Transcript
CHAPTER 10
Mode of Entry into International Business
Foreign Market Analysis
Assess alternative markets Evaluate the respective costs,
benefits, and risks of entering each Select those that hold the most
potential for entry or expansion
Factors in Assessing New Market Opportunities
Product-market dimensions
Major product-market differences
Structural characteristics of national market
Competitor analysis
•Potential target markets•Relevant trends•Explanation of change•Success factors•Strategic options
Evaluating Costs, Benefits and RisksC
OSTS - Direct cost
the Firm incurs in entering a new foreign market and included costs associated with setting up a business operation- Opportunity costa firm has a limited resources, entering one market may preclude or delay its entry into another
BEN
EFI
TS - Expected sales
- Profits from the market- Lower acquisition and manufacturing costs- Foreclosing of markets to competitors- Competitive adv.- Access to new technology- Opportunity to achieve synergy with other operations
RIS
KS - Exchange rate
fluctuations- Additional operating complexity- Direct financial losses due to inaccurate assessment of market potential
Choosing a Mode of Entry
Decision Factors:*Ownership advantages*Location advantages*Internalization advantages*Other factors: -Need for control -Resource availability -Global strategy
Export
International Licensing
International Franchising
Specialized modes
Foreign Direct Investment
(FDI)
•Resources owned by a firm that grant it a competitive adv.
•Depends on the nature of the firm
Ownership Advantage
•Affect the desirability of the host country
•Compares economic and non economic characteristics
Location Advantages
•Affect the desirability of a firm’s producing a good/services itself
•The amount of transaction costs is critical to any decision made
Internalization advantage
•Control and availability of resources
•Overall global strategy
Other factors
Exporting
Advantages
Relatively low financial exposure
Permit gradual market entry
Acquire knowledge about
local market
Avoid restrictions on foreign investment
Disadvantages
Vulnerability to tariffs and NTBs
Logistical complexities
Potential conflicts with distributors
Forms of Exporting
Indirect exporting
Direct exporting
Intra-corporated
transfer
Indirect Exporting
U.S.A
• Company A transfer to company B
Malaysia
• Company C sell to Malaysian
Direct Exporting
China
• Company A
Malaysia
• Company C
Intra-corporate Transfer
U.K
• Company A
Malaysia
• Company A
Additional Considerations for Exporting
Government Policies
Marketing Concern
Logistical Consideration
Distribution Issue
Types of Export IntermediariesExport Management CompaniesWebb-Pomerene AssociationsInternational Trading Companies
Other Intermediaries
Export Management Companies(EMC)
An export management company (EMC) is a firm that acts as its client's export department by managing the legal, financial, and logistical details of exporting, and providing advice about consumer needs and available distribution channels in the foreign markets the exporter wants to penetrate.
Webb-Pomerene Associations
A Webb-Pomerene association is a group of U.S. firms that operate within the same industry and that are allowed by law to coordinate their export activities without fear of violating U.S. antitrust laws.
International Trading Company Directly involved in importing and
exporting a wide variety of goods for its own business. Provides the necessary exporting and importing services. (buying goods in one country and selling to another country).
Other Intermediaries
Manufacturers’ Agents
Manufacturers’ Export Agent
Export And Import Brokers
Freight Forwarders
Licensing
Licensing is when a firm, called the licensor, leases the right to use its intellectual property—technology, work methods, patents, copyrights, brand names, or trademarks—to another firm, called the licensee, in return for a fee.
THE LICENSING PROCESS
Licensor leases the rights to use
intellectual property
Licensee uses the intellectual
property to create products
Pays a royalty to licensor
Earns new revenues with low investment
Basic Issues in International Licensing
Specifying the boundaries of the agreement
Determining compensation Establishing rights, privileges, and
constraints Specifying the duration of the contract
Licensing
Advantages
• Low financial risks• Low-cost way to
assess market potential
• Avoid tariffs, NTBs, restrictions on foreign investment
• Licensee provides knowledge of local markets
Disadvantages
• Limited market opportunities/profits
• Dependence on licensee
• Potential conflicts with licensee
• Possibility of creating future competitor
International Franchising
A franchising agreement allows an independent entrepreneur or organization, called the franchisee, to operate a business under the name of another, called the franchisor, in return for a fee.
Basic Issues in International Franchising
Does a differential advantage exist in domestic market?
Are these success factors transferable to foreign locations?
Has franchising been a successful domestic strategy?
Franchising
Advantages
• Low financial risks• Low-cost way to
assess market potential
• Avoid tariffs, NTBs, restrictions on foreign investment
• Maintain more control than with licensing
• Franchisee provides knowledge of local market
Disadvantages
• Limited market opportunities/profits
• Dependence on franchisee
• Potential conflicts with franchisee
• Possibility of creating future competitor
Specialized Entry Modes
Management Contract
Turnkey Projects
Contract Manufacturing
Contract Manufacturing
Advantages
• Low financial risks
• Minimize resources devoted to manufacturing
• Focus firm’s resources on other elements of the value chain
Disadvantages
• Reduced control (may affect quality, delivery schedules, etc.)
• Reduce learning potential
• Potential public relations problems
Management Contract
• Focus firm’s resources on its area of contracts
• Minimal financial exposureAdvantages
• Potential returns limited by contract expertise
• May unintentionally transfer proprietary knowledge and techniques to contractee
Disadvantages
Turnkey ProjectAdvantages •Focus firm’s resources on
its area of expertise•Avoid all long-term
operational risks
Disadvantages •Financial risks
•Cost overruns•Construction risks
•Delays•Problems with suppliers
Foreign Direct Investment
Entering international market through ownership of assets in host countries. A firm may first enter the foreign market through exporting, licensing or franchising.
Foreign Direct Investment
•High profit potential
•Maintain control over operations
•Acquire knowledge of local market
•Avoid tariffs and NTBs
Advantages
•High financial and managerial investments
•Higher exposure to political risk
•Vulnerability to restrictions on foreign investment
•Greater managerial complexity
Disadvantages
FDI Method
Building new facilities (the Greenfield strategy)
Buying existing assets in a foreign country (acquisition strategy)
Participating in a joint venture
Greenfield Strategy
• Best site• Modern facilities• Economic development incentives• Clean slateAdvantages
• Huge time and patience needed• Expensive • Comply with local and national
regulation• Local workforce needed• Strongly perceived as a foreign worker
Disadvantages
Acquisition Strategy
Advantages• Obtains control over the acquired
firm such as factories and brand names
• Integrate the mgt of the firm into its overall international strategy
Disadvantages• Assumes all the liabilities such as
financial and managerial
Joint Venture
An arrangement, whereby a new enterprise is created by two or more firms working together for mutual benefit.
Example:- IBM and Siemens- Motorola and Toshiba
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