1. StudsPlanet
Leading Education consultant in India
www.StudsPlanet.com

2. Foreign Market Entry StrategiesForeign Market Entry Strategies
Ruth V. AguileraRuth V. Aguilera

3. World Market
Principal Motives for Int’l ExpansionPrincipal Motives for Int’l Expansion
Locations
Economies
Economies
of Scale
Economies
of Scope
To seek lower
production factor costs
To expand sales and
production volume
To exploit proprietary
assets

4. Forms of FDIForms of FDI
 OwnershipOwnership
 Wholly ownedWholly owned
operationsoperations
 Green-fieldGreen-field
investmentinvestment
 Full acquisitionFull acquisition
 Partially ownedPartially owned
operationsoperations
 Partial acquisitionPartial acquisition
 Joint ventureJoint venture
 RelatednessRelatedness
 Horizontal FDIHorizontal FDI
 Vertical FDIVertical FDI
 UnrelatedUnrelated
diversificationdiversification

5. Host CountryHome Country
Forms of FDI: OwnershipForms of FDI: Ownership
MNE
New Entity
Local Firm
Joint Venture
Full Acquisition
(i.e., 100%)
Green Field
100% Owned
Partial Acquisition
(e.g., 50%)
Ownership = s%
Ownership = (1 - s)%

6. Entry Decision Making Under Uncertainty:Entry Decision Making Under Uncertainty:
Trade-off Between Flexibility and CommitmentTrade-off Between Flexibility and Commitment
 Timing: When is aTiming: When is a
good time to enter?good time to enter?
 Potential gain fromPotential gain from
waitingwaiting
 Cost of delayCost of delay
 Scale of entryScale of entry
 Small scale: EstablishSmall scale: Establish
a foothold to learna foothold to learn
 Large scale: AcquireLarge scale: Acquire
first mover advantagefirst mover advantage
 Speed of expansion: HowSpeed of expansion: How
fast to grow?fast to grow?
 Value of learningValue of learning
 Preemption of competitorsPreemption of competitors
 Constraints of internalConstraints of internal
resourcesresources
 ModeMode
 Some modes have moreSome modes have more
flexibility embeddedflexibility embedded
 Some modes reduceSome modes reduce
resource requirementsresource requirements

7. Choice of Market Entry ModeChoice of Market Entry Mode

8. Marketing
and Sales
ProductionR&D
Company Infrastructure
Organization, Coordination & HRM
Value Chain of an MNEValue Chain of an MNE
Innovative
Capabilities
Advanced
Technology
& Know-
How
Industry-
Specific
Marketing
Expertise
 What additional resources may the MNE need to
enter a foreign market?
 Local expertise: marketing, government relations, etc.

9. Marketing
and Sales
ProductionR&D
Company Infrastructure
Organization, Coordination & HRM
Typical Value Chain of a Local FirmTypical Value Chain of a Local Firm
Imitative
Capabilities
Older
Technology
and Know-
How
Country-
Specific
Marketing
Expertise
What may the MNE desire from a local firm?
 Complementary resources
 Not necessarily strength in every area

10. Complementarity ofComplementarity of
ResourcesResources
Local Firm’s
Resources
 Imitating capabilities
 Older technology and
know-how
 Country-specific
marketing expertise
 Country specific
organization skills
MNE’s Resources
 Innovative capabilities
 Advanced technology
and know-how
 Industry-specific
marketing expertise
 Organization structure
and systems

11. Going it Alone: ExportGoing it Alone: Export
HOME COUNTRY HOST COUNTRY
Export of Goods
MNE
Revenues
Customers

12. Going it Alone: ExportGoing it Alone: Export
AdvantagesAdvantages
 Low initial investmentLow initial investment
 Reach customers quicklyReach customers quickly
 Complete control overComplete control over
productionproduction
 Benefit of learning forBenefit of learning for
future expansionfuture expansion
DisadvantagesDisadvantages
 Potential costs of tradePotential costs of trade
barriersbarriers
 Transportation costTransportation cost
 Tariffs and quotasTariffs and quotas
 Foregoes potentialForegoes potential
location economieslocation economies
 Difficult to respond toDifficult to respond to
customer needs wellcustomer needs well
When Is Export Appropriate?When Is Export Appropriate?
 Low trade barriersLow trade barriers
 Home location has cost advantageHome location has cost advantage
 Customization not crucialCustomization not crucial

13. Licensing AgreementLicensing Agreement
Local Firm
Licensing of Technology
HOME COUNTRY HOST COUNTRY
MNE
Fees and Royalties

14. Licensing AgreementLicensing Agreement
AdvantagesAdvantages
 Low initial investmentLow initial investment
 Avoids trade barriersAvoids trade barriers
 Potential for utilizingPotential for utilizing
location economieslocation economies
 Access to localAccess to local
knowledgeknowledge
 Easier to respond toEasier to respond to
customer needscustomer needs
DisadvantagesDisadvantages
 Lack of control overLack of control over
operationsoperations
 Difficulty in transferring tacitDifficulty in transferring tacit
knowledgeknowledge
 Negotiation of a transfer priceNegotiation of a transfer price
 Monitoring transfer outcomeMonitoring transfer outcome
 Potential for creating aPotential for creating a
competitorcompetitor
When Is Licensing Appropriate?When Is Licensing Appropriate?
 Well codified knowledgeWell codified knowledge
 Strong property rights regimeStrong property rights regime
 Location advantageLocation advantage

15. Foreign AcquisitionForeign Acquisition
Local Firm
Investment
HOME COUNTRY HOST COUNTRY
MNE
Profit

16. Foreign AcquisitionForeign Acquisition
AdvantagesAdvantages
 Access to target’s localAccess to target’s local
knowledgeknowledge
 Control over foreignControl over foreign
operationsoperations
 Control over ownControl over own
technologytechnology
DisadvantagesDisadvantages
 Uncertainty about target’sUncertainty about target’s
valuevalue
 Difficulty in “absorbing”Difficulty in “absorbing”
acquired assetsacquired assets
 Infeasible if local market forInfeasible if local market for
corporate control iscorporate control is
underdevelopedunderdeveloped
When Is Acquisition Appropriate?When Is Acquisition Appropriate?
 Developed market for corporate controlDeveloped market for corporate control
 Acquirer has high “absorptive” capacityAcquirer has high “absorptive” capacity
 High synergyHigh synergy

17. Going it Alone: “Green Field” EntryGoing it Alone: “Green Field” Entry
New Subsidiary
Company
Investment
HOME COUNTRY HOST COUNTRY
MNE
Profit

18. Going it Alone: “Green Field” EntryGoing it Alone: “Green Field” Entry
AdvantagesAdvantages
 Normally feasibleNormally feasible
 Avoids risk ofAvoids risk of
overpaymentoverpayment
 Avoids problem ofAvoids problem of
integrationintegration
 Still retains full controlStill retains full control
DisadvantagesDisadvantages
 Slower startupSlower startup
 Requires knowledge ofRequires knowledge of
foreign managementforeign management
 High risk and highHigh risk and high
commitmentcommitment
When Is “Green Field” Entry Appropriate?When Is “Green Field” Entry Appropriate?
 Lack of proper acquisition targetLack of proper acquisition target
 In-house local expertiseIn-house local expertise
 Embedded competitive advantageEmbedded competitive advantage

19. Management ContractManagement Contract
Management Fees
Local Firm
Technological Inputs
HOME COUNTRY HOST COUNTRY
Profit
MNE
Wholly-Owned
Subsidiary
Managerial
Service

20. Management ContractManagement Contract
AdvantagesAdvantages
 Access to localAccess to local
management skillsmanagement skills
 Avoids buying unwantedAvoids buying unwanted
assetsassets
 Retains strategic controlRetains strategic control
DisadvantagesDisadvantages
 Potential incentivePotential incentive
problemproblem
 Potential adversePotential adverse
selection problemselection problem
 How do you know theHow do you know the
competencies of thecompetencies of the
manager?manager?
When Is a Management Contract Appropriate?When Is a Management Contract Appropriate?
 Manager has a reputation to protectManager has a reputation to protect
 HotelsHotels
 Consulting companiesConsulting companies
 Performance-based contract provides no perversePerformance-based contract provides no perverse
incentivesincentives

21. Joint VentureJoint Venture
Joint Venture
Company
Inputs
MNE Local Firm
HOME COUNTRY HOST COUNTRY
Inputs
Share of Profit
Share of
Profit

22. Joint VentureJoint Venture
AdvantagesAdvantages
 Access to partner’s localAccess to partner’s local
knowledgeknowledge
 Reduction of concern aboutReduction of concern about
overpaymentoverpayment
 Both parties have someBoth parties have some
performance incentivesperformance incentives
 Significant control overSignificant control over
operationoperation
DisadvantagesDisadvantages
 Potential loss ofPotential loss of
proprietary knowledgeproprietary knowledge
 Potential conflicts betweenPotential conflicts between
partnerspartners
 Neither partner has fullNeither partner has full
performance incentiveperformance incentive
 Neither partner has fullNeither partner has full
controlcontrol
When Is a Joint Venture Appropriate?When Is a Joint Venture Appropriate?
 Both partners contribute hard-to-measure inputsBoth partners contribute hard-to-measure inputs
 Large expected mutual gains in the long-runLarge expected mutual gains in the long-run
 Trade secrets can be walled offTrade secrets can be walled off

23. Common Market Entry ModesCommon Market Entry Modes
Joint Venture
Company
Licensing
Acquisition
Joint Venturing
Local Firm
New Subsidiary
Company
“Green Field” Entry
HOME COUNTRY HOST COUNTRY
Export
MNE

24. Kumar & Subramaniam
(1997)
A Contingency Framework for
the Mode of Entry Decision
 RiskRisk
 ReturnReturn
 ControlControl

25. Modes of entry
Exporting Contractual
Agreeme
nt
Joint
Venture
Acquisition Greenfield
Investm
ent
Risk Low Low Moderate High High
Return Low Low Moderate High High
Control Moderate Low Moderate High High
Integration Negligible Negligible Low Moderate High

26. Decision Strategies:Decision Strategies:
 Rational Analytic StrategyRational Analytic Strategy
 Cybernetic StrategyCybernetic Strategy
 SerendipitySerendipity

27. DiscoversDiscovers

28. The Australian ChallengeThe Australian Challenge
 What’s FreixenetWhat’s Freixenet corecore competency?competency?
 Evaluate Freixenet’s market entry modesEvaluate Freixenet’s market entry modes
 Freixenet in AustraliaFreixenet in Australia
 What lessons can we draw?What lessons can we draw?
 Where next?Where next?
 Adds: what is the theme?Adds: what is the theme?
 Is it a global theme (standarization/adaptaion?Is it a global theme (standarization/adaptaion?
 GloGloccalization (Akio Morita)alization (Akio Morita)

29. Good luck!Good luck!

30. Future ReadingFuture Reading
- Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry:- Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry:
A Transaction Cost Analysis. Journal of International BusinessA Transaction Cost Analysis. Journal of International Business
Studies, 17: 1-26.Studies, 17: 1-26.
- Kogut, B. and H. Singh. 1988. The effect of national culture on the- Kogut, B. and H. Singh. 1988. The effect of national culture on the
choice of entry mode. Journal of International Business Studies, 19:choice of entry mode. Journal of International Business Studies, 19:
411-432.411-432.
- Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The- Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The
strategy of Japanese investors in the United States. Managementstrategy of Japanese investors in the United States. Management
Science, 39(9): 1054-1070.Science, 39(9): 1054-1070.
- Hennart, J. F., and Reddy, S. 1997. The Choice Between- Hennart, J. F., and Reddy, S. 1997. The Choice Between
Mergers/Acquisitions and Joint Ventures: The Case of JapaneseMergers/Acquisitions and Joint Ventures: The Case of Japanese
Investors in the United States. Strategic Management Journal 18: 1-12.Investors in the United States. Strategic Management Journal 18: 1-12.
- Barkema, H. G. and Vermeulen, F. 1998. International Expansion- Barkema, H. G. and Vermeulen, F. 1998. International Expansion
Through Start-up or Acquisition: A Learning Perspective. Academy ofThrough Start-up or Acquisition: A Learning Perspective. Academy of
Management Journal 41: 7-26.Management Journal 41: 7-26.
- Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield- Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield
Start-up? Institutional, Cultural and Transaction Cost Influences.Start-up? Institutional, Cultural and Transaction Cost Influences.
Strategic Management Journal 21: 89-97.Strategic Management Journal 21: 89-97.