Chapter 15 ‒ Entering Developed and Emerging Markets
Entering Developed and Emerging Markets
Learning Objectives
• LO15-1: Explain the three
basic decisions that firms must
make when they decide on
foreign expansion: which
markets to enter, when to enter
those markets, and on what
scale.
• LO15-2: Compare the different
modes firms use to enter
foreign markets.
• LO15-3: Identify the factors
that influence a firm’s choice
of entry mode.
• LO15-4: Recognize the pros
and cons of acquisitions versus
This chapter is concerned with three closely related
topics: the decisions about which markets to enter,
when to enter those markets, and on what scale.
When a firm that wishes to enter a foreign market,
it has several options, 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 its advantages and each has its disadvantages.
Strategic alliances have become more frequent.
They may be seen as one way for firms to enter
into cooperative agreements between actual or
potential competitors. The term “strategic
alliances” is often used rather loosely to include a
wide range of arrangements between firms,
including cross-shareholding deals, licensing
arrangements, formal joint ventures, and informal
cooperative deals.
15
Chapter 15 ‒ Entering Developed and Emerging Markets
OUTLINE OF CHAPTER 15: ENTERING DEVELOPED AND
EMERGING MARKETS
Opening Case: Volkswagen, Toyota, and GM in China
Introduction
Basic Entry Decisions
Which Foreign Markets?
Management Focus: Tesco’s International Growth Strategy
Timing of Entry
Scale of Entry and Strategic Commitments
Market Entry Summary
Entry Modes
Exporting
Turnkey Projects
Licensing
Franchising
Joint Ventures
Wholly Owned Subsidiaries
Selecting an Entry Mode
Core Competencies and Entry Mode
Pressures for Cost Reductions and Entry Mode
Chapter 15 ‒ Entering Developed and Emerging Markets
CLASSROOM DISCUSSION POINT
OPENING CASE: Volkswagen, Toyota, and GM in China
Summary
The opening case describes the strategies of Volkswagen, Toyota, and GM in China. All
three companies count China as their most important market, and all three have entered
the country using the joint venture strategy required by China. Of the three, Toyota has
been in China the longest, beginning with its exports of trucks in 1936. Despite not
entering the market until 1978, Volkswagen’s success in China is evident. Sales of 4.2
million vehicles in China made Volkswagen the country’s top auto seller. With more the
58,000 employees in China, GM’s commitment to the market is clear. China has been
GM’s biggest market since 2012. Discussion of the case can begin with the following
questions:
QUESTION 1: China required Toyota, Volkswagen, and GM to form joint ventures with
state-owned companies in order to do business in China. Do you see any drawbacks for
the auto companies to this entry strategy? Did the automakers benefit from the joint
ventures?
ANSWER 1: Most students will probably point out that for Toyota, Volkswagen, and
GM there was likely little choice in the matter if they wanted to establish a presence in
China. China saw the foreign auto companies as a source of much needed knowledge.
QUESTION 2: Reflect on GM’s position as an American auto company with more sales
in China than in the United States. What does this tell you about the future of the global
auto industry?
Chapter 15 ‒ Entering Developed and Emerging Markets
ANSWER 2: China’s growing role in the global economy is clear in the auto industry.
Three foreign automakers, one from Japan, one from Germany, and one from the United
States now count China as their top market. Many students will agree that going forward,
we can expect to see a similar scenario in other industries and that we can expect that
QUESTION 3: Discuss the future of the global auto industry. How is the growing
awareness of global warming shaping the future of automobiles?
ANSWER 3: Following its emissions scandal, Volkswagen increased its commitment to
electric vehicles, promising to change its fleet completely by 2030. Many students will
agree that the combination of Volkswagen’s commitment to lower carbon emissions
together with China’s push for electrification and self-driving vehicles create a perfect
storm for a new direction in transportation. In a market that is rapidly growing, and has
many first-time buyers, sales of electric vehicles or self-driving cars could quickly out
pace sales of traditional models that rely on fossil fuels. China has been investing heavily
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The following provides a brief overview of each Power Point slide
along with teaching tips and additional perspectives.
Chapter 15 ‒ Entering Developed and Emerging Markets
Slides 15-3 ‒ 15-4 Introduction
Firms expanding internationally must decide which foreign markets to enter, when to
enter them, and on what scale; the choice of entry mode; and the role of strategic
alliances.
Slide 15-5 ‒ 15-8 Basic Entry Decisions
Which Foreign Markets?
The choice of foreign markets will depend on their long-run profit potential.
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.
Timing of Entry
Once attractive markets are identified, the firm must consider the timing of entry. Entry
is early when the firm enters a foreign market before other foreign firms, and late when
the firm enters the market after firms have already established themselves in the market.
First-mover advantages are the advantages associated with entering a market early.
First-mover disadvantages are disadvantages associated with entering a foreign market
before other international businesses. The costs associated with these disadvantages are
called pioneering costs.
Chapter 15 ‒ Entering Developed and Emerging Markets
Slides 15-9 ‒ 15-18 Entry Modes
The six entry modes are exporting, turnkey projects, licensing, franchising, joint ventures,
and wholly owned subsidiaries.
Exporting
Exporting avoids the costs of investing in a new location and may help achieve
experience curve and location economies. Exporting faces challenges from tariff barriers,
transportation costs, control over marketing, and local low-cost manufacturers.
Turnkey Projects
Turnkey projects allow a company to get a return on knowledge assets and are less risky
than conventional FDI. The disadvantages are that there is not long-term interest in the
location, the project may create a competitor, and if process technology is involved, the
firm may be selling a competitive advantage.
Licensing
A licensing agreement does not bear the costs and risks of investment and avoids
political/economic restrictions in a country.
Wholly Owned Subsidiaries
Wholly owned subsidiaries offer the most control and have the highest level of risk and
cost.
CONNECT
Click and Drag
Entry Mode Options
Summary
This activity focuses on the choice of how to enter a foreign market. Companies looking to enter
foreign markets can choose between exporting, turnkey projects, licensing, joint ventures,
wholly-owned subsidiaries, and franchising.
Chapter 15 ‒ Entering Developed and Emerging Markets
Activity
Students are asked to match advantages and disadvantages associated with the different entry
modes to the correct entry mode.
Slides 15-19 – 15-23 Selecting an Entry Mode
The optimal choice of entry mode involves trade-offs.
Core Competencies and Entry Mode
The optimal choice of entry mode for firms pursuing a multinational strategy depends to
some degree on the nature of their core competencies.
Pressures for Cost Reductions and Entry Mode
When pressure for cost reductions is high, firms are more likely to pursue some
combination of exporting and wholly owned subsidiaries.
CONNECT
Click and Drag
Selecting an Entry Mode
Summary
This activity focuses on market entry decisions for international companies. Firms can choose
from six possible entry modes, each of which has advantages and disadvantages.
Slides 15-24 – 15-28 Greenfield Venture or Acquisition?
Firms can establish a wholly owned subsidiary in a country through a greenfield strategy
(building a subsidiary from the ground up) or through an acquisition strategy.
Chapter 15 ‒ Entering Developed and Emerging Markets
Pros and Cons of Greenfield Ventures
Greenfield ventures allow the firm to build the subsidiary it wants, but it is slow, risky,
and may involve preemption by competitors. Acquisition is quicker, so it’s a
consideration if there are competitors ready to enter.
Which Choice?
In general, the choice will depend on the circumstances confronting the firm.
CONNECT
Decision Generator
Choosing Between Greenfield Ventures and Acquisitions
Summary
This activity focuses on the choice between greenfield ventures and acquisitions as a foreign
market entry mode. Each mode offers advantages and disadvantages.
Slides 15-29 ‒ 15-32 Strategic Alliances
Strategic alliances refer to cooperative agreements between potential or actual
competitors.
Advantages of Strategic Alliances
Strategic alliances facilitate entry into a foreign market, allow firms to share the fixed
costs (and associated risks) of developing new products or processes, bring together
complementary skills and assets that neither partner could easily develop on its own, and
can help a firm establish technological standards for the industry that will benefit the
firm.
Disadvantages of Strategic Alliances
Strategic alliances can give competitors low-cost routes to new technology and markets,
but unless a firm is careful, it can give away more than it receives.
Chapter 15 ‒ Entering Developed and Emerging Markets
strategic alliances. The organization is supported by a number of well-known global
companies and provides information on the involvement of the companies in strategic
alliances.
CONNECT
Case Analysis
Starbucks’ Foreign Entry Strategy
Summary
This activity focuses on international market entry and specifically on Starbucks’ foreign entry
strategy.
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: Review the Management Focus on Tesco, and then answer the following
questions:
a. Why did Tesco’s initial international expansion strategy focus on developing nations?
b. How does Tesco create value in its international operations?
c. In Asia, Tesco has a history of entering into joint venture agreements with local
partners. What are the benefits of doing this for Tesco? What are the risks? How are
those risks mitigated?
d. Tesco’s entry into the United States represented a departure from its historic strategy
of focusing on developing nations. Why do you think Tesco made this decision? How is
the U.S. market different from other markets Tesco has entered?
Chapter 15 ‒ Entering Developed and Emerging Markets
ANSWER 1:
a. Tesco’s global expansion strategy has been rather unique in the grocery industry.
Rather than competing head-to-head with established retailers in developed markets like
the United States and Western Europe, Tesco chose to pursue markets with strong growth
b. The keys to Tesco’s success in its international operations is its ability to spot markets
with strong underlying growth trends, identify existing companies in those locations that
have a deep understanding of the local market, form a joint venture with those companies
and transfer its expertise in the industry to the venture, and later buy the partner out. The
c. Tesco’s strategy of entering foreign markets via joint ventures has proven to be highly
successful. The company is able to bring its expertise in retailing as well as its financial
d. Most students will probably agree that Tesco’s initial entry into the crowded market in
QUESTION 2: Licensing propriety technology to foreign competitors is the best way to
give up a firm’s competitive advantage. Discuss.
ANSWER 2: The statement is basically correct—licensing proprietary technology to
foreign competitors significantly increases the risk of losing the technology. Therefore,
licensing should generally be avoided in these situations. Yet licensing still may be a
good choice in some instances. When a licensing arrangement can be structured in such a
way as to reduce the risks of a firm’s technological know-how being expropriated by
licensees, then licensing may be appropriate. A further example is when a firm perceives
Chapter 15 ‒ Entering Developed and Emerging Markets
QUESTION 3: Discuss how the need for control over foreign operations varies with
firms’ strategies and core competencies. What are the implications of the choice of entry
mode?
ANSWER 3: If a firm’s competitive advantage (its core competence) is based on control
over proprietary technological know-how, licensing and joint venture arrangements
should be avoided if possible so that the risk of losing control over that technology is
minimized. For firms with a competitive advantage based on management know-how, the
QUESTION 4: A small Canadian firm that has developed valuable new medical
products using its unique biotechnology know-how is trying to decide how best to serve
the European Union market. Its choices are given below. The cost of investment in
manufacturing facilities will be a major one for the Canadian firm, but it is not outside its
reach. If these are the firm’s only options, which one would you advise it to choose?
Why?
• Manufacture the products at home and let foreign sales agents handle marketing.
• Manufacture the products at home and set up a wholly owned subsidiary in
Europe to handle marketing.
• Enter into an alliance with a large European pharmaceutical firm. The product
would be manufactured in Europe by the 50–50 joint venture and marketed by the
European firm.
ANSWER 4: If there were no significant barriers to exporting, then the third option
would seem unnecessarily risky and expensive. After all, the transportation costs required
to ship drugs are small relative to the value of the product. The first two options would
expose the firm to less risk of technological loss and would allow the firm to maintain
much tighter control over the quality and costs of the drug. The only other reason to
Chapter 15 ‒ Entering Developed and Emerging Markets
CLOSING CASE: IKEA Entering India, Finally!
Summary
The closing 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
QUESTION 1: Did IKEA enter India too late in its evolution? The company started in
1943 and was already in 50 countries. Should operations in India have started sooner? If
you could decide for them, what other country markets would you have IKEA enter, and
why?
ANSWER 1: Many students will probably suggest that whether or not IKEA should have
entered the market in India earlier is irrelevant since it cannot be changed at this point.
Instead, students are likely to look at what IKEA can do now that it has entered India.
With its enormous market, India represents tremendous opportunity for growth. Yet, it is
also a market where there is little competition in the flat packaging furniture industry.
QUESTION 2: To prepare Indian customers’ mindsets before IKEA opened its first
store in 2018, the company unwrapped its first experiential center IKEA Hej (Hello)
Home close to the IT hub of Hyderabad as a way to ingratiate Hyderabad customers into
the IKEA model. How can this experiential model be used in other countries?
ANSWER 2: IKEA’s experiential center was a win-win for the company and its
customers in India. It allowed IKEA the opportunity to better understand the Indian
mindset and aesthetic, and it allowed customers a peek inside the flat pack furniture
Chapter 15 ‒ Entering Developed and Emerging Markets
QUESTION 3: Entry into India has been a fascinating journey for IKEA, and a deviation
from its normal Swedish-aligned business practices. Should IKEA become less Swedish
when entering new international markets, as they did in India, or should IKEA stay
Swedish as much as possible?
ANSWER 3: Responses to this question will vary by student, but many will agree that
IKEA should not change its identity. Since its inception, IKEA has sold its products in
more or less the same way across all of its markets. The store looks essentially the same,
the products sold within the store are essentially the same, and the message of good value
is more or less the same no matter whether visiting a store in Columbus, Ohio or a store
in Chengdu, China. Most students will likely suggest that IKEA needs to capitalize on its
MHE INTERNATIONAL BUSINESS VIDEO LIBRARY
Chapter 15 ‒ Entering Developed and Emerging Markets
CONNECT
Geography
Summary
This activity is designed to test the student’s knowledge of geography. Questions related to
chapter material are asked, requiring students to understand the topics and the locations of the
countries involved.
Activity
Students are asked to respond to a series of questions related to the geographic location of several
countries.
INCORPORATING globalEDGE™ EXERCISES
Exercise 1
Entrepreneur annually publishes a ranking of the top global franchises. Provide a list of
the top 25 companies that pursue franchising as their preferred mode of international
expansion. Study one of these companies in detail, and provide a description of its
business model, its international expansion pattern, desirable qualifications in possible
franchisees, and the support and training the company typically provides.
Exercise 2
The U.S. Commercial Service prepares reports known as the Country Commercial Guide
for countries of interest to U.S. investors. Utilize the Country Commercial Guide for
Russia to gather information on this country’s energy and mining industry. Considering
that your company has plans to enter Russia in the foreseeable future, select the most
appropriate entry method. Be sure to support your decision with the information
collected.
Answers to Exercises
Exercise 1 Answer
Search phrase: Top Global Franchises
Resource Name: Entrepreneur Magazine: Top Global Franchises
Chapter 15 ‒ Entering Developed and Emerging Markets
Additional Info:
Entrepreneur Magazine publishes two rankings of franchises, one for the United States
and one for International. The International one lists the top ranking 200 Franchise 500
companies that are seeking international franchisees. Each company listing includes an
overview of the company, as well as how much investment is required to open up a
franchise, what type of support is provided, and the type of financing available.
Exercise 2 Answer
Additional Info:
The Country Commercial Guides are detailed reports about each country in the world
drafted by U.S. Commercial Service specialists and commercial attachés responsible for
each of these markets. Each report is several hundred pages long and provides a detailed
economic overview of each market, as well as analysis of attractive sectors for U.S.
exporters, trade barriers they will face, appropriate market entry modes and successful
marketing and advertising strategies they can consider utilizing in those markets.