Foreign Market Entry Decision
Foreign market entry can take different shapes depending on the targeted business goals and costs. The major market-entry decisions are discussed below.
- Licensing: This kind of arrangement occurs when “a licensor grants the rights to intangible property to another company for a certain period of time” (Akbar and McBride 91). The “licensee will be required to pay a royalty fee to the parent company” (Jota and Horiuchi 4).
- Exporting: A company manufactures different goods and markets them in a different country (Hyun 27).
- Joint Ventures: This approach focuses on establishing a single firm that is conjointly owned by two or more different companies (Akbar and McBride 94).
- Wholly-Owned Foreign Investment: This foreign investment approach is associated with a hundred percent ownership of the targeted stock (Hyun 27). A company can establish a greenfield venture or purchase an existing organization.
The choice between Acquisition and Greenfield Investment (GI)
International companies can invest in different countries using Greenfield investment strategies or acquisitions. The decision to acquire an established business results in immediate profits. As well, the investor will be able to access different existing markets. However, the approach can result in new problems and weaknesses. Greenfield investment is associated with greater control of every business aspect (Jota and Horiuchi 8). Companies are committed to new markets. They can also achieve economies of scale in purchasing, production, and transportation. However, the approach is costly and results in competition.
Subcontracting and Franchising
Subcontracting can make it possible for companies to have increased productivity and performance. The level of effectiveness increases. Subcontracting also makes it possible for companies to reduce their operational costs. However, the approach can result in increased competition. Franchising is appropriate because it presents ready markets and business systems (Hyun 26). It also presents more customers and research and development (R&D) practices. The approach is characterized by limited creativity and unpredictability.
Difference between Investment in Production Facilities and Investment in Distribution Facilities
The method of foreign market entry dictates the investment approach embraced by an organization. Investment in production facilities is undertaken when companies establish new firms through greenfield ventures (Buckley and Casson 546). Investment in distribution facilities is widely associated with franchising. The firm invests a lot in procurement, warehousing, and transportation facilities.
Strength of Competition from Indigenous Rivals
Indigenous rivals can present much competition for foreign investors. Such rivals ted to have a proper understanding of the local market. Consumer loyalty and patriotism can also force more individuals to purchase locally-manufactured products. Such rivals also understand the cultural aspects associated with the local population (Buckley and Casson 544). Foreign investors should, therefore, be ready to face competition from such rivals.
1960: Exporting Vs FDI
Before the 1960s, foreign investment mainly focused on exportation and foreign direct investment. The product lifecycle theory (PLT) supported the use of exports in order to benefit from international trade (Buckley and Casson 544). FDI was characterized by continued investments in different countries.
1970: Licensing, franchising, and subcontracting
New methods of investment emerged throughout the 1960s and 1970s. Companies embraced new concepts such as franchising, subcontracting, and licensing in order to succeed in foreign markets (Buckley and Casson 541).
Throughout the 1980s, the continued resurgence of mergers and acquisitions was seen by many theorists as the best way to promote international trade. During the same period, foreign investors focused on the appropriateness of greenfield investment and the acquisition of already-established business entities (Ramady and Sale 49). Many US firms began to engage in international joint ventures (IJVs) during the same period. The concept of cooperation emerged in an attempt to support the business objectives of many multinational corporations.
Towards the end of the 20th century, FDI investors in emerging economies began to re-examine various issues such as the cost of doing business in other countries and psychic distances. Companies began to focus on the cultural issues and aspects associated with foreign countries (Nitsch, Beamish, and Makino 29). It was also necessary to focus on the best approaches to minimize operational costs.
Model 1: Detailed Analysis of Market Entry Strategy
This model focuses on the planned approaches that can be used to deliver services or goods to a specific target market. The right market entry should be identified in order to emerge successfully. The model encourages entrepreneurs to use appropriate business procedures in every foreign market (Nitsch et al. 32). Distribution should also be done carefully in order to get the best business outcomes.
Model 2: FDI in Distribution or Production
FDI can be achieved by investing either in production or distribution. The international company should consider the best approach that can deliver the best outcomes (Jota and Horiuchi 13). The model encourages companies to consider the best strategies that will improve the level of business performance.
Model 3: Strategic Interaction between Foreign Entrant and Leading Host Rivals
Foreign entrants will encounter competition from leading host rivals. This is the case because such rivals have existing markets and customers (Jota and Horiuchi 8). However, new strategic interactions can be embraced whenever offering customized services and products to more customers. The companies can also share resources and R&D processes in order to emerge successfully. This model has the potential to improve the level of synergy.
Factors Affecting Foreign Market Entry Strategy
The costs of doing business vary from region A to B (Hyun 46). Investors should consider such costs before entering a new foreign market.
These are forces embraced by companies to internalize their business operations (Akbar and McBride 95). Such factors are usually aimed at dealing with specific challenges such as business uncertainties.
These include financial aspects such as currencies, down-payments, royalties, pricing, and credits (Jota and Horiuchi 17). Businesspeople should consider these variables before investing in a foreign country.
People tend to have unique cultural values and behaviors (Akbar and McBride 91). Such behaviors will determine their purchasing and consumption behaviors. Businesses should be aware of such factors since they change from one region to another.
These are the costs incurred by companies whenever adapting to various market and environmental changes experienced in a specific foreign country (Jota and Horiuchi 15). Such costs should be carefully calculated in order to have profitable businesses.
This term refers to the existence of different companies producing similar services or products (Hyun 29). The existence of a market structure compels companies to identify appropriate strategies that can produce the best outcomes.
This is an approach embraced by a company to emerge successfully by competing directly with its immediate rivals (Hyun 42).
Cost of Doing Business Abroad
The cost of doing business differs from one country to another. Such costs depend on different factors such as “income levels, economic statuses, and government policies” (Akbar and McBride 92). Entrepreneurs should, therefore, be aware of such costs in order to have successful businesses.
Akbar, Yusaf and Brad McBride. “Multinational enterprise strategy, foreign direct investment and economic development: the case of the Hungarian banking industry.” Journal of World Business 39.1 (2004): 89-105. Print.
Buckley, Peter and Mark Casson. “Analyzing Foreign Market Entry Strategies: Extending the Internalization Approach.” Journal of International Business Studies 29.3 (1998): 539-561. Print.
Hyun, Hae-Jung. “Strategic Foreign Direct Investment in Developing Countries under Demand Uncertainty: Commitment vs. Flexibility.” Journal of East Asian Economic Integration 16.1 (2012): 25-66. Print.
Jota, Ishikawa and Eiji Horiuchi. “Strategic Foreign Direct Investment in Vertically Related Markets.” RIETI Discussion Paper Series 12.1 (2012): 1-28. Print.
Nitsch, Deklev, Paul Beamish and Shige Makino. “Entry mode and performance of Japanese FDI in Western Europe.” Management International Review 36.1 (1996): 27-43. Print.
Ramady, Mohamed and John Saee. “Foreign direct investment: A strategic move toward sustainable free enterprise and economic development in Saudi Arabia.” Thunderbird International Business Review 49.1 (2007): 37-56. Print.