Why MNEs Struggle with MOE
There is no “one shirt fits all” strategy when it comes to figuring out the best mode of entry (MOE) into foreign markets by multinational enterprises (MNEs). MNEs have to take into consideration various variances to come up with an effective entry strategy. Most of these MNEs struggle due to the variances such as cost, risk, and host government regulations that have to be put into consideration.
The high cost involved in production in a foreign country prompts entry modes such as exporting, which is less costly and easier to stop. However, there are risks in relying on the export option only since the distributor or buyer may opt for a cheaper supplier, or a local producer might come up and control a larger market. Therefore, others decide to move to a foreign country which involves high risk. Most of these entrants prefer licensing because there is no up-front investment (Hill & Hult, 2018). It only requires the licensor, granting permission to the licensee to use intellectual property rights such as trademarks or patents under specific terms and conditions (Hill & Hult, 2018). However, it has low potential returns since revenues are shared between parties.
On the other hand, after moving to the foreign country to maintain their national economies, the host government set their legislation that imposes policies on these MNEs. Therefore, this stretches the MNEs to an extent requiring them to share ownership with a local partner and thus exercising partial control. Therefore, forming a joint venture becomes difficult as the local partners may increase their knowledge, which results in t creation of another competitor in the market.
MOE Decision-making and MNE Entry Strategy
Most MNEs find it hard to go for foreign direct investment in countries with a high level of competition since it is like sailing on unchartered waters. Additionally, a joint venture is challenging since the local partner may increase their knowledge of their competitive goods and services. In countries with poor infrastructure, the entrant may prefer franchising so that the franchiser may be able to provide products, systems, services, and management expertise.
MOE is not a one-time decision, and MNE’s can change their entry strategies because each entry strategy has its pros and cons. By exporting, an MNE avoids the substantial cost of establishing its operations in a foreign country but has to find a way of marketing its products or services. Through licensing, they lower financial risks and give up control over the manufacturing and marketing of their products. Additionally, joint ventures reduce the amount of investment that an MNE needs to make because the costs are shared. Still, there is a higher overall cost compared to exporting and licensing. And there may be problems with cultural integration.
MOE’s that are Easy to Change
Changing Exporting to Licensing
Suppose an exporting MNE wants to manufacture its products in a foreign country. In that case, it can change to licensing by granting permission as a licensor to the licensee to use its intellectual property rights such as trademarks, patents, or brand names under defined conditions. This is likely to happen when a small MNC operating under a low cost but with a big brand decides to grant permission to its trademark in exchange for royalty fees.
Changing Licensing to a Joint Venture
When a licensing company does not want to give up control over the manufacturing and marketing of its products and services, or when the licensee is misusing its patents, the licensor may decide to go into a contractual, strategic partnership with a separate business entity. Here they may share resources or capital in joint-equity as they pursue a business opportunity together and share the profits through a joint venture.
Changing a Joint Venture to Foreign Direct Investment
An MNE may decide to go for foreign direct investment in another country. This is due to cultural differences and difficulty in integrating joint ventures or low-profit margins resulting from shared equity where each entity has to contribute. For this change to happen, the MNE has to be a significant brand with many resources or targets the resources of the foreign country it intends to relocate to.
Reference
Hill C. W.L. & Hult G. T. M. (2018). International business: Competing in the global marketplace, 13th edition. McGraw-Hill Education.