Question

Most common entry strategies for MNCs are joint venture, franchising and direct investment. Explain the costs and benefits of choosing these entry strategies. Give example of MNC operating in malaysia that gains from one of these entry strategies.

Answer 1

The joint venture is where two or more parties indulge in a new project by agreeing on certain terms such as equity, investment and time of each given to the project. The advantages of the joint venture are:

- it can provide access to new markets easily by having a good distribution network from the local party,

- risk and liability decreases when sharing it with a partner,

- investment and contribution of resources from two businesses help in increased capacity,

- access to new expertise and knowledge required for entry in a new market.

- specialised staff available to bring outcomes immediately.

The disadvantages of Joint venture business are:

- it is made on long term goals hence short term objectives are unclear.

- communication between partners for all decision making and operations is weak.

- unequal level of investment and expertise used can bring complications.

- cooperation in work is difficult due to differences in culture and management styles of partners.

- slow growth as all parties have to follow the limitations of contractual terms.

Franchising is where the company sells its brand name, trademark and products to a local company to run the business with its name and pay a royalty fee for it. The advantages of franchising are:

- it has low barriers to entry which means that a foreign business can enter the market with lesser investment and formalities.

- the business model can be moulded to local tastes thus ensuring better profits.

- it is a low-cost strategy which can be set up and running quickly and efficiently thus helping in a rapid expansion process.

- the benefit of local expertise of running the business from the franchisee

The disadvantages of franchising are:

- franchisors have no control over the business once given it to the franchisee

- Difficult to monitor quality and protection of the brand image

- choosing the right partner to the franchise is a difficult and strategic decision without which the whole model of franchising can fail.

- returns come in a fixed percentage so fewer chances of growth with the expansion of the business.

Foreign Direct Investment(FDI) is when a company purchases another smaller company in the host country having all the control over the local company and running the business in the foreign market through it. The advantages of FDI for the investor are:

- gaining access to the market by acquiring a company form the local market.

- gaining from resources available with the host company and the host country

- gain low-cost production with the cheaper labour market in the host country

- lesser legal restrictions for the firm which is entering through another firm

The disadvantages of FDI for investors can be:

- risk of political and economical fluctuations in a new country

- less domestic investment

- control of government regulations and rights over business and property

- requires huge investment and the risk involved is more

A company that has benefitted from franchising in Malaysia is McDonald's. It has set up in about 260 locations seriving 13M Malaysians annually. It has customised its menu based on the population of Malaysia and keeps includng new components to make the cutomer service effeicntly operational. The faciltiies like drive-thru also makes it convient for customers to purchase from them when it comes to quick fast food consumptions.