Foreign Market Entry Strategies
Ruth V. Aguilera
Principal Motives for Int’l Expansion
World Market
Locations
Economies
To seek lower
production factor costs
Economies
of Scale
To expand sales and
production volume
Economies
of Scope
To exploit proprietary
assets
Forms of FDI

Ownership

Wholly owned
operations
Green-field
investment
 Full acquisition


Partially owned
operations
Partial acquisition
 Joint venture


Relatedness



Horizontal FDI
Vertical FDI
Unrelated
diversification
Forms of FDI: Ownership
Home Country
Green Field
100% Owned
Host Country
New Entity
Full Acquisition
(i.e., 100%)
MNE
Local Firm
Partial Acquisition
(e.g., 50%)
Ownership = s%
Ownership = (1 - s)%
Joint Venture
Entry Decision Making Under Uncertainty:
Trade-off Between Flexibility and Commitment

Timing: When is a
good time to enter?




Potential gain from
waiting
Cost of delay
Speed of expansion: How
fast to grow?



Scale of entry


Small scale: Establish
a foothold to learn
Large scale: Acquire
first mover advantage

Value of learning
Preemption of competitors
Constraints of internal
resources
Mode


Some modes have more
flexibility embedded
Some modes reduce
resource requirements
Choice of Market Entry Mode
Value Chain of an MNE
Company Infrastructure
R&D
Innovative
Capabilities


Production
Marketing
and Sales
Advanced
Technology
& KnowHow
IndustrySpecific
Marketing
Expertise
Organization, Coordination & HRM
What additional resources may the MNE need to
enter a foreign market?
Local expertise: marketing, government relations, etc.
Typical Value Chain of a Local Firm
Company Infrastructure
R&D
Imitative
Capabilities
Production
Marketing
and Sales
Older
Technology
and KnowHow
CountrySpecific
Marketing
Expertise
Organization, Coordination & HRM
What may the MNE desire from a local firm?
 Complementary resources
 Not necessarily strength in every area
Complementarity of Resources
MNE’s Resources




Innovative capabilities
Advanced technology
and know-how
Industry-specific
marketing expertise
Organization structure
and systems
Local Firm’s Resources




Imitating capabilities
Older technology and
know-how
Country-specific
marketing expertise
Country specific
organization skills
Going it Alone: Export
HOME COUNTRY
HOST COUNTRY
Revenues
Customers
MNE
Export of Goods
Going it Alone: Export




Advantages
Low initial investment
Reach customers quickly
Complete control over
production
Benefit of learning for
future expansion








Disadvantages
Potential costs of trade
barriers
Transportation cost
Tariffs and quotas
Foregoes potential
location economies
Difficult to respond to
customer needs well
When Is Export Appropriate?
Low trade barriers
Home location has cost advantage
Customization not crucial
Licensing Agreement
HOME COUNTRY
HOST COUNTRY
Licensing of Technology
MNE
Local Firm
Fees and Royalties
Licensing Agreement





Advantages
Low initial investment
Avoids trade barriers
Potential for utilizing
location economies
Access to local knowledge
Easier to respond to
customer needs





Disadvantages
Lack of control over
operations
Difficulty in transferring tacit
knowledge



Negotiation of a transfer price
Monitoring transfer outcome
Potential for creating a
competitor
When Is Licensing Appropriate?
Well codified knowledge
Strong property rights regime
Location advantage
Foreign Acquisition
HOME COUNTRY
HOST COUNTRY
Investment
MNE
Local Firm
Profit
Foreign Acquisition
Advantages
Access to target’s local
knowledge
Control over foreign
operations
Control over own
technology









Disadvantages
Uncertainty about target’s
value
Difficulty in “absorbing”
acquired assets
Infeasible if local market for
corporate control is
underdeveloped
When Is Acquisition Appropriate?
Developed market for corporate control
Acquirer has high “absorptive” capacity
High synergy
Going it Alone: “Green Field” Entry
HOME COUNTRY
HOST COUNTRY
MNE
Profit
Investment
New Subsidiary
Company
Going it Alone: “Green Field” Entry




Advantages
Normally feasible
Avoids risk of
overpayment
Avoids problem of
integration
Still retains full control






Disadvantages
Slower startup
Requires knowledge of
foreign management
High risk and high
commitment
When Is “Green Field” Entry Appropriate?
Lack of proper acquisition target
In-house local expertise
Embedded competitive advantage
Management Contract
HOME COUNTRY
HOST COUNTRY
Management Fees
MNE
Local Firm
Profit
Technological Inputs
Managerial
Service
Wholly-Owned
Subsidiary
Management Contract
Advantages
Access to local
management skills
Avoids buying unwanted
assets
Retains strategic control




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
How do you know the
competencies of the
manager?
When Is a Management Contract Appropriate?
Manager has a reputation to protect




Disadvantages
Potential incentive
problem
Potential adverse
selection problem
Hotels
Consulting companies
Performance-based contract provides no perverse
incentives
Joint Venture
HOME COUNTRY
HOST COUNTRY
MNE
Local Firm
Share of
Profit
Joint Venture
Company
Inputs
Inputs
Share of Profit
Joint Venture







Advantages
Access to partner’s local
knowledge
Reduction of concern about
overpayment
Both parties have some
performance incentives
Significant control over
operation




Disadvantages
Potential loss of
proprietary knowledge
Potential conflicts between
partners
Neither partner has full
performance incentive
Neither partner has full
control
When Is a Joint Venture Appropriate?
Both partners contribute hard-to-measure inputs
Large expected mutual gains in the long-run
Trade secrets can be walled off
Common Market Entry Modes
HOME COUNTRY
HOST COUNTRY
Licensing
Acquisition
MNE
Local Firm
Export
Joint Venturing
“Green Field” Entry
Joint Venture
Company
New Subsidiary
Company
Kumar & Subramaniam (1997)
A Contingency Framework for
the Mode of Entry Decision



Risk
Return
Control
Modes of entry
Exporting Contractual
Agreeme
nt
Joint
Venture
Acquisition
Greenfield
Investm
ent
Risk
Low
Low
Moderate
High
High
Return
Low
Low
Moderate
High
High
Control
Moderate
Low
Moderate
High
High
Integration
Negligible
Negligible
Low
Moderate
High
Decision Strategies:

Rational Analytic Strategy

Cybernetic Strategy

Serendipity
Discovers
The Australian Challenge


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What’s Freixenet core competency?
Evaluate Freixenet’s market entry modes
Freixenet in Australia


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What lessons can we draw?
Where next?
Adds: what is the theme?


Is it a global theme
(standarization/adaptaion?
Glocalization (Akio Morita)
Good luck!
Future Reading
- Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry: A
Transaction Cost Analysis. Journal of International Business Studies,
17: 1-26.
- Kogut, B. and H. Singh. 1988. The effect of national culture on the
choice of entry mode. Journal of International Business Studies, 19:
411-432.
- Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The
strategy of Japanese investors in the United States. Management
Science, 39(9): 1054-1070.
- Hennart, J. F., and Reddy, S. 1997. The Choice Between
Mergers/Acquisitions and Joint Ventures: The Case of Japanese
Investors in the United States. Strategic Management Journal 18: 1-12.
- Barkema, H. G. and Vermeulen, F. 1998. International Expansion
Through Start-up or Acquisition: A Learning Perspective. Academy of
Management Journal 41: 7-26.
- Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield
Start-up? Institutional, Cultural and Transaction Cost Influences.
Strategic Management Journal 21: 89-97.