Foreign Market Entry Mode: Joint Venture v. Licensing

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Table of Contents

Introduction
Background Information
Foreign Market Entry Mode
Licensing
Joint Venture Business
Conclusion
References

Introduction

According to Fischer (2003, p. 5), the process of globalization that has been taking place in the recent years is usually intricate and many-sided.

There are several economic and non-economic challenges that businesses have to deal with satisfactorily to ensure that their systems continue operating as expected in order to achieve their fiscal objectives.

The major aims of the endeavours in business and economics is to reduce poverty and promote economic growth; this can only be achieved by the organisation’s ability to adopt feasible business strategies and policy structures that will help to deal with challenges and threats that may arise due to the numerous integration procedures involved in the global economy.

Background Information

Many multinational companies expand their operations into foreign countries through establishing their operations in the foreign countries or engaging in trade (Eicher & Kang 2003, p. 1). Gaining entries into the foreign market is associated with the growth of these companies that expand into the global markets.

The company that intends to establish its presence in the foreign market has to strategically assess and select the most appropriate mode of entry that will help in acquiring success in their foreign operations. There are several options, which Starbucks can use to enter the Nigerian coffee market.

In connection to this, the company has to make a very important strategic decision on the most appropriate entry mode to enter the Nigerian market. Joint venture and licensing are the modes of foreign entries that this paper will analyze in details.

Specifically, the purpose of this treatise is to evaluate the strengths and weaknesses of joint venture over licensing as a mode of entry into foreign markets.

Foreign Market Entry Mode

Expanding operations into the international markets presents an opportunity for a company to navigate through a financial crisis. Such expansions into the new international markets help a company to diversify the risks that may be associated with the specific markets in which it operates.

In this aspect, the company can easily expand its market share globally and increase sales revenue, as well as the overall profitability of the company.

Some of the international expansion strategies that a company like Starbucks Coffee Company has executed have resulted in generation of higher sales and revenues in the recent years.

For example, the company has dominated the coffee market with a market share of 69.8% (Brown 2011, p. 8; Gates et al. n.d, p. 14; Starbucks Coffee: Company Profile 2012).

Licensing

Licensing is an international market entry mode in which a company legally contracts its trademarks, intellectual property rights, design, as well as scientific expertise to a foreign firm. In return, the company offers payments or royalties.

For this mode of market entry, the company must have a legally protected and a distinctive asset. Licensing is a viable mode of entry for Starbucks Coffee Company into the Nigerian Market since the company does not have to incur development costs (Zekiri & Angelova 2011, p. 17).

It also reduces the commitment of the resources and political pressure from the foreign country. This in turn cuts down on the import barriers that are normally imposed on foreign companies like tariffs and regulations – these do not apply to the licensee company (Roby 2011, p. 9).

However, licensing may not be the most appropriate method to gain entry since such access to the market is constrained by the contracts and agreements (Zekiri & Angelova 2011, p. 25). The other problem is that licensees may not meet the quality standards that Starbucks delivers.

There is also a possibility of licensee turning into competitors in future, as the licensee may imitate or steal the technology in form of design processes.

International market entry through licensing is, therefore, only appropriate to companies that deal with technological innovations that are dynamic in nature to avoid instances where the ex-licensees may imitate the technology and become a competitor to the licensor (Ramaswami & Agarwal 1992, p. 18).

Joint Venture Business

Joint venture business involves the planned business agreements where there exists an equal involvement between the resident business and the overseas player.

This equity can be in terms ratios or in terms of control. Entering the Nigerian coffee market through joint venture may be profitable in the short-term since the Starbucks Coffee Company will definitely establish a quick presence in the market (Roby 2011, p. 23).

The company may also be in a position to influence the local company’s resources and managerial capability towards the manufacturing, retailing, and distribution of its product. However, the company is likely to face challenges of control and coordination of decisions, policies, and implementation with the local company.

The management problems may arise between the host country managers and the company managers due to disparities in culture, managerial styles and motivation that drives the participation (Wild, Wild, & Han 2008, p. 271).

Conclusion

The business environment has become volatile and organizations operating within different industries are affected by the factors that affect the industry such as political, economic, social, and technological factors among others (Kercher 2006, p. 58).

In order to overcome these challenges and experience success, organizations have to select the most appropriate and effective international business entry modes that will help them overcome challenges of environmental factors.

References

Brown, H. 2011, External Environmental Analysis of Starbucks and the Coffee Industry. Web.

Eicher, T. & Kang, J. W. 2003, Trade, Foreign Direct Investment or Acquisition: Optimal Entry Mode for Multinationals. Web.

Fischer, S. 2003, ‘Globalization and Its Challenges’, American Economic Review, vol. 93. no. 2, pp. 1-30.

Gates, R., Hogan, M., McCarty, L., Ramachandran, A., & Reed, T n.d., Starbucks Coffee: Strategic Analysis. Web.

Kercher, K., 2006, Impact of Globalisation and International Business. Web.

Ramaswami, S. N. & Agarwal, S. 1992, ‘Choice of Foreign Market Entry Mode: Impact of Ownership, Location and Internationalization Factors’, Journal of International Business Studies, First Quarter. Web.

Roby, L. 2011, Analysis of Starbucks as a Company and an International Business. Web.

Starbucks Coffee: Company Profile 2012. Web.

Wild, J., Wild, K., & Han, J. 2008, International Business: The Challenges of Globalization, Pearson Prentice Hall, Upper Saddle River, NJ.

Zekiri, J. & Angelova, B. 2011, ‘Factors that Influence Entry Mode Choice in Foreign Markets’, European Journal of Social Sciences, vol. 22. no. 4, pp. 1-31. Web.

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