Issues For Companies Entering Foreign Markets

A company should enter fewer countries when:

–Market entry and market control costs are high.
–Product and communication adaptation costs are high
–Dominant foreign firms are able to erect high barriers to entry.

The following issues may be important while choosing a country with which the company wants to do business.

Is the country a cost effective place, where a manufacturing base could be established? (Like Mexico, India)

Is there a large market for goods and services in the chosen country? (Like China, India)
What is the extent of government control? What about the political climate there? This is an important issue.

What about the cultural environment? Is it very difficult to get along with the cultural values and beliefs of people in the host country?

Language could be another important issue to be looked into closely. The Chevrolet Nova was not selling well in Latin America and General Motors executives couldn’t understand why until it was brought to their attention that, in Spanish no va means “it doesn’t go” When the firm tried to sell its gasoline in Japan, it learned that ESSO means stalled car in Japanese.
What about restrictions on foreign investment? Is it necessary to pass on control of operations to local partners invariably?

Are there any specific benefits offered by host countries in the form of low tax rates, rent free land and buildings, low interest or no interest loans,  subsidized energy and transportation rates and  a well-developed  infrastructure? To be evaluated against disincentives like job-creation quotas, export minimums for generating foreign currency, limits on local market growth, labour regulations, wage and price controls, restriction on profit repatriation controls on the transfer of technology. In general, MNCs prefer to enter countries:

–that rank high on market attractiveness (e.g. India and China where infrastructure is good, labour is cheap, large market for goods and services exists, less restrictive atmosphere now),
–that are low in market risks and
–in which MNCs possess a competitive advantage
(for example an Indian – Australian car manufacturer created an affordable rural transport vehicle to compete with bullock carts rather than cars. The vehicle functions well at low speeds and can carry up to two tones.

The specific location within a chosen country where the MNC wants to kick start its operations is guided by factors such as: access to markets, proximity to competitors, availability of transportation and electric power, desirability of the location for employees coming from outside, availability of skilled labour at economical  rates etc.

Once the MNC decides to target a particular country, it has to decide the best mode of entry. Its broad choices include: importing and exporting, licensing, strategic alliances and direct investment. These are called market entry strategies because they represent alternative ways to sell products and services in foreign markets.

Importing or exporting often are the only available choices for small firms trying to go international. These choices also offer an avenue for larger firms to begin their international expansion with a minimum level of investment. Exporting or making the product in the firm’s domestic market place and selling it in another country can involve both merchandise and services. Exporting does entail numerous problems based on physical distances, government restrictions, foreign countries and cultural differences, yet it is still less expensive than putting the firm’s own capital in land buildings and equipment in host countries.

Importing is bringing a good, service or capital into the home country from abroad. An import /export operation is an easy way to enter a market with a small investment. The products are sold as it is and they need not be adapted to the local conditions and the risk involved is less. However, imports and exports are subject to taxes, tariffs and transportation expenses. Since the products are not adapted to local conditions, they may fail to meet the expectations of a large segment of the market.

Licensing is an arrangement whereby a firm (licensor) allows another company (licensee) to use its trade mark, technology patent copyright or other assets in return for a fee or royalty The licensor typically restricts licensee sales to a particular geographic locale and limits the time period covered by the arrangement. The licensor thus, gains entry into another country at little risk and the licensee, in turn gains production expertise or a well-known product or brand name.  Factors that lead to such an arrangement include excessive transportation costs, government regulations, and home production costs. Franchising  is a form  of licensing  in which the franchiser provides foreign franchisees  with a complete package of material and services , including equipment, products, product ingredients trademark , trade name rights, managerial advice and a standardized operating system. Franchise agreements typically require payment of a fee upfront and then a percentage of the revenues.  For example over the years McDonald’s, KFC,   Nestle, and Coca-Cola  have used licensing  as a valuable market entry tool.

Licensing generates royalties and builds market share. It can also build a firm’s standardized global image with relatively little cost. This strategy   is generally used for entry into less developed countries where obsolete technology is still acceptable and in fact may be state of the art. On the negative side, licensing gives the firm very little control over the manufacture and marketing of its products in other countries.

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