Text II. SIX WAYS OF ENTERING A FOREIGN MARKET
There are six ways of entering a foreign market: exporting, turnkey projects, licensing, franchising, joint venturing, and setting up a wholly owned subsidiary.
Exporting has the advantage of avoiding the costs of setting up manufacturing operations in another country. Disadvantages include high transport costs and trade barriers and problems with local marketing agents. The latter can be overcome if the firm sets up a wholly owned marketing subsidiary in the host country.
Turnkey projects allow to export their process know-how to countries where FDI might be prohibited, thereby enabling the firm to earn a greater return from this asset. The disadvantage is that the firm may create efficient global competitors in the process.
The main advantage of licensing is that the licensee bears the costs and risk of opening a foreign market. Disadvantages include the risk of losing technological know-how to the licensee and a lack of tight control over licensees.
The main advantage of franchising is that the franchisee bears the costs and risks of opening a foreign market. Disadvantages center on problems of quality control of distant franchisees.
Joint ventures have the advantages of sharing the costs and risks of opening a foreign market and of gaining local knowledge and political influence. Disadvantages include the risk of losing control over technology and a lack of tight control.
The advantages of wholly owned subsidiaries include tight control over operations and technological know-how. The main disadvantage is that the firm must bear all the costs and risks of opening a foreign market.
The optimal choice of entry mode depends on the strategy of the firm.
When technological know-how constitutes a firm’s core competence, wholly owned subsidiaries are preferred, since they best control technology.
When management know-how constitutes a firm’s core competence, foreign franchises controlled by joint ventures seem to be optimal. This gives the firm the cost and risk benefits associated with franchising, while enabling it to monitor and control franchisee quality effectively.
When the firm is pursuing a global or transnational strategy, the need for tight control over operations to realize location and experience curve economies suggests wholly owned subsidiaries as the best entry mode.
Strategic alliances are cooperative agreements between actual or potential competitors.
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The advantage of alliances is that they facilitate entry into foreign markets, enable partners to share the fixed costs and risks associated with new products and processes, facilitate the transfer of complementary skills between companies, and can help firm establish technical standards.
The disadvantage of a strategic alliance is that the firm risks giving away technological know-how and market access to its alliance partner in return for very little.
The disadvantages associated with alliances can be reduced if the firm selects partners carefully, paying close attention to the issue of reputation, and structures the alliance so as to avoid unintended transfers of know-how.
Two of the keys to making alliances work seem to be (i) building trust and informal communications networks between partners and (ii) taking proactive steps to learn from alliance partners.
Vocabulary notes
turnkey project –проект «под ключ» (предприятие полностью укомплектовано)
licensing –лицензирование
joint venture –совместное предприятие
subsidiary –дочернее предприятие, филиал
FDI (Foreign Direct Investments) –прямые иностранные инвестиции
disadvantage –неблагоприятные условия
Comprehension and Discussion Questions
1. What are the six ways of entering a foreign market?
2. Which of the ways in your opinion is the most important?
3. When do foreign franchises seem to be optimal?
4. What can help firm establish technical standards?
5. What are two keys to making alliance work?
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