International Market Entry

Strategies
A
Presentation
By
Prof. Pawan K. Chugan
Institute of Management
Nirma University
Ahmedabad
International Market Entry -Strategies
– Exporting (Direct /Indirect Exporting)
– Licensing / Franchising
– Contract Manufacturing
– Management Contract
– Assembly Operation
– Fully Owned Manufacturing Facility
– Joint Venturing
– M&As
– Strategic Alliance
– Third Country Location

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 Licensing & Franchising
Licensing

• Minimal Involvement & Commitment of resources

by the International Marketer
• Here, a firm - International Marketer (Licensor) 
Licenses (Permits) a firm in another country
(Licensee) to use its  Intellectual Property (i.e.
Patents, Trade Marks, Copyrights, Technology,
Marketing skills, etc.) against some monetary
benefits such as royalty.
• Licensee pays royalty to licensor
• Cross Licensing – Mutual Exchange of knowledge &
patents. In cross licensing, a cash payment may or
may not be involved.
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 Licensing & Franchising
Franchising
• Franchising is a form of licensing in which
parent company (the franchiser) permits
another independent entity (the franchisee)
the right to do business in a prescribed
manner.
• This right can be in the form of selling the
franchiser's products, using its name,
production and marketing techniques, or
general business approach.
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 Licensing & Franchising
• One of the common forms in franchising
involves supplying an important ingredient
(part, material, etc.) for the finished product,
like Coca Cola supplying syrup to the
bottlers.

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 Licensing & Franchising
Advantages
• Entering markets with
proven Product /
Technology Disadvantages
• Marketing intangible • Involves risk that
without running the risk of
R&D failure licensee becomes
• Reduced investment competitor after
requirement expiry of the
• Harvesting of obsolete
products in developing
Licensing
countries. Agreement
• Provide opportunity to
enter into closed markets
that have plethora of strict
rules and entry barriers.
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 Contract Manufacturing
In this case, an international marketer signs a
contracts with local firm for manufacturing or
assembling of products while retaining the
responsibility of marketing the product. This is a
common practice in international business. For
example, many MNCs and their affiliates which
enjoyed this strategy in India for products, viz. –
Godrej Soaps manufactured Dettol for Reciktt &
Coleman, Clearton for Nicholas Laboratories;
Ponds-Dream flower, Sandalwood and Cold Cream
for Ponds and Johnson’s Baby Soap for Johson and
Johnson.
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 Contract Manufacturing
Advantage
• Company doesn’t commit any resource for setting
up production facility.
• No risk of investing in foreign country
• Cost of Product lower due to lower overheads and
tax concessions.
• Less Involvement and hence less risky.
• Allows the international marketer to enlist National
Support
• In case of failure, dropping is easy, but if company
had established its own production the exit
becomes difficult.
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 Contract Manufacturing
Advantages
• If access capacities are available in host
country units, it may be possible to get the
product supplied on the marginal cost basis.
Godrej Soaps manufactured Dettol for Reckitt
and Coleman, Clearton for Nicholas
Laboratories.
Disadvantage
• Loss of potential profits from manufacturing.
• Less control over manufacturing process.
• Risk of developing competitors.
• Not suitable for hi-tech products and cases
involving technical secrets. 9
 Management Contracting
Under this system, a firm provides management
know-how on certain terms and may not have
equity stake in enterprise being managed.
• Here, supplier brings together a “package of
skills” that provides an integrated service to the
client without incurring the risk and benefit of
ownership.
• According to Kotler, management contracting is
a low-risk method of getting into a foreign
market and it starts yielding income right from
the beginning. The arrangement is especially
attractive if the contracting firm is given an
option to purchase some shares in the managed
company within a stated period.
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 Management Contracting
Examples of Management Contracting:
Some Indian companies – Tata Tea, Harrisons
Malayalam, AVT, etc. have contracts to
manage a number of plantations in Sri Lanka.
Tata Tea also has a joint venture in Sri Lanka
namely Estate Management Services Pvt. Ltd
• Advantage
– Enables firms to commercialize existing
managerial know-how that has been built up
with significant investments by making use of
experienced personnel who otherwise would
have to be laid off.
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 Management Contracting
• Advantage
– Clear benefits for clients, as it provides
immediate organizational skills, expertise and
support services that are not available locally,
rather than to build up the same which would
be difficult and costly to replicate locally.
• Disadvantage
– Not sensible when company can put scarce
management to better use and higher profits be
made by investing in whole venture
– From client’s side there is possible risk for
over-dependence and loss of control.
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 Turnkey Contracts
• These are agreements by sellers to supply
buyers with a facility fully equipped and ready
to be operated by the buyer’s personnel, who
will be trained by the seller.
• These contracts are common in international
business for supplying, erection and
commissioning of plants like oil refineries, steel
mills, cement and fertilizers plants,
construction projects, etc. Many contracts
involve government or public sector as buyer
or as seller also.

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 Fully Owned Manufacturing Facilities
Companies with long term interests normally
establish fully owned manufacturing facilities.
• Reasons
– Trade barriers
– Difference in production & other costs
– Govt. policies, etc.
• Limitations
– Fully owned enterprises may not be allowed or favoured
in some countries particularly in low priority areas.
– This method demands sufficient financial and managerial
resources

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 Fully Owned Manufacturing Facilities

Advantages Disadvantages
1. Complete Control 1. In some cases cost of
over production and production is high in
foreign soil.
quality
2. Possible problems,
2. No risk of developing Non-availability of
skilled labor,
competitors as in case Infrastructural
of Licensing and bottlenecks, restrictions
Contract on use of technology,
etc.
Manufacturing.
3. Requirement of
sufficient financial and
other resources
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 Assembly Operations
Here, manufacturer wants to avail many
advantages of overseas manufacturing
facilities and yet doesn’t want to go that
far! Therefore, establishes overseas
assembly facilities in selected markets.
• It is cross between exporting and overseas
manufacturing.
• It is ideal when there are economies of
scale in manufacture of parts and
components and assembly operations are
labour intensive & labour is cheap in
foreign country.
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 Assembly Operations
• For example a number of US manufacturers ship
the parts and components to the developing
countries, get the product assembled there and
bring it back home. The US tariff law
encourages this. Thus, even products meant to be
marketed domestically are assembled abroad.

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 Assembly Operations
Advantages
 Cost Advantage
 Import duty is generally lower on Parts &
Components than Finished Products.
 Operations may satisfy the local content
demand, at least to some extent
 Favorable Govt. attitude due to Employment
generation
 Low levels of investments, when compared to
complete manufacturing unit. Thus, low
political risk of foreign investment.

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 Joint Ventures
It is a most common strategy of entering the foreign
market.

In the widest sense, any form of association which implies

collaboration for more than a transitory period is a
joint venture operations such as

• Sharing of ownership and management in an

enterprise.
• Licensing / Franchising Agreements
• Contract Manufacturing
• Management Contracts

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 Joint Ventures

Sharing of ownership and management in an

enterprise.

Here essential feature is that the “Ownership and

Management” are shared between a foreign and
local firm.
In some cases there could be more than 2 parties
involved, e.g. Pepsi’s India JV involved Voltas
and Punjab Agro Industries Corporation.

Proves successful only when both partners have

something definite to offer to the advantage of
other.
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 Joint Ventures
A joint ownership venture may be brought
about by
• a foreign investor buying a local company
• a local firm acquiring an interest in an
existing foreign firm or
• by both the foreign and local
entrepreneurs jointly forming a new
enterprise.
It is also common practice to split the local
interest between a partner and various
public participation (including public
sector firms or industrial development
organizations)
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 Joint Ventures
• Equity holding by the public would help the
enterprise get some public support.
• Parternership with government organization may
help to obtain favourable treatment from the
government.
• In countries where fully owned firms are not allowed,
it is the only way to get entry. Many foreign
companies through this route entered in the
communist, socialist and other developing countries.
• Local partner is in a better position to deal with
government and the public and a cultural bridge
between manufacture and market.

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 Third Location Country
• Practiced when there are no commercial
transactions between two countries due to political
reasons or when direct transaction in two nations
are difficult because of political reasons.
E.g. Taiwanese entrepreneurs find it easy to enter
Chinese markets through bases in Hong Kong.
• Sometimes country locations are decided based on
diplomatic relations, for e.g. Rank Xerox found it
easy to enter USSR through its Indian JV Modi
Xerox.

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 Third Location Country
• Sometimes commercial reasons such as tariff
and non-tariff barriers vis-a-vis the special or
preferential treatment to least developed and
developing countries encourages the production
or other operations from the third country.

For example a number of Japanese firms

established manufacturing in developing
countries for exporting to USA , EU to avail the
preferential treatment accorded to them by these
countries.
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 Third Location Country
• Third country locations may also be resorted
to reduce the cost of production and thereby
increasing the competitiveness to facilitate
market entry or maintaining or improving
the market position. This becomes more
relevant if incentives are offered by the
governments in developing countries for
investment and exports.

• For example, presently many govts. provide

with incentives for setting up units in SEZs
such India and China.

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 Mergers & Acquisitions
• Market entry as well as Expansion Strategy
• Major part of recent FDI Inflows has been
driven by cross border M&A.
• It provides instant markets and distribution -
particularly the distribution which is one of
the most difficult area of international
marketing.
For example, Vijay Mallya’s UB group
acquired a British company, Wiltshire Brewery
as it offered the UB group a readymade chain
of pubs throughout England which could be
used for marketing of UB’s beer brands like
Kingfisher, UB Lager and Kalyani in the UK.
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 Mergers & Acquisitions
• Many times M&A is to obtain access to
new technology or patent right.
• This method also has the advantage of
reducing competition . Indeed, M&A is
some times used, inter alia, to pre-empt
competition.
• M&A are also considered less risky than
green field ventures because when an
acquisition is made, it amounts to buying
a set of assets and known revenue
resources.
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 Mergers & Acquisitions
Disadvantages
1. Cost of acquisition may be
unrealistically high (mostly because
of deficiencies of evaluation).
2. Acquiring organizational problems
(When an enterprise is taken over, its
problems are acquired with it).

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 Strategic Alliance
• Strategic Alliance also known as “Entente” or
“Coalition”, becoming more and more popular in
international business.
• Here emphasis is to form a long term competitive
strategy by forming alliances with competitors –
instead of competing with them. Thus strategic
alliance is a more of a competitive strategy than
an entry strategy
• These alliances are also used as a market entry
strategy - for example by forming an alliance in a
foreign market for marketing and distribution of
products of each others, through their
established infrastructure in respective markets,
both parties may enter in each others market. 29
 Strategic Alliance
• These alliances may be Equity or Non -
equity based (viz. technology transfer,
licensing arrangement, marketing
agreements, etc.)

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Counter Trade

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