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Entering Developed and Emerging Markets
Table of Contents
Learning Objectives
Chapter Summary
Chapter Opening Activity
Chapter Outline
Opening Case: IKEA Entering India, Finally!
Introduction
Basic Entry Decisions
Entry Modes
Selecting an Entry Mode
Greenfield Venture or Acquisition?
End-of-Chapter Resources
Critical Thinking and Discussion Questions
globalEDGE™ Research Task
Closing Case: Cutco Corporation—Sharpening Your Market Entry
Continuous Case Concept
Additional Readings and Sources of Information
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Learning Objectives
13-2 Compare and contrast the different modes that firms use to enter foreign markets.
13-4 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy.
Chapter Summary
This chapter focuses on the basic market entry decisions for firms. The six most common foreign
entry strategies are discussed. These are: exporting, turnkey projects, licensing, franchising,
establishing a joint venture with a host country firm, and setting up a wholly owned subsidiary in
the host country. The advantages and disadvantages of each of these strategies are discussed.
Chapter Opening Activity
Ask students how they might sell mobile or cellular phones (the hardware, not the contractual
service) in Costa Rica. Tell them that Costa Rica has about 4.1 million people, a sprawling urban
area around the capital San José, and several secondary but much smaller cities in the mostly
rural provinces. The Costa Rican government owns and operates the landed telephone system,
and as a result of constraints and inefficiencies, demand for landlines has always exceeded
supply. Cell phones have “leap-frogged” landlines in countries like Costa Rica, and although
consumers’ willingness to pay may be lower than in more developed countries, people have
enthusiastically embraced cell phone usage as substitutes for land lines.
Using the Costa Rican example, ask the students to list the kinds of information (variables) they
need to know before they could make a sensible decision about selling cell phones designed in
the U.S. in that country. Keep in mind the criteria discussed in the chapter (i.e., product
suitability for international markets, distribution issues, managerial issues, market share issues,
country screening criteria, etc.). As students identify information, or variables, write them on the
board in categories (without titles).
After they have given you everything that they can, add “other” criteria by completing the lists
with the items discussed in the chapter. Then ask students to label or title each group using the
criteria. If they’ve paid attention and read the chapter, they may come close to identifying the
process and criteria.
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Chapter Outline
IKEA Entering India, Finally!
opening case
Summary
The opening case explores IKEA’s expansion into India. The Swedish retailer, renowned for its
ability to maintain its entire concept in multiple foreign markets, decided that India required a
different strategy. Despite its considerable experience operating in foreign markets, IKEA, aware
that India is one of the largest markets in the world, wanted to avoid missteps and so carefully
planned its expansion over five years, visiting some 200 homes in India and learning about the
Indian lifestyle. Today, the company has about 400 employees in India, a number it expects to
grow to 15,000 by 2025 as the company continues to expand its presence.
Discussion Questions
1. Why was it so important to IKEA that it understand the market in India? What made the
market different from other markets that IKEA operates in?
2. Can IKEA maintain its Swedish identity in India? Discuss.
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https://economictimes.indiatimes.com/industry/services/retail/ikea-says-namaste-to-indian-
customers-as–it-throws-open-its-first-store-in-hyderabad/videoshow/65340339.cms.
Introduction
A) This chapter is concerned with two closely related topics: the decision of which foreign
markets to enter, when to enter them, and on what scale; and the choice of entry mode.
B) There are several different options open to a firm that wishes to enter a foreign market,
including exporting, licensing or franchising to host country firms, setting up a joint venture with
a host country firm, or setting up a wholly owned subsidiary in the host country to serve that
market. Each of these options has advantages and disadvantages.
CONNECT
Decision Generator
Deciding How to Enter a Foreign Market
Summary
This activity focuses on the decisions firms make when they enter a foreign market. Firms must
decide which markets to enter, when to enter those markets, and on what scale.
Activity
Students are asked to respond to a series of questions related to market entry.
Class Discussion
International managers must understand and balance the tradeoffs involved in choosing which
markets to enter, when to enter them, and on what scale. Discuss factors that could impact these
tradeoffs.
Did You Know Video Clip
The video clip asks: “Did you know that increasingly more companies are born global?”
1. What’s a company that is “born global?”
2. How is that company different from a company that “becomes” global?
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3. Why is it easier for entrepreneurs to be “born global” today than it was, say, twenty years ago?
CONNECT
Video Case
Born Globals
Summary
This activity focuses on market entry decisions for international firms: which markets to entry,
when to enter, and on what scale.
Activity
Students are asked to watch a video on born globals and then respond to a series of questions
related to the video.
Class Discussion
Understanding the decisions regarding market entry is important for international managers.
Discuss why there are no “right” or “wrong” answers to the decisions.
Basic Entry Decisions
A) There are three basic decisions that a firm contemplating foreign expansion must make:
which markets to enter, when to enter those markets, and on what scale.
WHICH FOREIGN MARKETS?
Global Business Today Eleventh Edition Chapter 13
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C) Other things being equal, the benefit-cost-risk tradeoff is likely to be most favorable in the
case of politically stable developed and developing nations that have free market systems, and
where there is not a dramatic upsurge in either inflation rates or private sector debt. It is likely to
be least favorable in the case of politically unstable developing nations that operate with a mixed
or command economy or developing nations where speculative financial bubbles have led to
excess borrowing.
D) If an international business can offer a product that has not been widely available in a market
and that satisfies an unmet need, the value of that product to consumers is likely to be much
greater than if the international business simply offers the same type of product that indigenous
competitors and other foreign entrants are already offering.
Video Note: To explore the possible strategies for entering into a foreign market, consider
International Market Entry Strategies in the International Business Library at
http://bit.ly/MHEIBVideo. Click “Ctrl+F” on your keyboard to search for the video title.
Additionally, our McGraw-Hill Education International Business Video Library at
http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated
by key concept and major topic. Every new clip posted is supported by teaching notes and
discussion questions. Please feel free to leave comments in the library that you feel might be
helpful to your colleagues.
TIMING OF ENTRY
E) Once a set of attractive markets has been identified, it is important to consider the timing of
entry. With regard to the timing of entry, we say that entry is early when an international
business enters a foreign market before other foreign firms, and late when it enters after other
international businesses have already established themselves in the market.
F) There are several advantages frequently associated with entering a market early. These are
commonly known as first-mover advantages. One first mover advantage is the ability to pre-
empt rivals and capture demand by establishing a strong brand name. A second advantage is the
ability to build up sales volume in that country and ride down the experience curve ahead of
rivals. To the extent that this is possible, it gives the early entrant a cost advantage over later
entrants. This cost advantage may enable the early entrant to respond to later entry by cutting
prices below the (higher) cost structure of later entrants, thereby driving them out of the market.
A third advantage is the ability of early entrants to create switching costs that tie customers into
their products or services. Such switching costs make it difficult for later entrants to win
business.
G) It is important to realize that there can also be disadvantages associated with entering a
foreign market before other international businesses (these are often referred to as first-mover
disadvantages).
H) Pioneering costs are costs that an early entrant has to bear that a later entrant can avoid.
Pioneering costs arise when a business system in a foreign country is so different from that in a
firm’s home market that the enterprise has to devote considerable time, effort and expense to
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learning the rules of the game. Pioneering costs include the costs of business failure if the firm,
due to its ignorance of the foreign environment, makes some major mistakes. Pioneering costs
also include the costs of promoting and establishing a product offering, including the cost of
educating customers.
management FOCUS: Tesco’s International Growth Strategy
Summary
This feature describes Tesco’s international expansion strategy. Tesco, the British grocer, has
established operations in a number of foreign countries. Typically, the company seeks
underdeveloped markets in developing nations where it can avoid the head-to-head competition
that goes on in more crowded markets, and then enters those markets via joint ventures where the
local partner provides knowledge of the market while Tesco provides retailing expertise.
Discussion Questions
1. Reflect on Tesco’s decision to expand internationally primarily through establishing
operations in developing countries. What makes these countries attractive to Tesco?
2. Why does Tesco believe it is important to transfer its core capabilities to new ventures? How
have the company’s partners helped it find success in foreign locations?
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SCALE OF ENTRY AND STRATEGIC COMMITMENTS
I) Another issue that an international business needs to consider when contemplating market
entry is the scale of entry. Entering a market on a large scale involves the commitment of
resources to that venture. The consequences of entering on a significant scale are associated with
the value of the resulting strategic commitments. A strategic commitment is a decision that has a
long-term impact and is difficult to reverse. Deciding to enter a foreign market on a significant
scale is a major strategic commitment. Significant strategic commitments are neither
unambiguously good nor bad. Rather, they tend to change the competitive playing field and
unleash a number of changes, some of which may be desirable and some of which will not be.
J) Small-scale entry has the advantage of allowing a firm to learn about a foreign market while
simultaneously limiting the firm’s exposure to that market.
MARKET ENTRY SUMMARY
K) It is important to realize that there are no “right” decisions here, just decisions that are
associated with different levels of risk and reward.
management FOCUS: The Jollibee Phenomenon
Summary
This feature describes the remarkable success story of Jollibee. Jollibee, a fast food chain from
the Philippines, not only stood its ground when McDonald’s invaded its market in 1981, but it
also managed to find the weaknesses in the larger company’s global strategy and capitalize on
them. Jollibee, unlike McDonald’s, tailored its menu to the local market. The company built on
this localization strategy as it expanded into neighboring Asian countries and the Middle East.
Today, Jollibee has managed to find success in the United States, where it is being hailed as a
strong niche player and has begun to focus on options in mainland China and India.
Discussion Questions
1. How would Christopher Bartlett and Sumantra Ghoshal view Jollibee’s performance to date?
2. A key difference between McDonald’s global strategy and that of Jollibee is that McDonald’s
sees its path to success as offering a fairly standardized menu everywhere, whereas Jollibee
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views localization as its ticket to success. In your opinion, would Jollibee have achieved its
current position in the market if the company had standardized its menu like McDonald’s?
Most students will probably argue that Jollibee’s competitive advantage is that it offers fast food
tailored to local tastes, and that if the company pursued a standardized approach, it would have
failed. Students might note that McDonald’s global success with this strategy is due in part to the
fact that it is a symbol of America, and as such, offers an American experience in other markets.
Because Jollibee does not have this type of global reputation, it must look for alternative ways to
compete.
Teaching Tip: It is worth visiting Jollibee’s web page to see the American influence on the
company. Go to https://www.jollibee.com.ph/international to explore some of the company’s
foreign locations.
Lecture Note: To extend this discussion, consider exploring Jollibee’s recent international
expansion efforts at https://www.bworldonline.com/jollibee-ramping-up-global-store-expansion
and https://www.ft.com/content/1cdfd818-a9ca-11e8-89a1-e5de165fa619.
Entry Modes
A) These are six different ways to enter a foreign market: exporting, turnkey projects, licensing,
franchising, establishing joint ventures with host country firms, or setting up a new wholly
owned subsidiary in the host country. Each method has its advantages and disadvantages.
EXPORTING
B) Most manufacturing firms begin their global expansion as exporters and only later switch to
another mode for servicing a foreign market.
Teaching Tip: The U.S. government maintains a website providing U.S. companies with
detailed information on exporting. The site is available at https://www.usa.gov/import-export.
Students can click on the various topics to learn more about export financing, export plans,
dealing with risk, and so on.
Teaching Tip: Students may wonder how firms U.S. firms find buyers in foreign countries. To
find foreign customers, exporters often use ‘“trade leads” that are provided by organizations
dedicated towards the activity of matching “buyers” and “sellers” in an international context. An
example of a site that provides trade leads is the National Trade Data Bank at
https://www.wand.com/ntdb.
Advantages
C) Exporting avoids the often substantial cost of establishing manufacturing operations in the
host country. Exporting may also help a firm achieve experience curve and location economies.
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Teaching Tip: The SBA Office of International Trade offers export assistance to small
businesses. Students can learn more about the programs at the Small Business Association at
http://www.sba.gov.
Disadvantages
D) Exporting from the firm’s home base may not be appropriate if there are lower-cost locations
for manufacturing the product abroad. High transport costs can also make exporting
uneconomical, as can tariff barriers. Agents in a foreign country may not act in exporter’s best
interest.
TURNKEY PROJECTS
E) In a turnkey project, the contractor agrees to handle every detail of the project for a foreign
client, including the training of operating personnel. At completion of the contract, the foreign
client is handed the “key” to a plant that is ready for full operation, hence the term turnkey. This
is actually a means of exporting process technology to another country.
Lecture Note: Students might enjoy learning more about companies that identify themselves as
firms that engage in “turnkey projects.” One such company, Frigmaires Engineers,
http://www.feprojects.com, offers turnkey deals in India. A list of projects the company is
currently involved in is available, and you can click on various types of factories and get visuals
on each factory.
Advantages
F) The main advantage of turnkey projects is that they are a way of earning great economic
returns from the know-how required to assemble and run a technologically complex process.
Turnkey projects may also make sense in a country where the political and economic
environment is such that a longer-term investment might expose the firm to unacceptable
political and/or economic risk.
Disadvantages
G) First, the firm that enters into a turnkey deal will have no long-term interest in the foreign
country. Second, the firm that enters into a turnkey project may create a competitor. Third, if the
firm’s process technology is a source of competitive advantage, then selling this technology
through a turnkey project is also selling competitive advantage to potential and/or actual
competitors.
LICENSING
H) A licensing agreement is an arrangement whereby a licensor grants the rights to intangible
property to another entity (the licensee) for a specified time period, and in return, the licensor
receives a royalty fee from the licensee. Intangible property includes patents, inventions,
formulas, processes, designs, copyrights, and trademarks.
Advantages
I) In the typical international licensing deal, the licensee puts up most of the capital necessary to
get the overseas operations going. Thus, a primary advantage of licensing is that the firm does
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not have to bear the development costs and risks associated with opening a foreign market.
Licensing is often used when a firm wishes to participate in a foreign market but is prohibited
from doing so by barriers to investment. Licensing is frequently used when a firm possesses
some intangible property that might have business applications, but the firm does not want to
develop those applications itself.
Disadvantages
J) Licensing does not give a firm the tight control over manufacturing, marketing, and strategy
that is required for realizing experience curve and location economies. Competing in a global
market may require a firm to coordinate strategic moves across countries by using profits earned
in one country to support competitive attacks in another. Licensing severely limits a firm’s
ability to do this. A third problem involves the potential loss of proprietary (or intangible)
technology or property. One way of reducing the risk of losing proprietary trade secrets is
through the use of cross-licensing agreements. Under a cross-licensing agreement, a firm might
license some valuable intangible property to a foreign partner, but in addition to a royalty
payment, the firm might also request that the foreign partner license some of its valuable know-
how to the firm.
FRANCHISING
K) Franchising is basically a specialized form of licensing in which the franchisor not only sells
intangible property to the franchisee, but also insists that the franchisee agree to abide by strict
rules as to how it does business.
Advantages
L) The advantages of franchising as an entry mode are very similar to those of licensing.
Specifically, the firm is relieved of many costs and risks of opening up a foreign market and can
quickly build a foreign market presence.
Disadvantages
M) Franchising may inhibit the firm’s ability to take profits out of one country to support
competitive attacks in another. A more significant disadvantage of franchising is quality control.
The geographic distance of the firm from its foreign franchisees can make poor quality difficult
for the franchisor to detect.
JOINT VENTURES
N) A joint venture entails the establishment of a firm that is jointly owned by two or more
otherwise independent firms.
Teaching Tip: 1000ventures, available at
http://www.1000ventures.com/business_guide/jv_main.html, offers a wealth of information
about joint ventures.
Advantages
O) Joint ventures offer several advantages. A firm can benefit from a local partner’s knowledge
of the host country’s competitive conditions, culture, language, political systems, and business
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systems. When the development costs and/or risks of opening a foreign market are high, a firm
might gain by sharing these costs and/or risks with a local partner. In many countries, political
considerations make joint ventures the only feasible entry mode.
Disadvantages
P) Joint ventures also have some significant disadvantages. As with licensing, a firm that enters
into a joint venture risks giving control of its technology to its partner. A joint venture does not
give a firm the tight control over subsidiaries that it might need to realize experience curve or
location economies. Shared ownership arrangements can lead to conflicts and battles for control
between the investing firms if their goals and objectives change over time or if they take
different views as to what the venture’s strategy should be.
Lecture Note: To extend the discussion on joint ventures, consider exploring how to make them
more successful at https://www.forbes.com/sites/baininsights/2017/04/11/the-secrets-to–
successful-joint-ventures/#292564e938d1.
Lecture Note: To explore recent joint ventures in the news, consider
https://www.cnbc.com/joint-ventures.
Video Note: To explore Caterpillar’s example of a joint venture in China, consider Caterpillar
Joint Venture – China in the International Business Library at http://bit.ly/MHEIBVideo. Click
“Ctrl+F” on your keyboard to search for the video title.
WHOLLY OWNED SUBSIDIARIES
Q) In a wholly owned subsidiary, the firm owns 100 percent of the stock. Establishing a wholly
owned subsidiary in a foreign market can be done two ways. The firm can set up a new operation
in that country, or it can acquire an established firm and use that firm to promote its products in
the country’s market.
Advantages
R) Wholly owned subsidiaries offer three key advantages. First, when a firm’s competitive
advantage is based on technological competence, a wholly owned subsidiary will often be the
preferred entry mode, since it reduces the risk of losing control over that competence. A wholly
owned subsidiary gives a firm the tight control over operations in different countries necessary
for engaging in global strategic coordination (i.e., using profits from one country to support
competitive attacks in another). A wholly owned subsidiary may be required if a firm is trying to
realize location and experience curve economies.
Disadvantages
S) Establishing a wholly owned subsidiary is generally the most costly method of serving a