Entry Strategy in International Business

Topics: Investment, Foreign direct investment, Risk Pages: 8 (1602 words) Published: May 17, 2011
9.0 Entry Strategy

9.1 Introduction

Entry strategy is about the decision to enter which foreign market, when in what scale and regarding the choice of entry mode. In our case we have already decided to enter the UK market and offer our products to a selected niche initially. It is the case of entry mode we should address in this chapter.

The various modes to enter foreign markets are vast. A few popular methods are, exporting, licensing or franchising to host country firms, establishing joint ventures, setting up wholly owned subsidiaries or acquiring an established enterprise

Other key factors like transport cost, trade barriers, political risk, economic risk, business risk cost and firm’s strategy plays a key role in determining the entry mode.

9.2 Basic Entry Decisions

• Which foreign markets
• Time of Entry
• Scale of Entry and Strategic Commitments

9.3 Entry Modes in Brief
I) Exporting
Exporting is a business model where goods are produced in one country and shipped through distribution channels to another country’s economic market. Companies often use this international market entry strategy to reduce risk and the costly investment of setting up business operations in a foreign country. Exporting may also allow a company the advantage of sending goods to multiple locations from one advantageous shipping location.

II) Licensing
Licensing allows an international company the rights to produce the goods or services owned by another company. This market entry strategy offers companies a low investment market entry strategy for conducting international business. Companies may select one or a few foreign companies for licensing the product rights for the production and distribution of goods or services in the foreign economic market. Licensing helps companies minimize risk, create a quick market entry and allow companies to avoid trade barriers or tariffs. III) Joint Venture

Companies may decide to create a joint venture with a foreign company when entering an international economic market. Joint ventures occur when a company signs a contract or formal written agreement with foreign companies to exclusively develop goods or services in the foreign country. Companies may also make a financial investment in a foreign company to gain a controlling interest in the joint venture process. Joint ventures combine economic resources for producing goods or services, create formal ownership policies or restrictions and in-depth knowledge of a foreign country's economy and consumer marketplace.

IV) Foreign Direct Investment

Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment. V) Franchising

This is similar to licensing although franchising tends to involve longer-term commitment than licensing. Franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchiser, but also insists that the franchisee to abide by strict rules as to how it does business.

The selling/buying of the right to do business in a prescribed fashion, where most operations of the business are standardized. This is usually seen as a specialized form of Licensing. • Generally involves services organizations.

– Long commitments Strict Guidelines
• Advantages:
– Allows rapid expansion Low Cost
• Disadvantages:
– Loss of profit potential Loss of Control

VI) Wholly Owned Subsidiaries

In a wholly owned subsidiary the firm owns 100 percent of the stock; this can be done in two ways;...

References: Charles W Hill, Arun K Jain (2009): International business, Competing in the international market place 6th edition: Tata McGraw Hill
Alan M.Rugman, Simon Collinson (2009): International Business 5th Edition: Prentice Hall
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