Chapter 14 Outline

Introduction

This chapter is concerned with three closely related topics: (1) The decision of which foreign markets to enter, when to enter them, and on what scale; (2) the choice of entry mode, and (3) the role of strategic alliances. Any firm contemplating foreign expansion must first struggle with the issue of which foreign markets to enter and the timing and scale of entry. The choice of which markets to enter should be driven by an assessment of relative long-run growth and profit potential. In the opening case, we saw how Merrill Lynch's entry into the Japanese private client financial services market was driven by a desire to participate in a market that is potentially huge. Japanese households have ¥1,220 trillion in financial assets, only a tiny fraction of which are invested in stocks. If Merrill Lynch can tap into even a small percentage of this savings pool, Japan will quickly become its second biggest market after the United States. Thus, it makes sense for the company to focus on Japan rather than a country with a much smaller savings pool, such as India.

The opening case also illustrates the issues involved in the timing and scale of entry. Merrill Lynch entered Japan's private client market on a small scale in the mid-1980s, only to exit in 1993 after admitting it was making no progress. The reasons for this lack of progress included an adverse regulatory environment that made it difficult for Merrill Lynch to expand and an inability to recruit sufficiently talented people away from Japan's domestic financial institutions. In other words, the company was too early. By 1997, however, the regulatory climate in Japan had changed significantly. This, coupled with the bankruptcy of Yamaichi Securities and the resulting availability of talented financial services people, made it feasible for Merrill Lynch to reenter the market on a much larger scale. The timing now seemed right. A significant feature of Merrill Lynch's reengagement in Japan's private client market is that the company is still an early mover among foreign financial services entering the market. It is also an early mover relative to Japanese financial service firms. This preemptive move, combined with the substantial scale of the commitment, bodes well for the firm's objective of establishing itself as a dominant player in Japan's potentially huge private client market.

The choice of mode for entering a foreign market is another major issue with which international businesses must wrestle. The various modes for serving foreign markets are exporting, licensing or franchising to host-country firms, establishing joint ventures with a host-country firm, and setting up a wholly owned subsidiary in a host country to serve its market. Each of these options has advantages and disadvantages. The magnitude of the advantages and disadvantages associated with each entry mode are determined by a number of factors, including transport costs, trade barriers, political risks, economic risks, and firm strategy. The optimal entry mode varies from situation to situation depending on these various factors. Thus, whereas some firms may best serve a given market by exporting, other firms may better serve the market by setting up a wholly owned subsidiary or by using some other entry mode. The opening case reported Merrill Lynch's consideration of a joint venture with Sanwa Bank to serve the Japanese private client market, although it ultimately chose to establish a wholly owned subsidiary.

We touched on the topic of entry modes when we examined foreign direct investment (FDI) in Chapter 6. There we related economic theory to exporting, licensing, and foreign direct investment as means of entering foreign markets. Here we integrate that material with the material we discussed in Chapter 12 on firm strategy to present a comprehensive picture of the factors that determine the optimal entry mode. We consider a wider range of modes in this chapter as well as mixed entry modes. (For example, establishing joint ventures and wholly owned subsidiaries in another country are both FDI, but we did not make a distinction in Chapter 6.)

The final topic of this chapter is that of strategic alliances. Strategic alliances are cooperative agreements between actual or potential competitors. The term strategic alliances is often used loosely to embrace a variety of arrangements between actual or potential competitors including cross-shareholding deals, licensing arrangements, formal joint ventures, and informal cooperative arrangements. The motives for entering strategic alliances are varied, but they often include market access; hence, the overlap with the topic of entry mode.

Strategic alliances have advantages and disadvantages and a firm must weigh these carefully before deciding whether to ally itself with an actual or potential competitor. Perhaps the biggest danger is that the firm will give away more to its ally than it receives. As we will see, firms can reduce this risk in the way they structure their strategic alliances. We will also see how firms can build alliances that benefit both partners.

The chapter opens with a look at how firms choose which foreign markets to enter and at the factors that are important in determining the best timing and scale of entry. Then we will review the various entry modes available, discussing the advantages and disadvantages of each option. Next, we will consider the factors that determine a firm's optimal entry mode and then look at the advantages and disadvantages of engaging in strategic alliances with competitors. Finally, we will consider how a firm should select an ally, structure the alliance, and manage it to maximize the advantages and minimize the disadvantages associated with alliances.