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Firms can enter foreign markets through exporting licensing or franchising to host country firms a joint venture with a host country firm a wholly owned subsidiary in the host country to serve that market

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1. What are the methods a company can use to enter a foreign market (indirect exporting, exporting, franchising, licensing, manufacturing contract, wholly owned subsidiary, barter, counter trade, counterpurchase, etc.)?

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1) which market to enter, 2) When to enter those markets, and 3) on what scale.

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Three basic decisions firms must make when expanding internationally are

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an arrangement whereby a licensor grants the rights to intangible property to another for a royalty fee. Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks

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Licensing

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the firm does not have to bear the development costs and risks associated with opening a foreign market the firm avoids barriers to investment it allows a firm with intangible property that might have business applications, but which doesn't want to develop those applications itself, to capitalize on market opportunities

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Licensing is attractive when

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the firm doesn't have the tight control over manufacturing, marketing, and strategy necessary to realize experience curve and location economies the firm's ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another is compromised There is the potential for loss of proprietary (or intangible) technology or property

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Licensing is unattractive when

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a form of licensing in which the franchisor sells idea/concept and requires the franchisee agree to abide by strict rules as to how it does business

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Franchising

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because can avoid costs and risks of opening up a foreign market

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Franchising is attractive

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it may inhibit the firm's ability to take profits out of one country to support competitive attacks in another. The geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect

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Franchising is unattractive

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involve 100 percent ownership of the stock of the subsidiary

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Wholly owned subsidiaries

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set up a new operation in that country acquire an established firm

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Firms establishing a wholly owned subsidiary can

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they reduce the risk of losing control over core competencies they gives the firm the tight control over operations in different countries that is necessary for engaging in global strategic coordination they may be required if a firm is trying to realize location and experience curve economies

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Wholly owned subsidiaries are attractive because

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firms bear the full costs and risks of setting up overseas operations

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Wholly owned subsidiaries are unattractive because

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involve a contractor that 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.

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Turnkey Projects

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they allow firms to earn great economic returns from the know-how required to assemble and run a technologically complex process they are less risky in countries where the political and economic environment is such that a longer-term investment might expose the firm to unacceptable political and/or economic risk

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Turnkey Projects are attractive because

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The firm's process technology is a source of competitive advantage

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Turnkey projects are not attractive when

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an agreement between a manufacturer and a company that has developed a particular product. In this agreement the parties sets out the terms upon which the manufacturer will manufacture the product, the product to be manufactured, quantity, price and mode of delivery of the product. It will also specify about deliverables, ordering, inventory management, payment, shipping, product liability and refunds, termination and other liabilities of the parties.

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A manufacturing contract is

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for coordinating and overseeing a contract, is made between investors or owners of a project, and the hired management company. Computing management fees and the conditions and duration of the agreement is spelled out with any contributing methods.

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A management contract is an agreement

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the establishment of a firm that is jointly owned by two or more otherwise independent firms.

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A joint venture is

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a firm can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems the costs and risks of opening a foreign market are shared with the partner they can help firms avoid the risk of nationalization or other adverse government interference

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Joint ventures are attractive because

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the firm risks giving control of its technology to its partner the firm may not have the tight control over subsidiaries that it might need to realize experience curve or location economies shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time.

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Joint ventures can be unattractive because

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are quick to execute, enable firms to preempt their competitors, can be less risky than green-field ventures.

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Pros of Acquisitions are

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Many acquisitions are not successful. Sometimes firms pay too much for their acquisitions. Sometimes, the cultures of the two firms don't mesh well. A third problem that can cause an acquisition to fail occurs when attempts to realize synergies through the integration of the two firms run into roadblocks or take longer than anticipated. Inadequate pre-acquisition screening can also cause problems

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Cons of acquisitions are

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is the preferred mode of foreign market entry for high-tech firms that want to minimize the risk of losing control over its technological competence; and maintain tight control over its operations.

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A wholly owned subsidiary

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50/50, in which there are two partners and each partner holds an equal share.

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The most typical joint venture is:

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TRUE

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True or False? The choice of what foreign markets to enter should be driven by an assessment of relative long-run growth and profit potential

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FALSE

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True or False? Ultimately, the choice for foreign expansion must be based on an assessment of a nation's short-run profit potential.

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TRUE

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True or False? Although some markets are very large when measured by the number of consumers, businesses must also consider standards of living and economic growth.

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TRUE

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True or False? China and, to a less extent, India, while relatively poor, are growing so rapidly that they are attractive targets for inward investment.

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FALSE

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True or False? Preemptive advantages are the advantages frequently associated with entering a market early.

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TRUE

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True or False? An advantage of being a first-mover is the ability to build sales volume in a country and ride down the experience curve ahead of rivals.

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TRUE

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True or False? Pioneering costs are costs that an early entrant has to bear that a later entrant can avoid.

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FALSE

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True or False? A decision that is short-term in nature and is fairly easy to reverse is referred to as a strategic commitment.

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TRUE

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True or False? Early entrants can find themselves at a disadvantage if a subsequent change in a foreign country's regulations invalidates prior assumptions about the best business model for operating in that country.

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FALSE

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True or False? Large-scale entry is a way to gather information about a foreign market before deciding whether to enter on a significant scale and how best to enter.

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TRUE

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True or False? The risk-averse firm that enters a foreign market on a small scale may limit its potential loses, but it may also miss the chance to capture first-mover advantages.

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TRUE

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True or False? The liability of being foreign is increased by the absence of prior foreign entrants whose experience can be a useful guide.

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FALSE

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True or False? Entering s large developing nation such as China or India after most other international businesses in the firm's industry, and entering on a small-scale, will be associated with high levels of risk.

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TRUE

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True or False? One advantage to exporting is that it avoids the costs of establishing manufacturing operations in the host country.

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FALSE

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True or False? One disadvantage of wholly owned subsidiaries is that high transport costs can make it uneconomical, particularly for bulk products.

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TRUE

answer

True or False? The contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel in a turnkey project.

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TRUE

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True or False? A turnkey strategy is usually less risky than conventional FDI.

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FALSE

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True or False? Licensing gives a firm tight control over the manufacturing, marketing, and strategy that is required for realizing experience curve and location economies.

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FALSE

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True or False? In a typical international licensing deal, the licensor puts up most of the capital necessary to get the overseas operation going.

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TRUE

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True or False? A way to reduce the risks involved in licensing is to perform a cross-licensing agreement.

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TRUE

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True or False? Franchising is employed primarily by service firms, whereas licensing is pursued primarily by manufacturing firms.

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FALSE

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True or False? McDonald's is a good example of a firm that has grown by using a good licensing strategy.

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TRUE

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True or False? Quality control is one of the significant disadvantages of franchising.

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FALSE

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True or False? A franchise entails establishment of a firm that is jointly owned by two or more otherwise independent companies.

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TRUE

answer

True or False? One advantage of a joint venture is that a firm benefits from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems.

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TRUE

answer

True or False? Sharing of development costs and risks is one of the advantages of joint ventures.

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TRUE

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True or False? A firm that enters into a joint venture risks giving control of its technology to its partner.

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FALSE

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True or False? A joint venture gives a firm tight control over subsidiaries that it might need to realize experience curve or location economies.

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TRUE

answer

True or False? According to the text, Texas Instruments was engaging in global strategic coordination when it entered the Japanese semiconductor market.

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TRUE

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True or False? A disadvantage of joint ventures is that the shared ownership arrangement can lead to conflicts or battles for control between the investing firms if their goals and objectives change.

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TRUE

answer

True or False? One of the primary advantages of a wholly owned subsidiary is that it gives the firm tight control over operations in different countries that are necessary for engaging in global strategic coordination.

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TRUE

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True or False? When a firm's competitive advantage is based on technological competence, a wholly owned subsidiary will often be the preferred entry mode because it reduces the risk of losing control over that competence.

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FALSE

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True or False? A joint venture is required if a firm is trying to realize location and experience curve economies.

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TRUE

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True or False? Establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market from a capital investment standpoint.

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TRUE

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True or False? Licensing has low development costs and risks.

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FALSE

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True or False? Franchising has a lack of long-term market presence.

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TRUE

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True or False? Licensing has an inability to engage in global strategic coordination.

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FALSE

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True or False? If a firm's competitive advantage is based on control over technological know-how, licensing and joint-ventures should be encouraged.

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TRUE

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True or False? Over the past decade, between 50 and 80 percent of FDI inflows have been in the form of mergers and acquisitions.

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TRUE

answer

True or False? Overpayment for assets of an acquired firm is one reason acquisitions fail.

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C

answer

Which of the following is NOT a basic decision that a firm contemplating foreign expansion must make? A. Which markets to enter. B. When to enter new markets. C. How to withdraw from markets. D. Scale of entry into markets.

Chapter 13 Entry Methods – Flashcards

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