Various entry modes into foreign markets: advantages and disadvantages

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Various entry modes into foreign markets
advantages and disadvantages Entry
mode Advantage Disadvantage NO OWNERSHIP
INVOLVED Exporting from home production
scale economy trade barriers trade
secrets kept transportation cost local
marketing by whom? Turnkey little
financial risk may create efficient
contracts possible where competitors FDI
prohibited no long-term presence   Licensing
low cost, low risks lack of control
over your own technology Franchising low cost,
risks lack of control over quality
global strategic coordination difficult
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Entry mode Advantage Disadvantage OWNERSHIP
INVOLVED Joint ventures access to local lack
of control partner's knowhow over
technology in marketing, slow decision
making personnel management, local
government shared risks and cost Fully
owned protection of high risks and high cost
subsidiary technology fast
decisions BUSINESS DECISION which mode of
foreign entry? what share of
ownership, if ownership involved?
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SOME THEORIES ON FDI Efficiency considerations
lead to various forms of FDI organizationsHORIZO
NTAL FDI your FDI in the host country is in the
same industry as in home country (e.g. following
customers)BACKWARD VERTICAL FDI provides
inputs into your home operation (e.g. resource
FDI)FORWARD VERTICAL FDIreceives from you the
inputs produced in home country (e.g.
sales/distribution channel FDI)Vertical and
horizontal integration often increases production
efficiency due to scale economies.Sometimes
distinction between horizontal and vertical FDI
is unclearMANY THEORIES try to explain why
firms prefer FDI to pure "purchasing/selling
arrangements"
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IMPORTANT FACTORS WHICH AFFECT FDI DECISIONS -
TRANSPORTATION COSTS (3-12 per auto tire) -
MARKET SIZE (e.g. economies of scale) - MARKET
IMPERFECTIONS (e.g. tariffs, quotas, .....) -
FEAR OF TECHNOLOGY/KNOW-HOW SPILLOVER (problems
with technical licensing without ownership but
how much ownership?) - FOLLOW-THE-LEADER AND/OR
CUSTOMER, ME-TOO BEHAVIOUR (e.g. firms in
Toyota/Honda/Nissan capital keiretsu firms) - PLC
STAGES ... AT SOME STAGE OF A PLC, YOU HAVE TO
EXPLOIT FOREIGN MARKETS AND/OR SOURCE FROM
FOREIGN LOW-COST PRODUCERS - CORPORATE POLICY (to
become multinational by policy?) VARIOUS FORMS
OF FOREIGN EXPANSIONS (ref. Head (111-129)) below
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• Home Centralization
• Boeing commercial aircraft assembly in U.S.
  (mainly Seattle)
• Airbus commercial aircraft assembly in EU (mainly
  Toulouse)
• Foreign Centralization
• Mattels Barbie dolls (Dongguan, China)
• Matsushitas TVs (Malaysia)

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Nestle (replicator) had 254,000 Employees in 508
Factories in 85 Countries in 2002.
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The benefits of Home Centralization

• Strong economies of scale, that is plant-level
  fixed costs are high
• Low trade costs to export to foreign country
• Large home market
• Home country has comparative advantage in
  production costs

The benefits of Foreign Centralization

• Strong economies of scale, that is plant-level
  fixed costs are high
• Low trade costs to import from foreign country
• Large foreign market
• Foreign country has comparative advantage in
  production costs

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The benefits of Replication Form

• Absence of economies of scale, that is
  plant-level fixed costs should be low
• Both markets are large
• High trade costs impede exports imports
• Unimportant comparative advantages, that is costs
  of production similar across countries.

The following graphs show the tradeoffs between
'Home Centralization" and "Replication"
strategies in terms of the foreign market size
and distance WH home factory unit cost of
production WF foreign factory unit cost of
production K capital cost of building a new
factory T transportation and trade costs MF
foreign market size (e.g. of consumers)
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Forms of multinational firms with multiple
products Upstream (U) creates inputs Downstream
(D) uses U inputs to create outputs Example
ExxonMobilUpstream exploration and
production in 40 countries Downstream refining
and marketing Owns 46 refineries, located in 26
countries Operates 42,000 retail sites in 118
countries The maps below show ExxonMobil's
Upstream and Downstream operations.
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Various forms of multinational operations for
producing 2 vertically related products (various
combinations of U and D) E.g. U auto parts
D passenger car The firm wants to sell 2
related models of cars
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Reasons for "vertical specialization" Strong
economies of scale, that is plant-level fixed
costs are high Low trade costs to export U to
foreign country Low trade costs to import D
from foreign country Home country has
comparative advantage in production costs for
U Foreign country has comparative advantage in
production costs for D

• "Branching form" examples
• Coca Colas concentrate (U) and bottling (D)
• Honda's engines (U) and car assembly (D)
• Reasons for "branching form"
• Low trade costs on U, high on D
• Low scale economies on D, high on U
• Home comp. adv. in U, weak comp. advs. in D

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• "Multi-sourcing form" examples
• Refinery in one country, sourcing crude oil from
  multiple drilling sites (in different countries)
  Nikes strategy of shoe manufacturing
• Reasons for "multi-sourcing form"
• Low trade costs (for U D)
• Diseconomies of scale for U
• Uncertain comp. adv. for U.

More figures are found on Head, p.125.
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• Currently we are experiencing
• (1)Falling trade costs
• - more efficient transportation (containers, use
  of air transport)
• - lower tariffs, WTO oversight of disguised
  protection
• - technology-powered improvements in long
  distance communication
• (2)This may be leading to increased "economies of
  scale"
• The implications of (1) and (2) for multinational
  firms
• Optimal configuration of your FDI network
  requires continuingly changing efficiency
  calculations in particular
• Less Replication, and more Vertical
  Specialization
• But we also need to pay attention to
  industry-specific conditions
• Example Compare various companies' foreign
  expansion strategies
• Nestle, Boeing, Mattel
• Their strategies are not likely to converge.
• (They will continue to pursue divergent
  strategies)

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