global business unit 7

 

For the past 7 years, Zip-6 has been produced and sold in South Korea through a licensing agreement with the Korean beverage firm Lotse Tsangsung through its Chang Dow Trading Co. subsidiary. Mr. Jung Park, Lotse Tsangsung CEO recently visited Ravi and Keith in Atlanta and revealed that his firm was about to acquire its leading rival in the Korean market and as a result, wants to sell its Chang Dow unit. Mr. Park has approached Ravi and Keith with two proposals. First, Lotse Tsangsung is willing to sell Zip-6 its Chang Dow subsidiary. This would represent an acquisition for Zip-6 in the Korean market. Second, if the two firms cannot agree on terms for a purchase of Chang Dow, Lotse Tsangsung is willing to sell its licensing agreement back to Zip-6 which will effectively allow Zip-6 to produce and distribute its products directly within Korea. This would involve a Greenfield Venture. Based on your reading of the Greenfield Venture or Acquisition Section in the Hill text on pages 434-438, your Assignment is to address the following in your paper:

Checklist:

1. Discuss the pros of both options (acquisitions versus Greenfield ventures) for Zip-6
2. Discuss the cons of both options (acquisitions versus Greenfield ventures) for Zip-6
3. State your choice of options to pursue and your reasons for this choice

Respond in a minimum of one page in APA format to this Assignment and submit it to your instructor through the Dropbox for this unit.

After you have read this chapter you should be able to:

1 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter
those markets, and on what scale.

2 Compare and contrast the different modes that firms use to enter foreign markets.
3 Identify the factors that influence a firm’s choice of entry mode.

4 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy.

L
E

A
R

N
IN

G
O

B
J
E

C
T

IV
E

S

part 5 Competing in a Global Marketplace

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General Motors in China

Entering Foreign Markets

12 c h a p t e r

opening case

T he late 2000s were not kind to General Motors. Hurt by a deep recession in the United States, and plunging vehicle sales, GM capped off a decade where it had progressively lost market share to foreign rivals such as Toyota by entering Chapter 11 bankruptcy.
Between 1980, when it dominated the U.S. market, and 2009, when it entered bankruptcy
protection, GM saw its U.S. market share slip from 44 percent to just 19 percent. The troubled
company emerged from bankruptcy a few months later a smaller enterprise with fewer brands,
and yet going forward some believe that the new GM could be a much more profitable enterprise.
One major reason for this optimism was the success of its joint ventures in China.
GM entered China in 1997 with a $1.6 billion investment to establish a joint venture with the
state-owned Shanghai Automotive Industry Corp. (SAIC) to build Buick sedans. At the time, the
Chinese market was tiny (less than 400,000 cars were sold in 1996), but GM was attracted by
the enormous potential in a country of over 1 billion people that was experiencing rapid eco-
nomic growth. GM forecast that by the late 2000s some 3 million cars a year might be sold in
China. While it explicitly recognized that it had much to learn about the Chinese market, and
would probably lose money for years to come, GM executives believed that it was crucial
for them to establish a beachhead and to team with SAIC (one of the early leaders in
China’s emerging automobile industry) before its global rivals did. The decision to enter a
joint venture was not a hard one. Not only did GM lack knowledge and connections in
China, but also Chinese government regulations made it all but impossible for a for-
eign automaker to go it alone in the country.
While GM was not alone in investing in China—many of the world’s major auto-
mobile companies entered into some kind of Chinese joint venture during this
time period—it was among the largest investors. Only Volkswagen, whose man-
agement shared GM’s view, made similar-sized investments. Other compa-
nies adopted a more cautious approach, investing smaller amounts and
setting more limited goals.

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418 Part Five Competing in a Global Marketplace

By 2007 GM had expanded the range of its partnership with SAIC to in-
clude vehicles sold under the names of Chevrolet, Cadillac, and Wuling. The
two companies had also established the Pan-Asian Technical Automotive
center to design cars and components not just for China but also for other
Asian markets. At this point it was already clear that both the Chinese market
and the joint venture were exceeding GM’s initial expectations. The venture
was profitable, selling more than 900,000 cars and light trucks in 2007, an
18 percent increase over 2006 and placing it second only to Volkswagen in the
market among foreign nameplates. Equally impressive, some 8 million cars
and light trucks were sold in China in 2007, making China the second-largest
car market in the world, ahead of Japan and behind the United States.
Much of the venture’s success could be attributed to its strategy of de-
signing vehicles explicitly for the Chinese market. For example, together
with SAIC it produced a tiny minivan, the Wuling Sunshine. The van costs
$3,700, has a 0.8-liter engine, a top speed of 60 mph, and weighs less than
1,000 kilograms—a far cry from the heavy SUVs GM was known for in the
United States. For China, the vehicle was perfect, and some 460,000 were
sold in 2007, making it the best seller in the light-truck sector.
It is the future, however, that has people excited. In 2008 and 2009, while
the U.S. and European automobile markets slumped, China’s market regis-
tered strong growth. In 2009 some 13.8 million vehicles were sold in the
country, surpassing the United States to become the largest automobile mar-
ket in the world. GM and its local partners sold a record 1.8 million vehicles
in 2009, a 67 percent increase over 2008. At this point, there were 40 cars for
every 1,000 people in China, compared to 765 for every 1000 in the United
States, suggesting that China could see rapid growth for years to come. •
Sources: S. Schifferes, “Cracking China’s Car Market,” BBC News , May 17, 2007; N. Madden, “Led by Buick,
Carmaker Learning Fine Points of Regional China Tastes,” Automotive News , September 15, 2008, pp. 186–90;
and “GM Posts Record Sales in China,” Toronto Star , January 5, 2010, p. B4.

Introduction
This chapter is concerned with two closely related topics: (1) the decision of which
foreign markets to enter, when to enter them, and on what scale; and (2) the choice of
entry mode. Any firm contemplating foreign expansion must first struggle with the
issue of which foreign markets to enter and the timing and scale of entry. The choice
of which markets to enter should be driven by an assessment of relative long-run
growth and profit potential.
The choice of mode for entering a foreign market is another major issue with which
international businesses must wrestle. The various modes for serving foreign markets
are exporting, licensing or franchising to host-country firms, establishing joint ven-
tures with a host-country firm, setting up a new wholly owned subsidiary in a host

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Chapter Twelve Entering Foreign Markets 419

country to serve its market, or acquiring an established enterprise in the host nation to
serve that market. Each of these options has advantages and disadvantages. The mag-
nitude of the advantages and disadvantages associated with each entry mode is deter-
mined by a number of factors, including transport costs, trade barriers, political risks,
economic risks, business risks, costs, and firm strategy. The optimal entry mode varies
by situation, depending on these factors. Thus, whereas some firms may best serve a
given market by exporting, other firms may better serve the market by setting up a
new wholly owned subsidiary or by acquiring an established enterprise.
As discussed in the opening case, in 1997 GM decided to enter China on a sig-
nificant scale. It’s choice of entry mode, a joint venture with Shanghai Automotive
Industry Corp., was dictated by circumstances at the time (Chinese government regu-
lations made a joint venture the only practical alternative). GM was attracted to the
market by the promise of rapid future growth. The growth exceeded GM’s expecta-
tions, and the company reaped the rewards of making the right strategic choice under
considerable uncertainty. Although GM as a whole did not fair well in the late 2000s
(it had to seek bankruptcy protection in 2009), its success in China was the glittering
jewel in an otherwise dismal picture, demonstrating just how important it can be for a
company to get its foreign market entry strategy right.

Basic Entry Decisions
A firm contemplating foreign expansion must make three basic decisions: which mar-
kets to enter, when to enter those markets, and on what scale. 1

WHICH FOREIGN MARKETS? The world has more than 200 nation-states.
They do not all hold the same profit potential for a firm contemplating foreign ex-
pansion. Ultimately, the choice must be based on an assessment of a nation’s long-run
profit potential. This potential is a function of several factors, many of which we have
studied in earlier chapters. In Chapter 2, we looked in detail at the economic and
political factors that influence the potential attractiveness of a foreign market. There
we noted that the attractiveness of a country as a potential market for an interna-
tional business depends on balancing the benefits, costs, and risks associated with
doing business in that country.
Chapter 2 also noted that the long-run economic
benefits of doing business in a country are a func-
tion of factors such as the size of the market (in
terms of demographics), the present wealth (pur-
chasing power) of consumers in that market, and
the likely future wealth of consumers, which de-
pends upon economic growth rates. While some
markets are very large when measured by number
of consumers (e.g., China, India, and Indonesia),
one must also look at living standards and economic
growth. On this basis, China and India, while rela-
tively poor, are growing so rapidly that they are at-
tractive targets for inward investment (hence GM’s
decision to invest in China in 1997; see the opening
case). Alternatively, weak growth in Indonesia im-
plies that this populous nation is a far less attractive
target for inward investment. As we saw in Chapter 2,
likely future economic growth rates appear to be a
function of a free market system and a country’s

LEARNING OBJECTIVE 1
Explain the three basic

decisions that firms
contemplating foreign
expansion must make:

which markets to enter,
when to enter those

markets, and on what scale.

Another Per spect i ve

Thailand’s Homebuilder Enters Foreign Markets
As a child in Thailand, Thongma Vijitpongpun helped his
father sell soup to day laborers, balancing twin hampers
on a shoulder pole and learning the first rule of good busi-
ness: deliver quality at an affordable price. Today Thongma’s
business, Pruksa Real Estate, uses mass-production tech-
niques to build quality, affordable housing for low- and
middle-income families. Pruksa’s process has been so
successful—with recent annual revenues pegged at
$569 million—that the company intends to expand to other
Asian countries where the need for low-cost housing is
great. First on Pruksa’s list are India, Vietnam, and the
Maldives, with China, Indonesia, and the Philippines to fol-
low. (Brian Mertens, “Biggest Thai Home Builder Moving
Abroad to Expand Company,” Forbes.com, February 8,
2010, www.forbes.com)

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420 Part Five Competing in a Global Marketplace

capacity for growth (which may be greater in less developed nations). We also argued in
Chapter 2 that the costs and risks associated with doing business in a foreign country are
typically lower in economically advanced and politically stable democratic nations, and
they are greater in less developed and politically unstable nations.
The discussion in Chapter 2 suggests that, other things being equal, the benefit–
cost–risk trade-off is likely to be most favorable in politically stable developed and
developing nations that have free market systems, and where there is not a dramatic
upsurge in either inflation rates or private-sector debt. The trade-off is likely to be
least favorable in politically unstable developing nations that operate with a mixed or
command economy or in developing nations where speculative financial bubbles have
led to excess borrowing (see Chapter 2 for further details).
Another important factor is the value an international business can create in a for-
eign market. This depends on the suitability of its product offering to that market and
the nature of indigenous competition. 2 If the international business can offer a prod-
uct that has not been widely available in that market and that satisfies an unmet need,
the value of that product to consumers is likely to be much greater than if the interna-
tional business simply offers the same type of product that indigenous competitors and
other foreign entrants are already offering. Greater value translates into an ability to
charge higher prices and/or to build sales volume more rapidly. By considering such
factors, a firm can rank countries in terms of their attractiveness and long-run profit
potential. Preference is then given to entering markets that rank highly. For example,
Tesco, the large British grocery chain, has been aggressively expanding its foreign op-
erations in recent years, primarily by focusing on emerging markets that lack strong
indigenous competitors (see the accompanying Management Focus). Similarly, when
GM entered China in 1997 the indigenous competitors were small and lacked techno-
logical know-how (see opening case).

TIMING OF ENTRY Once attractive markets have been identified, it is impor-
tant to consider the timing of entry. We say that entry is early when an international
business enters a foreign market before other foreign firms and late when it enters
after other international businesses have already established themselves. The advan-
tages frequently associated with entering a market early are commonly known as first-
mover advantages. 3 One first-mover advantage is the ability to preempt rivals and
capture demand by establishing a strong brand name. This desire has driven the rapid
expansion by Tesco into developing nations (see the Management Focus). A second
advantage is the ability to build sales volume in that country and ride down the experi-
ence curve ahead of rivals, giving the early entrant a cost advantage over later entrants.
One could argue that this factor motivated GM to enter the Chinese automobile mar-
ket in 1997 when it was still tiny (it is now the world’s largest; see the opening case).
This cost advantage may enable the early entrant to cut prices below that of later en-
trants, thereby driving them out of the market. A third advantage is the ability of early
entrants to create switching costs that tie customers into their products or services.
Such switching costs make it difficult for later entrants to win business.
There can also be disadvantages associated with entering a foreign market before
other international businesses. These are often referred to as first-mover disadvan-
tages. 4 These disadvantages may give rise to pioneering costs, costs that an early
entrant has to bear that a later entrant can avoid. Pioneering costs arise when the busi-
ness system in a foreign country is so different from that in a firm’s home market that
the enterprise has to devote considerable effort, time, and expense to learning the
rules of the game. Pioneering costs include the costs of business failure if the firm, due
to its ignorance of the foreign environment, makes major mistakes. A certain liability
is associated with being a foreigner, and this liability is greater for foreign firms that

Timing of Entry
Entry is early when a firm

enters a foreign market
before other foreign

firms and late when a
firm enters after other

international businesses
have established

themselves.

First-Mover
Advantages

Advantages accruing to
the first to enter a market.

First-Mover
Disadvantages

Disadvantages
associated with entering

a foreign market before
other international

businesses.

Pioneering Costs
Costs that an early

entrant has to bear that a
later entrant can avoid,

such as the time and
effort in learning the
rules, failure due to
ignorance, and the

liability of being a
foreigner.

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Chapter Twelve Entering Foreign Markets 421

Management FOCUS

Tesco’s International Growth Strategy

Tesco is the largest grocery retailer in the United Kingdom,
with a 25 percent share of the local market. In its home
market, the company’s strengths are reputed to come from
strong competencies in marketing and store site selection,
logistics and inventory management, and its own label
product offerings. By the early 1990s, these competencies
had already given the company a leading position in the
United Kingdom. The company was generating strong free
cash flows, and senior management had to decide how to
use that cash. One strategy they settled on was overseas
expansion. As they looked at international markets, they
soon concluded the best opportunities were not in estab-
lished markets, such as those in North America and Western
Europe, where strong local competitors already existed, but
in the emerging markets of Eastern Europe and Asia where
there were few capable competitors but strong underlying
growth trends.
Tesco’s first international foray was into Hungary in 1994,
when it acquired an initial 51 percent stake in Global, a
43-store, state-owned grocery chain. By 2004, Tesco was
the market leader in Hungary, with some 60 stores and a
14 percent market share. In 1995, Tesco acquired 31 stores
in Poland from Stavia; a year later it added 13 stores pur-
chased from Kmart in the Czech Republic and Slovakia; and
the following year it entered the Republic of Ireland.
Tesco’s Asian expansion began in 1998 in Thailand when
it purchased 75 percent of Lotus, a local food retailer with
13 stores. Building on that base, Tesco had 64 stores in
Thailand by 2004. In 1999, the company entered South
Korea when it partnered with Samsung to develop a chain
of hypermarkets. This was followed by entry into Taiwan in
2000, Malaysia in 2002, and China in 2004. The move into
China came after three years of careful research and dis-
cussions with potential partners. Like many other Western
companies, Tesco was attracted to the Chinese market by
its large size and rapid growth. In the end, Tesco settled on
a 50/50 joint venture with Hymall, a hypermarket chain that
is controlled by Ting Hsin, a Taiwanese group, which had
been operating in China for six years. Currently, Hymall has
25 stores in China, and it plans to open another 10 each
year. Ting Hsin is a well-capitalized enterprise in its own
right, and it will match Tesco’s investments, reducing the
risks Tesco faces in China.
As a result of these moves, by 2007 Tesco had more than
800 stores outside the United Kingdom, which generated
£7.6 billion in annual revenues. In the United Kingdom,
Tesco had some 1,900 stores, generating £30 billion. The

addition of international stores has helped to make Tesco
the fourth-largest company in the global grocery market
behind Walmart, Carrefour of France, and Ahold of Holland.
Of the four, however, Tesco may be the most successful
internationally. By 2005, all of its foreign ventures were
making money.
In explaining the company’s success, Tesco’s managers
have detailed a number of important factors. First, the com-
pany devotes considerable attention to transferring its core
capabilities in retailing to its new ventures. At the same
time, it does not send in an army of expatriate managers to
run local operations, preferring to hire local managers and
support them with a few operational experts from the
United Kingdom. Second, the company believes that its
partnering strategy in Asia has been a great asset. Tesco
has teamed with good companies that have a deep under-
standing of the markets in which they are participating but
that lack Tesco’s financial strength and retailing capa-
bilities. Consequently, both Tesco and its partners have
brought useful assets to the venture, which have increased
the probability of success. As the venture becomes estab-
lished, Tesco has typically increased its ownership stake in
its partner. Thus, under current plans, by 2011 Tesco will
own 99 percent of Homeplus, its South Korean hypermarket
chain. When the venture was established, Tesco owned
51 percent. Third, the company has focused on markets
with good growth potential but that lack strong indigenous
competitors, which provides Tesco with ripe ground for
expansion.
In 2006, Tesco took its international expansion strategy to
the next level when it announced it would enter the
crowded U.S. grocery market with its Tesco Express con-
cept. Currently running in five countries, Tesco Express
stores are smaller, high-quality neighborhood grocery out-
lets that feature a large selection of prepared and healthy
foods. Tesco will initially enter on the West Coast, investing
some £250 million per year, with breakeven expected in the
second year of operation. Although some question the
wisdom of this move, others point out that in the United
Kingdom Tesco has consistently outperformed the ASDA
chain, which is owned by Walmart. Also, the Tesco Express
format is not something found in the United States.

Sources: P. N. Child, “Taking Tesco Global,” The McKenzie Quarterly, no. 3
(2002); H. Keers, “Global Tesco Sets Out Its Stall in China,” Daily Telegraph,
July 15, 2004, p. 31; K. Burgess, “Tesco Spends Pounds 140m on Chinese
Partnership,” Financial Times, July 15, 2004, p. 22; J. McTaggart, “Industry
Awaits Tesco Invasion,” Progressive Grocer , March 1, 2006, pp. 8–10; and
Tesco’s annual reports, archived at www.tesco.com.

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422 Part Five Competing in a Global Marketplace

enter a national market early. 5 Research seems to confirm that the probability of sur-
vival increases if an international business enters a national market after several other
foreign firms have already done so. 6 The late entrant may benefit by observing and
learning from the mistakes made by early entrants.
Pioneering costs also include the costs of promoting and establishing a product
offering, including the costs of educating customers. These can be significant when the
product being promoted is unfamiliar to local consumers. In contrast, later entrants
may be able to ride on an early entrant’s investments in learning and customer educa-
tion by watching how the early entrant proceeded in the market, by avoiding costly
mistakes made by the early entrant, and by exploiting the market potential created by
the early entrant’s investments in customer education. For example, KFC introduced
the Chinese to American-style fast food, but a later entrant, McDonald’s, has capital-
ized on the market in China.
An early entrant may be put at a severe disadvantage, relative to a later entrant, if
regulations change in a way that diminishes the value of an early entrant’s investments.
This is a serious risk in many developing nations where the rules that govern business
practices are still evolving. Early entrants can find themselves at a disadvantage if a
subsequent change in regulations invalidates prior assumptions about the best busi-
ness model for operating in that country.

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 sig-
nificant resources and implies rapid entry. Consider the entry of the Dutch insurance
company ING into the U.S. insurance market in 1999. ING had to spend several
billion dollars to acquire its U.S. operations. Not all firms have the resources necessary
to enter on a large scale, and even some large firms prefer to enter foreign markets on
a small scale and then build slowly as they become more familiar with the market.
The consequences of entering on a significant scale—entering rapidly—are associ-
ated with the value of the resulting strategic commitments. 7 A strategic commitment has
a long-term impact and is difficult to reverse. Deciding to enter a foreign market on a
significant scale is a major strategic commitment. Strategic commitments, such as rapid
large-scale market entry, can have an important influence on the nature of competition
in a market. For example, by entering the U.S. financial services market on a significant
scale, ING signaled its commitment to the market. Such a move has several effects. On
the positive side, it makes it easier for the company to attract customers and distributors
(such as insurance agents). The scale of entry gives both customers and distributors rea-
sons for believing that ING will remain in the market for the long run. The scale of
entry may also give other foreign institutions considering entry into the United States
pause; now they would have to compete not only against indigenous institutions in the
United States, but also against an aggressive and successful European institution. On the
negative side, by committing itself heavily to the United States, ING would have fewer
resources available to support expansion in other desirable markets, such as Japan. The
commitment to the United States limits the company’s strategic flexibility.
As suggested by the ING example, significant strategic commitments are neither un-
ambiguously good nor bad. Rather, they tend to change the competitive playing field and
unleash a number of changes, some of which may be desirable and some of which will not
be. It is important for a firm to think through the implications of large-scale entry into a
market and act accordingly. Of particular relevance is trying to identify how actual and
potential competitors might react to large-scale entry into a market. Also, the large-scale
entrant is more likely than the small-scale entrant to be able to capture first-mover
advantages associated with demand preemption, scale economies, and switching costs.

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Chapter Twelve Entering Foreign Markets 423

The value of the commitments that flow from rapid large-scale entry into a foreign
market must be balanced against the resulting risks and lack of flexibility associated
with significant commitments. But strategic inflexibility can also have value. A famous
example from military history illustrates the value of inflexibility. When Hernán Cortés
landed in Mexico, he ordered his men to burn all but one of his ships. Cortés reasoned
that by eliminating their only method of retreat, his men had no choice but to fight
hard to win against the Aztecs—and ultimately they did. 8
Balanced against the value and risks of the commitments associated with large-scale
entry are the benefits of a small-scale entry. Small-scale entry allows a firm to learn about
a foreign market while limiting the firm’s exposure to that market. Small-scale entry is a
way to gather information about a foreign market before deciding whether to enter on a
significant scale and how best to enter. By giving the firm time to collect information,
small-scale entry reduces the risks associated with a subsequent large-scale entry. But the
lack of commitment associated with small-scale entry may make it more difficult for the
small-scale entrant to build market share and to capture first-mover or early-mover
advantages. The risk-averse firm that enters a foreign market on a small scale may limit its
potential losses, but it may also miss the chance to capture first-mover advantages.

MARKET ENTRY SUMMARY There are no “right” decisions here, just deci-
sions that are associated with different levels of risk and reward. Entering a large devel-
oping nation such as China or India before most other international businesses in the
firm’s industry, and entering on a large scale, will be associated with high levels of risk.
In such cases, the liability of being foreign is increased by the absence of prior foreign
entrants whose experience can be a useful guide. At the same time, the potential long-
term rewards associated with such a strategy are great. The early large-scale entrant
into a major developing nation may be able to capture significant first-mover advan-
tages that will bolster its long-run position in that market. 9 This was what GM hoped
to do when it entered China in 1997, and as of 2010 it seems as if GM has captured a
significant first-mover, or at least early-mover, advantage (see the opening case). In
contrast, entering developed nations such as Australia or Canada after other interna-
tional businesses in the firm’s industry, and entering on a small scale to first learn more
about those markets, will be associated with much lower levels of risk. However, the
potential long-term rewards are also likely to be lower because the firm is essentially
forgoing the opportunity to capture first-mover advantages and because the lack of
commitment signaled by small-scale entry may limit its future growth potential.
This section has been written largely from the perspective of a business based in a
developed country considering entry into foreign markets. Christopher Bartlett and
Sumantra Ghoshal have pointed out the ability that businesses based in developing
nations have to enter foreign markets and become global players. 10 Although such firms
tend to be late entrants into foreign markets, and although their resources may be limited,
Bartlett and Ghoshal argue that such late movers can still succeed against well-established
global competitors by pursuing appropriate strategies. In particular, Bartlett and Ghoshal
argue that companies based in developing nations should use the entry of foreign multi-
nationals as an opportunity to learn from these competitors by benchmarking their
operations and performance against them. Furthermore, they suggest the local company
may be able to find ways to differentiate itself from a foreign multinational, for example,
by focusing on market niches that the multinational ignores or is unable to serve effec-
tively if it has a standardized global product offering. Having improved its performance
through learning and differentiated its product offering, the firm from a developing
nation may then be able to pursue its own international expansion strategy. Even though
the firm may be a late entrant into many countries, by benchmarking and then differenti-
ating itself from early movers in global markets, the firm from the developing nation

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424 Part Five Competing in a Global Marketplace

Management FOCUS

The Jollibee Phenomenon—A Philippine
Multinational

Jollibee is one of the Philippines’ phenomenal business suc-
cess stories. Jollibee, which stands for “Jolly Bee,” began
operations in 1975 as a two-branch ice cream parlor. It later
expanded its menu to include hot sandwiches and other
meals. Encouraged by early success, Jollibee Foods Corpora-
tion was incorporated in 1978, with a network that had
grown to seven outlets. In 1981, when Jollibee had 11 stores,
McDonald’s began to open stores in Manila. Many observers
thought Jollibee would have difficulty competing against
McDonald’s. However, Jollibee saw this as an opportunity
to learn from a very successful global competitor. Jollibee
benchmarked its performance against that of McDonald’s and
started to adopt operational systems similar to those used at
McDonald’s to control its quality, cost, and service at the store
level. This helped Jollibee to improve its performance.
As it came to better understand McDonald’s business
model, Jollibee began to look for a weakness in McDonald’s
global strategy. Jollibee executives concluded that
McDonald’s fare was too standardized for many locals, and
that the local firm could gain share by tailoring its menu to
local tastes. Jollibee’s hamburgers were set apart by a
secret mix of spices blended into the ground beef to make
the burgers sweeter than those produced by McDonald’s,
appealing more to Philippine tastes. It also offered local fare
including various rice dishes, pineapple burgers, and banana
langka and peach mango pies for desserts. By pursuing

this strategy, Jollibee maintained a leadership position
over the global giant. By 2006, Jollibee had over 540 stores
in the Philippines, a market share of more than 60 percent,
and revenues in excess of $600 million. McDonald’s, in
contrast, had about 250 stores.
In the mid-1980s, Jollibee had gained enough confidence
to expand internationally. Its initial ventures were into
neighboring Asian countries such as Indonesia, where it
pursued the strategy of localizing the menu to better match
local tastes, thereby differentiating itself from McDonald’s.
In 1987, Jollibee entered the Middle East, where a large
contingent of expatriate Filipino workers provided a ready-
made market for the company. The strategy of focusing on
expatriates worked so well that in the late 1990s Jollibee
decided to enter another foreign market where there was a
large Filipino population—the United States. Between 1999
and 2004, Jollibee opened eight stores in the United States,
all in California. Even though many believe the U.S. fast-
food market is saturated, the stores have performed well.
While the initial clientele was strongly biased toward the
expatriate Filipino community, where Jollibee’s brand
awareness is high, non-Filipinos increasingly are coming
to the restaurant. In the San Francisco store, which has
been open the longest, more than half the customers are
now non-Filipino.
Recently Jollibee has focused its attentions on two inter-
national markets, mainland China and India. It has more
than 100 stores in China, which operate under the Yonghe
brand name (and serve Chinese style fast food). While it

Jollibee may be heading your way! Unlike many fast-food chains that have their roots within the United States, the Jollibee
chain originated in the Philippines using McDonald’s as a role model.

(continued)

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Chapter Twelve Entering Foreign Markets 425

does not yet have a presence in India, the company is re-
ported to be considering its options for entering that nation
and is reported to be considering acquiring an Indian fast-
food chain, although as with so many enterprises, Jollibee
has slowed its expansion strategy in the wake of the
2008–2009 global financial crisis. Jollibee has a bright future
as a niche player in a market that has historically been
dominated by U.S. multinationals.

Sources: Christopher Bartlett and Sumantra Ghoshal, “Going Global: Lessons
from Late Movers,” Harvard Business Review, March–April 2000, pp. 132–45;
“Jollibee Battles Burger Giants in US Market,” Philippine Daily Inquirer,
July 13, 2000; M. Ballon, “Jollibee Struggling to Expand in U.S.,” Los Angeles
Times, September 16, 2002, p. C1; J. Hookway, “Burgers and Beer,” Far
Eastern Economic Review, December 2003, pp. 72–74; S. E. Lockyer, “Coming
to America,” Nation’s Restaurant News , February 14, 2005, pp. 33–35; Erik
de la Cruz, “Jollibee to Open 120 New Stores This Year, Plans India,” Inquirer
Money, July 5, 2006, www.business.inquirer.net; and www.jollibee.com.ph.

may still be able to build a strong international business presence. A good example of how
this can work is given in the above Management Focus, which looks at how Jollibee, a
Philippines-based fast-food chain, has started to build a global presence in a market
dominated by U.S. multinationals such as McDonald’s and KFC.

Entry Modes
Once a firm decides to enter a foreign market, the question arises as to the best mode
of entry. Firms can use six different modes to enter foreign markets: exporting, turn-
key 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. 11

EXPORTING Many manufacturing firms begin their global expansion as export-
ers and only later switch to another mode for serving a foreign market. We take a close
look at the mechanics of exporting in the next chapter. Here we focus on the advan-
tages and disadvantages of exporting as an entry mode.

Advantages Exporting has two distinct advantages. First, it avoids the often sub-
stantial costs of establishing manufacturing operations in the host country. Second,
exporting may help a firm achieve experience curve and location economies (see
Chapter 11). By manufacturing the product in a centralized location and exporting it
to other national markets, the firm may realize substantial scale economies from its
global sales volume. This is how Sony came to dominate the global TV market, how
Matsushita came to dominate the VCR market, how many Japanese automakers made
inroads into the U.S. market, and how South Korean firms such as Samsung gained
market share in computer memory chips.

Disadvantages Exporting has a number of drawbacks. First, exporting from the
firm’s home base may not be appropriate if lower-cost locations for manufacturing the
product can be found abroad (i.e., if the firm can realize location economies by mov-
ing production elsewhere). Thus, particularly for firms pursuing global or transna-
tional strategies, it may be preferable to manufacture where the mix of factor
conditions is most favorable from a value creation perspective and to export to the rest
of the world from that location. This is not so much an argument against exporting as
an argument against exporting from the firm’s home country. Many U.S. electronics
firms have moved some of their manufacturing to the Far East because of the avail-
ability of low-cost, highly skilled labor there. They then export from that location to
the rest of the world, including the United States.
A second drawback to exporting is that high transport costs can make exporting
uneconomical, particularly for bulk products. One way of getting around this is to

LEARNING OBJECTIVE 2
Compare and contrast the
different modes that firms

use to enter foreign
markets.

Exporting
Sale of products
produced in one country
to residents of another
country.

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426 Part Five Competing in a Global Marketplace

manufacture bulk products regionally. This strategy
enables the firm to realize some economies from
large-scale production and at the same time to limit
its transport costs. For example, many multinational
chemical firms manufacture their products region-
ally, serving several countries from one facility.

Another drawback is that tariff barriers can
make exporting uneconomical. Similarly, the threat
of tariff barriers by the host-country government
can make it very risky. A fourth drawback to ex-
porting arises when a firm delegates its marketing,
sales, and service in each country where it does
business to another company. This is a common
approach for manufacturing firms that are just be-
ginning to expand internationally. The other com-
pany may be a local agent, or it may be another
multinational with extensive international distribu-
tion operations. Local agents often carry the prod-

ucts of competing firms and so have divided loyalties. In such cases, the local agent
may not do as good a job as the firm would if it managed its marketing itself. Similar
problems can occur when another multinational takes on distribution.
The way around such problems is to set up wholly owned subsidiaries in foreign
nations to handle local marketing, sales, and service. By doing this, the firm can exer-
cise tight control over marketing and sales in the country while reaping the cost ad-
vantages of manufacturing the product in a single location, or a few choice locations.

TURNKEY PROJECTS Firms that specialize in the design, construction, and
start-up of turnkey plants are common in some industries. In a turnkey project, the
contractor agrees to handle every detail of the project for a foreign client, including
the training of operating personnel. At completion of the contract, the foreign client is
handed the “key” to a plant that is ready for full operation—hence, the term turnkey.
This is a means of exporting process technology to other countries. Turnkey projects
are most common in the chemical, pharmaceutical, petroleum refining, and metal re-
fining industries, all of which use complex, expensive production technologies.

Advantages The know-how required to assemble and run a technologically com-
plex process, such as refining petroleum or steel, is a valuable asset. Turnkey projects
are a way of earning great economic returns from that asset. The strategy is particu-
larly useful where FDI is limited by host-government regulations. For example, the
governments of many oil-rich countries have set out to build their own petroleum
refining industries, so they restrict FDI in their oil and refining sectors. But because
many of these countries lack petroleum-refining technology, they gain it by entering
into turnkey projects with foreign firms that have the technology. Such deals are often
attractive to the selling firm because without them, they would have no way to earn a
return on their valuable know-how in that country. A turnkey strategy can also be less
risky than conventional FDI. In a country with unstable political and economic envi-
ronments, a longer-term investment might expose the firm to unacceptable political
and/or economic risks (e.g., the risk of nationalization or of economic collapse).

Disadvantages Three main drawbacks are associated with a turnkey strategy.
First, the firm that enters into a turnkey deal will have no long-term interest in the
foreign country. This can be a disadvantage if that country subsequently proves to be

Another Per spect i ve

Saudi Arabia to Export Phosphate
In an effort to curb its reliance on oil as the country’s primary
export commodity, the kingdom of Saudi Arabia has taken
steps to develop and market a number of its other natural
resources, including phosphate, gold, and bauxite, the main
source of aluminum. Phosphate is important in the manufac-
ture of many commercial fertilizers. As the world population
continues to grow, the global food crisis deepens, leading
economists to emphasize the need to optimize crop yields.
Thus, fertilizer stands to become an important commodity.
According to the Saudi Ports Authority, plans are under way
to export phosphates from the port of Ras al-Zour. (“Saudis
to Start Exporting Phosphates in Dec—Paper,” Reuters.com,
January 27, 2010, www.reuters.com)

Turnkey Project
A project in which a

firm agrees to set up an
operating plant for a

foreign client and hand
over the “key” when the
plant is fully operational.

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Chapter Twelve Entering Foreign Markets 427

a major market for the output of the process that has been exported. One way around
this is to take a minority equity interest in the operation. Second, the firm that enters
into a turnkey project with a foreign enterprise may inadvertently create a competitor.
For example, many of the Western firms that sold oil-refining technology to firms in
Saudi Arabia, Kuwait, and other Gulf states now find themselves competing with these
firms in the world oil market. Third, if the firm’s process technology is a source of
competitive advantage, then selling this technology through a turnkey project is also
selling competitive advantage to potential and/or actual competitors.

LICENSING A licensing agreement is an arrangement whereby a licensor grants
the rights to intangible property to another entity (the licensee) for a specified period,
and in return, the licensor receives a royalty fee from the licensee. 12 Intangible property
includes patents, inventions, formulas, processes, designs, copyrights, and trademarks.
For example, to enter the Japanese market, Xerox, inventor of the photocopier, estab-
lished a joint venture with Fuji Photo that is known as Fuji–Xerox. Xerox then licensed
its xerographic know-how to Fuji–Xerox. In return, Fuji–Xerox paid Xerox a royalty fee
equal to 5 percent of the net sales revenue that Fuji–Xerox earned from the sales of
photocopiers based on Xerox’s patented know-how. In the Fuji–Xerox case, the license
was originally granted for 10 years, and it has been renegotiated and extended several
times since. The licensing agreement between Xerox and Fuji–Xerox also limited Fuji–
Xerox’s direct sales to the Asian Pacific region (although Fuji–Xerox does supply Xerox
with photocopiers that are sold in North America under the Xerox label). 13

Advantages In the typical international licensing deal, the licensee puts up most
of the capital necessary to get the overseas operation going. Thus, a primary advantage
of licensing is that the firm does not have to bear the development costs and risks as-
sociated with opening a foreign market. Licensing is very attractive for firms lacking
the capital to develop operations overseas. In addition, licensing can be attractive
when a firm is unwilling to commit substantial financial resources to an unfamiliar or
politically volatile foreign market. Licensing is also often used when a firm wishes to
participate in a foreign market but is prohibited from doing so by barriers to invest-
ment. This was one of the original reasons for the formation of the Fuji–Xerox joint
venture in 1962. Xerox wanted to participate in the Japanese market but was prohib-
ited from setting up a wholly owned subsidiary by the Japanese government. So Xerox
set up the joint venture with Fuji and then licensed its know-how to the joint venture.
Finally, licensing is frequently used when a firm possesses some intangible property
that might have business applications, but it does not want to develop those applica-
tions itself. For example, Bell Laboratories at AT&I originally invented the transistor
circuit in the 1950s, but AT&I decided it did not want to produce transistors, so it
licensed the technology to a number of other companies, such as Texas Instruments.
Similarly, Coca-Cola has licensed its famous trademark to clothing manufacturers,
which have incorporated the design into clothing.

Disadvantages Licensing has three serious drawbacks. First, it does not give a
firm the tight control over manufacturing, marketing, and strategy that is required for
realizing experience curve and location economies. Licensing typically involves each
licensee setting up its own production operations. This severely limits the firm’s ability
to realize experience curve and location economies by producing its product in a cen-
tralized location. When these economies are important, licensing may not be the best
way to expand overseas.
Second, competing in a global market may require a firm to coordinate strategic
moves across countries by using profits earned in one country to support competitive

Licensing
Occurs when a firm (the
licensor) licenses the
rights to produce its
product, its production
processes, or its brand
name or trademark to
another firm (the
licensee); in return, the
licensor collects a royalty
fee from the licensee.

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428 Part Five Competing in a Global Marketplace

attacks in another. By its very nature, licensing limits a
firm’s ability to do this. A licensee is unlikely to allow
a multinational firm to use its profits (beyond those
due in the form of royalty payments) to support a dif-
ferent licensee operating in another country.

A third problem with licensing is one that we
encountered in Chapter 7 when we reviewed the
economic theory of FDI. This is the risk associated
with licensing technological know-how to foreign
companies. Technological know-how constitutes the
basis of many multinational firms’ competitive ad-
vantage. Most firms wish to maintain control over
how their know-how is used, and a firm can quickly
lose control over its technology by licensing it. Many
firms have made the mistake of thinking they could
maintain control over their know-how within the
framework of a licensing agreement. RCA Corpora-

tion, for example, once licensed its color TV technology to Japanese firms including
Matsushita and Sony. The Japanese firms quickly assimilated the technology,
improved on it, and used it to enter the U.S. market, taking substantial market share
away from RCA.
There are ways of reducing this risk. One way is by entering into a cross-licensing
agreement with a foreign firm. Under a cross-licensing agreement, a firm might
license some valuable intangible property to a foreign partner, but in addition to a
royalty payment, the firm might also request that the foreign partner license some of
its valuable know-how to the firm. Such agreements are believed to reduce the risks
associated with licensing technological know-how, since the licensee realizes that if it
violates the licensing contract (by using the knowledge obtained to compete directly
with the licensor), the licensor can do the same to it. Cross-licensing agreements
enable firms to hold each other hostage, which reduces the probability that they will
behave opportunistically toward each other. 14 Such cross-licensing agreements are
increasingly common in high-technology industries. For example, the U.S. biotech-
nology firm Amgen licensed one of its key drugs, Nuprogene, to Kirin, the Japanese
pharmaceutical company. The license gives Kirin the right to sell Nuprogene in Japan.
In return, Amgen receives a royalty payment and, through a licensing agreement,
gained the right to sell some of Kirin’s products in the United States.
Another way of reducing the risk associated with licensing is to follow the Fuji–Xerox
model and link an agreement to license know-how with the formation of a joint ven-
ture in which the licensor and licensee take important equity stakes. Such an approach
aligns the interests of licensor and licensee because both have a stake in ensuring that
the venture is successful. Thus, the risk that Fuji Photo might appropriate Xerox’s
technological know-how and then compete directly against Xerox in the global photo-
copier market was reduced by the establishment of a joint venture in which both
Xerox and Fuji Photo had an important stake.

FRANCHISING Franchising is similar to licensing, although franchising tends
to involve longer-term commitments than licensing. Franchising is basically a special-
ized form of licensing in which the franchiser not only sells intangible property (nor-
mally a trademark) to the franchisee, but also insists that the franchisee agree to abide
by strict rules as to how it does business. The franchiser will also often assist the fran-
chisee to run the business on an ongoing basis. As with licensing, the franchiser typi-
cally receives a royalty payment, which amounts to some percentage of the franchisee’s

At the completion of the contract, the foreign client is handed the “key”
to a plant that is ready for full operation.

Franchising
A specialized form of

licensing in which the
franchiser sells

intangible property to the
franchisee and insists on

rules to conduct the
business.

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Chapter Twelve Entering Foreign Markets 429

revenues. Whereas licensing is pursued primarily by manufacturing firms, franchising
is employed primarily by service firms. 15 McDonald’s is a good example of a firm that
has grown by using a franchising strategy. McDonald’s strict rules as to how franchi-
sees should operate a restaurant extend to control over the menu, cooking methods,
staffing policies, and design and location. McDonald’s also organizes the supply chain
for its franchisees and provides management training and financial assistance. 16

Advantages The advantages of franchising as an entry mode are very similar to
those of licensing. The firm is relieved of many of the costs and risks of opening a
foreign market on its own. Instead, the franchisee typically assumes those costs and
risks. This creates a good incentive for the franchisee to build a profitable operation as
quickly as possible. Thus, using a franchising strategy, a service firm can build a global
presence quickly and at a relatively low cost and risk, as McDonald’s has.

Disadvantages The disadvantages are less pronounced than in the case of licens-
ing. Since franchising is often used by service companies, there is no reason to con-
sider the need for coordination of manufacturing to achieve experience curve and
location economies. But franchising may inhibit the firm’s ability to take profits out of
one country to support competitive attacks in another. A more significant disadvan-
tage of franchising is quality control. The foundation of franchising arrangements is
that the firm’s brand name conveys a message to consumers about the quality of the
firm’s product. Thus, a business traveler checking in at a Four Seasons hotel in Hong
Kong can reasonably expect the same quality of room, food, and service that she would
receive in New York. The Four Seasons name is supposed to guarantee consistent
product quality. This presents a problem in that foreign franchisees may not be as
concerned about quality as they are supposed to be, and the result of poor quality can
extend beyond lost sales in a particular foreign market to a decline in the firm’s world-
wide reputation. For example, if the business traveler has a bad experience at the Four
Seasons in Hong Kong, she may never go to another Four Seasons hotel and may urge
her colleagues to do likewise. The geographical distance of the firm from its foreign
franchisees can make poor quality difficult to detect. In addition, the sheer numbers of
franchisees—in the case of McDonald’s, tens of thousands—can make quality control
difficult. Due to these factors, quality problems may persist.
One way around this disadvantage is to set up a subsidiary in each country in which
the firm expands. The subsidiary might be wholly owned by the company or a joint
venture with a foreign company. The subsidiary assumes the rights and obligations to
establish franchises throughout the particular country or region. McDonald’s, for
example, establishes a master franchisee in many countries. Typically, this master fran-
chisee is a joint venture between McDonald’s and a local firm. The proximity and the
smaller number of franchises to oversee reduce the quality control challenge. In addi-
tion, because the subsidiary (or master franchisee) is at least partly owned by the firm,
the firm can place its own managers in the subsidiary to help ensure that it is doing a
good job of monitoring the franchises. This organizational arrangement has proven
very satisfactory for McDonald’s, KFC, and others.

JOINT VENTURES A joint venture entails establishing a firm that is jointly
owned by two or more otherwise independent firms. Fuji–Xerox, for example, was set
up as a joint venture between Xerox and Fuji Photo. Establishing a joint venture with
a foreign firm has long been a popular mode for entering a new market. As we saw in
the opening case, General Motors used a joint-venture strategy to enter the Chinese
automobile market. The most typical joint venture is a 50/50 venture, in which each of
the two parties holds a 50 percent ownership stake and contributes a team of managers

Joint Venture
Establishing a firm that is
jointly owned by two or
more otherwise
independent firms.

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430 Part Five Competing in a Global Marketplace

to share operating control. This was the case with the Fuji–Xerox joint venture until
2001; it is now a 25/75 venture with Xerox holding 25 percent. The GM SAIC ven-
ture in China was a 50/50 venture until 2010, when it became a 51/49 venture, with
SAIC holding the 51 percent stake. Some firms, however, have sought joint ventures
in which they have a majority share and thus tighter control. 17

Advantages Joint ventures have a number of advantages. First, a firm benefits
from a local partner’s knowledge of the host country’s competitive conditions, culture,
language, political systems, and business systems (this was one reason GM entered
into a joint venture with SAIC in China; see the opening case). Thus, for many U.S.
firms, joint ventures have involved the U.S. company providing technological know-
how and products and the local partner providing the marketing expertise and the lo-
cal knowledge necessary for competing in that country. Second, when the development
costs and/or risks of opening a foreign market are high, a firm might gain by sharing
these costs and or risks with a local partner. Third, in many countries, political consid-
erations make joint ventures the only feasible entry mode (again, as was the case with
GM’s joint venture with SAIC). Research suggests joint ventures with local partners
face a low risk of being subject to nationalization or other forms of adverse govern-
ment interference. 18 This appears to be because local equity partners, who may have
some influence on host-government policy, have a vested interest in speaking out
against nationalization or government interference.

Disadvantages Despite these advantages, joint ventures have major disadvan-
tages. First, as with licensing, a firm that enters into a joint venture risks giving control
of its technology to its partner. Thus, a proposed joint venture in 2002 between Boeing
and Mitsubishi Heavy Industries to build a new wide-body jet (the 787), raised fears
that Boeing might unwittingly give away its commercial airline technology to the
Japanese. However, joint-venture agreements can be constructed to minimize this risk.
One option is to hold majority ownership in the venture. This allows the dominant
partner to exercise greater control over its technology. But it can be difficult to find a
foreign partner willing to settle for minority ownership. Another option is to “wall
off ” from a partner technology that is central to the core competence of the firm,
while sharing other technology.
A second disadvantage is that a joint venture does not give a firm the tight control
over subsidiaries that it might need to realize experience curve or location economies.
Nor does it give a firm the tight control over a foreign subsidiary that it might need
for engaging in coordinated global attacks against its rivals. Consider the entry of
Texas Instruments (TI) into the Japanese semiconductor market. When TI established
semiconductor facilities in Japan, it did so for the dual purpose of checking Japanese
manufacturers’ market share and limiting their cash available for invading TI’s global
market. In other words, TI was engaging in global strategic coordination. To im-
plement this strategy, TI’s subsidiary in Japan had to be prepared to take instructions
from corporate headquarters regarding competitive strategy. The strategy also re-
quired the Japanese subsidiary to run at a loss if necessary. Few if any potential joint-
venture partners would have been willing to accept such conditions, since it would
have necessitated a willingness to accept a negative return on investment. Indeed,
many joint ventures establish a degree of autonomy that would make such direct con-
trol over strategic decisions all but impossible to establish. 19 Thus, to implement this
strategy, TI set up a wholly owned subsidiary in Japan.
A third disadvantage with joint ventures is that the shared ownership arrangement
can lead to conflicts and battles for control between the investing firms if their goals
and objectives change or if they take different views as to what the strategy should be.

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Chapter Twelve Entering Foreign Markets 431

This was apparently not a problem with the Fuji–Xerox joint venture. According to
Yotaro Kobayashi, currently the chairman of Fuji–Xerox, a primary reason is that both
Xerox and Fuji Photo adopted an arm’s-length relationship with Fuji–Xerox, giving
the venture’s management considerable freedom to determine its own strategy. 20
However, much research indicates that conflicts of interest over strategy and goals
often arise in joint ventures. These conflicts tend to be greater when the venture is
between firms of different nationalities, and they often end in the dissolution of the
venture. 21 Such conflicts tend to be triggered by shifts in the relative bargaining power
of venture partners. For example, in the case of ventures between a foreign firm and a
local firm, as a foreign partner’s knowledge about local market conditions increases, it
depends less on the expertise of a local partner. This increases the bargaining power of
the foreign partner and ultimately leads to conflicts over control of the venture’s strat-
egy and goals. 22 Some firms have sought to limit such problems by entering into joint
ventures in which one partner has a controlling interest.

WHOLLY OWNED SUBSIDIARIES In a wholly owned subsidiary, the
firm owns 100 percent of the stock. Establishing a wholly owned subsidiary in a for-
eign market can be done two ways. The firm either can set up a new operation in that
country, often referred to as a greenfield venture, or it can acquire an established firm
in the host nation and use that firm to promote its products. 23 For example, ING’s
strategy for entering the U.S. insurance market was to acquire established U.S. enter-
prises, rather than try to build an operation from the ground floor.

Advantages There are several clear advantages of wholly owned subsidiaries.
First, when a firm’s competitive advantage is based on technological competence, a
wholly owned subsidiary will often be the preferred entry mode because it reduces the
risk of losing control over that competence. (See Chapter 7 for more details.) Many
high-tech firms prefer this entry mode for overseas expansion (e.g., firms in the semi-
conductor, electronics, and pharmaceutical industries). Second, a wholly owned subsid-
iary gives a firm tight control over operations in different countries. This is necessary
for engaging in global strategic coordination (i.e., using profits from one country to
support competitive attacks in another).
Third, a wholly owned subsidiary may be required if a firm is trying to realize loca-
tion and experience curve economies (as firms pursuing global and transnational strat-
egies try to do). As we saw in Chapter 11, when cost pressures are intense, it may pay
a firm to configure its value chain in such a way that the value added at each stage is
maximized. Thus, a national subsidiary may specialize in manufacturing only part of
the product line or certain components of the end product, exchanging parts and
products with other subsidiaries in the firm’s global system. Establishing such a global
production system requires a high degree of control over the operations of each affili-
ate. The various operations must be prepared to accept centrally determined decisions
as to how they will produce, how much they will produce, and how their output will be
priced for transfer to the next operation. Because licensees or joint-venture partners
are unlikely to accept such a subservient role, establishing wholly owned subsidiaries may
be necessary. Finally, establishing a wholly owed subsidiary gives the firm a 100 percent
share in the profits generated in a foreign market.

Disadvantages Establishing a wholly owned subsidiary is generally the most
costly method of serving a foreign market from a capital investment standpoint.
Firms doing this must bear the full capital costs and risks of setting up overseas op-
erations. The risks associated with learning to do business in a new culture are less if
the firm acquires an established host-country enterprise. However, acquisitions raise

Wholly Owned
Subsidiary
A subsidiary in which the
firm owns 100 percent of
the stock.

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432 Part Five Competing in a Global Marketplace

additional problems, including those associated with trying to marry divergent cor-
porate cultures. These problems may more than offset any benefits derived by ac-
quiring an established operation. Because the choice between greenfield ventures
and acquisitions is such an important one, we shall discuss it in more detail later in
the chapter.

Selecting an Entry Mode
As the preceding discussion demonstrated, all the entry modes have advantages and
disadvantages, as summarized in Table 12.1. Thus, trade-offs are inevitable when
selecting an entry mode. For example, when considering entry into an unfamiliar
country with a track record for discriminating against foreign-owned enterprises
when awarding government contracts, a firm might favor a joint venture with a local
enterprise. Its rationale might be that the local partner will help it establish opera-
tions in an unfamiliar environment and will help the company win government con-
tracts. However, if the firm’s core competence is based on proprietary technology,
entering a joint venture might risk losing control of that technology to the joint-
venture partner, in which case the strategy may seem unattractive. Despite the exis-
tence of such trade-offs, it is possible to make some generalizations about the optimal
choice of entry mode. 24

LEARNING OBJECTIVE 3
Identify the factors that
influence a firm’s choice of
entry mode.

Entry Mode Advantages Disadvantages

Exporting Ability to realize location and
experience curve economies

High transport costs

Trade barriers

Problems with local marketing agents

Turnkey
contracts

Ability to earn returns from
process technology skills in
countries where FDI is restricted

Creating efficient competitors

Lack of long-term market presence

Licensing Low development costs and
risks

Lack of control over technology

Inability to realize location and
experience curve economies

Inability to engage in global strategic
coordination

Franchising Low development costs and
risks

Lack of control over quality

Inability to engage in global strategic
coordination

Joint
ventures

Access to local partner’s
knowledge

Sharing development costs
and risks

Politically acceptable

Lack of control over technology
Inability to engage in global strategic
coordination

Inability to realize location and
experience economies

Wholly
owned
subsidiaries

Protection of technology

Ability to engage in global
strategic coordination

Ability to realize location and
experience economies

High costs and risks

table 12.1

Advantages and
Disadvantages of

Entry Modes

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Chapter Twelve Entering Foreign Markets 433

CORE COMPETENCIES AND ENTRY MODE We saw in Chapter 11
that firms often expand internationally to earn greater returns from their core com-
petencies, transferring the skills and products derived from their core competencies
to foreign markets where indigenous competitors lack those skills. The optimal
entry mode for these firms depends to some degree on the nature of their core
competencies. A distinction can be drawn between firms whose core competency is
in technological know-how and those whose core competency is in management
know-how.

Technological Know-How As was observed in Chapter 7, if a firm’s competi-
tive advantage (its core competence) is based on control over proprietary techno-
logical know-how, licensing and joint-venture arrangements should be avoided if
possible to minimize the risk of losing control over that technology. Thus, if a high-
tech firm sets up operations in a foreign country to profit from a core competency
in technological know-how, it will probably do so through a wholly owned subsid-
iary. This rule should not be viewed as hard and fast, however. Sometimes a licens-
ing or joint-venture arrangement can be structured to reduce the risk of licensees
or joint-venture partners expropriating technological know-how. Another excep-
tion exists when a firm perceives its technological advantage to be only transitory,
when it expects rapid imitation of its core technology by competitors. In such cases,
the firm might want to license its technology as rapidly as possible to foreign firms
to gain global acceptance for its technology before the imitation occurs. 25 Such a
strategy has some advantages. By licensing its technology to competitors, the firm
may deter them from developing their own, possibly superior, technology. Further,
by licensing its technology, the firm may establish its technology as the dominant
design in the industry (as Matsushita did with its VHS format for VCRs). This may
ensure a steady stream of royalty payments. However, the attractions of licensing
are frequently outweighed by the risks of losing control over technology and if this
is a risk, licensing should be avoided.

Management Know-How The competitive advantage of many service firms is
based on management know-how (e.g., McDonald’s, Starbucks). For such firms, the
risk of losing control over the management skills to franchisees or joint-venture part-
ners is not that great. These firms’ valuable asset is their brand name, and brand names
are generally well protected by international laws pertaining to trademarks. Given
this, many of the issues arising in the case of technological know-how are of less con-
cern here. As a result, many service firms favor a combination of franchising and sub-
sidiaries to control the franchises within particular countries or regions. The
subsidiaries may be wholly owned or joint ventures, but most service firms have found
that joint ventures with local partners work best for the controlling subsidiaries. A
joint venture is often politically more acceptable and brings a degree of local knowl-
edge to the subsidiary.

PRESSURES FOR COST REDUCTIONS AND ENTRY MODE The
greater the pressures for cost reductions are, the more likely a firm will want to pur-
sue some combination of exporting and wholly owned subsidiaries. By manufactur-
ing in those locations where factor conditions are optimal and then exporting to the
rest of the world, a firm may be able to realize substantial location and experience
curve economies. The firm might then want to export the finished product to mar-
keting subsidiaries based in various countries. These subsidiaries will typically be
wholly owned and have the responsibility for overseeing distribution in their par-
ticular countries. Setting up wholly owned marketing subsidiaries is preferable to

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434 Part Five Competing in a Global Marketplace

joint-venture arrangements and to using foreign marketing agents because it gives
the firm tight control that might be required for coordinating a globally dispersed
value chain. It also gives the firm the ability to use the profits generated in one mar-
ket to improve its competitive position in another market. In other words, firms
pursuing global standardization or transnational strategies tend to prefer establish-
ing wholly owned subsidiaries.

Greenfield Venture or Acquisition?
A firm can establish a wholly owned subsidiary in a country by building a subsidiary
from the ground up, the so-called greenfield strategy, or by acquiring an enterprise in
the target market. 26 The volume of cross-border acquisitions has been growing at a
rapid rate for two decades. Over the past decade, between 40 and 80 percent of all FDI
inflows have been in the form of mergers and acquisitions. In 2001, for example, merg-
ers and acquisitions accounted for 80 percent of all FDI inflows. In 2004 the figure was
51 percent, or some $381 billion. In 2008 the figure was 40 percent, or some $673 bil-
lion. 27 The relative low figure recorded in 2008 reflects the impact of the global eco-
nomic crisis, which depressed equity values worldwide and made cross-border mergers
and acquisitions less attractive as an entry mode.

PROS AND CONS OF ACQUISITIONS Acquisitions have three major
points in their favor. First, they are quick to execute. By acquiring an established enter-
prise, a firm can rapidly build its presence in the target foreign market. When the
German automobile company Daimler-Benz decided it needed a bigger presence in the
U.S. automobile market, it did not increase that presence by building new factories to
serve the United States, a process that would have taken years. Instead, it acquired
the number three U.S. automobile company, Chrysler, and merged the two operations
to form DaimlerChrysler (Daimler spun off Chrysler into a private equity firm in

2007). When the Spanish telecommunications service pro-
vider Telefonica wanted to build a service presence in Latin
America, it did so through a series of acquisitions, purchas-
ing telecommunications companies in Brazil and Argentina.
In these cases, the firms made acquisitions because they
knew that was the quickest way to establish a sizable pres-
ence in the target market.

Second, in many cases firms make acquisitions to pre-
empt their competitors. The need for preemption is par-
ticularly great in markets that are rapidly globalizing, such
as telecommunications, where a combination of deregula-
tion within nations and liberalization of regulations gov-
erning cross-border foreign direct investment has made it
much easier for enterprises to enter foreign markets
through acquisitions. Such markets may see concentrated
waves of acquisitions as firms race each other to attain
global scale. In the telecommunications industry, for ex-
ample, regulatory changes triggered what can be called a
feeding frenzy, with firms entering each other’s markets
via acquisitions to establish a global presence. These in-
cluded the $60 billion acquisition of Air Touch Communi-
cations in the United States by the British company
Vodafone, which was the largest acquisition ever; the
$13 billion acquisition of One 2 One in Britain by the

LEARNING OBJECTIVE 4
Recognize the pros and
cons of acquisitions versus
greenfield ventures as an
entry strategy.

Three pros to acquisitions, such as Vodafone’s purchase of
AirTouch, include a quick execution, preemption of the
competition, and less risk than greenfield ventures.

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Chapter Twelve Entering Foreign Markets 435

German company Deutsche Telekom; and the $6.4 billion acquisition of Excel
Communications in the United States by Teleglobe of Canada, all of which occurred
in 1998 and 1999. 28 A similar wave of cross-border acquisitions occurred in the
global automobile industry over the same time period, with Daimler acquiring
Chrysler, Ford acquiring Volvo, and Renault acquiring Nissan.
Third, managers may believe acquisitions to be less risky than greenfield ventures.
When a firm makes an acquisition, it buys a set of assets that are producing a known
revenue and profit stream. In contrast, the revenue and profit stream from a greenfield
venture is uncertain because it does not yet exist. When a firm makes an acquisition in
a foreign market, it not only acquires a set of tangible assets, such as factories, logistics
systems, customer service systems, and so on, but it also acquires valuable intangible
assets including a local brand name and managers’ knowledge of the business environ-
ment in that nation. Such knowledge can reduce the risk of mistakes caused by igno-
rance of the national culture.
Despite the arguments for making acquisitions, acquisitions often produce disap-
pointing results. 29 For example, a study by Mercer Management Consulting looked at
150 acquisitions worth more than $500 million each that were undertaken between
January 1990 and July 1995. 30 The Mercer study concluded that 50 percent of these
acquisitions eroded shareholder value, while another 33 percent created only marginal
returns. Only 17 percent were judged to be successful. Similarly, a study by KPMG, an
accounting and management consulting company, looked at 700 large acquisitions be-
tween 1996 and 1998. The study found that while some 30 percent of these actually
created value for the acquiring company, 31 percent destroyed value, and the remain-
der had little impact. 31 A similar study by McKenzie Co. estimated that some 70 per-
cent of mergers and acquisitions failed to achieve expected revenue synergies. 32 In a
seminal study of the post-acquisition performance of acquired companies, David
Ravenscraft and Mike Scherer concluded that on average the profits and market shares
of acquired companies declined following acquisition. 33 They also noted that a smaller
but substantial subset of those companies experienced traumatic difficulties, which
ultimately led to their being sold by the acquiring company. Ravenscraft and Scherer’s
evidence suggests that many acquisitions destroy rather than create value. While most
of this research has looked at domestic acquisitions, the findings probably also apply to
cross-border acquisitions. 34

Why Do Acquisitions Fail? Acquisitions fail for several reasons. First, the ac-
quiring firms often overpay for the assets of the acquired firm. The price of the target
firm can get bid up if more than one firm is interested in its purchase, as is often the
case. In addition, the management of the acquiring firm is often too optimistic about
the value that can be created via an acquisition and is thus willing to pay a significant
premium over a target firm’s market capitalization. This is called the “hubris hypoth-
esis” of why acquisitions fail. The hubris hypothesis postulates that top managers
typically overestimate their ability to create value from an acquisition, primarily be-
cause rising to the top of a corporation has given them an exaggerated sense of their
own capabilities. 35 For example, Daimler acquired Chrysler in 1998 for $40 billion, a
premium of 40 percent over the market value of Chrysler before the takeover bid.
Daimler paid this much because it thought it could use Chrysler to help it grow mar-
ket share in the United States. At the time, Daimler’s management issued bold an-
nouncements about the “synergies” that would be created from combining the
operations of the two companies. Executives believed they could attain greater scale
economies from the global presence, take costs out of the German and U.S. opera-
tions, and boost the profitability of the combined entity. However, within a year of
the acquisition, Daimler’s German management was faced with a crisis at Chrysler,

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436 Part Five Competing in a Global Marketplace

which was suddenly losing money due to weak sales in the United States. In retro-
spect, Daimler’s management had been far too optimistic about the potential for fu-
ture demand in the U.S. auto market and about the opportunities for creating value
from “synergies.” Daimler acquired Chrysler at the end of a multiyear boom in U.S.
auto sales and paid a large premium over Chrysler’s market value just before demand
slumped (and in 2007, in an admission of failure, Daimler sold its Chrysler unit to a
private equity firm). 36
Second, many acquisitions fail because there is a clash between the cultures of the
acquiring and acquired firm. After an acquisition, many acquired companies experi-
ence high management turnover, possibly because their employees do not like the ac-
quiring company’s way of doing things. 37 This happened at DaimlerChrysler; many
senior managers left Chrysler in the first year after the merger. Apparently, Chrysler
executives disliked the dominance in decision making by Daimler’s German managers,
while the Germans resented that Chrysler’s American managers were paid two to
three times as much as their German counterparts. These cultural differences created
tensions, which ultimately exhibited themselves in high management turnover at
Chrysler. 38 The loss of management talent and expertise can materially harm the per-
formance of the acquired unit. 39 This may be particularly problematic in an interna-
tional business, where management of the acquired unit may have valuable local
knowledge that can be difficult to replace.
Third, many acquisitions fail because attempts to realize synergies by integrating
the operations of the acquired and acquiring entities often run into roadblocks and
take much longer than forecast. Differences in management philosophy and company
culture can slow the integration of operations. Differences in national culture may
exacerbate these problems. Bureaucratic haggling between managers also complicates
the process. Again, this reportedly occurred at DaimlerChrysler, where grand plans to
integrate the operations of the two companies were bogged down by endless commit-
tee meetings and by simple logistical considerations such as the six-hour time differ-
ence between Detroit and Germany. By the time an integration plan had been worked
out, Chrysler was losing money, and Daimler’s German managers suddenly had a crisis
on their hands.
Finally, many acquisitions fail due to inadequate pre-acquisition screening. 40 Many
firms decide to acquire other firms without thoroughly analyzing the potential bene-
fits and costs. They often move with undue haste to execute the acquisition, perhaps
because they fear another competitor may preempt them. After the acquisition, how-
ever, many acquiring firms discover that instead of buying a well-run business, they
have purchased a troubled organization. This may be a particular problem in cross-
border acquisitions because the acquiring firm may not fully understand the target
firm’s national culture and business system.

Reducing the Risks of Failure These problems can all be overcome if the firm
is careful about its acquisition strategy. 41 Screening of the foreign enterprise to be
acquired, including a detailed auditing of operations, financial position, and manage-
ment culture, can help to make sure the firm (1) does not pay too much for the
acquired unit, (2) does not uncover any nasty surprises after the acquisition, and
(3) acquires a firm whose organization culture is not antagonistic to that of the acquir-
ing enterprise. It is also important for the acquirer to allay any concerns that man-
agement in the acquired enterprise might have. The objective should be to reduce
unwanted management attrition after the acquisition. Finally, managers must move
rapidly after an acquisition to put an integration plan in place and to act on that plan.
Some people in both the acquiring and acquired units will try to slow or stop any
integration efforts, particularly when losses of employment or management power

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Chapter Twelve Entering Foreign Markets 437

are involved, and managers should have a plan for dealing with such impediments
before they arise.

PROS AND CONS OF GREENFIELD VENTURES The big advantage
of establishing a greenfield venture in a foreign country is that it gives the firm a
much greater ability to build the kind of subsidiary company that it wants. For ex-
ample, it is much easier to build an organization culture from scratch than it is to
change the culture of an acquired unit. Similarly, it is much easier to establish a set of
operating routines in a new subsidiary than it is to convert the operating routines of
an acquired unit. This is a very important advantage for many international busi-
nesses, where transferring products, competencies, skills, and know-how from the
established operations of the firm to the new subsidiary are principal ways of creating
value. For example, when Lincoln Electric, the U.S. manufacturer of arc welding
equipment, first ventured overseas in the mid-1980s, it did so by acquisitions, pur-
chasing arc welding equipment companies in Europe. However, Lincoln’s competi-
tive advantage in the United States was based on a strong organizational culture and
a unique set of incentives that encouraged its employees to do everything possible to
increase productivity. Lincoln found through bitter experience that it was almost im-
possible to transfer its organizational culture and incentives to acquired firms, which
had their own distinct organizational cultures and incentives. As a result, the firm
switched its entry strategy in the mid-1990s and began to enter foreign countries by
establishing greenfield ventures, building operations from the ground up. While this
strategy takes more time to execute, Lincoln has found that it yields greater long-run
returns than the acquisition strategy.
Set against this significant advantage are the disadvantages of establishing a green-
field venture. Greenfield ventures are slower to establish. They are also risky. As with
any new venture, a degree of uncertainty is associated with future revenue and profit
prospects. However, if the firm has already been successful in other foreign markets
and understands what it takes to do business in other countries, these risks may not be
that great. For example, having already gained great knowledge about operating inter-
nationally, the risk to McDonald’s of entering yet
another country is probably not that great. Also,
greenfield ventures are less risky than acquisitions
in the sense that there is less potential for unpleas-
ant surprises. A final disadvantage is the possibility
of being preempted by more aggressive global
competitors who enter via acquisitions and build a
big market presence that limits the market poten-
tial for the greenfield venture.

MAKING A CHOICE The choice between
acquisitions and greenfield ventures is not an easy
one. Both modes have their advantages and disad-
vantages. In general, the choice will depend on the
circumstances confronting the firm. If the firm is
seeking to enter a market where there are already
well-established incumbent enterprises, and where
global competitors are also interested in establish-
ing a presence, it may pay the firm to enter via an
acquisition. In such circumstances, a greenfield
venture may be too slow to establish a sizable
presence. However, if the firm is going to make an

Another Perspective

Risks and Entering Foreign Markets
Business is all about risk, the right risks. Choosing which
risks to accept and which to avoid is at the heart of manage-
ment. These risks increase and become more interesting
with entry into foreign markets. Scholar David Conklin dis-
cusses the idea of managing risk through planned uncer-
tainty. By planned uncertainty he means an awareness of
contingencies, with possible what-if scenarios developed in
advance. The key idea here is that through an ongoing mon-
itoring of the various risk areas, decision makers can have
much of the data they may need to address a number of pos-
sible outcomes. Of course, we have to know what uncer-
tainty to plan for, and we don’t know what we don’t know.
Planning for everything is impossible, but what Conklin sug-
gests is that planned uncertainty is a way of thinking. Given
that we don’t know the future, this way of thinking may be
helpful in career development and other parts of our lives.
Who ever said business wasn’t like surfing?

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438 Part Five Competing in a Global Marketplace

acquisition, its management should be cognizant of the risks associated with acquisi-
tions that were discussed earlier and consider these when determining which firms to
purchase. It may be better to enter by the slower route of a greenfield venture than to
make a bad acquisition.
If the firm is considering entering a country where there are no incumbent com-
petitors to be acquired, then a greenfield venture may be the only mode. Even
when incumbents exist, if the competitive advantage of the firm is based on the
transfer of organizationally embedded competencies, skills, routines, and culture, it
may still be preferable to enter via a greenfield venture. Things such as skills and
organizational culture, which are based on significant knowledge that is difficult to
articulate and codify, are much easier to embed in a new venture than they are in an
acquired entity, where the firm may have to overcome the established routines and
culture of the acquired firm. Thus, as our earlier examples suggest, firms such as
McDonald’s and Lincoln Electric prefer to enter foreign markets by establishing
greenfield ventures.

timing of entry, p. 420
first-mover advantages, p. 420
first-mover disadvantages, p. 420
pioneering costs, p. 420

exporting, p. 425
turnkey project, p. 426
licensing, p. 427
franchising, p. 428

joint venture, p. 429
wholly owned
subsidiary, p. 431

Key Terms

Summary
The chapter made the following points:

1. Basic entry decisions include identifying which
markets to enter, when to enter those markets,
and on what scale.

2. The most attractive foreign markets tend to be
found in politically stable developed and
developing nations that have free market
systems and where there is not a dramatic
upsurge in either inflation rates or private-
sector debt.

3. There are several advantages associated with
entering a national market early, before other
international businesses have established
themselves. These advantages must be balanced
against the pioneering costs that early entrants
often have to bear, including the greater risk of
business failure.

4. Large-scale entry into a national market
constitutes a major strategic commitment that
is likely to change the nature of competition in

that market and limit the entrant’s future
strategic flexibility. Although making major
strategic commitments can yield many benefits,
there are also risks associated with such a
strategy.

5. The six modes of entering a foreign market
are exporting, creating turnkey projects,
licensing, franchising, establishing joint
ventures, and setting up a wholly owned
subsidiary.

6. Exporting has the advantages of facilitating
the realization of experience curve economies
and of avoiding the costs of setting up
manufacturing operations in another country.
Disadvantages include high transport costs,
trade barriers, and problems with local
marketing agents.

7. Turnkey projects allow firms to export their
process know-how to countries where FDI
might be prohibited, thereby enabling the firm

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Chapter Twelve Entering Foreign Markets 439

to earn a greater return from this asset. The
disadvantage is that the firm may inadvertently
create efficient global competitors in the
process.

8. The main advantage of licensing is that the
licensee bears the costs and risks of opening a
foreign market. Disadvantages include the risk
of losing technological know-how to the
licensee and a lack of tight control over
licensees.

9. The main advantage of franchising is that the
franchisee bears the costs and risks of opening
a foreign market. Disadvantages center on
problems of quality control of distant
franchisees.

10. Joint ventures have the advantages of sharing
the costs and risks of opening a foreign market
and of gaining local knowledge and political
influence. Disadvantages include the risk of
losing control over technology and a lack of
tight control.

11. The advantages of wholly owned subsidiaries
include tight control over technological know-
how. The main disadvantage is that the firm
must bear all the costs and risks of opening a
foreign market.

12. The optimal choice of entry mode depends
on the firm’s strategy. When technological
know-how constitutes a firm’s core competence,
wholly owned subsidiaries are preferred,
since they best control technology. When

management know-how constitutes a firm’s
core competence, foreign franchises
controlled by joint ventures seem to be
optimal. When the firm is pursuing a global
standardization or transnational strategy, the
need for tight control over operations to
realize location and experience curve
economies suggests wholly owned subsidiaries
are the best entry mode.

13. When establishing a wholly owned subsidiary in
a country, a firm must decide whether to do so
by a greenfield venture strategy or by acquiring
an established enterprise in the target market.

14. Acquisitions are quick to execute, may enable
a firm to preempt its global competitors, and
involve buying a known revenue and profit
stream. Acquisitions may fail when the
acquiring firm overpays for the target,
when the culture of the acquiring and
acquired firms clash, when there is a high
level of management attrition after the
acquisition, and when there is a failure to
integrate the operations of the acquiring and
acquired firm.

15. The advantage of a greenfield venture in a
foreign country is that it gives the firm a much
greater ability to build the kind of subsidiary
company that it wants. For example, it is much
easier to build an organization culture from
scratch than it is to change the culture of an
acquired unit.

Critical Thinking and Discussion Questions
1. Review the Management Focus “Tesco’s

International Growth Strategy.” Then answer
the following questions:

a. Why did Tesco’s initial international expansion
strategy focus on developing nations?

b. How does Tesco create value in its
international operations?

c. In Asia, Tesco has a long history of entering
into joint-venture agreements with local
partners. What are the benefits of doing this
for Tesco? What are the risks? How are those
risks mitigated?

d. In March 2006 Tesco announced it would
enter the United States. This represents a
departure from its historic strategy of

focusing on developing nations. Why do you
think Tesco made this decision? How is the
U.S. market different from others Tesco has
entered? What are the risks here? How do
you think Tesco will do?

2. Licensing proprietary technology to foreign
competitors is the best way to give up a firm’s
competitive advantage. Discuss.

3. Discuss how the need for control over foreign
operations varies with firms’ strategies and core
competencies. What are the implications for the
choice of entry mode?

4. A small Canadian firm that has developed some
valuable new medical products using its unique
biotechnology know-how is trying to decide how

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440 Part Five Competing in a Global Marketplace

best to serve the European Community market.
Its choices are given below. The cost of investment
in manufacturing facilities will be a major one for
the Canadian firm, but it is not outside its reach. If
these are the firm’s only options, which one would
you advise it to choose? Why?

• Manufacture the product at home and let
foreign sales agents handle marketing.

• Manufacture the products at home and set up
a wholly owned subsidiary in Europe to
handle marketing.

• Enter into an alliance with a large European
pharmaceutical firm. The product would be
manufactured in Europe by the 50/50 joint
venture and marketed by the European firm.

Use the globalEDGE Resource Desk (http://global
EDGE.msu.edu/resourcedesk/) to complete the
following exercises:

1. Entrepreneur magazine annually publishes a
ranking of America’s top 200 franchisers seeking
international franchisees. Provide a list of the
top 10 companies that pursue franchising as a
mode of international expansion. Study one
of these companies in detail and provide a
description of its business model, its international
expansion pattern, the qualifications it looks for

in its franchisees, and the type of support and
training it provides.

2. The U.S. Commercial Service prepares a series of
reports titled the Country Commercial Guide ( CCG )
for each country of interest to U.S. investors.
Utilize this guide to gather information on China.
Imagine that your company is in agribusiness and
is considering entering this country. Select the
most appropriate entry method, supporting your
decision with the information collected from the
commercial guide.

Research Task http://globalEDGE.msu.edu

General Electric’s Joint Ventures

General Electric formerly entered a foreign market by either
acquiring an established firm or establishing a greenfield sub-
sidiary. Joint ventures with a local company were almost
never considered. The prevailing philosophy was that without
full control, the company didn’t do the deal. However, times
have changed. Since the early 2000s joint ventures have be-
come one of the most powerful strategic tools in GE’s arsenal.
To enter the South Korean market, for example, GE Money, the
retail lending arm of GE’s financial services business, formed
joint ventures with Hyundai to offer auto loans, mortgages,
and credit cards. GE has a 43 percent stake in these ventures.
Similarly, in Spain it has formed several joint ventures with
local banks to provide consumer loans and credit cards to
Spanish residents, and in Central America it has a joint ven-
ture with BAC-Credomatic, the largest bank in the region.
There are several reasons for the switch in strategy. For
one thing, GE used to be able to buy its way into majority
ownership in almost any business, but prices for acquisitions
have been bid so high that GE is reluctant to acquire for fear

of overpaying. Better to form a joint venture, so the thinking
goes, than risk paying too much for a company that turns out
to have problems that are discovered only after the acquisi-
tion. Just as importantly, GE now sees joint ventures as a
great way to dip its toe into foreign markets where it lacks
local knowledge. Moreover, in certain nations, China being a
case in point, economic, political, legal, and cultural consid-
erations make joint ventures an easier option than either ac-
quisitions or greenfield ventures. GE believes it can often
benefit from the political contacts, local expertise, and busi-
ness relationships that the local partner brings to the table,
plus in certain sectors of the Chinese economy and some oth-
ers, local laws prohibit other entry modes. GE also sees joint
ventures as a good way to share the risk of building a busi-
ness in a nation where it lacks local knowledge. Finally, under
the leadership of CEO Jeffrey Immelt, GE has adopted aggres-
sive growth goals, and it believes that entering via joint ven-
tures into nations where it lacks a presence is the only way of
attaining these goals. Fueled by its large number of joint

closing case

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Chapter Twelve Entering Foreign Markets 441

ventures, GE has rapidly expanded its international presence
over the past decade. For the first time, in 2007 the company
derived the majority of its revenue from foreign operations.
Of course, General Electric has done joint ventures in the
past. For example, it has a long standing 50/50 joint venture
with the French company Snecma to make engines for com-
mercial jet aircraft, another with Fanuc of Japan to make
controls for electrical equipment, and a third with Sea
Containers of the United Kingdom, which has become one of
the world’s largest companies leasing shipping containers.
But all of these ventures came about only after GE had ex-
plored other ways to gain access to particular markets or
technology. Once the last option for GE, establishing joint
ventures is now often the preferred entry strategy.
GE managers also note there is no shortage of partners
willing to enter into a joint venture with the company. The
company has a well-earned reputation for being a good
partner. GE also is well known for its innovative manage-
ment techniques and excellent management development
programs. Many partners are happy to team up with GE to
get access to this know-how. The knowledge flow goes
both ways, with GE acquiring access to knowledge about
local markets, and partners learning cutting-edge manage-
ment techniques from GE that can be used to boost their
own productivity.
Nevertheless, joint ventures are no panacea. GE’s agree-
ments normally give even the minority partner in a joint ven-
ture veto power over major strategic decisions, and control
issues can scuttle some ventures. In January 2007, for exam-
ple, GE announced it would enter into a venture with Britain’s
Smiths Group to make aerospace equipment. However, in
September of the same year, GE ended talks aimed at estab-
lishing the venture, stating it could not reach an agreement

over the vision for the joint venture. GE has also found that as
much as it would like majority ownership, or even a 50/50
split, sometimes it has to settle for a minority stake to gain
access to a foreign market. In 2003, when GE entered into a
joint venture with Hyundai Motor to offer auto loans, it did so
as a minority partner even though it would have preferred a
majority position. Hyundai had refused to cede control to GE.

Sources: C. H. Deutsch, “The Venturesome Giant,” The New York
Times , October 5, 2007, pp. C1, C8; “Odd Couple: Jet Engines,” The
Economist , May 5, 2007, p. 72; and “GE, BAC Joint Venture to Buy
Banco Mercantil,” Financial Wire , January 11, 2007, p. 1.

Case Discussion Questions
1. GE used to prefer acquisitions or greenfield ventures as

an entry mode, rather than joint ventures. Why do you
think this was the case?

2. Why do you think GE has come to favor joint ventures in
recent years? Do you think the global economic crisis of
2008–2009 might have impact this preference in any way?
If so, how?

3. What are the risks that GE must assume when it enters
into a joint venture? Is there any way for GE to reduce
these risks?

4. The case mentions that GE has a well-earned reputation
for being a good partner. What are the likely benefits of
this reputation to GE? If GE were to tarnish its reputation
by, for example, opportunistically taking advantage of a
partner, how might this impact the company going
forward?

5. In addition to its reputation for being a good partner, what
other assets do you think GE brings to the table that make
it an attractive joint-venture partner?

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