International Business Management

Merits & Demerits of various foreign Market entry strategies

Gouthami MBA(PHARMA) PM 112/10
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Entry Modes
These are seven different ways to enter a foreign market: 1. Exporting 2. Acquisition 3. Licensing 4. Franchising 5. Establishing joint ventures with a host country firm 6. Setting up a new wholly owned subsidiary in the host country 7. Trunkey Project
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Export
HOME COUNTRY Revenues HOST COUNTRY

MNE

Customers

Export of Goods

Export

Merits Low initial investment Reach customers quickly Complete control over production Benefit of learning for future expansion Demerits Potential costs of trade barriers
Transportation cost Tariffs and quotas

Foregoes potential location economies Difficult to respond to customer needs as well

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Licensing Agreement
HOME COUNTRY HOST COUNTRY Licensing of Technology

MNE

Local Firm
Fees and Royalties

Licensing
Merits Low initial investment Avoids trade barriers Potential for utilizing location economies Access to local knowledge Easier to respond to customer needs Demerits Lack of control over operations Difficulty in transferring tacit knowledge Negotiation of a transfer price Monitoring transfer outcome Potential for creating a competitor
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Acquisition
HOME COUNTRY HOST COUNTRY

Investment

MNE
Profit

Local Firm

Acquisition
Merits Access to targets local knowledge Control over foreign operations Control over own technology Demerits Uncertainty about targets value Difficulty in absorbing acquired assets Infeasible if local market for corporate control is underdeveloped

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Joint Venture
HOME COUNTRY HOST COUNTRY

MNE
Inputs

Local Firm
Inputs

Share of Profit Joint Venture Company

Share of Profit

Joint Venture

Merits Access to partners local knowledge Reduction of concern about overpayment Both parties have some performance incentives Significant control over operation

Demerits Potential loss of proprietary knowledge Potential conflicts between partners Neither partner has full performance incentive Neither partner has full control
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Wholly owned Subsidiaries

Demerits They reduce the risk of losing The firm bears the control over core full cost and risk of competencies setting up overseas they give a firm the tight operations control over operations in different countries that is necessary for engaging in global strategic coordination they may be required in order to realize location and experience curve MGM INSTITUTE OF HEALTH SCIENCES, economies
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Merits

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Management Contract
HOME COUNTRY HOST COUNTRY Management Fees

MNE
Profit

Local Firm
Managerial Service

Technological Inputs

Wholly-Owned Subsidiary

Management Contract

Merits Normally feasible Avoids risk of overpayment Avoids problem of integration Still retains full control Demerits Slower startup Requires knowledge of foreign management High risk and high commitment

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Turnkey Projects
Merits They are a way of earning economic returns from the know-how required to assemble and run a technologically complex process they can be less risky than conventional FDI
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Demerits The firm that enters into this deal will have no longterm interest in the foreign country

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Franchising
Merits Firms avoid many costs and risks of opening up a foreign market Firms can quickly build a global presence Demerits It may inhibit the firm's ability to take profits out of one country to support competitive attacks in another the geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect MGM INSTITUTE OF HEALTH SCIENCES,
AURANGABAD

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