to develop international opportunities
early in their careers. The Resources for Your Global Career section provides a range of useful suggested
websites for improving managers’ efforts to make good decisions regarding whether and how to enter
foreign markets.
Mini-Case, “Method of Entry – The Foley Company”
Although students will have various ideas regarding the options available to the Foley Company for
entering into Brazil, as well as the advantages and disadvantages of each, there is likely to be a larger
range of responses when it comes to recommendations on which option would be best (and why) and the
information that would be needed in order to proceed with market entry. Here is a listing of Joanne Poe’s
options, along with advantages and disadvantages of each.
I. Foley Company
A. Wholly owned subsidiary
13-3
Chapter 13 – Entry Modes
1. Start from ground up and build factory
2. Buy a company making products, which use about the same processes. Such a
plant could be converted albeit with a cost.
3. Purchase the distributor and expand facilities. The distributor already repairs
the combines so they must have a sizable machine shop and they certainly have
the marketing expertise
B. Form a joint venture
1. With the distributor
2. With the company making similar products
C. Licensing agreement
D. Contract manufacturing
II. Advantages and Disadvantages for each Option
A. Wholly owned subsidiary
1. Expensive (-)
2. Time Consuming (-)
3. Control (+)
4. Uncontrollable factors
i. Culture (-)
ii. Governmental (-)
iii. Legal (-)
5. Most Rewarding (+)
B. Joint Venture
1. Shared profits (-)
2. Shared risk (+)
3. Shared control (-)
4. Local partner helps smooth the way (+)
i. Politically
ii. Legally
iii. Culturally
5. Less Expense
C. Licensing Agreement
1. Easy to set up (+)
2. May be creating a competitor (-)
3. Lack of control (-)
4. May lose trade secrets (-)
D. Contract manufacturing
1. Similar to Licensing agreement in many ways
2. Control (+)
3. Must understand culture (-)
Joanne Poe would most likely recommend either purchase the Brazilian distributor or entry into a
joint venture with the distributor, since the Foley Company lacks marketing expertise in Brazil.
Before a wholly owned subsidiary is pursued, Osborne must check Brazilian laws to see if 100
percent foreign ownership is permitted (which it is) and if there are any tax incentives given to
joint ventures given to joint ventures when one partner is Brazilian.
Other questions to consider are as follows:
What is the market potential for peanut combines in Brazil? Is the crop size growing?
13-4
Chapter 13 – Entry Modes
What are the prices, levels of quality and acceptance in Brazilian market of competing
machines?
If peanut combines were to be produced in Brazil could they be exported? If so with
what countries does Brazil maintain free trade agreements?
Does the Brazilian government offer investment incentives?
Labor market issues – wage rates, unemployment rate and worker skill level.
Lecture Outline
Opening Section
The opening section describes market entry in the international social media sector, and the variation that
exists between major competitors pursuing globalized and more localized strategies.
I. Entering Foreign Markets: Should You Be a Market Pioneer or a Fast Follower?
A. Little evidence concerning the effect of the timing of entry into a new market and the firm’s
ultimate profitability in that market or the value it generates for shareholders.
B. A market pioneer firm stands the best chance for long-term success in market-share
leadership and profitability when:
1. the new market is insulated due to high entry barriers such as strong patent
protection, proprietary technology, or substantial investment requirements
2. the firm has sufficient size, resources and competencies to take full advantage of its
pioneering position
C. Fast followers can be successful when:
1. There are low entry barriers and the follower has sufficient resources or
competencies to overwhelm the pioneer’s early advantage
II. What Methods Are Available for Entering Foreign Markets?
There is a choice between equity or non-equity alternative entry modes.
A. Nonequity Modes of Entry – direct or indirect exporting
1. Exporting
a. Most firms begin their international involvement through exporting
b. Requires little investment
c. Relatively free of risks
d. Excellent means of getting a feel for international business without committing
great amounts of resources
2. Benefits of Exporting
a. allows firm to serve markets where it has no or limited production facilities
b. satisfies host government requirements that a local subsidiary has exports
c. helps to remain price competitive in home markets through lower cost foreign
sites
d. can test foreign markets and foreign competition inexpensively
e. can meet actual or prospective customer requests for the firm to export
f. can offset cyclical sales in the domestic market
g. can achieve additional sales, use excess production capacity, and lower per-unit
fixed costs
13-5
Chapter 13 – Entry Modes
h. can extend a product’s life cycle to exporting to currently unserved markets at
earlier stages of the life cycle
i. can respond strategically to foreign competitors that are in a firm’s home market
by entering the foreign competitor’s home market
j. can achieve the success that other firms have achieved through exports
k. can improve efficiency of manufacturing equipment utilization
3. Indirect Exporting
a. Indirect exporting is simpler than direct exporting because it requires neither
special expertise nor large capital expenditures.
b.Exporters that sell for the manufacturer ’ agents based in the country receiving
the goods will do the work of selling or distribution of the goods. Exporters’
agents are called many things.
i. Exporters that sell for the manufacturer – including manufacturers’
export agents, export management companies (EMCs), and
international trading companies.
ii. Exporters who buy for their overseas customers – export commission
agents.
iii. Exporters who purchase and sell for their own accounts – including
export merchants, cooperative exporters (also called piggyback
exporters), and Webb-Pomerene Associations
iv. Exporters that purchase for foreign users and middlemen – including
large foreign firms which use the goods in their overseas operations,
and export resident buyers.
c. Drawbacks of indirect exporting – a simple method as compared to direct
exporting but that simplicity comes at a price.
I. Indirect exporters pay a commission to the first three kinds of
exporters mentioned earlier.
II. Foreign business can be lost if exporters agents decide to change their
sources of supply.
III. Indirect exporters gain little experience from these transactions. It is
important to note that the indirect export loses some control over the
marketing mix when the international manager employs the services
of an exporting agent.
4. Direct Exporting
a. To engage in direct exporting, someone within the firm handles the export
business.
b. Its simplest form is to give someone in the business the responsibility for
exporting. Domestic employees may handle billing, credit, and shipping initially,
and if business expands, a separate export department may be established.
c. If a firm that has been exporting to wholesaler importers in an area and servicing
them from the home country, business managers may decide to set up a sales
company once business will support this arrangement.
i. Sales company is an arrangement in which a company will import in its
own name from the parent and will invoice in the local currency.
ii. A sales company may employ the same channels of distribution but the
new organization may permit the use of a more profitable arrangement.
iii. Internet has made direct exporting much easier.
5. Distribution options for direct exporters
a. If a firm chooses to do its own exporting but not directly handle distribution in
the market it is exporting to, it has four basic options for overseas middlemen
13-6
Chapter 13 – Entry Modes
I. Manufacturers agents – independent sales representatives that combine
functions of agent and wholesale distributor but do not assume financial
responsibility for the imported product
II. Distributors (wholesale importers) – independent importers that buy for
their own account for resale
III. Retailers – frequently act as direct importers, especially for consumer
products
IV. Trading companies – firms that develop international trade and serve as
intermediaries between foreign buyers and domestic sellers
6. Turnkey Projects
a. Involve exporting technology, management expertise, or capital equipment.
b. Contractor designs and builds plant and supplies process technology, raw
materials, and trained personnel.
c. After trial run, facility ownership goes to purchaser.
d. Another turnkey project supplier is a manufacturer of a factory.
7. Licensing
a. Licensing is an agreement in which the licensor grants the licensee the right to
use any kind of expertise, such as manufacturing processes, marketing
procedures, and trademarks for one or more of the licensor’s products.
b. For a fixed sum and annual 2%-5% percentage of sales (royalty).
8. Franchising is a form of licensing.
a. This arrangement allows the franchisee to sell products or services under a highly
publicized brand name and a well-proven set of procedures with a carefully
developed and controllable marketing strategy.
b. This arrangement is most common in service industries.
9. Management Contract:
a. Arrangement under which company provides managerial know how to another
party in some or all functional areas.
b. Fee is 2-5% of sales.
10. Contract Manufacturing
a. Contract manufacturing can be used as a means of entering a foreign market
without investment in plant facilities.
i. Firm contracts with a local manufacturer to produce products for it
according to specifications.
ii. The firm’s organization markets the products under their own brand.
iii. Second method is to subcontract assembly work or the production of
parts to independent companies overseas.
B. Equity-Based Modes of Entry
When management does decide to make a direct investment in a foreign country they have
several options.
Wholly owned subsidiary
Joint Venture
Strategic Alliances
When management is determined to make a direct investment, each option above has certain
advantages and disadvantages.
1. Wholly Owned Subsidiary
a. When a company wishes to make a direct foreign investment, they may undertake
any of the following strategies.
i. Build new plant from ground up (Greenfield investment)
13-7
Chapter 13 – Entry Modes
ii. Acquire a going concern
iii. Purchase its distributor
b. Wholly owned subsidiaries are preferred method of investment since they allow the
business ultimate control over the product.
c. It is interesting to note that when international firms invest in the United States they
have historically preferred to acquire a going concern. This gives the business instant
access to the market rather than going through the long and sometimes complex
process of building a wholly owned subsidiary from the ground up.
d. In some cases, government may not allow creation or acquisition of a wholly owned
subsidiary.
2. Joint Venture
a. A cooperative effort among two or more organizations that share common interest in
a business enterprise or undertaking.
b. A joint venture may be:
i. a corporate entity formed by an international company and local owners
ii. a corporate entity formed by two international companies for the purpose of doing business in a
third market
iii. a corporate entity formed by a government agency and an international firm, or
iv. a cooperative undertaking of a limited duration between two or more firms.
3. Benefits of Joint Ventures
i. Reduced risk and competition or increased scale economies
ii. Conform with government regulations for local participation
iii. Strong Nationalism – nationalistic sentiment may cause the foreign firm
to enter into a joint venture with a local partner in an effort to blend into
the local market.
iv. Expertise, tax, and other benefits – Businesses may enter a joint venture
for other reasons: acquire expertise that is lacking, access special tax
benefits, reduce investment risk, or meet need for additional capital and
experienced personnel.
4. A Disadvantage of joint ventures: Loss of Control – Joint ventures present many
advantages but have many disadvantages.
i. One disadvantage is sharing of profit.
ii. Can limit ability to achieve efficient allocation of investments and
production and to maintain a coordinated marketing plan worldwide
iii. Some international businesses fear their joint venture partner (or the joint
venture) may become a competitor in the future.
5. Control of joint venture though management contracts – Local laws may require local
majority ownership in an effort to give control of the joint venture to their own citizens.
6. Other Options for Exercising Control in Joint Ventures – Control with a minority
ownership may be feasible.
i. Supermajority voting requirements
ii. Maintaining the right to appoint or approve key managerial positions
iii. Splitting control of the venture so each partner may have primary
influence over certain key activities
iv. Control over or participation in the design and implementation of
performance appraisal and reward systems for top management and other
joint venture personnel.
13-8
Chapter 13 – Entry Modes
7. Strategic Alliance
a. Faced with both expanding global competition and growing cost of research, product
development, and marketing, and the need to move faster in carrying out their global
strategies, many firms are forming strategic alliances.
b. The goal of a strategic alliance is to achieve faster market entry and start-up; gain
access to new products, technologies, and markets; and share costs, resources, and
risks.
i. Companies wanting to share technologies may cross-license their
technology.
ii. If the goal is to pool research and design resources, they may form an
R&D partnership.
c. Alliances May Be Joint Ventures.
d. Pooling versus Trading Alliances – Differences between a trading alliance and a
pooling alliance. Pooling alliance is driven by similarity and integration, while
trading alliances are driven by the logic of contributing dissimilar resources.
e. Alliances versus Mergers and Acquisitions – Typically mergers and acquisitions are
not considered alliances, although alliances, mergers and acquisitions may be ways
for firms to acquire new technology
f. Future of Alliances – Many alliances fail or are taken over by one of the partners.
13-9