International Market Entry and Development - Assignment Example

Name: Tutor: Title: International Market Entry and Development Course: Institution: Date: International Market Entry and Development Topic 2 There are varied modes of entry into the international market and whichever mode a firm selects impacts on the amount of resources allocated to the firm’s foreign operations, risks that must be considered and the level of control the firm has over its operations as supported by Charles Hill et al, (1990). The mode of entry refers to the medium that a firm uses in order o gain entry into a new global market (Charles Hill et al, 1990). Ghauri (2000) argues that effective selection of mode ensures thriving foreign operations. There are varied modes and methods of international market entry and development which can be categorized into non-equity modes and equity modes (Schaffer, et al., 2008). Under non-equity modes, there are exports and contractual agreements and under equity modes, there are joint ventures and wholly owned subsidiaries. Non-equity modes Export; refers to the process of one country selling products and services to other countries, which can be facilitated directly or indirectly (Menipaz & Menipaz, 2011). Contractual modes Licensing; Dlabay, et al., (2010) describes it as a business arrangement where a licensee offers a fee to a licensor who has monopoly position and rights which include patent, copyright or trade mark which offers them exclusive right that hinders other organizations from utilizing the idea, brand, logo for business purposes. Franchising; is almost similar to licensing only that the franchisees, who are the partial-independent business owners pay royalties and charges to the franchiser to acquire the trademark and use its systems to sell (Ghauri 2000). Franchising is distinguished from licensing in that the franchisee has to comply with specific terms and conditions stipulated by the franchiser (Peng, 2008). Notable franchised business includes McDonalds. Research and Development contracts; which offer entering business the benefit the capacity to enter into lucrative locations for specific innovations cost effectively. Turnkey projects; are projects where contractors are paid to develop and build innovative facilities and train staff (Peng, 2008). Peng notes that often, these projects are a means for an entering business to export their processes and technologies into new markets by coming up with factories in new markets. Co-marketing; Peng indicates that co-marketing is another non-equity mode of internationalization where the business benefits through its ability to access a wider customer base (Peng, 2008). Equity modes Joint ventures; are strategic agreements between two organizations to partner in a project in a certain market (Peng 2008). Wholly owned subsidiaries; they can be in form of acquisitions or Greenfield operations (Peng, 2008). According to author, the main benefits of the two forms include full control over operations and equity, global coordination and safeguarding knowledge. There are varied theoretical models that explain how/which method/mode of market entry managers decide to use when entering an overseas market. This includes the transaction cost analysis model which suggests that an organization will often spread out until the cost of forming another transaction within the organization becomes similar to the cost of conducting a similar transaction through open market exchanges (Dlabay, et al., 2010). Often transaction cost occurs when markets do not function under the law of perfect competition since there is discord between the buyer and seller. The theory is limited in that it assumes that there is no discord in a foreign firm and it understates the significance of production cost (Schaffer, et al., 2008). There is also the network model that suggests that business networks are ways of dealing with activity interdependences among varied business players. According to the theory, the players are interconnected though varied social, economic, legal, cognitive, technical and administrative links (Ghauri 2000). According to the author, the theory assumes that an organization is reliant on resources managed by other organizations and they access them using their network positions (Ghauri 2000). Significantly, in order to join a network, one needs other players to be inspired to participate in interaction (Ghauri 2000). Topic 3: The concept of “Risk” in international business According to Schaffer, et al., (2008), international business in contemporary business and market environments are continuously faced by challenges which present as risks owing to the rapidly changing social, cultural, political, technological, economical, financial and legal market forces and the eminent threat of cutthroat competition from both small and large, private and public and from local and multinational enterprises. Menipaz & Menipaz, (2011) indicate that doing business in international contexts requires more than just financial capital but also, the ability of the management in these enterprises, to effectively and efficiently manage emerging risks. The ability to effectively and efficiently manage risks dictates the success or failure of business entering international markets. Dlabay et al, (2010) defines risk as the improbability of an event. Risks are inevitable in international business and successful managers in these environments are those that are able to not only identify the type of risks that exists but also, those that are able to make decisive actions in terms of anticipating the risks and acting on them early. Types of risk and how managers might minimize impact of these risks and manage them According to Cavusgil et al (2008), there are four main types of risks in international business which includes; Country risk- this type of risk is probably the most prevalent in international business. Although each country has individual investment opportunities they often present unique country risks which a manager in international business need to be aware of (Dlabay, et al., 2010). Different countries have different environments politically, economically and socially which directly or indirectly impact on business (Cavusgil, et al., 2002). This includes poor infrastructures, unstable governments, unemployment, civil unrest, unskilled manpower, internal conflicts, anti-foreign attitude from locals, high rates of crime and corruption. Current examples of nations with high rate of country risks include African and Middle Eastern Countries, which although have high potential for investments, present difficult market environments for doing business. A country such as Kenya is a potential hub for investments but she struggles with political instability, threat of terrorism, high unemployment rate, poor infrastructure and high rates of corruption. Country risks are inherent in nature and therefore, they cannot be avoided. Be it as it may, managers can effectively mitigate these risks through taking a safe approach (Schaffer, et al., 2008). This can be achieved by the management investing and doing business with and in countries that have stability, which have registered good records politically, socially and economically. By so doing, the country risk is greatly reduced. In addition, conducting PESTEL analysis of the countries they intend to invest in and weighing the benefits of doing business in the specific countries against the potential risks (Dlabay, et al., 2010). Currency and financial risk- Among the main objective for organizations entering the international market is to attain pre-determined financial gains and benefits but when financial elements of the international business are ill managed, this can result in business failure. According to Menipaz & Menipaz, (2011), financial elements are the macroeconomic environment of the host nation that entails changeability in foreign exchange rates, inflation and economic parameters, which have a strong impact on the overall performance of international business. Owing to substantial fluctuations of currencies and changes to financial policies, the value of assets and the organization’s operating income have the potential to be significantly minimized (Schaffer, et al., 2008). Current example of prevalence of financial and currency risk is the euro crisis, which has seen a rise in inflation and interest rates which has significantly increased the currency and financial risk for businesses running and entering the euro zone countries such as Spain and Greece. Managers entering and managing businesses in international markets can effectively and efficiently avert the currency and financial risks by allocating risks such as rise in tax rates, fluctuations in inflation, interest rates and the foreign exchange rates to another party such as entering in strategic alliances and through contracts such as dual currency contracts with local businesses and domestic subcontractors, where payments are done using both local and foreign currencies (Cavusgil, et al., 2002). Cross cultural risks- transacting internationally means transacting with businesses and in countries with varied cultural backgrounds which present risks of misunderstandings and miscommunications owing to differences in language, behavior, perspectives, beliefs and values among other cultural factors (Menipaz & Menipaz, 2011). To manage cross cultural risks, managers should not try to change how the host country operates but instead, they should be patient, flexible and adapt to local cultures (Dlabay, et al., 2010). In addition, to manage cross cultural risks and to avert them sufficiently, managers in international business needs to ensure product suitability and acceptability and align their products and services to the cultural needs of local markets (Schaffer, et al., 2008). To facilitate acceptability and to penetrate new markets, Nestle has implemented the strategies of keeping the brands local and people regional and using local brand names such as the use of specific ingredients to appeal to specific markets such as the use of soya instead of milk in Latin America and the naming of Asian condensed milk, Bear Brand, respectively (Kowitt, 2010). Topic 4 It is fundamental for a manager entering international market to be aware and knowledgeable on the varied methods and mode of market entry and development to use (Menipaz & Menipaz, 2011). This is crucial because, the methods and mode of market entry and development used greatly influences the perceptions of potential customers in the host country, which consequently, impacts on the acceptability of the products and services offered (Cross, 2000). They include Non-equity modes Export; In using exports as a mode of entry, an organization or country exporting has total control over its production and products and they have direct interactions with customers. Nevertheless, managers using exports are faced with the challenge of encountering possible costs of trade barriers such as tariffs and incurring extra costs in terms of transport (Peng, 2008). While using direct export and indirect exports, the entering organizations gain from economies of scale, they have enhanced control over distribution and they do not have to deal with export processes directly respectively (Cavusgil, et al., 2012). On the other hand, while dealing with direct exports, they are faced with the limitations of high costs of transport and marketing distance , and incase of indirect exports, minimized control over supply chains and they lack the benefit of gaining experience to function internationally (Cross, 2000). Contractual modes According to Cross, (2000), there are primarily four types of contractual agreement used as modes of entry in international trade which have varied benefits and limitations. These modes of entry includes Licensing; Other than offering the entering business the easy access to local information, using licensing as a mode of international market entry offers the added advantage of minimal initial investments required when starting in new markets, low political risk since a licensee are commonly fully locally owned, the obstacles of trade barriers are easily eliminated, a company can easily use location economies and more importantly, the management is in better position to effectively and efficiently meet the needs, expectations and preferences of the customers (Peng, 2008). Nevertheless, licensing as a mode of international market entry pose certain limitations which includes the loss of control over operations by the licensor, minimal returns compared to other modes of internalization, risk of destroying the trademark if the licensee is incompetent, hardships when moving tacit knowledge such as tedious negotiations on transfer cost and more often than not, the licensee can eventually become a potential competitor to the licensor (Cross, 2000). Franchising; Using franchising as a mode of entry is beneficial owing to the reduced costs, minimal political risk, and parallel entry into varied markets and regions and through effective partners, organizations are able to access to better investment returns (Peng, 2008). However, Cross, (2000) indicates that the main limitations of franchising is that franchisees are potential competitors, the possibility of destroying reputation and brand owing to ineffective franchisees and more significantly, compared to other modes such as licensing and exports, franchising needs extensive monetary investments in order to appeal and support prospective franchisees. Research and Development contracts; which offer entering business the benefit the capacity to enter into lucrative locations for specific innovations cost effectively (Peng, 2008). Be it as it may, Research and Development contracts are hard to negotiate and implement and there is potential for losing core innovation competencies and there is the risk that partners can develop into competitors (Dlabay, et al., 2010). Turnkey projects; are projects where contractors are paid to develop and build innovative facilities and train staff (Peng, 2008). Often, these projects are a means for an entering business to export their processes and technologies into new markets by coming up with factories in new markets. Where foreign direct investments are impossible and there lack skilled labor, turnkey projects allow for multinationals to attract high returns for investments (Cross, 2000). The main limitation of turnkey projects as modes of internationalization is development of competent competitors, inability to invest long term and the risk of the host country taking over the factory. Co-marketing; Peng indicates that co-marketing is another non-equity mode of internationalization where the business benefits through its ability to access a wider customer base (Peng, 2008). Be it as it may, Peng argues that co marketing has limited coordination. Equity modes There are two main types of equity modes of international market entry and development namely joint ventures and wholly owned subsidiaries (Cross, 2000). Joint ventures; As a mode, joint ventures allow cost sharing, risk sharing, profits sharing, asset sharing, and knowledge sharing and low political risk (Cross, 2000). However, partners may have different objectives and interests which hinder coordination and there is low equity and control over operations (Menipaz & Menipaz, 2011). Wholly owned subsidiaries; they can be in form of acquisitions or Greenfield operations. The main benefits of the two forms include full control over operations and equity, global coordination and safeguarding knowledge (Cross, 2000). They are however, limited. Cavusgil, et al., (2012) argues that Greenfield operations attract increased political risk, high costs of developing, slow speed when entering and in regards to acquisitions; problems with integration after the acquisitions are done. Bibliography . Cavusgil, S.T., Ghauri, P.N., & Agarwal, R. 2002. Doing Business in Emerging Markets: Entry and Negotiation Strategies. New York: SAGE. Cavusgil, S.T., Knight, G., & Riesenberger, J.R. 2012. A Framework of International Business. London: Prentice Hall PTR. Cross, A. 2000. Modes of internationalization. . From Tayeb, M, H. International Business Theories, Policies and Practice. Pp 154-180, 658.049 156: Pearson Education Ltd Charles W.L.Hill, Peter Hwang & Kim, W.C. 1990. An Eclectic Theory of the Choice of International Entry Mode, Strategic Management Journal. New York: Wiley. Dlabay, L., Scott, J., & Scott, J.C. 2010. International Business. London: Cengage Learning. Ghauri, P. 2000. Internationalization of the Firm. From Tayeb, M, H. International Business Theories, Policies and Practice. Pp 129-153, 658.049 156: Pearson Education Ltd. Kowitt, B. 2010. Nestlé. Fortune, 162(1): 20. Menipaz, E., & Menipaz, A. 2011. International Business: Theory and Practice. London: SAGE Publications Ltd. Peng, M.W. 2008. Global Strategy. London: Cengage Learning. Schaffer, R., Agusti, F., & Earle, B. 2008. 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