OLI: Choosing the Right Entry-Mode Strategy
Nowadays, an increasing number of businesses choose to grow by entering new markets and (re)locating some value chain operations abroad. Companies do this for a variety of reasons. First of all, businesses may be searching for strategic or natural resources that are more desirable abroad than at home, such as physical, financial, technical, or people resources. In other situations, the target firm may just be searching for new clients and may view entering a foreign market as a method to grow sales of its goods. Finally, it’s possible that the business is looking for methods to boost efficiency in order to achieve economies of scale and lower cost per unit. Whatever the cause, management will need to make a difficult choice on how to enter a foreign country.
There are several entry-mode tactics to pick from, and each one has advantages and disadvantages of its own. Exporting, licensing, franchising, developing a strategic alliance, forming a joint venture, purchasing, or beginning from scratch with a greenfield investment are examples of often employed tactics. These final three are categorized as kinds of foreign direct investment since they entail significant equity investments (FDI). Using the so-called OLI paradigm is a useful method to at least reject some of them from consideration (also known as the eclectic paradigm). Ownership-, Location-, and Internalization-advantage is referred to as OLI. This paradigm states that a corporation must have all three benefits in order to successfully participate in FDI. The focus firm may choose to employ an alternative entry-mode approach if one or more of these benefits are absent. Here are further details on each of the three benefits:
For a corporation to overcome the risk of being foreign, ownership advantage is first necessary. The inherent disadvantage that foreign companies face in their host nations as a result of their non-native status is known as the liability of foreignness. These drawbacks range from just not speaking the native tongue to having insufficient awareness of the local market needs. Proprietary information and varied ownership rights of a firm are examples of ownership advantages. Factors that provide a corporation an edge include its brand, copyright, trademark or patent rights, and the use and talents it has on hand internally. As a result, ownership benefits are frequently seen as intangible. These benefits ought to be priceless, uncommon, difficult to duplicate, and organizationally ingrained. In other words, the resource must be so valuable that it gives a corporation a competitive edge over rivals from other countries. In order to mitigate their liability of being foreign, businesses should assess if they have a specific competitive advantage that they may transmit outside. These could include things like a well-known brand name, cutting-edge technology capabilities, or significant economies of scale.
The market the organization is aiming to penetrate must also have some sort of geographical advantage. Again, given the well-known risk associated with being foreign, hosts must provide sufficient advantages to make FDI worthwhile. These benefits may simply be geographical (for instance, the Netherlands is situated between two major economies, the UK and Germany, and it is also close to the ocean), or they may be brought about by the availability of inexpensive raw materials, low wages, a skilled labour force, or unique taxes and tariffs. Using Porter’s Diamond as a tool to identify these geographical benefits is quite helpful. Are any of these geographic benefits available in the market we are considering entering? is the question management should be asking itself in this situation. If the answer to this question is “no,” management would be better served by continuing to produce goods domestically and exporting them instead, supposing that there is demand for them abroad. However, if the response is YES, it can be intriguing to carry out some value chain tasks overseas via FDI or by licensing/franchising.
The final benefit, internalization advantage, should be considered when deciding between licensing and FDI management. Is performing the value chain activity internally more appealing than having it done by a third party? Because they are more skilled at it, can do it more affordably, have a better understanding of the local market, or simply because management wants to concentrate on other activities in the value chain like marketing or design, some companies may choose to outsource specific tasks to other countries. In this situation, management may want to consider licensing its product design to a foreign firm that isn’t affiliated with it or contracting with an original equipment manufacturer to produce it (OEM). However, if the response is YES, the company should maintain control over its operations and engage in FDI. This might be accomplished by beginning from scratch with a greenfield investment, developing joint ventures with local partners, or purchasing existing local businesses.
With the help of the OLI paradigm, you should be able to at least dismiss certain entry-mode techniques after addressing these three issues. When all of the questions are answered in the affirmative, choosing to participate in FDI and maintain control over the operations should be a wise choice. You might wish to read this article if you’re having trouble deciding whether to partner with a local player through an equity partnership or buy an established international firm.
Also Read: Value Disciplines: Customer Intimacy, Product Leadership and Operational Excellence