Chapter 3 Participants in International Business

International Business: Strategy, Management, and the New Realities

Chapter 3

Participants in International Business


Three Types of Participants in IB

1. The focal firm – initiator of IB transaction, including MNEs and SMEs

2. Distribution channel intermediary – specialist firm providing logistics and marketing services in the international supply chain

3. Facilitator – a firm providing special expertise in legal advice, banking, customs clearance, market research, and similar areas


The MNE as a Focal Firm

• A Multinational Enterprise (MNE) is a large organization with a network of production plants, regional headquarters, and country subsidiaries in numerous countries.

• Examples include: Nestlé, Sony, Unilever, Nokia, Ford, Citibank, ABB, and Shell Oil.

• MNEs include those in retailing ( e.g., Carrefour and Gap) and services ( e.g., Citibank, Amazon).

• Some MNEs in countries like China and Russia may be state owned.


The SME as a Focal Firm

• A Small and Medium-Sized Enterprise (SME) is a relatively small player in its respective industry (in the U.S., those with less than 500 employees).

• SMEs can be more flexible and quicker to respond to international opportunities.

• Though their limited resources prevent them from engaging in FDI, SMEs can excel in exporting, licensing, and franchising.


The Born Global as a Focal Firm

• A Born Global (BG) firm represents a relatively new breed of the SME that undertakes early and substantial internationalization.

• Primarily a niche player, born globals display high degree of entrepreneurial orientation, proactiveness, and customer service.

• In the contemporary era, born globals make up the fastest growing segment of exporters in most countries.


Evolution of a Born Global Exporterand Challenges It Overcomes

Some will exceed$100 million

Nichelimits

Managetransitionissues early

Createinternationalposition

Begin exportingearly (2 years)

Smalldomesticsales only

Product orprocessdevelopment

Time

Size

CredibilityFinanceExport

FinanceForeign representationExport know-how & skillsMarket information

Innovation… the next product


Common Characteristics of Born Global

Firms

Experience early, rapid, and substantial internationalization

Fewer financial and other resources than traditional exporters

Formed by technically inclined, market-oriented business people with entrepreneurial drive

Often enjoy internationally recognized technical eminence and universal appeal in given product category


Common Characteristics of Born Global

Firms (2)

Emergence often associated with significant product/process breakthrough or innovation

Products often involve advanced technology, substantial added value, superior quality, and differentiated design

Internationalization typically via exporting and facilitated through network relationships

Heavy user of advanced IT and communications technologies


Typically a specialist, niche player

Distinctive product/offering

High degree of product/service quality

Personal attention to building customer relationships

Constant effort to upgrade foreign distributor effectiveness

Distinctive Features of Born Global Marketing Strategy

Globalization and Entrepreneurship


The Stanford Technology Ventures Program

Link: http://ecorner.stanford.edu/


Foreign Market Entry Strategies of Focal Firms

Cross-border business transactions can be grouped into three categories:

1. Trade: buying and selling of products

2. Contractual exchange of services or intangibles: buying and selling of services

3. Equity ownership in foreign operations: establishing foreign presence through direct investment


The Nature of Cross-Border Transactions

• Trade (export and import) implies a home-based operation where independent partners in the foreign market are engaged to provide local services.

• Contractual exchanges include licensing, franchising, service contracting, turnkey operations, and project-based partnerships.

• Equity ownership is accomplished through FDI which can be implemented through acquisition or greenfield investment.


Examples of Focal Firms that are Involved in Contractual Exchanges

Turnkey Contractor: Provide engineering, design, and architectural services in the construction of airports, hospitals, oil refineries, and other types of infrastructure.

• These projects are typically awarded on the basis of open bidding by the sponsor.

• Examples- European Channel Tunnel, the Three Gorges Dam in China, Delhi Metro Rail Ltd. and the Hong Kong Airport.

• Build-own-transfer venture- an increasingly popular type of turnkey contract in the developing economies where contractors acquire an ownership in the facility for a period of time until it is turned over to the client.


International Collaborative Venture

• In an international collaborative venture (ICV), partners pool their resources and share the cost and risks of the new venture.

• Through an ICV, a focal firm can exploit partner’s complementary technologies and expertise, avoid trade barriers, connect with customers abroad, and configure value chains more effectively.

• ICV represents the middle ground between FDI and exporting; the firm externalizes value adding activities such as R&D or manufacturing.


Two Types of International Collaborative Ventures

• Joint Venture: the focal firm creates and jointly owns a new legal entity together with foreign partners

• Project-Based Collaborative Venture: Focal firm collaborates with foreign partners on a project with a relatively narrow scope and a well-defined timetable, without creating a new legal entity.

• Firms often form project-based ventures to share the cost and risks involved in knowledge-intensive R&D projects.


An Example of Joint Venture

• Advantages: share costs and risks, gain access to needed resources, gain economies of scale, and pursue long-term strategic goals.

• Hitachi formed a joint venture with MasterCard to promote a smart card system (Multos) for banking and other applications.

• BP partnered with the state-controlled Hindustan Petroleum Corporation in India. The new venture built a $3 billion refinery in Punjab and established a joint marketing business, including a network of retail service stations around India.


An Example of Project-Based Collaboration

Cisco Systems has expanded much of its operations through strategic alliances with key foreign players.

• With Japan’s Fujitsu to jointly develop routers and switches that enable clients to build Internet protocol networks for advanced telecommunications.

• In Italy, Cisco teamed with the telecommunications company Italtel to jointly develop network solutions for the convergence of voice, data, and video to meet growing global demands.

• In China, Cisco formed an alliance with telecommunications company ZTE to tap the China and Asian markets.


Distribution Channel Intermediary

• Agents, distributors, manufacturers’ reps• Specialize in physical distribution and marketing service;

connect the focal firm with the end user in the foreign market.

• Assist the focal firm by providing logistics services such as warehousing and customer support.

• Especially critical to exporters who do not establish foreign presence themselves.

• Are based either in the home country or the host country.


Export Management Company (EMC)

• A more common intermediary in the U.S. is the Export Management Company which acts as an export agent on behalf of the focal firm.

• An EMC finds export customers, negotiates terms of sale, and arranges for international shipping, typically for smaller exporters.

• Most EMCs specialize in specific industries and geographic areas.


Online Intermediaries

• Disintermediation – bypassing traditional intermediaries – is made possible due to widespread use of the Internet to reach customers globally.

• Examples include Amazon, Dell, eBay, and Alibaba – English-language portal based in China that specializes in business-to-business exchanges.

• Traditional retailers such as Sony and Tesco have also established online presence.

• One negative outcome of online retailing has been the ease with which unscrupulous marketers reach on suspecting him customers with fake products (e.g., fake pharmaceuticals).


Facilitators in IB

• Facilitators assist the focal firm with specialized services required in cross-border transactions.

• Facilitators include: Banks, international trade lawyers, freight forwarders, customs brokers, consultants, ad agencies, and market researchers.

Chapter 3 Participants in International Business

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