Comparison of Foreign Market Entry Modes - Welsh Company - Case Study Example

Economy Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Instructor Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Contents Contents 2 1.0 Introduction 3 2.0 Nature of economic globalization 4 3.0 Modes of entry in foreign markets 6 3.1 Exporting 6 3.2 Licensing 7 3.3 Joint ventures 8 3.5 Ownership 9 3.6 Comparison of Foreign Market Entry Modes 9 4.0 Cultural issues companies faces in developing into international dimensions 11 5.0 Conclusion 13 6.0 References 14 1.0 Introduction Globalization has ultimately changed the way business is operated by many firms across the world. Through advances in technology and communication, the distance between the providers of goods and services and the consumers has been greatly reduced. As a result knowledge, information, capital and commodities can be easily transited across borders. This has also seen the dramatic growth of interdependence among nations. The concept of globalization is therefore forcing many firms to become internationalized in order to reap its enormous benefits. Many companies are exploring new markets not only for the purpose of expanding their profits but also to have easy access to better facilities such as technological knowhow, human, informational and financial resources. Welsh company is one such company that has come to the realization of the sustainable advantages of going international. The company has operated domestic markets in Cardiff for many years until recently when international competition became tremendously high forcing the company to look for other options. In spite of the company having a highly competent management team, it is slowly losing its market share in the domestic market. As the Chief Commercial manager of Welsh, I have prepared this report which will take an in depth analysis to all matters pertaining to internationalization of the firm. The report begins by giving an analysis of the nature of economic globalization. It will further discuss all the possible market entry strategies and more so advantages and disadvantages of each of them. The report will finally discuss some of the cultural issues that might be encountered when establishing operations overseas (Falvo and Parshad 2005). 2.0 Nature of economic globalization According to Hofstede (2001) economic globalization is defined as the increased economic interdependence of various national economies across the globe by way of rapid cross border movement of technology, capital, services and goods. Clearly, for a midsized company that is situated in Cardiff and wants to go international it is important that it analysis the nature of the current economic globalization. This is important since it will enable the company to ensure that it does not loose on market share due to foreign competition as well as the shrinking of the overall market size especially in today global financial crisis. Arguably, while globalization is mainly centered around the great dimulation of international trade not forgetting the tariffs, taxes and several other impediments that are known to suppress global trade, economic globalization is viewed as that process involved in increasing economic integration between different countries which in turn lead to the emergence of single world market or global marketplace (Hofstede 2001). Clearly, the nature of economic globalization today largely combines various economic activities which take place both in individual and other activities between countries. Today the nature of economic globalization is widely manifested through trade, production, technology, labor, economic behavior between and in nations, investment and financial flows. Hofstede (2001) maintains that, it is important that the company understand the growth of economic globalization. Clearly, the world economy has been rapidly growing with an average growth of about 3.4% in the 90s to around 6% in 2000s. These rates have been consistent over a period of time until the recent financial crisis that began in United States. Today, economic globalization just like individuals economies is going through both cycles of decline and growth where these cycles are referred to as international business cycles which are important to be studied by an organization planning to go international (Hofstede 2001). Further, it is of importance for this midsized Welsh company who engages in supplying electronic component to the UK car industry to understand effects of economic globalization towards their daily operations. Based on positive effects, there exist three positive financial effects of economic globalization. Firstly, it is notable that growth brought by economic globalization is greatly shared within the organization. Also, economic globalization has been helpful in the reduction of poverty with immediate focus on the company’s employees and management. Poverty has greatly been reduced by a margin of 5.4% annual growth in income especially in organization like this one due to its ability to go international. Finally, economic globalization has been in the forefront in narrowing the gap that existed between the rich and poor. Researchers suggest that increased economic globalization is largely narrowing the per capita income gap between globalizing nations and the rich. Small organization like this is able to be positively influenced with this narrowing of the existing worldwide inequalities due to its rapid expansion in economy. Based on the negative effects associated to economic globalization, the various trade movements such as fair trade have been linked to play a major role in alleviating exploitation. It is quite evident that international economic institutions such as International Monetary Fund and World Bank are examples of economic globalization which usually spread out social injustice dilemma. 3.0 Modes of entry in foreign markets Any firm intending to take its operation into new market places must make crucial strategic decisions on the most appropriate entry mode that is most favorable for its operations. Mode of entry into a new market is defined as the channel that a company intends to employ in order to acquire entrance into a new international market. There are four most common market entry methods which are joint ventures, exporting, licensing, and ownerships. The mode that is to be used depends on various factors which include cost, the risk involved and the extent to which the company will have control over the venture. 3.1 Exporting Exporting is regarded as the most traditional mode of market entry. Exporting refers to direct sale or marketing of domestically produced goods and services into another country. In this mode of market entry, the company does not need to open up manufacturing plants in the foreign country and any costs incurred during exporting are treated as marketing costs. The key players in exportation are the exporter, importer, government and transport providers. Exportation is the best mode of market entry to employ when trade barriers are significantly low, when customization is not a crucial factor and when the location of the home producers has cost advantages. Exports can either be direct or indirect. In direct exportation, the company is essentially committed and directly involved in all its overseas operations. Contrary to this, indirect exports involve employment of an agency from within the home country to handle all matters of exports on behalf of the organization. There are several forms of indirect exportation. The first one is piggybacking whereby a company with little or no skills on exporting utilizes the logistics of another that is highly competent in the issue. Another form of indirect exportation is countertrade which is by far the most common method of exportation. Countertrades are basically commercial transactions where two companies enter into contractual agreements to exchange goods and/or services in place of financial settlements. Cortrtia is another form of indirect exportation where companies join forces to market their products in the international markets (Foley 1999). The advantage of using exports is that initial investments in terms of capital are significantly low as compared to other modes of entry. In addition, it gives the company an opportunity to investigate the new market, reach customers quickly, assess potential risks and learn methodsof future expansion. On the other hand there are several drawbacks to this method. Firstly, trade barrier costs such as quotas, tariffs and transport costs may hinder full success of the venture. Secondly, the company is not able to benefit from economies of location and finally it is quite difficult for the company to effectively respond to customers’ needs since it is not in directly contact with them. 3.2 Licensing Licensing is defined as the process where a company in one country permits another from a different country to use some of its properties mainly intangibles such as patents, trademarks, processing techniques and certain skills for a given fee or royalty. Licensing is the most appropriate method to use when strong property rights regimes exist, there are location advantages and when well codified knowledge is present. Licensing includes turnkey contracts, franchising and contract manufacturing. The main advantage of licensing is that very low costs are involved as the only expense involved is the licensing fee. Besides this, the company operates at very low risk since it has joined an already established market via its host company. The company is also open to taking full ownership of its partner. However, licensing limits the company participation which can only last as long as the laid down agreement. It also requires many logistics such as comprehensive investigation of the Host Company, planning and fact finding. In addition, the company has limited control over operations (Bennett and Blythe 2002). 3.3 Joint ventures Joint ventures occur when two or more firms or investors come together to share control and ownership of their operations and property rights. Unlike exportation and licensing, joint ventures allow active and direct participation of all parties involved. Joint ventures are most appropriate in situations where both partners are willing to contribute immeasurable inputs into the venture. It is also used when the partners intend to make large and long term mutual gains. There are many advantages of joint ventures. To begin with, risk is equally distributed amongst the partners. Additionally, there is combined financial strength which creates a competitive advantage. The foreign partner also has significant control over the operations of the venture. On the other hand there are several disadvantages of using joint ventures. The local partner and the foreign ones may have conflicting issues in terms of view points and expected results. In addition, recovery of capital might prove impossible at the incidence of the joint venture breakage (Foley 1999). 3.5 Ownership Under this mode of entry, the foreign company acquires 100% ownership of a local company in the new market. This mode also referred to as direct investment is the most extensive form of participation among other modes and involves the greatest commitment in terms of managerial efforts and capital. Resources such are capital, personnel and technology are completely transferred from one company to another. Direct investments are high risk ventures and can only be used by companies with high synergy, high absorptive capacity and possesses high corporate control. The advantage of ownerships is that the company has direct relationships with consumers hence it can respond to their needs appropriately. Indeed, the company acquires full control over its foreign operations which enhances monitoring of performance. It is also able to enjoy all the benefits involved such as profits without having to share it amongst partners like in other modes of entry. However, direct investment is a high risk venture due to uncertainties with regard to absorbability of the company into the foreign country (Bennett and Blythe 2002). 3.6 Comparison of Foreign Market Entry Modes Mode Conditions Favoring this Mode Advantages Disadvantages Exporting Limited sales potential in target country; little product adaptation required Distribution channels close to plants High target country production costs Liberal import policies High political risk Minimizes risk and investment. Speed of entry Maximizes scale; uses existing facilities. Trade barriers & tariffs add to costs. Transport costs Limits access to local information Company viewed as an outsider Licensing Import and investment barriers Legal protection possible in target environment. Low sales potential in target country. Large cultural distance Licensee lacks ability to become a competitor. Minimizes risk and investment. Speed of entry Able to circumvent trade barriers High ROI Lack of control over use of assets. Licensee may become competitor. Knowledge spillovers License period is limited Joint Ventures Import barriers Large cultural distance Assets cannot be fairly priced High sales potential Some political risk Government restrictions on foreign ownership Local company can provide skills, resources, distribution network, brand name, etc. Overcomes ownership restrictions and cultural distance Combines resources of 2 companies. Potential for learning Viewed as insider Less investment required Difficult to manage Dilution of control Greater risk than exporting a & licensing Knowledge spillovers Partner may become a competitor. Direct Investment Import barriers Small cultural distance Assets cannot be fairly priced High sales potential Low political risk Greater knowledge of local market Can better apply specialized skills Minimizes knowledge spillover Can be viewed as an insider Higher risk than other modes Requires more resources and commitment May be difficult to manage the local resources. 4.0 Cultural issues companies faces in developing into international dimensions Being a chief commercial manager for an organization that is going international, it is important for the organization to realize that despite of advantages of opening up new foreign markets and new destinations there are cultural issues the go hand in hand of going international. Evidently, when a company is going international there are various challenges associated to cultural issues. Culture is usually considered as a key challenge associated to going international and can widely affect the entire operation of business. For this organization, it is notable that culture can influence a business in different ways. While going international it is important to understand that mistake can be viewed to be difficult to correct whereby disrespect for the foreign culture can largely affect the entire business operation. It is important for this organization before entering into any foreign market it is necessary to find out about the custom and culture that its displayed in any given international market. Clearly, foreign cultures have different ways in which they conduct their businesses (Rugman 2000). When going international, there are both negative and positive influences. Cultural issues ware usually divided into several levels of cultures. This is because there is a rapid change in the cultural environment which is creating major challenges for most international marketplaces. According to Rugman (2000), cultural issues that affect international businesses include language, art and religious ritual. The adaptation to these cultural issues by this will depend with the company adaptability on its level of market participation for example product and service marketed as well as direct investment and licensing. Further, every culture country is meditated by three major factors namely; consumer decision process, cultural forces and cultural messages. There are certain cultural issues that largely influenced from international wants and needs in both consumer trends and society. To establish good cultural relationship, it is necessary for this country to analyze and cope with various cultural differences as well as ensuring that it harnesses with the tension to bring about reconciliation in different cultures. Rugman (2000) maintains that, language is another cultural issue that affects business that intends to go international. Language is an important aspect especially when negotiating with trade partners that are from different cultures. Although researchers indicate that it is not always indispensable to know business partner language, studies indicate that a great link exists between creating a successful international company performance as well as the ability of the company in conducting its business in the same language as the customer. 5.0 Conclusion With today increase in globalization, it is very advantageous for an organization to go global so as to have connection with both local and international customers. Therefore, for every organization that is intending to go global it is very important to understand the various mode of entries towards international dimension by clearly understanding the advantages and disadvantages associated with these modes of entries. Also, it is important that an organization to engages in understanding the nature displayed by economic globalization. Understanding economic globalization ensures that an organization is able to plan ahead for the future of the organization. Further, it is important for an organization to understand cultural issues associated to going international. Culture plays an important role in the international markets. There are various strategies that are important in managing cultural differences for any business that is thinking to go international. These strategies includes; building of a very strong corporate culture both locally and international, ensuring that an organization is able to develop a general professional or technical culture worldwide, great reliance on strong planning and financial system as well as leaving each culture on its own. Therefore, it is necessary that any organization deciding to go international evaluates the above. 6.0 References Bennett, R. and Blythe, J. 2002, International marketing: strategy planning, market entry and implementation. London: Kogan Page. Falvo, F. and Parshad, M. 2005, The internationalization process of a firm-The case of Volvo Company.Department of Social sciences Roskilde university. Foley, J., 1999, The global entrepreneur: taking your business international. Chicago: Dearborn. Hofstede, G. 2001. Culture’s Negation-Comparing values, Behaviors, Institutions, and Organization Across Nation, USA: Sage Publication Rugman, A. 2000. International Business- A strategy management approach, England: Prentice Hall. Read More