MGCR 382 Chapter Notes - Chapter 12: Royalty Payment, Political Risk Insurance, Outstrip

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MGCR382 Chapter 12 Notes: Strategies for Analyzing and Entering Foreign Markets
Foreign Market Analysis
To successfully increase market share, revenue, and profits, firms must normally 1) assess alternative markets, 2)
evaluate the respective costs, benefits, and risks of entering each, and 3) select those that hold the most potential
for entry or expansion
Assessing Alternative Foreign Markets
Market potential the decisions a firm draws from this information often depend upon the positioning of its
products relative to those of its competitors. A firm producing high-quality products at premium prices will find
richer markets attractive but may have more difficulty penetrating a poorer market. Conversely, a firm
specializing in low-priced, lower-quality goods may find the poorer market even more lucrative than the richer
o A firm must then collect data relevant to the specific product line under consideration. In some situations,
a firm may have to resort to using proxy data. Firms may also be concerned about the income distribution
of the country
o Firms must also consider the potential for growth in a country’s economy by using both objective and
subjective measures. Objective measures include changes in per capita income, energy consumption,
GDP and ownership of consumer durables. More subjective considerations must also be taken into
account when assessing potential growth
Levels of competition to assess the competitive environment, it 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. It must then weigh these factors
against actual market conditions and its own competitive position
o Most successful firms continually monitor major markets in order to exploit opportunities as they become
available. This is particularly critical for industries undergoing technological or regulatory changes.
Privatization has been coupled with the tumbling of regulatory barriers to entry and innovation, allowing
firms to enter new geographic and product markets
Legal and political environment a firm contemplating entry into a particular market also needs to understand the
host country’s trade policies and its general legal and political environment. A firm may choose to forgo
exporting its goods to a country that has high tariffs and other trade restrictions in favour of exporting to one that
has fewer or less significant barriers
o Government stability is an important factor in foreign market assessment. Some less-developed countries
have been prone to military coups and similar disruptions. Government regulation of pricing and
promotional activities may need to be considered. Care also often needs to be taken to avoid offending the
political sensibilities of the host nation
Sociocultural influences to reduce the uncertainty associated with these factors, firms often focus their initial
internationalization efforts in countries culturally similar to their home markets
o If the proposed strategy is to produce goods in another country and export them to the market under
consideration, the most relevant sociocultural factors are those associated with consumers. Firms that fail
to recognize the needs and preferences of host country consumers often run into trouble
o A firm considering FDI in a factory or distribution center must also evaluate sociocultural factors
associated with potential employees. It must understand the motivational basis for work in that country,
the norms for working hours and pay, and the role of labour unions
Evaluating Costs, Benefits and Risks
Costs direct costs are those the firm incurs in entering a new foreign market and include costs associated with
setting up a business operation, transferring managers to run it, and shipping equipment and merchandise. The
firm also incurs opportunity costs. Because a firm has limited resources, entering one market may preclude or
delay its entry into another. The profits it would have earned in that second market are its opportunity costs the
organization has forfeited or delayed its opportunity to earn those profits by choosing to enter another market first
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
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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. In extreme cases, it also
faces the risk of loss through government seizure of property or due to war or terrorism
Choosing a Mode of Entry
Ownership advantages tangible or intangible resources owned by a firm that grant it a competitive advantage over its
industry rivals. Assuming that local firms know more about their home turf than foreigners do, a foreign firm
contemplating entry into a new market should possess some ownership advantage that allows it to overcome the liability
of foreignness
Liability of foreignness reflects the informational, political, and cultural disadvantages that foreign firms face when
trying to compete against local firms in the host country market
Location advantages factors that affect the desirability of host country production relative to home country production.
Firms routinely compare economic and noneconomic characteristics of the home market with those of the foreign market
in determining where to locate their production facilities. If home country production is found to be more desirable than
host country production, the firm will choose to enter the host country market via exporting. Conversely, if the opposite is
true, the firm may invest in foreign facilities or license the use of its technology and brand names to existing host country
Affected by many factors relative wage rates and land acquisition costs are important, but firms must also
consider surplus or unused capacity in existing factories, access to R&D facilities, logistical requirements, the
needs of customers, and the additional administrative costs of managing a foreign facility. Political risk must also
be considered
Government policies can also have a major influence. High tariff walls discourage exporting and encourage local
production, while high corporate taxes or government prohibitions against repatriation of profits inhibit FDI
May also be culture-bound
Internalization advantages those 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 is critical to this decision. If such costs are high,
the firm may rely on FDI and joint ventures as entry modes. If they are low, the firm may use franchising, licensing, or
contract manufacturing. In deciding, the firm must consider both the nature of the ownership advantage it possesses and
its ability to ensure productive and harmonious working relations with any local firm with which it does business
A firm’s lack of experience in a foreign market may cause a degree of uncertainty. To reduce this uncertainty,
some firms may prefer an initial entry mode that offers them a high degree of control. However, firms short on
capital or executive talent may be unable or unwilling to commit themselves to the large capital investments this
control entails
Firms that seek to exploit economies of scale and synergies between their domestic and international operations
may prefer ownership-oriented entry modes
Firms whose competitive strengths lie in flexibility and quick response to changing market conditions are more
likely to use any and all entry modes warranted by local conditions in a given host country
Exporting to Foreign Markets
Advantages: firm can control its financial exposure to the host country market as it deems appropriate. Little or no
capital investment may be needed if the firm chooses to hire a host country firm to distribute its products. In this
case, the firm’s financial exposure is often limited to start-up costs associated with market research, locating, and
choosing its local distributor, and/or local advertising plus the value of the goods and services involved in any
given overseas shipment. Alternatively, the firm may choose to distribute its products itself to better control their
marketing. If the firm opts for this approach, it is then able to raise its selling prices because a middleman has
been eliminated. However, its investment costs and its financial exposure may rise substantially, for the firm will
have to equip and operate its own distribution expenses, hire its own employees, and market its products
Exporting permits a firm to enter a foreign market gradually, thereby allowing it to assess local conditions and
fine-tune its products to meet the idiosyncratic needs of host country consumers. If its exports are well-received,
the firm may use this experience as a basis for a more extensive entry into that market
Proactive motivations those that pull a firm into foreign markets as a result of opportunities available there. A
form also may export proactively in order to exploit a technological advantage or to spread fixed R&D expenses
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