A Conceptual Framework
Anil K. Gupta and Vijay Govindarajan
ManagingGlobalExpansion:A ConceptualFramework 47
such an ability is gener- priate mode of entry: The entry mode issue rests
Figure 3 ally a fast track to disaster. on two fundamental questions. The first concerns
A Framework for Choice of Markets The ability to exploit the extent to which the firm will export or pro-
a market is a function of duce locally. Here, the firm has several choices. It
two factors: (1) the height can rely on 100 percent export of finished goods,
Phased-in of entry barriers, and (2) export of components but localized assembly,
entry (create Rapid the intensity of competi- 100 percent local production, and so on.
beachhead Entry
first) tion in the market. Entry The second question deals with the extent of
barriers are likely to be ownership control over activities that will be
lowest when there are no performed locally in the target market. Here also,
regulatory constraints on the firm faces several choices: 0 percent owner-
Ignore Opportunistic trade and investment (as ship modes (licensing, franchising, and so on),
for now Entry in the case of regional partial ownership modes (joint ventures or affili-
economic blocks) and ates), and 100 percent ownership modes (fully-
when new markets are owned greenfield operations or acquisitions).
geographically, culturally, Figure 4 uses these two dimensions to depict the
Low High
and linguistically proxi- array of choices regarding mode of entry that are
Firm's Ability to mate to the domestic open to any firm, and includes examples illustrat-
Exploit the Market market. Even when there ing the variety of available options.
are low entry barriers, the Choosing the right mode of entry is critical
intensity of competition because the choice, once made, is often difficult
can hinder a company's potential for exploiting a and costly to alter. Inappropriate decisions can
market. For example, the large U.S. market in the impose unwanted, unnecessary, and undesirable
retailing industry has historically proven to be a constraints on future development options.
graveyard for foreign entrants such as Marks & Turning to the first question, greater reliance
Spencer, precisely because of the intensity of on local production would be appropriate under
local competition. the following four conditions:
Figure 3 presents a conceptual framework • Size o f local market is larger than mini-
that combines the two key dimensions--"strategic m u m efficient scale of production. The larger the
importance of market" and "ability to exploit"--to size of the local market, the more completely
offer guidelines on how a firm can engage in local production will translate into scale econo-
directed opportunism in its choice of markets. mies for the firm while holding down tariff and
The firm's stance toward markets that have high transportation costs. One illustration of this argu-
strategic importance and high ability to exploit ment is Bridgestone's entry into the U.S. market
ought to be to enter rapidly. By comparison, the by acquiring the local production base of Fire-
firm can afford to be much more opportunistic stone instead of exporting tires from Japan.
and ad hoc with respect to markets that have low • Shipping a n d tariff costs associated with
strategic importance but are easier to exploit. In exporting to the target market are so high that
the case of markets that have high strategic im- they neutralize any cost advantages associated
portance but are also very difficult to exploit, we with producing in any country other than that
recommend an incremental phased approach in market. This is why cement companies such as
which the development of needed capabilities Cemex and Lafarge Coppee engage heavily in
precedes market entry. One attractive way for a local production in every country they enter.
company to develop such capabilities is to first • Need f o r local customization o f p r o d u c t
enter a beachhead market: one that closely re- design is high. Product customization requires
sembles the targeted strategic market but pro- two capabilities: a deep understanding of local
vides a safer opportunity to learn how to enter market needs, and an ability to incorporate this
and succeed there. Some commonly used ex- understanding in the company's design and pro-
• amples of beachhead markets are Switzerland duction decisions. Localizing production in the
and/or Austria for Germany, Canada for the U.S., target market significantly enhances the firm's
and Hong Kong or Taiwan for China. Finally, the ability to respond to local market needs accu-
firm should stay away from those markets that rately and efficiently.
are neither strategic nor easy to exploit. • Local content requirements are strong. This
is one of the major reasons why foreign auto
MODE OF ENTRY companies rely heavily on local production in
markets such as the EU, China, and India.
nce a company has selected the coun- Turning to the second question, given the