Chap 11

Griffin and Pustay Third Edition
INTERNATIONAL
BUSINESS
A MANAGERIAL PERSPECTIVE
Chapter 11
Strategies for Analyzing and Entering Foreign Markets
1
Prentice
Prentice
Hall ©Hall
2002©International
2002 International
Business
Business
3e 3e
Chapter Objectives
After studying this chapter you should be able to:
• Discuss how firms analyze 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.
2
Prentice Hall © 2002 International Business 3e
Chapter Objectives (cont.)
After studying this chapter you should be able to:
• 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 and acquisition
forms of FDI.
3
Heineken Brews Up Global
Strategy
• Within a few years of its founding, in 1864, Heineken

was exporting beer to France, Italy, Spain, Germany,
and the Far East. In 1914 Heineken’s managers
decided to export beer to the United States, and
contracted with Van Munching & Company to
distribute its products in North America.
• After World War II, Alfred Heineken came to New
York to study marketing and advertising with Van
Munching, and returned to the Netherlands in 1948
with knowledge to help launch Heineken into other
foreign markets worldwide.
4
Heineken Brews Up Global
Strategy (cont.)
• Heineken has refused to establish a brewery in the
United States. Why?
• Heineken learned from the experience of other
breweries. Lowenbrau had begun to brew in the U.S.
and sales began to drop. The beer was no longer an
import and lost its cachet as an authentic Bavarian
beer. Heineken continues to ship its beer into the
U.S. market even though it might be cheaper to
produce it there.
• Heineken recently bought Van Munching & Company,
and now owns its U.S. distribution arm outright.
5
Foreign Market Analysis
• To successfully increase market share,

revenue, and profits, firms must
normally follow three steps:
– Assess alternative markets
– Evaluate the respective costs, benefits,
and risks of entering each
– Select those that hold the most potential
for entry or expansion
6
Assessing Alternative Foreign
Markets
• Market potential
– The first step in foreign market selection is assessing market
potential. Many publications provide data about population,
GDP, per capita GDP, public infrastructure, and ownership
of such goods as cars and televisions. Such data permit
firms to conduct a preliminary screening of foreign markets.
• Levels of competition
– To assess the competitive environment, a firm should
identify the number and sizes of firms already competing in
the target market, their relative market shares, their pricing
and distribution strategies, and their relative strengths and
weaknesses, both individually and collectively.
7
Market Potential Data
8
Assessing Alternative Foreign
Markets (cont.)
• Legal and political environment
– A firm may choose to forego exporting its goods to a country
that has high tariffs and other trade restrictions in favor of
exporting to one that has fewer or less significant barriers.
Conversely, trade policies and/or trade barriers may induce
a firm to enter a market via FDI.
• Sociocultural influences
– Managers assessing foreign markets must also consider
sociocultural influences, which, because of their subjective
nature, are often difficult to quantify. To reduce the
uncertainty associated with these factors, firms often focus
their initial internationalization efforts in countries culturally
similar to their home markets.
9
Evaluating Costs, Benefits, and
Risks
• Costs
– Two types of costs are relevant at this point: direct and
opportunity. Direct costs are those the firm incurs in entering a
new foreign market and include costs associated with setting up
a business operation. Opportunity costs are those that result
from entering one market as opposed to another—a firm forfeits
or delays its opportunity to earn profits in one market by
dedicating its resources to another.
• Benefits
– Among the most obvious potential benefits are the expected
sales and profits from the market. Others include 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.
10
Evaluating Costs, Benefits, and
Risks (cont.)
• Risks
– Generally, a firm entering a new market
incurs the risks of exchange rate
fluctuations, additional operating
complexity, and direct financial losses due
to inaccurate assessment of market
potential.
11
Choosing a Mode of Entry
• Having decided which markets to enter, the firm

is now faced with another decision: which mode
of entry should it use?
• Ownership advantages
– These are tangible or intangible resources owned by
a firm which grant it a competitive advantage over its
industry rivals.
• Location advantages
– These are factors that affect the desirability of host
country production relative to home country
production.
12
Choosing a Mode of Entry
(cont.)
• Internalization advantages
– These are factors that make it desirable for
a firm to produce a good or service itself
rather than contracting with another firm to
produce it. The level of transaction costs
(costs of negotiating, monitoring, and
enforcing an agreement) is critical to this
decision.
13
Proactive Motivations
Proactive motivations are

those that pull a firm into
foreign markets as a result
of opportunities available
there.
14
Reactive Motivations
Reactive motivations for

exporting are those that push
a firm into foreign markets,
often because opportunities
are decreasing in the
domestic market.
15
Forms of Exporting
• Export activities may take several

forms:
– Indirect exporting
– Direct exporting
– Intracorporate transfers
16
Indirect Exporting
• Indirect exporting occurs when a firm sells its

product to a domestic customer, which in
turn, exports the product in either its original
form or a modified form.
• A firm also may sell to a foreign firm’s local
subsidiary, which then transports the first
firm’s products to the foreign country.
17
Direct Exporting
• Direct exporting occurs through sales to

customers—either distributors or end-
users—located outside the firm’s home
country.
• Through direct exporting activities, the
firm gains valuable expertise about
operating internationally and specific
knowledge concerning the individual
countries in which it operates.
18
Intracorporate Transfers
• An intracorporate transfer is the sale of

goods by a firm in one country to an
affiliated firm in another.
• Intracorporate transfers are an
important part of international trade.
They account for about 40 percent of all
U.S. merchandise exports and imports.
19
Additional Considerations
• In considering exporting as its entry

mode, a firm must consider many other
factors besides which form of exporting
to use:
– Government policies
– Marketing concerns
– Logistical considerations
– Distribution issues
20
Export Intermediaries
• An exporter may also market and distribute its

goods in international markets by using one
or more intermediaries, third parties that
specialize in facilitating imports and exports.
• Types of intermediaries that offer a broad
range of services include the following:
– Export management companies
– Webb-Pomerene associations
– International trading companies
21
Export Management Company
• An export management company

(EMC) is a firm that acts as its client’s
export department.
• EMCs usually operate in one of two
ways:
– Some act as commission agents for
exporters
– Others take title to the goods
22
Webb-Pomerene Association
• A Webb-Pomerene association is a group of

U.S. firms that operate within the same
industry and that are allowed by law to
coordinate their export activities without fear
of violating U.S. antitrust laws.
• In general, Webb-Pomerene associations
have not played a major role in international
business. Fewer than 25 such associations
exist today.
23
International Trading Company
• An international trading company is a firm

directly engaged in importing and exporting a
wide variety of goods for its own account. It
differs from an EMC in that it participates in
both importing and exporting activities.
• The most important international trading
companies in the global marketplace are
Japan’s sogo sosha, which are in integral part
of Japan’s keiretsu system.
24
International Licensing
• Another means of entering a foreign

market is licensing, in which a firm,
called the licensor, leases the right to
use its intellectual property—
technology, work methods, patents,
copyrights, brand names, or trademarks
—to another firm, called the licensee, in
return for a fee.
25
Basic Issues in International
Licensing
• Normally the terms of a licensing

agreement are specified in a detailed legal
contract, which addresses such issues as:
– Specifying the boundaries of the agreement
– Determining compensation
– Establishing rights, privileges, and constraints
– Specifying the duration of the contract
26
International Franchising
• Another popular strategy for

internationalizing a business is
franchising. Franchising allows the
franchisor more control over the
franchisee and provides for more
support from the franchisor to the
franchisee than is the case in the
licensor-licensee relationship.
27
Basic Issues in International
Franchising
• International franchising is likely to succeed
when certain market conditions exist:
– The franchisor has been successful domestically
because of unique products and advantageous
operating procedures and systems.
– The factors that contributed to domestic success
are transferable to foreign locations.
– The franchisor has already achieved considerable
success in franchising in its domestic market.
– Foreign investors must be interested in entering
into franchise agreements.
28
Specialized Entry Modes for
International Business
• A firm may also use any of several

specialized strategies to participate in
international business without making
long-term investments:
– Contract manufacturing
– Management contracts
– Turnkey projects
29
Foreign Direct Investment
• There are three methods for FDI:

– Building new facilities (called the greenfield
strategy)
– Buying existing assets in a foreign country
(called the acquisition strategy or the
brownfield strategy)
– Participating in a joint venture
30
Chapter Review
• An important aspect of international strategy

formulation is determining which markets to
enter.
• Exporting, the most common initial entry
mode, is the process of sending goods or
services from one country to other countries
for use or sale there.
• International licensing, another popular entry
mode, occurs when one firm leases the right
to use its intellectual property to another firm.
31
Chapter Review (cont.)
• International franchising is also growing

rapidly as an entry mode.
• Three specialized entry modes are
contract manufacturing, the
management contract, and the turnkey
project.
• The most complex entry mode is FDI.
32

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Griffin and Pustay Third Edition

• Discuss how firms analyze foreign markets.

• Identify the basic issues in international

• Within a few years of its founding, in 1864, Heineken

• To successfully increase market share,

• Having decided which markets to enter, the firm

Proactive motivations are

Reactive motivations for

• Export activities may take several

• Indirect exporting occurs when a firm sells its

• Direct exporting occurs through sales to

• An intracorporate transfer is the sale of

• In considering exporting as its entry

• An exporter may also market and distribute its

• An export management company

• A Webb-Pomerene association is a group of

• An international trading company is a firm

• Another means of entering a foreign

• Normally the terms of a licensing

• Another popular strategy for

• A firm may also use any of several

• There are three methods for FDI:

• An important aspect of international strategy

• International franchising is also growing

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