Main Entry Methods that Firms Use to Gain Access to Foreign Markets - Coursework Example

How firms attempt to address the challenges facing them as they enter foreign markets by adopting different modes of entry Name Course Tutor’s Name Date Introduction Internalisation process theory is the predominant explanation given about how firms enter foreign markets. The theory proposes that firms enter foreign markets incrementally, starting with exports and progressing ultimately to foreign-based production (Chen, Cannice & Daniels 2015, p. 134). The theory also argues that it is only logical for a firm to get to know the risks and opportunities available in the foreign markets before taking on an entry strategy that allows all its international operations to be based in a foreign market (Chen et al. 2015, p. 134). However, some firms are on record for expanding their international operations through foreign market strategies that set aside the internalisation process theory. This essay will discuss the main entry methods that firms use to gain access to foreign markets. The essay will use examples of international firms to critically analyse the challenges that firms face when entering foreign markets. It will also look at how the choice of entry methods differs depending on the circumstances that a firm faces as well as the timing of the entry. The essay has a discussion section as well as a conclusion section that reiterates the main arguments discussed in the essay. The challenges of foreign market entry The challenges of entering a foreign market differ depending on the entry strategy that a firm chooses (Twarowska & Kakol 2013, p. 1007). Some strategies present more risks than others since the commitment of resources and the control of the same differs. Generally, there are two modes of foreign market entry – i.e. the non-equity mode and the equity mode. The non-equity mode involves franchising, licensing, turnkey projects, and exports. In contrast, the equity mode is more involving and includes different aspects of foreign direct investments such as the establishment of wholly-owned subsidiaries, joint ventures, acquisitions and import networks that return the finished product back to the home country. By nature, all firms are constrained by the resources that they have, making them limit the risk they are willing to assume. According to Cavusgil, Knight and Riesenberger (2011, p. 45), firms have to choose an entry mode that gives them a desired level of control, but within acceptable resource commitments as well as risk levels (Johnson & Tellis 2008, p. 3). Notably, higher control levels require firms to commit more resources and therefore assume more risks. Therefore, firms that are willing to enter foreign markets have to attain a tough balance between their risk exposure and business control. Johnson and Tellis (2008, p. 3) indicate that whatever entry mode a firm chooses to use in accessing a foreign market, the firm should make several considerations. First, the timing of entry should be the utmost consideration. The size of the firm, the economic distance, the cultural distance, the country risk and openness are other considerations that are likely to pose challenges to firms that intend to enter foreign markets (Johnson & Tellis 2008, p. 3). Wu (2008, pp. 168- 172) on the other hand indicates that whatever mode of entry a foreign firm chooses, chances are that such a firm will encounter human resource-related challenges, law-related challenges, market-related challenges, as well as cultural challenges. The extent of each challenge, however, greatly differs between entry strategies. In wholly-owned subsidiaries, direct investments, and in joint ventures, for example, human resource challenges and cultural challenges are more pronounced when compared to the export and import foreign market entry strategies. The Wuhan Iron and Steel Corporation (WISCO) is a Chinese company that deals in the manufacture and marketing of steel and iron. The company started its operations in 1958 in its home country, and in 1980, it eventually expanded its operations into the international market (Ravelomanana, Mahazomanana & Miarisoa 2015, pp. 25-26). It is important to note that WISCO has used different entry modes – i.e. exporting, contracting, sales subsidiaries, and strategic alliances to enter different markets. According to Ravelomanana et al. (2015, p. 26), the firm has experienced different challenges while using different foreign market entry modes. In its initial stages of foreign market entry, WISCO used both direct and indirect export to gets its iron and steel products into the international market. However, the company faced challenges related to demand uncertainty. However, it was able to overcome such challenges by establishing good relationships with sales representatives and retailers (Revelomanana et al. 2015, p. 27). Another challenge that WISCO faced relates to laws and regulations in different importing countries where its products were sold. As De Burca, Brown and Fletcher (2004, p. 720) observe, the target country that a firm seeks to enter may have laws and regulations that regulate imports. Arguably, such challenges are best dealt with at a bilateral trade level, which primarily is within the jurisdiction of governments and not firms. In other words, unless a firm is able to lobby policymakers to push for more favourable bilateral trading terms at a government level, there is nothing that such firms can do to overcome challenges that come from laws and regulations. Geographical distance is also another challenge that WISCO faced particularly as it started exporting to markets in Europe (Ravelomanana et al. 2008. 26). The distance-related challenge was resolved when the company embraced strategic alliances, which facilitated WISCO’s entry into particular markets in Europe. Theoretically, strategic alliances are considered advantageous to a firm because they facilitate foreign market entry; enable the foreign firm to share costs with its partners; bring together assets and skills from different firms; and enable the companies involved to establish standards for use in their processes (Zamir, Sahar & Zafar 2014, p. 26). Unfortunately, such alliances can make the strategic partner to access technology knowledge and market information, which they can use to compete against the foreign firm in future. Culture and prevailing national environments are other challenges that firms interested in the foreign markets face. The Walt Disney Company, for example, seemingly tried to export its American philosophies to Europe resulting in the epic failure of Euro Disneyland as indicated by Yue (2009, p. 87). By setting up the Euro Disneyland in France, the Walt Disney Company used a joint venture strategy of market entry (because the company expected to list its shares in the French bourse and attract local French (and other European) investors). However, the company experienced challenges in managing the theme park, marketing it, financing it, and even understanding the culture of the French and the habits of people in the larger Europe (Yue 2009, p. 89). In the end, the Walt Disney Company structured the theme park in a manner that did not appeal much to the European audience. Moreover, the firm did not forecast the 2008-2009 economic recession and as a result, the new project was then hit relatively hard. Since Walt Disney executives were overseeing the construction of the Euro Disney, Yue (2009, p. 89) further notes that the firm faced other challenges related to adhering to French labour laws, which were a contradiction to what the executives were used to in the US. Seemingly, therefore, most of the challenges that the Walt Disney Company faced while entering the European market were occasioned by an absence of proper preparation, meaning that the company did not fully understand the social, cultural and legal dynamics of its target market. Walt Disney’s attempt to handle the Euro Disney is documented by Matusitz (2010, p. 224). The author argues that it was only after the firm made drastic changes (like rebranding the theme park from Euro Disney to Disneyland Paris and adapting to local preferences) that the resistance challenges – whose genesis was cultural, social and legal norms – slowly started to wane. Firms that choose to use franchising as their mode of market entry also have their share of challenges. For instance, prospective franchisors incur many transactional, legal and marketing costs, which may in some cases add to the cost of entering a new market (Zwisler & Krakus 2015, p. 5). While most of such costs are necessary for purposes of readying the targeted market for business entry, the likely possible way of handling the related challenges is anticipating the costs, preparing the financing sources, and identifying how the franchisor will recover the costs in future if indeed the foreign market entry will make business sense. Conclusion The challenges of venturing into foreign markets differ depending on the entry mode that a firm chooses. As indicated in this essay, some modes of entry into foreign markets attract more risks and challenges, while others have relatively fewer challenges. However, even the least likely foreign market entry modes still attract challenges, particularly those presented in the foreign market. Trade barriers in importing countries, for instance, have been found to present challenges to firms that choose the export mode. Geographical distance, which increases logistics costs, is also another challenge for firms that choose the export method. But as argued in the essay, this can be resolved through establishing strategic alliances that move manufacturing closer to the import market. Other challenges as seen from the Euro Disney example relate to the social, cultural and legal aspects of the foreign market culture. However, as noted from this example, a solution would involve reconsidering what the host market needs and re-strategising on how best to satisfy the requirement. References Cavusgil, ST, Knight, G & Riesenberger, J 2011, International Business: the new realities, Pearson Education, Upper Saddle River, New Jersey. Chen, R, Cannice, MV & Daniels, JD 2015, ‘Market entry and international technology transfer: a case analysis of ten U.S. high-tech firms in China and Southeast Asia’, Reassessing the Internationalisation of the Firm, vol. 11, pp. 133-155. De Burca, S, Brown, L, & Fletcher, R 2004, International marketing: an SME perspective, 1st edn, Financial Times Prentice Hall, Harlow. Johnson, J & Tellis, G 2008, ‘Drivers of success for market entry into China and India’, Journal of Marketing, vol. 72, pp. 1-13. Matusitz, J 2010, ‘Disneyland Paris: a case analysis demonstrating how glocalisation works’, Journal of Strategic Marketing, vol. 18, no. 3, pp. 223-237. Ravelomanana, F, Yan, L, Mahazomanana, C & Miarisoa, P 2015, ‘The external and internal factors that influence the choice of foreign entry modes at Wuhan iron and steel corporation’, Open Journal of Business and Management, vol. 3, pp. 20-29. Twarowska, K & Kakol, M 2013, ‘International business strategy – reasons and forms of expansion into foreign markets’, Management Knowledge and Learning, vol. 13, no. 34, pp. 1005- 1011. Wu, J 2008, ‘An Analysis of business challenges faced by foreign multinationals operating the Chinese market’, International Journal of Business and Management, vol. 3, no. 12, pp. 169-174. Yue, W 2009, ‘The fretful Euro Disneyland’, International Journal of Marketing Studies, vol. 1, no. 2, pp. 87-91. Zamir, Z, Sahar, A & Zafar, F 2014, ‘Strategic alliances: a comparative analysis of alliances in large and medium scale enterprises around the world’, Educational Research International, vol. 3, no. 1, pp. 25-39. Zwisler, CE & Krakus, B 2015, ‘Avoiding common mistakes in international franchising’, IFA Legal Symposium, Chicago, IL. Read More