Foreign market entry decision is perhaps one of the most difficult and risky decisions which a company takes. Given a chance, perhaps no firm will like to venture in the new and uncertain foreign environment. Ever increasing pressure to increase profitability, a saturating domestic market or a lucrative foreign deal – these are just a few reasons why a company may decide to enter a foreign market.
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With this, comes the decision process associated the mode of entry in foreign market. A company has an option of exporting, making contractual agreements, forming joint ventures or alliance, acquisitions and Greenfield investments. Obviously, there has to be one mode of entry and it has to be decided by considering all the internal and external factors which the company faces. A wrong entry decision can have disastrous implications.
In this project, we have tried to throw some light on the foreign entry decision process. We have tried to analyze various factors which influence a company’s decision to venture abroad. These factors are classified as internal and external.
Later in the project, we have tried to come up with a framework which tries to simplify the market entry decision process for a firm. We analyze all the factors and try to find out the combinations which are suited to different modes of entry.
In the later sections, the case of Tata Motor’s acquisition of Jaguar-Land Rover is studied. We have tried to identify the various factors which confirm or do not confirm with the actual scenario. In case if a factor fails according to the framework, we have also tried to provide a possible explanation for it.
Problem Statement
The all pervasive and ever growing factor of globalization has been a huge force which has changed the way any business functions in the present day. Boundaries have shrunk making the entire world a potential market for a company. This implies that a company may have to move beyond the safe realms of its domestic market and enter foreign markets. It will have to consider and take into account various factors, both internal and external, which will then decide the mode of entry in the foreign market.
Therefore, the two important questions which we want to answer through this study are:
How do internal factors influence firm’s choice of international market entry mode?
How do external factors influence firm’s choice of international market entry mode?
Factors governing a Company’s Decision to Venture Abroad
With our problem statement defined, we now focus on a company’s decision process to venture abroad.
The main issues which need to be addressed during the decision process are –
Should a company venture abroad
If it ventures, which are the markets it needs to target
The mode of entry it should adopt to gain a strong foothold in the foreign market
These various issues are discussed in detail in the sections following below.
For any company, a decision on whether it should venture beyond the safety of its domestic market and enter foreign markets is a significant one. This decision cannot be taken until a good amount of analysis is done. This analysis should cover the breadth of the various factors and each factor should in turn be covered to the maximum depth possible. Four primary factors, which are a mix of external and internal factors, are considered which assist in this process –
Demand: A declining demand for a company’s goods or services within the domestic market can be considered for the company to decide on whether it needs to venture abroad to fulfill this lack of demand. This should logically be followed by the analysis as to whether the demand for the goods or services exists abroad or not.
Cost: For every company an advantage exists in the domestic market regarding the costs involved to manufacture the products due to the assistance given by the Govt. in terms of favorable rules and regulations. Also, the company is aware about the various sources of procurement of cheap raw materials. However, if this advantage is taken away by an unfavorable legislation or fallout with any of the suppliers, the company may need to explore other markets where the cost of production works out cheaper.
Product Life-Cycle: Certain goods or services come under a category which has a very brief window in which they can earn the maximum possible revenues. Post this period, the product gets replicated by a competitor or a substitute is released which eats away into its revenues. Or the product could be such that a newer and better version keeps getting developed after a period making the current one soon obsolete. Hence, in order to realize maximum revenues the company can launch the product simultaneously in several markets-domestic and foreign.
Strategy: A company may feel the need to project itself as a global player in order to gain a greater leverage for its products or services. It also helps the company attain credibility as it would project an image of being trusted in several countries and also make the stakeholders aware that they have the expertise to adapt to diverse situations.
Entry Moved Available to Venture Abroad
Once a company decides to venture abroad, it needs to devise a mode of entry which would ensure its success in the foreign market. The entry modes would vary based on the environment in the foreign market, core competencies of the company and the institutional set up of the supporting industries.
The various entry modes available in order of hierarchy of penetration of the foreign market are as mentioned below –
Exports from Domestic to Foreign Markets: This purely involves producing goods within the domestic market and exporting them to the foreign market. This is one of the most basic forms of international business as it hardly exposes the firm to any of the risks. But this doesn’t necessarily project the company as a global player.
Contractual Agreement: A company could enter into a contractual agreement with one of the local players in the foreign market wherein the local player would carry out certain aspects of the business on the company’s behalf. This basically works as a proxy for the company and helps it carry out operations in the foreign market without actually having a presence in that market. However the company would have no say in the operations of the local player and would only have a nominal say.
Joint Venture or Strategic Alliance with a Local Player: A company could also achieve a foreign presence by entering into a joint venture or any form of strategic alliance with one of the local players. This move could be carried out at any stage of the product value chain. The main intention of the company would be to choose a partner who would provide the necessary resources to smoothen the operations in the foreign market. The JV or alliance could be formed with a distributor, supplier, or a direct competitor in the foreign market. This way the firm gets an easy access into the market and gets a local player to help it deal with any of the potential risks.
Acquisition: This is a higher step over a JV or strategic alliance. A firm can attain a considerable presence in a foreign market by acquiring a local player in the same line of business. This would provide the firm a good network of pre-existing stakeholders in the form of suppliers and distributors. The firm would also be better placed in terms of the labour force as it could continue with the existing employees and save itself the costs of fresh recruitments. However, the choice of the company to acquire and the process of acquisition should be done accurately so as to not face any backlash later.
Greenfield Investment: This is the most extreme form of venturing abroad wherein the firm establishes production facilities from scratch in a foreign country. The firm needs to go through all the processes right from getting the permission and acquiring suitable land to recruiting employees and making the final product available to the market. The risks faced by the firm employing this strategy are seamless and the whole process is long drawn stretching over years. Companies decide to venture in such a manner as it gives it benefits over the long run. The growth of the firm’s business is ensured in that market as it is a highly self sustaining means of carrying out international business.
The benefits or risks associated with each mode of entry are summarized in the table shown below.
Figure : Modes of Entering Foreign Markets, Okoroafo, 1991
The modes could be categorized into an equity and non equity mode of entry depending on the manner of penetration by the company into the foreign market. The entry modes can be analyzed in depth as to the various forms available under each and the hierarchy that they follow.
Figure : The model of the choice of entry modes, Gomes-Casseres, 1990
Internal Determinants of Foreign Market Entry Strategy
There are a lot of factors internal to companies which play a vital role in deciding the entry strategy choice. Some of these factors are psychic or cultural distance, centralization of decision-making, organizational culture, firm size, international experience and characteristics of the decision maker. All these factors are critical in determining a firm’s corporate strategy, and as such it is expected that have a significant influence on entry strategy selection.
Previous Research: Research on entry strategy has identified a firm’s level of involvement or control over an operation and resource commitment as critical dimensions upon which entry strategies can be categorised (Kogut and Singh, 1988; Treadgold, 1988). Treadgold (1988) distinguished between three main entry strategies. First, an entry strategy that affords a high degree of control is normally associated with high cost, such as acquisition, dominant shareholding or wholly owned Greenfield investments. The second strategy involves medium cost and control, which is typically connected with 50:50 joint ventures. Third, a low cost strategy is said to imply a reduction in control, such as minority equity interests, franchise arrangements and in-store concessions.
Since organizational culture is a critical factor in determining a firm’s corporate strategy and direction, we now examine how various internal factors influence the entry decisions of a firm. Though these factors play an important role in the decision process, they have to be evaluated along with the external factors as well.
Centralization of decision-making: It is defined as “the amount of delegation of decision-making authority throughout an organization and the extent of participation by organizational members in decision-making” (Jaworski and Kohli, 1993, p.56). As centralization is primarily a control issue it can be argued that more centralized structures would prefer entry strategies that afford a high level of control for headquarters based in the home market. Moreover, decentralized or autonomous decision making structures may be more willing to adopt low control entry strategies.
Culture Distance: Culture distance can be simply described as the difference between the cultures which a firm faces when it decides to enter a foreign market. It captures management’s perception of both cultural and business differences, which increases its explanatory power. It is expected that greater psychic or cultural distance leads a firm to adopt an entry strategy that is more independent. This is attributed to the problems encountered by ‘double layered acculturation’, which requires a firm to adjust to both a different national and organizational culture (Barkema et al., 1996). When a firm enters a distant market it is more likely to adopt an entry strategy that incorporates an indigenous firm (Luo and Chen, 1995). This argument is based partly on the premise that shared-equity ventures enable foreign firms to delegate certain culturally sensitive management functions to the local firm.
Organizational Culture: Organizations can be classified as one of four cultures (Deshpande, 1993).First, a hierarchical culture emphasizes established procedures, rules and uniformity. Second, the clan culture stresses loyalty, tradition and commitment to the firm. Third, the market culture focuses on competitive actions and achievement. Fourth, an organization with an adhocracy culture is entrepreneurial, creative and flexible. Classification of organizational cultures suggests a positive relationship between organizational culture and entry strategy. For instance, a more entrepreneurial culture, such as adhocracy, is likely to take more substantial business risks and enter markets through high cost/high control strategies, whereas a hierarchy or clan culture may be more likely to adopt a low cost/low control strategy. Consequently, organizational culture has a significant positive effect on entry strategy.
International experience: In previous research also, international experience is shown to have important implications for entry strategy selection (Agarwal, 1994; Anderson and Gatignon, 1986; Caves and Mehra, 1986). as firms gain more international experience the level of uncertainty regarding operating in foreign markets will reduce, which, in turn, increases the likelihood that such firms will use high cost/high control entry strategies. Correspondingly, those firms with less international experience are more likely to enter a foreign market through a joint venture as a means of sharing the risks and responsibility. The market entry mode decision is affected by how many times, how recently and in what circumstances the company or its competitors have used any particular entry mode.
Firm Size: It is also suggested that larger firms, with greater financial resources, are more likely to use acquisition as a mode of entry, whereas small firms will evaluate the relative benefits of franchising, concessions, distributors and agents (White, 1995). Small companies may not have sufficient management potential and special skills to enter foreign market through establishing fully owned foreign-based subsidiaries or international joint ventures. A company with limited resources is constrained to use entry modes that call for only a small resource commitment.
Management Risk Attitude: According to Koch (2001): the company’s financial situation, its strategic options, the competitiveness of its competitive environment, its relevant experience etc. The less risk-averse the management, the more likely it is for the company to select the countries that show greater prospects and promise to enhance the firm’s capabilities.
Complexity and differentiation of the product: According to Hollensen (2001), the complexity and differentiation of the product which a company is about to market in the new country, influences the cost of shipping, economies of scale, technology transfer, and already existing know-how, as an example the author brings up the risk of licensee abuse of technical know-how and that it might render unbearable costs to ship heavy or large goods due to the high shipping costs. Highly differentiated products with distinct advantages over competitive products give sellers a significant degree of pricing discretion. In contrast weakly differentiated products must compete on a price basis in a target market.
Goals and motives: According to Bruno and Schildt (2001), motives and goals try to answer questions like what motives were there in the company for internationalization, are there any long-term and/or short- term goals for the company. However, we feel that these factors should not be studied in isolation with other factors.
External Determinants of Foreign Market Entry Strategy
Along with the above mentioned internal factors, deciding the optimum entry strategy also takes into account several environmental conditions pertaining to the market into which the firm wishes to enter. Below, we highlight some crucial external factors which are taken into consideration while deciding the mode of entry of a business into a new international market.
Industry feasibility/viability: Koch (2001), stated that some entry modes may be excluded in some countries because of laws and regulations. Some entry modes, like fully owned foreign subsidiary and international joint ventures, may be excluded by law in some countries; some of these exclusions may relate to selected industries considered to be of strategic significance for the state. Other entry modes like licensing may involve excessive know-how dissemination risk, particularly if the foreign country is not a signatory to the appropriate international conventions. Other hindrances (e.g. restrictive labor regulation and practices, cost of labor, insufficient level of skill) may discourage from establishing a subsidiary, or a joint venture operation in a foreign market.
Market Size: The present and projected size of the target country market is an important influence on the entry mode. Entry into a small market may not be justified by heavy investments via alliances etc. Exports, licensing etc could act as ideal entry modes in a smaller market. Similarly, venturing into a large market could typically involve joint alliances, acquisitions, major franchising etc. Thus, the market potential and its projected growth can play an important part in determining the mode of entry.
Market growth rate: There is an interesting proposition regarding the impact of market growth rate on the entry mode strategy given by Koch (2001). According to the same, if a market is growing at a fast rate and this growth does not seem to be sustainable for long term duration, the entry should be quick and aggressive to get maximum output. For a slowly growing market, the entry strategy needs to be sustainable, often accompanied by heavy investment like a joint venture, alliances, acquisitions etc.
Target Country Production Factors: According to Root (1994), the quality, quantity, and cost of raw materials, labor, energy and other productive agents in the target country, as well as the quality and cost of economic infrastructure (transportation, communications and port facilities) have bearing on entry mode decisions. Low production costs in the target country encourage some for local production as against exporting. High costs would be a factor against local manufacturing.
Characteristics of the overseas country business environment: Similarity and volatility of general business regulation/practices, business infrastructure and supporting industries levels of development, forms, scope and intensity of competition, customer sophistication and customer protection legislation are amongst those characteristics which would normally attract the attention of potential entrants into a foreign market.
Competition in the Target Market: The competitive structure of a foreign market plays a crucial role in determining the entry strategy of a firm (Root, 1994). According to that theory, an unknown market can have either multiple non-dominant leaders, that is an atomistic structure or it can have a few extremely dominant leaders or competitors, a monopolistic market. Thus, the intuitive argument advices an export based entry into an atomistic market while a highly monopolized market will require cost cutting solutions like production abroad. In case of really strong competitive market, a firm can also opt for a milder entry strategy like licensing or other contractual agreements.
Market barriers: There are many market barriers following are of major barriers which make market entry difficult. Some of them are tariff barriers, governmental regulations, distribution access, natural barriers (market success and customer allegiances), advanced versus developing countries and exit barriers. For example, if the exit barriers are very high in a market, a company may decide to keep its involvement to an export strategy only.
Home Country Factors: Market, production, and environmental factors in the home country also influence a company’s choice of entry mode to penetrate a target country. For example, a big domestic market allows a company to grow to a large size before it turns to foreign markets. High production costs in the home country relative to the foreign target country encourage entry modes involving local production, such as licensing, contract manufacturing and investment. The policy of the home government toward exporting and foreign investment by domestic firms also has significant effect.
Target Country SPEC Factors: Social, Economic and Political conditions also have dominant role in entry decision.
Political Conditions: The government regulations regarding tariff, quotas etc. also help to determine the entry strategy. For instance, a highly restrictive market with extremely high tariff rates and stringent quotas will not be favorable for entry via exports. Similarly, firms wishing to do business with socialist countries may have to rule out certain entry strategies like production abroad, alliances and rely on licensing etc. Thus, the compatibility between the political nature of the firms’ working and the host countries environment needs to be taken into account while deciding on the entry strategies.
Economic Conditions: The major economic factors like market size and growth potential have already been discussed above. Apart from it, some major macro-economic factors can also be added to the list. Some of these are country’s GDP growth, interest rate structure, the growth of the target consumer class. These factors are however the determinants of the market size and growth rate.
Social/Cultural Conditions: Certain attributes of the Market are crucial in deciding the entry strategies
Home/Host Conditions: The social conditions of the home as well as host nations need to be considered while deciding on the entry strategy. For instance, a firm originating from a highly developed nation wanting to expand into developing nation generally is looking for a low cost environment or a market with high growth potential. In such cases, entry via production abroad, equity investments or alliances can work in their favor.
Similarly, the host countries production capabilities are equally crucial. Their strength in procurement of raw materials based on their quality, quantity as well as cost, the costs associated with labor, energy, the available infrastructure etc. will play an important role in determining the entry mode for any firm.
Geographical Distance: The geographical distance between the host and home countries determines the possible transportation costs that could be associated with a subsequent trade. If this distance is great, high transportation costs involved will discourage entry via exports. In such cases, franchising, licensing or even production abroad could be considered as possible options subject to other favorable conditions.
Psychic Distance: The phenomenon of ‘Cultural Distance’ explained previously also acts as an external factor, also to be explained as the ‘psychic distance’ (Bell, 1995). According to the research by Bell, 50-70% of firms end up expanding into markets which are ‘closer’ in terms of cultural similarities, geographical proximities. Indian firms establishing their presence into UK can be attributed to the strong historical ties between the two nations.
Risks Associated with Foreign Ventures
When a firm decides to venture into a specific market it is exposed to some of the risks attached with the chosen market. These risks could be diverse and if not handled in the right way may seriously hamper the operations of the firm. The firm needs to be proactive in evaluating the potential threat of any hindrance and come up with appropriate strategies to deal with them even before they set up the foreign operations. The risks can be broadly classified under the following categories –
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Political Risk:
The political stability in a country is an important factor for a firm to analyze before deciding to enter that market. As governments change, the policies they come up with change too. This may easily result in a situation where a market scenario which was favourable for the company turns out completely unfavourable by the new policy. Political stability is also important as any imbroglio within the country could throw normal processes out of gear and in most cases it’s the firm not local to a market which is targeted first.
Economic Risk:
A company could also face a good amount of economic risk which arises due to regulations and fluctuations carried out in a country’s economic policies. Some of the major threats are the foreign exchange valuation, growth rate of GDP per capita and domestic money supply management. The inflation and unemployment rates too affect a company’s strategy. The firm may need to adjust its prices as per the changes in the inflation.
Financial Risk:
Restrictions on Foreign Direct Investment may hamper the scale to which a company plans to venture abroad. It may even alter the strategy it chooses to enter a particular foreign market. The policies implemented by the central bank would affect the capital availability. The country should also be checked if it has had any history of expropriation to judge whether it is financially safe to enter it or not.
Socio – Cultural Risk:
Though globalization has shrunk the physical boundaries, it has still not conquered the cultural boundaries which exist between nations. Every nation has its own culture which may be at work or in their daily practices. This culture defines the way things are carried out and hence it becomes imperative for a country to understand the nuances so as to maintain good relations with all the stakeholders. This risk would also cover the educational level of the local workforce which would in turn affect their employability.
A Framework for Foreign Market Entry
With the decision process of entry, the modes of entry, the internal and external factors governing the decision process and the risks associated well defined, we can now consolidate all this information in a framework which can then be used to formulate the entry decision process. We will try to fit this framework to the case of Tata Motors and try to prove its efficacy.
The framework is as shown below:
Table : Framework for Internal Factors
Internal Factors
Types of Entry Mode
Exports
Contractual Agreement
JV or Strategic Alliance
Acquisition
Greenfield Investment
Centralization of decision-making
High
√
√
Low
√
√
√
Culture Distance
Small Culture Distance
√
√
Large Culture Distance
√
√
Organizational Culture
Entrepreneurial culture
√
√
Hierarchy
√
√
Previous International experience
√
√
Large Firm Size
√
√
High Management Risk Attitude
√
√
High Product differentiation
√
√
Goals and motives
Short Term
√
√
Long Term
√
√
√
Table : Framework for External Factors
External Factors
Types of Entry Mode
Exports
Contractual Agreement
JV or Strategic Alliance
Acquisition
Greenfield Investment
Industry feasibility/viability
Favorable
√
√
√
Unfavorable
√
√
√
Potential Market Size
Large Market
√
√
√
Small Market
√
√
Market growth rate
Low potential
√
√
High Potential
√
√
√
Target Country Production Factors
Low Production Cost
√
√
High Production Cost
√
√
√
Overseas country business environment
Stable with favorable Supporting Ind.
√
√
Unstable
√
√
√
Competition in the Target Market
Atomistic structure
√
√
Strong competitive market
√
√
Monopolistic
√
√
Market barriers
High
√
√
√
Low
√
√
√
Home Country Factors
Large Market
√
√
√
Small Market
√
√
Low Production Cost
√
√
High Production Cost
√
√
Restrictions on Abroad Investments
√
√
Target Country SPEC Factors
Political Conditions
Liberal Import Policies
√
√
Restrictive Import Policies
√
√
Economic Conditions
Dynamic Economy
√
√
Stagnant Economy
√
Social/Cultural Conditions
Favorable Home/Host Conditions
√
√
Great Geographical Distance
√
√
High Psychic Distance
√
√
Case Study of Tata-JLR
Overview of the Jaguar and Land Rover Businesses
Jaguar Cars Limited which is based in the UK is one of the world’s premier manufacturers of sports saloons and sports cars. It was originally founded in 1922 by Sir William Lyon as Swallow Sidecar Company and was later merged with British Motor Corporation in 1968. Land Rover is currently a luxury type 4-wheeled drive, all terrain vehicle manufacturer based out of Gayden, Warwickshire England. Land Rover was acquired by Ford from BMW in 2000. After its acquisition of both Jaguar and Land Rover, Ford setup Jaguar Land Rover to manage the operations of both Jaguar and Land Rover as a single entity.
Ford bought Jaguar for $2.5bn in 1989 and Land Rover for $2.7bn in 2000 but received only $1.7bn from the sale of the two brands. The main reason in selling off both the brands was declining profitability. One of the main reasons for this was the increasing competition it faced from luxury carmakers like BMW and Mercedes Benz which had wider product portfolios as compared to Jaguar. Due to this, while BMW and Merce
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