Q: Tabulate the advantages and disadvantages of the various “entry modes”.

Entry mode / Advantage / Disadvantage
Exporting
/
  • Realise location and experience curve economies.
  • Increased production in home country typically results in higher domestic employment
  • Export sales generate valuable foreign exchange
  • Least expensive way for a firm to sell its products overseas
  • Minimum of financial commitment
  • Avoids high cost of establishing manufacturing operations
/
  • High transport costs.
  • Trade barriers.
  • Problems with local marketing agents.
  • High transportation costs
  • Trade barriers to imports in the foreign country
  • Problems with foreign marketing agents
  • Have no control of its products in foreign markets and middleman represents other clients
  • Own marketing staff does not gain experience
  • Other cheaper exporters

Turnkey contracts
“Allow firms to export their know-how to countries that may restrict FDI by training of staff for the project” /
  • Ability to earn returns from process technology skills in countries where FDI is restricted.
  • Earning substantial income for the companies concerned and valuable foreign exchange for the home country
/
  • Creating efficient competitors (client may become competitor).
  • Lack of long-term market presence – limited life
  • Process technology is divulged and it could lose its competitive advantage

Licensing
“Licensor grants a right to the licensee, who pays a fee or royalty ”. /
  • Low development costs & risks.
  • Might be the only alternative in countries with barriers to foreign investment
  • Has marketing intellectual property, but does not want to develop this itself
/
  • Lack of control over technology.
  • Inability to realise location and experience curve economies.
  • Inability to engage in global strategic coordination.
  • Risk of losing technological know-how to the licensee, and consequently, their competitive advantage
  • Prevents firm from optimally co-ordinating its activities across countries

Franchising
“very similar to licensing, but involves longer-term commitments. Sells intangible property such as a trademark” /
  • Low development costs & risks.
/
  • Lack of control over quality.
  • Inability to engage in global strategic coordination.
  • Customers may be driven away by a bad experience
  • Geographical distance may make is difficult to detect poor quality and inefficient operations

Joint ventures
“Establishing a firm that is jointly owned by 2+ partners.” (Strategic alliances are based on collaborative agreements). /
  • Sharing development costs & risks.
  • Access to partner’s knowledge.
  • Politically acceptable.
  • May be the only available option where industries are regarded as politically sensitive
  • Home countries resources are limited, can make use of shared countries resources
  • Multinational companies can form a joint venture in developing countries without much capital outlay, but provide technological know-how, or developing country needs managerial know-how
  • Local companies can provide raw material
  • Knowledge of host-country’s markets, competitive conditions, culture, language and political, legal and economic systems
/
  • Lack of control over technology.
  • Inability to engage in global strategic coordination.
  • Inability to realise location and experience curve economies.
  • Risk of giving away core competence or technological know-how systems
  • Potential for conflict

Wholly-owned subsidiaries
“setting up a new operation in a foreign country, or acquiring an established firm in the industry concerned” /
  • Protection of technology.
  • Ability to engage in global strategic coordination.
  • Ability to realise location and experience curve economies.
/
  • High costs & risks.

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