Determinants of Success and Failure in Foreign Market Entries
The success of any company, local or international, depends on the strategic planning done before the initiation of a project. International organizations normally have an advantage over local ones mainly because of their large capital base and human resources. They can utilize their assets to determine the best cause of action. Nevertheless, while they can control the market where they have already set roots, entry into new markets is always problematic because of many different reasons, for instance, political interference, culture, as well as entry modes and competence (Dunne, Klimek, Roberts &Xu, 2013).
Political interference plays a critical in influencing the success of efforts to enter into a foreign market. In the case of General Electronics, for example, it was argued that through all the legal work and transactions had already been put in place, the political movements felt that the company would increase the level of unemployment by venturing into foreign markets. The shareholders’ view was that the entry of the company would bring more capital investments into the country, increase production, earn more returns and consequently contribute more revenue to the country (Laufs, Bembom&Schwens, 2016).
International companies mainly go for take-overs instead of mergers and partnerships. Taking over means that they have full control of the newly acquired enterprise. In the case of financial institutions, leaders of many countries tend to argue that the firms are uncontrollable. In the case of inflation and economic downturns where a central bank has to impose fiscal and monetary policies to reduce the rate of inflation, they have little or no control over foreign companies. They can always get more from the mother company and increase their lending thereby flooding the market with “foreign-based” products and opposing the fiscal rules meant to save the economy. Consequently, they tend to face opposition on cultural grounds.
Most international companies are subsidiaries of their main corporate entities. For this reason, they can manage to get support from the parent firm in the form of direct aid in case problems during entry into a foreign market. For these companies, direct exports as is the fundamental mode of entry. Many managers prefer this approach because it eliminates the need for intermediaries. At the same time, their companies can produce in one country and sell in another as though production outcomes vary depending on the targeted nation and the exporting country. Compared to indirect exports, the method offers the companies in question a choice of having a representative reduce goodwill or protects the trademark of the original producers.
In cases of risky markets where the managers are unable to predict the possibilities of profit margins, licensing is the best entry method. The home company can produce and sell commodities in a different country without having to go through all the processes of opening new operations there. The contracted producer undertakes to provide the stipulated products within a given period. Moreover, it allows the home company to increase sales and reduce operational costs. By sharing production costs with another company, firms can increase relationships which in some cases allow them to study the market by experiment before coming in to establish their own operations (Johanson&Mattsson, 2015).
Lastly, Franchising is also a beneficial mode of entry = into new markets. However, the method reduces the profits made in the country of entry because the original company only enjoys royalties paid by another semi-independent company. The franchising operator increases the risk of entry because he may produce substandard products thereby reducing the level of acceptance of the products in the region (Jell-Ojobor&Windsperger, 2014).
Whether a company chooses a joint venture or a strategic alliance, entry into a new country is a difficult undertaking. It requires a detailed analysis of the market, ironing out of political issues and putting in place arrangements for support services. To be able to enter in a new market, one must create an international strategy that will optimize the chances of success. In many cases, failure during entry results from a lack of understanding of the target market.
Dunne, T., Klimek, S. D., Roberts, M. J. &Xu, D. Y. (2013). Entry, exit, and the determinants of market structure. The RAND Journal of Economics, 44(3), 462-487.
Jell-Ojobor, M., &Windsperger, J. (2014). The choice of governance modes of international franchise firms—Development of an integrative model. Journal of International Management, 20(2), 153-187.
Johanson, J., &Mattsson, L. G. (2015). Internationalization in industrial systems—a network approach. In Knowledge, Networks, and Power (pp. 111-132). London: Palgrave Macmillan UK.
Laufs, K., Bembom, M., &Schwens, C. (2016). CEO characteristics and SME foreign market entry mode choice: The moderating effect of a firm’s geographic experience and host country political risk. International Marketing Review, 33(2), 246-275.