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Foreign Market Entry Modes
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Flashcards
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Direct Investment
A company invests capital directly in facilities to produce or market products in a foreign country; this brings high returns but also high risks due to political and economic uncertainties.
Countertrade
Exchanging goods and services with other goods and services when currency exchange is not possible; risks include valuation of goods and complexity of agreements.
Strategic Alliances
Agreements between firms to pursue shared objectives while remaining independent organizations; risks are opportunistic behavior and management complexity.
Minority Ownership
Investing in a foreign operation, but not having a controlling interest; this reduces risk exposure but can limit control over the business.
Management Contracts
Providing management personnel to operate a foreign company’s facilities in exchange for a fee; these bear low risk but may result in less control over the business.
International Franchising
Extending a company's products or services to a global market through franchising agreements; risks can include misrepresentation of the brand and adherence to franchise agreements across different legal systems.
Local Production
Manufacturing products within the target market to avoid import tariffs and reduce shipping costs; risks include high initial investment and potential operational inefficiencies.
Wholly Owned Subsidiaries
A firm invests directly to create its own operations in a foreign country; risks include high investment costs and exposure to political risks.
Foreign Direct Investment (FDI)
Investing in a foreign country by acquiring a controlling interest in a business; it can result in high financial gains, but risks include political instability and expropriation concerns.
Exporting
Sending goods or services to another country for sale; associated risks include trade barriers and exchange rate fluctuations.
Licensing
Allowing a foreign company to produce a firm's product for a fee; risks include loss of control over the technology and lower profit margins.
Greenfield Investments
A form of wholly owned subsidiary where a company builds its operations from scratch in the foreign market; risks include slow entry and high costs of setting up.
Mergers
Combining with a foreign company to take advantage of synergies; risks can include antitrust issues and difficulties in merging operations and cultures.
Joint Ventures
Two or more companies create a new business entity to operate in the foreign market; risks include conflicts between partners and loss of proprietary information.
Piggybacking
Using another company’s distribution network to enter a market; although it can be low-cost, risks include lack of control over the marketing and sales process.
Turnkey Projects
A company designs and constructs a facility, then hands it over to the purchaser when it’s ready for operation; risks include project cost overruns and transfer of process knowledge.
Build-Operate-Transfer (BOT)
A type of project financing where a private entity receives a concession to finance, design, build, and operate a facility and then transfer it to the public sector; risks include political changes and contractual misunderstandings.
Franchising
A form of licensing where the foreign franchisee sells the franchisor’s products and follows their business model; risks involve quality control and maintaining brand reputation.
Acquisitions
Buying an existing company in the foreign market; while it allows rapid entry, risks include overvaluation of the target and integration difficulties.
Export Processing Zones (EPZs)
Special areas within a country where goods can be imported, handled, manufactured, and exported without intervention from customs; this offers benefits like tax advantages but can depend heavily on local policies and regulations.
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