This article the third in series is the last one on “Methods of entering a foreign market”. In the previous two, I talked about:
This article talks about the following methods:
- Wholly Owned Subsidiary
- Mergers & Acquisitions
- Joint Venture
- Strategic Alliance
Wholly owned subsidiaries (WOS):
includes two types of strategies – New Capital Investment or acquisition. Investments and acquisitions have advantages and disadvantages. To decide which entry mode to use depends on the situation in hand.
Investing: is incorporating a subsidiary. Setting a company is an important decision and requires deliberation. The process is often complicated and potentially expensive, but it can provide 100% control. Wholly-owned subsidiaries are preferred in service industries where close contact with end customers, high expertise, and customisation are required. Incorporating a subsidiary is more likely to be preferred when capital intensive factories are planned and/ or technology is to be closely guarded. This strategy is appealing if there are no competitors to buy or transfer a competitive advantage that includes embedded competencies, skills, habits and culture.
For incorporating a company, there is a need to understand local rules & regulations, market knowledge and expertise of reliable third parties such as a consultant, competitor and/ or business partner. This entry strategy takes a long time due to the need to establish new operations, distribution network and the need to learn and implement the right marketing strategies to compete with competitors in a new market.
Merger & Acquisitions (M&A): have become a popular method of entering overseas markets mainly due to the advantage of quick access it offers. The acquisition strategy offers the fastest and largest international expansion among the alternatives.
Acquisitions have increased because it is a way to gain greater market power in less time. Market share is often influenced by market power. As a result, large multinational corporations prefer acquisitions to gain greater market power. M&A requires the purchase of a competitor, supplier, distributor or business in the relevant industry. To enable the realization of core competencies and capture a competitive advantage in the market.
Acquisitions carry a lower risk than fresh investment because the acquisition results can be more easily and accurately estimated. Overall, acquisitions are attractive if there are well-established firms in action or if competitors want to cede the ground.
There are certain disadvantages in achieving optimisation in acquisition:
- Unifying the two organizations can be quite difficult due to the different organizational cultures, control systems, and relationships. Integration is a complex issue, but it is one of the most important things for organizations.
- By adopting acquisitions, leveraged firms can increase their debt levels, which could negatively impact firms’ ability to repay.
Joint Venture (JV): Following are the common goals in entering a joint venture:
- market entry,
- risk/reward sharing,
- technology sharing & joint product development,
- access to the distribution channel, and
- compliance with government regulations.
The main issues to consider in a joint venture are ownership, control, duration of the deal, pricing, technology transfer, local company’s capabilities and resources, and government intentions. Potential conflict issues include:
- Additional investment plans are asymmetric;
- Conflicting management practices;
- Ambiguous performance – ownership of joint IP; and
- Cultural conflict.
Strategic alliance: is a type of cooperation agreement between different companies such as joint research, technical contribution, joint venture or minority equity participation. The modern form of strategic alliances is becoming increasingly common and has the following distinctive features:
- Preferred in companies in industrialized countries;
- The focus is often on creating new products and/or technologies;
- They are typically non-equity agreements in which the firms are separate and independent.
Some of the advantages of strategic alliances include:
Technology exchange: This is a prime target for many strategic alliances. In high technology areas, it is increasingly difficult for a single company to possess the resources or capabilities needed to undertake the entire development and R&D efforts. Sectors like telecommunication, medical devices, pharma, speciality chemical prefer this type of partnership arrangements.
Global competition: To thwart the risks of global battles between corporations, like-minded companies come together as affiliated players in strategic partnerships. Strategic alliances will become the primary tool for companies to stay competitive in this globalized environment, especially in industries with dominant leaders, such as mobile phones, where smaller companies need alliances to stay competitive.
Industrial convergence: As traditional lines between different industries fade, strategic alliances are sometimes the only way to develop the complex skills needed within the required timeframe. Alliances become a way to reduce the intensity of competition, eliminating potential participants and isolating players, and building complex value chains that could act as barriers.
Economies of scale and minimizing risks: Aggregation of resources can contribute to the economic size, and smaller firms, in particular, can benefit greatly from strategic alliances in terms of cost reduction because of economies of scale.
In terms of risk mitigation, no company bears all the risks and costs for a joint operation in strategic alliances. This is extremely favourable for businesses engaging in high-risk / high-cost activities such as R&D.
Alliance alternative to a merger: Some industrial sectors have limitations to cross-border mergers and acquisitions, and strategic alliances prove to be a great alternative to overcome these limitations. Alliances may lead to a larger integration in future.
Do you know any other ways to infiltrate or have other opinions?
Please comment below to discuss together.