Deciding How to Enter the Market

Once a company has decided to sell in a foreign country, it must determine the best mode of entry. Its choices are exporting, joint venturing, and direct investment. A green circle icon. Figure 19.2 shows the three market entry strategies along with the options each one offers. As the figure shows, each succeeding strategy involves more commitment and risk but also more control and potential profits.

A green circle icon. Figure 19.2

Market Entry Strategies

Chart explains market entry strategies.

Exporting

The simplest way to enter a foreign market is through exporting. The company may passively export its surpluses from time to time, or it may make an active commitment to expand exports to a particular market. In either case, the company produces all its goods in its home country. It may or may not modify them for the export market. Exporting involves the least change in the company’s product lines, organization, investments, or mission.

Companies typically start with indirect exporting, working through independent international marketing intermediaries. Indirect exporting involves less investment because the firm does not require an overseas marketing organization or network. It also involves less risk. International marketing intermediaries bring know-how and services to the relationship, so the seller normally makes fewer mistakes. Sellers may eventually move into direct exporting, whereby they handle their own exports. The investment and risk are somewhat greater in this strategy, but so is the potential return.

Joint Venturing

A second method of entering a foreign market is by joint venturing—joining with foreign companies to produce or market products or services. Joint venturing differs from exporting in that the company joins with a host country partner to sell or market abroad. It differs from direct investment in that an association is formed with someone in the foreign country. There are four types of joint ventures: licensing, contract manufacturing, management contracting, and joint ownership.

Licensing

Licensing is a simple way for a manufacturer to enter international marketing. The company enters into an agreement with a licensee in the foreign market. For a fee or royalty payments, the licensee buys the right to use the company’s manufacturing process, trademark, patent, trade secret, or other item of value. The company thus gains entry into a foreign market at little risk; at the same time, the licensee gains production expertise or a well-known product or name without having to start from scratch.

Photo shows a group of Japanese teenage girls posing along with a person wearing a Mickey Mouse mask.

A blue circle icon. International licensing: The Tokyo Disney Resort is owned and operated by Oriental Land Company (a Japanese development company) under license from The Walt Disney Company.

Yuriko Nakao/Reuters

In Japan, Budweiser beer flows from Kirin breweries, and Mizkan produces Sunkist lemon juice, drinks, and dessert items. A blue circle icon. Tokyo Disney Resort is owned and operated by Oriental Land Company under license from The Walt Disney Company. The 45-year license gives Disney licensing fees plus a percentage of admissions and food and merchandise sales. And Coca-Cola markets internationally by licensing bottlers around the world and supplying them with the syrup needed to produce the product. Its global bottling partners range from the Coca-Cola Bottling Company of Saudi Arabia to beer maker SABMiller in Africa to Europe-based Coca-Cola Hellenic, which bottles and markets 136 Coca-Cola brands to 593 million people in 28 countries, from Italy and Greece to Nigeria and Russia.30

Licensing has potential disadvantages, however. The firm has less control over the licensee than it would over its own operations. Furthermore, if the licensee is very successful, the firm has given up these profits, and if and when the contract ends, it may find it has created a competitor.

Contract Manufacturing

Another option is contract manufacturing, in which the company makes agreements with manufacturers in the foreign market to produce its product or provide its service. For example, P&G serves 650 million consumers across India with the help of nine contract manufacturing sites there. And Volkswagen contracts with Russia’s largest auto manufacturer, GAZ Group, to make Volkswagen Jettas for the Russian market as well as its Škoda (VW’s Czech Republic subsidiary) Octavia and Yeti models sold there.31 The drawbacks of contract manufacturing are decreased control over the manufacturing process and loss of potential profits on manufacturing. The benefits are the chance to start faster with less risk and the later opportunity either to form a partnership with or buy out the local manufacturer. Contract manufacturing can also reduce plant investment, transportation, and tariff costs while at the same time helping to meet the host country’s local manufacturing requirements.

Management Contracting

Under management contracting, the domestic firm provides the management know-how to a foreign company that supplies the capital. In other words, the domestic firm exports management services rather than products. Hilton uses this arrangement in managing hotels around the world. For example, the hotel chain operates DoubleTree by Hilton hotels in countries ranging from the UK and Italy to Peru and Costa Rica to China, Russia, and Tanzania. The properties are locally owned, but Hilton manages the hotels with its world-renowned hospitality expertise.32

Management contracting is a low-risk method of getting into a foreign market, and it yields income from the beginning. The arrangement is even more attractive if the contracting firm has an option to buy some share in the managed company later on. The arrangement is not sensible, however, if the company can put its scarce management talent to better uses or if it can make greater profits by undertaking the whole venture. Management contracting also prevents the company from setting up its own operations for a period of time.

Joint Ownership

Joint ownership ventures consist of one company joining forces with foreign investors to create a local business in which they share possession and control. A company may buy an interest in a local firm, or the two parties may form a new business venture. Joint ownership may be needed for economic or political reasons. For example, the firm may lack the financial, physical, or managerial resources to undertake the venture alone. Alternatively, a foreign government may require joint ownership as a condition for entry. Disney’s Hong Kong Disneyland and Shanghai Disneyland are both joint ownership ventures with the Chinese government-owned Shanghai Shendi Group. Disney owns 43 percent of the Shanghai resort; the Shanghai Shendi Group owns 57 percent.33

Often, companies form joint ownership ventures to merge their complementary strengths in developing a global marketing opportunity. A blue circle icon. For example, to increase its presence and local influence in China’s mobile phone and tablets markets, chipmaker Intel recently paid $1.5 billion for 20 percent ownership in China’s state-run Tsinghua Unigroup, which controls two domestic mobile chipmakers. The joint ownership investment will help Intel to better understand Chinese consumers. It may also help to earn more favorable treatment from Chinese regulators. So far, Intel has gone untouched by China’s recent crackdown on foreign technology companies such as competitor Qualcomm and software makers Microsoft and Symantec.34

Photo shows Intel signage in Japanese.

A blue circle icon. Joint ownership and direct investment: To increase its understanding and influence in China’s huge mobile device market, Intel has invested heavily there in joint ownership ventures and its own manufacturing facilities.

ICHPL Imaginechina

Joint ownership has certain drawbacks, however. The partners may disagree over investment, marketing, or other policies. Whereas many U.S. firms like to reinvest earnings for growth, local firms often prefer to take out these earnings; whereas U.S. firms emphasize the role of marketing, local investors may rely on selling.

Direct Investment

The biggest involvement in a foreign market comes through direct investment—the development of foreign-based assembly or manufacturing facilities. For example, in addition to joint ownership ventures in China, Intel has also made substantial investments in its own manufacturing and research facilities there. It recently spent $1.6 billion upgrading its decade-old chip factory in the central Chinese city of Chengdu and another $2.5 billion to build a shiny new fabrication plant in Dalian, a port city in China’s northeast. “China is our fastest-growing major market,” says Intel’s CEO, “and we believe it’s critical that we invest in markets that will provide for future growth to better serve our customers.” 35

If a company has gained experience in exporting and if the foreign market is large enough, foreign production facilities offer many advantages. The firm may have lower costs in the form of cheaper labor or raw materials, foreign government investment incentives, and freight savings. The firm may also improve its image in the host country because it creates jobs. Generally, a firm develops a deeper relationship with the government, customers, local suppliers, and distributors, allowing it to adapt its products to the local market better. Finally, the firm keeps full control over the investment and therefore can develop manufacturing and marketing policies that serve its long-term international objectives.

The main disadvantage of direct investment is that the firm faces many risks, such as restricted or devalued currencies, falling markets, or government changes. In some cases, a firm has no choice but to accept these risks if it wants to operate in the host country.

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