Page 99 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes There can be disadvantages associated with entering a foreign market which are often referred
to a first-mover disadvantages. These disadvantages may give rise to pioneering costs that an
early entrant has to bear that a later entrant can avoid. Pioneering costs arise when the business
system in a foreign country is so different from that in a firm’s home market that an enterprise
has to devote considerable effort, time, and expense to learning the rules of the game, e.g, costs
of business failure due to ignorance of the foreign environment, certain liability associated with
being a foreigner, the costs of promoting and establishing a product offering including the costs
of educating customers, change in regulations in a way that diminishes the value of an early
entrant’s investments.

scale of entry and strategic commitments

Another issue that an international business needs to consider when contemplating market entry
is the scale of entry. Entering a market on a large scale involves the commitment of significant
resources. For example, ING had to spend several billion dollars to acquire its US operations.
Not all firms have the resources necessary to enter on a large scale, and even some firms prefer to
enter foreign markets on a small scale and then build slowly as they become more familiar with
the market.

6.2 modes of entry

Firms can use six different modes to enter foreign markets: exporting, turnkey projects, licensing,
franchising, establishing joint ventures with a host-country firm, or setting up a new wholly
owned subsidiary in the host country. Each entry mode has advantages and disadvantages.
Managers need to consider these carefully when deciding which to use.

6.2.1 exporting

Using domestic plant as a production base for exporting goods to foreign markets is an excellent
initial strategy for pursuing international sales. Exporting is the marketing and direct sale of
domestically-produced goods in another country. Exporting is a traditional and well established
method of reaching foreign markets. Since exporting does not require that the goods to be
produced in the target country, no investment in foreign production facilities is required. Most
of the costs associated with exporting take the form of marketing expenses.
Exporting commonly requires coordination among four players:

1. Exporter,
2. Importer,
3. Transport provider, and
4. Government.

advantages of exporting

Some of them are discussed as under:
1. It minimizes both risk and capital requirements and it is conservative way to test the
international waters. With an export strategy the manufacturer can limit its involvement
in foreign markets by contracting with foreign wholesalers experienced in importing to
handle the entire distribution and marketing function in their countries or regions of the
world. If it is more advantageous to maintain control over these functions, a manufacturer
can establish its own distribution and sales organizations in some or all of the target foreign
markets. Either way, a firm minimizes its direct investments in foreign countries because of
its home-based production and export strategy.

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