Chapter 14 Outline

Chapter Summary

This chapter addressed two related topics: the optimal choice of entry mode to serve a foreign market and strategic alliances. The two topics are related in that several entry modes (e.g., licensing and joint ventures) are strategic alliances. Most strategic alliances, however, involve more than just issues of market access. This chapter made the following points:

1. Basic entry decisions include identifying which markets to enter, when to enter those markets, and on what scale.

2. The most attractive foreign markets tend to be found in politically stable developed and developing nations that have free market systems and where there is not a dramatic upsurge in either inflation rates or private-sector debt.

3. There are several advantages associated with entering a national market early, before other international businesses have established themselves. These advantages must be balanced against the pioneering costs that early entrants often have to bear including the greater risk of business failure.

4. Large-scale entry into a national market constitutes a major strategic commitment that is likely to change the nature of competition in that market and limit the entrant's future strategic flexibility. The firm needs to think through the implications of such commitments before embarking on a large-scale entry. Although making major strategic commitments can yield many benefits, there are also risks associated with such a strategy.

5. There are six modes of entering a foreign market: exporting, turnkey projects, licensing, franchising, establishing joint ventures, and setting up a wholly owned subsidiary.

6. Exporting has the advantages of facilitating the realization of experience curve economies and of avoiding the costs of setting up manufacturing operations in another country. Disadvantages include high transport costs and trade barriers and problems with local marketing agents. The latter can be overcome if the firm sets up a wholly owned marketing subsidiary in the host country.

7. Turnkey projects allow firms to export their process know-how to countries where FDI might be prohibited, thereby enabling the firm to earn a greater return from this asset. The disadvantage is that the firm may inadvertently create efficient global competitors in the process.

8. The main advantage of licensing is that the licensee bears the costs and risks of opening a foreign market. Disadvantages include the risk of losing technological know-how to the licensee and a lack of tight control over licensees.

9. The main advantage of franchising is that the franchisee bears the costs and risks of opening a foreign market. Disadvantages center on problems of quality control of distant franchisees.

10. Joint ventures have the advantages of sharing the costs and risks of opening a foreign market and of gaining local knowledge and political influence. Disadvantages include the risk of losing control over technology and a lack of tight control.

11. The advantages of wholly owned subsidiaries include tight control over technological know-how. The main disadvantage is that the firm must bear all the costs and risks of opening a foreign market.

12. The optimal choice of entry mode depends on the strategy of the firm.

13. When technological know-how constitutes a firm's core competence, wholly owned subsidiaries are preferred, since they best control technology.

14. When management know-how constitutes a firm's core competence, foreign franchises controlled by joint ventures seem to be optimal. This gives the firm the cost and risk benefits associated with franchising, while enabling it to monitor and control franchisee quality effectively.

15. When the firm is pursuing a global or transnational strategy, the need for tight control over operations in order to realize location and experience curve economies suggests wholly owned subsidiaries are the best entry mode.

16. Strategic alliances are cooperative agreements between actual or potential competitors.

17. The advantage of alliances are that they facilitate entry into foreign markets, enable partners to share the fixed costs and risks associated with new products and processes, facilitate the transfer of complementary skills between companies, and can help firms establish technical standards.

18. The disadvantage of a strategic alliance is that the firm risks giving away technological know-how and market access to its alliance partner in return for very little.

19. The disadvantages associated with alliances can be reduced if the firm selects partners carefully, paying close attention to the issue of reputation and structure of the alliance so as to avoid unintended transfers of know-how.

20. Two of the keys to making alliances work seem to be building trust and informal communications networks between partners and taking proactive steps to learn from alliance partners.