Entry Strategy In Emerging Markets - Essay Example

?Entry Strategy in emerging Markets In the advent of globalization the countries are promoting trade activities with one another and also the rise ofmultinational organizations is evident. However the strategy of entering into the emerging markets is one of the interesting mater of study. Most organizations aim to invest in the countries which has a stable economy and where they can get maximum return on their investment. As a result the emerging economy of the world has a clear cut advantage in attracting organizations to invest in their countries. However foreign organizations need to be careful in framing policies for the entry. The overall choice of the entry strategy is crucial for the overall success of the organization. The paper analyzes the various entry strategies in the emerging markets with special reference to the BRIC countries and their contribution to the world economy as more numbers of western business houses are cropping trying to intrude and make allies. For the convenience of our study we are taking the examples of China, India and Brazil to study them in details. Analysis of various risks is also being undertaken in the matters of entry. Emerging markets and BRIC: The term emerging market denotes the nations where the social and business activities are in the process of rapid industrialization and growth. As per the statistics collected in the year 2006, almost 28 emerging markets were existent across the world but the markets of China and India have been most significant in this respect as they account to be the largest. In 1980 World Bank economist termed the countries as “Emerging Economies” to those countries which lie in between developed and developing countries. (In’s and Out, 2008) In recent time some more terms cropped up like BRIC to describe the largest developing countries which do not necessarily share common agendas but these countries are enjoying increased role in the world economy and political platforms as a whole. (After BRICs, look to CIVETS for growth, 2010) Another characteristic of emerging market is that most of the countries have an average low income, and the labor is cheap over there, besides there is a huge variability in the customer profile. (Dawar & Chattopadhay, 2002, pp.457-454) Entry Strategy in Emerging Economies: The market of the emerging economies is one of the latest destinations for various organizations. However before entering into the markets, the organizations should study the vulnerability of the market conditions and various socio economic factors which are mentioned below. Based on the analysis of the factors the organizations should decide whether it has the necessary potential for setting up a business in the country and also should devise the entry strategy accordingly. The factors which are of prime importance are discussed below Political Factors: The consequence of the political issues is of a high significance to the business. While investigating into the political factors, matters relating to the policymaking of diverse regions are all taken into consideration. These fields include the administrative, provincial, nationwide and worldwide aspects. Another vital part which is included under the political factors is the consequence which businesses have to face due to alteration in the government both in the local and countrywide level. Multinational businesses also need to properly understand the official policy which a government offers towards other countries (Wiiliams & Green, 1997, p.162). Economic Factors: The economic factors recount the components which influence the economic position of the business. The economic issues thoroughly deal with the economic and the fiscal strategy of the government. It is quite clear that the economic recessions relating inflation also disturb the officialdoms. The power of the national economy is a major factor which organizations do ponder upon. Alteration in taxation rate and bilateral trade agreements amongst the countries are also thoroughly administered (Walters, 2006, p 208) Social Factors: The study of the communal situation is a precondition for any industry. Any industry depends on the clienteles. A good research is mandatory for them to study their habits and life style .The ethnic feature along with the values is quite noteworthy. The training in economic status of diverse classes of society is required so that the assessing of the products according to the demand can be ensured. (Analoui & Karami, 2003, p.76) Technological Factors: The presence of technology in the country also needs to be considered as in the present generation any organization thrives upon the presence of technology and is hugely dependent on it. A careful analysis of the technological factors needs to be considered before the entry strategy is formulated (Henry, 2008, p.58). Various strategies for entry in the market The analysis of the various factors eventually leads to the framing of the market entry strategy. Various market entry strategies for emerging economies are discussed in the section below. Foothold entry Strategy: Based on the segmentation of the market and the variability in the market, business houses decide their mode of entry. Some organizations adapt to the foothold entry strategy. The foothold entry strategy involves partial acquisitions and Joint Ventures. In the method of foothold entry strategy, the organizations are provided with the options for learning about the market condition of a country and after the learning phase they can look for the overall market expansion. In this method low level of resource commitment is made by the organizations. The primary advantage of the overall strategy lies in the fact that during the initial days the organization can study the overall growth of the business and then take further decision regarding the expansion. In case the prospect of the business appears to be less promising, organizations have the opportunity of restoring back without any considerable loss (Fernandez & Shenguin, 2007, p.92). Multi tier strategies: Another effective mode of entry which is often preferred by the organizations is the multi tier strategies in which the foreign firms seeking entry, combines the global and local brands. This mode of strategy works efficiently in highly segmented markets. With these strategy organizations can capitalize on the brand value of their products or services. The global brands are backed up by the already present channels of the local brands and it gains the flexibility to react according to varied trends in the market. However there are certain limitations regarding the multitier strategy. The strategy involves additional costs and risks. The association of a global brand with an inefficient distribution channel may hamper the cause of the global organization. Besides the strategy needs support from the various combination of resources (Kvint, 2009, p. 355). Global brand strategy: The global brand strategy allows the organizations to concentrate on the premium segment of the market. The entry strategy through this mode provides substantial level of margin for the organization. The mode of entry is suitable for markets where the customers are highly conscious about their status and the prestige. The prerequisite of the strategy is the presence of a brand which is recognized globally. Organizations incorporating these modes also have the opportunity to import the premium brands if the country of origin is a crucial factor of the brand. Organizations which have still not emerged as the global brand can utilize their operational efficiency in making their presence feel in the local market. The global branding strategies involves the emergence of brands in the market with little amount of adaptation. The strategy involves the positioning of the brand as a premium brand in the market (Meyer & Tran, 2006). Local Brand Strategy: The local brand strategy is one of the measures applied by the organizations to enter in a market which is highly fragmented. The local brands may not be efficient enough to generate huge amount of sales but it can be effective in building market share and reduce the overall cost through the huge volumes of sales. This strategy has proved efficient in markets where the incomes of the individuals are low in average. (Meyer & Tran, 2006) The strategy of Joint venture: The joint venture strategy involves the partnership between firms from different nations with an aim to gain mutual benefit by sharing the resource and capabilities of each other. Two types of joint ventures strategies are there. The equity joint venture strategy involves the sharing of equity between two different organizations along with the sharing of financial and other resource. In the cooperative joint venture, the profits and the responsibilities are shared between the organizations according to the terms and conditions of the contract. The cooperative joint ventures involve various sub forms which involves the alliance of the process of production, marketing and joint management of the organizations. The main motive of the organizations behind entering into joint venture is for gaining economic benefits (Agarwal & Ramaswamy, 1992, p. 20). The local organizations in a country which are often a part of the joint venture enters into the agreement for improving their overall reputation, and the foreign companies become a part for gaining the business experience in the country from the local company. The foreign organizations entering in the emerging economies faces some difficulties in relation to the structural reforms, property rights and fails to capture the weakly structured market (Bremer, 2005). The collaboration with a local partner indeed reduces the exposure of such risks and acts as a guide for them. However cross cultural difference may arise to be a limitation for the joint venture (Luo, 2002, p.217), Wholly owned subsidiary: The concept of wholly owned subsidiary is one of the expensive strategies for the entry in the market of the emerging countries. The organizations with a view of long term commitment in the foreign market generally opt for the strategy. It allows the organization to be more flexible in the market and gain sufficient knowledge regarding the market conditions. However the exposure to appropriate market conditions often involves lot of time and cost which a serious limitation of the strategy (Hill & Jones, 2009, p.270) Mergers and acquisitions: The strategy of mergers and acquisitions provides one of the fastest ways for the entry into market. The acquisition strategy provides instant access to a wide variety of resource including labor, suppliers, and distribution channels for the organizations seeking entry into the foreign market. In some countries acquisitions are the only option for entering into the market. The limitation with the option of acquisitions is that the strategy involves high cost and also faces the risk of absence of integration and coordination between the two firms. Any occurrence of resentment seriously hampers the cause of both the firms and the objective of the firm seeking entry in the country can never be fulfilled (Tielamn, 2010, p.14). Entry strategy in China: The significant principle dealing with the entry policy in any foreign economy is to study the universal economic situation of the country. China is a very overcrowded nation in the world with a current populace of approximately 1.341 billion. The vast population of China interests business from all industries to finance in Chinese market. The current financial circumstance of China gives a GDP of 2.20. There is an upsurge of 9.5% of GDP in the subsequent quarter of the year related to its preceding year (China GDP Growth Rate, 2011). Foreign countries seeking entry in the market of china are provided with three optional strategies for entry. The organizations seeking entry in China can enter the market with the help of a Hong Kong distributor. This mode is the easiest mode for entry but the benefits gained from this strategy proves inefficient for the overall penetration in the market. The Hong Kong distributors also do not have the power to directly sell in the Chinese market and they emerge out to be a middle man for the foreign organization raising the overall cost. The customer’s needs and demands are also unknown to the foreign companies. Another strategy for the entry is the export mode, through the direct channels based in China. The strategy incurs more time than the previous one but proves to be one of the efficient methods for the penetration in the Chinese market. However the organizations choosing the method requires implementing their own distribution channel and identify the customers and build its own network. This process may prove difficult and involve heavy amount of cost for the new organizations seeking entry in China. The most efficient method of entry in the market of China is the method of Joint venture or an alliance with the local partner. Though this method also involves sufficient time but it reaps long term advantage for both the local and foreign partner. The method of joint ventures also provides additional benefit to the organization from the behalf of government. The method allows the procurement of the raw materials at a subsidized rate. The overall rules and procedures of setting up joint ventures in China are also very transparent and complete in structure (Gross, 1995). Market entry Strategy in India: India has been one of the developing countries in the recent times. The wide variety in the market and a mix of cultures are attracting the investors from the foreign countries to set up their ventures in this part of the world. The Indian government has opened up areas for the foreign direct investment by allowing up to 51% investment in the mining sector and up to 49% in the area of telecommunications (JOINT VENTURES IN INDIA, n. d) As a result these two sectors have been crowded by the multinationals. The study of the different organizations investing in India refers to the fact that the Joint venture is one of the most popular strategies for the entry in the Indian market. Joint venture strategy helps the organizations to reduce the high tariffs associated with the finished goods, which helps in the overall reduction of cost for the organizations. The joint venture facility also enables the organization to undertake the contracts sponsored by the governments. Another major advantage which the organization has in the joint venture strategy is that they have a good exposure of the wide variety of customer demand. The rules and regulations in India vary a lot from state to state and an alliance with a local partner does facilitate the foreign organizations. In order to enter the Indian market under the joint venture, organizations have to take the permissions of the Reserve Bank of India. The high cost for tariff in the Indian market is a barrier for entry through the export mode, besides there is also variety of restrictions imposed by the Indian government which makes the option of joint venture far more appealing for investing. More than 40% percent of firms enter the Indian market through the mode of joint venture (Chandra, et al, 2002, p.93). Market entry Strategy in Brazil: Brazil is one of the nations in the BRIC community and its economic stability has made it one of the desired countries for the investors. The GDP of Brazil in the year 2010 was $ 2.0879 trillion (Borodina & Shvyrkov, 2010, p.6). Brazil was also one of the few countries who had experienced stability in the market during the crunch period of the global inflation. In Brazil, most of the organizations enter the market by the establishment of the strategic alliance with Brazilian local firms. Joint venture allows the firms to enter the market which are controlled by the regulation of the government or procured by the government interventions (Brazil, n. d). The process of joint venture is popular in sectors like telecommunication, and capital markets. The strategy of joint venture enables the firms to gain competitive position in the market. The presence of high tariffs in Brazil also persuades the European organization and most of the American companies to seek for a local partner in Brazil to set up their operation. Bombardier, one of the leading producers of the personal watercrafts, had accounted the maximum amount of sales in Brazil than in any other parts of the world because of the partnership with a local Brazilian firm (Caslione & Thomas, 2000, p.108). Among the firms investing in the Brazilian economy, the priority of the investment has occurred in the manufacturing sector and in 1998; over 55% of the foreign direct investment in the country was from this sector (BRAZIL FOREIGN DIRECT INVESTMENT AND CORPORATE STRATEGIES, n. d, p.145). As a mode of entry strategy, the majority of the firms opted for the Joint venture and in turn the local market of the manufacturing industry improved considerably. Conclusion: The analysis of the different market entry strategy shows that all the strategies discussed above offers a range of advantages and also does have some limitation. However in context of the analysis of the market entry strategy in the BRIC nations it has been found that the countries like China ,India , and Brazil are the emerging nations and the foreign organizations looks to invest over there because of the wide range of benefits. The study reveals that the strategy of joint venture has been applied by most of the foreign multinational in the country. The reason for the choice is quite obvious as joint venture allows having a close look at the market and reduces the exposure to a wide variety of risk. The option of joint venture also provides additional benefit to organizations in countries like India. The help from a local organization provides guide to the foreign companies for penetrating the market and build up a strong presence in the market. The corruptions in the market also can be reduced through the strategic alliance (Javorick & Wei, 2009, pp.605-624). 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