Q1. (a) Discuss the motives for companies deciding to enter a foreign market.

There are 4 main motives influencing their decisions to enter foreign markets, The first motive is to
seek natural resources, where companies can acquire access to resources like minerals, oil, timber,
or agricultural products needed in their production line. For example, oil deposits in the middle east.
The second motive is seeking new markets and increasing market opportunities, companies can
access new customers, markets, and opportunities in order to increase their revenues by seeking
large potential markets, for example for sales, marketing and distribution operations. For example,
untapped markets like China and India with huge population. Thirdly, to achieve efficiency,
companies can reduce their overall costs of production, by seeking the most efficient locations
featuring a combination of low-cost factors in terms of labor force, economies of scale and good
transportation linkages. For example, manufacturing in Guangdong, China. Lastly, companies can
aim to achieve target countries known for world class innovations by seeking locations that offer
accessibility to innovation which support new ideas and new technology, for example biotech in
Cambridge. The 4 mentioned motives are not mutually exclusive, for example TATA consulting
services into Hungary for the best combination of low labor cost that is efficiency seeking and
proximity to potential European clients.

(b) To what extent are these motives related to Dunning’s OLI advantages?

These 4 motives are related to the ‘location’ advantages of Dunning’s OLI advantages(Eclectic
theory). The L advantages are location-specific advantages available in foreign countries in terms of
quality and costs of natural resources, which typically a company wouldn’t be able to enjoy at home.
The advantages include resource seeking, market seeking, efficiency seeking and innovation
seeking(agglomeration).

Example: use above everything if the points are higher

(c) Do you agree that first movers in foreign markets have always been more successful than late-
movers?

No, first movers have not always been more successful, as entry timing has no bearing on success or
failure of foreign market entry. While it has achieved success for certain companies like Fedex,
Google, Xerox,but there are examples of first mover companies failing while the second-mover
company gain success. One example would be Netscape in internet browser as a first mover and
Microsoft explorer has much success being a second mover.

Why? → both have their own pros and cons

First mover advantages: achieve proprietary, technological leadership, preemption of scarce

resources (right of purchasing it before others, ex get better quality workers than others),
establishment of entry barriers for late entrants (apply and get patent), build up relationships and
connections with key stakeholders such as customers and governments

➔ First mover can maintain market leadership if they continuously commit resources and if
they actively learn about the local environment
 Example: Coca-Cola is one of the most well-known brands in China and was one of the first
American businesses to enter the Chinese market in the 1970s. Due to its early debut into China,
Coca-Cola was able to build a strong brand presence and distribution system before its rivals.

Late mover advantage: opportunity to free ride on first mover investments (MacDonalds in China
that free rode on kfc investment in educating the public about fast food), resolution of technological
and market uncertainty (Netscape, many tech uncertainties with the browser), first mover have
difficulty in adapting to market changes

Example:

(success) Spotify: The Indian music streaming market was controlled by regional players like Gaana
and JioSaavn when Spotify very recently entered the scene. Spotify has been able to increase its
market share despite fierce competition and difficulties like language barriers and regional music
preferences by putting a strong emphasis on user experience and individualized recommendations.

(Failure) Amazon, several years after domestic e-commerce behemoths like Alibaba and JD.com had
already made a name for themselves, Amazon entered the Chinese market in 2004. Amazon made
large market investments, but was ultimately unable to successfully compete against established
local businesses and withdrew from the Chinese market in 2019.

Q2. (a.1) Discuss the difference between licensing and franchising

Licensing is long term non-equity arrangement, which grants rights to intangible property to a
company in a foreign country in return for royalty fee such as patents, inventions or formulas. This
will enable the licensee in the host country to produce and market a similar product to what the
licensor has been producing in home country. One example is Hasbro, a toy manufacturer in US.

Franchising is long term non-equity arrangement, which grants rights to intangible property to a
company in a foreign country in return for royalty fees such as patents, inventions or formulas. To
enable the franchisee to perform, the franchiser typically provides all necessary support, including
supplies, training, and advertising. For example, many multinational corporations like fast food
chains say McDonald’s have internationalized using this mode.

Comparison in detail

In terms of time span, licensing has a shorter-time span which is usually less than 10 years, while
franchising is longer taking up 10 or more years. In terms of control, licensing allows licensee free
hand to run the business, while franchiser has tight rules for the franchisee like franchiser will also
assist the franchisee to run the business on an ongoing basis. In terms of usage, licensing is primarily
used by manufacturing companies, while franchising is mainly used by servicing companies. In terms
of payment, licensor usually receives a fixed royalty payment, while franchiser usually receives a
fixed royalty payment plus a percentage of the franchisee’s gross sales. For branding, licensee often
keeps its own company name and operating system for example anheuser-busch licenses the right
to brew beer to several companies including Labatt in Canada but having the companies retaining
their own company names, identities and autonomy, while franchising takes the name and system
from the franchiser, for example macdonalds.
Comparison in short

Licensing: shorter time frame (less than 10 years), free hand control, mostly for manufacturing, fixed
royalty payment, keep company’s name and operation system

Franchising: longer time frame (more than 10 years), tight rules and help franchisee to run, mostly
for servicing, fixed royalty payment and % of sales, take franchisor’s name and operation system

Equity arrangement: brownfield investment (acquisitions), a company acquires a

(a.2) Discuss the difference between brownfield investment and greenfield investment.

Fully owned subsidiaries like brownfield investment can expand businesses to new markets way
faster as it already have existing design and layout. They function by fully acquiring a foreign
company and turning it into their subsidiary and this subsidiary will then be used to manufacture,
promote, and sells its products and services. One example would be the acquisition of Survey
Research Group in Asia by AC Nielsen and so entering the Asian market. This strategy is very quick
simply by paying and executing. As the company grows bigger, it’s enabled to pre-empt its
competitors in the foreign market. It incurs less risk because the company is buying a set of assets
that already have a specific revenue and profit stream. These strengths can equally backfire if
inadequate pre-acquisition screening is done, overpaying might occur such as quaker oats paying $1
billion too much in acquiring Snapple. Other than that, a clash of cultures and roadblocks in
integration like incompatible technologies and human resource policies can result in poor
performance of the company.

Whereas greenfield investments are a new fully owned subsidiary built from scratch in a foreign
country with no design and layout so it will be slower to start, for example, Nissan built a new car
factory in Mississippi US. The advantage is to build the kind of subsidiary that the company wants,
which allows for setting systems and processes from scratch, at the same time, its own
organizational culture without the integration of 2 cultures, this is the main reason why joint
ventures fail. The downside is its slow establishment and risk in acquiring market knowledge,
people, and know-how in a different culture. Surely, substantial capital investment is required.

In short comparison for brownfield and greenfield

Brownfield investment: existing design and layout, quicker to start, lower capital investment, local
knowledge and employees, existing customers.

Greenfield investment: own design and layout, slow to start, larger capital investment, lack local
knowledgeand employees and have to find new customers.
(b) Under what conditions are joint ventures, brownfield investments and greenfield investments
attractive?

All the above mode of entry strategies are the 3 options of FDI. They represent equity arrangements,
while joint ventures are partial, both brownfield and greenfield investments are wholly-owned.

Starting off with joint ventures, they are attractive when local government has resstrictions on
wholly owned subsidiaries, at the same time, when companies aren’t ready to assume a costly and
risky market entry. When the local partner is well known and well-established and has aspiration to
join up with a foreign company for international expansion.

For brownfield investments or international acquisitions, it should be part of the broader global
expansion strategy to have fully owned subsidiaries, acquire a successful company but now is in
need of capital and ready for sale. Lastly, where there is a need to quickly set up a business and start
operating.

For greenfield investments, it has to be part of a broader global strategy to have fully owned
subsidiaries and have local subsidies like tax advantage. There should be a strong organization
culture for the company, and so its own culture should be set up instead of integrating 2
organization cultures.

1. If a business is considering entering a new overseas market, there are many crucial decisions to
make. Using a particular type of business to illustrate your points, answer these questions:

(a) What are the different modes of entry strategies that your chosen type of business could use to
enter a new overseas market? Compare the strengths and weaknesses of each one. (12 marks)

Different modes of entry strategies: The 6 main ways include Exporting, Turnkey project, Licensing,
Franchising, Joint ventures, wholly owned subsidiaries.

Starting with the simplest mode, exporting from home, where a company produces products in its
home country and exports them to a foreign market. Avoids the costs of establishing local
manufacturing and service operations, overcomes trust issues with a letter of credit, and requires
lower capital. This strategy is very practical for my small enterprise due to limited capital, however, if
the local location cost for manufacturing the products is lower than the home country and high
transport costs and tariffs may make it uneconomical. Since there’s always a ceiling for exporting,
there would be restrictions on overall revenue growth.

Short term non-equity arrangement, while the turnkey project is not a suitable strategy for my
business as it is usually used by companies that require complex process techniques and unique
know-how. It’s comparatively less risky, has high revenue, and can create value, but it’s a one-off
short-term tactic and a risk for selling off the competitive advantage to potential competitors by
supplying process technologies and know-how.

Long-term non-equity arrangement, licensing involves granting access to use a company’s

intellectual property to a foreign partner in exchange for royalties. Low-risk mode of entry into the
new market with low investments and prevent investment barriers from governments. However,
risky due to handing over control to a foreign partner, in terms of quality control issues and losing
control over a brand. Besides, Intangible property may be lost as methodologies and tricks are
exposed, so would not renew contracts.
Long-term non-equity arrangement, franchising involves allowing foreign partners to use the
company’s business model, brand, and operating system in exchange for a fee. Low-cost and risk
entry modes can quickly build a global presence. It can be hard due to cultural differences and legal
issues, the geographical distance from the franchisee may make quality detection harder, and poor
quality at one location can result in hurting the brand’s reputation globally, for instance, the poor
quality of McDonald’s in China hurt the brand elsewhere.

Equity arrangement: full-scale strategic alliances, joint venture means partnerships with other
foreign companies operating in a foreign market, it can gain extensive knowledge in terms of local
conditions, culture, language, and political, legal, and business systems. However, companies would
expose exposing their methodologies and have conflicts over culture, power, and control.
Statistically, the failure rate is over 80%.

Lastly, foreign direct investment establishing a wholly-owned subsidiary can expand businesses way
faster by paying and executing while having full control over its operations. It can pre-empt its
competitors in the foreign market by growing. It incurs less risk, however, problems like overpaying
might arise if inadequate pre-acquisition screening is done. Other than that, a clash of cultures and
roadblocks in integration like incompatible technologies can result in poor performance of the
company.

→ brownfield and greenfield investments

(b) Discuss when a business may gain benefit from entering a new overseas market and when the
challenges may make this undesirable. (13 marks)

First of all, when businesses enter untapped markets and have the first mover advantage. It’s often
beneficial to market seekers that sell their products or services to new customers such as Google or
FedEx. It’s beneficial the most for proprietary or technological leadership who can establish a
dominant position in the market, gain brand recognition and build customer loyalty. First movers can
also have pre-emption of scarce resources by establishing relationships with key suppliers and
distributors, where they may enjoy location-specific advantages such as oil exploration in the Middle
East. This would establish a market entry barrier for late entrants and increase its competitiveness,
for example patenting certain products. It’s better to be a first mover when there are certain
relationships established with the host countries’ stakeholders like the government or customers.
First movers need to actively learn about the local environment and adapt or they’ll lose against new
market entries that are more aligned with the local status.

There are a number of late mover advantages as well, such as the opportunity to free ride on first
mover investments and technological developments by learning from the experience and knowledge
of the first mover, they can avoid costs and risks associated with entering the new market. Late
movers have the opportunity to learn from the mistakes of the first mover and make amendments
to their products or services to better cater to the needs of the market. One example would be
MacDonalds in China free rode and learned from KFC’s marketing, research, and educating the
public. It could resolve technological and market uncertainty like Netscape internet browser did as it
succeed while being a second mover company.

First-movers face the risk of investing too much in the market which may decrease their profitability.
While late movers do enjoy entering the market with a lower risk profile, they have a chance of
competing with established first-mover firms and gaining a market share.
On what scale to enter foreign market?

Small scale: little cost and less risk , but little ownership and control

Large scale: high cost and more risk, but more control and ownership

➔ 6 marketing strategies to enter foreign market

Limited strategic alliances

- operational collaboration → marketing, operations and distributions

→ example: airlines form alliances to connect major travel destinations, share frequent flyer
programmes and share facilities like passenger lounges

Internationalization process

Classical view: growth through evolution→ companies start with a relatively low commitment to a
market like exporting, turnkey projects, licensing and franchising

Then companies proceed to make more commitment → strategic alliances via joint ventures, fully
owned subsidiaries via brownfield and greenfield

-the classical approach of gradual stages of internalization is an evolutionary process and is the most
adopted one → derived from Uppsala model

Uppsala model → argues that companies take gradual incremental steps to international business
expansion

➔ These successful steps are based on learning and knowledge acquisitions about the foreign
market and operation

BMGC – Final Revision: Chapter 9

Q1: (a) Discuss the motives for companies deciding to enter a foreign market. (b) To what
extent are these motives related to Dunning’s OLI advantages? (c) Do you agree that first movers
in foreign markets have always been more successful than late-movers?

(a)

• Four motives influencing decisions to enter a foreign market:

1. Resource seeking
- seek locations that offer minerals, oil, timber, agricultural products that

are required by companies in production process, e.g. oil deposits in M.E.

2. Market seeking
- seek locations that have large potential markets, e.g. markets in China and

India.

3. Efficiency seeking
- seek locations that offer low cost factors such as low labour costs,
economies of scale, good transportation linkages, e.g. manufacturing in Guandong,
China; logistics in Rotterdam.
4. Innovation seeking
- seek locations that offer accessibility to innovation, resulting in companies to advance
organizational learning, e.g. bio-tech in Cambridge; IT in Bangalore.
 • The above four motives are not mutually exclusive, e.g. Tata Consulting Services went
into Hungary, because of best combination of low labour costs (efficiency seeking) and
proximity to potential European clients (market seeking).

(b)
• These four motives are related to the ‘Location’ (L) advantages of Dunning’s OLI
advantages (Eclectic theory).
- The ‘L’ advantages are location-specific advantages that are available in foreign
locations, which a company would not enjoy at home.
- Dunning’s ‘L’ advantages include (i) market; (ii) resources; (iii) agglomeration.

(c )
• No – first movers have not always been more successful; entry timing has no direct
bearing on success or failure of foreign market entry.
• It is true that first movers have achieved success –e.g. Xerox, Fedex, Google.
• But late movers have also achieved success – e.g. Microsoft as 2nd mover has been more
successful than first mover Netscape.
• Other examples in automobile industry in China: in early 1980’s – of the three first
movers, only Volkswagen has been successful, the other two (Chrysler and Peugeot)
have failed. In 1990’s & 2000’s – many late movers (GM, Honda, Hyundai and BMW)
went into China and have been successful to gain significant market shares in China.

Q2: (a) Discuss the differences between licensing and franchising, and between brownfield
investment and greenfield investment. (b) Under what conditions are joint ventures, brownfield
investments, and greenfield investments attractive?

(a)

• Differences between licensing and franchising:

Licensing Franchising

- shorter time frame <10 years - longer time frame 10 years+

- free hand - tight rules and help franchisee to run

- mostly for manufacturing - mostly for servicing

- fixed royalty payment - fixed royalty payment + a % of sales

- keep own co’s name & op. sys. - take franchisor’s name & op. sys.

• Differences between brownfield investment and greenfield investment:

Brownfield investment Greenfield investment
- existing design & layout - own design & layout

- quicker to start - slow to start

- lower capital investment - larger capital investment

- local knowledge & employees - lack local knowledge & employees

- existing customers - have to find new customers

(b)

• Joint ventures, brownfield investments (international acquisitions), and greenfield

investments are the three options of FDI. They represent equity arrangements (joint
ventures are partial; both brownfield and greenfield investments are wholly-owned).

• Under what conditions are these three options attractive:

a. Joint ventures
(i) Local government has restrictions on wholly own subsidiaries
(ii) Not ready to assume a more costly and risky market entry
(iii) Local partner is well-known and well-established, and has aspiration to join up with
a foreign company for international expansion

b. Brownfield investments (international acquisitions)

(i) Part of a broader global strategy to have fully owned subsidiaries
(ii) A successful local company but now in need of capital and ready for sale
(iii) Need to quickly set up the business and start running

c. Greenfield investments
(i) Part of a broader global strategy to have fully owned subsidiaries
(ii) Local government subsidies, e.g. tax advantage
(iii) Strong organization culture is very important for the company, and so setting up
own culture instead of integrating two organization cultures.