The concepts of which mode of entry or legal structure is most conducive to a given business model for entering a foreign market.
DQ introduces the concepts of which mode of entry or legal structure is most conducive to a given business model for entering a foreign market.
The legal structure (exporting, licensing, joint-venture, or wholly-owned subsidiary) that a firm chooses to enter a foreign market has both advantages and disadvantages, which you will glean from your weekly readings. Also, in both the discussion forum and the application assignment you will be evaluating modes of entry strategies for Venezuelan Chocolate and Brazil’s Embraer.
Exporting
There are several Advantages:
Avoids the cost of establishing manufacturing operations.
May help achieve an experience curve and location economies.
There are several Disadvantages:
May compete with low-cost location manufacturers.
Possible high transportation costs.
Tariff barriers. There are duties and taxes when bringing goods into a country unless they come from within a trading agreement nation (as we discussed in week 2).
There is the possible lack of control over marketing reps.
Licensing
There are several Advantages:
Reduces the development costs and risks of establishing a foreign enterprise.
May be necessary when there is a lack capital for a venture and/or
The venture is in an unfamiliar or a politically volatile market.
This mode overcomes restrictive investment barriers which may be in force.
There are several Disadvantages:
Others can develop or copy the business applications of intangible property, (i.e., proprietary technology).
There is a total lack of control.
Cross-border licensing may be difficult.
You may in the long-term be creating a competitor in that same market
Joint-Ventures
There are several Advantages:
The foreign company benefits from local partner’s knowledge of the culture, laws, channels of distribution, and market intelligence.
There are shared costs/risks with a local partner.
There is reduced political risk due to the local partner’s insights and government connections
There are several Disadvantages:
There is the risk of giving control of technology and management know-how to a partner.
Shared ownership can lead to conflict and almost always does.
Wholly-Owned Subsidiaries
There are several Advantages:
There is no risk of losing proprietary technology or management know-how to a competitor.
The firm has a tight control of all operations.
The firm can realize a learning curve and location economies.
There are several Disadvantages:
The total capital is ‘put up’ by the firm and so it bears the full cost and takes 100% of the risk.
Trends – Modes of Entry
Smaller firms tend to export until they grow and can make a more sizeable financial commitment to a foreign market. Larger corporations are moving away from joint-ventures and more towards wholly-owned subsidiaries for the advantages listed above. Also, since there are now many experienced business professionals (many with MBA degrees) in most markets; it is much less costly to hire local nationals who have: an even better knowledge of the local market, government connections, speak the language, and fully understand the culture. A business can hire this expertise instead of giving away stock for this in-country intelligence and connections.
A good example of this is Starbuck’s decision beginning in 2003 to buy back all of the shares from it joint-venture partners in China. Why did Starbucks buy out its partners? First, Starbuck’s felt that their Chinese partners were not able to replicate the “customer experience” of being in a Starbucks which is a big part of their recipe for success and management know-how. Secondly, they felt that their partners were not providing transparency of the books in all cases. Starbuck originally chose joint-ventures as the mode of entry for China in order to gain a learning curve plus at the time in 1999 the Chinese government required that all foreign firms have a joint-stock partner.
Since global issues of managing an overseas business are so complex and dynamic, it is important for firms to continually monitor and measure their mode of entry models and be prepared to make changes as deemed appropriate for the continued success of the business.
With the above information please respond to-
Related to a product offering that would be considered a commodity, identify three (3) key variables that would impact your choice of entry strategies. Using specific examples, how might these variables impact your analysis?
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