Thomas Shelton, CPA
The development of entry modes involving the Canadian firm could consist of the following three methods 1) Manufacture the products at home and let foreign sales agents handle marketing, 2) Manufacture the products at home and set up a wholly owned subsidiary in Europe to handle marketing, and 3) Enter into an alliance with a large European pharmaceutical firm. The products would be manufactured in Europe by the 50/50 joint venture and marketed by the European firm. The mode of entry of any company wanting to develop business in a foreign country should be given serious thought and the strategy developed should protect the owners’ investment throughout the whole process.
The first mode of entry above is an indicator that the company would only export its products to the foreign countries. This method has its advantages and disadvantages. Advantages as related by Hill in Global Business Today 6e include the fact that by exporting the company can avoid the high cost of establishing manufacturing facilities in the foreign country and it will help establish the experience curve and location economies. Distinct disadvantages, also revealed by Hill, might be that lower cost manufacturing facilities can be found in the foreign market. High costs of transportation and trade barriers could stand in the way of exporting the company’s products. With unique bio-technology know-how the firm stands to lose a lot financially if they are not careful with their secrets. The produce at home and then export mode of entry could very well be the safest mode to entry but not necessarily the best option.
The second mode is indicating that the firm still produces the product at home and has a wholly owned subsidiary handle the marketing. This method would still have the advantage of maintaining control over the processes and technical know-how while overseeing a sales force of foreign marketers to get their products into the foreign market. By setting up a physical location in the foreign country to do the marketing, the firm is showing a long-term commitment to the host country and would make it easier to start production if and when the time came. The disadvantage to only having a marketing subsidiary is that it might be difficult to find sales people with the knowledge of the products and the commitment to aggressively market them in the local area even if they were aware of the customs of the local residents.
The final mode is most risky as it involves a joint venture with a foreign firm. The technology that has been acquired by the development of the new products could be “stolen away” if safeguards are not put into place to protect the knowledge. This type of entry has advantages that consist of “sharing of risks and ability to combine the local in-depth knowledge with a foreign partner with know-how in technology or process, joint financial strength, may be the only means of entry, may be the source of supply for a third country” (Market Entry Strategies, http://www.fao.org/docrep/W5973E/w5973e0b.htm). At the same time, disadvantages are found in the fact that “partners do not have full control of management, may be impossible to recover capital if need be, disagreement on third party markets to serve and partners may have different views on expected benefits (http://www.fao.org/docrep/W5973E/w5973e0b.htm).
Which entry mode is the best? Direct export would be the cheapest and safest for the firm while setting up the wholly owned subsidiary to market the product, even though it could provide valuable information concerning the market in the foreign country and could establish location and experience economies it is still costly but would be less risky than the joint venture with the European firm.