Multinationals and Global Market Entry Strategies
A multinational company (MNC) is a business that owns or controls production or service operations in two or more countries. When a business decides to expand internationally, it must choose a market entry method, each offering a different balance of control, risk, speed, and capital required: exporting (producing at home and selling abroad, lowest risk and capital but limited local knowledge and exposed to trade barriers such as tariffs); licensing or franchising (allowing an overseas partner to produce or sell under the firm's brand/technology for a fee, faster and lower-capital but less control and quality risk); a joint venture (setting up a new, jointly owned business with a local partner, sharing cost, risk and local market knowledge, but also sharing control and profit); and foreign direct investment (FDI), which can be greenfield (building entirely new facilities abroad, giving full control but the highest cost, risk and time) or brownfield (acquiring or merging with an existing overseas business, faster than greenfield since infrastructure and local knowledge already exist, but potentially requiring costly integration of different systems and cultures).
Before you start
Make sure you're comfortable with these topics first:
Method
- Identify the resources the business has available: how much capital it can commit, and how much local market knowledge and experience of the target country it already has.
- Identify how much control the business wants to retain over quality, brand and operations in the new market.
- Identify the time pressure: does the business need to enter quickly, or can it take longer to build its own presence.
- Match these factors to an entry method: limited capital and low local knowledge point towards licensing/franchising or a joint venture; strong capital and a wish for full control point towards FDI; a wish to test a market with minimal commitment points towards exporting.
- Where FDI is chosen, decide between greenfield (more control and a fresh start, but slower and more expensive, and no existing local knowledge/customer base) and brownfield (faster market entry using an existing business's assets and customers, but risk of costly integration problems).
- For an evaluate question, weigh the trade-off between control and risk explicitly, since higher control almost always comes with higher capital commitment and risk, and reach a conclusion that reflects the specific business's stated resources and objectives.
Worked example
A small UK clothing retailer with limited capital and no previous experience of Vietnam wants to start selling in the Vietnamese market. Separately, a large, well-funded UK retailer wants to establish a strong, fully controlled long-term presence in India, a market it has researched extensively. Identify and justify a suitable market entry method for each business.
- For the small UK clothing retailer entering Vietnam: identify a joint venture as most suitable.
- Justify: its limited capital rules out FDI, and its lack of local knowledge of Vietnam makes a joint venture with a Vietnamese partner valuable, since the partner brings market knowledge, contacts and shared financial risk that the retailer could not access alone.
- For the large UK retailer entering India: identify greenfield FDI as most suitable.
- Justify: it has the capital to fund building its own facilities from scratch, and because it wants a fully controlled, long-term presence, greenfield FDI avoids the compromises on control and profit-sharing that a joint venture or licensing arrangement would require, and its extensive prior research reduces the local-knowledge risk that would otherwise make greenfield FDI riskier.
Practice questions
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Q1Define a multinational company (MNC).Show answer
Answer: A business that owns or controls production or service operations in two or more countries.
Q2State the two forms of foreign direct investment (FDI).Show answer
Answer: Greenfield investment (building entirely new facilities abroad) and brownfield investment (acquiring or merging with an existing overseas business).
Q3State one advantage of exporting as a market entry method.Show answer
Answer: It requires relatively low capital investment and carries lower risk than setting up operations directly in the overseas market.
Q4State one disadvantage to a business of entering a market through a joint venture.Show answer
Answer: The business must share control over decisions and share profit with its joint venture partner, rather than keeping all control and profit itself.
Q5Explain one reason a business might choose brownfield FDI rather than greenfield FDI.Show answer
Answer: Brownfield FDI is usually faster to establish and lower risk, because it uses an existing business's facilities, staff, local knowledge and customer base rather than building everything from scratch.
Q6Give one example of a trade barrier that can make exporting less attractive.Show answer
Answer: A tariff (a tax on imported goods), which raises the price of the exported product in the overseas market and can make it less competitive.
Exam-style questions
Written in the style of a A Level Business exam paper, with a full mark scheme.
Analyse the factors a business should consider when choosing between licensing and foreign direct investment (FDI) to enter an overseas market.
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BrightHome, a UK home furniture retailer, has 4 million pounds available for overseas expansion and wants to enter the Brazilian market, where it has never operated before and has limited knowledge of local consumer tastes and regulations. It is considering two options: Option A, forming a joint venture with an established Brazilian furniture retailer, sharing costs, profits, and decision-making equally; or Option B, acquiring an existing mid-sized Brazilian furniture chain outright (brownfield FDI) for the full 4 million pounds, gaining full ownership and control of its stores, staff and supplier contracts. Evaluate which option BrightHome should choose to enter the Brazilian market.
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