Entry Strategies (With real world examples) | International Business | From A Business Professor

Summary

Dr. Yang explores six strategies for firms entering foreign markets: exporting, turnkey projects, licensing, franchising, joint ventures, and wholly-owned subsidiaries. Each method offers unique advantages and challenges, such as cost, control, and market adaptation. The video delves into real-world examples, like 3M's global manufacturing and McDonald's franchising, to illustrate these strategies' practical applications. Viewers are encouraged to consider resource commitment and desired control when choosing an entry mode.

Takeaways

• 🌐 Firms have six primary strategies to enter foreign markets: exporting, turnkey projects, licensing, franchising, joint ventures, and wholly owned subsidiaries.
• 📦 Exporting is a traditional method that involves selling and shipping goods to another country without needing local production facilities.
• 🏭 Turnkey projects are agreements where a contractor handles all aspects of a project, providing a complete operational plant to the client.
• 📜 Licensing involves granting rights to intangible property like patents or trademarks to a licensee in exchange for royalty fees.
• 🍔 Franchising is an extension of licensing but includes longer-term commitments and strict operational rules that the franchisee must follow.
• 🤝 Joint ventures are collaborative business arrangements where multiple parties pool resources to achieve specific business objectives.
• 🏢 Wholly owned subsidiaries allow a firm to have full control over its operations in a foreign market, either through greenfield investments or acquisitions.
• 💰 Exporting benefits from low costs as no foreign production facilities are required, and it can take advantage of favorable government policies like tax rebates.
• 🚧 Turnkey projects offer short-term revenue and less risk compared to traditional FDI, especially in politically unstable environments.
• 💡 Licensing provides income without overhead and can lead to better marketing through local firms' knowledge of their markets.
• 🔒 Franchising benefits from spreading costs and risks with the franchisee and can quickly establish a brand presence globally.
• 🌟 Joint ventures can leverage local partners' knowledge and reduce government intervention risks, providing market entry support.
• 💡 Wholly owned subsidiaries protect core technology and allow for tight control and global strategic coordination.
• 💸 Acquisitions can rapidly establish market presence and preempt competitors but may face challenges like overpayment and cultural clashes.
• 🏗️ Greenfield ventures offer the advantage of building operations from scratch according to the firm's vision but require significant capital and time.

Q & A

What are the six different modes for a firm to enter foreign markets discussed in the video?

The six modes are exporting, turnkey projects, licensing, franchising, establishing joint ventures with a host country firm, and setting up a new wholly owned subsidiary.

What are the three advantages of exporting as an entry strategy?

The advantages include low cost, high efficiency, and favorable government policies such as tax rebates and special loans.

How can exporting be expensive for a firm?

Exporting can be expensive if lower-cost manufacturing locations are available abroad, particularly when labor costs in the home country are high.

What are the benefits of using turnkey projects as an entry strategy?

Turnkey projects offer more revenue in the short term and less risk compared to conventional foreign direct investment, especially in countries with unstable political and economic environments.

What is the primary advantage of licensing as an entry mode?

Licensing allows a firm to generate income without taking on heavy overhead and production costs, essentially passing the burden onto the licensee while collecting royalties.

What are the potential risks associated with licensing agreements?

Risks include intellectual property theft, no guarantee of revenue, diminished reputation if the licensee conducts business unethically, and potential conflicts with licensees.

How does franchising differ from licensing?

Franchising involves longer-term commitments and requires the franchisee to abide by strict rules regarding business operations, unlike licensing which is a more general form of granting rights to intangible property.

What are the benefits of establishing a joint venture for entering a foreign market?

Joint ventures can provide local partner support, share risks and costs, and often face less government intervention, making them a feasible entry mode in many countries.

What are the disadvantages of joint ventures?

Disadvantages include the risk of losing core technology, not having total control over the venture, and potential clashes between partners over control, strategy, and goals.

What are the two ways a firm can establish a wholly owned subsidiary in a foreign market?

A firm can establish a wholly owned subsidiary through a greenfield venture, which involves building operations from the ground up, or by acquiring an established firm in the host nation.

What are the advantages of a greenfield venture over an acquisition?

Greenfield ventures allow a firm to build the kind of subsidiary it wants from scratch, which is easier for embedding organizational culture and routines, and can be preferable when transferring competencies and skills.

What are the potential challenges of acquisitions as an entry strategy?

Challenges include overpaying for the acquisition, cultural clashes between the acquiring and acquired firms, and underestimating the difficulties of integrating operations and realizing synergies.

Outlines

00:00

🌐 Entry Strategies for Foreign Markets

Dr. Yang introduces six different modes for firms to enter foreign markets: exporting, turnkey projects, licensing, franchising, establishing joint ventures, and setting up wholly owned subsidiaries. Each strategy has its own advantages and disadvantages, and managers must carefully consider these when making decisions. The video aims to explain these strategies and provide real-world examples.

05:01

📦 Exporting: Traditional and Established

Exporting is described as a traditional method of reaching foreign markets without the need for local production facilities. It offers low cost, high efficiency, and favorable government policies as advantages. However, it can be expensive, with high transportation costs, long lead times, tariff barriers, and foreign exchange risks. The script also mentions the risk of local agents having divided loyalties.

10:01

🔑 Turnkey Projects: Exporting Process Technology

Turnkey projects involve the design, construction, and startup of plants for foreign clients. They are common in industries with complex production technologies. The benefits include short-term revenue and reduced risk, especially in politically unstable environments. Drawbacks include potential long-term revenue loss, unintended competition, and the potential loss of competitive advantage.

15:02

📜 Licensing: Granting Rights for Royalties

Licensing agreements involve granting rights to intangible property for a fee. It allows for income without overhead, better marketing, easier entry into foreign markets, and the diffusion of conflicts. However, it carries risks such as intellectual property theft, no guaranteed revenue, diminished reputation, and potential conflicts with licensees.

20:03

🍔 Franchising: A Specialized Form of Licensing

Franchising is a form of licensing with longer-term commitments and strict operational rules. It is commonly used by service firms and allows for quick, cheap, and safe global expansion. McDonald's is given as an example. The disadvantages include quality control issues and potential conflicts over revenue withholding.

25:03

🤝 Joint Ventures: Pooling Resources

Joint ventures involve two or more parties pooling resources for specific tasks. They offer support from local partners, shared risks and costs, and less government intervention. However, they carry risks such as losing core technology, lack of total control, and potential clashes between partners.

🏢 Wholly Owned Subsidiaries: Full Control

A wholly owned subsidiary gives a firm full control over its operations in a foreign market. It is beneficial for protecting core technology and realizing economies of scale. However, it involves high sunk costs, risks, and potential lack of local support. The choice between acquisitions and greenfield ventures depends on the firm's circumstances and strategic goals.

🏭 Acquisition vs. Greenfield Ventures

Acquisitions allow rapid market entry, preempt competitors, and are less risky than greenfield ventures. They provide tangible and intangible assets but may result in overpayment, cultural clashes, and underestimated challenges. Greenfield ventures offer greater control over subsidiary building but are costly and vulnerable to political risks. The choice between these strategies depends on market conditions and the firm's competitive advantages.

🔚 Summary of Entry Strategies

The video concludes with a summary of the six entry strategies discussed. It emphasizes the importance of considering resource commitment and desired control level when choosing a strategy. It invites viewers to comment with questions or thoughts on the topic.

Keywords

💡Exporting

Exporting refers to the process of selling and sending goods or services to another country. It is highlighted in the video as a traditional and well-established method for firms to reach foreign markets without the need for local production facilities. The script mentions advantages such as low cost, high efficiency, and favorable government policies, exemplified by tax rebates and financial incentives for exporters.

💡Turnkey Projects

Turnkey projects are a strategy where a firm handles every detail of a project for a foreign client, including the training of operating personnel, and hands over a fully operational plant at completion. The video script illustrates this with the chemical, pharmaceutical, and petroleum refining industries, emphasizing benefits like short-term revenue and reduced risk compared to conventional Foreign Direct Investment (FDI).

💡Licensing

Licensing is an arrangement where a licensor grants rights to intangible property, such as patents or trademarks, to a licensee for a fee. The video explains how Calvin Klein and Disney use licensing to leverage their brand without direct production, highlighting benefits like income generation without overhead and easier market entry.

💡Franchising

Franchising is a form of licensing with longer-term commitments where the franchisor provides not only intellectual property but also operational rules and sometimes ongoing support. The script uses McDonald's as an example, showing how franchising can quickly and safely expand a service firm's global presence.

💡Joint Ventures

Joint ventures involve two or more parties pooling resources for specific business activities. The video script points out that Volvo's joint venture with Uber for autonomous driving vehicles exemplifies how firms can share risks and costs while gaining local market knowledge and potentially less government intervention.

💡Wholly Owned Subsidiaries

A wholly owned subsidiary is a company in which another company owns 100% of the stock. The video discusses how establishing such subsidiaries can provide tight control and reduced risk of losing core technology, but it may also involve high sunk costs and lack of local support.

💡Greenfield Ventures

Greenfield ventures are new operations established in a foreign country from the ground up. The script contrasts this approach with acquisitions, noting that greenfield ventures allow firms to build a company as they wish without existing routines or cultures to overcome, though they are costly and time-consuming.

💡Acquisition

Acquisition is the purchase of one company by another, which can be a quick way to enter a foreign market and gain control over an existing business. The video script warns of potential pitfalls such as overpayment, cultural clashes, and underestimated challenges post-acquisition.

💡Foreign Market Entry Strategies

Foreign market entry strategies encompass the various methods a firm can use to enter international markets, as detailed in the video. Each strategy has its own set of advantages and disadvantages, and the choice depends on the firm's willingness to commit resources and the desired level of control.

💡Experience Curve

The experience curve is a concept mentioned in the video that refers to the decrease in costs as a company gains experience and efficiency in producing a product. Exporting can help achieve this by leveraging centralized manufacturing and global sales volume.

💡Location Economies

Location economies are cost advantages that arise from the concentration of similar or related industries in a particular area. The video script suggests that exporting from a centralized location can help firms realize substantial scale economies from their global sales volume.

Highlights

Firms can use one of six different modes to enter foreign markets: exporting, turnkey projects, licensing, franchising, establishing joint ventures, or setting up wholly owned subsidiaries.

Exporting avoids the cost of establishing foreign production facilities and can be cost-effective with the right product at a competitive price.

Exporting may help achieve experience curve and location economies by manufacturing in a centralized location.

Government policies can favor exporting with incentives like tax rebates and special loans.

Disadvantages of exporting include high transportation costs, long lead times, tariff barriers, and foreign exchange risks.

Turnkey projects involve handling every detail of a project for a foreign client, including training, and can lead to short-term revenue.

Turnkey projects can be less risky than conventional FDI in countries with unstable political and economic environments.

Licensing agreements allow a firm to grant rights to intangible property, such as patents and trademarks, for a royalty fee.

Licensing can generate income without heavy overhead and production costs, and can improve marketing through local firms' expertise.

Franchising is a form of licensing with longer-term commitments and strict rules for the franchisee's operations.

Joint ventures pool resources for specific tasks and can gain support from local partners with knowledge of the host country.

Wholly owned subsidiaries allow a firm to own 100% of the stock and have full control over operations in a foreign market.

Acquisitions can rapidly build a firm's presence in a target foreign market and allow preempting competitors.

Greenfield ventures involve establishing a new operation from the ground up, giving the firm greater control over the type of subsidiary built.

The choice between acquisition and greenfield venture depends on the firm's resources, willingness to commit, and the level of control desired.

Transcripts

hello everyone welcome to business

school 101

i'm dr yang once a firm decides to enter

a foreign market the question regarding

the best strategy of entry inevitably

arises

generally firms can use one of six

different modes to enter foreign markets

exporting

turnkey projects

licensing franchising establishing joint

ventures with a host country firm or

setting up a new wholly owned subsidiary

in the host country

each entry strategy has its own

advantages and disadvantages and

managers need to consider these pros and

cons carefully when deciding which

strategy to use

in this video i will explain these

various entry strategies along with

their respective advantages and

disadvantages i will also provide some

real world examples for you

let's begin by discussing exporting

exporting refers to the selling and

sending of goods and services to another

country

exporting is a traditional and

well-established method of reaching

foreign markets since it does not

require that the goods be produced in

the target country no investments in

foreign production facilities are needed

exporting does have three distinct

advantages

first low cost exporting avoids the

substantial cost of establishing

manufacturing or other deeply ingrained

operations in the host country

all you need is the right product at a

competitive price

second high efficiency

exporting may help a firm achieve

experience curve and location economies

by manufacturing a product in a

centralized location and exporting it to

other national markets a firm may

realize substantial scale economies from

its global sales volume

third favorable government policies

exporting goods or services abroad is

one of the key activities that brings

foreign currency into home countries and

helps create foreign currency reserves

that's why some governments give many

incentives and benefits such as tax

rebates to exporters

some financial institutions offer

special loans to exporters as well

however exporting also has a few

disadvantages

first it can be expensive

exporting from a firm's home base may

not be appropriate if lower-cost

locations for manufacturing the product

can be found abroad

this is particularly evident if the

labor cost in the home country is high

here's a real world example

many fortune 500 companies such as 3m

texas instruments samsung lg sony and

panasonic have built multiple

manufacturing facilities all over the

world to take advantage of the cheap yet

highly skilled labor in developing

countries

second high transportation costs and

long lead time

high transportation costs can make

exporting uneconomical particularly for

bulk products such as agricultural and

mineral items

additionally delivering products

overseas could take anywhere from weeks

to months

third tariff barriers can make exporting

risky

the threat of tariff barriers by the

government of the host country can make

exporting very hazardous

consider the trade war between the u.s

and china for instance

the average u.s tariffs on imports from

china remain elevated at 19.3 percent

while the average chinese tariffs on

imports from the us persist at 20.7

percent

fourth foreign exchange risks

the exchange rate is the value of one

currency for the purpose of conversion

to another

for companies that want to export

products to the us

export activities are encouraged if the

value of their local currency decreases

against the us dollar

conversely if the value of their

domestic currency increases then the

development of export activities is

inhibited

fifth foreign agents loyalty concerns

local agents often carry products from

multiple different suppliers which could

include competitors in the same industry

therefore they may have divided

loyalties

in such cases the local agents may not

do as good of a job as the firm would if

it managed its own marketing and sales

from the beginning

the second entry strategy is the

utilization of turnkey projects firms

that specialize in the design

construction and startup of turnkey

plants are common in some industries

in a turnkey project the contractor

agrees to handle every detail of the

project for a foreign client including

the training of operating personnel

at completion of the contract the

foreign client is handed the key to a

plant that is ready for full operation

hence the term turnkey

this is a means of exporting process

technology to other countries

turnkey projects are most commonly used

in the chemical pharmaceutical petroleum

refining and metal refining industries

all of which use complex and expensive

production technologies turnkey projects

have two major benefits

first more revenue in the short term

the know-how required to assemble and

run a technologically complex process

such as refining petroleum or steel is a

big asset and turnkey projects are a way

of earning great economic returns from

the asset

this strategy is particularly useful in

areas where fdi or foreign direct

investment is limited by host government

regulations

for example the government of many oil

rich countries have set out to build

their own petroleum refining industries

so they restrict fdi in their oil

refining sectors

because many of these countries lack

petroleum refining technology they then

join turnkey projects with foreign firms

that have the technology that they need

second less risk

the turnkey strategy can also be less

risky than conventional fdi

in a country with unstable political and

economic environments a long-term

investment might expose the firm to

unacceptable political and economic

risks

however there are also three main

drawbacks that are associated with the

turnkey project strategy

first possible revenue loss in the long

term

a firm that enters into a turnkey deal

will have no long-term interest in the

foreign country

this can be a downside if that country

subsequently proves to be a major market

for the output of the process that has

been exported

second unintended competition

a firm that enters into a turnkey

project with a foreign enterprise may

inadvertently create a competitor

for example many of the western firms

that sold oil refining technologies to

firms in saudi arabia kuwait and other

gulf states now find themselves

competing with those firms in the global

oil market third the potential loss of a

competitive advantage

if a firm's process technology is a

source of a competitive advantage then

selling this technology the return key

project is also selling the competitive

advantage to rivals

the third entry strategy is licensing

a licensing agreement is an arrangement

whereby a licensor grants the rights to

intangible property to the licensee for

a specified period and in return the

licenser receives a royalty fee from the

licensee

intangible property includes patents

inventions formulas processes designs

copyrights and trademarks

here are two real-world examples of

licensing calvin klein works with the

number of manufacturers under licensing

agreements

this means that calvin klein has

licensed the brand to sell their

products

calvin klein products such as underwear

perfume and jeans are all produced and

branded under licensing agreements

similarly when you purchase items

emblazoned with disney characters that

product was likely not manufactured by

disney itself

instead disney usually signs licensing

agreements with certain producers to use

their characters and images which is why

you find disney characters on everything

from soap and sleeping bags to t-shirts

and other types of clothing

licensing has four clear advantages

first income without overhead

licensing often allows licensers to

generate income without taking on heavy

overhead and production costs

normally companies need to invest

considerable resources into stimulating

income from their intellectual property

or ip

however allowing someone else to use it

essentially passes a burden onto them

while allowing licensors to collect

royalties

second potentially better marketing

licensing can also help improve the way

that a licensor's intangible property is

marketed

for instance a local business will

likely have a better sense of how to

reach their market than a national chain

will by licensing intangible property to

local firms a licensor could benefit

from more targeted marketing without

having to conduct individualized market

research

third the ability to enter foreign

markets more easily intangible property

has an easier time crossing national

borders than physical products do

which makes licensing a great way to

enter foreign markets the licensors

don't need to worry about tariffs or

other barriers since they are not

shipping products overseas

fourth the diffusion of conflicts

one benefit of licensing that is often

overlooked is its usefulness and

diffusing conflicts between businesses

for example if someone uses your

intellectual property then it's often

advantageous to create a licensing

agreement with them rather than to sue

them outright

this way both parties can make a profit

and an expensive dispute is avoided

licensing has four serious disadvantages

as well

first risk of ip theft

one risk of licensing stems from the

fact that the licensor has little

control over the way that the licensee

conducts their operations

that means that the licensor's

intellectual property may be more

exposed to theft

second no guarantee of revenue

the licensor also has no guarantee of

revenue from the agreement since

royalties are typically based on a

percentage of the profits

if the licensee fails to generate any

profit from the ip then the licensor

will get no revenue

third risk of diminished reputation

if the licensee doesn't conduct business

in an ethical manner then the licensure

may take a hit to their reputation even

though the licensor is not technically

liable for the licensee's actions

fourth potential conflicts

licensing also exposes the licensure to

potential conflicts with their licensees

particularly if those licensees try

withholding revenue from the licensor

the licenser would likely be entitled to

take legal action in this type of

situation but that can become expensive

the fourth entry strategy is franchising

although franchising is similar to

licensing it tends to involve

longer-term commitments

franchising is basically a specialized

form of licensing in which the

franchisor not only sells intellectual

property of the franchisee but also

insists that the franchisee agree to

abide by strict rules regarding how they

do business

the franchisor will often assist the

franchisee in running the business on a

regular basis

as with licensing the franchisor

typically receives a royalty payment

which amounts to some percentage of the

franchisee's revenue

whereas licensing is primarily pursued

by manufacturing firms franchising is

mainly employed by service firms

mcdonald's is a good example of a firm

that has grown by using a franchising

strategy

the strict rules of mcdonald's as to how

franchisees should operate a restaurant

extend to control over the menu

cooking methods and staffing policies as

well as the design and location

mcdonald's also organizes the supply

chain for its franchisees and it

provides management training and

financial assistance

other famous franchise businesses

include burger king

7-eleven marriott international ace

hardware corporation great clips jiffy

loop and the ups store

the advantages of franchising as an

entry mode are very similar to those of

licensing

for example a participating firm is

relieved of many of the costs and risks

of opening a foreign market on its own

instead the franchisee typically assumes

those costs and risks

this creates a good incentive for the

franchisee to build a profitable

operation as quickly as possible

thus by using a franchising strategy a

service firm can build a global presence

quickly cheaply and safely

the disadvantages of franchising are

less pronounced than those of licensing

since franchising is often used in

service industries there is no reason

for firms to consider the need for

coordination of manufacturing to achieve

experience curve and location economies

however franchising may inhibit a firm's

ability to take profits out of one

country to support competitive attacks

in another

a more significant downside of

franchising is quality control

the foundation of franchising

arrangements is that the firm's brand

name conveys a message to consumers

about the quality of the firm's product

for example a business traveler checking

in at a four seasons hotel in india can

reasonably expect the same quality of

room food and service that they would

receive in new york

the four season's name is supposed to

guarantee consistent product quality

this presents a problem in that foreign

franchisees may not be as concerned

about quality as they should be and the

result of poor quality can extend beyond

lost sales in a particular foreign

market to a decline in firm's worldwide

reputation

the fifth entry strategy is the

establishment joint ventures a joint

venture is a business arrangement in

which two or more parties agreed to pool

their resources for the purpose of

accomplishing specific tasks

this task can be a new project or any

other business activity

in a joint venture each of the

participants is responsible for the

profits losses and costs associated with

it however the venture is its own entity

in other words it is separate from the

participants other business interests

here's a real world example of an

international joint venture

in 2016 the swedish automaker volvo car

group and the american ride sharing

service provider uber entered into a 300

million dollar joint venture to develop

autonomous driving vehicles

the ratio of ownership is 50 50.

the volvo uber joint venture allows both

companies to combine their resources

with the aim of capitalizing on each

other's strengths

joint ventures have three major benefits

first gaining support from a local

partner

a firm benefits from a local partner's

knowledge of the host country's

competitive conditions culture language

political systems and business systems

for many u.s firms joint ventures have

involved the u.s company providing

technological know-how and products

while the local partner provides the

marketing expertise and the local

knowledge necessary for competing in

that country

second sharing risks and costs

when the development risks and costs of

opening a foreign market are high a firm

might do good by facing these obstacles

with a local partner

third less government intervention

in many countries political

considerations make joint ventures the

only feasible entry mode

research suggests that joint ventures

with local partners face a low risk of

being subject to nationalization or

other firms of adverse government

interference

despite these benefits there are still

some considerable drawbacks that

accompany joint ventures

first the risk of losing core technology

as with licensing a firm that enters

into a joint venture risks giving

control of its technology to its partner

however joint venture agreements can be

constructed to minimize the risk

one option is to hold majority ownership

in the venture this allows the dominant

partner to exercise greater control over

their own technology

another option is to wall off a

partner's technology that's central to

the core competence of the firm while

also sharing other technology

second not having total control

a joint venture does not give a firm the

tight control over subsidiaries that it

might need to realize experience curve

or location economies

additionally it does not give a firm the

jurisdiction over a foreign subsidiary

that may be required to engage in

coordinated global attacks against its

rivals

third a possible clash between partners

a shared ownership arrangement can lead

to battles for control between partners

if either of their objectives change or

if they hold different views regarding

what the strategy should be

for example in the case of ventures

between a foreign firm and a local firm

as a foreign partner's knowledge about

local market conditions rises it depends

less on the expertise of a local partner

this increases the bargaining power of

the foreign partner and ultimately leads

to conflicts over control of the venture

strategy and goals

the final entry strategy is the

construction of wholly owned

subsidiaries

in a wholly owned subsidiary the firm

owns 100 of the stock

establishing a wholly owned subsidiary

in a foreign market can be done two ways

the firm can either set up a new

operation in a foreign country which is

often referred to as a greenfield

venture or acquire an established firm

in the host nation and use that firm to

promote its products

there are several advantages of wholly

owned subsidiaries

first less risk of losing core

technology

when a firm's competitive advantage is

based on technological competence a

wholly owned subsidiary is often the

preferred entry mode because it reduces

the risk of losing control over that

competence

many high-tech firms prefer this

strategy for overseas expansion

second tight control a wholly owned

subsidiary gives firm secure control

over operations in different countries

this is necessary for engaging in global

strategic coordination

third attaining an economy of scale

a wholly owned subsidiary may be

required if a firm is trying to realize

location and experience curve economies

additionally it gives the firm a 100

share of the profits generated in a

foreign market on the other hand wholly

owned subsidiaries have two serious

disadvantages

first huge sunk costs and big risks

establishing this type of business can

eat up the financial resources of a

parent company

therefore the parent company must

conduct feasibility studies to determine

not only what the costs will be to get

the subsidiary up and running but also

what it will cost within the next five

years to sustain that subsidiary

these numbers are based on various

economic factors

second a lack of local support there are

cultural and political challenges that

may negatively affect the performance of

a firm's wholly owned subsidiary

for example it is very difficult to

conduct business in china without local

wan ji otherwise known as a strong

trustful relationship with someone who

has authority

as we have just learned a firm can

establish a wholly owned subsidiary in a

country by building a subsidiary from

the ground up which is known as the

greenfield strategy or by acquiring an

enterprise in the target market the

choice between acquisitions and

greenfield ventures is not an easy one

as always both modes have pros and cons

let's start by discussing acquisition

an acquisition is defined as a corporate

transaction in which one company

purchases either a portion or all of

another company's shares or assets

acquisitions are typically made in order

to take control of and build on the

target company's strengths and to

capture synergies

acquisitions have the following three

points in their favor

first they are quick to execute

by acquiring an established enterprise a

firm can rapidly build its presence in

the target foreign market for example in

both the automobile industry or

telecommunications service industry it

can take years to construct a new

facility or network

in these cases the firms might prefer

acquisitions because it's the quickest

way to establish a sizeable presence in

the target market

second they allow a firm to preempt

competitors

the need for preemption is particularly

great in markets that are rapidly

globalizing

a combination of the deregulation within

countries and liberalization of

regulations that govern cross-border fdi

has made it much easier for enterprises

to move into foreign markets through

acquisitions

third they are less risky than

greenfield ventures

when a firm makes an acquisition it buys

a set of assets that are producing a

known revenue and profit stream

in contrast the revenue and profit

stream that a greenfield venture might

generate is uncertain because it does

not exist yet

when a firm makes an acquisition in a

foreign market it not only obtains a set

of tangible assets such as factories

logistics systems and customer service

systems but it also acquires valuable

intangible assets including a local

brand name and manager's knowledge of

the business environment in that nation

such knowledge can reduce the risk of

mistakes caused by ignorance of the

national culture

despite the arguments for making

acquisitions they often produce

disappointing results

here are some major reasons why

first firms may overpay for the

acquisition

the acquiring firms often overpay for

the assets of the acquired firm

the price of the target firm can get bid

up if more than one firm is interested

in its purchase as is often the case

additionally the management of the

acquiring firm is often too optimistic

about the value that can be created via

an acquisition and is thus willing to

pay a significant premium over a target

firm's market capitalization

second there may be a cultural clash

many acquisitions fail because there is

a clash between the cultures of the

acquiring and acquired firms

after an acquisition many acquired

companies experience high management

turnover

this is possibly because the employees

do not like the acquiring companies way

of doing things

third the challenges are underestimated

many acquisitions fail because attempts

to realize synergies by integrating the

operations the acquired and acquiring

entities often run into roadblocks and

take much longer than expected

differences in management philosophy and

company culture can slow the integration

of operations

differences in national culture may

exacerbate these problems

so what about greenfield ventures

a greenfield venture refers to when a

company creates a subsidiary in a

different country building its

operations from the ground up

in addition to the construction of new

production facilities these projects can

sometimes include the building of new

distribution hubs offices and living

quarters

establishing greenfield ventures are

quite common in the automobile industry

here are a few real world examples

in 2007 mercedes-benz entered the indian

market by purchasing 100 acres of land

in pune mahashrata for establishing its

new manufacturing unit

in 2015 toyota motors decided to set up

its new plant in mexico under greenfield

investment

the total cost of establishing the

facility was around 1.5 billion

in 2018 u.s electric vehicle maker tesla

set up its wholly owned subsidiary in

shanghai and it aimed to penetrate the

fast-growing chinese market the big

advantage of establishing a greenfield

venture in a foreign country is that it

gives the firm a much greater ability to

build the kind of subsidiary company

that it wants

for example it is much easier to build

an organization culture from scratch

than it is to change the culture of an

acquired unit

similarly it is simpler to establish a

set of operating routines and a new

subsidiary than it is to convert the

operating routines of an acquired unit

this is a very important advantage for

many international businesses

transferring products competencies

skills and know-how from the established

operations of the firm to the new

subsidiary are principal ways of

creating value

the disadvantages of establishing a

greenfield venture include the following

first it comes at a high cost and

requires a long-term commitment

greenfield ventures require a huge

amount of capital expenditure which

could call for a large number of

borrowings and loans so the financial

burden can be very high

additionally it could take years to

build all the necessary facilities from

scratch before they can even begin

generating revenue

second it is more vulnerable to

political risk

if there are discouraging government

policies in the country that a

greenfield investment is supposed to

take place then the foreign investor may

decide not to put money into that

company because the government policies

could hinder them from achieving their

goals

in general the choice between an

acquisition or agreeing to a venture

depends on the circumstances that the

firm is facing

if the firm is seeking to enter a market

where there are already well-established

incumbent enterprises and where global

competitors are also interested in

establishing a presence then it may

benefit the firm to enter via an

acquisition

in such cases a greenfield venture may

be too slow to form a significant

presence

conversely if the firm is considering

entering a country where there are no

incumbent competitors to be acquired

then a greenfield venture may be the

only sensible mode

in fact if the competitive advantage of

the firm is based on the transfer of

organizationally embedded competencies

skills routines and culture then it may

still be preferable to enter via

greenfield venture even when incumbents

exist

things like skills and organizational

culture which are based on significant

knowledge that is difficult to

articulate and codify are much easier to

embed in a new venture than they are in

an acquired entity in which the firm may

have to overcome the established

routines and culture of the acquired

firm

now let's wrap up today's topic with a

brief summary in this video we discussed

six significant entry strategies

exporting turnkey projects licensing

franchising joint ventures and wholly

owned subsidiaries under a wholly owned

subsidiary a firm has two options

acquisition or the establishment of a

greenfield venture

each entry strategy has its own

advantages and limitations

when deciding which mode of entry to

choose companies should ask themselves

two questions

first how much of our resources such as

money time and personnel are we willing

to commit the fewer the resources the

company wants to devote the better it is

for the company to enter the foreign

market on a contractual basis like

exporting licensing franchising or

turnkey projects

second how much control do we wish to

retain the more control a company wants

the better off it is either establishing

or buying a wholly owned subsidiary or

constructing a joint venture with

carefully delineated responsibilities

and accountabilities between the partner

companies

so do you have any questions or thoughts

about firm's entry strategies

please leave your comments below

thanks for watching and i will see you

next time