Method of Approach

Entry Strategies: Japan or Mexico

Global

Edge

Consultants

Entry Strategies: Japan or Mexico

Lisa A Bartha

Tara Camp

Sonya Kinch-Monyem

Amy M Marks

Kenneth A Willis

Lindsay B Yacavone

AMBA606, Section 9011

July 15, 2006

Professor Jane Ross

Table of Contents

Method of Approach…………………………………………………………….. 3

Executive Summary……………………………………………………………… 3

Introduction Joint Venture …………………………………………………….. 5

Joint Ventures Mexico …………………………………………………. 6

Conclusion Joint Ventures……………………………………………… 14

Appendix Joint Ventures……………………………………………….. 16

Introduction to Licensing……………………………………………………..... 19

Licensing – Mexico……………………………………………………... 19

Licensing – Japan………………………………………………………. 24

Conclusion Licensing…………………………………………………. 28

Introduction Franchising……………………………………………………… 31

Franchising Mexico……………………………………………………. 31

Franchising Japan……………………………………………………… 38

Conclusion Franchising………………………………………………… 42

Entry Strategies: Japan or Mexico

Method of Approach

This study is comprised of six individual papers that focus on the merits and drawbacks of entering the Japanese and Mexican markets via one of the following three entry methods; joint venture, licensing, and franchising. As such, the Global Edge Consultants feel that one comprehensive Executive Summary best explains the work that is presented as a whole. Within each method of entry section there will be a shared introduction and conclusion for the two country approaches. In this manner we are able to minimize redundancy and present the white paper in the most clear and concise manner possible.

Executive Summary

There are distinct differences between strategic planning and strategic thinking. Strategic thinking is an emergent process that is flexible and requires long-range vision with an eye on the qualitative (Mintzberg, 2004). Strategic thinking is about creating new opportunities and having the courage to pursue them. Now that the Federal courts have upheld the Lexapro patent, the timing is right for Forest to establish themselves in a foreign market with a proven product.

This white paper is a component of a more compressive set of recommendations that will emerge over the next several weeks. Presented in three parts, joint ventures, licensing, and franchising, this study examines methods of entry strategy and positions them in the context of Japan and Mexico, the two markets that Forest Labs is considering for expansion. Each of the strategic choices comes with advantages and disadvantages, and each differs in the scale of entry.

Joint ventures, the largest scale commitment examined here, would allow Forest to minimize their initial investment and risk. An important consideration is the loss control if there is conflict about the strategic direction of the venture among the partners. Based on our research this mode of entry is a viable option for both markets.
Licensing, the smallest scale commitment examined here, is an entry mode with which that Forest has substantial experience. It would allow Forest to expand into new markets quickly and at minimal cost. This must be carefully weighed against the risk of licensing away competitive advantage as well as loss of control of brand image and quality. Forest will have to determine how this mode of entry fits with its long-term vision for foreign expansion.
Franchising has somewhat more scale than licensing, but shares the same advantages and disadvantages. Should Forest consider this option, it must enforce strict governance to enforce quality standard in marketing and production. Additionally, franchising does not allow Forest to move monetary support from one location to another.

Forest must remain flexible in their strategic thinking about these two markets, in terms of how the timing of entry will be impacted by the recent geopolitical controversy concerning the Mexican presidential elections and the North Korean missile crisis that plagues Japan, and in turn, how they should scale their entry.

Introduction to Joint Ventures

According to Hill (2007) a joint venture is an entry strategy whereby a company is established that is jointly owned by two existing companies. This is a popular mode of entry into foreign markets for several reasons. The first is that the entering company can benefit from the expertise of a local partner. This strategy also mitigates the risk associated with opening in a foreign market. Lastly, research has suggested that joint ventures are less likely to be subject to nationalization and other government interference (Hill, 2007).
Of course, there are also disadvantages to joint ventures as well. Possibly the most significant risk incurred is the possible loss of intellectual property to a partner if given too much control. As the Austrade website points out, there is also a potential for partner disagreement on export markets or other expected benefits of the partnership. In addition, Barajas and Kozolchyk (2001) note that joint ventures are likely to fail if the reasons for its development are ill-conceived, if partners’ overestimate each other’s strengths, or if the formal agreements drafted are inadequate. The Austrade website suggests considering the '4Cs' when selecting a partner for a foreign joint venture. They are to find a partner with: complementary skills, cooperative cultures, compatible goals, and commensurate risk.

In addition to identifying a viable partner, Forest must consider the potential risks and benefits when deciding whether or not to initiate a joint venture as a market entry strategy into either Mexico or Japan. The advantages and disadvantages of joint ventures relative to both countries are discussed below as well as how the politics of each country may affect joint venture activity.

Joint Ventures – MexicoTara Camp

The trade integration between the U.S. and Mexico as well as Mexico’s proximity to the United States makes it an ideal market to consider for a joint venture. In fact, joint ventures have historically been an important component of Mexico’s economic development (Barajas & Kozolchyk, 2001). In addition to some significant benefits; however, there are also potential risks associated with creating a joint venture with a Mexican company. Because the newly created business entity will operate as a Mexican company under Mexican law, Forest must understand the legal business structure recognized in the country before evaluating the viability of a joint venture in Mexico.

Business Strategies

The business entity created by a joint venture contract in Mexico is known as an asociacion en participacion (AP). This type of agreement is a private one that establishes the business relationship between the partners, but is not publicly listed with the Mexican Registry of Commerce. The more common option is for the two joint venture partners to simply create a separate legal entity, as is the practice in American joint ventures.

There are several types of registered companies recognized in Mexico. Their version of a corporation is called a sociedad and is structured in much the same way as in the U.S. Other options are to form either a limited liability stock corporation, called a sociedad anónima (SA), or a limited liability partnership, called a sociedad de responsabilidad limitada (SRL). Joint ventures that yield a separate entity would be registered with the Registry of Commerce just as any other company would (Gordon, 2001). According to Abogados ( incorporating a business entity in Mexico requires an Incorporation Permit that can be obtained from the Ministry of Foreign Relations. The company must also receive approval from the Foreign Investments Authorities. In general, foreign investors are permitted to participate in the capital of a Mexican company at any level.

Joint Ventures with Domestic Partners in Mexico

Based on a search through Pharmaceutical Company Directory ( there are approximately ten domestic pharmaceutical companies based in Mexico. Several of those have limited global operations. Partnering with one of these companies could help Forest attain rapid market entry and enable the company to capitalize on the local skills and competencies of the Mexican firm as well as take advantage of the domestic firm’s experience with government authorities. Considering joint ventures in Mexico specifically, Barajas and Kozolchyk (2001) wrote, “The participation of local venturer may also enhance perceptions that the enterprise is a local operation, thus encouraging good relations with local consumers, suppliers, and government” (p. 11).

Although Forest could realize these same fundamental benefits from a joint venture as in any other market, there are specific disadvantages to joint ventures in Mexico as well. One significant problem is that of mind set. Thomas Lawson, the managing director of Deloitte Consulting Mexico, explains that Mexican companies fall into one of two tiers. Top tier companies are those that have a worldly mindset and are already competing globally. Second tier companies, even if they engage in exporting, do not think globally and are uncomfortable with externally driven changes (Sutter, 1998). As such, partnering with a second tier company could create a host of issues for Forest including technological differences relating to supply chain management and other operations. If Forest does elect to form a joint venture with a Mexican company, it would be more advantageous to explore one of the multinationals based in Mexico.

A final consideration when exploring a joint venture in Mexico is that of differing business styles. Americans, for example, tend to use extremely detailed and lengthy legal agreements that cover all possible contingencies. By contrast, Mexican legal counsels often opt for more brief agreements, allowing for details to be settled as the business evolves (Barajas & Kozolchyk, 2001). As such, the development the necessary agreements and legal documents to form a joint venture could become a considerable source of conflict and threaten positive relationship development.

Similarly, Barajas and Kozolchyk (2001) explain that while American managers conduct business in a fairly formal manner, putting emphasis on business plans and financial statements; Mexican managers though focus on relationship building and value face-to-face meetings, believing that the individual is the essence of the business. If these cultural differences are not attended to, it could put a significant strain on any possible joint ventures.

Joint Ventures with Foreign Partners in Mexico

Another option for Forest is to form a joint venture with an American or European multinational pharmaceutical company with established operations in Mexico. Among them are familiar names like Aventis, Bayer, Merck, and Novartis. The benefit here would be that all of these companies, regardless of their home country, have a very strong presence in the U.S. market. As such, working with these partners would minimize the risk of cultural issues that could arise if working with a Mexican company while enabling Forest to capitalize on their local experience. The disadvantage is that it would likely be difficult to provide a benefit to the partner. In order to maintain control of their intellectual property interests, Forest would need to hold a majority ownership in the joint venture. This might not prove an attractive prospect to any of these firms, all of which are larger than Forest.

Political Implications

Exploring foreign market entry of a U.S. firm into Mexico is a timely topic in light of the country’s recent, and controversial, presidential election. Felipe Calderon of the center-right National Action Party (PAN) narrowly defeated his opponent, and it looks as though the results will be contested. Calderon has promised to maintain the pro-business, pro-foreign investment policies of his predecessor. Calderon’s opponent represents the less developed states in the country, where he argues that foreign investment and trade agreements like NAFTA are not benefiting the people who need the help. His platform is to re-direct government spending to aide the citizens in these impoverished areas (Conteras & Campbell, 2006).

The current political unrest makes any decision to expand into the Mexican market at this time a significant risk. Even if Calderon maintains his victory, the country is divided. As evidenced by the upheaval since the election and the subsequent call for a recount, Obrador’s supporters will not abate. This opens Forest up to significant criticism and may cause them difficulty in finding a local partner to work with them.

References
Abogados, S. Joint ventures in Mexico. Solutions Abroad. Retrieved on July 14, 2006

from

Barajas, T., and Kozolchyk, B. (2001). Joint ventures in Mexico. National Law Center for

Inter-American Free Trade. Retreived on July 9, 2006 from

Contreras, J., and Campbell, M. (2006, July 9). Mexican stand off. Newsweek

International. Retrieved in July 9, 2006 from

Gordon, G. (2001). Doing Business in Mexico: A Practical Guide. New York, Hawthorne

Press.

Hill, C.W.L. (2007). International Business (6th ed.). New York, McGraw Hill.
Market entry strategies for Australian exporters. Government of Australia. Retrieved

on July 8, 2006 from

Sutter, M. (2998, October 26). Consultants see growth for Mexican manufacturers.

Journal of Commerce, p3A. Retrieved on June 28, 2006 from the ABI/INFORM

global database.

Joint ventures in the Japanese Market

Sunny Kinch-Monyem

As stated in the previous company overview, Forests current business strategy includes licensing of products from other companies and collaborating to leverage their products; therefore, examining joint venture market entry into Japan is warranted. Reasons for establishing a joint venture are to lower costs, decrease vulnerability, enable local adaptation, decrease transportation costs, and share equity. GlobalEdge.msu (2004) asserted “Collaboration can take place at different levels of the value chain and can be exemplified by:

Joint R&D projects
Technology licensing
Subcontracting production under license
Agency agreements in banking, consulting, accounting, advertising
Marketing agreements; cross licensing; and so on (p. 3)

Collaboration between companies can take place in two ways, as a strategic alliance as a specific project that may include management contracts, international licensing agreements, and special joint ventures that all occur for a predetermined timeframe, or as a conventional equity based joint venture. The key disadvantage of a long-term strategic alliance is that it creates the risk of losing proprietary information to a potential future competitor and the commitment of the alliance itself restricts strategic flexibility (Hill, 2007). For the purposes of this study the focus will be on the conventional equity based joint venture that will create a separate entity, of which Forest will hold at minimum a fifty-percent share, that will be controlled by the partners.

In examining joint ventures as an option for entry into the Japanese pharmaceutical market, it is necessary to look at the timing of this entry into the market. Forest is not going to benefit from a first-mover advantage, as there are already several well-established pharma companies there already. They will not be able to beat competitors to the punch by being early entrants into the market or set low pricing as a method to gain market share due to regulations. By researching the Japan Pharmaceutical Reference (JPR, 2005.), we were able to determine that under the therapeutic category central nervous system agents and sub-classification of psychotropics there are 13 drugs. Of these, only 3 are indicated as antidepressants: Depas®, Dogmatyl®, and Rize® (JPR, 2005). Therefore, the value of entering this market occurs is in the fact that the market for central nervous system drugs such as Lexapro® is not saturated, and therefore there is still enough room for new product. Hill (2007) contended that, “Even though the firm may be a late entrant …, by benchmarking and then differentiating itself from early movers in global markets, the firm from the developing nation may still be able to build a strong international business presence” (p. 485). Secondly, Forest needs to understand the regulatory intricacies of setting up a joint venture in Japan, and how establishing a joint venture will provide the benefit of overcoming any of the trade barriers they face in this challenging market.

Japan’s joint venture business models

The U.S. Department of State (2005) reported, “Japan does not maintain a system of performance requirements [, and] Japan also maintains no formal requirements for local management participation or local control in joint ventures or other forms of direct investment, except in restricted sectors “ (

There is one form of business set-up in Japan that would be applicable to a joint venture, that being a subsidiary company, as this is the only form of business that allows for a percentage of stock shares ownership as is needed. Subsidiary companies are either Kabushiki-Kaisha (joint-stock corporation) or Godo-Kaisha (limited liability company (LLC)), and Forest would need to be a Kabushiki-Kaisha (joint-stock corporation) because there is no possibility of public stock offering under Godo-Kaisha (JETRO, 2006). Furthermore, under the Kabushiki-Kaisha (joint-stock corporation) set-up, large companies (joint stock corporations with capital of 500 million yen or more or total liabilities of 20 billion yen or more) are either classified as Kokai Kaisha (publicly traded) or Kabushiki Joto Seigen Kaisha (not publicly traded and subject to restrictions on the transfer of issued shares) (JETRO, 2006).

Finding the best partner

As a new venture it is unlikely that it will begin as a publicly traded entity, however, since the likelihood of this joint venture occurring with a Japanese firm rather than a foreign firm in the Japanese market is very high, the possibility does exist and therefore a comparison of the legal set-up requirements in the two classifications has been prevented in Table 1. Of key importance here are the requirements for the number of directors and their minimum or maximum term in office.

The challenges and barriers that will face Forest in entering the Japan market were previously determined to be the cost of entry, cultural differences, corporate practices such as Keiretsu that also heavily impact access to buyer-supplier networks of distribution, and the labor requirements for MR’s. The U.S. Department of State (2005) maintained that these challenges and barriers are more a result of cultural business practice rather than government regulation, and as such it is necessary that Forest employees in this venture have the global attitude and sufficient cultural training necessary to smooth the way with both their partners and customers. “Business in Japan is based on long-term relationships and a company’s reputation and credibility” (p. 56), Alden (1987) stated, and further maintained, “Find the best partners possible. Because so much business from foreign markets is done with Japanese partners, going this route is often preferable” (p. 54). Partners will share in the risk; and choosing an existing Japanese pharmaceutical company as a partner will provide Forest with much-needed access to a ready established complex distribution network, this is a primary advantage for using joint venture as a mode of entry. In fact many of the non-tariff trade barriers to entering the pharmaceutical market in Japan would be overcome using the joint venture process.