Internationalization Readiness & Foreign Market Entry Modes

Assessing Readiness to Internationalize

To assess readiness to internationalize, consider the following:

1. Analyze Organizational Readiness

   Examine business strengths and weaknesses relative to international business by evaluating key factors such as appropriate financial and tangible resources, relevant skills and competencies, and commitment by senior management to international expansion.

2. Assess Product/Service Suitability

   Systematically assess the suitability of the firm's products and services for foreign markets. Evaluate the degree of fit between the product or service and foreign customer needs.

Bargaining Power & Entry Mode Selection

A high-control entry mode is likely to be selected when:

• The host government strongly desires to attract FDI.
• The MNE has little need for local resources.
• The MNE’s resource commitment is low, and risks are high.
• The MNE perceives its need to enter the foreign market as low.

Capability building: Consider the compatibility between the requirements of the operational context and the cost of developing capabilities. In general, high-control modes are preferable in domains where the firm has strong knowledge.

Exporting

Advantages:

• Lower cost of entry.
• Minimize risk and maximize flexibility.
• Leverage the capabilities of foreign distributors.
• Stabilize fluctuations in sales associated with economic cycles.

Disadvantages:

• Management has fewer opportunities to learn about customers.
• High transport and tariffs, and non-tariff barriers.
• Shifting exchange rates of foreign currencies can be costly.
• Challenges in learning about foreign currencies.

Licensing

Advantages:

• Does not require capital investment or presence of the licensor.
• Ability to generate royalty income from existing intellectual property.
• Appropriate for countries that pose substantial country risk.
• Useful when trade barriers reduce the viability of exporting.
• Useful for testing a foreign market.

Disadvantages:

• Difficult to maintain control.
• Risk of losing control.
• The licensee may infringe and become a competitor.
• Does not guarantee a basis for future expansion in the market.
• Not ideal for product services or knowledge.
• May not produce satisfactory results.

Franchising

Advantages:

• Entry into foreign countries quickly and cost-effectively.
• No need to invest capital.
• Established brand name encourages sales potential abroad.
• Develop local markets.

Disadvantages:

• Maintaining control may be difficult.
• Conflicts with franchisees.
• Preserving the franchisor’s image in the foreign market may be challenging.
• Franchisees may take advantage and become competitors in the future.

Joint Venture

A joint venture is a form of collaboration to create a jointly owned enterprise. It can help to share and lower costs of high risk, to gain economies of scale and scope in value-adding activities, and to secure access to a partner's resources.

Success factors:

• Take time to assess the partner.
• Learn from partners.
• Establish specific rules.
• Give managers sufficient autonomy.

Wholly Owned Subsidiary

A wholly-owned subsidiary is a foreign direct investment in which the investor fully owns the foreign markets.

Advantages:

• Protection of technology.
• Ability to engage in global strategic coordination.
• Ability to realize location advantages.

Disadvantages:

• High cost and high risk.