In our previous module we explored the question of where? When? And how big or small to enter different markets and in the case of a multinational corporation. In this module we're going to start discussing the different types of entry strategies that a firm would choose when entering a foreign market. Some of these strategies will be determined by things like transportation costs, economic conditions, political conditions, and several factors that we already explored when understanding the O.L.I framework-- the ownership, location and internalization framework and the CAGE framework-- the cultural, administrative, geographic and economic distance framework. Now we're going to again try to understand what strategies a firm has at its disposal when deciding to enter a particular market. And these are what are known as entry strategies. The most basic way to enter foreign markets for a firm is through exports. I mean just sending your product from the place in which they are produced into other countries. Now this is the most basic one because it does not require the firm to actually go into that foreign market and try to understand them or dealing with the particularities of those foreign markets. Now, let's explore some advantages and disadvantages of this type of strategy. The most basic advantage of an export strategy is saving costs. Basically you don't have to open facilities in the other country and this is something that would provide an advantage for an export strategy. A second advantage is that you would be learning about the foreign markets in a way that gives you more flexibility. If the foreign market doesn't work-- if a firm is entering the market through export strategies it can just withdraw from that market, stop exporting from that market and focus on another market that is more convenient or more accessible for what they are producing. And it also depends on where the competitive advantage of a firm is. Let's say, let's take a look at some elements of some firms of the luxury industry. The luxury industry, one of the main elements defining their competitive advantage is the location of the production of their goods. So let's look at one major firm in the world like Ermenegildo Zegna from Italy. They sell luxury goods particularly clothes and shoes to different places of the world, but one of the main advantages that allows Zegna to charge big prices for their products is the fact that most of their products are made in Europe. Particularly a lot of them are made in Italy. So for Ermenegildo Zegna, in order to sell in an upscale shopping mall in China, it's better that their products are made in Europe rather than made in China because the Chinese customers actually prefer -- the upscale customers prefer a product that is made in Europe rather than in China. So Zegna for example has focused on these type of export strategy while at the same time vertically integrating some of their operations. They have bought sheep, cattle in Australia in order to have the best quality leather for their products, so all the production is based in Europe but again because this is their competitive advantage and their quality explains why the export strategy. They're not competing against low cost producers in China because this is their advantage. They are Italian and not Chinese. Exports of course can bring some disadvantages as well. The first one or the most basic one is the lack of real knowledge you can get from the place in which you're selling the product. It might take too long to really understand what the customers want in the foreign markets. If you're just exporting and allowing somebody else to take care of the marketing and distribution and all these other aspects that are involved in the expansion of a particular sector. If the price/weight ratio is low, it does not really make much sense to export. Let's say, firms that are involved in the production of things like sodas. I mean it does not make much sense to export Coca-Cola from the United States around the world because the price by which you would sell it would be too high in order to compensate for transportation costs. As we were mentioning before, this is not the case for a luxury firm. A pair of luxury shoes weigh the same as a pair of non-luxury issues, but once you can compensate for the price then transportation costs are not really a big deal. Another big element creating potential disadvantages on an export strategy are tariffs. This is something that would increase the price of your product right away as a result of a government decree. Tariffs were not that important in the 1990s and 2000s but they're increasingly becoming important in times when nativism and public governments are talking about protection of domestic industries. So if your firm depends a lot on exports, tariffs might be a source of problems. Related to the previous point, nationalism is something that certainly would hurt a firm based on an export strategy as an entry strategy. In the 1990s and 2000s there was a lot of criticism against the Chinese export to the United States in the United States. Many politicians started accusing these Chinese exports of being the ones responsible for the fall of the manufacturing production in the United States and the creation of unemployment among people previously employed in the manufacturing sector. This is not the first time this is happening in the U.S. In the 1980s, the criticism was targeted towards the Japanese. Japanese car manufacturers were accused of destroying the car industry in the city of Detroit in the United States, and these created a lot of political tensions between Japan and the United States. As a final solution, the only thing that the Japanese could think of was by restraining themselves from exporting to the United States to avoid all this backlash because they believed at this point our products will be related to unemployment in the United States, thanks to what the people in the media and in the political sphere were saying. Not only did the Japanese restrain voluntarily their exports to the United States, but actually opened production facilities in the United States. They targeted particularly the most poor states in the U.S. and in this way that gained them political favors, some political favorability among policy makers in the U.S. But here we find nationalism as an element creating problems for firms, developing an entry strategy around exports. Sometimes your exports can be damaged by the image of the country you're coming from even when it comes to things that are not related to your firm. Let's take that Danish firm, Arla. Arla had a big market for snacks in the Middle East. Their snacks were very popular in the Middle East. In the year of 2006, there was a cartoon competition in Denmark organized by a newspaper about Prophet Muhammad, and basically the idea was to make fun of Prophet Muhammed. This generated a lot of criticism in the Middle East. In the Islamic countries there were demonstrations against these, demonstrations against Denmark and one of the results was a boycott against Danish products. Arla was one of the main victims of this boycott even though Arla was not involved in any way in the cartoon competition about Prophet Muhammed, it paid the consequences of coming from a country that was related to these cartoon competition. So a very successful entry strategy that they had developed before was all of a sudden then lashed by something absolutely out of their control. These are the things that need to be taken into a consideration. Tariffs, nationalism and this home country faith when developing an entry strategy based on exports.
