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CHAPTER 9
MARKET ENTRY AND EXPANSION
Chapter Outline
A. Stimuli to Internationalize
1. Proactive Stimuli
C. Going International
D. Export
1. Export Management Companies
2. Trading Companies
3. E-Commerce
E. Licensing and Franchising
Chapter Objectives
This chapter discusses on how firms continuously progress through a process of
internationalization. It highlights the benefits and repercussions of entering international markets.
Suggestions for Teaching
A good starting point in class is to ask students why a firm goes abroad. Surprisingly often, the
profit motive only emerges after some time. It is very useful to ask students then how firms can
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When discussing the usefulness or helpfulness of external agents to the internationalization
process, it is valuable to spend some time focusing the discussion on what is expected of different
external agents, and what their comparative advantage is in delivering on all of these
For both the topics of franchising and licensing, it is useful to pick several business activities and
present them to the class and suggest their internationalization. Taken together with foreign
market restrictions and different consumer needs abroad, students will quickly recognize barriers
to international expansion. Once this recognition has occurred, it should be counterbalanced by
demonstrating the successful licensing and franchising operations which exist (e.g., McDonald’s,
Coca-Cola, etc.) and by guiding the students in their discussion to understand the factors which
have made these organizations such a success and have ensured their longer-term survival (e.g.,
economies of scale, thorough understanding of customers, proprietary technology, etc.).
In discussing export intermediaries, students need to fully understand the difference between an
The issue of ownership can then be discussed with a special focus on the need for control. A
stepwise approach can be helpful to us here, focusing on the different marketing functions, and
then exploring with the students different corporate activities which are sensitive to control. What
should be continuously stressed is the fact that, initially at least, in a joint venture, all partners
have a great interest in making the venture a great success. However, the definition of success
may vary from partner to partner.
Chapter Summary
Exhibit 9.1 illustrates a model of international entry and expansion.
A. Stimuli to Internationalize
Exhibit 9.2 lists the major motivations to go international, differentiated into proactive
and reactive motivations. Proactive firms go international because they want to, while
reactive ones go international because they have to.
1. Proactive Stimuli
Profits provide the strongest incentive to become involved in international
marketing.
2. Reactive Stimuli
Here firms respond to changes and pressures in the business environment rather than
blaze new trails.
In reaction to competitive pressures, a firm may fear losing domestic market share to
competing firms or losing foreign markets permanently to new competitors.
Excess capacity can be a powerful motivation.
The stimulus of a saturated domestic market is similar to that of declining domestic
sales.
A final major reactive motivation is proximity to customers and ports.
In this context, the concept of psychological distance needs to be understood.
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Overall, the more successful international firms are motivated by proactive—that is,
firm-internal—factors. The motivations of firms do not seem to shift dramatically
over the short term but are rather stable.
B. Change Agents
Someone or something within the firm must initiate change and shepherd it through to
implementation. This intervening individual or variable is here called a change agent.
Change agents in the internationalization process are shown in Exhibit 9.3.
1. Internal Change Agents
The type and quality of management is key to a firm’s international activities.
Dynamic management is important when firms take their first international steps.
Over the long term, management commitment and management’s perceptions and
2. External Change Agents
The primary outside influence on a firm’s decision to go international is foreign
demand. Inquiries from abroad and other expressions of demand have a powerful
effect on initial interest in entering the international marketplace. Unsolicited
international orders are one major factor that encourages firms to begin exporting.
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D. Export
In some countries, more than a third of exporting firms commenced their export activities
within two years of establishment. Such start-up or innate exporters play a growing role
in an economy’s international trade involvement.
In most instances today, firms begin their operations in the domestic market. From their
home location, they gradually expand, and, over time, some of them become interested in
the international market. The development of this interest typically appears to proceed in
several stages, as shown in Exhibit 9.4.
In each one of these stages, firms are measurably different in their capabilities, problems,
and needs. Initially, the vast majority of firms are not even aware of the international
far from being committed to international marketing activities.
After some export activity, typically within two years of the initial export, management is
likely to conduct an evaluation of its export efforts. If a firm is disappointed with its
international performance it may withdraw from these activities. Alternatively, it can
continue as an experienced small exporter. Success can also lead to the process of export
• Firms that have reached the export adaptation phase are mainly strategy- and
service-oriented. They worry about longer-range issues such as service delivery
and regulatory changes.
Firms who choose to export their products may do so in a number of different ways:
1. Export Management Companies
Export management companies (EMCs) are domestic firms that perform
international marketing services as commissioned representatives or as distributors
for several other firms. They have two primary forms of operation:
2. Trading Companies
Today, the most famous trading companies are the sogoshosha of Japan. These
general trading companies play a unique role in world commerce by importing,
exporting, countertrading, investing, and manufacturing. Four major reasons have
been given for the success of the Japanese sogoshosha:
3. E-Commerce
Many companies increasingly choose to market their products internationally
through e-commerce, the ability to offer goods and services over the Web. The
growth of e-commerce has led to increased revenue for many companies. There are a
1. Licensing
Under a licensing agreement, one firm, the licensor, permits another to use its
intellectual property in exchange for compensation designated as a royalty. The
recipient firm is the licensee. The property might include patents, trademarks,
The rights conveyed are product or patent rights. Defining their scope involves
specifying the technology, know-how, or show-how to be included, the format, and
guarantees.
Compensation issues may be heavily argued. The licensor wants to cover:
• Transfer costs, which are all variable costs incurred in transferring
as exports or direct investment.
Compensation can take the form of running royalties, such as 5 percent of the
licensee sales, and up-front payments, service fees, and disclosure fees.
Licensee compliance in the agreement should address:
• Export control regulations
In franchising, a parent company (the franchiser) grants another, independent entity
(the franchisee) the right to do business in a specified manner. This right can take the
form of selling the franchiser’s products or using its name; its production,
preparation, and marketing techniques; or its business approach. The major forms of
exchange, and the bulk of the profit generated remains within the country.
One key franchising concern is the need for standardization, without which many of
the benefits of the transferred know-how are lost. Typically, such standardization
will include the use of a common business name, similar layout, and similar
production or service processes.
To encourage better-organized and more successful growth, many companies turn to
the master franchising system, wherein foreign partners are selected and awarded the
rights to a large territory in which they can subfranchise in turn. As a result, the
franchiser gains market expertise and an effective screening mechanism for new
franchises while reducing costly mistakes.
F. Foreign Direct Investment
Foreign direct investment (FDI) represents international investment flows that acquire
properties and plants. The international marketer makes such investments to create or
expand a long-term interest in an enterprise with some degree of control. Portfolio
investment in turn focuses on the purchase of stocks and bonds internationally. Portfolio
investment is of primary concern to the international financial community.
FDIs have grown rapidly.
1. Major Foreign Investors
The United Nations defines multinational corporations as “enterprises which own or
control production or service facilities outside the country in which they are based.”
2. Reasons for Foreign Direct Investment
• Marketing Factors: Marketing considerations and the corporate desire for
growth are major causes for the increase in FDI. Corporations attempt to
obtain low-cost resources and ensure their sources of supply. FDI permits
corporations to circumvent current barriers to trade and operate abroad as a
• Government incentives: Governments are under pressure to provide jobs for
their citizens. Foreign direct investment can increase employment and
income. Government incentives are mainly of three types:
o Fiscal: These are specific tax measures designed to attract the
not exist.
3. A Perspective on Foreign Direct Investors
Foreign direct investors, and particularly multinational corporations, are viewed with
a mixture of awe and dismay. Governments and individuals praise them for bringing
capital, economic activity, and employment and for transferring technology and
4. Types of Ownership
• Full Ownership: Many firms prefer to have 100 percent ownership.
Sometimes, this is the result of ethnocentric considerations based on the
belief that no outside entity should have an impact on management. To make
a rational decision about the extent of ownership, management must evaluate
firms reinvest into their foreign operations. Governments often believe that
transfer pricing mechanisms are used to amass profits in a place most
advantageous for the firm and that, as a consequence, local operations often
show very low levels of performance. By reducing the foreign control of
firms, they hope to put an end to such practices. Ownership can be limited
exercise over local operations. Equally important to the formation of
joint ventures are commercial considerations. Joint ventures can
pool resources and lead to a better outcome for each partner than if
they worked individually. Joint ventures also permit better
relationships with local organizations—government, local
profits are to be shared; these are typically the result of a lack of
communication and planning before, during, and after the formation
of the venture. In some cases, managers are interested in launching
the venture but are too little concerned with actually running the
enterprise. In other instances, managers dispatched to the joint
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Companies must carefully evaluate the effects of entering such a coalition,
particularly with regard to strategy and competitiveness. The most
successful alliances are those that match the complementary strengths of
partners to satisfy a joint objective. Often the partners have different
product, geographic, or functional strengths, which the alliance can build on
immediately available rather than built up, and management assistance in the
form of support services that would be difficult and costly to replicate
locally. Similar advantages exist for the supplier. The risk of participating in
an international venture is substantially lowered because no equity capital is
at stake.
Key Terms
Safety-valve activity: Stimulating export sales with short-term price cuts in order to balance
inventories or compensate for overproduction in the short term.
Psychological distance: The lack of symmetry between growing international markets with
respect to cultural variables, legal factors, and other societal norms; a market that is
geographically close may seem to be psychologically distant.
establishment.
Awareness: The stage in corporate export where a firm gains knowledge about its international
market opportunities.
Interest: The stage in corporate export where a firm shows attentiveness in its international
activities.
reduce the antitrust threat to joint export efforts.
E-commerce: The ability to offer goods and services over the Web.
Licensing: An agreement where one firm, the licensor, permits another to use its intellectual
property in exchange for compensation designated as a royalty.
Transfer costs: All variable costs incurred in transferring technology to a licensee and all
Foreign direct investment: It represents international investment flows that acquire properties
and plants. The international marketer makes such investments to create or expand a long-term
interest in an enterprise with some degree of control.
Portfolio investment: It focuses on the purchase of stocks and bonds internationally.
Resource seekers: Firms that search for either natural resources or human resources.
allowances, tax credits or rebates, special deductions for capital expenditures, tax holidays, and
other reductions of the tax burden on the investor.
Financial incentives: Offer special funding for the investor by providing land or buildings, loans,
loan guarantees, or wage subsidies.
Nonfinancial incentives: Consist of guaranteed government purchases; special protection from
objective.
Complementary strengths: When one firm’s strengths (product, geographic, or functional)
complement another firm’s strengths and satisfy a joint objective.
Piggyback: One firm making use of another firm’s strength, rather than joining that firm as
equals.
1. Why do firms enter the global market?
The major motivations for firms to go international are:
Proactive stimuli:
• Profit advantage
2. What is meant by the term “born global”?
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3. What relationship exists between governments and foreign investors? Why are foreign
investors important?
Students’ answers will vary.
4. Discuss the impact of the Internet and e-commerce in making a firm global.
Many companies increasingly choose to market their products internationally through e-
commerce, the ability to offer goods and services over the Web. The growth of e-commerce
has led to increased revenue for many companies. There are a variety of ways in which
5. Discuss the various advantages and disadvantages of full ownership versus joint ventures.
Full ownership:
Many firms prefer to have 100 percent ownership. Sometimes, this is the result of
ethnocentric considerations based on the belief that no outside entity should have an impact
on management.
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advantageous for the firm and that, as a consequence, local operations often show very low
levels of performance. By reducing the foreign control of firms, they hope to put an end to
such practices.
Ownership can be limited either through outright legal restrictions or through measures
percentage levels of ownership.
Equally important to the formation of joint ventures are commercial considerations. Joint
ventures can pool resources and lead to a better outcome for each partner than if they worked
individually. This is particularly the case when each partner has a specialized advantage in
areas that benefit the joint venture.
1. What programs does the Export-Import Bank (http://www.exim.gov) offers that specifically
benefit small businesses trying to export? What benefits can be derived from each?
Three programs offered by the Ex-Im Bank for small businesses are short-term export credit
insurance, working capital guarantee, and medium and long-term financing. Loan guarantees
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2. Use the United Nations Conference on Trade and Development FDI database (available
under the Statistics option at http://www.unctad.org) to research the foreign direct investment
profile of a country or region of your choice.
Foreign direct investment has clearly become a major avenue for international market entry