169

CHAPTER 11
Strategies for Analyzing and Entering
Foreign Markets

After studying this chapter, students should be able to:

> Discuss how firms go about analyzing foreign markets.

> Outline the process by which firms choose their mode of entry into a foreign
market.
> Describe forms of exporting and the types of intermediaries available to assist
firms in exporting their goods.
> Identify the basic issues in international licensing and discuss the advantages
and disadvantages of licensing.
> Identify the basic issues in international franchising and discuss the advantages
and disadvantages of franchising.
> Analyze contract manufacturing, management contracts, and turnkey projects
as specialized entry modes for international business.
> Characterize the greenfield strategies and acquisition as forms of FDI.

LECTURE OUTLINE

OPENING CASE: Heineken Brews Up a Global Strategy

The opening case explores Heineken NV’s global strategy. In particular, it considers
the strategic moves and selection of entry modes Heineken is making in the U.S. and
Europe to increase its competitiveness.

Key Points

• Heineken NV, the world’s second largest beer producer, earns more than 85
percent of its revenues outside of the Netherlands. The company is a market
leader in every European country, and sells its beer in North and South America,
Africa, and Asia.

• Heineken began exporting beer to the U.S. in 1914, temporarily halted its sales
during Prohibition, and successfully reestablished sales after Prohibition.
Heineken’s distributor in the U.S. was Van Munching & Company.
170 > Chapter 11

• Today, Heineken brews beer in more than 50 countries. The company

expanded into the soft drink and wine businesses in the 1970s to exploit its bottling
technology and global distribution networks.

• Heineken’s current strategy is to achieve in Europe the same sort of market

dominance Anheuser-Busch has in the U.S. To that end, Heineken has bought
breweries in several European countries as a way of expanding its product lines
and facilitating distribution throughout Europe. In addition, the company has closed
or modernized older breweries.

• Heineken has avoided establishing a brewery in the U.S., however, because it

wants to retain its imported image. Heineken knows that from a cost standpoint,
local production might make sense, but notes that Lowenbrau actually saw a
decrease in sales after establishing a U.S. operation.

• Heineken has, however, bought its U.S. distributor, Van Munching & Company,
to cut costs and increase profits. The move also enables Heineken to coordinate its
U.S. marketing campaigns with its global ones.

Case Questions

1. Why is it so important for Heineken to maintain its export sales to the U.S.?

The U.S. has been an important export market for Heineken for nearly a century.
Heineken recently acquired the distributor, Van Munching & Company, that has
been responsible for importing and distributing its products in the U.S. from the
beginning. Although Heineken considered establishing a brewery in the U.S. to cut
costs, it decided to maintain its current export strategy because it believes the
imported image Heineken beer carries is an important selling point in the U.S.

2. Heineken earns the majority of its revenues outside of its home country, yet both
Anheuser-Busch and Miller sell 95 percent of their output locally. What factors could
explain this difference?

Most students will quickly point out that if Heineken wanted to be one of the world’s
major producers of beer, it had to expand outside of its home country, the
Netherlands, because its local market is so small. Miller and Anheuser-Busch, on
the other hand, had the luxury of producing beer in one of the world’s larger
markets, and thus could rely on domestic sales for most of their earnings. Later,
Heineken continued its global expansion in order to capitalize on its distinctive
competencies, its bottling technology, and its global distribution networks.

Additional Case Application

Today, Budweiser is one of the hot (or should one say cold?) beers of choice in
Britain. Much of its current appeal to the British appears to be related to the fact
that it is imported. Students can be asked to compare and contrast Budweiser’s
strategy in Britain with Heineken’s strategy in the U.S. Issues to consider include
whether Budweiser should establish a British brewery or form a joint venture with a
local company, whether exporting is a sustainable strategy, and how Heineken
should respond to Budweiser’s recent success in Britain.
CHAPTER SUMMARY
 Strategies for Analyzing and Entering Foreign Markets > 171

Chapter Eleven examines the various entry modes available to companies as they
expand internationally. The chapter begins with the choice of entry modes, and then
proceeds to discuss the advantages and disadvantages of each one.

I. FOREIGN MARKET ANALYSIS

To successfully increase foreign market share, firms must assess alternative markets;
evaluate the respective costs, benefits, and risks of entering each; and select those
that hold the most potential for entry or expansion.

Assessing Alternative Foreign Markets

• A firm must consider a variety of factors, including market potential, levels of

competition, the legal and political environment, and sociocultural influences when
assessing alternative foreign markets. Discuss Table 11.1 here.
• Information on some of the factors is easily obtainable from published sources
in the firm’s home country. Other information may be subjective and difficult to
obtain. In fact, it may be necessary to visit the foreign location in question.
• Market Potential. The first step in foreign market selection is assessing market
potential. Variables a firm might wish to consider include population, GDP, per
capita GDP, public infrastructure, and ownership of goods such as automobiles and
televisions. Students should refer to Building Global Skills in Chapter 2 for a list of
publications that provide this type of information.
Next, a firm must collect information relating to the specific product line under
consideration. It may be necessary for a firm to use proxy data in some cases. The
potential for growth in a particular market can be estimated using both objective and
subjective measures. Show map 11.1 here.
• Levels of Competition. Firms must also consider the current and future
level of competition in foreign markets. Firms assessing their competitive
environment should identify the number and size of firms already competing in
the potential market, their relative market shares, their pricing and distribution
strategies, and their relative strengths and weaknesses. Continual monitoring
can help firms identify new opportunities. (See Chapter 10's closing case, The
New Conquistador.)
• Legal and Political Environment. It is important that a firm understand the host
country’s policies toward trade as well as its general legal and political environment
prior to making an investment. Students should refer to Chapters 6 and 8 for a
review of these concepts.
Trade barriers, for example, might induce a firm to enter a market via FDI as
opposed to exporting. In some countries, legal and political issues will impact both
entry methods and the repatriation of profits. A country’s tax policies and
government stability may also affect a firm’s strategy. The text provides specific
examples of how these factors affected the international strategies of various firms.
• Sociocultural Influences. Sociocultural influences should also be considered
when assessing foreign market opportunities. The role of culture in international
business was discussed in Chapter 9. In many cases, firms will attempt to
minimize the potential impact of sociocultural differences by initially focusing on
countries that are culturally similar to their home markets.
172 > Chapter 11

Depending on the proposed type of internationalization effort, certain sociocultural

variables may be more important than others. For example, if the proposed
strategy is to export goods to a new market, the sociocultural factors of most
importance are those that relate to consumers. In contrast, if a firm is considering
establishing a factory or distribution center in a foreign country, the firm should
evaluate sociocultural factors associated with its potential employees.

Evaluating Costs, Benefits, and Risks

• Costs. There are two types of relevant costs at this point: direct and
opportunity. Direct costs are incurred when entering the foreign market in question
and include costs associated with setting up a business operation, transferring
managers to run it, and shipping equipment and merchandise. A firm incurs
opportunity costs when entering one market precludes or delays its entry into
another. The profits it would have earned in the second market are opportunity
costs.
• Benefits. Benefits from entering a foreign market include expected sales and
profits, lower acquisition and manufacturing costs, foreclosing of markets to
competitors, competitive advantage, access to new technology, and the opportunity
to achieve synergy with other operations.
• Risks. A firm entering a new market incurs the risks of opportunity costs,
additional operating complexity, and direct financial loss due to misassessment of
market potential. In some extreme cases a firm may also risk loss due to
government seizure of property, war or terrorism.
• It is important that firms carefully assess foreign markets prior to making
strategic decisions. Poor strategic judgments may rob a firm of profitable
operations, while a continued inability to reach the right strategic decisions may
threaten the firm’s existence.

Teaching Note:
Instructors may want to begin their discussion of entry
methods by asking students how a hypothetical (or real)
firm should sell its product in other markets. Students
can usually quickly name the various choices, but are uncertain as to the pros and
cons of each method.

II. CHOOSING A MODE OF ENTRY

• Dunning’s eclectic theory (see Chapter 5) can be helpful in providing insight as

to the best means of penetrating foreign markets. The theory considers three
factors: ownership advantages, location advantages, and internalization factors,
which in addition to other factors such as the firm’s need for control, the availability
of resources, and the firm’s global strategy, help a firm decide between exporting,
FDI, joint ventures, licensing, and franchising. Show Figure 11.1 here.
• Ownership advantages are the tangible or intangible resources owned by a
firm that grant it a competitive advantage over industry rivals. The text provides
examples of both tangible (Inco, Ltd’s nickel-bearing ore) and intangible (the luxury
appeal of LVMH Moet Hennessy Louis Vuitton’s products) ownership advantages.
The nature of a firm’s ownership advantage will play a role in the firm’s selection of
entry mode.
 Strategies for Analyzing and Entering Foreign Markets > 173

• Location advantages are those factors that affect the desirability of host
country production relative to home country production. The choice of home
country versus host country production is affected by factors such as relative wage
rates, land acquisition costs, capacity in existing plants, access to R&D facilities,
logistical requirements, customer needs, the administrative costs of managing a
foreign subsidiary, political risk, and government restrictions. Present Map 11.2
here.
• Internalization advantages are factors that affect the desirability of a firm
producing a good or service itself rather than relying on an existing local firm to
handle production. Transaction costs (see Chapter 3) will play a role in this
decision. If transaction costs are high, the firm may select FDI or a joint venture as
an entry method. If transaction costs are low, franchising, contract manufacturing,
or licensing may be a better choice. The text illustrates this concept with an
example of the factors affecting choice of entry mode in the pharmaceutical
industry.
• Other factors that affect a firm’s choice of entry method include its need for
control, the availability of resources, and the firm’s overall global strategy. In sum,
the choice of an entry mode will be a tradeoff between risk and reward, the level of
resource commitment necessary, and the level of control the firm seeks.

III. EXPORTING TO FOREIGN MARKETS

• The most common international business activity is exporting, or the process of

sending goods or services from one country to other countries for use or sale there
(see Chapter 1). Discuss Table 11.2 here.
• There are many advantages to exporting. It allows a firm to control its financial
exposure in the host country; in fact, in most situations the risk is limited to basic
start-up costs and the value of the goods or services involved in the transaction.
Exporting also allows a firm to enter a market on a gradual basis, gain experience in
operating internationally, and obtain information about certain markets without any
investment expense.

Discuss Venturing Abroad: Jumping on a Japanese Jam

Deal
Chivers Hartley, a UK firm producing fruit preserves, after two
years of negotiation landed a deal to export its products to
Japan. The deal required changes in recipes and packaging, as well as the
creation of a new brand name.

• Firms may have a proactive motivation for entering a foreign market, and in
effect be pulled into the market as a result of the opportunities available there. The
text provides several examples of firms that have exported as a result of a proactive
motivation.
• Firms may also export as a result of a reactive motivation whereby they are
pushed into exporting because domestic opportunities are shrinking, or production
lines are running below capacity, or they are seeking higher profit margins.
174 > Chapter 11

Forms of Exporting

There are three forms of exporting: indirect exporting, direct exporting, and
intracorporate transfer. Discuss Figure 11.2 here.

• Indirect exporting occurs when a firm sells its products to a domestic

customer, which in turn exports the product, in either its original form or a modified
form. Because indirect exporting is usually not done on a conscious basis, the
process does not provide the firm with experience in international business and
does not allow the firm to capitalize on potential export profits.
• Direct exporting involves sales to customers located outside the firm’s home
country. Although one-third of firms exporting for the first time are responding to an
unsolicited order, subsequent efforts are usually the result of a deliberate effort,
allowing a firm to gain valuable international business experience.
• An intracorporate transfer is the selling of goods by a firm in one country to an
affiliated firm in another. Intracorporate transfer has become more important as the
sizes of MNCs have increased, and today represents some 35 percent of all U.S.
merchandise exports and imports. The text provides several examples of
intracorporate transfer, and the topic will also be discussed in more depth in
Chapter 17.

Additional Considerations

In additional to considering which form of exporting to use, a firm must also assess
government policies, marketing considerations, logistical considerations, and
distribution issues.

• Government policies such as export promotion policies, export financing

programs, and other forms of home country subsidization encourage exporting.
However, tariff and nontariff barriers may discourage firms from selecting exporting
as an entry mode. The text illustrates this concept with the example of how
voluntary export restraints on Japanese automobile exports encourage Japanese
producers to manufacture in the U.S.
• Marketing concerns including image, logistics, distribution, responsiveness to
the customer, and the need for quick feedback may also affect a firm’s choice of
entry method. The text provides several examples of products, which are
successful as exports because of their image.
• Logistical Considerations. A firm must consider the logistical costs of
exporting such as the physical distribution costs of warehousing, packaging,
transporting and distributing goods, and inventory carrying costs when selecting an
entry mode.
• Distribution issues may also influence a firm’s decision to export. Many firms
are forced to use distributors in foreign markets, and the selection of the distributor
can be critical to the firm’s international success. In some cases, the best distributor
may already be handling a competitor’s products and a firm will be forced to weigh
the costs of using a less experienced distributor with the costs of using a distributor
that will not handle its products on an exclusive basis. In addition, compensation
decisions must be made, the firm may find that its business judgment differs from
the distributor’s, and pricing strategies may differ.

Export Intermediaries
 Strategies for Analyzing and Entering Foreign Markets > 175

A firm may market and distribute its goods via an intermediary, a third party specializing
in the facilitation of exports and imports. There are several types of export
intermediaries including export management companies, Webb-Pomerene
associations, and international trading companies.

• An export management company (EMC) is a firm that acts as its client’s

export department. Several thousand EMCs operate in the U.S., providing clients
with information about the legal, financial, and logistical details of exporting. Some
EMCs act as commission agents, while others take title to the good.
• A Webb-Pomerene association is a group of U.S. firms that operate within the
same basic industry and that are allowed by law to coordinate their export activities
without fear of violating U.S. antitrust laws. Fewer than 25 associations exist today,
providing market research, overseas promotional activities, freight consolidation,
contract negotiations, and other services for members.
• An international trading company is a firm directly engaged in trading a wide
variety of goods for its own account. Unlike an EMC, an international trading
company participates in both exporting and importing. Japan’s sogo sosha are the
most important trading companies in the world. The success of the sogo soshas is
a result of several factors. First, they are able to continuously obtain information
about economic conditions and business opportunities anywhere in the world.
Second, they have a ready source of financing from the keiretsu, and a built-in
source of customers (fellow keiretsu members.) Discuss Table 11. 3 here.
• Other Intermediaries. Manufacturers’ agents solicit domestic orders for foreign
manufacturers while manufacturers’ export agents act as an export department for
domestic manufacturers. Finally, export and import brokers bring together
international buyers and sellers of standardized commodities, and freight
forwarders specialize in the physical transportation of goods.

IV. INTERNATIONAL LICENSING

• Licensing is an arrangement whereby a firm, the licensor, sells the rights to

use its intellectual property to another firm, the licensee, in return for a fee. Firms
operating in countries with weak intellectual property protection are not advised to
use licensing. However, in cases where tariff and nontariff barriers, restrictions on
the repatriation of profits, or restrictions on FDI discourage other alternatives,
licensing may be the only option. Show Figure 11.3 here.

Teaching Note:
Instructors may wish to raise the issue of why intellectual
property protection is so important to firms, and why it is
difficult to enforce. Instructors may wish to use the
example of Polaroid and Kodak to illustrate the concept.

• Licensing is attractive because it requires few out-of-pocket costs, and because

it allows a firm to capitalize on location advantages of foreign production without
incurring any ownership, managerial, or investment obligations. The text provides
an example of why the Kirin Brewery company chose licensing as a means of
international expansion.

Basic Issues in International Licensing

176 > Chapter 11

The actual licensing agreement is a critical part of the licensing process, and reflects
the bargaining power and skills of the licensor and licensee. The contract should
consider the boundaries of the agreement; compensation, rights, privileges, and
constraints; dispute resolution; and duration of the contract.

• Specifying the Agreement’s Boundaries. The first step in negotiating a

licensing contract is specifying the boundaries of the agreement. The text provides
an example of how Pepsi sets the boundaries in its licensing agreement with
Heineken.
• Determining Compensation. Compensation under a licensing agreement is
called a royalty. Both parties have an interest but opposing views in the
determination of an agreement’s compensation. The licensor wants to receive as
much compensation as possible, while the licensee wants to pay as little as
possible. Royalties of 3-5 percent are common.
• Establishing Rights, Privileges, and Constraints. A licensing contract should
spell out the rights and privileges of the licensee and the constraints the licensor
may impose. Typically, licensees are prohibited from divulging information learned
from the licensor to third parties, are required to keep specific records on the sale of
products or services, and must follow specified standards regarding product and
service quality.
• Specifying the Agreement’s Duration. Finally, a licensing agreement specifies
the duration of the arrangement. Licensors who have chosen licensing as a low-
cost means of gaining information about a foreign market may seek a short-term
agreement. However, a licensee will seek an agreement that is long enough for it
to recoup its investments in market research, the establishment of distribution
networks, and/or production facilities. The text notes, for example, that the
licensees that built Tokyo Disneyland required a 100-year agreement with Walt
Disney Company.

Advantages and Disadvantages of International Licensing

• A primary advantage of licensing is its relatively low financial risk. In addition,

licensing permits a company to investigate foreign market sales potential without
making significant investment in financial and managerial resources. Licensees
benefit from the arrangement by being able to make and sell products with a proven
track record, yet incur relatively little R&D cost.
• A primary disadvantage of licensing is that it limits market opportunities for both
the licensee and the licensor. In addition, there is mutual dependence between the
licensor and the licensee, and costly and tedious litigation to resolve disputes may
hurt both parties. Finally, firms must carefully word their licensing agreements to
minimize problems and misunderstandings, and also guard against creating a future
competitor.
 Strategies for Analyzing and Entering Foreign Markets > 177

V. INTERNATIONAL FRANCHISING

A franchising agreement allows an independent entrepreneur or organization, called

the franchisee, to operate a business under the name of another, called the
franchisor, in return for a fee. Franchising is one of the fastest growing forms of
international business today.

Basic Issues in International Franchising

• International franchising is more likely to succeed when the franchisor has

already achieved considerable success in franchising in its domestic market; the
franchisor has been successful domestically because of unique products and
advantageous operating systems; the factors that contributed to its domestic
success are transferable to foreign locations; and there are foreign investors who
are interested in entering into franchise agreements. The text illustrates this
concept by examining the franchise agreements of McDonald’s.
• A formal contract is associated with franchise agreements. A typical contract
specifies the fee and royalties paid by the franchisee for the rights to use the name,
trademarks, formulas, and operating procedures of the franchisor. In addition,
under a franchise contract, the franchisee typically agrees to adhere to the
franchisor’s requirements for appearance, reporting, and operating procedures.
Usually, the franchisor agrees to help the franchisee establish the new business.
• U.S. firms are the leaders in the international franchise business, perhaps
because franchising is more common in the U.S. than in other countries. The text
provides examples of U.S. and non-U.S. firms that have been successful at
franchising.

Discuss Wiring the World: Advice from Afar

Cendant Corporation, a hotel franchising company that
controls such brands as Days Inn, Howard Johnson, Ramada,
Travelodge, and Super 8, relies heavily on the Internet to
manage its operations. It uses e-mail to give advice and guidance, helps with web
design and online training, and provides overall real time support to its franchisees.
The Internet has allowed Cendant to improve the quality while lowering the cost of
its services.

Advantages and Disadvantages of International Franchising

• Primary advantages of international franchising are that it allows franchisees to

enter a business with a proven track record, and allows franchisors to expand
internationally at relatively low cost and risk. Franchisors also have the opportunity
to obtain information about local markets that they might otherwise have difficulty
acquiring.
• As with licensing, a primary disadvantage of franchising is that profits are
shared between the franchisor and the franchisee. International franchising may
also be more complex than domestic franchising. The text provides an example of
some of the problems McDonald’s had with a franchisee in Moscow.

VI. SPECIALIZED ENTRY MODES FOR INTERNATIONAL BUSINESS

178 > Chapter 11

Firms may also use specialized entry modes such as contract manufacturing,
management contracts, and turnkey projects.

• Contract Manufacturing is used by firms that outsource most or all of their

manufacturing needs to other companies in an effort to reduce the amount of
resources needed in the physical production of their products. The text notes that
both Nike and Mega Toys use contract manufacturing in the production of their
goods.
• A management contract is an agreement whereby one firm provides
managerial assistance, technical expertise, or specialized services to a second firm
for some agreed-upon time in return for a fee. In many cases, management
contracts are arranged as a result of government activities. For example, the text
notes that when Saudi Arabia nationalized Aramco, it hired the former owners to
manage the firm. Management contracts are attractive because they allow firms to
earn additional revenues without incurring investment risks or obligations. The text
illustrates this concept with an example of Hilton Hotel’s management contracts.
• A turnkey project is a contract under which a firm agrees to fully design,
construct, and equip a facility and then turn the project over to the purchaser when
it is ready for operation. International turnkey projects typically involve large,
complex, multiyear projects such as the construction of a nuclear power plant or
airport. In some cases, turnkey projects are used when firms fear difficulties in
procuring resources locally. The text provides an example of the latter concept by
exploring PepsiCo’s operations in the former Soviet Union.
• Some firms today are using a B-O-T project in which the firm builds a facility,
operates it, and later transfers ownership of the project to another party. The text
provides an example of such a project involving the country of Gabon.

VII. FOREIGN DIRECT INVESTMENT

• Some firms choose to establish operations in a host country at the beginning of

their internationalization effort, while others prefer to use one of the other entry
methods initially, and later invest in facilities in the host country.
• FDI is attractive not only for its profit potential, but also because a firm has
increased control over its foreign operations. Control is important to firms because
it allows firms to closely coordinate the activities of its foreign subsidiaries to
achieve strategic synergies, and because control may be necessary to fully exploit
the economic potential of an ownership advantage. FDI is also attractive if host
country customers prefer to deal with local factories.
• However, FDI is riskier and more complex than other types of entry strategies.
In some cases, government actions encourage firms to invest in local operations
(through such policies as the availability of political risk insurance), while in other
cases, government actions discourage FDI (through direct controls on foreign
capital or repatriation of profits).
• The three basic methods of FDI are greenfield strategies, whereby a firm
builds new facilities; acquisitions strategies (also known as "brownfield
strategies"), whereby a firm buys existing assets in a foreign country; and joint
ventures.
• A greenfield strategy involves starting from scratch: buying or leasing and
constructing new facilities, hiring and/or transferring managers and employees, and
launching the new operation. The greenfield strategy is attractive because the firm
can select the site that meets its needs best, the firm starts with a clean slate, and
 Strategies for Analyzing and Entering Foreign Markets > 179

the firm can acclimate itself to the new national business culture at its own pace.
The main disadvantages of the greenfield strategy include the time and patience
necessary for successful implementations; the fact that land in the desired location
is not available, or is only available at an unreasonable price; local and national
regulations must be complied with during the building of the new factory; the firm
must recruit and train a local workforce; and the firm may be perceived as a foreign
enterprise. The text provides an example of the difficulties Disney had with some of
these issues when it opened its European operations.
• Acquisition strategies (or brownfield strategies) are popular because, unlike
other entry methods, an acquisition quickly gives the purchaser control over the
firm’s factories, employees, technology, brand names, and distribution networks.
The text provides examples of several recent acquisitions made by firms including
Proctor and Gamble, Arabia Oil Co., and Komomklijke PTT Netherland. The main
disadvantage of an acquisition strategy is that the purchaser assumes all liabilities
of the acquired firm. In addition, the purchasing firm must also spend substantial
sums up front. In contrast, a greenfield strategy allows a firm to spread its
investment over an extended period of time.

Discuss Bringing the World into Focus: A Bubbly

Business
When Plantagenet, based in San Francisco, tried to buy a
French champagne maker, they became embroiled in a variety
of legal problems and tax issues. Eventually the problems were worked out,
however they now make their international deals through a company incorporated in
Luxembourg.

• The joint venture involves an arrangement whereby a new enterprise is created

by two or more firms working together for mutual benefit. Joint venture creation is
on the rise, in part because of rapid changes in technology, telecommunications,
and government policies. Joint ventures will be explored in more depth in Chapter
Twelve.

Teaching Note:
Instructors may wish to create a “master chart” of the
different entry modes, their advantages and
disadvantages, when and where each mode is most appropriate, and so forth, so
that students can easily compare the various options for entering a new market.
The charts can then be used as reference material when discussing future topics.
180 > Chapter 11

reference material when discussing future topics.

CA

OS
SE

CL
IN
G
David vs. Goliath

The case describes the success of Ricardo.de, a German online auction company in
establishing itself despite eBay's dominance in the field.

Key Points

• Ricardo.de was established by three young German entrepreneurs in 1997.

• eBay, the U.S. based online auction company, began in 1995 and went public in
1997. Unlike many dot.com businesses, eBay has been profitable for quite some
time.

• Ricardo.de grew through the establishments of strategic alliances with key firms
throughout Europe and through the publicity gained by auctioning off high-profile
items such as visits to the submerged Titanic and Steffi Graf's tennis racket.

• In 2000 Ricardo.de was acquired by the British firm QXL (Britain's largest online
auctioneer) for QXL stock worth $261 million.

Case Questions

1. Turn back the clock to 1997. Suppose you were hired by Ricardo's founders to
map out an entry strategy for the firm. What advice would you have given them?
Would you have done anything differently?

This question allows students a lot of latitude. There is not a "right" answer.
Students will consider that Ricardo's founders originally intended to create an online
publishing business and should demonstrate an understanding of how strategies
change (sometimes radically) over time. Another key issue is the decision to sell
only new items. Given eBay's success in used and collectible items, students will
probably suggest that Ricardo's founders might have been more successful if they
had not limited the firm in this manner.

2. Why did Ricardo.de strive to grow quickly? Do you agree with this strategy?
Should it have grown more slowly?

Dot.com success depends largely on name recognition. Given the large numbers
of dot.com start-ups in the late 90's it was important that Ricardo.de establish itself
quickly. The speed with which they moved created legal and financial problems. It
appears, however, that Ricardo's founders were interested in building the business
and then selling it. If that is true, the strategy to build it quickly and then get out
seems appropriate. Had the business grown more slowly it might not have
attracted QXL's eye and Ricardo's founders may have had a harder time finding a
partner interested in acquiring the firm.
 Strategies for Analyzing and Entering Foreign Markets > 181

3. What advantages does eBay possess over upstart competitors like Ricardo?

eBay has tremendous name recognition and a solid reputation. It also has a huge
variety of products being sold, which attracts additional buyers and sellers alike.

4. What advantages does a combined Ricardo-QXL have over eBay?

A key advantage of Ricardo-QXL is their European emphasis. As noted in the

case, eBay seems to have almost abandoned Europe and allowed Ricardo to
establish a strong presence in Germany. Also, it could be argued that Ricardo's
focus on new merchandise helps enhance buyers' confidence in the goods
purchased. Finally, in many countries (like France, for example) there is a backlash
against the dominance of U.S. firms in the global marketplace. The fact that
Ricardo-QXL is a European alternative to a U.S. firm will give it an advantage with
some customers.

5. Do you agree with Ricardo's decision to be acquired by QXL?

It all depends on the objectives of the owners. To the extent that it netted $261
million for three years of work, students will tend to say it was a good decision.
Given the difficulties that e-commerce firms have faced recently, their decision to be
acquired seems even more prudent.
W

VI

R
R

A
H
C
E

P
T

1. What are the steps in conducting a foreign market analysis?

A market analysis usually is comprised of three steps: (1) assessing alternative markets;
(2) evaluating respective costs, benefits, and risks of entering each; and, (3) selecting
those that hold the most potential for entry or expansion.

2. What are some of the basic issues a firm must confront when choosing an entry mode for a
new foreign market?

When choosing an entry mode for a new foreign market, a firm must confront issues
relating to ownership advantages, location advantages, internalization advantages, the
need for control, the availability of resources, and the firm’s global strategy.

3. What is exporting? Why has it increased so dramatically in recent years?

Exporting, the most common form of international business activity, is the process of
sending goods or services from one country to other countries for use or sale there. There
are three forms of exporting: indirect exporting, direct exporting, and intracorporate
transfer. Many firms are pushed into exporting because of shrinking domestic
marketplaces, but other firms are pulled into exporting because of foreign market
opportunities.
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4. What are the primary advantages and disadvantages of exporting?

One of the primary advantages of exporting is its relatively low level of financial exposure.
A second advantage of exporting is related to speed of entry. Exporting allows a firm to
expand into a foreign market gradually, and therefore allows a company to assess the local
environment and adapt its products to local consumers. The disadvantages of exporting
include a lack of presence in the local marketplace, vulnerability to trade barriers, and
potential problems with trade intermediaries.

5. What are the three forms of exporting?

The three forms of exporting are indirect exporting, direct exporting, and intracorporate
transfer. Indirect exporting involves selling a product to a domestic customer, which then
exports the product in its original form or a modified form. Direct exporting involves selling
directly to distributors or end-users in other markets. Intracorporate transfer occurs when a
company sells its product to a foreign affiliate.

6. What is an export intermediary? What is its role? What are the various types of export
intermediaries?

An export intermediary is a third party that specializes in facilitating imports and exports.
There are various types of export intermediaries, including export management companies,
the Webb-Pomerene association, international trading companies, manufacturer’s agents,
and export and import brokers. The role of an export intermediary can range from simply
handling transportation and documentation to taking ownership of foreign-bound goods
and/or assuming total responsibility for marketing or financing exports. Export
intermediaries are third parties that specialize in facilitating trade. There are several types
of export intermediaries. An export management company is a firm that acts as the client’s
export department, while a Webb-Pomerene association handles market research,
overseas promotion, freight consolidation, contract negotiations, and other services for its
members. An international trading company trades a variety of goods for its own account.
A manufacturer’s agent, acting on a commission basis, solicits domestic orders for foreign
manufacturers, while a manufacturer’s export agent acts as an export department for
domestic manufacturers. Export and import brokers bring together buyers and sellers of
standardized commodities, and freight forwarders handle the physical transportation of
goods.

7. What is international licensing? What are its advantages and disadvantages?

International licensing occurs when a firm, the licensor, sells the right to use its intellectual
property to another firm, the licensee. The primary advantages of international licensing
are its relatively low financial risk and the opportunity it provides the licensor to learn about
sales potential in foreign markets. Licensees like the arrangements because they are able
to make and sell products with proven success tracks, yet incur low R&D costs. However,
the agreements limit market opportunities for both the licensor and the licensee, and there
is mutual dependency between the two parties. Further, there is potential for problems and
misunderstandings. Finally, licensors must be careful to avoid creating a future competitor.
 Strategies for Analyzing and Entering Foreign Markets > 183

8. What is international franchising? What are its advantages and disadvantages?

International franchising involves an agreement whereby the franchisee operates a

business under the name of the franchisor in return for a fee. International franchising
agreements are attractive because they allow franchisees to enter a business that is
established and has a proven track record. Franchisors benefit from the agreements
because they can expand internationally at relatively low cost and risk. In addition, they
can obtain critical information about the local marketplace from franchisees. However, an
international franchising agreement requires both parties to share profits and may be more
complicated than domestic franchisee agreements.

9. What are three specialized entry modes for international business, and how do they work?

Three specialized entry modes for international business are management contracts,
turnkey projects, and contract manufacturing. Under a management contract agreement,
one firm provides managerial assistance, technical expertise, or specialized services to a
second firm in exchange for a fee. A turnkey project is an agreement whereby a firm
agrees to fully design, construct, and equip a facility and then turn the key over to the
purchaser when it is ready for operation. Contract manufacturing involves outsourcing
manufacturing needs to other companies.

10. What is FDI? What are its three basic forms? What are the relative advantages and
disadvantages of each?

FDI is foreign direct investment. The three basic forms of FDI are greenfield investments,
acquisitions, and joint ventures. Greenfield investments involve the construction of new
facilities. It is attractive because its allows a firm to select the most suitable site for
construction, the firm starts with a clean slate, and the firm can adapt to its new
surroundings at its own pace. However, greenfield investments take time and patience,
may be expensive, require the firm to comply with local regulations and recruit a workforce,
and may result in a firm being perceived as a foreigner. Acquisitions, in contrast, allow a
firm to generate profits even as it integrates the new company into its overall strategy.
However, acquisition requires a firm to assume all of the acquired firm’s liabilities, and
spend substantial money up front. Joint ventures involve the creation of a new firm by two
or more companies working together for mutual benefit.

Questions for Discussion

1. Do you think it is possible for someone to make a decision about entering a particular
foreign market without having visited that market? Why or why not?

The response to this question probably depends in part on the market in question and the
degree of risk one is willing to assume. Typically, mangers will not be able to obtain all of
the information needed to make a decision about a foreign market from secondary sources.
Thus, managers have two options: they can visit the market in person and obtain
information directly from local experts, embassy staff, and chamber of commerce officials,
or, hire consulting firms to provide the necessary information.
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2. How difficult or easy do you think it is for managers to gauge the costs, benefits, and risks
of a particular foreign market?

In general, it is probably easier to gauge the costs, benefits, and risks of developed country
markets than it is to gauge the same variables in a developing economy. However, there is
a fair amount of subjectivity involved regardless of the market in question. For example,
managers must estimate not only the costs involved in establishing a foreign operation, but
also opportunity costs. In addition, future benefits and risks must be estimated.

3. How does each advantage in Dunning’s eclectic theory specifically affect a firm’s decision
regarding entry mode?

Dunning’s eclectic theory considers three factors: ownership advantages, location

advantages, and internalization advantages. Ownership advantages affect a firm’s decision
regarding entry mode in that certain types of advantages are more easily transferred
through certain modes than others. For example, imbedded technologies are best
transferred through equity modes, while simple technology is more suited to a licensing
mode. In addition, ownership advantages will affect a firm’s bargaining power, and
therefore the outcome of entry mode negotiations. Location advantages affect a firm’s
decision regarding entry mode because they affect the desirability of host country
production relative to home country production. For example, if home country production is
more desirable, perhaps because of low wage rates, a firm will probably choose exporting
as an entry mode. Finally, internalization advantages affect a firm’s decision regarding
entry mode because they affect the desirability of producing a good or service in-house
versus farming it out to another firm. For example, when transaction costs are low, and the
firm believes that it can farm out production without jeopardizing its interests, the firm may
use licensing as an entry mode.

4. Why is exporting the most popular initial entry mode?

Exporting is the most popular initial entry mode because of its simplicity and its low risk
relative to other types of entry modes. Exporting typically requires little or no capital
investment, and the dollar amount of risk is limited to the value of a particular transaction.
Exporting also allows a firm to enter a foreign market on a gradual basis, and gain
experience in the market.

5. What specific factors could cause a firm to reject exporting as an entry mode?

There are several factors which could cause firms to reject exporting as an entry mode,
including the presence of trade barriers, logistical issues, and distribution issues. Firms
facing high tariff or nontariff barriers may find host country production preferable to home
country production. Logistical considerations may also affect the desirability of exporting.
For example, the higher transportation costs associated with exporting, and the longer
supply channel and difficulty communicating with customers may encourage a firm to
choose an alternative entry method. Finally, firms that face difficulty finding appropriate
distributors may turn to one of the other entry modes.
 Strategies for Analyzing and Entering Foreign Markets > 185

6. What conditions must exist for an intracorporation transfer to be cost-effective?

An intracorporate transfer occurs when one firm sells goods to an affiliate in another
country. Firms engage in intracorporate transfers to lower their production costs and use
their facilities more effectively. Therefore, for an intracorporate transfer to be cost-effective,
it must be cheaper to buy the product in question from the affiliate firm than from an
alternative source, and the affiliate firm must have the capacity necessary to produce the
product in question, while the buying firm does not.

7. Your firm is about to begin exporting. In selecting an export intermediary, what

characteristics would you look for?

Export intermediaries are third parties that specialize in the facilitation of trade. Depending
on the particular circumstances of a firm, employing certain types of intermediaries is more
appropriate than employing others. For example, a small firm may select an export
management company because it will essentially act as the firm’s export department.
However, a larger firm that has an in-house export department might engage a freight
forwarder on a product-by-product basis.

8. Do you think trading companies like Japan’s sogo sosha will ever become common in the
United States? Why or why not?

Sogo soshas acquire goods either by importing them or having them produced, and then
resell them in both domestic and foreign markets. Most students will probably agree that
sogo soshas will never become common in the United States, in part because of antitrust
laws in effect, and in part because the close relationships with other firms that the sogo
soshas imply go against the individualistic culture of the U.S. Other students, however,
may point to export trading companies in the U.S. that provide many of the same services
as a sogo sosha, and suggest that a form of sogo sosha is already common in the U.S.

9. What factors could cause you to reject an offer from a potential licensee to make and
market your firm’s products in a foreign market?

There are several reasons why a firm might reject the offer of a potential licensee to make
and market the firm’s product in a foreign market. First, such an arrangement would limit
the market opportunities for the firm, and create a situation of mutual dependency.
Second, if the licensee violated the licensing agreement, the licensing firm could face
costly and time-consuming litigation. Third, the firm would face a risk of problems and
misunderstandings related to the agreement, which could affect the speed of entry into the
foreign market. Finally, the firm may be concerned that if it licensed its proprietary
information it may create a future competitor.

10. Under what conditions should a firm consider a greenfield strategy for FDI? An acquisition
strategy?

A greenfield strategy involves setting up an operation from scratch. It is attractive to firms

because it allows them to select the site that is most appropriate for their needs, start with
a clean slate, and acclimate to the local environment at a gradual pace. However,
because successful implementation takes time and patience, firms that are facing time
constraints should probably select an alternative option. In addition, firms using this
method of expansion may find that the desired location is too expensive, or even
186 > Chapter 11

unavailable; that workforces must be hired and trained; and that various governmental
regulations must be complied with. Finally, greenfield investment is probably not
appropriate in cases where it is important for a firm to be perceived as a local firm. Under
an acquisition strategy, a firm acquires an existing firm doing business in a foreign country.
This strategy makes sense when the purchaser needs to generate revenues from its
expansion immediately. Through acquisition, a purchasing firm has an immediate market
presence, a distribution system in place, as well as trained employees, brand names, and
technology. This strategy would not make sense for a company that is short of capital
since it requires substantial sums up front.

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This exercise is designed to allow students to become experienced with using the Internet to
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Essence of the exercise

This exercise begins with a description of Heineken’s global strategy, and then asks students
to identify other products or brands that could or could not use Heineken’s strategy for entering
markets. Students should be assigned to groups for this exercise because it requires that
groups exchange lists of companies that could or could not use the Heineken approach to
international expansion.

Answers to the follow-up questions.

1. What are the specific factors that enable Heineken to use the approach described and
simultaneously make it difficult for some other firms to copy it? What types of firms are
most and least likely to be able to use this approach?

Students will probably identify several factors that enable Heineken to use its three-step
approach to foreign market expansion, including its international experience, its deep
pockets, its ability to enter a market on a gradual basis, and the presence of local
producers in most markets. In addition to certain consumer products, students will
probably identify other beer companies that could use this approach. Firms that would find
this approach difficult include auto producers, steel producers, and clothing producers.

2. What does this exercise teach you about international business?

Students should recognize from this exercise that an international strategy that works well
for some companies might not be effective for other companies. Students should also
recognize that successful global companies such as Heineken might achieve their success
in a very methodical manner, first by testing a market and then learning about it before
actually investing in it. In addition, students should recognize that firms might use a variety
 Strategies for Analyzing and Entering Foreign Markets > 187

of modes to enter a foreign market. Finally, through the exchange of lists (steps 3 and 4 of
the exercise), students should recognize that not all managers think alike.

Other Applications
Heineken follows a very precise strategy of expanding into new markets. Students can
debate the merits of the particular strategy it follows (exporting, then licensing, then
investing directly), and suggest alternative strategies. Instructors should play the role
of a devil’s advocate, bringing up issues such as the importance of speed in entering a
new market, the potential of creating a future competitor and/or the potential loss of
quality if a firm engages in a licensing agreement, and the problem of finding a good
joint venture partner.